Directors’ Report

The loss for the six months to 31 December 1997 of $668,000 was disappointing. The major portion of the loss stems from Wellington Electric (53% owned US subsidiary) which has been having difficulty obtaining a consistent order flow to enable it to trade profitably, while at the same time continuing to invest heavily in the development of the Wellington brushless motor.

The Board of Directors has resolved to take the following initiatives to control expenditure and speed up progress:

1. the focus of the Group development effort will be within Brushless Drives (75% owned N.Z. subsidiary). Brushless Drives will take over responsibility for development work relating to licensees and for much of the development work currently being carried out at Wellington Electric. This will enable a co-ordinated and managed approach to the development of the Wellington motor.

2. Wellington Electric has achieved a number of important goals. It has attracted a lot of interest in the motor, attracted two licensees, established a manufacturing line for Wellington motor production and produced about 6,000 motors for a number of different customers. Notwithstanding these achievements the necessary critical mass of order flow for Wellington Electric to be cash flow positive has not been attained. The Wellington Drive board has somewhat reluctantly formed the view that Wellington Electric is unlikely to be able to reach a self sustainable position without a significant input of further capital. Accordingly several established motor manufacturers are being approached with a view to partnering Wellington Electric in the commercialisation of the Wellington motor in North America.

During the last six months a number of positive developments have occurred:

1. Several thousand motors have been produced by Wellington Electric for powering a dust ejector on earth moving machinery:

2. Motors are being produced by Wellington Electric/Dayron for testing by General Motors (Canada) for air cooling armoured fighting vehicles;

3. Motors are currently being produced by Wellington Electric for a commercial frozen drink dispenser manufacturer;

4. Brushless Drives has recently received a significant order for motors for an air separator device which has been granted FAA approval;

5. A manufacturing arrangement with one of Australia's largest fan manufacturers is at an advanced stage of negotiation;

6. Wellington Drive is investing to bring forward a new generation of electronic circuitry which is fully production engineered to support a number of near term opportunities for our licensees in the United States and Australia;

7. Wellington Electric has developed a true "two wire", variable speed motor which allows for direct replacement of brush motors in truck and bus air conditioning units with no wiring changes. This motor has completed trials and will enter production this year;

8. Extensive prototyping work has been undertaken in the electrically-assisted bicycle area by Wellington Electric and Dayron. The Wellington motor has excellent characteristics for this important new leisure market.

Good progress continues to be made, although the Directors' view is that the Group is in need of some restructuring to enable a more speedy commercialisation of the technology. Further communication with shareholders will be provided following resolution of the restructuring.

Dr R.J. Thomson
Chairman
10 March 1998

Consolidated Statement of Financial Performance
for the six months ended 31 December 1997

Consolidated Statement of Movements in Equity

Consolidated Statement of Financial Position
as at 31 December 1997

There has been no change in accounting policies, which have been applied on the bases consistent with the previous year.

Consolidated Statement of Cash Flows
for the six months ended 31 December 1997

Reconciliation of Net Surplus to
Operating Cash Flows

These half year accounts have not been audited.

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