ASIC Annual Report June 2008-Rev 9 - Adacel June 2008. Adacel ... a robust opening order book that is expected to help provide a strong ... Smith was a senior executive of the company

Adacel Technologies LimitedABN 15 079 672 281

Financial Report, Directors’ Report, Auditor’s Report & Additional Information

30 June 2008

Adacel Technologies Limited

ABN 15 079 672 281240 Bay StreetBrighton VictoriaAustralia 3186Telephone +61 3 8530 7777Facsimile +61 3 9596 2960www.adacel.com

Board of Directors

Julian Beale (Chairman)Kevin CourtneySilvio SalomDavid SmithAlex WaislitzPeter Landos (Alternate to Mr. Waislitz)

Company Secretary

Ms. Sophie Karzis

Bank

Royal Bank of Canada1 Place Ville Marie, 8th Floor, East WingMontreal Quebec H3C 3A9Canada

Solicitors

Deacons

RACV Tower485 Bourke StreetMelbourne Victoria 3000

Blake Dawson Waldron

Level 39101 Collins StMelbourne Victoria 3000

Auditor

PricewaterhouseCoopers

Freshwater PlaceLevel 19, 2 Southbank BoulevardSouthbank Victoria, 3006

Share Registry

Computershare Investor Services

Yarra Falls452 Johnston StreetAbbotsford Victoria [email protected]

Page 1

DIRECTORS’ REPORT

Your Directors submit their report on the consolidated entity consisting of Adacel Technologies Limited and theentities it controlled at the end of, or during the year ended 30 June 2008.

DIRECTORS

The names and details of the Directors of Adacel Technologies Limited in office during the whole of the financial yearand up to the date of this report are:

Julian Beale (Chairman)Kevin CourtneySilvio SalomDavid SmithAlex WaislitzPeter Landos (alternate for Alex Waislitz).

PRINCIPAL ACTIVITIES

The principal activities of the consolidated entity during the year were the development and sale of simulation andsoftware applications and services. There were no significant changes in the nature of the consolidated entity'sactivities during the year, other than described in the review of operations.

REVIEW OF OPERATIONS

SummaryAdacel recorded strong orders growth during the year to 30 June 2008 and consolidated its market position with theaward of the approximately $54,000,000 five year FAA Tower simulator contract – the largest ever civil air trafficcontrol tower simulator program - and the approximately $7,700,000 Royal Australian Air Force contract, as well asfurther contracts in North America, Europe and Asia.

The group’s after-tax profit was $1,810,000, which partly reflected the impact of slower-than-planned deliveryschedules for some key programs. Earnings were also adversely impacted by:

The strong rise in the Australian dollar (foreign exchange losses of $476,000 in the year) Additional costs of around $1,000,000 due to the longer-than-expected bid programs for the FAA and RAAF

contracts.

The after-tax result was after allowing for tax benefits of $1,914,000 resulting from research and development taxincentives and the recognition of deferred tax assets in a North American subsidiary due to the outlook for continuedprofitable operations.

RevenuesOperating revenues rose during the 2008 financial year, although they were below the levels originally expected dueto the delays in awarding of key contracts and the slower than expected start up activity on some programs.Revenues from operations increased to $37,162,000 from $34,946,000 previously, assisted by higher internationalsales and growth in the Advanced Programs business. Revenues from services and support continued to account foraround 50% of revenues from operations.

EarningsEarnings before interest, tax, depreciation and amortisation were $1,352,000 compared with $3,054,000 previously.Amortisation and depreciation totalled $1,418,000 (previously $1,303,000) and finance costs were $38,000(previously $52,000).

Balance Sheet and Cash FlowThe balance sheet continues to be strong, with current assets of $19,445,000 against current liabilities of$10,946,000 and total assets of $23,344,000 against total liabilities of $11,020,000. Cash usage during the periodwas largely attributable to work on programs for which pre-payments were received in FY2007, the expenditure of$2,587,000 for the on-market share buy-back and additional costs of approximately $1,000,000 incurred in securingsignificant programs with FAA and RAAF.

No Dividend declaredDirectors have not declared a dividend for the period but Directors recently announced a renewal of the on-marketshare buy-back program.

Page 2

Operational PerformanceThe growth in orders during the 2008 financial year reflected Adacel’s market leadership position. This has generateda robust opening order book that is expected to help provide a strong start to the 2009 financial year.

The company is in a strong position for the medium term following the FAA, RAAF and other air traffic controlsimulator contract awards, the continuation of the relationship with Lockheed Martin in air traffic managementsupport, and with the growth in sales of our new products.

Air Traffic Control SimulationThe company received orders under the FAA program totalling approximately $8,000,000 that generated revenues ofaround $5,200,000 in the period to June 30. We expect orders from this program to accelerate in FY2009. The FAAhas indicated that in the first phase of the Tower simulator program, 24 simulators are to be deployed at 19 locationsover the first eighteen months of the program. The securing of this contract confirms Adacel’s position as thepreferred supplier of air traffic control tower simulators to both the civil and defence sectors in the United States.

In addition to this work, Adacel will also be delivering systems to the RAAF under the approximately $7,700,000Tower simulator contract awarded in June. The 360-degree simulators to be supplied to the RAAF training schoollocated in East Sale, Victoria, as a key part of the program are the largest in the Southern hemisphere. With theRAAF contract, Adacel is now the primary supplier of air traffic control tower simulators to both the Australian defenceand civil sectors.

Adacel was also awarded simulation and support contracts totalling in excess of $10 million by civil and defenceaviation organisations in North America and Europe. This included contracts from the US Air Force, US Army, USNavy and US Marines.

Air Traffic ManagementAdacel continues to work with Lockheed Martin to provide software support for the US ATOP (AdvancedTechnologies and Oceanic Procedures) and ERAM (En Route Automation and Modernization) programs. Adacel alsocontinues to provide support and upgrades to NAV Portugal’s Oceanic system, and received an additional contractfor around $2,300,000.

Advanced ProgramsAdacel’s strategy to utilise the company’s existing technologies to enter new closely-associated markets is continuingto be successful. The company received its first contract revenue from the Air Traffic Control in a Box product, andthrough the agreement with CAE, a number of major airlines have included ATCiB as a component of their flightsimulator purchases.

Adacel has also received further contracts for Voice Activated Cockpit technology, including from Boeing for the AH-64 Apache attack helicopter, as well as continuing to work alongside Lockheed Martin with the installation of voiceactivated cockpit controls for the F-35 Joint Strike Fighter.

During the year, the company launched a new product, ICE Pilot, for teaching and evaluating aviation English. ICEPilot uses Adacel’s speech recognition and air traffic control simulation technology to enable aircrew to learn, practiceand assess their ability to communicate in the real world air traffic environment. It is ideally suited to new pilots andthose preparing for their English language certification to International Civil Aviation Organization standards.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRSThere were no significant changes in the state of affairs during the current year, except as noted in the review ofoperations.

MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEARThere were no significant events after the balance date.

LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONSWith the consolidation of its global leading positioning key markets and the strong opening order book, the companyis cautiously optimistic for revenue and earnings growth in the 2009 financial year.

ENVIRONMENTAL REGULATIONThe Chief Executive Officer or equivalent reports to the Board on any environmental and regulatory issues at eachDirectors meeting. There are no matters that the Board considers need to be reported in this report.

Page 3

INFORMATION ON DIRECTORS

Julian Beale BE (Syd), MBA (Harvard)Non-Executive Chairman

Appointed as an independent non-executive Director in June 2003. Mr. Beale has extensive international businessand capital markets experience and a background in private and public companies at both Board and managementlevel. Mr. Beale held senior positions in a range of Australian companies including English Electric and Esso Australia(now Exxon) and was Managing Director of a resources group with interests in petroleum production, pipelines andminerals. He also established a plastics processing company in Melbourne and was a key participant in thesuccessful transition of Moldflow, a developer of software for injection moulding machines, to the United StatesNASDAQ capital market. Mr. Beale was also a member of the Federal Parliament for 11 years from 1984 as theMember for Deakin and later Bruce. During this time he held many Shadow Ministerial portfolios. Mr. Beale does notcurrently hold and has not held directorships in other listed companies at any time in the 3 years immediately beforethe end of the financial year.

Interests in Shares and Options1,816,867 ordinary shares in Adacel Technologies Limited.300,000 options over ordinary shares in Adacel Technologies Limited.

Kevin Courtney FCA, FAICDNon-Executive Director

Independent non-executive Director since October 1998. Mr. Courtney is a chartered accountant and a formerregional managing partner of Ernst & Young. He is a Director of National Markets Group Limited, a member of theNational Australia Bank group of companies. He is Chairman of Adacel's audit committee. Mr. Courtney has been aCommissioner of the City of Melbourne and a Director of Connect.com.au, the internet service provider sold to AAPTTelecommunications Ltd. He has been Chair of the audit committees of the Victorian Workcover Authority, theSunraysia Rural Water Authority and the National Competition Council. Mr. Courtney is a Director of the DOXASocial Club assisting underprivileged youth. Mr. Courtney was a director of Melbourne IT Limited from October 1999until his retirement in April 2003 and a director of MLC Nominees Pty Ltd and National Australia Superannuation PtyLtd from 2003 to 2006.

Interests in Shares and OptionsNil ordinary shares in Adacel Technologies Limited.Nil options over ordinary shares in Adacel Technologies Limited.

Silvio Salom B Eng (Electrical)Non-Executive Director

Managing Director of Adacel Technologies Limited from incorporation in October 1997 until 16 June 2006, and non-executive Director since that date. Mr. Salom was founder and Managing Director of the predecessor Adacel Pty Ltdfrom establishment in 1987. Mr. Salom has extensive experience in the strategic and operational management of hi-tech companies with particular expertise in information technology related to the manufacturing, environmental,defence, transport, multimedia and telecommunications industry sectors. Mr. Salom does not currently hold and hasnot held directorships in other listed companies at any time in the 3 years immediately before the end of the financialyear.

Interests in Shares and Options14,496,659 ordinary shares in Adacel Technologies Limited.Nil options over ordinary shares in Adacel Technologies Limited.

David Smith BE (Electronics)Non-Executive Director

Non-executive Director since July 2000 and prior to that date an executive director from incorporation in October1997. Mr. Smith was a senior executive of the company and has extensive experience in software development,project and operations management in the military, aviation and transport domains. Mr. Smith does not currently holdand has not held directorships in other listed companies at any time in the 3 years immediately before the end of thefinancial year.

Interests in Shares and Options10,060,558 ordinary shares in Adacel Technologies Limited.Nil options over ordinary shares in Adacel Technologies Limited.

Page 4

Alex Waislitz BEc (Mon), LLB (Mon)Non-Executive Director

Non-executive Director since August 2003. Mr. Waislitz is Executive Chairman of the Thorney Investment Group. Hehas extensive business experience, and is a director of various Pratt Group and Visy Board companies. Mr. Waislitzis a Director of McPhersons Limited and Vice President of Collingwood Football Club.


Alex Waislitz is the Executive Chairman of the Thorney Investment Group. A member of the Thorney InvestmentGroup, namely Thorney Holdings Pty Ltd, is a major shareholder of Adacel Technologies Limited. During the yearended 30 June 2008, there were no share transactions conducted by Thorney Holdings Pty Ltd. As at 30 June 2008,Thorney Holdings Pty Ltd holds 30,423,967 ordinary shares in Adacel Technologies Limited (2007: 30,423,967).

Invia Custodian Pty Ltd is a custodial entity that holds a number of shares for the Thorney Investment Group asnominee. During the year ended 30 June 2008, there were no share transactions conducted by Invia Custodian PtyLtd. As at 30 June 2008, Invia Custodian Pty Ltd holds 2,296,224 ordinary shares in Adacel Technologies Limited(2007: 2,296,224).

Peter Landos BEco (ANU)Alternate to Alex Waislitz

Non-executive Director alternate to Mr. Waislitz since August 2003. Mr. Landos is an Investment Manager with theThorney Investment Group. He joined Thorney in 2000 after five years at Macquarie Bank Limited. Mr. Landos is analternate Director to Alex Waislitz on the McPhersons Limited Board. Mr. Landos is also a Director of Biological WoolHarvesting Holding Company Limited, an unlisted public company, and Rattoon Holdings Limited, an investmentcompany listed on the National Stock Exchange of Australia.


COMPANY SECRETARIES

Michael Woodgate MBA (Melb), BA (Melb)

Mr. Woodgate was Company Secretary of Adacel Technologies Limited from 20 May 2006 until his resignation on 30June 2008. Mr. Woodgate joined Adacel in 1999 and previously worked in the corporate, government and consultingsectors in industry policy, corporate strategy and corporate communications. Mr. Woodgate continues to act ascorporate affairs advisor to Adacel Technologies Limited.

Sophie Karzis

Sophie Karzis was appointed as Company Secretary on 30 June 2008. Ms Karzis is a practicing lawyer and amember of the Law Institute of Victoria and the Institute of Chartered Secretaries.

Page 5

MEETINGS OF DIRECTORS

The numbers of meetings of the company’s Board of Directors and of each Board committee held during the year andthe number of meetings attended by each Director were as follows:

Meetings ofDirectors

Meetings of Committees

Audit Remuneration NominationsHeld Attended Held Attended Held Attended Held Attended

Julian Beale ** 16 16 3 3 2 2 1 1Kevin Courtney ** 16 15 3 3 2 2 1 1Silvio Salom ** 16 15 * * * * 1 1David Smith ** 16 15 * * * * 1 1Alex Waislitz ** 16 5 3 1 2 1 1 0Peter Landos **(alternate to Alex Waislitz –attending at times of AlexWaislitz’s absence)

16 11 3 2 2 1 1 1

* Denotes that the Director is not a member of the relevant committee.** Denotes that the Director is a non-executive director.

As at the date of this report, the company has an Audit Committee, a Remuneration Committee and a NominationsCommittee of the Board of Directors.

The members of the Audit Committee are Kevin Courtney, Julian Beale and Alex Waislitz. The Chairman of the AuditCommittee is Kevin Courtney.

The members of the Remuneration Committee are Julian Beale, Kevin Courtney and Alex Waislitz. The Chairman ofthe Remuneration Committee is Julian Beale.

The members of the Nominations Committee are all members of the Board of Directors. The Chairman of theNominations Committee is Julian Beale.

REMUNERATION REPORT

The remuneration report is set out under the following main headings:

A. Principles used to determine the nature and amount of remunerationB. Details of remunerationC. Service agreementsD. Share-based compensationE. Additional information

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

A. Principles used to determine the nature and amount of remuneration.

The Adacel Board has determined policies in relation to the remuneration of directors and executives, as follows:

Non-executive DirectorsNon-executive Directors are remunerated by fixed annual fees, superannuation and from time-to-time may also beissued share options in place of higher cash fees.

The level of annual Directors' fees is reviewed by the Remuneration Committee and the Board, taking into account anumber of factors, including the range of Directors' fees paid in the market, and the company's costs and operatingperformance. The maximum total for annual fees for Directors is approved from time to time by shareholders ingeneral meeting and was last set at $300,000 per annum at the 1999 Annual General Meeting.

Non-executive Directors may also, in view of the company's size and resources, from time-to-time be issued optionsas part of their remuneration in place of a higher cash fee. Options would be issued after consideration by theRemuneration Committee and the Board and subject to shareholder approval at general meeting. These optionswould be issued separately to the Adacel Staff Share Option Plan and with conditions that were designed to providea link with company share price performance.

Directors are not paid additional fees for work on Board committees and are not entitled to a retirement benefit.

Page 6

Senior ExecutivesUnder the company's constitution, remuneration of the Managing Director, subject to other provisions in any contractbetween the executive and the company, may be by way of fixed salary or participation in the profits of the companybut may not be by way of commission on or percentage of operating revenue. Other senior executives, including thecompany secretary, may be remunerated by fixed salary and performance based bonuses. Remuneration packageswill generally be set to be competitive to both retain executives and attract experienced executives to the company.

Where packages comprise a fixed element and variable incentive components, the variable components will dependon company and personal performance. Short-term incentives may include annual cash incentives on meetingspecific profit and performance criteria that has been agreed to in plans set with the Board. Criteria to be met mayinclude group and/or business unit orders, revenue and profit performance and personal Key Performance Indicators.The amount of the incentive will depend upon the extent that the measure is exceeded. These conditions help toensure that the short-term incentives are aligned with the interests of shareholders in the current period.

To provide long-term incentives, senior executives may also participate in the Adacel Staff Share Option plan. Theoptions are issued with conditions to help ensure that the remuneration of senior executives is aligned with the long-term interests of shareholders.

The overall level of executive reward takes into account the performance of the company over a number of years,with greater emphasis given to the current year.

Short Term IncentivesFor a number of the executives in the consolidated entity, an element of their remuneration is dependent on thesatisfaction of various performance conditions.

For the year ended 30 June 2008, the performance conditions included financial targets (primarily new orders,revenue, earnings and cash generation) and other strategic and milestone criteria. Under the incentive scheme,budget earnings must be achieved prior to any bonus payments being made. For the year ended 30 June 2008, theperformance conditions and financial targets were not achieved and there were no bonuses paid or payable.

BenefitsExecutives receive benefits including health insurance and disability insurance.

B. Details of remuneration.

Amounts of remunerationDetails of the nature and amount of each element of the emoluments of each Director of Adacel TechnologiesLimited, each of the key management personnel (as defined in AASB 124 Related Party Disclosures) of the Group,are as follows:

Key management personnel of Adacel Technologies Limited

2008 Short-term employee benefits

Post-employment

benefits Other

Share-based

payments

Name

Cash salaryand fees

$Cash bonus

$

Nonmonetary

$

Super-annuation

$

Terminationbenefits

$Options

$Total

$Non-executive DirectorsJulian Beale (Chairman) 87,200 - - - - - 87,200Kevin Courtney 40,000 - - 3,600 - - 43,600Silvio Salom 119,500 - - 3,600 - - 123,100David Smith 40,000 - - 3,600 - - 43,600Alex Waislitz 40,000 - - 3,600 - - 43,600Peter Landos(alternate to Alex Waislitz)

- - - - - - -

Sub-total non-executivedirectors

326,700 - - 14,400 - - 341,100

Other key managementpersonnelSophie Karzis (1) - - - - - - -Michael Woodgate (1) 21,600 - - - - - 21,600Total 348,300 - - 14,400 - - 362,700

Page 7

Key management personnel of the Group


Post-employment

benefits Other

Share-based

payments

Name

Cash salaryand fees

$Cash bonus

$

Nonmonetary

$

Super-annuation

$

Terminationbenefits

$Options

$Total


- - - - - - -


326,700 - - 14,400 - - 341,100

Other key managementpersonnelGeorges Ata (From1/7/2007 – 27/6/2008)

250,360 - 5,703 10,899 - - 266,962

Seth Brown 174,651 - 21,235 9,164 - 6,027 211,077Mark Creasap 177,423 - 2,079 8,860 - - 188,362William Lang 199,125 - 5,537 9,956 - - 214,618Don Cleveland (From3/1/2008 – 30/6/2008

95,535 - 6,830 1,493 - 105,925 209,783

Gary Pearson 177,423 - 13,003 8,855 - - 199,281Steve Piller (From1/7/2007 – 18/10/2007)

76,247 - 6,940 3,672 111,913 - 198,772

Fred Sheldon 293,857 - 21,289 13,424 - 13,962 342,532Michael Woodgate 21,600 - - - - - 21,600Total 1,792,921 - 82,616 80,723 111,913 125,914 2,194,087

(1) Michael Woodgate resigned as Company Secretery on 30 June 2008 and was replaced by Ms Sophie Karzis onthe same day. No payments were made to Ms Karzis for the period up to 30 June 2008.

Key management personnel of Adacel Technologies Limited


Post-employment

benefits Other

Share-based

payments

Name

Cash salaryand fees

$Cash bonus

$

Nonmonetary

$

Super-annuation

$

Terminationbenefits

$Options

$Total


- - - - - - -


243,567 - - 14,400 - - 257,967

Other key managementpersonnelMichael Woodgate 21,600 - - - - - 21,600Totals 265,167 - - 14,400 - - 279,567

Page 8

Key management personnel of the Group


Post-employment

benefits Other

Share-based

payments

Name

Cash salaryand fees

$Cash bonus

$

Nonmonetary

$

Super-annuation

$

Terminationbenefits

$Options

$Total


- - - - - - -


243,567 - - 14,400 - - 257,967

Other key managementpersonnelGeorges Ata 211,676 - 4,466 10,584 - 22,350 249,076Seth Brown 247,086 - 21,528 8,979 - 25,096 302,689Mark Creasap 190,066 - 11,157 6,768 - 4,145 212,136William Lang 200,721 - 5,351 10,036 - 4,145 220,253Gary Pearson 183,730 - 13,445 6,629 - 4,145 207,949Steve Piller 259,757 - 15,010 9,494 - 28,608 312,869Fred Sheldon 316,776 - 21,528 11,774 - 155,379 505,457Michael Woodgate 21,600 - - - - - 21,600Total 1,874,979 - 92,485 78,664 - 243,868 2,289,996

C. Service agreements.

Remuneration and other terms of employment for the key management personnel are formalised in serviceagreements. The major provisions of the agreements relating to remuneration are set out below.

Silvio Salom (Non-executive director) Effective 19 June 2006, the company entered into a consulting agreement with Mr. Salom with no fixed term. The agreement provides for assistance in identifying business opportunities in relation to specific business

customers in Australia. The agreement is to provide services on a 1 day per week basis, and the fee for the service is $1,500 per day.

Payment for the year to 30 June 2008 of $79,500 has been included in the cash, salary and fees column of theremuneration tables for 2008.

Georges Ata (Vice President – Engineering & Operations) Term of agreement – Agreement terminated on 27 June 2008 upon resignation. Base salary, superannuation and medical/health insurance benefits for the year ended 30 June 2008 of

$266,962. Cash salary and fees for the year also includes an amount of $32,383 for unused annual leaveentitlements paid out on termination on 27 June 2008.

Payment of termination benefit on early termination by the employer, other than for gross misconduct, equal toan amount agreed to between the parties to the employment agreement.

Provision of performance-related cash bonuses (up to 40% of base salary). No bonus is payable in respect of theyear ended 30 June 2008.

Participation, when eligible, in the Staff Share Option Plan.

Seth Brown (Chief Financial Officer – North America, and General Manager - Canada until 31 December 2007 thenas Senior Advisor to the Chief Executive Officer – North America from 1 January 2008) Term of agreement – 12 months from 2 January 2008. The original agreement was terminated on 31 December 2007, and replaced with new agreement reflecting the

change to the engagement and the term of the new agreement. Base salary, superannuation, medical/health insurance and other benefits for the year ended 30 June 2008 of

$205,050. Payment of termination benefit on early termination by the employer, other than for gross misconduct, equal to 3

months base salary and superannuation..

Page 9

Don Cleveland (Chief Financial Officer – North America) Term of agreement – ongoing, commencing on 3 January 2008. Base salary, superannuation, medical/health insurance and other benefits for the year ended 30 June 2008 of


months base salary and superannuation. Provision of performance-related cash bonuses (up to 45% of base salary). No bonus is payable in respect of the

year ended 30 June 2008. Participation, when eligible, in the Staff Share Option Plan.

Mark Creasap (Vice President – US Simulation and Training – North America) Term of agreement – ongoing. Base salary, superannuation and medical/health insurance benefits for the year ended 30 June 2008 of

$188,362. Payment of termination benefit on early termination by the employer, other than for gross misconduct, equal to

an amount agreed to between the parties to the employment agreement. Provision of performance-related cash bonuses (up to 40% of base salary). No bonus is payable in respect of the


William Lang (Vice President – Air Traffic Management) Term of agreement – ongoing. Base salary, superannuation and medical/health insurance benefits for the year ended 30 June 2008 of




Gary Pearson (Vice President – Advanced Programs – North America) Term of agreement – ongoing. Base salary, superannuation and medical/health insurance benefits for the year ended 30 June 2008 of

$199,281. Payment of termination benefit on early termination by the employer, other than for gross misconduct, equal to

an amount agreed to between the parties to the employment agreement. Provision of performance-related cash bonuses (up to 40% of base salary). No bonus is payable in respect of the


Steve Piller (Senior Vice President – Business Development and International programs – North America). Term of agreement – Agreement terminated on 18 October 2007. Base salary, superannuation and medical/health insurance benefits for the year ended 30 June 2008 of $86,859.

Cash salary and fees for the year also includes an amount of $6,301 for unused annual leave entitlements paidout on termination on 18 October 2007.

Payment of termination benefit on early termination by the employer, other than for gross misconduct, equal to 3months base salary and superannuation. A payment of $56,831 in respect of this termination benefit. In addition,a separation agreement payment of $55,082 was made

Provision of performance-related cash bonuses (up to 40% of base salary). No bonus is payable in respect of theyear ended 30 June 2008.

Participation, when eligible, in the Staff Share Option Plan.

Fred Sheldon (Chief Executive Officer – North America) Term of agreement – ongoing. Base salary, superannuation, medical/health insurance and other benefits for the year ended 30 June 2008 of




Michael Woodgate (Company Secretary) Term of agreement – ongoing. Michael Woodgate provides services to the company as a contractor. Agreement terminated 30 June 2008 and replaced with a new agreement covering the corporate affairs services

only Fees for the year ended 30 June 2008 in respect of Company Secretarial activities of $21,600. Fees for the year ended 30 June 2008 in respect of corporate affairs services activities of $76,917.

Page 10

Sophie Karzis (Company Secretary) Term of agreement – ongoing commencing on 30 June 2008. Ms Karzis provides services to the company as a contractor. No fees were paid or payable during the year ended 30 June 2008.

D. Share-based compensation.

Staff Share Option PlanOptions are granted under the Adacel Technologies Staff Share Option Plan, which was approved by theshareholders at the Annual General Meeting on the 15 November 2000. Under this plan, Directors can issue options(up to 10% of the company’s issued capital) to eligible employees. The Directors have the discretion as to thenumber of options to be issued and exercise periods. The options are issued for no consideration from Directors oremployees. The options are not listed. Options granted under the plan carry no dividend or voting rights. Whenexercisable, each option is convertible into one ordinary share.

Staff Share Option Plan options may be issued with conditions precedent to the options vesting. The conditionsprecedents for the options on issue are one of the following:

(a) Set time periods are achieved (the anniversary dates); andOn the anniversary date or any subsequent date, the weighted average sale price of all ordinary shares inthe capital of the company sold on ASX during the 5 trading days immediately preceding that date or anysubsequent date is determined to be at least 15% higher on an annual compound basis than the exerciseprice of the options. Once this price threshold is achieved, a subsequent fall in the company’s share pricewill not affect the right to exercise the options.

(b) Set time periods are achieved.

(c) The achievement of the fiscal year EBITDA as set forth in the Board approved annual budget.

(d) Set time periods are achieved; andThe weighted average sale price of all ordinary shares in the capital of the company sold on ASX for aperiod of 10 trading days reaches a defined price, andFor a period of 90 days thereafter the average price per share is greater than, or equal to, the same definedprice. Once this price threshold is achieved, a subsequent fall in the company’s share price will not affect theright to exercise the options.

In the event of the resignation, redundancy or termination of employment of an option holder, the options issuedunder the Staff Share Option Plan lapse immediately, unless the Directors, at their absolute discretion, determineotherwise.

The service and performance criteria used to determine the amount of the options granted as remuneration are setout in section A of this remuneration report.

Chairman’s OptionsOptions issued to the Chairman were issued on 30 November 2004 following approval by the shareholders at theAnnual General Meeting on the 19 November 2004. The options were issued as part of remuneration for acting asthe non-executive chairman of the Board. 50% of the options vested immediately on issue and the remaining 50%vested on 12 September 2005. The options are not listed. The options granted carry no dividend or voting rights.When exercisable, each option is convertible into one ordinary share. The exercise price is $0.61, payableimmediately on exercise. The expiry date of these options is 12 September 2008.

The terms and conditions of each grant of options affecting remuneration in this or future reporting periods are as follows:

Grant date Expiry dateExercise

price

Value peroption at

grant dateVesting

conditions Date exercisable from

Staff Share Option Plan1 October 2004 1 October 2009 $0.60 $0.1335 (d) 1 August 2005 & 1 June 2006 & 1

April 2007 & 1 February 2008 & 1December 2008

17 January 2005 17 January 2010 $0.60 $0.0969 (c) 17 January 20053 January 2008 3 January 2013 $0.68 $0.3188 (b) 1 July 2008 & 1 July 2009

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The conditions precedents for the options on issue are one of the following:

(a) Set time periods are achieved (the anniversary dates); andOn the anniversary date or any subsequent date, the weighted average sale price of all ordinary shares inthe capital of the company sold on ASX during the 5 trading days immediately preceding that date or anysubsequent date is determined to be at least 15% higher on an annual compound basis than the exerciseprice of the options. Once this price threshold is achieved, a subsequent fall in the company’s share pricewill not affect the right to exercise the options.

(b) Set time periods are achieved.

(c) The achievement of the fiscal year EBITDA as set forth in the Board approved annual budget.

(d) Set time periods are achieved; andThe weighted average sale price of all ordinary shares in the capital of the company sold on ASX for aperiod of 10 trading days reaches a defined price, andFor a period of 90 days thereafter the average price per share is greater than, or equal to, the same definedprice. Once this price threshold is achieved, a subsequent fall in the company’s share price will not affect theright to exercise the options.

The Staff Share Option Plan is described in note 37 and the Chairman’s Options are described in note 37.

The service and performance criteria used to determine the amount of the options granted as remuneration are setout on pages 5 and 6 of the remuneration report.

Details of options over ordinary shares in the company provided as remuneration to each Director of AdacelTechnologies Limited and each of the key management personnel of the Group are set out below. When exercisable,each option is convertible into one ordinary share of Adacel Technologies Limited. Further information on the optionsis set out in note 37 to the financial statements.

Number of options grantedduring the year

Number of options vestedduring the year

Name 2008 2007 2008 2007Directors of Adacel Technologies LimitedJulian Beale (Chairman) - - - 150,000Kevin Courtney - - - -Silvio Salom - - - -David Smith - - - -Alex Waislitz - - - -Peter Landos(alternate to Alex Waislitz)

- - - -

Other key management personnel of the GroupSeth Brown - - - 250,000Mark Creasap - - - 100,000William Lang - - - 100,000Don Cleveland 500,000 - - -Gary Pearson - - - 100,000Fred Sheldon - - - 1,125,000Michael Woodgate - - - -Sophie Karzis - - - -

The assessed fair value at grant date of options granted to the individuals is allocated equally over the period fromgrant date to vesting date, and the amount is included in the remuneration tables above. The fair value at grant dateis independently determined using a Black-Scholes option pricing model that takes into account the exercise price,the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of theoption, the share price at grant date and expected volatility of the underlying share, the expected dividend yield andthe risk-free interest rate for the term of the option.The model inputs for options granted during the year ended 30 June 2008 and for the year ended 30 June 2007 canbe found in note 37 to the financial statements.

No options have been issued to directors or any of the key management personnel as part of their remuneration atthe date of signing this financial report.

Shares provided on exercise of remuneration optionsDuring the year, 250,000 ordinary shares in the company were provided as a result of the exercise of remunerationoptions.

Page 12

E. Additional information.

Details of remuneration: cash bonuses and optionsFor each cash bonus and grant of options included in the above tables, the percentage of the available bonus orgrant that was paid, or that vested, in the financial year, and the percentage that was forfeited because the persondid not meet the service and performance criteria is set out below. No part of the bonuses are payable in futureyears. The options vest over the period determined at the time of issue, provided the vesting conditions are met. Nooptions will vest if the conditions are not satisfied, hence the minimum value of the option yet to vest is nil. Themaximum value of the options yet to vest has been determined by reference to the exercise price of the options.

Cash bonus Options

NamePaid

%Forfeited

%

Yeargranted

Vested

%

Forfeited

%

Financialyears inwhich

optionsmay vest

Minimumtotal value

of grant yetto vest

$

Maximumtotal

value ofgrant yetto vest

$Seth Brown 0% 100% 2005 - - 2009-10 - 210,000Mark Creasap 0% 100% 2003 - 100% - - -

2004 - - 2009 - 5,280William Lang 0% 100%Don Cleveland 0% 100% 2008 - - 2009 - 340,000Gary Pearson 0% 100% 2003 - 100% - - -Fred Sheldon 0% 100% 2005 - - 2009-10 - 750,000

Share-based compensation: Options

Further details relating to options are set out below:

Name

ARemunerationconsisting of

options

BValue at grant

date$

CValue at

exercise date$

DValue at lapse

date$

E Total ofcolumns B-D

$Julian Beale (Chairman) - - - - -Kevin Courtney - - - - -Silvio Salom - - - - -David Smith - - - - -Alex Waislitz - - - - -Peter Landos(alternate to Alex Waislitz)

- - - - -

Michael Woodgate - - - - -Sophie Karzis - - - - -Seth Brown 2.9% - - - -Mark Creasap - - - 1,435 1,435William Lang - - - - -Don Cleveland 50.5% 159,400 - - 159,400Gary Pearson - - - - -Fred Sheldon 4.1% - - - -

A = The percentage of the value of remuneration consisting of options, based on the value of options expensedduring the current year.B = The value at grant date calculated in accordance with AASB 2 Share-based Payment of options granted duringthe year as part of remuneration.C = The value at exercise date of options that were granted as part of remuneration and were exercised during theyear, being the intrinsic value of the options at that date.D = The value at lapse date of options that were granted as part of remuneration and that lapsed during the year.Lapsed options refer to options that vested but expired unexercised.

LOANS TO DIRECTORS AND KEY MANAGEMENT PERSONNELDuring the financial year, no loans were made, guaranteed or secured by Adacel Technologies Limited or any of itssubsidiaries to any director of Adacel Technologies Limited or any of the specified executives of the Group, includingtheir personally related entities. No loans remain outstanding as at 30 June 2008 (2007 = nil).

Page 13

SHARE OPTIONS GRANTED TO DIRECTORS AND THE MOST HIGHLY REMUNERATED OFFICERSDetails of options granted over unissued ordinary shares in Adacel Technologies Limited during or since the end ofthe year to any Directors, any of the most highly remunerated officers of the consolidated entity, or the two officers ofthe company as part of their remuneration were as follows:

Directors of Adacel Technologies LimitedOptionsgranted

Exerciseprice

Expiry date Vesting date OptionsVested

Julian Beale (Chairman) - - - - -Kevin Courtney - - - - -Silvio Salom - - - - -David Smith - - - - -Alex Waislitz - - - - -Peter Landos(alternate to AlexWaislitz)

- - - - -

Executive Officers of Adacel Technologies LimitedOptionsgranted

Exerciseprice


Sophie Karzis - - - - -Michael Woodgate - - - - -

Executive Officers of the Consolidated EntityOptionsgranted

Exerciseprice


Seth Brown - - - - -Mark Creasap - - - - -William Lang - - - - -Don Cleveland 250,000 0.68 3 January 2013 1 July 2008 -

250,000 0.68 3 January 2013 1 July 2009 -Gary Pearson - - - - -Fred Sheldon - - - - -Sophie Karzis - - - - -Michael Woodgate - - - - -

Page 14

SHARES UNDER OPTIONDetails of unissued ordinary shares in Adacel Technologies Limited under option as at 8 August 2008 are as follows:

Plan Grant Date Number Expiry Date Exercise Price

Staff Share Option Plan 3 October 2003 22,000 3 October 2008 $0.75Staff Share Option Plan 9 January 2004 21,000 9 January 2009 $0.85Staff Share Option Plan 2 April 2004 25,000 2 April 2009 $0.66Staff Share Option Plan 4 July 2004 49,000 4 July 2009 $0.45Staff Share Option Plan 1 October 2004 7,000 1 October 2009 $0.39Staff Share Option Plan 1 October 2004 1,250,000 1 October 2009 $0.60Staff Share Option Plan 7 January 2005 1,000 7 January 2010 $0.31Staff Share Option Plan 17 January 2005 500,000 17 January 2010 $0.60Staff Share Option Plan 1 April 2005 6,000 1 April 2010 $0.33Staff Share Option Plan 1 July 2005 7,000 1 July 2010 $0.26Staff Share Option Plan 7 October 2005 5,000 7 October 2010 $0.24Staff Share Option Plan 20 November 2005 1,200,000 20 November 2010 $0.35Staff Share Option Plan 20 November 2005 1,200,000 20 November 2010 $0.60Staff Share Option Plan 6 January 2006 3,000 6 January 2011 $0.42Staff Share Option Plan 7 April 2006 7,000 7 April 2011 $0.50Staff Share Option Plan 28 April 2006 500,000 28 April 2011 $0.60Staff Share Option Plan 7 July 2006 7,000 7 July 2011 $0.47Staff Share Option Plan 6 October 2006 14,000 6 October 2011 $0.53Staff Share Option Plan 5 January 2007 7,000 5 January 2012 $0.68Staff Share Option Plan 10 April 2007 22,000 10 April 2012 $0.63Staff Share Option Plan 6 July 2007 3,000 6 July 2012 $0.80Staff Share Option Plan 5 October 2007 11,000 5 October 2012 $0.58Staff Share Option Plan 3 January 2008 500,000 3 January 2013 $0.68Staff Share Option Plan 4 January 2008 8,000 4 January 2013 $0.68Staff Share Option Plan 4 April 2008 15,000 4 April 2013 $0.44

Chairman’s Options 30 November 2004 300,000 12 September 2008 $0.61

5,690,000

Option holders do not have any right, by virtue of the option, to participate in any share issue of the company or anyrelated body corporate except in exercising the relevant options.

SHARES ISSUED ON THE EXERCISE OF OPTIONSDuring the year ended 30 June 2008, 250,000 ordinary shares of Adacel Technologies Limited were issued on theexercise of options granted. No further shares have been issued since 30 June 2008 and up to the date of this report.

INSURANCE OF DIRECTORS AND OFFICERSDuring the year the company paid a premium for a Directors and Officers Liability Insurance Policy. This policycovers Directors and Officers of the company and the consolidated entity. In accordance with normal commercialpractices under the terms of the insurance contracts, the nature of the liabilities insured against and the amount ofthe premiums are confidential.

PROCEEDINGS ON BEHALF OF THE COMPANYNo person has made any application under section 237 of the Corporations Act 2001.

Page 15

NON-AUDIT SERVICESThe company may decide to employ the auditor on assignments additional to their statutory audit duties where theauditor’s expertise and experience with the company and/or the consolidated entity are important.

Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for audit and non-audit servicesprovided during the year are set out below.

The Board of Directors has considered the position and, in accordance with the advice received from the auditcommittee is satisfied that the provision of the non-audit services is compatible with the general standard ofindependence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision ofnon-audit services by the auditor, as set out below, did not compromise the auditor independence requirements ofthe Corporations Act 2001 for the following reasons:

all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartialityand objectivity of the auditor; and

none of the services undermine the general principles relating to auditor independence as set out in APES 110Code of Ethics for Professional Accountants, including reviewing or auditing the auditor’s own work, acting in amanagement or a decision-making capacity for the company, acting as advocate for the company or jointlysharing economic risk and rewards.

During the year the following fees were paid or payable for services provided by the auditor of the parent entity, andits related practices:

Consolidated2008 2007

$ $Assurance services

(a) Audit servicesPricewaterhouseCoopers Australian firm

Audit and review of financial reports and other auditwork under the Corporations Act 2001

215,063 189,800

Related practices of PricewaterhouseCoopersAustralian firm

265,751 252,599

Total remuneration for audit services 480,814 442,399

(b) Other assurance servicesPricewaterhouseCoopers Australian firm

Other services 2,500 -Related practices of PricewaterhouseCoopersAustralian firm

- 99,483

Total remuneration for other assurance services 2,500 99,483Total remuneration for assurance services 483,314 541,882

Taxation services

PricewaterhouseCoopers Australian firmTax compliance services, including review ofcompany income tax returns, international taxconsulting and tax advice on group structuring

76,080 77,960

Other tax related services 16,745 65,816Related practices of PricewaterhouseCoopersAustralian firm

160,595 183,196

Total remuneration for taxation services 253,420 326,972

Page 16

AUDITORS’ INDEPENDENCE DECLARATIONA copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is setout on page 17.

ROUNDINGThe amounts contained in this report and in the financial report have been rounded off to the nearest thousanddollars, or in some cases to the nearest dollar, under the option available to the company under Australian Securities& Investment Commission Class Order 98/0100. The company is an entity to which the Class Order applies.

AUDITORPricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001.

CORPORATE GOVERNANCE

In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of AdacelTechnologies Limited support and have adhered to the principles of corporate governance. The company's corporategovernance statement is contained in the Corporate Governance Statement section of this annual report.

Signed in accordance with a resolution of the Directors.

Julian Beale David SmithChairman Director

Melbourne, 9th September 2008

Liability limited by a scheme approved under Professional Standards Legislation

Page 17

PricewaterhouseCoopersABN 52 780 433 757

Freshwater Place2 Southbank BoulevardSOUTHBANK VIC 3006GPO Box 1331LMELBOURNE VIC 3001DX 77Telephone 61 3 8603 1000Facsimile 61 3 8603 1999

Auditor’s Independence Declaration

As lead auditor for the audit of Adacel Technologies Limited for the year ended 30 June 2008, Ideclare that to the best of my knowledge and belief, there have been:

a) no contraventions of the auditor independence requirements of the Corporations Act 2001 inrelation to the audit; and

b) no contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Adacel Technologies Limited and the entities it controlled duringthe period.

John O'Donoghue MelbournePartner 9 September 2008PricewaterhouseCoopers

Page 18

THIS PAGE INTENTIONALLY LEFT BLANK

Page 19

Adacel Technologies Limited ABN 15 079 672 281

Annual financial report – 30 June 2008

Contents Page

Financial reportIncome statements 20Balance sheets 21Statements of changes in equity 22Cash flow statements 23Notes to the financial statements 24Directors’ declaration 70

Independent auditor’s report to the members 71

This financial report covers both Adacel Technologies Limited as an individual entity and the consolidated entityconsisting of Adacel Technologies Limited and its subsidiaries. The financial report is presented in the Australiancurrency.

Adacel Technologies Limited is a company limited by shares, incorporated and domiciled in Australia. Its registeredoffice and principal place of business is:

Adacel Technologies LimitedLevel 1, Suite 3, 240 Bay StreetBrighton VIC 3186.

A description of the nature of the consolidated entity’s operations and its principal activities is included in the reviewof operations and activities on pages 1 to 2 and in the directors’ report on pages 1 to 16, both of which are not part ofthis financial report.

The financial report was authorised for issue by the directors on 22 August 2008. The company has the power toamend and reissue the financial report.

Through the use of the Internet, we have ensured that our corporate reporting is timely, complete, and availableglobally at minimum cost to the company. All press releases, financial reports and other information are available atour Shareholders’ Centre on our website: www.adacel.com.

Page 20

INCOME STATEMENTSFor the year ended 30 June 2008

Notes Consolidated Parent entity2008 2007 2008 2007$’000 $’000 $’000 $’000

Revenue from continuing operations 5Sale of goods and servicesOther revenue

36,971191

34,804142

471622

516707

Other income 6 1,351 729 150 55

ExpensesMaterials and consumables (7,176) (3,012) (76) (90)Labour expense (22,662) (20,555) (1,293) (1,214)Fair value adjustment to inter-company loans 7 - - - (31)Net foreign exchange gain/(loss) 7 (476) (665) (296) (1)Depreciation and amortisation expense 7 (1,418) (1,303) - (8)Finance costs 7 (38) (52) (247) (82)Lease rental expense 7 (792) (1,600) (53) (48)Professional fees 28 (717) (704) (291) (268)Insurance expense (553) (504) (53) (42)Communications expense (346) (399) (22) (35)Travel and entertainment expense (862) (735) (105) (14)All other expenses (3,315) (2,636) (338) 78Non-Operating Costs – Commercial legal claim defenceNon-Operating Costs – Other

29 (245)(17)

(1,244)(567)

-(17)

-(260)

Profit/(loss) before tax (104) 1,699 (1,548) (737)

Income tax benefit 8 1,914 873 - -

Profit/(loss) for the year 1,810 2,572 (1,548) (737)

Profit/(loss) for the period attributable to members ofAdacel Technologies Limited 1,810 2,572 (1,548) (737)

Earnings per share for profit attributable to theordinary equity holders of the company

Cents Cents

Basic earnings per share 36 2.1 2.9Diluted earnings per share 36 2.1 2.9

The above income statements should be read in conjunction with the accompanying notes.

Page 21

BALANCE SHEETSAs at 30 June 2008


Current assetsCash and cash equivalents 9 1,242 11,137 650 819Trade and other receivables 10 11,640 3,919 47 482Current tax asset 565 698 - -Accrued revenue 4,866 3,158 63 -Inventories 11 1,090 478 - -Other financial assets 21 42 - - -Total current assets 19,445 19,390 760 1,301

Non-current assetsInter-group receivables 13 - - 1,619 -Plant and equipment 15 1,294 1,282 - -Intangible assets 16 1,100 1,971 - -Future income tax benefit 17 1,376 - - -Other financial assets 14 129 533 10,790 16,479Total non-current assets 3,899 3,786 12,409 16,479

Total assets 23,344 23,176 13,169 17,780

Current liabilitiesPayables 18 6,849 4,392 515 440Borrowings 19 1,863 - - -Inter-group payables 18 - - - 938Advance payments from customers 1,019 2,839 - -Current tax liabilities 351 411 - -Provisions 20 604 896 207 183Other current liabilities 21 260 165 260 -Total current liabilities 10,946 8,703 982 1,561

Non-current liabilitiesBorrowings 22 - - - -Other non-current liabilities 23 74 105 - -Total non-current liabilities 74 105 - -

Total liabilities 11,020 8,808 982 1,561

Net assets 12,324 14,368 12,187 16,219

EquityContributed equity 24 76,830 79,317 76,830 79,317Reserves 25 (1,299) 160 823 838Retained profits/(accumulated losses) 25 (63,207) (65,109) (65,466) (63,936)Total equity 12,324 14,368 12,187 16,219

The above balance sheets should be read in conjunction with the accompanying notes.

Page 22

STATEMENTS OF CHANGES IN EQUITYFor the year ended 30 June 2008


Total equity at the beginning of the period 14,368 12,329 16,219 16,631

Transfers from share based payments reserve for optionsexercised

37 - 37 -

Transfer from share based payments reserve for optionslapsed

92 47 92 47

Equity transfer to Investment in Subsidiaries for Options 25 - - (74) (37)Exchange differences on translation of foreign operations 25 (1,444) (895) - -Net income/(expense) recognised directly in equity (1,315) (848) 55 10

Profit/(loss) for the period 1,810 2,572 (1,548) (737)

Total recognised income/(expense) for the period 495 1,724 (1,493) (727)

Contributions of equity, net of transaction costs 24 87 117 87 117Employee share options 25 (15) 198 (15) 198Reduction of share capital through share buy-back net oftransaction costs

(2,611) - (2,611) -

Total transactions with equity holders in theircapacity as equity holders

(2539) 315 (2,539) 315

Total equity at the end of the period 12,324 14,368 12,187 16,219

The above statements of changes in equity should be read in conjunction with the accompanying notes.

Page 23

CASH FLOW STATEMENTSFor the year ended 30 June 2008


Cash flows from operating activitiesReceipts from customers (inclusive of GST) 25,073 44,218 143 210Payments to suppliers and employees (inclusive ofGST)

(33,066) (36,574) (1,089) (2,925)

Payments for development expenditure (inclusive ofGST)

(967) (1,114) - -

(8,960) 6,530 (946) (2715)Interest received 118 142 55 40Income tax paid (106) (160) - -Tax credits refunded 367 1,620 - -Finance costs (38) (52) - (6)Net cash inflow/(outflow) from operating activities 34 (8,619) 8,080 (891) (2681)

Cash flows from investing activitiesPayments for plant and equipment (707) (940) - (8)Proceeds from sale of plant and equipment - 55 - 55Proceeds from sale of business assets 150 - 150 -Proceeds from /(payment for) deposits - (6) - 11Net cash inflow/(outflow) from investing activities (557) (891) 150 58

Cash flows from financing activitiesProceeds from shares issued 87 94 87 94Repayment of borrowing - (122) - (115)Shares repurchased through on market buy-back (2,587) - (2,587) -Share buy-back costs (24) - (24) -(Payment)/Receipt of security deposit to bank facilityprovider

- 2,292 - -

Loans from controlled entities - - 3,096 3,154Loans (to) controlled entities - - - -Net cash inflow/(outflow) from financing activities (2,524) (2,264) 572 3,133

Net increase/(decrease) in cash and cashequivalents

(11,700) 9,453 (169) 510

Cash and cash equivalents at the beginning of thefinancial year

11,137 2,152 819 309

Effects of exchange rate changes on cash and cashequivalents (58) (468) - -Cash and cash equivalents at the end of thefinancial year

9(621) 11,137 650 819

Non-cash financing and investing activities 35Financing arrangements 22

The above cash flow statements should be read in conjunction with the accompanying notes.

NOTES TO THE FINANCIAL STATEMENTS

Page 24

Contents of the notes to the financial statements

Page

1 Summary of significant accounting policies 252 Financial risk management 343 Critical accounting estimates and judgements 384 Segment information 385 Revenue from continuing operations 416 Other income 417 Expenses 418 Income tax expense 429 Current assets – Cash and cash equivalents 4310 Current assets – Trade and other receivables 4411 Current assets – Inventories 4512 Derivative financial instruments 4513 Non-current assets – Receivables 4514 Non-current assets – Other financial assets 4615 Non-current assets – Property, plant and equipment 4716 Non-current assets – Intangible assets 4917 Non-current assets – Deferred tax assets 5018 Current liabilities – Trade and other payables 5119 Current liabilities – Borrowings 5120 Current liabilities – Provisions 5221 Current liabilities – Other 5222 Non-current liabilities – Borrowings 5323 Non-current liabilities – Other 5324 Contributed equity 5425 Reserves and retained profits 5526 Dividends 5627 Key management personnel disclosures 5628 Remuneration of auditors 6029 Contingencies 6030 Commitments 6131 Related Party transactions 6132 Subsidiaries 6233 Events occurring after the balance sheet date 6234 Reconciliation of profit after income tax to net cash inflow from operating activities 6335 Non-cash investing and financing activities 6336 Earnings per share 6437 Share-based payments 65


Page 25

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

(a) Basis of preparationThis general purpose financial report has been prepared in accordance with Australian Accounting Standards, otherauthoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and theCorporations Act 2001.

Compliance with IFRSAustralian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AIFRS).Compliance with AIFRS ensures that the financial report of Adacel Technologies Limited complies with InternationalFinancial Reporting Standards (IFRS).

Early adoption of standardsAdacel Technologies Limited does not intend to adopt any of the new standards prior to the due date.

Historical cost conventionThese financial statements have been prepared under the historical cost convention, as modified by the revaluation offinancial assets and liabilities at fair value through profit or loss.

Critical accounting estimatesThe preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. Italso requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areasinvolving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to thefinancial statements, are disclosed in note 3.

(b) Principles of consolidationSubsidiariesThe consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Adacel Technologies Limited(“company”, “parent entity”) as at 30 June 2008 and the results of all subsidiaries for the year then ended. AdacelTechnologies Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidatedentity.

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

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

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to note 1(i)).

Intercompany 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 bythe Group.

Investments in controlled entities are carried in the company’s financial statements at the lower of cost and recoverableamount.

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


Page 26

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(d) Foreign currency translation(i) Functional and presentation currencyItems included in the financial statements of each of the Group’s entities are measured using the currency of the primaryeconomic environment in which the entity operates (‘the functional currency’). The consolidated financial statements arepresented in Australian dollars, which is Adacel Technologies Limited’s functional and presentation currency.

(ii) Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates ofthe transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from thetranslation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised inthe income statement, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investmenthedges or are attributable to part of the net investment in a foreign operation.

(iii) Group companiesThe 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 asfollows:

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balancesheet;

income and expenses for each income statement are translated at average exchange rates (unless this is not areasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case incomeand 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 are taken toshareholders’ equity. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, aproportionate share of such exchange differences are recognised in the income statement as part of the gain or loss on sale.

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

(e) Revenue recognitionRevenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net ofreturns, trade allowances, duties and taxes paid.

Revenue from the sale of product is recognised when the product has been dispatched to a customer pursuant to a salesorder and the associated risks have passed to the carrier or the customer.

Revenue from the provision of services is recognised in accordance with the percentage of completion method unless theoutcome of the contract cannot be reliably estimated. Where the outcome of a contract to provide services cannot bereliably estimated, and where it is probable that the costs will be recovered, revenue is recognised to the extent of costsincurred.

For fixed price contracts, the stage of completion is measured by reference to:(a) the milestones within the contract that have been completed by the company or economic entity and have been

accepted by the customer,(b) the labour costs incurred to date as a percentage of total estimated labour costs, or(c) the total costs incurred to date as a percentage of total estimated costs.

The method used is selected on the basis of that which best represents services performed and is dependent upon thenature of the contract.

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

Dividends are recognised as revenue when the right to receive payment is established.


Page 27


(f) Government grantsGrants from the government are recognised at their fair value where there is a reasonable assurance that the grant will bereceived and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the income statement over the period necessary tomatch them with the costs that they are intended to compensate.

Government grants relating to the purchase of property, plant and equipment are included in non-current liabilities asdeferred income and are credited to the income statement on a straight-line basis over the expected lives of the relatedassets.

(g) Income taxThe income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on thenational income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable totemporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements,and to unused tax losses.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when theassets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for eachjurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences tomeasure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initialrecognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differencesif they arose in a transaction, other than a business combination, that at the time of the transaction did not affect eitheraccounting profit or taxable profit or loss.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable thatfuture taxable amounts will be available to utilise those temporary differences and losses.

Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax basesof investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporarydifferences and it is probable that the differences will not reverse in the foreseeable future.

Tax consolidation legislationAdacel Technologies Limited and its wholly owned Australian controlled entities have implemented the tax consolidationlegislation as of 1 July 2002.

The head entity, Adacel Technologies Limited, and the controlled entities in the tax-consolidated group continue to accountfor their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax-consolidatedgroup continues to be a stand-alone taxpayer in its own right.

In addition to its own current and deferred tax amounts, Adacel Technologies Limited also recognises the current taxliabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed fromcontrolled entities in the tax-consolidated group.

Assets or liabilities arising under tax funding agreements with the tax-consolidated entities are recognised as amountsreceivable from or payable to other entities in the group. Details about the tax funding agreement are disclosed in note 8.

(h) LeasesLeases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards ofownership are classified as finance leases (note 30). Finance leases are capitalised at the lease’s inception at the lower ofthe fair value of the leased property and the present value of the minimum lease payments. The corresponding rentalobligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment isallocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. Theinterest element of the finance cost is charged to the income statement over the lease period so as to produce a constantperiodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquiredunder finance leases is depreciated over the shorter of the asset’s useful life and the lease term.

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified asoperating leases. Payments made under operating leases (note 30), (net of any incentives received from the lessor) arecharged to the income statement on a straight-line basis over the period of the lease. Lease income from operating leaseswhere the Group is a lessor is recognized in income on a straight-line basis over the lease term (note 5).


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(i) Acquisitions of assetsThe purchase method of accounting is used to account for all acquisitions of assets (including business combinations)regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assetsgiven, equity instruments issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable tothe acquisition. Where equity instruments are issued in an acquisition, the fair value of the instruments is their publishedmarket price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at thedate of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a morereliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initiallyat their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost ofacquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer tonote 1(q)). If the cost of acquisition is less than the Group’s share of the fair value of the identifiable net assets of thesubsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of theidentification and measurement of the net assets acquired.

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to theirpresent value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate atwhich a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

(j) Impairment of assetsGoodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually forimpairment. Other assets that are subject to amortisation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amountby which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’sfair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowestlevels for which there are separately identifiable cash flows (cash generating units).

(k) Cash and cash equivalentsFor cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call withfinancial institutions, other short-term, highly liquid investments with original maturities of three months or less that arereadily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bankoverdrafts. Bank overdrafts are shown as part of current liabilities on the balance sheet.

(l) Trade receivables and accrued revenue(i) Trade receivablesTrade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effectiveinterest method, less provision for impairment. Trade receivables payment terms are generally contained within the contractdocuments for each project and can vary from between 30 – 120 days.

Collectability of trade receivables is reviewed on an ongoing basis. Debts, which are known to be uncollectible, are writtenoff by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) isestablished when there is objective evidence that the Group will not be able to collect all amounts due according to theoriginal terms of the receivables. The amount of the provision is the difference between the asset’s carrying amount and thepresent 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 provision is recognised in the income statement. When a trade receivable for which an impairmentallowance had been recognized becomes uncollectible in a subsequent period, it is written off against the allowanceaccount. Subsequent recoveries of amounts previously written off are credited against other expenses in the incomestatement.

(ii) Accrued revenueAccrued revenue represents revenue that has been recognised, but which has not been invoiced to the customer at balancedate.

(m) InventoriesWork in progress and finished goods are stated at the lower of cost and net realisable value.

Costs deferred to work in progress comprise direct materials and direct labour. These costs are charged as expenses whenthe related revenue is recognised.


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(n) Investments and other financial assetsLoans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in anactive market. They arise when the Group provides money, goods or services directly to a debtor with no intention of sellingthe receivable. They are included in current assets, except for those with maturities greater than 12 months after the balancesheet date, which are classified as non-current assets. Loans and receivables are included in trade and other receivables inthe balance sheet (note 10) and non-current receivables (note 13). Loans and receivables are carried at amortised cost.

(o) Fair Value EstimationThe fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosurepurposes.

The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate theirfair values. The fair value of financial liabilit ies for disclosure purposes is estimated by discounting the future contractualcash flows at the current market interest rate that is available to the Group for similar financial instruments.

Details on how the fair value of financial instruments is determined are disclosed in note 2.

(p) Plant and equipmentPlant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directlyattributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cashflow hedges of foreign currency purchases of property, plant and equipment.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only whenit is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can bemeasured reliably. All other repairs and maintenance are charged to the income statement during the reporting period inwhich they are incurred.

Depreciation on plant & equipment assets is calculated using the straight line method to allocate their cost, net of theirresidual values, over their estimated useful lives, as follows:

Class of Fixed Assets Depreciation RateLeasehold improvements 20%Motor vehicles 25%Computers and office equipment 25-50%Furniture and fittings 10%Leased plant and equipment 15-25%

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greaterthan its estimated recoverable amount (note 1(j)).

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in theincome statement when sold.

(q) Intangible assets(i) GoodwillGoodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiableassets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included inintangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is not amortised.Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that itmight be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entityinclude the carrying amount of goodwill relating to the entity sold.

(ii) Intellectual propertyIntellectual property is carried at cost and is amortised on a straight-line basis over the periods of the expected benefit. TheBoard has established a process to review the value of the company's intellectual property assets, on a timely basis, forrecoverable amount assessment purposes. During the year ended 30 June 2004, the company reassessed the useful lifefrom 15 years to 5 years.


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(iii) Research and developmentExpenditure on research activities, undertaken with the prospect of obtaining new scientific or technical knowledge andunderstanding, is recognised in the income statement as an expense when it is incurred.

Expenditure on development activities, being the application of research findings or other knowledge to a plan or design forthe production of new or substantially improved products or services before the start of commercial production or use, iscapitalised if the product or service is technically and commercially feasible and adequate resources are available tocomplete development. The expenditure capitalised comprises all directly attributable costs, including costs of materials,services, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in theincome statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulatedamortisation.

At 30 June 2008 and 30 June 2007, no expenditure on development activities has been capitalised.

(r) Trade and other payablesThese amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year, whichare unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.

(s) Advance payments from customersAdvance payments from customers represent amounts invoiced to customers in excess of the amount of revenuerecognised on contracts. Services for these contracts will be rendered and revenue will be recognised in future periods.

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

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

(u) Borrowing costsBorrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is requiredto complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed.

The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interestrate applicable to the entity's outstanding borrowings during the year.

(v) ProvisionsProvisions for legal claims and service warranties are recognized when the Group has a present legal or constructiveobligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation; andthe amount has been reliably estimated. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined byconsidering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect toany one item included in the same class of obligations may be small.

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle thepresent obligation at the reporting date. The discount rate used to determine the present value reflects current marketassessments of the time value of money and the risks specific to the liability. The increase in the provision due to thepassage of time is recognized as interest expense.

(w) Employee benefits(i) Wages and salaries, annual leave and sick leaveLiabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to besettled within 12 months of the reporting date are recognised in other payables in respect of employees' services up to thereporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable.

(ii) Long service leaveThe liability for long service leave is recognised in the provision for employee benefits and measured as the present value ofexpected future payments to be made in respect of services provided by employees up to the reporting date using theprojected unit credit method. Consideration is given to expected future wage and salary levels, experience of employeedepartures and periods of service. Expected future payments are discounted using market yields at the reporting date onnational government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cashoutflows.


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(iii) SuperannuationContributions are made by the consolidated entity to defined contribution employee superannuation funds and are chargedas expenses when incurred. Amounts outstanding at balance date are recognised in other creditors.

(iv) Share-based paymentsShare-based compensation benefits are provided to employees via the Adacel Staff Share Option Plan.

Shares options granted before 7 November 2002 and/or vested before 1 January 2005No expense is recognised in respect of these options. The shares are recognised when the options are exercised and theproceeds received allocated to share capital.

Shares options granted after 7 November 2002 and vested after 1 January 2005The fair value of options granted under the Adacel Staff Share Option Plan is recognised as an employee benefit expensewith a corresponding increase in equity. The fair value is measured at grant date and recognised over the period duringwhich the employees become unconditionally entitled to the options.

The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into accountthe exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeablenature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividendyield and the risk-free interest rate for the term of the option.

The fair value of the options granted excludes the impact of any non-market vesting conditions (for example, profitability).Non-market vesting conditions are included in assumptions about the number of options that are expected to becomeexercisable. At each reporting date, the entity revises its estimate of the number of options that are expected to becomeexercisable. The employee benefit expense recognised each period takes into account the most recent estimate. The impactof the revision to original estimates, if any, is recognized in the income statement with a corresponding adjustment to equity.

Upon the exercise of options, the balance of the share-based payments reserve relating to those options is transferred toshare capital and the proceeds received, net of any directly attributable transaction costs, are credited to share capital.

(v) Bonus plansThe Group recognises a liability where contractually obliged or where there is a past practice that has created a constructiveobligation.

(vi) Termination benefitsLiabilities for termination benefits are recognised when a detailed plan for the terminations has been developed and a validexpectation has been raised in those employees affected that the terminations will be carried out. The liabilities fortermination benefits are recognised in other creditors unless the amount or timing of the payments is uncertain, in whichcase they are recognised as provisions.

Liabilities for termination benefits expected to be settled within 12 months are measured at the amounts expected to be paidwhen they are settled. Amounts expected to be settled more than 12 months from the reporting date are measured as theestimated cash outflows, discounted using market yields at the reporting date on national government bonds with terms ofmaturity and currency that match, as closely as possible, the estimated future payments, where the effect of the discountingis material.

(vii) Employee benefit on-costsEmployee benefit on-costs, including payroll tax, are recognised and included in the employee benefit liabilities and costswhen the employment to which they relate has occurred.

(x) Contributed equityOrdinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax,from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of abusiness are included in the cost of the acquisition as part of the purchase consideration.

If the entity reacquires its own equity instruments, e.g. as a result of a share buy-back, those instruments are deducted fromthe equity and the associated shares are cancelled. No gain or loss is recognized in the profit or loss and the considerationpaid including any directly attributable incremental costs (net of income taxes) is recognized directly in equity.


Page 32


(y) Earnings per share(i) Basic earnings per shareBasic earnings per share is calculated by dividing the profit/(loss) attributable to equity holders of the company, excludingany costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstandingduring the financial year, adjusted for bonus elements in ordinary shares issued during the year.

(ii) Diluted earnings per shareDiluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account theafter income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and theweighted average number of additional ordinary shares that would have been outstanding assuming the conversion of alldilutive potential ordinary shares.

(z) Security depositsSecurity deposits are carried at the amounts paid to suppliers in relation to contract performance for the rental of offices.Security deposits are refundable following successful performance of contractual obligations.

(aa) Onerous contractsA provision for onerous contracts is recognised when the expected benefits to be derived from the contract are less than theunavoidable costs of meeting the obligations under that contract, and only after any impairment losses to assets dedicatedto that contract have been recognised. The provision recognised is based on the excess of the estimated cash flows tomeet the unavoidable costs under the contract over the estimated cash flows to be received in relation to the contract,having regard to the risks of the activities relating to the contract. The net estimated cash flows are discounted using marketyields at balance date on national government guaranteed bonds with terms to maturity and currency that match, as closelyas possible, the expected future payments, where the effect of discounting is material.

(ab) Website costsCosts relating to the company's website are charged as expenses in the period in which they are incurred unless they relateto the acquisition of an asset, in which case they are capitalised and amortised over the period of expected benefit.

(ac) Goods and Services Tax (GST)Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is notrecoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part ofthe expense.

Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GSTrecoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet.

Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activitieswhich are recoverable from, or payable to the taxation authority, are presented as operating cash flow.

(ad) Rounding of amountsThe company is of a kind referred to in Class order 98/0100, issued by the Australian Securities and InvestmentsCommission, relating to the ''rounding off'' of amounts in the financial report. Amounts in the financial report have beenrounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar.

(ae) New accounting standards and interpretationsCertain new accounting standards and interpretations have been published that are not mandatory for 30 June 2008reporting periods. The Group’s and the parent entity's assessment of the impact of these new standards and interpretationsis set out below.

(i) AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards arising fromAASB 8.AASB 8 and AASB 2007-3 are effective for annual reporting periods commencing on or after 1 January 2009.AASB 8 will result in a significant change in the approach to segment reporting, as it requires adoption of a‘management approach’ to reporting on financial performance. The information being reported will be based onwhat the key decision-makers use internally for evaluating segment performance and deciding how to allocateresources to operating segments. The Group intends to apply AASB 8 from 1 January 2009. Application ofAASB 8 may result in different segments, segment results and different types of information being reported inthe segment note of the financial report. However, at this stage it is not expected to affect any of the amountsrecognised in the financial statements.


Page 33


(ii) Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to Australian Accounting Standardsarising from AASB 123 [AASB 1, AASB 101, AASB 107, AASB 111, AASB 116 & AASB 138 andInterpretations 1 & 12].The revised AASB 123 is applicable to annual reporting periods commencing on or after 1 January 2009.It has removed the option to expense all borrowing costs and, when adopted, will require the capitalisation ofall borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. Atpresent the Group does not have any qualifying assets, nor any plans to acquire, construct or produce anysuch qualifying assets. However, the Group accounting approach, in the event that such assets are acquired,constructed or produced will be in compliance with AASB 123.

(iii) AASB-I 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.AASB-I 14 will be effective for reporting periods commencing on or after 1 January 2008. It provides guidanceon the maximum amount that may be recognized as an asset in relation to a defined benefit plan and theimpact of minimum funding requirements on such an asset. The Group does not operate any defined benefitplans and this new standard will have no impact on the Group’ financial reports.

(iv) Revised AASB 101 Presentation of Financial Statements and AASB 2008-8 Amendments to AustralianAccounting Standards arising from AASB 101.A revised AASB101 was issued in September 2007 and is applicable for annual reporting periods beginning

on or after 1 January 2009. It requires the presentation of a statement of comprehensive income and makeschanges to the statement of changes in equity, but will not affect any of the amounts recognised in the financialstatements. If an entity has made a prior period adjustment or has reclassified items in the financialstatements, it will need to disclose a third balance sheet (statement of financial position), this one being as atthe beginning of the comparative period. The Group intends to apply the revised standard from 1 July 2009.


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2. FINANCIAL RISK MANAGEMENT

The Group’s activities expose it to a variety of financial risks; market risks (including currency risk and interest rate risk),credit risk, and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financialmarkets and seeks to minimize potential adverse effects on the financial performance of the Group. The Group may usederivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures.Derivatives are used exclusively for hedging purposes, i.e. not as trading or other speculative instruments. The Group usesdifferent methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in thecase of interest rate, foreign exchange and other price risks, and aging analysis for credit risk.

Risk management is carried out by the Group Chief Financial Officer, or equivalent, under policies approved by the Board ofDirectors. The Board provides written principles for overall risk management, as well as policies covering specific areas suchas foreign exchange risk, interest rate risk, use of derivative financial instruments and non-derivative financial instruments,and investment of excess liquidity.

The Group and the parent entity hold the following financial instruments:

(a) Market risk

(i) Foreign exchange riskThe Group and the parent entity operate internationally and are exposed to foreign exchange risk arising from currencyexposures primarily to the US dollar and the Canadian dollar.

Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in acurrency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting.To minimise the exposure, the Group manages the natural hedges that may exist and may also enter into certain forwardexchange contracts. A high proportion of foreign exchange risk within the Group results from transactions between membersof the Group, and there is therefore no currency risk to the Group resulting from these transactions.

When significant transactions with external customers or suppliers are conducted in currencies other than the functionalcurrency, forward exchange contracts may be put into place to minimise the risk.

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

Values are shown in foreign currencies 30 June 2008 30 June 2007USD CAD USD CAD$’000 $’000 $’000 $’000

Cash and cash equivalents 244 - 4,256 -Trade and other receivables 2,542 - 1,859 -Accrued revenues 246 58 222 -Other financial assets - - - 350Trade and other payables (851) - (115) -Derivative financial instruments - (213) 150 -

Consolidated Parent entity2008 2007 2008 2007$’000 $’000 $’000 $’000

Financial assetsFrom continuing operationsCash and cash equivalents 1,242 11,137 650 819Trade and other receivables 11,640 3,919 47 482Derivative financial instruments 42 - - -Investments in subsidiary companies - - 10,790 15,702Receivable from subsidiaries - - 1,619 -

12,924 15,056 13,106 17,003Financial liabilitiesTrade and other payables 6,849 4,392 515 440Borrowings 1,863 - - -Derivative financial instruments 260 165 260 -Payable to subsidiaries - - - 938

8,972 4,557 775 1,378


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2. FINANCIAL RISK MANAGEMENT (CONTINUED)

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

Values are shown in foreign currencies 30 June 2008 30 June 2007USD CAD USD CAD$’000 $’000 $’000 $’000

Trade and other receivables - - 330 -Accrued revenues - 58 - -Derivative financial instruments - (255) - -

Group sensitivityBased on the financial instruments held at 30 June 2008, had the Australian dollar weakened/strengthened by 10% againstthe US dollar and by 10%against the Canadian dollar, with all other variables held constant, the Group’s post tax profit forthe year would have been $233,000 higher/$189,000 lower (2007 - $875,000 higher/$717,000 lower), mainly as a result offoreign exchange gains/losses on translation of US dollar and Canadian dollar denominated financial instruments as detailedin the above table. There would be no direct impact on equity resulting from this movement.

(ii) Price riskThe group is not exposed to equity securities price risks since all investments are impaired and recorded at the impairmentvalues. None of these impaired investments are in publicly traded equity vehicles. Neither the Group nor the parent entity isexposed to commodity price risk.

(iii) Cash flow and fair value interest rate riskThe Group’s main interest rate risk arises on cash balances held and on its bank facility with the Royal Bank of Canada.Cash at bank and borrowings under the facility are subject to variable interest rate. Excess cash is placed on short-termdeposit, which is also subject to interest rate risk. The Group monitors the movements in interest rates, but to date has notdeemed it necessary or cost effective to use derivative financial instruments to manage such risk.

Values are shown in foreign currencies 30 June 2008 30 June 2007Weightedaverage

interest rate

Balance Weightedaverage

interest rate

Balance

% $’000 $’000 $’000

Cash at bank 3.15 1,242 3.34 11,137Bank overdraft 5.75 (1,863) - -

Net exposure to cash flow interest rate risk (621) 11,137

Group sensitivity

The Group’s main interest rate risk arises from cash equivalents, loans and other receivables with variable interest rates.However, the impact of any anticipated movements in interest rates would not have a material impact on the results of theGroup.

Parent entity sensitivityThe parent entity’s main interest rate risk arises from cash equivalents, loans and other receivables with variable interestrates. However, the impact of any anticipated movements in interest rates would not have a material impact on the results ofthe parent entity.

(b) Credit risk

Credit risk arises from cash and cash equivalents, derivative financial instruments, deposits and borrowings with banks andfinancial institutions, as well as credit exposures to customers, including outstanding receivables and committedtransactions.

The Group has no significant concentration of risk.

For banks and financial institutions each entity deals exclusively with a single bank with whom we have built up a long-standing relationship. For customers, due to the nature of the customer base being predominantly government, defence, ormajor commercial businesses within the air transport industry, there is no significant exposure to customer risk.


Page 36


For derivative financial instruments, the Group has access to a facility with the major bank, which is reviewed on a regularbasis to ensure that it is appropriate to the current requirements. The credit quality of financial assets that are neither pastdue nor impaired can be assessed by reference to external credit ratings (if available) or to historical information aboutcounterparty default rates.

The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised onpage 34.

Credit risk further arises in relation to financial guarantees given to certain parties (see note 29 for details). Such guaranteesare only provided as a result of contractual obligations to customers, and are primarily in the nature of performanceguarantees.

(c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of fundingthrough an adequate amount of committed credit facilities and the ability to close out market positions. The Group managesliquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assetsand liabilities. Due to much of the business being project driven, the Chief Financial Officer, North America, or equivalent,aims to maintain flexibility in funding by keeping committed credit lines available with the Royal Bank of Canada. Surplusfunds are generally only invested in short-term bank deposits to enable ready access to the funds as required.

Financing arrangementsThe Group and the parent entity had access to undrawn borrowing facilities at the reporting date as disclosed in note 22.

Maturities of financial instrumentsThe tables below analyse the Group’s and the parent entity’s financial liabilities, net and gross settled derivative financialinstruments into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturitydate. The amounts disclosed in the table are the contractual undiscounted cash flows.

Group – At 30 June 2008 Less than6 months

6 – 12months

Between 1and 2 years

Total contractualcash flows

Carrying Amount(assets)/liabilities

$’000 $’000 $’000 $’000 $’000

Borrowings - overdraft 1,863 - - 1,863 1,863Trade and other payables 6,849 - - 6,849 6,849Derivatives 148 46 66 260 260

Total 8,860 46 66 8,972 8,972

Group – At 30 June 2007 Less than 6months

6 – 12months




$’000 $’000 $’000 $’000 $’000

Trade and other payables 4,392 - - 4,392 4,392Derivatives 165 - - 165 165

Total 4,557 - - 4,557 4,557


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Parent – At 30 June 2008 Less than6 months

6 – 12months




$’000 $’000 $’000 $’000 $’000

Trade and other payables 515 - - 515 515Dreivatives 148 46 66 260 260

Total 663 46 66 775 775

Parent – At 30 June 2007 Less than 6months

6 – 12months




$’000 $’000 $’000 $’000 $’000

Trade and other payables 440 - - 440 440

Total 440 - - 440 440

(d) Fair value estimation

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

The Group does not hold financial instruments that are traded in active markets, nor does it hold derivative contracts that areclassified as held for trading.

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


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3. CRITICAL ACCOUNTING ESTIMATES

Estimates and judgements are continually evaluated and are based on historical experience and other factors, includingexpectations of future events that may have a financial impact on the entity and that are believed to be reasonable under thecircumstances.

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 materialadjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Contract revenue recognised at balance dateThe Group reviews all contracts work in progress at the balance date to determine the percentage value of completion.Costs and revenues are brought to account based on the outcomes of the review, in accordance with the accounting policystated in note 1(e). The judgements can only be finally confirmed at the point of completion of the contract and final deliveryto the customer. This may result in differences between the revenue recognised at balance date and the amounts that aresubsequently determined to be applicable. Any such differences are brought to account at the next contract review cycle.

Estimated useful life of intangible assetsThe Group amortises intellectual property over five years, which is the estimated period over which the expected benefitsare expected to derive. There are inherent judgements in estimating this period as it is dependent on future product sales.This may result in a change in the amortisation period.

Income taxesThe Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement isrequired in determining the worldwide provision for income taxes. There are many transactions and calculations undertakenduring the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilitiesfor anticipated tax audit issues based on the Group’s current understanding of the tax law. Where the final tax outcome ofthese matters is different from the amounts that were initially recorded, such differences will impact the current and deferredtax provisions in the period in which such determination is made.In addition, the Group has recognised deferred tax assets relating to carried forward tax losses and unused tax credits to theextent that there are sufficient taxable temporary differences (deferred tax liabilities) relating to the same taxation authorityand the same subsidiary against which the unused tax losses can be utilised. Further tax losses and unused tax credits arealso booked to the extent that it is probable that they will be recouped. However, utilisation of the tax losses also depends onthe ability of the entity to actually generate taxable income and satisfy certain tests at the time the losses are recouped.

4. SEGMENT INFORMATION

(a) Description of segments

Geographical segmentsThe consolidated entity is organised on a global basis into two main geographical areas:North AmericaServicing the US and Canada as well as global markets in air traffic control simulation and air traffic management softwareand services.AustraliaServicing the Australian domestic market for simulation and software development services.

Business segmentsAlthough the consolidated entity’s divisions are managed on a global basis they operate in the following divisions by productand service type.

SimulationEncompassing defence and aviation simulation services and support.

Software EngineeringEncompassing Oceanic air traffic management systems, real time software and systems development.


Page 39

4. SEGMENT INFORMATION (CONTINUED)

(b) Primary reporting format –geographical segments

Notes Australia North America Corporate Office IntersegmentEliminations

Total

2008 2007 2008 2007 2008 2007 2008 2007 2008 2007$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000

Sales to external customers 177 174 36,794 34,630 - - - - 36,971 34,804Intersegment sales 294 342 125 - - - (419) (342) - -Total sales revenue 5 471 516 36,919 34,630 - - (419) (342) 36,971 34,804Other revenue/income 5,6 150 - 790 776 602 95 - - 1,542 871Total segment revenue/income 621 516 37,709 35,406 602 95 (419) (342) 38,513 35,675

Segment result prior to the followingitems:

(317) (42) 1,124 3,575 602 - 128 (275) 1,537 3,258

Redundancies (24) - - - - - - - (24) -Royalties due to Canada entity (3) - 3 - - - - - - -Segment result (344) (42) 1,127 3,575 602 - 128 (275) 1,513 3,258Corporate office costs - - - - (1,579) (1,507) - - (1,579) (1,507)Management fees - - (567) (667) 567 667 - - - -Interest on funds advanced – intergroup - - 248 76 (248) (76) - - - -Finance costs – external - - (38) (46) - (6) - - (38) (52)Profit/(loss) before income tax (344) (42) 770 2,938 (658) (922) 128 (275) (104) 1,699Income tax (expense)/benefit 1,914 873Profit/(loss) after income tax 1,810 2,572

Segment assets 73 28 32,567 33,618 12,446 16,975 (21,742) (27,445) 23,344 23,176Unallocated assets - -Total assets 23,344 23,176

Segment liabilities 22,163 21,773 14,186 738 (177) 531 (25,152) (14,234) 11,020 8,808Unallocated liabilities - -Total liabilities 11,020 8,808

Acquisitions of plant and equipment - - 711 932 - 8 - - 711 940

Depreciation and amortization expense 7 - - 1,546 1,442 - 8 (128) (147) 1,418 1,303

Impairment of trade receivables - - (172) (195) - (15) - - (172) (210)

Other non-cash expenses - - - - - (55) - - - (55)


Page 40

4. SEGMENT INFORMATION (CONTINUED)

(c) Secondary reporting format –business segments Notes Simulation Software Engineering Corporate

OfficeIntersegmentEliminations

Total

2008 2007 2008 2007 2008 2007 2008 2007 2008 2007$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000

Sales to external customers 23,785 23,201 13,186 11,603 - - - - 36,971 34,804Intersegment sales 419 - - 342 567 - (986) (342) - -Total sales revenue 5 24,204 23,201 13,186 11,945 567 - (986) (342) 36,971 34,804Other revenue/income 5,6 1,337 776 150 - 55 95 - - 1,542 871Total segment revenue/income 25,541 23,977 13,336 11,945 622 95 (986) (342) 38,513 35,675

Segment assets 31,359 32,954 1,281 692 12,446 16,975 (21,742) (27,445) 23,344 23,176Total assets 23,344 23,176

Acquisitions of plant & equipment 498 652 213 280 - 8 - - 711 940

(d) Notes to and forming part of the segment information

(i) Accounting policiesSegment information is prepared in conformity with the accounting policies of the entity as disclosed in note 1 and the accounting standard AASB 114 Segment Reporting.

Segment revenues, expenses, assets and liabilities are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on areasonable basis. Segment assets include all assets used by a segment and consist primarily of operating cash, receivables, accrued revenues, inventories, other plant andequipment and intangible assets net of related provisions. While most of the assets can be directly attributable to individual segments, the carrying amounts of certain assetsused jointly by segments are allocated based on reasonable estimates of usage. Segment liabilities consist primarily of trade and other creditors, advanced payments fromcustomers, employee benefits and other provisions.

(ii) Inter-segment transfersSegment revenues, expenses and results include transfers between segments. Such transfers are priced on an “arm’s length” basis and are eliminated on consolidation.


Page 41


6. OTHER INCOME

Grant income 654 674 - -Net profit on disposal of business assets 150 - 150 -Net credit arising from reversal of FCTR on liquidation ofsubsidiary company 547 - - -Net profit on disposal of plant and equipment - 55 - 55

1,351 729 150 55

(a) Government grants

Government grants recognised as other income by the Group during the financial year comprise $654,000 (2007:$674,000. There are no unfulfilled conditions or other contingencies attaching to these grants. The Group did notbenefit directly from any other forms of government assistance.


7. EXPENSES

Profit/(loss) before income tax includes the followingspecific expenses:

Depreciation/amortisation of property, plant & equipmentLeasehold improvements 70 52 - -Furniture, fittings and equipment 452 351 - 8Motor vehicles 25 30 - -

Total depreciation 547 433 8

Amortisation of intangiblesIntellectual property 871 870 - -

Total depreciation and amortisation 1,418 1,303 - 8

Interest and finance charges paid/payable 38 52 247 82Rental expense relating to operating leases 792 1,600 53 48Net foreign exchange losses 476 665 296 1Defined contribution superannuation expense 742 678 53 51Research and development 18 180 - -Bad and doubtful debts – trade debtors - 202 (15) 7Fair value adjustment to inter-company loans - - - 31Provision for diminution of investments in subsidiaries - - - -


5. REVENUE FROM CONTINUING OPERATIONS

Sales revenueSale of services and systems 36,971 34,804 471 516

36,971 34,804 471 516Other revenueInterest 118 142 55 40Rental income 73 - - -Management fee - - 567 667

191 142 622 70737,162 34,946 1,093 1,223


Page 42


8. INCOME TAX

(a) Numerical reconciliation of income tax expense/(benefit) toprima facie tax payable

Profit/(loss) from continuing operations before income tax expense (104) 1,699 (1,548) (737)Income tax calculated at applicable tax rates (51) 629 (464) (221)

Tax effect of amounts which are not deductible/(taxable) incalculating taxable income:

Provision for diminution of investments - - - -Increase/(decrease) of provision for diminution of intercompanyloans - - - (2,561)Canadian Federal and Provincial income tax credits (1,856) (1,332) - -Forgiveness of intergroup loans - - - 1,924Non-deductible interest - 313 - -Other items (net) (95) (349) 3 81

Current year tax losses and temporary differences not brought toaccount 860 798 461 777Utilisation of previously unbooked tax losses and research anddevelopment tax credits (784) (697) - -Income tax under/(over) provided in prior years 12 (235) - -Income tax expense/(benefit) (1,914) (873) - -

(b) Income tax (expense)/benefit

Current tax 1,926 1,108 - -(Under)/over provided in prior years (12) (235) - -

1,914 873 - -

Income tax (expense)/benefit is wholly attributable tocontinuing operations

(c) Estimated Unused Tax losses

Unused tax losses for which no deferred tax asset hasbeen recognised 48,702 48,278 34,263 31,901

Potential tax benefit at applicable tax rates* 15,146 15,003 10,278 9,571

(d) Estimated Unrecognised temporary differences

Temporary differences for which no deferred tax assetor liability has been recognised 729 1,494 (241) 824

Potential tax benefit at applicable tax rates* 241 644 (72) 247

* Tax rates applicable are 30%, 32.02%, 34%, and 40%.Tax rates for the prior year are 30%, 32.02%, 34%, and 40%.

These are the income tax rates applicable in Australia, Canada,and USA.


Page 43

8. INCOME TAX (CONTINUED)

(e) Tax consolidation legislation

Adacel Technologies Limited and its wholly owned Australian controlled entities implemented the tax consolidationlegislation from 1 July 2002. The accounting policy in relation to this legislation is set out in note 1(g).

On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharingagreement, which, in the opinion of the directors, limits the joint and severable liability of the wholly owned entities in thecase of a default by the head entity, Adacel Technologies Limited.

The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate AdacelTechnologies Limited for any current tax payable assumed and are compensated by Adacel Technologies Limited for anycurrent tax receivable and the deferred tax assets relating to unused tax losses or unused tax credits that are transferred toAdacel Technologies Limited under the tax consolidation legislation. The funding amounts are determined by reference tothe amounts recognized in the wholly owned entities’ financial statements.

The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the headentity, which is issued as soon as practicable after the end of each financial year. The head entity may also require paymentof interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognized ascurrent inter-company receivables or payables (see note 13).


9. CURRENT ASSETS - CASH AND CASH EQUIVALENTS

CurrentCash at bank and in hand 1,242 11,137 650 819

1,242 11,137 650 819

(a) Reconciliation to cash at the end of the year

The above figures are reconciled to cash at the end ofthe financial year as shown in the statement of cashflows as follows:

Balances as above 1,242 11,137 650 819Bank overdrafts (note 22) (1,863) - - -Balances per statement of cash flows (621) 11,137 650 819

(b) Cash at bank and in hand

Cash at bank is interest bearing at rates of 0.0% to 6.73% (2007 0.0% to 5.41%). Cash at bank is at call.

(c) Interest rate risk exposure

The Group’s and the parent entity’s exposure to interest rate risk is discussed in note 2.


Page 44


10. CURRENT ASSETS – TRADE & OTHER RECEIVABLES

CurrentTrade receivables 11,238 3,481 10 439Provision for impairment of receivables (172) (210) - (15)

11,066 3,271 10 424Sundry debtors 65 26 15 26Security deposits 48 55 4 4Prepayments 461 567 18 28

11,640 3,919 47 482

(a) Impaired trade receivables

As at 30 June 2008, current trade receivables with a nominal value of $172,000 (2007 - $210,000) were impaired. Theamount of the provision was $172,000 (2007 - $210,000). The individually impaired receivables relate to a USA governmentcontract where the pricing is in dispute,, and it is assessed that all of these receivables will be recovered over time. Therewere no impaired trade receivables for the parent entity in 2008 or 2007.

The age of these receivables is as follows:


1 to 3 months - - - 53 to 6 months - - - 2Over 6 months 172 195 - 8

172 195 - 15

Movements in the provision for impairment of receivables are as follows:


As at 1 July (210) (42) (15) (42)Provision for impairment recognised during the year - (202) - (7)Receivables written off during the year as uncollectible - 20 20Unused amount reversed 10 8 10 8Provision reversed after credits issued to the customer 5 6 5 6Foreign Exchange impact 23 - - -As at 30 June (172) (210) - (15)

The creation and release of the provision for impaired receivables has been included in ‘other expenses’ in the incomestatement. Amounts charged to the allowance account are generally written off when there is no expectation of recoveringadditional cash.

(b) Past due but not impaired

As of 30 June 2008, trade receivables of $9,040,000 (2007 - $983,000) were past due but not impaired. A large proportion ofthe balance relates to US government organisations where there has been no history of default and payment is expected tobe received in full. $5,090,000 of the past due balance of $7,352,000 in the following table has been received subsequent tothe 30 June 2008.

Consolidated Parent entity2008 2007 2008 2007

$’000 $’000 $’000 $’000

Up to 3 months 7,352 605 - 2823 to 6 months 906 54 - 5Over 6 months 782 324 - 9

9,040 983 - 296


Page 45

10. CURRENT ASSETS – TRADE & OTHER RECEIVABLES (CONTINUED)

The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on thecredit history of these other classes, it is expected that these amounts will be received when due. The Group does not holdany collateral in relation to these receivables.

(c) Foreign exchange and interest rate risk

Information about the Group’s and the parent entity’s exposure to foreign currency risk and interest rate risk in relation totrade and other receivables is provided in note 2.

(d) Fair value and credit risk

Due to the short- term nature of these receivables, their carrying amount is assumed to approximate their fair value.The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentionedabove. Refer to note 2 for more information on the risk management policy of the Group and the credit quality of the entity’strade receivables.


11. CURRENT ASSETS - INVENTORIES

CurrentWork-in-progress on contracts – at cost 1,090 478 - -

12. DERIVATIVE FINANCIAL INSTRUMENTS

(a) Instruments used by the Group

Forward exchange contractsThe functional currency for the North American operations is either Canadian dollars or US dollars. Virtually all of thebusiness expenses are incurred in US or Canadian dollars by these business units in Canada and USA. Due to the nature ofthese compensating businesses and the interaction in business activities, foreign currency hedges are not utilized forcustomer contracts denominated in either Canadian or USA dollars.

(b). Risk exposures

Information about the Group’s and the parent entity’s exposure to credit risk, foreign exchange and interest raterisk is provided in note 2.


13. NON-CURRENT ASSETS – RECEIVABLES

Receivable from related parties - - 3,286 1,667Provision for non-recovery of amounts receivable fromrelated parties - - (1,667) (1,667)

- - 1,619 -

(a) Impaired receivables and receivables past due

Provision is made for non-recovery of amounts receivable from inter-group subsidiaries of the parent entity to the extent thatthe fair value of the these receivables is written down to a fair value representation of the carrying value.

(b) Fair Value Disclosures

The fair values of non-current receivables equates to the carrying value

(c) Interest rate risk exposure

Details of the group’s exposure to interest rate risk is set out in note 2.


Page 46


14. NON-CURRENT ASSETS -OTHER FINANCIAL ASSETS $’000 $’000 $’000 $’000

(1) Other financial assets at fair value through profit or loss

Non CurrentUnlisted shares – fair value - - - -

(a) Unlisted shares

Adacel Technologies Limited held approximately a 47% interest in Logo Media Inc, a company established in the USA forthe purpose of Machine Language Translation. The principal activities of the company are internet language translationservices. As at 30 June 2007 the cost of this investment was $14,050,000. This company ceased trading in 2003 and at thattime there were no assets held by the company. The Company was dissolved by statute on 31 March 2008. This investmentwas removed from the records of the parent entity as of 1 April 2008.

Adacel Technologies Ltd also has an investment in IT&T Skills Exchange Pty Ltd for a cost of $150,000 (2007: $150,000)and an investment in Smart Internet Technology CRC for a cost of $346,000 (2007: $346,000). Adacel Technologies Ltdhas less than 20% holding in both of these entities and does not have control or significant influence.

All of the interests in these entities described above have been measured at fair value of nil.

Consolidated Parent entityNotes 2008 2007 2008 2007

(2) Other Financial Assets $’000 $’000 $’000 $’000

Non CurrentShares in subsidiaries (unlisted) – at cost 32 - - 19,261 24,950Provision for diminution - - (8,471) (8,471)Security deposit against Credit Card facility 129 147 - -Deposit letter of performance guarantee with EDC - 386 - -

129 533 10,790 16,479

(a) Security DepositsThe security deposits are not interest earning deposits.


Page 47

15. NON-CURRENT ASSETS - PLANT AND EQUIPMENT

Furniture,fittings &

equipment

Motorvehicles

Equipmentunder

financelease

Leaseholdimprovements

Total

$’000 $’000 $’000 $’000 $’000

Consolidated

At 1 July 2006Cost 7,687 142 170 263 8,262Accumulated depreciation/amortisation (7,021) (22) (170) (179) (7,392)Net book amount 666 120 - 84 870

Year ended 30 June 2007Opening net book value 666 120 - 84 870Additions 692 - - 295 987Disposals - (5) - (13) (18)Depreciation/amortisation expense (351) (30) - (52) (433)Reclassification of asset types 17 - - (17) -Exchange differences (88) (12) - (24) (124)Closing net book amount 936 73 - 273 1,282

At 30 June 2007Cost 5,520 110 - 363 5,993Accumulated depreciation/amortisation (4,584) (37) - (90) (4,711)Net book amount 936 73 - 273 1,282

Year ended 30 June 2008Opening net book value 936 73 - 273 1,282Additions 689 - - 22 711Disposals - - - - -Depreciation/amortisation expense (452) (25) - (70) (547)Reclassification of asset types - - - - -Exchange differences (117) (7) - (28) (152)Closing net book amount 1,056 41 - 197 1,294

At 30 June 2008Cost 5,796 93 - 344 6,233Accumulated depreciation/amortisation (4,740) (52) - (147) (4,939)Net book amount 1,056 41 - 197 1,294


Page 48

15. NON-CURRENT ASSETS - PLANT AND EQUIPMENT (CONTINUED)

Furniture,fittings &

equipment

Motorvehicles

Equipmentunder

financelease

Leaseholdimprovements

Total

$’000 $’000 $’000 $’000 $’000

Parent entity

At 1 July 2006Cost 4,018 - 170 - 4,188Accumulated depreciation/amortisation (4,018) - (170) - (4,188)Net book amount - - - - -

Year ended 30 June 2007Opening net book value - - - - -Additions 8 - - - 8Disposals - - - - -Depreciation/amortisation expense (8) - - - (8)Closing net book amount - - - - -

At 30 June 2007Cost 1,516 - - - 1,516Accumulated depreciation/amortisation (1,516) - - - (1,516)Net book amount - - - - -

Year ended 30 June 2008Opening net book value - - - - -Additions - - - - -Disposals - - - - -Depreciation/amortisation expense - - - - -Closing net book amount - - - - -

At 30 June 2008Cost 1,499 - - - 1,499Accumulated depreciation/amortisation (1,499) - - - (1,499)Net book amount - - - - -

(a) Non-current assets pledged as security

Refer to note 22 for information on non-current assets pledged as security by the parent entity and its controlled entities


Page 49

16. NON-CURRENT ASSETS – INTANGIBLE ASSETS

Coreintellectual

property

Purchasedintellectual

property

Totalintellectual

property

Goodwill Total

$’000 $’000 $’000 $’000 $’000

Consolidated

At 1 July 2006Cost 21,136 919 22,055 3,705 25,760Accumulated amortisation (18,293) (919) (19,212) (3,705) (22,917)Net book amount 2,843 - 2,843 - 2,843

Year ended 30 June 2007Opening net book value 2,843 - 2,843 - 2,843Amortisation expense (870) - (870) - (870)Exchange differences (2) - (2) - (2)Closing net book amount 1,971 - 1,971 - 1,971

At 30 June 2007Cost 15,550 919 16,469 2,535 19,004Accumulated depreciation/amortisation (13,579) (919) (14,498) (2,535) (17,033)Net book amount 1,971 - 1,971 - 1,971

Year ended 30 June 2008Opening net book value 1,971 - 1,971 - 1,971Amortisation expense ** (871) - (871) - (871)Exchange differences - - - - -Closing net book amount 1,100 - 1,100 - 1,100

At 30 June 2008Cost 15,312 869 16,181 2,464 18,645Accumulated depreciation/amortisation (14,212) (869) (15,081) (2,464) (17,545)Net book amount 1,100 - 1,100 - 1,100

** Amortisation of $871,000 (2007: $870,000) is included indepreciation and amortisation expense in the income statement


Page 50

16. NON-CURRENT ASSETS – INTANGIBLE ASSETS (CONTINUED)

Coreintellectual

property

Purchasedintellectual

property

Totalintellectual

property

Goodwill Total

$’000 $’000 $’000 $’000 $’000

Parent entity

At 1 July 2006Cost - 919 919 1,607 2,526Accumulated amortisation - (919) (919) (1,607) (2,526)Net book amount - - - - -

Year ended 30 June 2007Opening net book value - - - - -Amortisation expense - - - - -Disposals - - - - -Closing net book amount - - - - -

At 30 June 2007Cost - 919 919 1,607 2,526Accumulated amortisation - (919) (919) (1,607) (2,526)Net book amount - - - - -

Year ended 30 June 2008Opening net book value - - - - -Amortisation expense - - - - -Disposals - - - - -Closing net book amount - - - - -

At 30 June 2008Cost - 869 869 1,607 2,476Accumulated depreciation/amortisation - (869) (869) (1,607) (2,476)Net book amount - - - - -

17. NON-CURRENT ASSETS – DEFERRED TAX ASSETSConsolidated Parent entity

2007 2006 2007 2006Note $’000 $’000 $’000 $’000

The balance comprises temporary differences attributable to:

Tax losses and unused tax credits 1,376 - - -

Total deferred tax assets 1,376 - - -

Deferred tax assets to be recovered within 12 months 1,376 - - -Deferred tax assets to be recovered after more than 12 months - - - -Total deferred tax assets 1,376 - - -


Page 51


18. CURRENT LIABILITIES – TRADE AND OTHER PAYABLES

Trade payables 5,855 3,423 439 365Inter-group payables - - - 938Other payables (a) 994 969 76 75

6,849 4,392 515 1,378

(a) Amounts not expected to be settled within the next 12 monthsOther payables include accruals for annual leave. The entire obligation is presented as current, since the Group does nothave an unconditional right to defer settlement. However, based on past experience, the Group does not expect allemployees to take the full amount of accrued leave within the next 12 months. The following amounts reflect leave that is notexpected to be taken within the next 12 months


Annual leave obligation expected to be settled after 12months

271 257 40 34

(b) Risk exposureInformation about the Group’s and the parent entity’s exposure to foreign exchange risk is provided in note 2.


19. CURRENT LIABILITIES - BORROWINGS

SecuredBank overdrafts 1,863 - - -Total secured current borrowings 1,863 - - -

Total Current Borrowings 1,863 - - -

(a) Risk exposures

Details of the group’s exposure to risks arising from current and non-current borrowings areprovided in note 2.

(b) Security and fair value disclosures

Information about the security relating to each of the secured liabilities and the fair value ofeach of the borrowings is provided in note 2.


Page 52


20. CURRENT LIABILITIES – PROVISIONS

CurrentEmployee benefits – Long service leave 207 183 207 183Service and contract performance warranties 397 713 - -

604 896 207 183

(a) Service and contract performance warrantiesProvision is made for the estimated warranty claims in respect of contracts delivered which are still under warranty atbalance date. These claims are expected to be settled in the next financial year. Management estimates the provision basedon historical warranty claim information and any recent trends that may suggest future claims could differ from historicalamounts.

(b) Movements in provisionsMovements in each class of provision during the financial year, other than employee benefits are set out below.

Warranty$’000

Carrying amount at the beginning of the yearCharged/(credited to the income statement

-additional provisions recognised-unused amounts reversed

Amounts used during the period

713

741(761)(223)

Foreign exchange impact on opening balance (73)

Carrying amount at the end of the year 397

(c) Amounts not expected to be settled within the next 12 monthsThe current provision for long service leave includes all unconditional entitlements where employees have completed therequired period of service and also those where employees are entitled to pro-rata payments in certain circumstances. Theentire amount is presented as current, since the Group does not have an unconditional right to defer settlement. However,based on past experience, the Group does not expect all employees to take the full amount of accrued long service leave orrequire payment within the next 12 months. The following amounts reflect leave that is not expected to be taken or paidwithin the next 12 months.


Long service leave obligation expected to be settledAfter 12 months 143 145 143 145


21. CURRENT LIABILITIES –OTHER FINANCIALLIABILITIES

Financial guarantees (a)Net foreign exchange liability on embedded derivatives 218 165 260 -

218 165 260 -

(a) Embedded derivativesThe parent entity has entered into a contract with an Australian customer in Canadian dollars for C$7,234,000, giving rise to aFX loss at balance date of A$260,000 on the outstanding portion of the contract still to be billed and delivered.A subsidiary has entered into a contract with a UK customer in US dollars for US$3,300,000, giving rise to a FX gain atbalance date of A$42,000 on the outstanding portion of the contract still to be billed and delivered.


Page 53


23. NON-CURRENT LIABILITIES - OTHER

Deferred lease inducement 74 105 - -74 105 - -

The lease for the premises in Canada came due for renewal during 2007. An inducement for the company to sign a new 5-year lease was agreed to by the lessor. This inducement will be progressively brought to account as a reduction in the rentalexpense payable over the remaining period of the lease.


22. NON-CURRENT LIABILITIES - BORROWINGS

FINANCING ARRANGEMENTS

Bank facilities availableOverdraft 4,886 5,292 - -Guarantees 2,831 3,403 - -Foreign exchange contracts 305 331 - -Credit card 306 341 10 10

8,328 9,367 10 10Bank facilities used at balance dateOverdraft 1,863 - - -Guarantees 2,628 3,183 - -Foreign exchange contracts - - - -Credit card 30 31 1 -

4,521 3,214 1 -

Bank facilities unused at balance dateOverdraft 3,023 5,292 - -Guarantees 203 220 - -Foreign exchange contracts 305 331 - -Credit card 276 310 9 10

3,807 6,153 9 10

The Royal Bank of Canada has provided the company a facility for up to $5 million Canadian Dollars. Access to the facilityis governed by pre-agreed covenants with the bank and is repayable on demand. The facility is secured by a fixed andfloating charge over the assets and undertakings of Adacel Inc (Canadian operating entity). Adacel Technologies Limited(the parent entity) and the other North American entities (being Adacel Systems Inc, Adacel Technologies Holdings Inc andAdacel Technologies Inc) have also agreed to provide a guarantee to the bank for the facility.

The unsecured bank guarantee and foreign exchange contracts facilities are subject to annual review.

The Credit card facility is secured by a cash deposit.

The directors have reviewed the size and terms of the facilities and are satisfied that the operating plans and budgets for theperiod of 12 months from the date of signing this financial report will provide sufficient cash flows, that together with thefacility, will be adequate for the company’s requirements.

Risk exposuresInformation about the Group’s and the parententity’s exposure to interest rate and foreigncurrency changes is set out in note 2.


Page 54


24. CONTRIBUTED EQUITY

(a) Share capitalOrdinary shares 76,830 79,317 76,830 79,317

(b) Movements in ordinary share capitalDate Details Number of

SharesIssuePrice

$'000

1 July 2006 Balance 87,528,524 79,200

24 April 200724 April 200717 May 200721 May 200730 June 2007

Exercise of optionsExercise of optionsExercise of optionsExercise of optionsTransfer from share based payments reserve

75,0002,000

75,00070,000

-

0.350.500.350.58

261

264123

30 June 2007 Balance 87,750,524 79,317

16 Aug 07-30 Jun 0816 Aug 07-30 Jun 0817 May 200731 Dec 2007

Share buy-backShare buy-back costsExercise of optionsTransfer from share based payments reserve

(4,171,146)-

250,000-

(2,587)(24)

8737

30 June 2008 Balance 83,829,378 76,830

(c) Share options(i) At the end of the year there were 5,442,000 unissued ordinary shares under the Staff Share Option Plan.(ii) At the end of the year there were 300,000 unissued ordinary shares under option to the chairman of the Board of

Directors following approval by the shareholders at the Annual General Meeting on the 19 November 2004.

(d) Terms and conditions of ordinary sharesThe Ordinary shares of Adacel Technologies Limited have no par value. Ordinary shares have the right to receive dividendsas declared and in the event of winding up the company, to participate in the proceeds from the sale of all surplus assets inproportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either inperson or by proxy, at a meeting of the company.

(e) Terms and conditions of share options

Staff Share Option Plan OptionsThe terms and conditions of the options issued under the Staff Share Option Plan are disclosed in note 37.

Chairman’s OptionsThe terms and conditions of the options issued to the Chairman are disclosed in note 37.

(f) Share buy-backOn 16 August 2007, the parent entity announced that it would conduct an on-market share buy-back for a maximum of8,752,850 shares, being 10 per cent of the lowest number of ordinary shares on issue during the previous 12 months.Accordingly, the buy-back did not require shareholder approval. The buy-back accorded with the Group’s and the parententity’s long-term capital management program. The objectives of the on-market share buy-back were to increase earningsper share and returns on shareholder equity. The buy-back program was also intended to result in the return of excess capitalto shareholders in an efficient manner. The Group and the parent entity funded the share buy-back from cash reserves. Underthe buy-back, which was completed on 30 June 2008, the parent entity purchased and cancelled 4,171,146 shares at anaverage price of 62c per share, with the highest price paid 68.5c and the lowest price 41.0c. The total cost of $2,611,874.37,including $24,468.51 of after-tax transaction costs was deducted from paid up capital.

On 1 July 2008, the parent entity announced a new on-market buy-back to be conducted from 15 July 2008 to 1 July 2009 toacquire a maximum of 8,382,937 shares, being 10 per cent of the lowest number of ordinary shares on issue during theprevious 12 months. Accordingly this buy-back does not require shareholder approval.


Page 55


Notes $’000 $’000 $’000 $’000

25. RESERVES AND RETAINED PROFITS / ACCUMULATEDLOSSES

(a) Retained profits/(Accumulated losses)Retained profits/(accumulated losses) (63,207) (65,109) (65,466) (64,713)

Movements in retained prof its/(accumulated losses) wereas follows:

Balance at the beginning of the year (65,109) (67,738) (63,936) (63,220)Adjustment to opening balance (i)

During the current year - - (74) (36)

Adjusted retained earnings brought forward (65,109) (67,738) (64,010) (63,256)

Net profit/(loss) for the yearTransfers from share based payments reserve for lapsedoptionsTransfer from Asset Revaluation reserve

1,810

92-

2,572

4710

(1,548)

92-

(737)

4710

Balance at the end of the year (63,207) (65,109) (65,466) (63,936)

(i). To give effect to interpretation 11(February 2007) of AASB 2 – Group and Treasury Share Transactions, the expensedvalue of options granted to employees of the subsidiaries have been re-classified as investments in those subsidiaries for theyears up to and ending on 30 June 2007. This adjustment only has an effect on the retained earnings of the parent entity.During the current year, there were share options that were expensed, and charged as an investment in the subsidiaries as at30 June 2007 that have now lapsed and the value of the expense is now reversed out of investment in subsidiaries andreturned to the retained earnings of the parent entity.

(b) ReservesProperty, land and equipment revaluation reserve (1) - - - -Foreign currency translation reserve (2) (2,122) (678) - -Share-based payments reserve (3) 823 838 823 838

(1,299) 160 823 838

(1) Property, land and equipment revaluation reserve(i) Nature and purpose of reserveThe property, land and equipment revaluation reserve is used to record increments and decrements in the value of non-currentassets. The reserve can only be used to pay dividends in limited circumstances as permitted by law.

(ii) Movements in reserve

Balance at the beginning of the year - 10 - 10Transferred to retained earnings during the year - (10) - (10)Balance at the end of the year - - - -


Notes $’000 $’000 $’000 $’000

(2) Foreign currency translation reserve(i) Nature and purpose of reserveExchange differences arising on translation of foreign controlled entities are taken to the foreign currency translation reserve,as described in note 1(d). The reserve is recognised in profit and loss when the net investment is disposed of.

(ii) Movements in reserveBalance at the beginning of the year (678) 217 - -Currency translation differences arising during the year (897) (895) - -Transfer to profit and loss on liquidation of subsidiary (547) - - -Balance at the end of the year (2,122) (678) - -


Page 56

25. RESERVES AND RETAINED PROFITS / ACCUMULATEDLOSSES (CONTINUED)

(3) Share-based payments reserve(i) Nature and purpose of reserveThe share-based payments reserve is used to recognise the fair value of options issued but not exercised.

(ii) Movements in reserveBalance at the beginning of the year 838 640 838 640Option expenseTransfer to retained earningsTransfer to share capital for options exercised in the year

34 114(92)(37)

268(47)(23)

114(92)(37)

268(47)(23)

Balance at the end of the year 823 838 823 838

26. DIVIDENDS

(a) Ordinary sharesNo dividends were provided for, or paid during the current or prior financial years.

(b) Franking balanceAdacel Technologies Limited and its Australian controlled entities have not paid Australian income tax. Accordingly there isa nil balance in the franking account of the company.

27. KEY MANAGEMENT PERSONNEL DISCLOSURES

(a) DirectorsThe following persons were Directors of Adacel Technologies Limited during the financial year:

Chairman – non-executiveJulian Beale

Non-executive directorsKevin CourtneySilvio SalomDavid SmithAlex WaislitzPeter Landos (alternate to Alex Waislitz)

Since 30 June 2008 and up to the date of this report, no changes have occurred.

(b) Other key management personnelThe following persons were the executives with the greatest authority for the strategic direction and management of theconsolidated entity (“specified executives”) during the financial year.

Name Position EmployerGeorges Ata Vice President – Engineering and Operations

(from 1/7/2007 – 27/6/2008)Adacel Inc

Seth Brown

Don Cleveland

Chief Financial Officer – North America, and General Manager –Canada (from 1/7/2007 – 31/12/2007. Senior Advisor to the CEO NorthAmerica (from 1/1/2008 – 30/6/2008)Chief Financial Officer – North America.(from 3/1/2008)

Adacel Systems Inc

Adacel Systems IncAdacel Systems Inc

Mark Creasap Vice President – US Simulation & Training – North America Adacel Systems IncWilliam Lang Vice President – Air Traffic Management Adacel IncGary Pearson Vice President – Advanced Programs – North America Adacel Systems IncSteve Piller Senior Vice President – Business Development and International

programs – North America (from 1/7/2007 – 18/10/2007)Adacel Systems Inc

Fred Sheldon Chief Executive Officer – North America Adacel Systems IncMichael WoodgateSophie Karzis

Company Secretary (from 1/7/2007 – 30/6/2008)Company Secretary (from 30/6/2008)

Adacel Technologies LimitedAdacel Technologies Limited


Page 57

27. KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED)

All of the above persons were also key management persons during the year ended 30 June 2007, except for Don Clevelandwho commenced employment with the Group on 3 January 2008 and Ms Sophie Karziz who commenced as CompanySecretary from 30 June 2008.

(c) Key management personnel compensationConsolidated Parent entity

2008 2007 2008 2007$ $ $ $

Short-term employee benefits 1,875,537 1,967,464 348,300 265,167Post-employment benefits 80,723 78,664 14,400 14,400Share-based payments 125,914 243,868 - -Termination benefits 111,913 - - -

2,194,087 2,289,996 362,700 279,567

The company has taken advantage of the relief provided by Corporations Regulation 2M.6.04 and has transferred thedetailed remuneration disclosures to the directors’ report. The relevant information can be found in sections A – C of theremuneration report on pages 5 to 10.

(d) Equity instrument disclosures relating to key management personnel(i) Options provided as remuneration and shares issued on exercise of such options.Details of options provided as remuneration and shares issued on the exercise of such options, together with terms andconditions of the options, can be found in section D of the remuneration report on pages 10 to 11.

(ii) Option holdingsThe number of options over ordinary shares in the company held during the financial year by each director of AdacelTechnologies Limited and other key management personnel of the Group, including their personally related parties, are set outbelow.


Page 58


2008

Name

Balance atthe start of

the year

Grantedduring the

year asremune-

ration

Became aspecifiedexecutiveduring the

year

Exercisedduring the

year

Lapsedduring the

year

Ceased tobe a

specifiedexecutiveduring the

year

Balance atthe end ofthe year

Vested atthe

reportingdate

Vested andexercisable

at thereporting

date

Vestedand

unexer-cisable at

thereporting

dateDirectors of Adacel Technologies limitedJulian Beale 300,000 - - - - - 300,000 300,000 300,000 -Kevin Courtney - - - - - - - - - -Silvio Salom - - - - - - - - -David Smith - - - - - - - - - -Alex Waislitz - - - - - - - - - -Peter Landos - - - - - - - - - -Other key management personnel of the groupGeorges Ata 202,000 - - - (202,000) - - - - -Seth BrownDon Cleveland

1,000,000-

-500,000

--

--

--

--

1,000,000500,000

1,000,000-

650,000-

350,000-

Mark Creasap 216,000 - - - (8000) - 208,000 208,000 200,000 8,000William Lang 200,000 - - - - - 200,000 200,000 200,000 -Gary Pearson 204,000 - - - (4,000) - 200,000 200,000 200,000 -Steve Piller 1,000,000 - - (250,000) (750,000) - - - - -Fred Sheldon 3,000,000 - - - - - 3,000,000 3,000,000 1,750,000 1,250,000Sophie Karziz - - - - - - - - - -MichaelWoodgate

- - - - - - - - - -

2007

Name

Balance atthe start of

the year

Grantedduring the

year asremune-

ration

Became aspecifiedexecutive

duringthe year

Exercisedduring the

year

Lapsedduring the

year

Ceased tobe a

specifiedexecutiveduring the

year

Balance atthe end ofthe year

Vested atthe

reportingdate

Vested andexercisable

at thereporting

date

Vestedand

unexercisable at thereporting

dateDirectors of Adacel Technologies limitedJulian Beale 300,000 - - - - - 300,000 300,000 300,000 -Kevin Courtney - - - - - - - - - -Silvio Salom 37,000 - - - (37,000) - - - - -David Smith - - - - - - - - - -Alex Waislitz - - - - - - - - - -Peter Landos - - - - - - - - - -Other key management personnel of the groupGeorges Ata 204,000 - - - (2,000) - 202,000 202,000 200,000 2,000Seth Brown 1,000,000 - - - - - 1,000,000 1,000,000 650,000 350,000Mark Creasap 216,000 - - - - - 216,000 216,000 200,000 16,000William Lang 222,000 - - - (22,000) - 200,000 100,000 100,000 -Gary Pearson 208,000 - - - (4,000) - 204,000 204,000 200,000 4,000Steve Piller 1,000,000 - - - - - 1,000,000 750,000 400,000 350,000Fred Sheldon 3,000,000 - - - - - 3,000,000 3,000,000 1,750,000 1,250,00MichaelWoodgate

22,000 - - (22,000) - - - - -


Page 59


(iii) Share holdingsThe numbers of ordinary shares in the company held during the financial year by each Director of Adacel TechnologiesLimited and other key management personnel of the Group, including their personally related parties, are set out below.There were no shares granted during the reporting period as compensation.

2008

Name

Balance at thestart of the

year

Granted duringthe year as

remune-ration

Receivedduring the yearon the exercise

of options

Acquisitionsduring the

year

Disposalsduring the

year

Ceased to bean employee

during the yearBalance at theend of the year

Directors of Adacel Technologies limitedJulian Beale 1,816,867 - - - - - 1,816,867Kevin Courtney - - - - - - -Silvio Salom 14,496,659 - - - - - 14,496,659David Smith 10,060,558 - - - - - 10,060,558Alex Waislitz - - - - - - -Peter Landos - - - - - - -Other key management personnel of the groupGeorges Ata - - - - - - -Seth Brown - - - - - - -Mark Creasap - - - - - - -William Lang - - - - - - -Gary Pearson - - - - - - -Steve Piller - - - - - - -Fred Sheldon 100,000 - - 100,000 - - 200,000Michael Woodgate 15,500 - - - - - 15,500Sophie Karzis - - - - - - -

2007

Name

Balance at thestart of the

year

Granted duringthe year as

remune-ration

Receivedduring the yearon the exercise

of options

Acquisitionsduring the

year

Disposalsduring the

year

Ceased to bean employee

during the yearBalance at theend of the year

Directors of Adacel Technologies limitedJulian Beale 1,816,867 - - - - - 1,816,867Kevin Courtney - - - - - - -Silvio Salom 14,496,659 - - - - - 14,496,659David Smith 10,060,558 - - - - - 10,060,558Alex Waislitz - - - - - - -Peter Landos - - - - - - -Other key management personnel of the groupGeorges AtaSeth Brown - - - - - - -Mark Creasap - - - - - - -William Lang - - - - - - -Gary Pearson - - - - - - -Steve Piller - - - - - - -Fred Sheldon 100,000 - - - - - 100,000Michael Woodgate 15,500 - - - - - 15,500

(e) Loans to key management personnelDuring the financial year no loans were made, guaranteed or secured by Adacel Technologies Limited or any of itssubsidiaries to any director of Adacel Technologies Limited or any of the key management personnel of the Group.No such loans were made during the previous year.

(f) Other transactions with directors and executivesDuring the financial year, no transactions were entered into between Adacel Technologies Limited or any of its subsidiariesand any director of Adacel Technologies Limited or any of the specified executives of the consolidated entity, including theirpersonally- related entities, other than those set out below. At 30 June 2008, there are no payable or receivable balancesoutstanding relating to other transactions.

Fred Sheldon acquired 100,000 ordinary shares in Adacel Technologies Limited by way of on-market purchase of theshares. As at 30 June 2008 Fred Sheldon holds 200,000 ordinary shares in Adacel Technologies Limited.


Page 60

28. REMUNERATION OF AUDITORS

During the year the following fees were paid or payable forservices provided by the auditor of the parent entity, and itsrelated practices:


$ $ $ $Assurance services(a) Audit servicesPricewaterhouseCoopers Australian firm

Audit and review of financial reports and other auditwork under the Corporations Act 2001

215,063 189,800 215063 189,800


265,751 252,599 - -

Total remuneration for audit services 480,814 442,399 215063 189,800

(b) Other assurance servicesPricewaterhouseCoopers Australian firm

AIFRS related services - - - -Other services 2,500 - 2,500 -


- 99,483 - -

Total remuneration for other assurance services 2,500 99,483 - -Total remuneration for assurance services 483,314 541,882 217,563 189,800

Taxation servicesPricewaterhouseCoopers Australian firm

Tax compliance services, including review ofcompany income tax returns, international taxconsulting and tax advice on group structuring.

76,080 77,960 76,080 77,960

Other tax related services 16,745 65,816 16,745 65,816Related practices of PricewaterhouseCoopersAustralian firm

160,595 183,196 - -

Total remuneration for taxation services 253,420 326,972 92,825 143,776

It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties wherePricewaterhouseCoopers’ expertise and experience with the Group are important. These assignments are principally taxadvice and advice relating to changes to the accounting compliance regulations. It is the Group’s policy to seek competitivetenders for all major consulting projects.

29. CONTINGENCIES

As at 30 June 2008, the parent entity, Adacel Technologies Limited, will continue to provide financial support to subsidiariesthat are in a net position.

Guarantees of $2,627,673 (2007: $3,182,866) have been given to banks and customers in relation to contract warranty andperformance, and in relation to rental of properties.

A claim was lodged against the company during a prior year by the vendor of a business acquisition made several yearsago. This claim was defended in arbitration during 2007 and the arbitrator found in favour of Adacel. However, each partywas to bear its own costs and in addition to the costs expensed in 2007 amounting to 1.2 million the company incurredfurther legal costs of $245 thousand during 2008. This action is now closed.


Page 61


30. COMMITMENTS

(a) Operating leases expenditure commitmentsCommitments for minimum lease payments in relationto non-cancellable operating leases are payable asfollows:Within one year 1,046 1,272 - 12Later than one year and not later than 5 years 785 1,943 - -Later than 5 years - - - -Commitments not recognised in the financial statements 1,831 3,215 - 12

The above operating lease commitments are for the rental of offices and for various office and computer equipment.

(b) Finance leasesNeither the Group nor the parent entity have any finance leases in place during 2008 or 2007.

(c) Remuneration CommitmentsCommitments arising from service contracts of key management personnel are detailed in section C of the remunerationreport.

31. RELATED PARTY TRANSACTIONS

(a) Parent entityAdacel Technologies Limited, incorporated in Australia, is the ultimate Australian parent entity.

(b) SubsidiariesInterests in subsidiaries are disclosed in note 32.

(c) Key management personnelDisclosures relating to key management personnel are set out in note 27.

(d) Transactions with related partiesThe following transactions occurred with related entities:


$ $ $ $Issue of shares by subsidiaries to the parent entity - - - -Loans to subsidiaries forgiven by the parent entity - - - (8,307,559)Cash advanced by the parent entity to subsidiaries - - - -Cash advanced by subsidiaries to the parent entity - - (3,093,141) (2,411,644)Cash received by the parent entity on behalf ofsubsidiaries

- - (752,369) (534,228)

Payments made by the parent entity on behalf ofsubsidiaries

- - 235,511 132,838

Payments made by subsidiaries on behalf of the parententity

- - (170,272) (45,346)

Sales of services by the parent entity to subsidiaries - - 293,756 -Repayment of Capital by subsidiaries to the parententity

- - 5,727,661 -

Reversal of provision for/(provision for) non-recovery ofamounts loaned to subsidiaries

- - - -

Interest charged/(reversed) by the parent entity tosubsidiaries

- - (246,879) (76,279)

Royalties charged/(reversed) by the subsidiaries to theparent entity

- - (3,004) -

Management fees charged by the parent entity tosubsidiaries

- - 566,788 667,724


Page 62

31. RELATED PARTY TRANSACTIONS (CONTINUED)


$ $ $ $(e) Outstanding balancesThe following balances are outstanding at the reportingdate in relation to transactions with related parties:Receivables (non-current) – amounts loaned tosubsidiaries - - 3,286,394 1,667,039Receivables (non-current) – provision for non-recoveryof amounts loaned to subsidiaries - - (1,667,039) (1,667,039)Payables (current) – amounts loaned by subsidiaries toparent entity - - - (938,697)

- - 1,619,355 (938,697)

(f) Terms and conditions

All transactions between Adacel Technologies Limited and its controlled entities were made on normal commercial termsand conditions and at market rates, except that there are no fixed terms for the repayment of loans between the parties. Theaverage interest rate on the intercompany loans during the year was 6.6% (2007: 7.5%). Trade payables and receivablesare interest free.

32. SUBSIDIARIES

The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordancewith the accounting policy described in note 1(b).

Equity holding *Country of Class of 2008 2007

Name of entity incorporation shares % held % held

Adacel Inc. Canada Ordinary 100 100Adacel Technologies Holdings Inc USA Ordinary 100 100Adacel Technologies Inc USA Ordinary 100 100Adacel Systems Inc USA Ordinary 100 100

* The proportion of ownership interest is equal to the proportion of voting power held.

The following companies were placed into liquidation during the current financial year. These companies have been dormantfor a number of years and there were no transactions, assets or liabilities reported during the financial years 2008 and 2007Adacel Multimedia Pty Limited – liquidated on 2 July 2007Rami Logistics Pty Ltd – liquidated on 2 July 2007Brightstar Consulting Services Pty Ltd – liquidated on 2 July 2007Adacel Technologies (Europe) Ltd – liquidated on 25 September 2007.

33. EVENTS OCCURRING AFTER REPORTING DATE

There were no significant events subsequent to balance date.


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34. RECONCILIATION OF PROFIT/(LOSS) AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATINGACTIVITIES


Operating Profit/(loss) from ordinary activities after income tax 1,810 2,572 (1,548) 995

Depreciation and amortisation 1,418 1,303 - 8Net (profit)/loss on sale of plant and equipment - (55) - (55)Net (profit)/loss on sale of intellectual property (150) - (150) -Provision for doubtful debts (15) 188 (15) (7)Provision for diminution of investments insubsidiaries

- - - -

Provision for/(reversal of provision for) non-recovery ofintercompany loans

- - - 31

Net credit arising from reversal of FCTR on liquidation ofsubsidiary company (547) - - -Employee share options expense 114 268 2 268Net exchange differences 476 665 296 (1)

Changes in assets and liabilities:(Increase)/decrease in trade receivables and accrued revenue (10,751) 9,718 (64) -(Increase)/decrease in other receivables and other assets (43) 573 440 (416)(Increase)/decrease in inventory (631) (355) - -(Increase)/decrease in prepayments 71 (222) 10 141(Increase)/decrease in deferred tax assets andliabilities and tax payable

(1,653) 587 - -

Increase/(decrease) in trade and other creditors 2,685 (4,657) 39 (788)Increase/(decrease) in employee benefits provisions 24 22 24 22Increase/(decrease) in other provisions 89 (1,125) - -Increase/(decrease) in advanced payments from customers (1,903) (1,016) - (1)(Increase)/decrease in other non-current assets 387 (386) - -(Increase)/decrease in intercompany loans - - 75 (888)

Net cash inflow/(outflow) from operating activities (8,619) 8,080 (891) (2,681)

35. NON-CASH INVESTING AND FINANCING ACTIVITIES

There were no non-cash investing and financing activities during the years ended 30 June 2008 and 2007.


Page 64

Consolidated2008 2007

36. EARNINGS PER SHARE

Basic earnings per share (cents per share) 2.1 2.9Diluted earnings per share (cents per share) 2.1 2.9

(a) Reconciliations of earnings used in calculating earnings per shareBasic earnings per shareProfit from continuing operations 1,810 2,572Profit attributable to the ordinary equity holders of the company used incalculating basic earnings per share 1,810 2,572

Diluted earnings per shareProfit from continuing operations 1,810 2,572Profit attributable to the ordinary equity holders of the company used incalculating diluted earnings per share 1,810 2,572

(b) Weighted average number of ordinary shares used as the denominator

Weighted average number of ordinary shares used as the denominator incalculating basic earnings per share

85,537,027 87,559,370

Adjustments for calculation of diluted earnings per shareOptions 686,642 1,312,326

Weighted average number of ordinary shares and potential ordinary shares usedas the denominator in calculating diluted earnings per share 86,223,669 88,871,696

(c) Information concerning the classification of securities(i) Staff Share Option PlanStaff Share Option Plan options are considered to be potential ordinary shares and have been included in the determinationof diluted earnings per share to the extent to which they are dilutive. The options have not been included in thedetermination of basic earnings per share for the year ended 30 June 2008 and 2007. Details of the options are set out innote 37.

(ii) Chairman’s OptionsThe Chairman’s options are considered to be potential ordinary shares and have been included in the determination ofdiluted earnings per share to the extent to which they are dilutive. The options have not been included in the determinationof basic earnings per share for the year ended 30 June 2008 and 2007. Details of the options are set out in note 37.

(d) Conversions, calls, subscription or issues after 30 June 2008Holders of option certificates have not exercised any options to acquire ordinary shares since 30 June 2008. Since the endof the year, Nil options have been issued and 52,000 options have lapsed.


Page 65

37. SHARE-BASED PAYMENTS

(a) Staff Share Option PlanThe Staff Share Option Plan was approved by the shareholders at the Annual General Meeting on the 15 November 2000.Under this plan, Directors can issue options (up to 10% of the company’s issued capital) to eligible employees. TheDirectors have the discretion as to the number of options to be issued and exercise periods. The options are issued for noconsideration from Directors or employees. The options are not listed. Options granted under the plan carry no dividend orvoting rights. When exercisable, each option is convertible into one ordinary share.

Staff Share Option Plan options may be issued with conditions precedent to the options vesting. The conditions precedentfor the options on issue are one of the following:

(i) Set time periods are achieved (the anniversary dates); and On the anniversary date or any subsequent date, the weighted average sale price of all ordinary shares in the

capital of the company sold on ASX during the 5 trading days immediately preceding that date or anysubsequent date is determined to be at least 15% higher on an annual compound basis than the exercise priceof the options. Once this price threshold is achieved, a subsequent fall in the company’s share price will notaffect the right to exercise the options.

(ii) Set time periods are achieved.

(iii) The company’s share price is greater than or equal to the exercise price plus a pre agreed amount for a periodof 10 consecutive days; and for a period of 90 days thereafter, the average share price is greater than or equalto the exercise price plus a pre agreed amount. Once this price threshold is achieved, a subsequent fall incompany’s share price will not affect the right to exercise the options.

(iv) The achievement of the fiscal year EBITDA as set forth in the Board approved annual budget.

In the event of the resignation, redundancy or termination of employment of an option holder, the options issued under theStaff Share Option Plan lapse immediately, unless the Directors, at their absolute discretion, determine otherwise.

During the year ended 30 June 2008, 250,000 options were exercised, 546,000 options were issued and 1,268,000 optionslapsed.

Future issues to eligible employees will be made quarterly. There are currently 191 employees eligible under the plan.


Page 66

37. SHARE-BASED PAYMENTS (CONTINUED)

Set out below is a reconciliation of options on issue under the plan:

Plan

ExercisePrice

$

No ofOptions on

Issue at30 June

2007 Issued Exercised Lapsed

No ofOptions on

Issue at30 June

2008 Issue Date Expiry DateStaff Share Option Plan $0.89 14,000 - - 14,000 - 5 July 2002 5 July 2007Staff Share Option Plan $0.66 35,000 - - 35,000 - 4 October 2002 4 October 2007Staff Share Option Plan $0.58 130,000 - 130,000 - 11 November 2002 11 November 2007Staff Share Option Plan $0.81 49,000 - - 49,000 - 10 January 2003 10 January 2008Staff Share Option Plan $0.71 31,000 - - 31,000 - 4 April 2003 4 April 2008Staff Share Option Plan $0.75 52,000 - - - 52,000 4 July 2003 4 July 2008Staff Share Option Plan $0.75 22,000 - - - 22,000 3 October 2003 3 October 2008Staff Share Option Plan $0.85 26,000 - - 5,000 21,000 9 January 2004 9 January 2009Staff Share Option Plan $0.66 25,000 - - - 25,000 2 April 2004 2 April 2009Staff Share Option Plan $0.45 49,000 - - - 49,000 4 July 2004 4 July 2009Staff Share Option Plan $0.39 7,000 - - - 7,000 1 October 2004 1 October 2009Staff Share Option Plan $0.60 1,250,000 - - - 1,250,000 1 October 2004 1 October 2009Staff Share Option Plan $0.31 2,000 - - 1,000 1,000 7 January 2005 7 January 2010Staff Share Option Plan $0.60 500,000 - - - 500,000 17 January 2005 17 January 2010Staff Share Option Plan $0.33 10,000 - - 4,000 6,000 1 April 2005 1 April 2010Staff Share Option Plan $0.26 7,000 - - - 7,000 1 July 2005 1 July 2010Staff Share Option Plan $0.60 500,000 - - 500,000 - 5 September 2005 5 September 2010Staff Share Option Plan $0.24 5,000 - - - 5,000 7 October 2005 7 October 2010Staff Share Option Plan $0.35 1,500,000 - 250,000 50,000 1,200,000 20 November 2005 20 November 2010Staff Share Option Plan $0.60 1,500,000 - - 300,000 1,200,000 20 November 2005 20 November 2010Staff Share Option Plan $0.42 3,000 - - - 3,000 6 January 2006 6 January 2011Staff Share Option Plan $0.50 22,000 - - 15,000 7,000 7 April 2006 7 April 2011Staff Share Option Plan $0.60 600,000 - - 100,000 500,000 28 April 2006 28 April 2011Staff Share Option Plan $0.47 15,000 - - 8,000 7,000 7 July 2006 7 July 2011Staff Share Option Plan $0.53 14,000 - - - 14,000 6 October 2006 6 October 2011Staff Share Option Plan $0.68 10,000 - - 3,000 7,000 5 January 2007 5 January 2012Staff Share Option Plan $0.63 36,000 - - 14,000 22,000 10 April 2007 10 April 2012Staff Share Option Plan $0.80 - 11,000 - 8,000 3,000 6 July 2007 6 July 2012Staff Share Option Plan $0.58 - 11,000 - - 11,000 5 October 2007 5 October 2012Staff Share Option Plan $0.68 - 500,000 - - 500,000 3 January 2008 3 January 2013Staff Share Option Plan $0.68 - 9,000 - 1,000 8,000 4 January 2008 4 January 2013Staff Share Option Plan $0.44 - 15,000 - - 15,000 4 April 2008 4 April 2013

6,414,000 546,000 250,000 1,268,000 5,442,000

Weighted averageprice

$0.54 $0.67 $0.35 $0.60 $0.55

Weighted average exercise priceThe weighted average share price at the date of each exercise of options during the period was: -29 October 2007 - $0.35

250,000 options were exercised during the year ended 30 June 2008.

The weighted average remaining contractual life of share options outstanding at the end of the period was 2.25 years (2007– 3.0 years).

Total numbers of options that have met the conditions precedent as described above, and as a result have vested as at 30June 2008 is 3,141,000.


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Fair value of options grantedThe assessed fair value at grant date of options granted to the individuals is allocated equally over the period from grantdate to vesting date, and the amount is included in the remuneration tables shown in the Directors report. The fair value atgrant date is independently determined using a Black-Scholes option pricing model that takes into account the exerciseprice, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of theoption, the share price at grant date and expected volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.

The model inputs for options granted during the year ended 30 June 2008 were:

Option Type FFF(a) granted for no consideration,(b) have a 5 year life,(c) 50% of each tranche vests after each of the first two anniversaries of the date of grant. The options are

exercisable provided that the 5 Day weighted average sale price of ordinary shares has achieved a 15%increase on an annual compound basis at any date on or after the vesting date.

(d) exercise price: $0.80(e) grant date: 06 Jul 2007(f) expiry date: 06 Jul 2012(g) share price at grant date: $0.78(h) expected price volatility of the company’s shares: 51%(i) expected dividend yield: 0%(j) risk-free interest rate: 6.37%

Option Type GGG(a) granted for no consideration,(b) have a 5 year life,(c) 50% of each tranche vests after each of the first two anniversaries of the date of grant. The options are

exercisable provided that the 5 day weighted average sale price of ordinary shares has achieved a 15%increase on an annual compound basis at any date on or after the vesting date.

(d) exercise price: $0.58(e) grant date: 05 Oct 2007(f) expiry date: 05 Oct 2012(g) share price at grant date: $0.58(h) expected price volatility of the company’s shares: 50%(i) expected dividend yield: 0%(j) risk-free interest rate: 6.42%

Option Type HHH(a) granted for no consideration,(b) have a 5 year life,(c) 50% vests on 1 July 2008, and 50% vests on 1 July 2009.(d) exercise price: $0.68(e) grant date: 03 Jan 2008(f) expiry date: 03 Jan 2013(g) share price at grant date: $0.65(h) expected price volatility of the company’s shares: 48%(i) expected dividend yield: 0%(j) risk-free interest rate: 6.42%

Option Type III(a) granted for no consideration,(b) have a 5 year life,(c) 50% of each tranche vests after each of the first two anniversaries of the date of grant. The options are


(d) exercise price: $0.68(e) grant date: 4 Jan 2008(f) expiry date: 4 Jan 2013(g) share price at grant date: $0.63(h) expected price volatility of the company’s shares: 48%(i) expected dividend yield: 0%(j) risk-free interest rate: 6.40%


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Option Type JJJ(a) granted for no consideration,(b) have a 5 year life,(c) 50% of each tranche vests after each of the first two anniversaries of the date of grant. The options are


(d) exercise price: $0.44(e) grant date: 4 Apr 2008(f) expiry date: 4 Apr 2013(g) share price at grant date: $0.43(h) expected price volatility of the company’s shares: 49%(i) expected dividend yield: 0%(j) risk-free interest rate: 6.21%

The expected price volatility is based on the historic volatility (based on the remaining life of the options), adjusted for anyexpected changes to future volatility due to publicly available information.

The model inputs for options granted during the previous year ended 30 June 2007 were:

Option Type BBB(a) granted for no consideration,(b) have a 5 year life,(c) 50% of each tranche vests after each of the first two anniversaries of the date of grant. The options are

exercisable provided that the 5 Day weighted average sale price of ordinary shares has achieved a 15%increase on an annual compound basis at any date on or after the vesting date.

(d) exercise price: $0.47(e) grant date: 07 Jul 2006(f) expiry date: 07 Jul 2011(g) share price at grant date: $0.47(h) expected price volatility of the company’s shares: 53%(i) expected dividend yield: 0%(j) risk-free interest rate: 5.87%

Option Type CCC(a) granted for no consideration,(b) have a 5 year life,(c) 50% of each tranche vests after each of the first two anniversaries of the date of grant. The options are


(d) exercise price: $0.53(e) grant date: 06 Oct 2006(f) expiry date: 06 Oct 2011(g) share price at grant date: $0.535(h) expected price volatility of the company’s shares: 47%(i) expected dividend yield: 0%(j) risk-free interest rate: 5.83%

Option Type DDD(a) granted for no consideration,(b) have a 5 year life,(c) 50% of each tranche vests after each of the first two anniversaries of the date of grant. The options are


(d) exercise price: $0.68(e) grant date: 05 Jan 2007(f) expiry date: 05 Jan 2012(g) share price at grant date: $0.71(h) expected price volatility of the company’s shares: 47%(i) expected dividend yield: 0%(j) risk-free interest rate: 6.13%


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Option Type EEE(a) granted for no consideration,(b) have a 5 year life,(c) 50% of each tranche vests after each of the first two anniversaries of the date of grant. The options are


(d) exercise price: $0.63(e) grant date: 10 Apr 2007(f) expiry date: 10 Apr 2012(g) share price at grant date: $0.62(h) expected price volatility of the company’s shares: 46%(i) expected dividend yield: 0%(j) risk-free interest rate: 6.26%

The expected price volatility is based on the historic volatility (based on the remaining life of the options), adjusted for anyexpected changes to future volatility due to publicly available information.

(b) Chairman’s Options300,000 options were issued to the Chairman on 30 November 2004 following approval by the shareholders at the AnnualGeneral Meeting on the 19 November 2004. The options were issued as part of remuneration for acting as the non-executive chairman of the Board. 50% of the options vest immediately on issue and the remaining 50% vested on 12September 2005. The options are not listed. The options granted carry no dividend or voting rights. When exercisable,each option is convertible into one ordinary share. The exercise price is $0.61, payable immediately on exercise. The expirydate of these options is 12 September 2008. As at 30 June 2008 these options have not been exercised.

During the year ended 30 June 2008 no options were issued, exercised or lapsed.

The weighted average remaining contractual life of share options outstanding at the end of the period was 0.2 years (2007 –1.2 years).

(c) Expenses arising from share-based payment transactionsTotal expenses arising from share-based payment transactions recognised during the period as part of employee benefitexpense were as follows:


Options issued under the Staff Share Option Plan 114 268 2 268Options issued as Chairman’s Options - - - -

114 268 2 268


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DIRECTORS’ DECLARATION

In the Directors’ opinion:

(a) the financial statements and notes set out on pages 19 to 69 are in accordance with the Corporations Act 2001,including:(i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional

reporting requirements; and(ii) giving a true and fair view of the company's and consolidated entity's financial position as at 30 June 2008 and of

their performance for the financial year ended on that date; and

(b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become dueand payable; and

(c) The remuneration disclosures set out on pages 5 to 14 of the directors’ report comply with Accounting Standards AASB124 Related Party Disclosures and the Corporations Regulations 2001 .

The Directors have been given the declarations by the chief executive officer or equivalent and the chief financial officer orequivalent, required by section 295A of the Corporations Act 2001.

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

Julian Beale David SmithChairman Director

Melbourne, 9th September 2008

Liability limited by a scheme approved under Professional Standards Legislation

Page 71

PricewaterhouseCoopersABN 52 780 433 757

Freshwater Place2 Southbank BoulevardSOUTHBANK VIC 3006GPO Box 1331LMELBOURNE VIC 3001DX 77Telephone 61 3 8603 1000Facsimile 61 3 8603 1999

Independent auditor’s report to the members ofAdacel Technologies Limited

Report on the financial report

We have audited the accompanying financial report of Adacel Technologies Limited (the company), which comprisesthe balance sheet as at 30 June 2008, and the income statement, statement of changes in equity and cash flowstatement for the year ended on that date, a summary of significant accounting policies, other explanatory notes andthe directors’ declaration for both Adacel Technologies Limited and the Adacel Technologies Group (the consolidatedentity). The consolidated entity comprises the company and the entities it controlled at the year's end or from time totime during the financial year.

Directors’ responsibility for the financial report

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

Auditor’s responsibility

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

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

Our procedures include reading the other information in the Annual Report to determine whether it contains anymaterial inconsistencies with the financial report.

For further explanation of an audit, visit our website http://www.pwc.com/au/financialstatementaudit.

Our audit did not involve an analysis of the prudence of business decisions made by directors or management. Webelieve that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Independent auditor’s report to the members ofAdacel Technologies Limited (continued)

Page 72

Independence

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

Auditor’s opinion

In our opinion:

(a) the financial report of Adacel Technologies Limited is in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June2008 and of their performance for the year ended on that date; and

(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations)and the Corporations Regulations 2001; and

(b) the financial report and notes also comply with International Financial Reporting Standards as disclosed inNote 1.

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 5 to 14 of the directors’ report for the year ended 30 June2008. The directors of the company are responsible for the preparation and presentation of the Remuneration Reportin accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on theRemuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Auditor’s opinion

In our opinion the Remuneration Report of Adacel Technologies Limited for the year ended 30 June 2008 complies withsection 300A of the Corporations Act 2001.

Matters relating to the electronic presentation of the audited financial report

This auditor’s report relates to the financial report and remuneration report of Adacel Technologies Limited (thecompany) for the year ended 30 June 2008 included on the Adacel Technologies Limited web site. The company’sdirectors are responsible for the integrity of the Adacel Technologies Limited web site. We have not been engaged toreport on the integrity of this web site. The auditor’s report refers only to the financial report and remuneration reportnamed above. It does not provide an opinion on any other information which may have been hyperlinked to/from thesestatements or the remuneration report. If users of this report are concerned with the inherent risks arising fromelectronic data communications they are advised to refer to the hard copy of the audited financial report andremuneration report to confirm the information included in the audited financial report and remuneration reportpresented on this web site.

PricewaterhouseCoopers

John O'Donoghue MelbournePartner 9 September 2008

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SHAREHOLDER INFORMATIONAdditional information required by the Australian Stock Exchange Ltd. and not shown elsewhere in this report is as follows.The information is complete up to 8 August 2008.

(a) Equity security holders(i) Top 20 largest holders of quoted ordinary shares

Fully Paid Ordinary Shares

Top 20Shareholders

Name No. ofshares held

% held

ANZ Nominees Limited 28,090,197 33.51Mr Silvio Salom 13,453,178 16.05Mr David Wallace Smith 8,551,083 10.20Thorney Holdings Pty Ltd 2,316,255 2.76Invia Custodian Pty Limited (Black A/C) 2,296,224 2.74D & E Smith Superannuation Nominees Pty Ltd 1,509,475 1.80M F Custodians Ltd 1,337,800 1.60Mr James Douglas Carnegie (James Carnegie Family A/C) 880,000 1.05Coalwell Pty Ltd 796,182 0.95D & D Nominees Pty Ltd 792,717 0.95Mr Anthony Mark Van Der Steeg 756,361 0.90Obena Ridge Pty Limited 676,775 0.81Obena Ridge Pty Limited 595,095 0.71Mr Brian Hennessey 545,764 0.65Valwren Pty Limited (WFIT Account) 503,000 0.60Kazakco Pty Limited 500,000 0.60Aznanob Pty Ltd 460,934 0.55Bissapp Software Pty Ltd (Super Fund A/C) 445,940 0.53J P Morgan Nominees Australia Limited 365,072 0.44Citicorp Nominees Pty Limited 320,749 0.38

65,192,801 77.78

Thorney Holdings Pty LtdMr Silvio SalomMr David Wallace Smith

SubstantialShareholdings

No. ofshares held

32,720,19114,496,65910,060,558

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SHAREHOLDER INFORMATION(ii) Unquoted options over ordinary shares

Plan Number Expiry Date ExercisePrice

Number OfHolders

Staff Share Option Plan 22,000 3 October 2008 $0.75 10Staff Share Option Plan 21,000 9 January 2009 $0.85 10Staff Share Option Plan 25,000 2 April 2009 $0.66 13Staff Share Option Plan 49,000 4 July 2009 $0.45 9Staff Share Option Plan 7,000 1 October 2009 $0.39 3Staff Share Option Plan 1,250,000 1 October 2009 $0.60 1Staff Share Option Plan 1,000 7 January 2010 $0.31 1Staff Share Option Plan 500,000 17 January 2010 $0.60 1Staff Share Option Plan 6,000 1 April 2010 $0.33 3Staff Share Option Plan 7,000 1 July 2010 $0.26 5Staff Share Option Plan 5,000 7 October 2010 $0.24 3Staff Share Option Plan 1,200,000 20 November 2010 $0.35 6Staff Share Option Plan 1,200,000 20 November 2010 $0.60 6Staff Share Option Plan 3,000 6 January 2011 $0.42 2Staff Share Option Plan 7,000 7 April 2011 $0.50 5Staff Share Option Plan 500,000 28 April 2011 $0.60 1Staff Share Option Plan 7,000 7 July 2011 $0.47 5Staff Share Option Plan 14,000 6 October 2011 $0.53 4Staff Share Option Plan 7,000 5 January 2012 $0.68 5Staff Share Option Plan 22,000 10 April 2012 $0.63 14Staff Share Option Plan 3,000 6 July 2012 $0.80 2Staff Share Option Plan 11,000 5 October 2012 $0.58 2Staff Share Option Plan 500,000 3 January 2013 $0.68 1Staff Share Option Plan 8,000 4 January 2013 $0.68 4Staff Share Option Plan 15,000 4 April 2013 $0.44 9

Chairman’s Options 300,000 12 September 2008 $0.61 1

5,690,000

(b) Distribution of equity securitiesAnalysis of numbers of equity security holders by size of holding:

Class of equity securityOrdinary Shares

Shares Options

100,001 and over 53 710,001 to 100,000 326 45,001 to 10,000 227 21,001 to 5,000 580 481 to 1,000 263 18

1,449 79

There were 370 holders of less than marketable parcel of ordinary shares.

(c) Voting rights(i) All ordinary shares (whether fully paid or not) carry one vote per share without restriction.(ii) All options have no voting rights.

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CORPORATE GOVERNANCE STATEMENT

This statement outlines the main corporate governance practices of Adacel. The framework for Adacel’s company policiesand procedures was established through the company’s ‘Adacel Management Practices’, which were issued in 1998. Thesehave been reviewed since then and some policies and procedures have been revised and others added. During the 2004financial year, management and the Board reviewed and in some cases revised or added to these policies in light of theASX Corporate Governance Council (Council) best practice recommendations for good corporate governance. Followingchanges to the management structure in June 2006, these policies and this statement were revised to reflect the changedstructure without altering the substance of the policies. Unless otherwise stated, Adacel’s corporate governance practicesoutlined in this statement were effective from 1 July 2006 and comply with the first edition of the Council’s best practicerecommendations. In August 2007, the Council issued a second edition of its “Corporate Principles and Recommendations”to become effective from 1 July 2008. Adacel’s policies and procedures and Corporate Governance Statement have beenrevised to reflect these recommendations. The revised Corporate Governance Statement and policies effective from 1 July2008 are available on the company’s website (www.adacel.com) and will form the basis of reporting on corporategovernance performance in the 2009 Annual Report.As recognised by the Council, corporate governance is the system by which companies are directed and managed. Itinfluences how the objectives of the company are set and achieved, how risk is monitored and assessed and howperformance is optimised. There is no single model of good corporate governance. For Adacel, what constitutes goodcorporate governance will evolve with our changing circumstances and will be tailored to meet those circumstances.Adacel’s Corporate Governance Statement follows the framework of the ASX Corporate Governance Council’s ten principlesfor Corporate Governance.

1.0 Role of the Board and Management

Council Recommendation 1.1: Formalise and disclose the functions reserved to the board and those delegated tomanagement

The Board of Directors

The Board of Directors of Adacel Technologies Limited is responsible for the corporate governance of the consolidated entity,including the establishment of strategic direction, goals for management and monitoring the achievement of those goals.

The Board is responsible for guiding and monitoring the company on behalf of the shareholders by whom they are elected andto whom they are accountable.

The Board seeks to identify the expectations of the shareholders, as well as other regulatory and ethical expectations andobligations. In addition, the Board reviews with management areas of significant identified business risk and overseesmanagement arrangements to adequately manage those risks.

To ensure that the Board is well equipped to discharge its responsibilities it has established practices for the nomination andselection of directors, referred to under section 2 of this statement, and for the operation of the Board, referred to below.

The responsibility for the operation and administration of the company is delegated, by the Board, to the Chief ExecutiveOfficer or equivalent and the executive management team. The Board ensures that this team is appropriately qualified andexperienced to discharge their responsibilities and has in place procedures to assess the performance of the Chief ExecutiveOfficer or equivalent and the executive management team.

Whilst at all times the Board retains full responsibility for guiding and monitoring the company, in discharging its stewardship itmakes use of sub–committees. Specialist committees are able to focus on a particular responsibility and provide informedfeedback to the Board.

To this end the Board has established the following committees, details of which are included later in this CorporateGovernance Statement:

Audit Committee; Remuneration Committee; and Nomination Committee, comprising the whole Board.

The Board is responsible for ensuring that management’s objectives and activities are aligned with the expectations and risksidentified by the Board. The Board has a number of mechanisms in place to ensure this is achieved including:

Board approval of strategic plans designed to meet stakeholders’ needs and manage business risk; Ongoing development of strategic plans and approving initiatives and strategies designed to ensure the

continued growth and success of the entity; and Implementation of budgets by management and monitoring progress against budget – via the establishment

and reporting of both financial and non–financial key performance indicators.

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CORPORATE GOVERNANCE STATEMENTOther functions reserved to the Board include:

Approval of the annual and half–yearly financial reports; Approving and monitoring the progress of major capital expenditure, capital management, and acquisitions and

divestitures; Ensuring that any significant risks that arise are identified, assessed, appropriately managed and monitored;

and Reporting to shareholders.

Details of the matters delegated to the Board are posted on our website (www.adacel.com).

Chief Executive Officer and Senior Management

The role of the Chief Executive Officer or equivalent is to develop and agree with the Board the corporate strategy and visionand to oversee implementation of the strategy and management of the company to achieve the agreed vision in accordancewith the strategies, policies and programs set by the Board. Where the CEO is also Managing Director, the Managing Directorwill not have to retire as a Director by rotation or stand for reappointment as a Director in accordance with the constitution.

Responsibilities of the CEO or equivalent include

Formulating and reviewing, with the Board, the vision and strategy and developing actions and plans to achievethe vision and implement the strategy for the company’s aviation and defence simulation and air traffic controloperations. Reporting to the Board on the progress against those plans.

Appointing a management team and negotiating terms and conditions for approval by the RemunerationCommittee or the Board. Providing leadership to and overseeing the senior management team, ensuringemployees are properly instructed to achieve a safe workplace and ensuring compliance with laws andcompany policies and that a high level of ethical behaviour is expected.

Reporting to the Board on various matters, including all matters requiring review or approval, significant changesto the risk profile, certification (with the CFO) to the Board on the fairness of the financial statements andadequacy of policies as regards risk management, monthly reporting on performance of businesses andcontinual education of directors on the company, its business environment and relevant changes of law.

Acting within delegated authority levels for capital expenditure, sale of assets, appointment and termination ofexecutives.

All other matters necessary for the day–to–day management of the company’s operations and not reserved forthe Board.

2.0 Board structure

Council Recommendation 2.1: A majority of the board should be independent directors

Composition of the Board

Under the company’s Constitution, the Board is to be comprised of not less than three nor more than ten Directors. Thisnumber may be increased where it is felt that additional expertise is required in specific areas, or where an outstandingcandidate emerges. The Board currently numbers five and an Alternate Director.

The Board comprises a majority of non–executive Directors but does not currently have a majority of independent Directors.This is a departure from the ASX Corporate Governance Council recommendation 2.1.

The Board believes that the interests of the shareholders are best served by

Directors having the appropriate skills and experience, and providing a mix of industry, technical, financial,capital markets and business skills and contacts;

A number of directors being independent, as defined in the Council corporate governance guidelines. Theindependence of each Director is reviewed by the Board against these Council Independence guidelines andmateriality thresholds. Materiality for these purposes is determined on both quantitative and qualitative bases. Ashareholding over 5%, or a contractual relationship amounting to more than 5% of annual turnover of thecompany or 5% of the individual Director’s net worth is considered material for these purposes. Theindependence of each Director is noted in the profile of Directors in the Directors’ Report in the Annual Reportand on the company website; various significant parties that have supported the development of the companybeing represented on the Board.

Consequently, at various times there may not be a majority of the directors classified being independent. However, allDirectors, non–executive and executive, acknowledge the need to act in good faith in the interests of all shareholders. TheBoard has a specific Code of Conduct for Directors and senior management (referred to in Section 3.0 of this Statement). Aspart of this, where any director has a material personal interest in a matter, the director will not be permitted to be presentduring discussions or to vote on the matter. The enforcement of this requirement should ensure that the interest ofshareholders, as a whole, are pursued and not jeopardised by a lack of a majority of independent directors. The Board willreview its governance structures, including the level of independent Directors as the company develops and changes toensure that it continues to meet effective governance for the circumstances of the company.

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CORPORATE GOVERNANCE STATEMENTThe names of Directors in office and their term in office at the date of this statement, and their standing as executive or non–executive and independent, are given in the Directors Report contained in the Annual Report and on the Board of Directorspage of Adacel’s website.

Independence of Chairman

Council Recommendation 2.2: The chairperson should be an independent director

Adacel’s Chairman is an independent non–executive Director.

Roles of Chairman and CEO

Council Recommendation 2.3: The roles of chairperson and chief executive officer should not be exercised by the sameindividual

The roles of Chairman and the CEO or equivalent are not exercised by the same individual.

Access to independent professional advice

Council Recommendation 2.5: Other matters requiring disclosure

Each Director has the right to seek a reasonable level of independent professional advice on matters concerning the companyat the company’s expense.

Nomination Committee

Council Recommendation 2.4: The board should establish a nomination committee

In consideration of the size of the company and the Board, in December 2003, Directors resolved that the Board as a wholewould comprise a Nomination Committee. The members of the Nomination Committee during the year and their attendance atmeetings of the Committee are disclosed in the Directors’ Report in the Annual Report. In this role, the Board as NominationCommittee:

Reviews the structure, size and composition of the Board; Identifies, considers and selects candidates with appropriate capabilities, to fill Board vacancies when they

arise; Ensures candidates have adequate time available to fulfil their role as a director; Undertakes or arranges for annual performance evaluation of the Board, its committees and directors; and Reviews the:

o continuation of the chairman after the initial term of appointment and subsequent re–appointmentso re–election of directors who retire by rotationo membership of committees.

The charter of the Nomination Committee is posted on the company’s website.

Procedure for the selection and appointment of directors


If the need for a new Board member is identified, the Board, in its role as Nomination Committee, may initiate a search ornominate eligible candidates, who are interviewed by the Chairman and considered by the Board. The Board then appoints themost suitable candidate, who must stand for election at the next general meeting of the shareholders. New Directors areprovided with a letter of appointment setting out their responsibilities and rights. Adacel’s procedure for the selection andappointment of directors is posted on the company’s website.

Policy on appointment of directors and Board composition


The Adacel Board has a policy on the appointment of directors and the composition of the Board. The policy is posted on thecompany’s website.

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CORPORATE GOVERNANCE STATEMENT3.0 Ethical and responsible decision–making

Code of Conduct for Directors and senior managers

Council Recommendation 3.1: Establish a code of conduct to guide directors, CEO, CFO and other key executives

Adacel has a formal Ethics Policy for employees and a specific Code of Conduct for Directors and Senior Managers (being theCEO or equivalent and senior managers reporting the CEO or equivalent). The Code of Conduct has the commitment of thedirectors and senior management to ensure practices are operating that are necessary to maintain confidence in thecompany’s integrity, and responsibility and accountability of individuals for reporting and investigating reports of unethicalpractices.

Under the Code of Conduct, the directors and senior management are expected to: Act honestly and in good faith; Exercise due care and diligence in fulfilling the functions of office; Use their powers to act in the best interests of the company as a whole; Avoid conflicts and make full disclosure of any possible conflicts of interest; Comply with the law; Directors are obliged to be independent in judgment and ensure all reasonable steps are taken to be satisfied as

to the soundness of Board decisions; and Encourage the reporting and investigating of unlawful and unethical behaviour.

Adacel’s Code of Conduct is posted on the company’s website.

Trading in Adacel securities

Council Recommendation 3.2: Disclose the policy concerning trading in company securities by directors, officers andemployees

The company has a policy concerning the trading in the company’s securities by Directors, senior managers and employees.In summary, Directors, senior managers and employees must not deal in Adacel securities when they are in possession ofinsider information. Directors and senior managers must not trade during the “trading blackout” beginning at the end of the HalfYear and Full Year reporting period until the release to the ASX of the Financial Results for the relevant period. Directors areexpected to discuss the matter with the Chairman and senior executives are expected to discuss the matter with the CEO orequivalent who will consult with the Chairman.

Details of Adacel’s trading policy are posted on our website.

4.0 Integrity in financial reporting

Corporate Reporting

Council Recommendation 4.1: Chief executive officer and chief financial officer to sign a certificate regarding financial reportsgiving a true and fair view and are in accordance with accounting standards

The Chief Executive Officer or equivalent and Chief Financial Officer or equivalent have made the following certifications to theBoard:

That the company’s financial reports are complete and present a true and fair view, in all material respects, ofthe financial condition and operating results of the company and are in accordance with the relevant accountingstandards; and

All reasonable steps have been undertaken to ensure that the above statement is founded on a sound systemof risk management and internal compliance and control and which implements the policies adopted by theBoard and that the company’s risk management and internal compliance and control is operating efficiently andeffectively in all material respects.

Audit Committee

Council Recommendation 4.2 and 4.4: The board should establish an audit committee and have an audit committee charter

The Board has an Audit Committee that reports to the Board.

The role of the Audit Committee is to advise on the establishment and maintenance of a framework of internal controls andappropriate ethical standards for the management of the Company and to advise on financial information prepared for use bythe Board or for inclusion in financial statements.

The responsibilities of the Audit Committee include: Reviewing audit reports to ensure that where major deficiencies or breakdowns in controls or procedures have

been identified, appropriate and prompt remedial action is taken by management; Liaising with the auditors and ensuring that the annual statutory audits are conducted in an effective manner;

Monitoring management efforts to improve continuously the quality of the accounting function; Reviewing the half–year and annual reporting and financial statements prior to lodgment of those documents

with the Australian Stock Exchange and to make the necessary recommendations to the Board for the approvalof these documents;

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CORPORATE GOVERNANCE STATEMENT

Providing the Board with additional assurance regarding the reliability of financial information for inclusion in thefinancial reports; Recommending to the Board the appointment, removal and remuneration of the externalauditors, and reviewing the terms of their engagement the scope and quality of the audit;

Assessing the attention being given by management to matters likely to impact on the financial performance ofthe Company, including monitoring of compliance with laws and regulations and monitoring and control ofbusiness risks;

Management information and other systems of internal control and risk management; and Ethical policies and practices for corporate conduct are in place and being adhered to.

The auditors, the Chief Financial Officer or equivalent and the company Managers are invited to the Audit Committee meetingsat the discretion of the Committee. The Audit Committee charter is posted on the company’s website.

Composition of Audit Committee

Council Recommendation 4.3: Structure the audit committee so that it consists of only non–executive directors, a majority ofindependent directors, an independent chairperson (who is not chairperson of the board) and at least three members

The Company’s Audit Committee comprises: Only non–executive directors; A majority of independent directors; An independent chairperson, who is not chairperson of the Board; and At least three members.

The members of the Audit Committee during the year and attendance at meetings of the Committee are disclosed in theDirectors’ Report in the Annual Report.

External Auditors

Council Recommendation 4.4: Other matters – Procedures for the selection and appointment of the external auditor and forthe rotation of external audit engagement partners

The Board, with the involvement of the Audit Committee, has established procedures in relation to the external auditorselection and appointment and for discussing with the auditor the rotation of the lead partner. Procedures for the selection andappointment of external auditors and rotation of engagement partners are posted on the company’s website.

5.0 Timely and balanced disclosures

Council Recommendation 5.1: Establish written policies and procedures designed to ensure compliance with ASX listing ruledisclosure requirements and to ensure accountability at a senior level for that compliance

Continuous Disclosure

The Company has written policies and procedures on information disclosure. The focus of these procedures is on continuousdisclosure of any information concerning the company that a reasonable person would expect to have a material effect on theprice of the Company’s securities and improving access to information for all investors. The company has nominated theCompany Secretary and the Group Manager Corporate Affairs & Strategy Support to be responsible for communications withthe Australian Stock Exchange. This role includes:

Overseeing compliance with the continuous disclosure requirements in the ASX Listing Rules; Overseeing and coordinating information disclosure to the ASX, shareholders, analysts, brokers, the media and

the public; Educating Directors and staff on the company’s disclosure policies and procedures and raising awareness of

the principles underlying continuous disclosure.

Price sensitive information is publicly released through the ASX before disclosing it to analysts or others outside the company.Further dissemination to investors through the ASX website and other information providers is also managed through the stockexchange. Information is posted on the company’s website as soon as practicable after the stock exchange confirms anannouncement has been made, with the aim of making the information accessible to the widest audience.

Procedures have also been developed for reviewing whether any price sensitive information has been inadvertently disclosed,and if so, this information is also immediately released to the market. Procedures are also in place to respond to marketrumors or leaks.

The policy on continuous disclosure is posted on the company’s website.

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CORPORATE GOVERNANCE STATEMENT6.0 Rights of shareholders

Shareholder communication and participation

Council Recommendation 6.1: Design and disclose a communication strategy to promote effective communication withshareholders and encourage effective participation at general meetings

The Board of Directors aims to ensure that the shareholders are informed of all major developments affecting the state ofaffairs of the company. Information is communicated to shareholders through: the annual report, the interim report, disclosuresmade to the Australian Stock Exchange, notices and explanatory memoranda of annual and extraordinary general meetings,the annual general meeting, occasional letters to shareholders where appropriate, and the company’s website,www.adacel.com, which has a dedicated investor relations section.

The website also includes a feedback mechanism and an option for shareholders to register their email address for directemail updates of company matters.

The Board encourages full participation of shareholders at the annual general meeting to ensure a high level of accountabilityand identification with the company’s strategy and goals. Important issues are presented to the shareholders as singleresolutions.

Auditor presence at AGM

Council Recommendation 6.2: Request the external auditor to attend the annual general meeting and be available to answershareholder questions about the conduct of the audit and the preparation and content of the auditor’s report

The company requires the lead audit partner or their partner delegate to attend each annual general meeting of the companyand to be available to answer shareholder questions about the conduct of the audit and the preparation and content of theauditor’s report.

7.0 Recognising and managing risk

Risk management

Council Recommendation 7.1: The board or appropriate board committee should establish policies on risk oversight andmanagement

The Board oversees policies on risk assessment and management and has delegated certain responsibilities in these mattersto the Audit Committee. The company has established policies and procedures to identify, assess and manage critical areas offinancial and operating risk. The company’s Risk Management policy is posted on the company’s website.

CEO and CFO certification

Council Recommendation 7.2: The chief executive officer and chief financial officer should state to the board in writing; 1) thestatement given in accordance with company practice 4.1 is founded on a sound system of risk management and internalcompliance and control which implements the policies adopted by the board; 2) the company’s risk management and internalcompliance and control system is operating efficiently and effectively in all material respects.

At the time the Board considers the draft half year and full year financial statements and reports, the Chief Executive Officer orequivalent and Chief Financial Officer or equivalent are required to provide a signed certificate that the statements and reportsare founded on a sound system of risk management and internal compliance and control that implements the policies adoptedby the Board, and that the company’s risk management and internal compliance and control is operating efficiently andeffectively in all material respects.

The company adopted this reporting structure in regard to the 2004 financial year report and all subsequent reports.

These statements are included in the policy on CEO and CFO certification referred to in Section 4.0 of this CorporateGovernance Statement.

8.0 Enhancing performance

Council Recommendation 8.1: Disclose the process for performance evaluation of the board, its committees and individualdirectors, and key executives

Performance Assessment

The Board as Nomination Committee undertook a self-assessment in June 2008 of its collective performance, the performanceof the Chairman and of its Committees. This is an annual process. Management is invited to contribute to this appraisalprocess. The assessment of the performance of individual Directors is undertaken by the Chairman, who meets privately witheach Director to discuss this assessment.

Descriptions of the process for performance assessment for the Board and senior executives are available on the website.

New Directors are provided with a letter of appointment setting out the company’s expectations, their responsibilities, rightsand terms and conditions of their employment. By way of induction, new Directors meet with the Company Secretary, CEO orequivalent and the Chairman. These briefings cover the operation of the Board and its Committees and financial, strategic,operations and risk management issues.

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CORPORATE GOVERNANCE STATEMENT9.0 Remuneration of Directors and senior executives

Remuneration practice

Council Recommendation 9.1: Provide disclosure in relation to the company’s remuneration policies to enable investors tounderstand: (1) the costs and benefits of those policies and (2) the link between remuneration paid to directors and keyexecutives and corporate performance

The Adacel Board has determined policies in relation to the remuneration of directors and executives, as follows:

Non–executive Directors

Non–executive Directors are remunerated by fixed annual fees, superannuation, and from time–to–time may also be issuedshare options in place of higher cash fees. The level of annual Directors’ fees is reviewed by the Remuneration Committee andthe Board, taking into account a number of factors, including the range of Directors’ fees paid in the market, and the company’scosts and operating performance. The maximum total for annual fees for Directors is approved from time to time byshareholders in general meeting and was last set at $300,000 per annum at the 1999 Annual General Meeting.

Non–executive Directors may also, in view of the company’s size and resources, from time–to–time be issued options as partof their remuneration in place of a higher cash fee. Options would be issued after consideration by the RemunerationCommittee and the Board and subject to shareholder approval at general meeting. These options would be issued separatelyto the Adacel Staff Option Plan and with conditions that were designed to provide a link with company share priceperformance. Directors are not paid additional fees for work on Board committees and are not entitled to a retirement benefit.

Senior Executives

Under the company’s constitution, remuneration of the Managing Director where one is appointed and Executive Directors,subject to other provisions in any contract between these executives and the company, may be by way of fixed salary orparticipation in the profits of the company but may not be by way of commission on or percentage of operating revenue. Othersenior executives, including the company secretary, may be remunerated by fixed salary and performance based bonuses.Remuneration packages will generally be set to be competitive to both retain executives and attract experienced executives tothe company.

Where packages comprise a fixed element and variable incentive components, the variable components will depend oncompany and personal performance. Short term incentives may include annual cash incentives on meeting specific profit andperformance criteria that has been agreed to in plans set with the Chief Executive Officer or equivalent and the Board. Criteriato be met may include group and/ or business unit profit performance and personal Key Performance Indicators. The amountof the incentive will depend upon the extent that the measure is exceeded. These conditions help to ensure that the short-termincentives are aligned with the interests of shareholders in the current period.

To provide long-term incentives, senior executives may also participate in the Adacel Staff Share Option plan. The options areissued with conditions to help ensure that the remuneration of senior executives is aligned with the long-term interests ofshareholders. The total costs of Director and Senior Manager remuneration packages, including the fair value of options, islisted in the Directors Report and Financial Statements in the Annual Report.

Remuneration Committee

Council Recommendation 9.2: The board should establish a remuneration committee

The Board has established a remuneration committee. The role of the Remuneration Committee is to review and makerecommendations to the Board on remuneration packages and practices applicable to the Chief Executive Officer orequivalent, senior executives and Directors themselves. This role also includes responsibility for share option schemesincentive performance packages and retirement and termination entitlements. Remuneration levels are competitively set toattract the most qualified and experienced Directors and senior executives. The Remuneration Committee may obtainindependent advice on the appropriateness of remuneration packages.

The members of the Remuneration Committee during the year and attendance at meetings of the Committee are disclosed inthe Directors’ Report in the Annual Report

The Remuneration Committee charter is posted on the website.

Non–executive Director remuneration

Council Recommendation 9.3: Clearly distinguish the structure of non–executives directors’ remuneration from that ofexecutives

The Adacel Board has determined that non–executive directors will be remunerated differently from executives in the followingways:

Non–executive directors will receive fees in the form of cash fees and statutory superannuation; Non–executive directors may be issued options as approved by shareholders, but will not participate in the

Adacel Staff Share Option plan or receive bonus payments; and Non–executive directors will not receive retirement benefits other than superannuation.

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CORPORATE GOVERNANCE STATEMENTEquity–based remuneration

Council Recommendation 9.4: Ensure that payment of equity–based executive remuneration is made in accordance withthresholds set in plans approved by shareholders

The Adacel Board has determined that executives will only participate in equity–based plans where the plan has beenapproved by shareholders, and participation in a benefit is subject to share price performance measures of the company beingmet.

Retirement benefits

Council Recommendation 9.5: Other matters (if applicable) – Disclose the existence and terms of any schemes for retirementbenefits, other than statutory superannuation, for non–executive directors

Non–executive Directors do not receive retirement benefits other than statutory superannuation.

10.0 Recognising the legitimate interests of stakeholders

Council Recommendation 10.1: Establish and disclose a code of conduct to guide compliance with legal and other obligationsto legitimate stakeholders

Code of Conduct

The Adacel Board has established a code of conduct for all employees, called Adacel’s Ethics Policy, to assist in maintainingintegrity, ethics and sound business practices. Employees are advised of the company’s ethics and other management policiesand procedures, which are posted on the company’s intranet.

The purposes of this Ethics Policy are to: Ensure compliance with all relevant legislation; Fulfill the reasonable expectations of the communities in which the company operates, by acknowledging the

rights of various stakeholders; Enhance the reputation of the company with its stakeholders; Improve the performance of the company; Inform employees of the Board’s expectations of them, including the obligations of raising and pursuing

concerns of non–compliance or unethical behaviour; and Assist in achieving the company vision.

The company’s ethics policy is posted on the website.

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Adacel Technologies LimitedABN 15 079 672 281

Financial Report, Directors’ Report, Auditor’s Report & Additional Information

30 June 2008

Documents

ASIC Annual Report June 2008-Rev 9 - Adacel June 2008. Adacel ... a robust opening order book that is expected to help provide a strong ... Smith was a senior executive of the company