0820Annual Report

Hardide plc

Hardide™ is a family of low temperature CVD

(chemical vapour deposition) tungsten carbide-based

coatings which possess a unique combination of

abrasion, erosion and chemical resistant properties.

The coating is applied in a furnace where components are heated to approximately 500oC

depending on the substrate and application. A controlled mixture of gases is then pumped into

the furnace where a chemical reaction takes place; the gases crystallise on the surface of the

components to produce a smooth, homogeneous layer of binder-free tungsten carbide coating.

Hardide surface engineering technology is revolutionising the way parts perform under the

harshest of conditions. Previously, levels of friction, abrasion and aggressive chemical attack

have led to part failure, downtime and sometimes incalculable cost. Hardide’s unique coatings

are enabling customers in high wear/high value industries such as oil and gas exploration

and production, aerospace and valves to optimise part life, achieve market leading product

performance and make significant cost savings.

Financial Highlightsn Groupturnoverdecreased14%to£2.12million(FY2007:£2.47million)

n Decreasedlossbeforetaxof£1.74million(FY2007:loss£1.86million)

n Decreasedlosspershareof1.1p(FY2007:loss1.2p)

n Successfulraisingof£1.5million(gross)newfunds

n MaidenprofitachievedforUKoperatingcompany,HardideCoatingsLimited,inH12008.FullyearlossforHardideCoatingsLimitedduetocustomerde-stockingissueatthestartofH22008

n Groupoverheadsreducedby£600,000(21%)onanannualisedbasis

Operational Highlightsn AppointmentofDrGrahamHineasCEO

n Commencementofthree-yeartestingprogrammewithAirbus

n GlobalgassupplyagreementfortungstenhexafluoridesuccessfullynegotiatedinH12008

n FormationofanApplicationsDevelopmentGrouptostrategicallyevaluate,prioritise,manageandmonitorthedevelopmentofnewapplicationsforboththeUKandUSdivisions

n Newmarketssuccessfullyidentified,includingtheindustrialdiamondmarket

n HoustonfacilityachievesISO9001accreditation

Contents4 Chairman’sStatement

6 ChiefExecutiveOfficer’sReview

10 FinancialReview

12 BoardofDirectors

14 ReportoftheDirectors

18 ReportoftheIndependentAuditor

20 ConsolidatedIncomeStatement

21 ConsolidatedBalanceSheet

22 ConsolidatedCashFlowStatement

23 ConsolidatedStatementofRecognisedIncomeandExpense

24 NotestotheGroupFinancialStatements

41 ParentCompanyBalanceSheet

42 NotestotheParentCompanyAccounts

46 DirectorsandAdvisers

Chairman’s Statement

AnincreaseinGroupturnoverandgrossprofit,andreductioninoperatingloss,wasreportedforH12008togetherwithamaidenpre-taxprofitfortheUKbusiness,HardideCoatingsLimited.However,thesuddencustomerde-stockingissue,whichbecameapparentatthestartofH22008,combinedwithslowgrowthintheUSbusiness,hasdepressedthefullyearresults.Salesrevenuefortheyearended30September2008was£2.12million,down14%from£2.47millionin2007.TheGroupresultfortheyearwasalossbeforetaxof£1.74million,a6%reductionfromthepre-taxlossof£1.86millionin2007.Sharpfocusoncostreductionhashelpedcontrolthedeclineingrossmargincausedbylowervolumes,from52%in2007to47%thisyear.

On1April2008,theboardtookthedecisiontosuspendtradingintheGroup’sshares.Thesharesuspensioncontinueduntil3June2008duringwhichtimeGroupChiefExecutiveOfficer,JimMurray-Smith,resignedandnewfundsof£1.5million(gross)wereraised.Thenewmoneycoveredoperatinglossesandhasfacilitatedthedevelopmentofnewapplicationsintendedtogenerateadditionalnearandmid-termsalesrevenue.

On2June2008,theboardwaspleasedtoappointDrGrahamHineasChiefExecutiveOfficer.Grahambringsapowerfulcombinationofgeneralmanagement,technicalknowledgeandcommercialexperience.HebeganhiscareeratPhilipsPLCandhassubsequentlyheldanumberofdirector-levelbusinessdevelopmentandgeneralmanagementroles.Hehasmorethantwelveyears’experienceinChairmanandCEOroleswherehesignificantlygrewshareholdervalueintechnology-basedcompaniesintheadvancedmaterialsandsensorindustries.

ArevisedstrategicplanwasformulatedinApril2008.ThiswassubsequentlydevelopedfurtherbyGrahamandthemanagementteam.Intheshortterm,thenewstrategyisfocusedonincreasingcashgenerationintheUKandcommercialisingthe

significantcustomerinterestintheUS.Atthesametime,discretionarycapitalandrevenueexpenditureisbeingminimiseduntilfirmerongoingsalesgrowthisestablished.Forthemediumandlongerterm,carefullytargetedresourceshavebeencommittedtodevelopmentsdesignedtoprovidegrowthinanumberofexcitingnewareas.

H22008sawarigorouscostreductionprogrammeandamarkedtighteningoffinancialcontrols.Thishasresultedinthereductionof£600,000(21%)oftotalGroupoverheads,onanannualisedbasis.

Hardidehasenteredthenewfinancialyearinastrongerpositionandwithaclearstrategyfordiversification,astreamlinedmanagementstructure,firmcontrolofcostsandenhancedinternalreporting.Theboardandmanagementnowhaveaclearviewofthebusinessandhavesetthestrategyandimplementedthechangesthatareneededtogrowrevenuesanddelivershareholdervalue.

TheGroupisalerttotheeffectthattheglobaleconomicdownturnmayhaveonourbusiness.However,todatewehaveobservednoadverseindicationsforHardide.Wewillremainvigilantandtakeappropriateactionintheeventthatwebelievesalesmayfallbelowourcurrentforecast.

Iwouldliketothankallstaffandmembersoftheboardfortheirsupportandcontributionoverthelastyear.

Robert GoddardChairman

08December2008

2008 has been a challenging year for Hardide plc. However, the fundamental business performance was sound and the year ended in line with revised market expectations.

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Hardide has proven to give us an

exciting advantage in heavily abrasive

valve applications. The superior

performance of our Hardide-coated

ball valves will unlock new markets for

us, and we will be testing the coating

as an enabling technology for brand

new valve designs.

A Hardide US customer:oneoftheworld’slargestmanufacturersofpumps,valves,sealsandcomponents

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0820Annual Report

Chief Executive Officer’s Review

Thetechnologyisrobustandhasexcitingpotentialforfurtherdevelopment,themanagementandstaffhaveproventhattheyaretalentedandcommitted,andourcustomerscontinuetobeextremelysupportive.Wehavestreamlinedandrevitalisedthemanagementteam,developedanewstrategicplananddramaticallyreducedbasecostsandoverheads.Thefocusisnowonincreasingrevenuesthroughcross-sellingtoexistingcustomers,andgrowinganddiversifyingourcustomerbase.TheUSbusinessmustnowrealisethesubstantialinterestinthetechnologyandcommercialisethesamplesandteststhatarebeingcarriedout.Thedirectionandframeworkhasbeensettoachievethis.

UK: Hardide Coatings Limited

TheUKoperatingcompany,HardideCoatingsLimited,deliveredFY2008revenueof£1.97million,down18%from£2.41millionin2007.ThecompanyachievedmaidenprofitinH12008butthefullyearresultsweredrivendownbythesuddencustomerde-stocking.OrdersresumedfromthiscustomerinQ42008andhavesincereturnedtopreviouslevels.Weareworkingmorecloselywiththecustomertominimisetheeffectofanyrepetitionofsuchasituation.

InH12008,theGroupnegotiatedaglobalgassupplyagreementfortungstenhexafluoride,itsprincipalrawmaterial.Thisisestimatedtosaveaminimumof£600,000overathreeyearperiod.TheGroupalsonegotiatedpricesofotherprocessgasesleadingtoatotalreductioningascostsof41%.Togetherwithotherefficiencymeasures,thisledtoanimprovementof3%inthevariablecostofsales.

ThetechnicalandproductionteamsintheUKhavebeenworkinghardtoincreasefurnaceyield.ThisprojecthasachievedconsiderablesuccessandisreportedonmorefullyintheTechnology,Research&Developmentsection.Theresultantincreaseincapacitydeferstheneedforadditionalcapitalexpendituretomeetdemand.UKgrossmarginremainshealthy,althoughdownby2%duetoreducedsalesandfixedproductioncosts.

Asreportedintheinterimresults,theUKbusinessenteredathree-yeartestprogrammewithAirbusduringtheyear.Theresultssofarhavebeenencouragingalthoughthisisunderstandablyariskaversesectoranditwilltaketimetomovetoacommercialbasis.

In my first six months, I have been impressed and encouraged by the strength of the Hardide technology, the quality of people and the commitment of our customers.

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US: Hardide Coatings, Inc.

TheUSoperatingcompanywasstrengthenedwiththeappointmentinNovember2007ofKenSiddall,nowUSVicePresidentandGeneralManager.Kenbringsover20yearsofcoatingtechnology,engineeringandgeneralmanagementexperienceandhasbeeninstrumentalinimplementingtheoperationalandproductionpracticesnecessarytounderpincommercialsuccessintheUS.However,thesalescycleistakinglongerthananticipatedandrevenueshavebeenslowtodevelop,withFY2008salesof$0.41million;althoughthisisanincreaseof164%oversalesof$0.16millionin2007.Inthelastsixmonths,significantprogresshasbeenmadeinidentifyingandfocusingoncoremarkets.Localengineeringsupporthasalsobeenestablishedtosupportsamplingandsales.Havingthoroughlyreviewedthepipelineofnewbusinessandpersonallymetkeyprospectivecustomers,Iamoptimisticthatconversions,particularlyinthevalvesector,willberealisedduring2008/09.

Relationshipswithlocalsuppliershavebeenstrengthenedtosupportquickturnaroundwiththeresultthatsamplesarebeingprocessedinapproximatelyhalfthetimethatittookonlyninemonthspreviously.Thisisalreadyleadingtoimprovedcustomerrelationships.

ThefacilityachievedISO9001inNovember2007.

Markets

AstrategicreviewwascarriedoutinApril2008andre-visitedindepthonmyappointmentinJune2008.Ourcoremarketsarelarge,growingandprofitableandweareconfidentthatoilandgas,valvesandpumps,andaerospaceremainsectorsofhighpotentialfortheGroup.However,diversificationofproductsalestomajorcustomersandsalestonewcustomersisfundamentaltogrowingasolidandvaluablebusiness.Toacceleraterevenuegenerationweareintensifyingourfocusondevelopingnewbusinesswithkeycustomersthroughstrongcustomerrelationshipmanagement,andingeneratingnewbusinessinourcoremarketsandforexistingapplications.Wearealsoinvestigatingnewsectorswhichrequiremoderateresourceinvestmentforhighpotentialreturn.Anorganisationalframeworkandevaluationsystemhavebeenestablishedtoprioritisetheseopportunities.

Wearemakingprogresswiththecoatingofindustrialdiamonds;anewmarketwithexcitingpotential.WeareworkingcloselyinboththeUKandUSwithleadingmanufacturersofindustrialdiamondsthatareusedindrillandsawtoolsintheoilandgas,miningandconstructionindustries.ThisapplicationisforanewandpatentedtungstencarbideHardidecoatingthatoffersanunprecedentedcombinationofadhesiveandprotectiveproperties.Improvedtoolperformanceanddurabilityisexpectedtoofferimpressivecostsavingstousers.Testingtodateisencouragingandisapriorityforourtechnicalteam.

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Chief Executive Officer’s Review continued

Health, Safety and Environment

Theeffectivemanagementofhealth,safetyandenvironmental(HSE)riskscontinuestobeapriorityfortheboardandmanagementofHardideplc.TheUKandUSfacilitieshavecompliedwithallHSEregulationsthroughouttheyear.

FollowingISO14001certificationinSeptember2007,theUKbusinesswaspraisedbyLRQAthisyearforprogressmadeininternalmaintenance,wastemanagementanddutyofcare.Iamalsopleasedtoreportthatelectricityconsumptionwasreducedby14%duringtheyear.

AGroup-wideenergyawarenessprogrammeandpolicyisbeingintroducedtoassistenergyconsumptionreductionandmeasuresarebeingtaken,particularlybyfurnacestaff,toensurethatelectricityandgasconsumptionateveningsandweekendsisminimised.TheUSbusinessenteredintoanelectricitycontractthatusesatleast10%renewableresources.

Technology, Research & Development

AnApplicationsDevelopmentGroupledbyTechnicalDirector,DrYuriZhuk,wasformedduringtheyeartostrategicallyevaluate,prioritise,manageandmonitorthedevelopmentofnewapplicationsforboththeUKandUSfacilities.Thishasresultedinamorecohesiveandcommercially-orientedapproachtothedevelopmentandtestingofnewapplications.PreviouslytheGroupprocessedandtestedover200samplesperannum,althoughmanyofthesecouldneverbecommerciallyviable.Thenewandfocusedstrategyisconcentratingonarotationoffarfewerkeyprojects,allofwhichhavescoredhighlyintheevaluationprocess.Thisallowsforthedisciplinedattentionoflimitedresourcesandisalreadyprovingsuccessful,withtworecentlycompletedprojectsexpectedtogeneratecommercialordersinthenearfuture.Oneoftheprojects,whichisforaUScustomer,hasresultedina400%increaseinfurnaceyieldfor2”ballvalves,oneofthemostcommoncomponentsforHardidecoating.Acombinationofhigh-capacityjigging,alargerfurnacebellandmodificationstothecoatingprocesshasquadrupledthefurnaceloadcapacityforthispart.ThisreducestheunitcosttothecustomerandoffersrawmaterialandprocesscostefficienciestotheGroup.Plansareunderwaytoreplicatethissuccesswithothercommonly-coatedcomponenttypes.

Lastyear’sinvestmentinstate-of-the-artscientificequipmenthaspaiddividendswithimprovementsintheproductionprocessandlowermaterialcosts.Asauniquetechnologywithawidevarietyofapplications,weinevitablyexperienceoccasionalprocessfailures.Thisyearwereworked40%fewerpartsduetopre-treatmentstagefailures.ThisisprimarilyduetotheuseoftheX-rayfluorescenceequipmentpurchasedlastyeartoswiftlyandaccuratelydiagnoseandunderstandthecauseofanyfailures.

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Hardide allows a level of design

flexibility that we have not found

in other coatings. This means that

we can easily revise designs and

increase component complexity in

the knowledge that Hardide can be

applied exactly where we want it.

Jeff RutlandDirectorofEngineeringMeciriaLtd

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0820Annual Report

Thecontinualimprovementinloadingandjiggingtechniquesandintherobustnessofthecoatingprocesswillrealiseevengreateryieldsfromfurnaceruns.Recenttrialshavevalidatedtoolingtechniquesthatareincreasingyieldsbyupto300%onsomecomponents.

TheGroup’sR&Dactivitieshavealsobeenre-prioritisedinthecourseoftheyear.ThedevelopmentofvariantcoatingsfordiamondsandtitaniumhavebeenidentifiedaskeyprojectsforR&Dresources.Thesearebothmedium-termprojectswithhighpotentialfornewopportunitiesinourexistingoilandgas,andaerospacemarketsanddiversificationintominingandFormula1motorsport.Developmentworkisbeingundertakeninconjunctionwithcustomerpartnersalthoughbothprojectswillrequirecapitalinvestmentforscale-upandcommercialisation.

Outlook

Wearealreadyseeingthebenefitsofaflattermanagementstructure,goalalignmentbetweentheUKandUS,andbetterengagementwithkeycustomers.ThefocusmustnowbeonrevenuegenerationandIbelievewearewellplacedtogrowsalesinallofourkeymarketsoverthenextyear.WehavesomeexcitingprospectsinthepipelineandIexpectasmallnumberoflargeandstrategicallysignificantnewapplicationandnewcustomergainsin2008/09.Meanwhile,weremainfirmlyfocusedoncontrollingcostsandmaximisingoperatingefficiencies.TheboardisoptimisticaboutthefutureofthebusinessinboththeUKandUS.

ThemanagementandstaffacrosstheGrouphaveenduredayearofchange.Itistestamenttothestrengthofpreviousrecruitmentandbeliefinthefutureofourbusinessthatthelargemajorityofpeopleandtalenthaveremainedinplaceanddedicatedtosuccess.IwouldliketothankallstaffthroughouttheGroupfortheircontinuedloyalty,hardworkandsupport.

Dr Graham HineChiefExecutiveOfficer08December2008

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Financial Review

OverallGroupsalesdecreasedto£2.12mfrom£2.47minthepreviousyearandrevenuefromtheUKoperation,HardideCoatingsLimitedwasdown18%to£1.97m.However,afallinUKvariablecostsof33%anda16%reductioninoverheadshelpedmitigatetheimpactoftherevenuedeclinesuchthattheUKpre-taxlosswas£134,000comparedtoaUKpre-taxlossof£50,000onsalesof£2.39mlastyear.TheUKoperationachievedanEBITDApositivepositionandwasalsosubstantiallycashpositivefortheyear.Tightcontrolofworkingcapitalreducedlevelsofstockanddebtorstoaroundhalftheirlevelofayearago.

ThedepressedsalesperformancehasmaskedtheconsiderableprogressthattheGrouphasmadebothintermsofprocessefficiencyandsuccessinsecuringadvantageoussupplycontractsforourprincipalrawmaterials.Groupvariablecostofsalesfellby21%asaresultofthesemeasureswhileenergyefficiencyandimprovedpurchasinghelpedreduceenergycostsby11%yearonyear.Afterincludingproductionsalaries(whichrepresentmorethan50%ofcostofsales)Groupoverallgrossmarginfellby5%.Thefinancialbenefitsfromtheconsiderabletechnicaldevelopmentsthroughouttheyearsuchasfurnaceyieldonlybegantoimpactattheendofthisyearandfurtherbenefitsshouldbecomeapparentin2009.

SalesfromourHoustonfacilitymorethandoubledto$0.41malthoughtheyhavebeenslowertodevelopthananticipated.Theappointmentofanexperiencedandlocally-basedGeneralManagerhasimprovedthefocusonmarginsandyieldsuchthattoproducesalesgrowthof164%incurredacostofsalesincreaseofonly39%.

InMay2008,theGroupembarkedonaprogrammetocutdiscretionaryandcapitalexpenditureandtotightencostcontrols.Significantcutsweremadetooverheadsaspartofthisrollingcostreductionprocess,reducingtheseonanannualisedbasisby£600,000.Thebenefitsofthesecutswillflowthroughto2009.Themajorityofthedeclineinadministrativeexpensesshownin2008isduetothefavourableexchangeratevarianceontheintercompanyloan.

Thedepreciationchargeincludes£47,000forone-offadjustments.Financecostsof£187,000include£79,000fornon-cashFRS25chargesforcombinedinstruments.

TheGroupwillcontinuetofocusoncashretentionandoverheadreduction,aswellascontinuingtosteerourHoustonoperationtowardscashpositivestatus.Wearegratefulforthecontinuedsupportofourmajorshareholdersthroughwhathasbeenadifficultyear.

Peter DavenportFinanceDirector08December2008

While consolidated turnover was down by 14% over the year, the Group made positive progress in a number of areas and has implemented stringent forecasting and other methodologies which have improved the financial heart of the business.

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For years we have struggled with the design of unique pump components,

trying to strike a balance between performance and manufacturability. The

Hardide process allows us to finish machine the intricate geometry then add

a precise thickness of the Hardide matrix to produce a part with great wear

characteristics and low co-efficient of friction. Recently, a customer suffered a

system upset and introduced a large amount of ceramic bead catalyst to the

pumpage and destroyed all of the 8 stage pump internals except the Hardide-

coated components. The Hardide-coated components were re-used in the

refurbished pump.

Dennis BowmanConsultingEngineerAlfredConhagen,Inc

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Board of Directors

Robert John Goddard(57)Non-ExecutiveChairman

RobertGoddardwasappointedasnon-executivechairmaninJanuary2008.Acharteredengineer,hewasontheexecutiveboardofBurmahCastrolplcandpreviouslymanageditsworldwidefuelsbusinessandasubstantialportionofitschemicalsbusiness.HesubsequentlyjoinedAmberleyGroupPLCwherehewaschiefexecutive,responsibleforturningroundandsellingonitsfourspecialitychemicalsubsidiaries.Mostrecentlyhehasundertakenavarietyofadvisoryandturnaroundassignments.Heisalsochairmanofagroupdevelopingawaste-to-energybusiness.

Dr (Richard) Graham Hine(54)ChiefExecutiveOfficer

GrahamHinewasappointedaschiefexecutiveofficerinJune2008.HejoinedHardidefromP2iLimitedwherehewaschairmanandchiefexecutiveoftheMinistryofDefencetechnologyspin-outfromPortonDown.AtP2iheoversawthecreationoftheworld’sleadinghydrophobicsurfaceenhancementcompany.DrHinebeganhiscareeratPhilipsPLCandhassubsequentlyheldanumberofdirector-levelbusinessdevelopmentandgeneralmanagementroles.Hehasmorethantwelveyears’experienceinchairmanandCEOpositionswherehesignificantlygrewshareholdervalueintechnology-basedcompaniesintheadvancedmaterialsandsensorindustries.

Peter Neil Davenport(42)FinanceDirector

PeterDavenportwasappointedfinancedirectorofHardideplcinMarch2006.HejoinedHardideinJune2005asfinancialcontrollerbringingtenyears’financialmanagementexperience.MrDavenportwaspreviouslyfinancialcontrollerattheUKsubsidiaryofNYSE-listedglobalcoatingscompanyValsparCorporation.HeisanassociateoftheCharteredInstituteofManagementAccountants.

Dr Yuri Nikolaevich Zhuk(47)TechnicalDirector

YuriZhukisaco-founderofHardideCoatingsLimitedandisresponsibleforthecompany’stechnology,research&development,patentingandapplicationsdevelopmentprogrammes.Previously,heco-foundedTetraConsultLtd,aMoscow-basedtechnologyconsultancycompanywherehespecialisedininternationaltechnologycommercialisationandtransferdeliveringprojectsforcompaniesincludingICI,GM,Johnson&JohnsonandSamsung.Inthelastyear,DrZhukhasgainedanMBAfromtheOpenUniversity.

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Hugh Carlisle Smith (62)Non-ExecutiveDirector

HughSmithjoinedtheboardofHardideplcinMarch2005havingbeenontheboardofHardideCoatingsLimitedsinceMay2003.HewasformerlyaseniorexportmanageratBritishLeylandbeforehelpingtofoundAllmakesLimited,oneoftheUK’slargestindependentsuppliersofLandRoversparepartsandwherehewaschairmanuntilOctober2006.Heholdsanumberofnon-executivedirectorships.

David Edward Christian Mott (35)Non-ExecutiveDirector

DavidMottwasappointedtotheboardofHardideplcinMarch2005.HejoinedtheboardofHardideCoatingsLimitedinApril2004.MrMottistheco-founderofOxfordCapitalPartnersand,since1999,hasledover30venturecapitaltransactionsinscienceandtechnologycompanies.HespenthisearlycareerwithJardineFleminginAsiaasanequitiesanalystfollowedbyDeloitte&ToucheinLondon.

William Yale Zakroff (58)Non-ExecutiveDirector

WilliamZakroffjoinedtheboardofHardideplcinJune2007.BasedinHouston,Texas,heisthefounderandCEOofMarinusPowerLLC,amarinerenewableenergyfirm,andisco-founderandadirectorofSyncWaveSystemsInc.MrZakroffalsocontinuestoprovideinternationalbusinessdevelopmentandgeneralmanagementconsultingservicesunderZakroffGroupLPandisontheAdvisoryBoardofIngeneroInc.PriortofoundingZakroffGroupin1984,heheldvariousmanagementpositionswithintheadvancedmaterialsgroupoftheGeneralElectricCompany(US).

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Results

TheGrouplossfortheperiod,aftertaxation,amountedto£1,703,000(2007:£1,831,000loss).

Directors

Thepresentmembershipoftheboardissetoutonpages12and13.Changestomembershipoftheboardduringtheyearisshownbelow,aswellasthebeneficialinterestsofthedirectorsandtheirfamiliesinthesharesoftheCompany.

30September2008 30September2007 Appointed Resigned Numberofshares Numberofshares

RobertGoddard 28January2008 135,000 -

DavidMott 14March2005 - -

HughSmith 14March2005 4,012,900 2,120,400

WilliamZakroff 26June2007 25,000 -

JimMurray-Smith 3February2005 11April2008 1,078,000 1,078,000

GrahamHine 2June2008 - -

YuriZhuk 14March2005 4,364,465 4,364,465

PeterDavenport 21March2006 560,000 -

DavidMottisadirectorofOxfordCapitalPartnerswhichholds4,441,667ordinaryshares(2007:4,275,000).

Nodirectorhad,duringorattheendoftheyear,amaterialinterestinanycontractwhichwassignificantinrelationtotheCompany’sbusinessexceptasdisclosedinNote19tothefinancialstatements.

Directors’ interest in share options

TheCompanyhasshareoptionschemesunderthetermsofwhichdirectorsareabletosubscribeforordinarysharesintheCompany.Detailsofthedirectors’interestinshareoptionsareshowninnote18totheGroupaccounts.

Directors’ responsibilities for the financial statements

ThedirectorsareresponsibleforpreparingtheannualreportandthefinancialstatementsinaccordancewithapplicablelawandInternationalFinancialReportingStandards.

UnitedKingdomcompanylawrequiresthedirectorstopreparefinancialstatementsforeachfinancialyearwhichgiveatrueandfairviewofthestateofaffairsoftheGroupandoftheCompanyandoftheprofitorlossoftheGroupforthatperiod.Inpreparingthosefinancialstatements,thedirectorsarerequiredto:-

n selectsuitableaccountingpoliciesandthenapplythemconsistently;

n makejudgementsandestimatesthatarereasonableandprudent;

n preparethefinancialstatementsonthegoingconcernbasisunlessitisinappropriatetopresumethattheGroupwillcontinueinbusiness;and

n statewhetherapplicableInternationalFinancialReportingStandardshavebeenfollowed,subjecttoanymaterialdeparturesdisclosedandexplainedinthefinancialstatements.

ThedirectorsareresponsibleforkeepingproperaccountingrecordsthatdisclosewithreasonableaccuracyatanytimethefinancialpositionoftheGroupandCompanyandenablethemtoensurethefinancialstatementscomplywiththeCompaniesAct1985.TheyarealsoresponsibleforsafeguardingtheassetsoftheGroupandhencefortakingreasonablestepsforthepreventionanddetectionoffraudandotherirregularities.

Report of the Directors

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Insofarasthedirectorsareaware:

n thereisnorelevantauditinformationofwhichtheCompany’sauditorisunaware,and

n thedirectorshavetakenallstepsthattheyoughttohavetakentomakethemselvesawareofanyrelevantauditinformationandtoestablishthattheauditorsareawareofthatinformation.

ThedirectorsareresponsibleforthemaintenanceandintegrityofcorporateandfinancialinformationincludedontheGroup’swebsite.LegislationintheUnitedKingdomgoverningthepreparationanddisseminationoffinancialstatementsmaydifferfromlegislationinotherjurisdictions.

Financial risk management objectives and policies

TheGroupusesvariousfinancialinstrumentsincludingfinanceleases,equityandloans,andcashandvariousitems,suchastradedebtorsandtradecreditorsthatarisedirectlyfromitsoperations.ThemainpurposeofthesefinancialinstrumentsistoraisefinancefortheGroup’soperations.TheexistenceofthesefinancialinstrumentsexposestheGrouptoanumberoffinancialrisks.Themainrisksarecurrencyriskandinterestraterisk.Thedirectorsreviewandagreepoliciesformanagingeachoftheserisks.FurtherdisclosureisprovidedinNote20.

Substantial shareholders

At5December2008thefollowinghadnotifiedtheCompanyofadisclosableinterestin3%ormoreofthenominalvalueoftheCompany’sshares:

Name Shareholding %

RBoyce&Associates 32,543,892 17.2

AllianzInsurance 27,139,332 14.3

ABadenoch&Associates 22,400,680 11.8

ProgressiveAssetManagement 7,990,530 4.2

NobleFundManagers 6,400,000 3.4

Payment policy and practice

ItistheCompany’spolicythatpaymentstosuppliersaremadeinaccordancewiththosetermsandconditionsagreedbetweentheCompanyanditssuppliers,providedthatalltradingtermsandconditionshavebeencompliedwith.At30September2008theGrouphadanaverageof34daysoutstandingintradecreditors(2007:51days).

Corporate Governance

Theboardhasthefollowingcommittees:

Remuneration

TheRemunerationCommitteecomprisesHughSmith(Chairman)andDavidMott.DuringthefinancialyeartheRemunerationCommitteemetonanumberofoccasions.Theremitofthecommitteeistodeterminetheremunerationpackagesoftheexecutivedirectors,approveanyshareoptionproposalsforotheremployees(suchproposalsnormallybeingputforwardbytheCEO)andundertakeinvestigationsregardinganypotentialdisciplinarymattersregardingboardmembers.

Thecommitteeusesindependentresearchtohelptodecideafairlevelofremunerationforexecutivedirectors.InthecaseoftheCEOthepackageismadeupofacombinationofsalary,bonuses,shareoptionsandotherbenefits.Thelevelofbonusesisdeterminedbasedonacombinationofsalesachieved,profitabilityandsharepricegrowth.NobonuswaspaidouttotheCEOinthefinancialyears2007or2008.

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InthecaseoftheFinanceDirectorandTechnicalDirector,theirpackagesaremadeupofacombinationofsalary,otherbenefitsandshareoptions.

CEO PackageTheCEOispaidasalaryof£120,000plusacarallowanceof£10,000.Inadditionabonusplanisinplacewhichwillrewardhimupto50%ofsalaryifthefollowingtargetsareachieved:

16.67%ofbonusplanifHardidePLCachievesagrossprofitinexcessof£2,100,000duringthefinancialyear;andafurther16.67%ofbonusplanifHardidePLCachievesagrossprofitinexcessof£2,500,000;

16.67%ofbonusplanifHardidePLCachievesaEBITDAinexcessof£200,000duringthefinancialyear;andafurther16.67%ofbonusplanifHardidePLCachievesaEBITDAinexcessof£400,000duringthefinancialyear;

Upto33.33%ofbonusplanatthediscretionoftheboard,basedonoverallperformanceagainsttargetssetbytheboard.

Share OptionsOptionshavebeenissuedtotheCEOonthefollowingbasis:6,000,000optionshavebeenissuedtotheCEOatanexercisepriceof£0.03p.Theseshareswillvestprogressivelyoveraperiodof3yearsfromOctober2008.SharesmayvestearlierthanthatintheeventthattheCompanyissoldbeforeOctober31st2011.

Audit

TheAuditCommitteecomprisesDavidMott(Chairman)andHughSmith,bothnon-executivedirectorsoftheCompany.

TheCommitteeoverseesthemonitoringoftheGroup’sinternalcontrols,accountingpoliciesandfinancialreportingandprovidesaforumthroughwhichtheexternalauditorsreport.Italsoreviewsthescopeandresultsoftheexternalaudit;theindependenceandobjectivityoftheauditors;andmakesrecommendationstotheboardonissuessurroundingtheauditor’sremuneration,appointment,resignationandremoval.TheCommitteeisauthorisedbytheboardtoseekandobtainanyinformationitrequiresfromanyofficeroremployeeoftheCompanyandtoobtainexternallegalorotherindependentprofessionaladvice.

Duringtheyear,theCommitteerecommendedtotheboardthattheCompanyinvitetendersfortheroleofauditor.Fivecompaniestenderedfortheroleandafterreviewingthesetenders,theCommitteerecommendedthattheCompany’spreviousauditorbereplacedwithCritchleysCharteredAccountants,whointheopinionoftheCommitteeofferedtheappropriatelevelsofcompetenceandvalue.CritchleyshasanexistingrelationshipwiththeCompanyandprovidespayrollservicestotheCompanyanditsUKsubsidiary,HardideCoatingsLimited.ItistheCommittee’sviewthatthisdoesnotcompromisetheindependenceandobjectivityoftheauditorfortheyearinquestion.Critchleyswillceasetoprovidepayrollservicesduringthecurrentyear.

TheAuditCommitteehasreviewedtheeffectivenessofthesystemofinternalcontrolthroughouttheyearanduptothedatethatthefinancialstatementsweresigned,andthisreviewdidnotidentifyanysignificantfindingsorweaknesses.

TheCommitteehasreviewedanddiscussedtheCompany’sauditedfinancialstatementswithmanagement,whichhasprimaryresponsibilityforthefinancialstatements.CritchleysCharteredAccountants,theCompany’sindependentauditor,isresponsibleforexpressinganopinionontheconformityoftheCompany’sauditedfinancialstatementswithgenerallyacceptedaccountingprinciples.Basedontheconsiderationsreferredtoabove,theCommitteerecommendedtotheboardofdirectorsthattheauditedfinancialstatementsbeincludedintheCompany’sAnnualReport.

Auditor

AresolutiontoreappointCritchleysasauditorwillbeproposedattheAnnualGeneralMeeting.

Report of the Directors continued

16

0820Annual Report

Business Review

TheboardregularlyreviewsboththefinancialpositionoftheGroupandnon-financialperformanceinformation.FinancialinformationincludesmonthlybalancesheetsandprofitandlossaccountsfortheGroup,Companyandsubsidiaries,togetherwithanalysisofmovementsincash,tradedebtorsandfixedassets.Non-financialinformationreviewedbytheboardincludesreportsandkeyperformanceindicatorsincludingfurnaceperformance,deliveryperformance,researchanddevelopmentactivity,salesactivityandhealthandsafety.Duringtheyear,theCompanyhasmadegoodprogressindevelopinganumberofnon-financialKPIswhichareenablingustomonitor,benchmarkandimproveourperformanceacrossarangeofenvironmental,production,operations,salesandhumanresourcemeasures.

Onbehalfoftheboard,

Graham HineDirector05December2008

17

0820Annual Report

Report of the Independent Auditor

WehaveauditedtheGroupandparentCompanyfinancialstatementsofHardidePlcfortheyearended30September2008whichcomprisetheConsolidatedIncomeStatement,theConsolidatedandCompanyBalanceSheets,theConsolidatedCashFlowStatement,theConsolidatedStatementofRecognisedIncomeandExpenseandtherelatednotes.Thesefinancialstatementshavebeenpreparedundertheaccountingpoliciessetouttherein.

ThisreportismadesolelytotheCompany’smembers,asabody,inaccordancewithSection235oftheCompaniesAct1985.OurauditworkhasbeenundertakensothatwemightstatetotheCompany’smembersthosematterswearerequiredtostatetotheminanauditors’reportandfornootherpurpose.Tothefullestextentpermittedbylaw,wedonotacceptorassumeresponsibilitytoanyoneotherthantheCompanyandtheCompany’smembersasabody,forourauditwork,forthisreport,orfortheopinionswehaveformed.

Respective responsibilities of directors and auditor

Thedirectors’responsibilitiesforpreparingtheAnnualReportandAccountsandtheGroupFinancialStatementsinaccordancewithapplicablelawandInternationalFinancialReportingStandardsasadoptedbytheEuropeanUnionandforpreparingtheparentCompanyfinancialstatementsinaccordancewithapplicablelawandUnitedKingdomAccountingStandards(UnitedKingdomGenerallyAcceptedAccountingPractice)aresetoutintheStatementofDirectors’Responsibilities.

OurresponsibilityistoauditthefinancialstatementsinaccordancewithrelevantlegalandregulatoryrequirementsandInternationalStandardsonAuditing(UKandIreland).

Wereporttoyououropinionastowhetherthefinancialstatementsgiveatrueandfairview,whethertheyhavebeenproperlypreparedinaccordancewiththeCompaniesAct1985andwhethertheinformationgivenintheDirectors’Reportisconsistentwiththosefinancialstatements.Wealsoreporttoyouif,inouropinion,theCompanyhasnotkeptproperaccountingrecords,ifwehavenotreceivedalltheinformationandexplanationswerequireforouraudit,orifinformationspecifiedbylawregardingdirectors’remunerationandothertransactionsisnotdisclosed.

WereadotherinformationcontainedintheAnnualReportandconsiderwhetheritisconsistentwiththeauditedfinancialstatements.Thisotherinformationcomprisesonlythefinancialhighlights,theChairman’sStatement,theChiefExecutive’sReview,theFinancialReview,andtheReportoftheDirectors.Weconsidertheimplicationsforourreportifwebecomeawareofanyapparentmisstatementsormaterialinconsistencieswiththefinancialstatements.Ourresponsibilitiesdonotextendtoanyotherinformation.

Basis of audit opinion

WeconductedourauditinaccordancewithInternationalStandardsonAuditing(UKandIreland)issuedbytheAuditingPracticesBoard.Anauditincludesexamination,onatestbasis,ofevidencerelevanttotheamountsanddisclosuresinthefinancialstatements.Italsoincludesanassessmentofthesignificantestimatesandjudgmentsmadebythedirectorsinthepreparationofthefinancialstatements,andofwhethertheaccountingpoliciesareappropriatetotheGroup’sandCompany’scircumstances,consistentlyappliedandadequatelydisclosed.

Weplannedandperformedourauditsoastoobtainalltheinformationandexplanationswhichweconsiderednecessaryinordertoprovideuswithsufficientevidencetogivereasonableassurancethatthefinancialstatementsarefreefrommaterialmisstatement,whethercausedbyfraudorotherirregularityorerror.Informingouropinionwealsoevaluatedtheoveralladequacyofthepresentationofinformationinthefinancialstatements.

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0820Annual Report

Opinion

Inouropinion:

n theGroupfinancialstatementsgiveatrueandfairview,inaccordancewithInternationalFinancialReportingStandardsasadoptedbytheEuropeanUnion,ofthestateoftheGroup’saffairsasat30September2008andofitslossfortheyearthenended;

n theparentCompanyfinancialstatementsgiveatrueandfairview,inaccordancewithUnitedKingdomGenerallyAcceptedAccountingpractice,ofthestateoftheparentCompany’saffairsasat30September2008;

n thefinancialstatementshavebeenproperlypreparedinaccordancewiththeCompaniesAct1985;and

n theinformationgivenintheDirectors’Reportisconsistentwiththefinancialstatements.

Emphasis of matter - loan by Hardide plc to Hardide IncIncludedindebtorsintheCompanybalancesheetisanamountof£3,647,000duefromHardideInc.Informingouropiniononthefinancialstatements,whichisnotqualified,wehaveconsideredtheadequacyofthedisclosuresmadeinnote4totheCompanyfinancialstatementsconcerningtherecoverabilityofthisloan.Thedisclosureindicatesamaterialuncertaintyregardingtherecoverabilityofthisloan.Thefinancialstatementsdonotincludetheadjustmentsthatwouldresultiftheloanwerenotrecoverable.

Emphasis of matter - going concernInformingouropiniononthefinancialstatements,whichisnotqualified,wehaveconsideredtheadequacyofthedisclosuresmadeinnote1concerningtheGroup’sabilitytocontinueasagoingconcernshouldtheGroupunderperformitscurrentplanforrevenue,costsandcashflow.Thedirectorsareconfidentthatthiswilleitherbeachievedorthatfreshfundingwillbeavailable.ThefinancialstatementsdonotincludetheadjustmentsthatwouldresultiftheGroupwasunabletocontinueasagoingconcern.

Critchleys Chartered AccountantsRegisteredAuditorsAbingdon21January2009

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0820Annual Report

Note 2008 2007 £’000 £’000

Revenue 2 2,123 2,470

Costofsales (1,132) (1,180)

Gross profit 991 1,290

Administrativeexpenses (2,081) (2,676)

Depreciationandamortisation (500) (475)

Operating profit 3 (1,590) (1,861)

Financeincome 4 37 31

Financecosts 5 (187) (25)

Profit on ordinary activities before taxation (1,740) (1,855)

Taxation 7 37 24

Profit on ordinary activities after taxation (1,703) (1,831)

Losspershare:Basic 8 (1.1)p (1.2)p

Losspershare:Diluted 8 (0.8)p (1.1)p

Alloperationsarecontinuing.

Theaccompanyingaccountingpoliciesandnotesformanintegralpartofthesefinancialstatements.

20

Consolidated Income Statement for the year ended 30 September 2008 08

20Annual Report

Consolidated Balance Sheet at 30 September 2008

Note 2008 2007 £’000 £’000

Assets Non-current assets Goodwill 9 69 69

Intangibleassets 10 4 7

Property,plant&equipment 11 1,366 1,661

Total non-current assets 1,439 1,737

Current assets

Inventories 12 44 99

Tradeandotherreceivables 12 325 648

Othercurrentfinancialassets 12 160 147

Cashandcashequivalents 12 995 1,135

Total current assets 1,524 2,029

Total assets 2,963 3,766

Liabilities

Current liabilities

Tradeandotherpayables 13 356 512

Financialliabilities 13 110 145

Total current liabilities 466 657

Net current assets 1,058 1,372

Non-current liabilities

Financialliabilities 14 1,162 893

Total non-current liabilities 1,162 893

Total liabilities 1,628 1,550

Net assets 1,335 2,216

Equity attributable to equity holders of the parent

Sharecapital 16 1,896 1,467

Sharepremium 17 4,102 3,345

Retainedearnings 17 (4,705) (3,077)

Share-basedpaymentsreserve 17 347 450

Translationreserve 17 (305) 31

Total equity 1,335 2,216

Thefinancialstatementswereapprovedandauthorisedbytheboardon5December2008.

Graham Hine Director

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0820Annual Report

22

Consolidated Cash Flow Statement for the year ended 30 September 2008

Note 2008 2007 £’000 £’000

Cash flows from operating activities Operatingprofit (1,590) (1,861)

Impairmentofintangibles 3 2

Depreciation 497 473

Shareoptioncharge 50 59

(increase)/decreaseininventories 55 23

(increase)/decreaseinreceivables 310 (224)

Increase/(decrease)inpayables (155) 72

Exchangeratevariance (391) -

Cash generated from operations (1,221) (1,456)

Financeincome 37 31

Financecosts (108) (25)

Taxreceived/(paid) 26 107

Net cash generated from operating activities (1,226) (1,343)

Cash flows from investing activities Purchaseofproperty,plantandequipment (127) (439)

Net cash used in investing activities (127) (439)

Cash flows from financing activities Netproceedsfromissueofordinarysharecapital 1,173 -

Financeleaseinception - 209

Financeleaserepayment (145) (95)

Newloansraised 225 1,000

Net cash used in financing activities 1,253 1,114

Net increase / (decrease) in cash and cash equivalents (140) (668)

Cash and cash equivalents at the beginning of the year 1,135 1,803

Cash and cash equivalents at the end of the year 995 1,135

0820Annual Report

Consolidated Statement ofRecognised Income and Expensefor the year ended 30 September 2008

Note 2008 2007 £’000 £’000

Exchangedifferencesontranslationofforeignoperations (335) 31

Net income recognised directly in equity (335) 31

Lossfortheyear (1,703) (1,831)

Total recognised income and expense for the year (2,038) (1,800)

23

0820Annual Report

1. Accounting policies

Accounting conventionTheGrouppreviouslyreporteditsfinancialstatementsunderUKGenerallyAcceptedAccountingPractice(GAAP).From1October2007theGroupisrequiredtoprepareitsfinancialstatementsinaccordancewithInternationalFinancialReportingStandards(IFRS),InternationalAccountingStandards(IAS)andInterpretations(IFRIC).Thecomparativedatafortheyearended30September2007havebeenrestatedandreconciliationshavebeenpreparedtoexplainthechanges.

First time adoption of IFRSTheGroup’stransitiondatetoIFRSwas1October2006,whichisthebeginningofthecomparativeperiodfortheyearended30September2007.TheGrouphasappliedIFRS1forthefirsttimeadoptionofIFRSandhaselectedtousethefollowingexemptions:

n Businesscombinations–businesscombinationsthattookplacepriorto1October2006havenotbeenrestated;

n Share-basedpayment–theGrouphasappliedtherequirementsofIFRS2Share-basedpaymentstoallgrantsofequityinstrumentsafter7November2002thatwereunvestedasof1October2006.

Standards, interpretations and amendments to published standards not yet effectiveCertainnewstandards,amendmentsandinterpretationstoexistingstandardshavebeenpublishedthataremandatoryfortheGroup’saccountingperiodsbeginningonorafter1October2008orlaterperiodsandwhichtheGrouphasdecidednottoadoptearly.Theseare:

n IFRS8,OperatingSegments(effectiveforaccountingperiodsbeginningonorafter1January2009).Thisstandardsetsoutrequirementsforthedisclosureofinformationaboutanentity’soperatingsegmentsandalsoabouttheentity’sproductsandservices,thegeographicalareasinwhichitoperates,anditsmajorcustomers.ItreplacesIAS14,SegmentalReporting.Asthisisadisclosurestandard,itwillnothaveanyimpactontheresultsornetassetsoftheGroup.

n IAS1,PresentationofFinancialStatements–arevisedapproach(effectiveforaccountingperiodsbeginningonorafter1January2009.Asthisisadisclosurestandard,itwillnothaveanyimpactontheresultsornetassetsoftheGroup.

The following principal accounting policies have been applied:

Basis of preparationThefinancialstatementshavebeenpreparedonthegoingconcernbasis,underthehistoricalcostconvention.ThesefinancialstatementsarepresentedinpoundssterlingbecausethatisthecurrencyoftheprimaryeconomicenvironmentinwhichtheGroupoperates.

Going concernThedirectorsbelievethattheCompanyandtheGrouphaveadequateresourcestocontinueinoperationalexistencefortheforeseeablefuture.ThisbeliefisbasedontheGroup’scurrentbusinessplanandinparticularitsplanforrevenues,costsandcashflows,aswellastheavailabilityoffreshfunding.

Basis of consolidationTheconsolidatedfinancialstatementsincorporatethefinancialstatementsoftheCompanyandentitiescontrolledbytheCompany(itssubsidiaries)madeupto30Septembereachyear.

ControlisachievedwhereHardideplchasthepowertogovernthefinancialandoperatingpoliciesofaninvesteeentitysoastoobtainbenefitsfromitsactivities.

Thefinancialstatementsofsubsidiariesareincludedintheconsolidatedfinancialstatementsfromthedatethatcontrolcommencesuntilthedatethatcontrolceases.

Notes to the Group Financial Statements

24

0820Annual Report

25

TransactionsbetweenandbalanceswithGroupcompaniesareeliminatedtogetherwithunrealisedgainsoninter-companytransactions.Wherenecessary,adjustmentsaremadetothefinancialstatementsofsubsidiariestobringtheaccountingpoliciesusedintolinewiththoseusedbytheGroup.

Acquisitionsareaccountedforbythepurchasemethod.Thecostofanacquisitionismeasuredasthefairvalueatthedateofexchangeoftheconsiderationprovidedplusanycostsdirectlyattributabletotheacquisition.Onacquisition,theassetsandliabilitiesandcontingentliabilitiesoftheacquiredbusinessthatmeettheconditionsforrecognitionunderIFRS3aremeasuredattheirfairvaluesatthedateofacquisition.Anyexcessofthecostofacquisitionoverthefairvaluesoftheidentifiablenetassetsacquiredisrecognisedasgoodwill.Anydeficiencyofthecostofacquisitionbelowthefairvaluesoftheidentifiablenetassetsacquirediscreditedtoprofitorlossintheperiodofacquisition.

Revenue recognitionRevenuerepresentstheinvoicedamountofgoodssoldandservicesprovidedduringtheperiod,excludingvalueaddedtaxandothersalestaxes,tradediscounts,andintra-Groupsales.Revenueisrecognisedwhenperformancehasoccurredandarighttoconsiderationhasbeenobtained.Thisisnormallywhengoodshavebeendespatchedorservicesprovidedtothecustomer,titleandriskoflosshavebeentransferredandcollectionofrelatedreceivablesisprobable.

Research and developmentExpenditureonresearchanddevelopmentcostsischargedtotheincomestatementintheperiodinwhichitisincurredunlesssuchcostsshouldbecapitalisedundertherequirementsoftheapplicablestandard,whichisonlywhenthefutureeconomicbenefitsexpectedtoarisearedeemedprobableandthecostscanbereliablymeasured.

Intangible assets: GoodwillGoodwillrepresentstheexcessofthecostofacquisitionovertheCompany’sinterestinthefairvalueoftheidentifiableassetsandliabilitiesofasubsidiaryatthedateofacquisition.Goodwillisrecognisedasanassetandreviewedforimpairmentatleastannually.

GoodwillarisingonacquisitionsbeforethedateoftransitiontoIFRS(1October2006)hasbeenretainedatthepreviousUKGAAPamountssubjecttobeingtestedforimpairmentatthatdateandatleastannuallythereafter.

Ondisposalofasubsidiarytheattributableamountofgoodwillisincludedinthedeterminationoftheprofitorlossondisposal.

Intangible assets: Development costsCapitaliseddevelopmentcostsareamortisedonastraightlinebasisovertheirusefuleconomiclivesoncetheproductisavailableforuse.

Intangible assets: Other Separableintangibleassetsarerecognisedseparatelyfromgoodwillonallacquisitionsafterthedateoftransition,areinitiallymeasuredatfairvalueandamortisedovertheirusefuleconomiclives.Purchasedintangibleassetsarecapitalisedatcostandamortisedovertheirusefuleconomiclives.

Impairment of intangible assetsGoodwillisallocatedtocash-generatingunitsforthepurposesofimpairmenttesting.Therecoverableamountofthecash-generatingunittowhichthegoodwillrelatesistestedannuallyforimpairmentorwheneventsorchangesincircumstancesindicatethatitmightbeimpaired.Anyimpairmentisrecognisedimmediatelyintheincomestatementandisnotsubsequentlyreversed.

Intangibleassetsotherthangoodwillaretestedforimpairmentwhenatriggereventoccurs.Usefullivesarealsoexaminedonanannualbasisandadjustments,whereapplicable,aremadeonaprospectivebasis.

0820Annual Report

1. Accounting policies continued

Recoverableamountisthehigheroffairvaluelesscoststosell,andvalueinuse.Inassessingvalueinuse,theestimatedfuturecashflowsarediscountedtotheirpresentvalueusingapre-taxdiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheassetforwhichtheestimatesoffuturecashflowshavenotbeenadjusted.Animpairmentlossisrecognisedtotheextentthatthecarryingvalueexceedstherecoverableamount.

Animpairmentlossisrecognisedasanexpenseimmediately,unlesstherelevantassetiscarriedatarevaluedamount,inwhichcasetheimpairmentlossistreatedasarevaluationdecrease.Areversalofanimpairmentlossisrecognisedasincomeimmediately,unlesstheassetiscarriedatarevaluedamount,inwhichcasethereversaloftheimpairmentlossistreatedasarevaluationincrease.

Property, plant and equipmentProperty,plantandequipmentarestatedatcostlessaccumulateddepreciationandanyrecognisedimpairmentloss.

Depreciationisprovidedonthecostofassetslessanyresidualvalueovertheirestimatedusefullives,usingthestraightlinemethod,asfollows:

Plant&machinery 2to10years Leaseholdimprovements Overremainingtermoflease Fixtures&fittings 4years Computerequipment 4years

Depreciationisnotchargedonassetsunderconstruction.

Borrowingcostsrelatedtothepurchaseoffixedassetsarenotcapitalised.

Thecarryingvaluesofproperty,plantandequipmentandinvestmentsmeasuredusingacostbasis,arereviewedforimpairmentonlywheneventsindicatethecarryingvaluemaybeimpaired.

InvestmentsInvestmentsheldasfixedassetsarestatedatcostlessanyprovisionforimpairment.

InventoriesInventoriesarevaluedatthelowerofcostandnetrealisablevalue.Thecostsincurredinbringingeachproducttoitspresentlocationandconditionareaccountedforasfollows:

Rawmaterials Costofpurchaseonafirstin,firstoutbasis

Workinprogressand Costofrawmaterialsanddirectlabourandaproportionofmanufacturing finishedgoods overheadsbasedonthenormallevelofactivity

Netrealisablevalueisbasedontheestimatedsellingpricelessestimatedcoststocompletionandestimatedcostsnecessarytomakethesale.

LeasesFinanceleases,whichtransfertotheGroupsubstantiallyalltherisksandbenefitsincidentaltoownershipoftheleaseditem,areincludedinthebalancesheetatfairvalueor,iflower,atthepresentvalueoftheminimumleasepayments.Depreciationischargedovertheusefuleconomiclifeoftheassets.Leasepaymentsareapportionedbetweenthefinancechargesandthereductionoftheleaseliabilitysoastoachieveaconstantrateofinterestontheremainingbalanceoftheliability.

Leaseswherethelessorretainssubstantiallyalltherisksandrewardsofownershipareclassifiedasoperatingleases.Rentalspayableunderoperatingleasesarechargedtotheincomestatementonastraightlinebasisoverthetermofthelease.

Notes to the Group Financial Statements continued

26

0820Annual Report

27

Financial InstrumentsTheGroupdoesnotenterintohedgingorspeculativederivativecontracts.

FinancialassetsandliabilitiesarerecognisedontheGroup’sbalancesheetwhentheGroupbecomesapartytothecontractualprovisionsoftheinstrument.

Incomeandexpenditurearisingonfinancialinstrumentsisrecognisedontheaccrualsbasis,andcreditedorchargedtotheprofitandlossaccountinthefinancialperiodtowhichitrelates.

Financial liabilities and equityFinancialliabilitiesandequityinstrumentsareclassifiedaccordingtothesubstanceofthecontractualarrangementsenteredinto.

Afinancialliabilityexistswherethereisacontractualobligationtodelivercashoranotherfinancialassettoanotherentity,ortoexchangefinancialassetsorfinancialliabilitiesunderpotentiallyunfavourableconditions.Inaddition,contractswhichresultintheentitydeliveringavariablenumberofitsownequityinstrumentsarefinancialliabilities.Sharescontainingsuchobligationsareclassifiedasfinancialliabilities.

Financecostsandgainsorlossesrelatingtofinancialliabilitiesareincludedintheincomestatement.Thecarryingamountoftheliabilityisincreasedbythefinancecostandreducedbypaymentsmadeinrespectofthatliability.

AnequityinstrumentisanycontractthatevidencesaresidualinterestintheassetsoftheGroupafterdeductingallofitsliabilities.Dividendsanddistributionsrelatingtoequityinstrumentsaredebiteddirectlytoreserves.

Equityinstrumentsissuedarerecordedattheproceedsreceived,netofdirectissuecosts.

Compound instrumentsCompoundinstrumentscomprisebothaliabilityandanequitycomponent.Theelementsofacompoundinstrumentareclassifiedinaccordancewiththeircontractualprovisions.Atthedateofissue,theliabilitycomponentisrecordedatfairvalue,whichisestimatedusingtheprevailingmarketinterestrateforasimilardebtinstrumentwithouttheequityfeature.Thereafter,theliabilitycomponentisaccountedforasafinancialliabilityinaccordancewiththeaccountingpolicysetoutabove.Theresidualistheequitycomponent,whichisaccountedforasanequityinstrument.

Cash and cash equivalentsCashandcashequivalentsincludecashatbankandinhand,andshort-termdepositswithanoriginalmaturityperiodofthreemonthsorless.

Trade and other receivables and payablesTradeandotherreceivablesarestatedatamountsreceivablelessanyprovisionforrecoverability.Tradepayablesarestatedattheirnominalvalue.

Foreign currenciesTheCompany’sfunctionalandpresentationcurrencyisSterling.Transactionsdenominatedinforeigncurrenciesaretranslatedintosterlingattheratesrulingatthedateofthetransactions.

Monetaryassetsandliabilitiesdenominatedinforeigncurrenciesatthebalancesheetdatearetranslatedattheratesofexchangerulingatthatdate.Gainsandlossesarisingontranslationarerecognisedintheincomestatement.

Onconsolidation,theassetsandliabilitiesoftheGroup’soverseasoperationsaretranslatedintoSterlingattheexchangerateatthedateofthebalancesheet.Incomeandexpenseitemsaretranslatedattheaverageexchangeratesfortheperiod.Exchangedifferencesarisingareclassifiedasequityandaretransferredtothetranslationreserve.

ExchangegainsandlossesarisingonthetranslationoftheGroup’snetinvestmentinforeignentitiesarealsoclassifiedasequity.

0820Annual Report

1. Accounting policies continued

Share-based paymentsThefairvalueofequity-settledsharepaymentsisdeterminedatthedateofgrantandisrecognisedonastraightlinebasisoverthevestingperiodbasedontheGroup’sestimateofoptionsthatwilleventuallyvest.

FairvalueismeasuredbyuseofaBlack-Scholespricingmodel.

Retirement benefitsTheGroupoperatesastakeholderschemeforitsemployees,butnomembershavejoined.

Short-term employee benefit costsTheundiscountedamountofshort-termbenefitsattributabletoservicesthathavebeenrenderedintheperiodarerecognisedasanexpense.Anydifferencebetweentheamountofcostrecognisedandthecashpaymentsmadeistreatedasaliabilityorprepaymentasappropriate.

TaxationThechargeforcurrenttaxisbasedontheresultsfortheperiodasadjustedforitemsthatarenon-assessableordisallowed,andiscalculatedusingtaxratesthathavebeenenactedorsubstantivelyenactedbythebalancesheetdate

Deferredtaxassetsandliabilitiesarerecognisedwherethecarryingamountofanassetorliabilityinthebalancesheetdiffersfromitstaxbase.Recognitionofdeferredtaxassetsisrestrictedtothoseinstanceswhereitisprobablethattaxableprofitwillbeavailableagainstwhichthedifferencecanbeutilised.Deferredtaxliabilitiesarerecognisedfortaxabletemporarydifferences.Suchassetsandliabilitiesarenotrecognisedifthetemporarydifferencearisesfromtheamortisationofgoodwillortheinitialrecognitionofotherassetsandliabilitiesinatransactionthatisnotabusinesscombinationandaffectsneitherthetaxprofitnortheaccountingprofit.

Theamountoftheassetorliabilityisdeterminedusingtaxratesthathavebeenenactedorsubstantiallyenactedatthebalancesheetdate,andareexpectedtoapplywhenthedeferredtaxassetsorliabilitiesaresettledorrecovered.Deferredtaxbalancesarenotdiscounted.

Deferredtaxischargedorcreditedintheincomestatementexceptwhereitrelatestoitemschargedorcreditedtoequity,inwhichcasethedeferredtaxisdealtwiththere.

BorrowingsBorrowingsareclassifiedascurrentliabilitiesunlesstheGrouphasanunconditionalrighttodefersettlementoftheliabilityforatleasttwelvemonthsafterthebalancesheetdate.Allborrowingcostsarerecognisedintheincomestatementintheperiodinwhichtheyareincurred.

ProvisionsProvisionsaremadewhentheGrouphasapresentobligationasaresultofpastevents,itismorelikelythannotthatanoutflowofeconomicbenefitswillberequiredtosettletheobligation,andtheamountcanbereliablyestimated.Provisionsarediscountedtopresentvaluewheretheimpactissignificant,usingadiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheobligation.

Notes to the Group Financial Statements continued

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0820Annual Report

29

2. Segmental analysis

ThestructureandmanagementoftheGroupisonageographicalbasis,andthisistheprimarysegment.Informationaboutthesesegmentsispresentedbelow:

Yearended30September2008

UK USA Eliminations Consolidated £’000 £’000 £’000 £’000

Revenue

Externalsales 1,916 207 - 2,123

Inter-segmentsales 58 - (58) -

Total revenue 1,974 207 (58) 2,123

Segmentresult (108) (1,194) - (1,302)

Unallocatedexpenses (288)

Operating profit (1,590) Financeincome 37

Financecosts (187)

Profit before tax (1,740) Taxation 37

Profit after tax (1,703) UK USA Corporate Eliminations Consolidated £’000 £’000 £’000 £’000 £’000

Balance sheet

Assets 1,307 752 4,839 (3,935) 2,963

Liabilities 730 3,760 1,073 (3,935) 1,628

Netassets/(liabilities) 577 (3,008) 3,766 - 1,335

UK USA Corporate Consolidated £’000 £’000 £’000 £’000

Other information

Costincurredtoacquireassets 73 50 - 123

Depreciationandamortisation 334 166 - 500

Other significant non-cash expenses

Share-basedpayments 19 - 23 42

Intercompanymanagementcharges 117 134 (251) -

TheGroupcurrentlyhasasingleclassofbusiness,sonosecondaryanalysisispresented.

0820Annual Report

3. Operating profit

Thisisstatedaftercharging:

2008 2007 £’000 £’000

Depreciationoftangiblefixedassets 497 473

Impairmentofintangiblefixedassets 3 2

Auditor’sremuneration

feespayabletotheCompany’scurrentauditorfor

theauditoftheCompany’s2008annualaccounts 12 -

feespayabletotheCompany’spreviousauditorfor

theauditoftheCompany’s2007annualaccounts 4 22

otherservices 1 8

Costofinventoryrecognisedasanexpense 282 371

Researchanddevelopment 151 279

Operatingleaserentals

plantandmachinery 19 20

property 184 189

Shareoptionexpense 50 59

4. Finance income

2008 2007 £’000 £’000

Interestonbankdeposits 37 31

5. Finance costs

2008 2007 £’000 £’000

Interestonloans 78 -

Interestonfinanceleases 29 25

Financechargesoncombinedinstruments 79 -

Otherinterestpayable 1 -

187 25

Notes to the Group Financial Statements continued

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0820Annual Report

31

6. Employees

Theaveragenumberofemployees,includingexecutivedirectorsbutnotincludingnon-executivedirectors,duringtheyearcomprised:

2008 2007 Number Number

Technical 9 8

Production 13 13

Salesandmarketing 5 6

Managementandadmin 10 10

37 37

Staffcosts,includingexecutiveandnon-executivedirectors,duringtheyearamountedto:

2008 2007 £’000 £’000

Wagesandsalaries 1,467 1,632

Socialsecuritycosts 148 136

Shareoptionexpense 50 59

1,665 1,827

Theamountsreceivedbyeachdirectorduringtheyearwasasfollows:

2008 £’000

JimMurray-Smith(ChiefExecutive) ToApril2008 Salary 78

Carallowance 6

Severance 30

DrGrahamHine(ChiefExecutive) FromJun2008 Salary 40

Carallowance 3

DrYuriZhuk(TechnicalDirector) Salary 68

Carallowance 9

PeterDavenport(FinanceDirector) Salary 60

RobertGoddard(Non-ExecutiveChairman) FromDec2007 Fees 44

DavidMott(Non-ExecutiveDirector) Fees 12

HughSmith(Non-ExecutiveDirector) Salary 12

WilliamZakroff(Non-ExecutiveDirector) Fees 12

Total directors’ remuneration 374

Nobonuseswerepaidtodirectorsduringtheyear.

TheremunerationpaidtoRobertGoddardincluded£19,225inrespectofadditionaltimeworkedbetweenAprilandtheendofJune2008followingtheresignationofJimMurray-Smith.Forthesamereason,OxfordCapitalPartners(onbehalfofDavidMott)andHughSmithwereawarded166,667and233,333fullypaidordinarysharesrespectively(seenote16).

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7. Taxation

2008 2007 £’000 £’000

UKcorporationtaxonthelossfortheyear - -

R&Dtaxcredit 36 26

AdjustmentinrespectofprioryearR&Dtaxcredits 1 (2)

37 24

TheGrouphasunutilisedtaxlossesintheUKofapproximately£6.0m(2007:£4.6m).

8. Earnings per ordinary share

2008 2007 £’000 £’000

Lossonordinaryactivitiesaftertax (1,703) (1,831)

Basicearningsperordinaryshare

Weightedaveragenumberofordinarysharesinissue 157,433,902 146,742,236

Earningspershare (1.1)p (1.2)p

Fullydilutedearningsperordinaryshare

Numberofordinarysharesinissue 189,642,236 146,742,236

Outstandingshareoptions 24,308,332 14,370,832

Convertibleloan 5,000,000 -

Total 218,950,568 161,113,068

Earningspershare (0.8)p (1.1)p

9. Goodwill

£’000

Costat1October2007and30September2008 69

Netbookvalueat1October2007and30September2008 69

GoodwillrelatestotheacquisitionofIsleHardideLimitedbyHardideCoatingsLimited.

10. Intangible assets

£’000

Costat1October2007and30September2008 9

Netbookvalueat1October2007 7

Impairmentcharge 3

Netbookvalueat30September2008 4

Notes to the Group Financial Statements continued

32

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33

11. Property, plant and equipment

Leasehold Plant,vehicles Computer buildings andfixtures equipment Total £’000 £’000 £’000 £’000

Costat1October2007 191 2,618 153 2,962

Additions 29 92 6 127

Exchangedifferences 1 102 8 111

Cost at 30 September 2008 221 2,812 167 3,200

Depreciationat1October2007 96 1,125 80 1,301

Providedintheyear 20 448 29 497

Exchangedifferences - 29 7 36

Depreciation at 30 September 2008 116 1,602 116 1,834

Netbookvalueat1October2007 95 1,493 73 1,661

Net book value at 30 September 2008 105 1,210 51 1,366

Thenetbookvalueofplant&machineryincludes£446,000(2007:£516,000)inrespectofassetsheldunderfinanceleases.Depreciationontheseassetsamountedto£59,000(2007:£103,000).

12. Current assets

2008 2007 £’000 £’000

Inventories

Rawmaterialsandconsumables 44 88

Workinprogress - 11

44 99

Tradeandotherreceivables

Tradereceivables 263 580

Otherreceivables 62 68

325 648

Othercurrentfinancialassets

Prepayments 100 114

Accruedincome 49 24

RecoverableVAT 11 9

160 147

Cashandcashequivalents

Sterling 933 1,081

Euro - 6

USDollar 62 48

995 1,135

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13. Current liabilities

2008 2007 £’000 £’000

Tradeandotherpayables

Tradepayables 182 302

Taxationandsocialsecuritycosts 97 174

Accruals 77 36

356 512

Currentfinancialliabilitiesrelatetofinanceleases.

14. Non-current other financial liabilities

2008 2007 £’000 £’000

Financeleases 173 284

Loans 989 609

1,162 893

Allnon-currentfinancialliabilitiesaredenominatedinsterling.Theamountshownforloansisthebookvalueofthedebt.TheloanshavebeenclassifiedascombinedinstrumentsunderIAS32.Theloansarediscountedusinganappropriateinternalrateofreturn,asshownbelow.Thetablebelowshowsthetotalamountsrepayableanditsprofile.Theamountsshownunderfinanceleasesarethecapitalrepaymentsonly.

Maturityprofile: Loans Financeleases 2008 2007 2008 2007 £’000 £’000 £’000 £’000

Inoneyearorless - - 110 145

Inmorethanonebutnotmorethantwoyears 1,000 1,000 118 110

Inmorethantwobutnotmorethanfiveyears 225 - 55 173

1,225 1,000 283 428

Interestonthefinanceleasesisfixedataweightedaverageinterestrateof7.9%.

Repaymentandinterestrateinformationontheloansisasfollows:

£1,000,000 RepayableSeptember2010 Baserate+2%payablemonthly IRR22%£225,000 RepayableJune2013 Fixedrate8%payableannually IRR11%

15. Total commitments under operating leases

Landandbuildings Plant 2008 2007 2008 2007 £’000 £’000 £’000 £’000

Inoneyearorless - - 2 1

Intwotofiveyears - - 58 76

Inmorethanfiveyears 1,382 1,567 - -

1,382 1,567 60 77

Notes to the Group Financial Statements continued

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35

16. Share capital

2008 2007 Number Value Number Value 000 £’000 000 £’000

Authorisedordinarysharesof1peach 250,000 2,500 250,000 2,500

Allottedordinarysharesof1peach 189,642 1,896 146,742 1,467

On2June2008theCompanyissued225,0008%convertibleunsecuredloannotesof£1each,repayableinJune2013.Thenotesareconvertibleatanytimepriortorepaymentataconversionrateofoneordinaryshareper4.5pofloannote.Theseareshownaslong-termliabilitiesinthebalancesheet.

On26June2008theCompanyissued42,500,000ordinarysharesat3peach.

On21July2008,theCompanyissued233,333fullypaidordinarysharestoHughSmithand166,667fullypaidordinarysharestoOxfordCapitalPartners(onbehalfofDavidMott)inrecognitionoftheextraworkperformedbythemduringtheyear.Theseamountswerearrivedatbytakingthenumberofadditionaldaysworked,multipliedbyadiscounteddailyrate,andusingamarketpriceof3ppersharetocalculatethenumberofsharestobeawarded.

17. Analysis of changes in equity

Share Share Share-based Foreign Retained Total Capital Premium Payments Translation Earnings Equity £’000 £’000 £’000 £’000 £’000 £’000

At1October2007 1,467 3,345 450 31 (3,077) 2,216

Issueofnewshares 429 757 - - - 1,186

Employeeshareoptions - - (29) - 75 46

Combinedinstruments - - (75) - - (75)

Exchangetranslation - - 1 (336) - (335)

Lossfortheyear - - - - (1,703) (1,703)

At 30 September 2008 1,896 4,102 347 (305) (4,705) 1,335

0820Annual Report

18. Share-based payment

Number Weightedaverage exerciseprice

Outstandingat1October2007 14,370,832 11p

Exercisableat1October2007 13,170,832 11p

Cancelledduringyear (2,798,332) 9p

Forfeitedduringyear (3,589,166) 8p

Grantedduringyear 16,324,998 3p

Outstandingat30September2008 24,308,332 5p

Exercisableat30September2008 8,333,334 9p

Ofthe14,370,832shareoptionsoutstandingat1October2007,6,037,498relatedtoemployeeshareoptionsandtheremaining8,333,334relatedtooptionsgrantedalongsideloanstotheCompany.

Oftheemployeeshareoptions3,239,166wereforfeitedandtheremaining2,798,332werecancelledbytheemployeesconcernedinfavourofnewoptions.

On26thMay2008theCompanygranteddirectorsandemployeesnewshareoptionspricedat3peach.Thesenewoptionsvestinequaltranchesoverthreeyears.Intotal16,324,998employeeshareoptionsweregrantedatthatdate,ofwhich350,000wereforfeitedbytheyearend.

Thecurrentdirectors’interestinshareoptions,allofwhicharepricedat3p,isasfollows:

Number

RobertGoddard(Chairman) 1,000,000

GrahamHine(ChiefExecutive) 6,000,000

YuriZhuk(TechnicalDirector) 1,000,000

PeterDavenport(FinanceDirector) 1,000,000

On26thJune2008,theCompanyrenegotiatedtheexistingloanarrangementbywhich8,333,334optionsweregrantedinSeptember2007withanoptionpriceof12pexpiringinSeptember2010.Theseoptionswererepricedat9pandtheexpirydateextendedtoSeptember2011.

ThefairvaluesoftheoptionsgrantedweremeasuredbytheuseofaBlack-Scholespricingmodel.Theassumptionsusedinthemodelareasfollows:Volatilityof40%;dividendyieldofnil;risk-freeinterestrateof4.4%;andexpectedlifeofoptionsof3.5years.Volatilityhasbeendeterminedwithreferencetotheweeklyclosingsharepricecomparedtothepreviousweek’sclose,betweenApril2007andMarch2008.

19. Related party transaction

HardideCoatingsLtdspent£4,709withBCBEnvironmentalManagementLtdforwastedisposal.RobertGoddardischairmanofbothHardideplc,theparentCompanyofHardideCoatingsLtd,andAWPEnvironmentalLtd,theparentcompanyofBCBEnvironmentalManagementLtd.

Notes to the Group Financial Statements continued

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37

20. Financial Instruments – Risk Management

Incommonwithotherbusinesses,theGroupisexposedtorisksthatarisefromitsuseoffinancialinstruments.TheGroupusesfinancialinstrumentscomprisingborrowings,cash,liquidresourcesandvariousitemssuchastradedebtorsandcreditorsthatarisedirectlyfromitsoperations.Exposuretocredit,liquidityandmarketrisksarisesinthenormalcourseoftheGroup’sbusiness.TheGroupdoesnotenterintoderivativefinancialinstruments.

Credit riskTheGroup’screditriskisprimarilyattributabletoitscreditsales.TheGrouphassignificantconcentrationofsalestoafewkeycustomers,however,sincetheultimatecustomersfortheGroup’sproductsarepredominantlyblue-chipmultinationalcompanies,theboardbelievesthatthisisnotasignificantrisk.Creditriskalsoarisesfromcashanddepositswithbanks.Theserisksarereviewedregularlybytheboard.

Liquidity riskTheGroupseekstomanagefinancialriskbyensuringsufficientliquidityisavailabletomeetforeseeableneedsandtoinvestcashassetssafelyandprofitably.TheinterestrateexposureoftheGroupasat30September2008andthematurityprofileofthecarryingvalueoftheGroup’sfinancialliabilitiesareshowninnote14.TheGroup’spolicyistoensurethatithassufficientcashtoallowittomeetitsliabilities.Theboardreceivesforecastcashflowsonamonthlybasisandusestheseasthebasisforforwardplanning.

Market riskTheGroupisexposedtotranslationandtransactionforeignexchangeriskarisingbecausetheGrouphasoperationsinmorethanonecountry.Assuch,theGroup’snetassetsarisingfromsuchoverseasoperationsareexposedtocurrencyriskresultingingainsorlossesonretranslationintosterling.ForeignexchangeriskalsoariseswhenGroupcompaniesenterintotransactionsdenominatedinacurrencyotherthantheirfunctionalcurrency.

Fair valueThedirectorsconsiderthatthefairvaluesofthefinancialinstrumentsoftheGrouparenotsignificantlydifferentfromtheirbookvalue.

0820Annual Report

21. IFRS reconciliations

Thereconciliationsofequityasat1October2006(dateoftransitiontoIFRS)andat30September2007(dateoflastUKGAAPfinancialstatements)andthereconciliationofprofitforthatyeararebelow.

Reconciliationofequityat1October2006(dateoftransitiontoIFRS)

UKGAAP TransitiontoIFRS IFRS £‘000 £‘000 £‘000

Assets

Non-currentassets

Goodwill (10) 81 71

Intangibleassets - 9 9

Property,plant&equipment 1,753 (9) 1,744

Total non-current assets 1,743 81 1,824Currentassets

Inventories 102 - 102

Tradeandotherreceivables 340 - 340

Othercurrentfinancialassets 248 - 248

Cashandcashequivalents 1,803 - 1,803

Total current assets 2,493 - 2,493

Total assets 4,236 81 4,317

Liabilities

Currentliabilities

Tradeandotherpayables 486 - 486

Financialliabilities 98 - 98

Provisions - - -

Total current liabilities 584 - 584

Net current assets 1,909 - 1,909

Non-currentliabilities

Financialliabilities 216 - 216

Total non-current liabilities 216 - 216 Total liabilities 800 - 800

Net assets 3,436 81 3,517

Equity

Sharecapital 1,467 - 1,467

Sharepremium 3,345 - 3,345

Retainedearnings (1,387) 81 (1,306)

Share-basedpaymentsreserve - - -

Translationreserve 11 - 11

Total equity 3,436 81 3,517

Notes to the Group Financial Statements continued

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39

Reconciliationofequityat30September2007(dateoflastUKGAAPfinancialstatements)

UKGAAP TransitiontoIFRS IFRS £‘000 £‘000 £‘000

Assets

Non-currentassets

Goodwill 23 46 69

Intangibleassets - 7 7

Property,plant&equipment 1,668 (7) 1,661

Total non-current assets 1,691 46 1,737Currentassets

Inventories 99 - 99

Tradeandotherreceivables 648 - 648

Othercurrentfinancialassets 147 - 147

Cashandcashequivalents 1,135 - 1,135

Total current assets 2,029 - 2,029

Total assets 3,720 46 3,766

Liabilities

Currentliabilities

Tradeandotherpayables 512 - 512

Financialliabilities 145 - 145

Provisions - - -

Total current liabilities 657 - 657

Net current assets 1,372 - 1,372

Non-currentliabilities

Financialliabilities 893 - 893

Total non-current liabilities 893 - 893

Total liabilities 1,550 - 1,550

Net assets 2,170 46 2,216

Equity

Sharecapital 1,467 - 1,467

Sharepremium 3,345 - 3,345

Retainedearnings (3,123) 46 (3,077)

Share-basedpaymentsreserve 450 - 450

Translationreserve 31 - 31

Total equity 2,170 46 2,216

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21. IFRS reconciliations continued

Reconciliationoflossfortheyearended30September2007

UKGAAP TransitiontoIFRS IFRS £‘000 £‘000 £‘000

Revenue 2,470 - 2,470

CostofSales (1,180) - (1,180)

Gross Profit 1,290 - 1,290

Administrativeexpenses (2,676) - (2,676)

Depreciation (439) (36) (475)

Operating profit (1,825) (36) (1,861)

Interestincome 31 - 31

Financecosts (25) - (25)

Profit on ordinary activities before tax (1,819) (36) (1,855) Tax 24 - 24

Profit for the period (1,795) (36) (1,831)

40

Notes to the Group Financial Statements continued

0820Annual Report

Parent Company Balance Sheet

41

at 30 September 2008 Prepared in accordance with UK Generally Accepted Accounting Policies

Note 2008 2007 £’000 £’000

Assets

Non-currentassets

Investments 3 1,100 1,100

Total non-current assets 1,100 1,100

Currentassets

Tradeandotherreceivables 4 4,009 2,691

Cashandcashequivalents 830 1,037

Total current assets 4,839 3,728

Total assets 5,939 4,828

Liabilities

Currentliabilities

Tradeandotherpayables 5 84 108

Total current liabilities 84 108

Net current assets 4,755 3,620

Non-currentliabilities

Financialliabilities 6 989 609

Total non-current liabilities 989 609

Total liabilities 1,073 717

Net assets 4,866 4,111

Equity

Sharecapital 7 1,896 1,467

Sharepremium 8 4,102 3,345

Retainedearnings 8 (1,465) (1,121)

Share-basedpaymentsreserve 8 333 420

Total equity 4,866 4,111

Undersection230oftheCompaniesAct1985theCompanyhasnotincludeditsownprofitandlossaccountinthesefinancialstatements.TheparentCompany’slossfortheyearwas£416,000(2007:lossof£712,000).

Theaccompanyingnotesformanintegralpartofthesefinancialstatements.

Thefinancialstatementswereapprovedandauthorisedbytheboardon5December2008.

Graham HineDirector

0820Annual Report

Basis of preparationTheaccountsbeenpreparedunderthehistoricalcostconventionandinaccordancewithapplicableUnitedKingdomGenerallyAcceptedAccountingPoliciesandtheCompaniesAct1985.

1. Summary of significant accounting policies

Foreign currency translationMonetaryassetsandliabilitiesdenominatedinforeigncurrenciesaretranslatedattheratesofexchangerulingatthebalancesheetdate.Transactionsinforeigncurrenciesaretranslatedattherateofexchangerulingatthedateoftransaction.Anydifferencesaredealtwiththroughtheprofitandlossaccount.

Research and developmentResearchanddevelopmentexpenditureischargedtotheprofitandlossaccountintheperiodinwhichitisincurred.

InvestmentsInvestmentsarestatedatcost.

Financial instrumentsTheGroupdoesnotenterintohedgingorspeculativederivativecontracts.TheGroupusesfinancialinstrumentsprimarilytomanageexposuresinfluctuationsinforeigncurrencyexchangeratesandinterestrates.Incomeandexpenditurearisingonfinancialinstrumentsisrecognisedontheaccrualsbasis,andcreditedorchargedtotheprofitandlossaccountinthefinancialperiodtowhichitrelates.Financialassetsarerecognisedinthebalancesheetatthelowerofcostandnetrealisablevalue.Provisionismadefordiminutioninvaluewhereappropriate.

Classification as equity or financial liabilityFinancialliabilitiesandequityinstrumentsareclassifiedaccordingtothesubstanceofthecontractualarrangementsenteredinto.Afinancialliabilityexistswherethereisacontractualobligationtodelivercashoranotherfinancialassettoanotherentity,ortoexchangefinancialassetsorfinancialliabilitiesunderpotentiallyunfavourableconditions.Inaddition,contractswhichresultintheentitydeliveringavariablenumberofitsownequityinstrumentsarefinancialliabilities.Sharescontainingsuchobligationsareclassifiedasfinancialliabilities.Financecostsandgainsorlossesrelatingtofinancialliabilitiesareincludedintheprofitandlossaccount.Thecarryingamountoftheliabilityisincreasedbythefinancecostandreducedbypaymentsmadeinrespectofthatliability.Financecostsarecalculatedsoastoproduceaconstantrateofchargeontheoutstandingliability.AnequityinstrumentisanycontractthatevidencesaresidualinterestintheassetsoftheGroup/Companyafterdeductingallofitsliabilities.Dividendsanddistributionsrelatingtoequityinstrumentsaredebiteddirectlytoreserves.

Compound instrumentsCompoundinstrumentscomprisebothaliabilityandanequitycomponent.Theelementsofacompoundinstrumentareclassifiedinaccordancewiththeircontractualprovisions.Atthedateofissue,theliabilitycomponentisrecordedatfairvalue,whichisestimatedusingtheprevailingmarketinterestrateforasimilardebtinstrumentwithouttheequityfeature.Thereafter,theliabilitycomponentisaccountedforasafinancialliabilityinaccordancewiththeaccountingpolicysetoutabove.Theresidualistheequitycomponent,whichisaccountedforasanequityinstrument.

PensionsTheGroupoperatesastakeholderpensionschemeforitsemployees,butdoesnotmakeanycontributionstoit.

Share-Based PaymentsInaccordancewithFRS20,thefairvalueofequity-settledsharepaymentsisdeterminedatthedateofgrantandisrecognisedonastraightlinebasisoverthevestingperiodbasedontheGroup’sestimateofoptionsthatwilleventuallyvest.ThefairvalueofshareoptionsismeasuredbytheBlack-Scholespricingmodel.

Notes to the Parent Company Accounts

42

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43

2. Employees

Theaveragenumberofemployees,includingexecutivedirectors,duringtheyearcomprised:

2008 2007 Number Number

Managementandadmin 4 5

Salesandmarketing 2 3

Technical 1 -

Staffcosts,includingexecutiveandnon-executivedirectors,duringtheyearamountedto:

2008 2007 £’000 £’000

Wagesandsalaries 443 395

Socialsecuritycosts 44 46

Shareoptionexpense 23 30

510 471

Detailsofindividualdirectors’remunerationareincludedinnote6totheGroupfinancialstatements.

3. Investments

£’000

Investmentsinsubsidiariesat1October2007and30September2008 1,100

At30September2008theCompanyheld100%ofthesharecapitalofthefollowingsubsidiaries:

Classofshare Amount Country Natureofbusiness

HardideCoatingsLimited Ordinary 100% UK Surfaceengineering

HardideCoatingsIncorporated Ordinary 100% USA Surfaceengineering

4. Trade and other receivables

2008 2007 £’000 £’000

AmountsowedbyGroupundertakings 3,935 2,648

Prepaymentsandaccruedincome 27 34

Taxationrecoverable 47 -

Otherdebtors - 9

4,009 2,691

OftheamountsowedbyGroupundertakings,£3,647,000isowedbyHardideCoatingsInc.TherecoverabilityofthisamountisdependentonthefutureprofitabilityofHardideCoatingsInc.ThedirectorsbelievethatHardideCoatingsIncwillmakesufficientprofitsinthefuturetobeabletorepaytheloan.

0820Annual Report

5. Trade and other payables

2008 2007 £’000 £’000

Tradecreditors 37 62

Socialsecurityandothertaxes 12 24

Accrualsanddeferredincome 35 22

84 108

6. Financial liabilities

2008 2007 £’000 £’000

Loans 989 609

Loansarerepayableasfollows:

Inoneyearorless - -

Inmorethanonebutnotmorethantwoyears 788 609

Inmorethantwobutnotmorethanfiveyears 201 -

TheaboveloanshavebeenclassifiedascombinedinstrumentsunderFRS25.Theamountsshownhavebeendiscountedbyanappropriateinternalrateofreturn.Theactualamountsrepayableareasfollows:

2008 2007 £’000 £’000

Inmorethanonebutnotmorethantwoyears 1,000 1,000

Inmorethantwobutnotmorethanfiveyears 225 -

7. Share capital

2008 2007 Number Value Number Value 000 £’000 000 £’000

Authorisedordinarysharesof1peach 250,000 2,500 250,000 2,500

Allottedordinarysharesof1peach 189,642 1,896 146,742 1,467

Detailsofthemovementinsharecapitalcanbefoundinnote16totheGroupfinancialstatements.

8. Reserves

Share Share Other Retained Total Capital Premium Reserve Earnings Equity £’000 £’000 £’000 £’000 £’000

At1October2007 1,467 3,345 420 (1,121) 4,111

Issueofnewshares 429 757 - - 1,186

Employeeshareoptions - - (12) 36 24

Combinedinstruments - - (75) - (75)

Retainedlossfortheyear - - - (380) (380)

At30September2008 1,896 4,102 333 (1,465) 4,866

Detailsofthemovementinreservescanbefoundinnote17totheGroupfinancialstatements.

44

Notes to the Parent Company Accounts continued

0820Annual Report

9. Capital commitments

TheCompanyhadnocapitalcommitmentsat30September2008or30September2007.

10. Contingent liabilities

Therewerenocontingentliabilitiesat30September2008or30September2007.

11. Related party transaction

HardideCoatingsLtdspent£4,709withBCBEnvironmentalManagementLtdforwastedisposal.RobertGoddardischairmanofbothHardideplc,theparentCompanyofHardideCoatingsLtd,andAWPEnvironmentalLtd,theparentCompanyofBCBEnvironmentalManagementLtd.

12. Post balance sheet events

Therearenopostbalancesheetevents.

13. Cash flow statement

TheCompanyisexemptfromtherequirementtopublishacashflowstatementbecauseacashflowstatementfortheGroupisincludedintheGroupfinancialstatements.

14. Share based payment

Number Weightedaverage exerciseprice

Outstandingat1October2007 12,092,499 11p

Exercisableat1October2007 11,617,499 11p

Cancelledduringyear (703,332) 10p

Forfeitedduringyear (3,055,833) 9p

Grantedduringyear 9,269,999 3p

Outstandingat30September2008 17,603,333 6p

Exercisableat30September2008 8,333,334 9p

On26thMay2008theCompanygranteddirectorsandemployeesnewshareoptionspricedat3peach.Thesenewoptionsvestinequaltranchesoverthreeyears.Alloutstandingshareoptionsatthatdatewerecancelled.

Thecurrentdirectors’interestinshareoptions,allofwhicharepricedat3p,isasfollows:

Number

RobertGoddard(Chairman) 1,000,000

GrahamHine(ChiefExecutive) 6,000,000

YuriZhuk(TechnicalDirector) 1,000,000

PeterDavenport(FinanceDirector) 1,000,000

On26thJune2008,theCompanyrenegotiatedtheexistingloanarrangementbywhich8,333,334optionsweregrantedinSeptember2007withanoptionpriceof12pexpiringinSeptember2010.Theseoptionswererepricedat9pandtheexpirydateextendedtoSeptember2011.

ThefairvaluesoftheoptionsgrantedweremeasuredbytheuseofaBlack-Scholespricingmodel.Theassumptionsusedinthemodelareasfollows:Volatilityof40%;dividendyieldofnil;risk-freeinterestrateof4.4%;andexpectedlifeofoptionsof3.5years.

45

0820Annual Report

Directors

RGoddardDMottHSmithWZakroffPDavenportGHineYZhuk

Secretary

PDavenport

Auditors

Critchleys Chartered AccountantsAvalonHouseMarchamRoadAbingdonOxonOX141UD

Bankers

The Royal Bank of ScotlandOxfordCommercialOfficeWillowCourtMinnsBusinessPark7WestWayOxfordOX20JB

Nominated Advisers and Broker

Seymour Pierce Limited20OldBaileyLondonEC4M7EN

Registrars

Capita Registrars LimitedTheRegistry34BeckenhamRoadBeckenhamKentBR34TU

Patent Agent

Harrison Goddard FooteBelgraveHallBelgraveStreetLeedsLS28DD

Registered Office

KnightsQuarter14StJohn’sLaneLondonEC1M4AJ

Head Office

Unit11WedgwoodRoadBicesterOxfordshireOX264UL

46

Directors and Advisers

0820Annual Report

Designed by Veuphonic: www.veuphonic.com

www.hardide.com

Unit 11

Wedgwood Road

Bicester

Oxfordshire

OX26 4UL

United Kingdom

Tel: +44 (0) 1869 353830

Fax: +44 (0) 1869 353831

Email: info@hardide.com

10811 Train Court

Houston

TX 77041

USA

Tel: +1 713 221 9020

Fax: +1 713 554 0017

Email: info@hardideinc.com