Annual report 2007 - Torotrak

Annual Report and Financial Statements 2007

Torotrak is the world leader in full-toroidal traction-drive transmission technology, focused on the developmentof IVT (Infinitely Variable Transmission) and TCVT (Toroidal Continuously Variable Transmission) systemswhich deliver outstanding levels of performance, functionality and commercial advantage in automotive, truck,bus, outdoor power equipment, agricultural and off-highway applications.Contents1 Financial Highlights2 Chairman’s Review4 Chief Executive’s Review11 Financial Review16 Directors’ Biographies18 Directors’ Report22 Corporate Governance25 Remuneration Report31 Statement of Directors’ Responsibilities32 Independent Auditors’ Report to the Members of Torotrak plc34 Financial Information 200737 Notes to the Financial Statements57 Financial Record58 Notice of AGMTorotrak’s Board of Directors

Financial Highlights2007 Restated 2006(i)£m £mRevenue 2.7 2.1Operating cash outflow (3.5) (4.3)Year end net cash 4.3 7.5Operating loss (3.7) (5.8)(i) 2006 figures restated to take account of change in accounting policy to proportionately consolidate interest in Infinitrak joint venture.■■■31% increase in revenues to £2.7mReduction in Group operating costs by £1.4mReduction in Group operating cash consumption by £0.8m to £3.5m outflowRevenues£mFinancial yearAnnual Report and Financial Statement 20071

Chairman’s ReviewBusiness Highlights■■Start of production of IVT transmissions atInfinitrak, with pilot builds commenced inMarch 2007Memorandum Of Understanding signed forlicence with major Asian car andcommercial vehicle manufacturer■ Prototype programme confirmed withleading forklift truck manufacturer –bringing new customer and sectorIntroductionI am pleased to report on a year of significant progress inthe commercialisation of Torotrak’s technology, withadvances in each of our key markets. Our strategy, tosecure new customers across a range of markets and toapply a wider business model that extends beyond asimple royalty arrangement, is delivering increases inrevenue and valuable opportunities for future growth.In March 2007, we achieved a major milestone in thestart-up of the production facilities of our Infinitrak jointventure (JV) in the USA. Infinitrak was formed with ourpartner MTD to establish Torotrak technology in the highvolume outdoor power equipment (OPE) market, a newmarket for Torotrak. The start of pilot production wasdelivered within 18 months from the formation ofInfinitrak. This demonstrates the substantial progressthat Torotrak has made in its drive to commercialise itsfull-toroidal traction drive technology.ResultsRevenues of £2.7m represent a 31% increase over 2006.It is particularly encouraging that we closed the year witha strong order book of programme work, which continuesto build as the benefits of our technology becomeincreasingly apparent to our growing list of customers.Our customers are some of the leading, global tier-1transmission manufacturers and vehicle makers in ourtarget markets; their engagement is evidence of thestrong technical and commercial foundations thatTorotrak has put in place to underpin our plans for futuregrowth.The increase in revenue, together with the delivery of ourpreviously committed £1.1m of recurring cost savings,demonstrates continued progress towards achieving ourtarget of operating cash flow turning positive during thefinancial year ending 31 March 2009.Market ProgressOur revenues have been generated from activities in all ofour four established markets of:• OPE• Off-highway• Automotive• Truck and Bus.Across all of these markets, we have established anearnings cycle that starts with engineering anddevelopment fees, then moves to licence sales leading toproduction related income in the form of manufacturingroyalties or joint venture income.Engineering consultancy work has focused on theapplication of our full-toroidal technology in customers’products covering all markets. In addition to our existingcustomers and licensees, we have secured newcustomers and confirmed new projects to add to ourorder book for the year ahead. This engineeringconsultancy activity is important not just in terms ofimmediate revenue, but because it is instrumental inhelping our customers to progress through prototypeprogrammes into licence agreements and futuremanufacturing arrangements, where the real future valueto Torotrak lies.2Annual Report and Financial Statement 2007

‘It is clear that our strategy, to develop a broader market and product portfolio, is deliveringresults. Torotrak now has a range of high quality customers across a spectrum of products andmarkets from ride-on lawnmowers through automotive applications, to full size haulage trucks’Infinitrak illustrates this point powerfully, as we have nowmoved from a significant engineering programme lastyear to the point where revenues from the sale ofproduction Infinitely Variable Transmission (IVT) units areexpected to impact the second half of the financial yearending 31 March 2008.As a further example, we expect to see royalty incomebeginning to flow in the financial year ending 31 March2009 from manufacturing activities in the agriculturalvehicle sector, as two of our licensees have indicated theirintentions to enter production within the next 18-24months. Again, this follows significant engineeringactivity over the last two years.In the automotive market, which remains a principaltarget market for Torotrak, I can also report that wecontinue to make good progress. Our work to open up themarket for Torotrak technology in emerging economieshas led to detailed negotiations on a potential licence dealwith an Asian car and commercial vehicle manufacturer,on which we expect to report more fully in the first half ofthe financial year ending 31 March 2008. Securing thisfoothold in the Asian automotive market will be a majorstep forward for Torotrak and will open up a new sourceof revenues from engineering services, licensing androyalties, as well as creating a springboard for otherautomotive opportunities.Whilst Torotrak’s immediate future is no longerdependent upon securing a production commitment fromthe premium automotive sector, our continued work withmajor tier-1 automotive transmission manufacturer AisinAW, coupled with the new pressures on the car makers todeliver fuel economy and C0 2 improvement, underline thecontinuing importance of this area to Torotrak. We havemade further strong technical progress during the yearand, whilst Torotrak’s technology has to compete againstthe grip of incumbent technology, including conventionalsix, seven and now eight speed automatic gearboxes, ourtechnology is still widely regarded as a logical successorto these current technologies. We believe that there is avery real window of opportunity for us to access thisvaluable market, to secure medium to long-term growth.Achievement of this objective is supported by themomentum that is developing in non-automotive marketswhich add credibility and commercial strength to theTorotrak proposition.PeopleOur reputation as a dependable, professional and capablehigh-technology engineering business continues to grow,underpinning our ability to secure engineeringconsultancy income from our customers as we help themdeliver their plans for using Torotrak’s technology. Thehigh calibre of our engineers is important in establishingcredibility with the major international businesses whichare our customers, and also determines the value thatthese customers place on our consultant engineers asexperts in their field of work.Rebecca Joyce resigned as a director in December 2006following a prolonged period of ill-health. We weredelighted to welcome to the Board Jeremy Deering, whotook up the role of Finance Director and CompanySecretary in December 2006 following his interimassignment.I would like to thank all of our employees for theirindividual contributions to our progress during the pastyear.SummaryIt is clear that our strategy, to develop a broader marketand product portfolio, is delivering results. Torotrak nowhas a range of high quality customers across a spectrumof products and markets from ride-on lawnmowersthrough automotive applications, to full size haulagetrucks. We are continuing to secure new business withnew customers from new sectors, all of which adds to ourorder book and to our confidence in securing furtherlicence agreements in the future.Annual Report and Financial Statement 20073

Chief Executive’s ReviewIntroductionThe last year has seen Torotrak continue to buildcommercial momentum with our full year revenuesreflecting the increasing value which our customers,across a wide range of markets, place on our technology.Our earnings model, which covers the entire product lifecyclefrom initial interaction with a new customer throughto production related income, is becoming morepredictable and sustainable and is supported by activitiesin all of our markets.Outdoor Power Equipment (OPE)The global OPE market is dominated by the US with morethan 90% of wheeled vehicle shipments being supplied byUS companies. The OPE sector comprises products andvehicles that are intended for use in the domesticenvironment for gardening, outdoor ‘housekeeping’ andhobby farming, as well as more robust commercialproducts which are used, for example, on golf coursesand in municipal applications.Torotrak’s entry to this significant market is throughInfinitrak, our joint venture company with MTD Holdings,with whom we have specifically targeted ride-on mowersas the ideal first application for Torotrak’s technology.MTD is one of the leading OPE manufacturers in the USAwith a substantial share of the two million units perannum ride-on mower sector. Infinitrak has beengranted exclusive rights to apply Torotrak’s technology inthis sector.In March this year we achieved a major milestone forTorotrak with the commencement of pilot build of IVTs onthe Infinitrak production facilities in Leitchfield Kentucky.This build represents the first phase of production ofInfinitrak’s initial product, the Twin Toroidal Transmission(TTT). The build rate of TTTs in the Leitchfieldproduction facility is currently at controlled levels inrelatively small batches, which are being produced tosupport MTD’s requirement for production vehicle testingand subsequent limited release to specific markets.The transmission has been designed for applicationacross a number of MTD’s products and, as such, theprecise market roll-out and vehicle specification will besubject to their marketing and business plans, which areconfidential to MTD.The build of lawn and garden vehicles, particularly rideonmowers, is highly seasonal. The work that Infinitrakis currently undertaking with the pilot build units is toprepare the way for a much higher build rate to supportthe 2008 season’s build for MTD. The Infinitrak planremains in line with our original target for the first year ofproduction which is to build and sell 100,000 single units(which equates to 50,000 TTTs), assuming successfulacceptance for the 2008 season. MTD’s operationsrequire a substantial proportion of the transmissions forthese high volume lawn mowers to be built in advance ofvehicle assembly and the financial impact of this forInfinitrak should be seen in the second half of thefinancial year ending 31 March 2008.The Infinitrak business plan continues to develop as wework with our joint venture partner on our plans to exploitthe broader OPE sector. The plan focuses on high volumeapplications which can be used initially by MTD, providingInfinitrak with a predictable market and production plan.This approach obviates the need for significant marketingexpense in the early stages of business growth, asInfinitrak will be selling directly to MTD in volumes whichare sufficiently high to build up the business and deliverthe profitability that was agreed at the formation of theventure.This strategy will remain the priority at Infinitrak for theinitial 18 months to two years of production before salesof transmissions to third parties begin, by which time theTTT is expected to have gained recognition in the OPEmarket. The relatively standardised nature of thetransmission technology in this sector means that the taskto configure Infinitrak product for third party sales istechnically straightforward.Cost breakthroughOur ability to compete in the OPE market with a highlycost competitive product is the result of a breakthrough inlow-cost manufacturing technology for low-power toroidal4Annual Report and Financial Statement 2007

‘Our earnings model, which covers the entire product life-cycle from initial interaction with a newcustomer through to production related income, is becoming more predictable and sustainableand is supported by activities in all of our markets’.drives. Until now, we have not revealed any details ofthis breakthrough due to our requirement to securepatent protection. However, we can now disclose thatone of the key inventive elements in the TTT is the use ofpowder metallurgy in the production of several keycomponents in the transmission, including the crucialtoroidal disc and roller components.Powder metallurgy is a well established, proven low-costmanufacturing process which is used extensively, forexample, in the manufacture of low-cost gears. Ourinventive step is the development and application of thistechnology to produce the key components at the heartof IVT. This breakthrough means that the TTT discs androllers can be produced for a fraction of the cost ofconventionally machined components. There is no ‘tradeoff’ in performance with these powder metal discs androllers; in fact, we have demonstrated that thesecomponents can outperform normal steel parts in the OPEapplications.Having established this combination of cost andperformance advantage for the TTT product throughInfinitrak, Torotrak is now exploring the potential that thisapproach can offer us in other low power applicationsoutside of OPE.Off-HighwayThe off-highway market is divided into:• The agricultural vehicle sector, which is currentlyour principal business focus• Materials handling / fork lift trucks, which is asector we have targeted more recently• Construction equipment, which is a sector forpossible future business activity.Agricultural vehicle sectorThe global agricultural vehicle sector is dominated bythree major players (John Deere, Case New Holland andAGCO) which, together, account for approximately twothirds of all tractor applications sold worldwide.Around 80% of all agricultural transmissions aremanufactured by the larger vehicle manufacturersthemselves. However, we expect this to change as thetier-1 transmission manufacturers (such as Carraro, ZFand Dana) introduce new technology into their owntransmission products and entice the vehiclemanufacturers to look externally for innovation.The transmission element of a tractor represents a higherproportion of total vehicle cost and ‘value added’ than isthe case in many of Torotrak’s other markets. The offhighwaymarket also has a strong appetite to embracenew technology and is characterised by shortertimescales to production than, for example, theautomotive market.Recognising these market dynamics, Torotrak’s approachfocuses on:• Targeting mid-sized companies who manufacturetractors and who also have the capability todevelop transmissions for their own production -we have two licensees already developing theirown IVT equipped vehicles• Securing the engagement of the major tier-1transmission manufacturers who supply the majorcompanies in this sector - Torotrak has alreadysecured a major transmission manufacturer as alicensee• Securing formal customer relationships with atleast one major tractor manufacturer that iscapable of delivering significant volume within themore established areas of the market - Torotrak isin early discussions with one such major player inthis area.This initial focus is centred on the small to mid-sizedtractor sector which accounts for a total market of around450,000 vehicles per year. We have targeted this sectoras our bridgehead into the wider agricultural marketbecause there is no other commercially viable variabledrive transmission technology currently available forthese applications.Annual Report and Financial Statement 20075

Chief Executive’s Review - continuedOur three active off-highway licensees have all madeprogress with their individual plans this year. Two arecurrently developing prototype IVTs in their mid-sizedtractors and Torotrak is providing help and technicalinput. The third has asked for Torotrak’s support todesign their proposed first production transmission, whichis for a compact tractor. This engineering programme hasalready commenced and will be earning Torotrak valuableengineering consultancy revenue in the first quarter ofthe new financial year. All three licensees continue todemonstrate their commitment to progress intoproduction, with two maintaining their ambition of beingin production within 18-24 months.The development of a hydromechanical control systemfor use in tractor IVTs, which we first revealed in theannual report last year, has continued to be of value toTorotrak through our established licensees and also withnew prospects in emerging markets. This developmentoffers high levels of functionality at a low cost and isrelatively simple to engineer and develop. As an exampleof the progress we have made, one of our establishedlicensees is considering adopting the hydromechnicalcontrol system for their production application in place ofa more complex electronically controlled route, which hadbeen their previous plan.Materials handling / fork lift trucks – a new sectorWe have continued to target other sectors within the offhighwaymarket and, as a result, we are now active in thematerials handling area.At the interim results in November last year we indicatedthat we were engaged in early discussions withmanufacturers of fork lift trucks and I am pleased toconfirm that one of these, an industry leader in thissector, has committed to a prototype programme toprove the capability of IVT in one of their vehicles. Thisnew programme adds further to our order book for thefinancial year ending 31 March 2008. The fact that wehave now progressed beyond business development inthis sector, and have secured consultancy revenue, is ademonstration of the greater predictability of ourearnings model, based upon new customers askingTorotrak to support them with the application andconfiguration of our toroidal technology for theirproducts.AutomotiveThe automotive market remains a principal target forlonger-term financial returns and I am able to report thatsubstantial progress has been made in this sector duringthe last six months.New sector – emerging economiesThis year we have carried out a prototype engineeringprogramme with a major Asian car and commercialvehicle manufacturer, to demonstrate the capability ofTorotrak technology in one of their entry-level vehicles.This programme has brought Torotrak valuableengineering revenue, but more importantly has secured astrong relationship with this significant vehiclemanufacturer.I am pleased to report that we have progressed to thepoint where we have agreed the principal terms of alicence agreement with this manufacturer. We have aMemorandum of Understanding in place which supportsthis agreement and we are currently working to finalisethe commercial terms and the formal licence, which weexpect to announce in the first half of the financial yearending 31 March 2008.These licence negotiations have progressed to encompassa broad range of vehicles produced by this manufacturer,and to cover the potential for a significantly widerapplication of Torotrak’s technology than the low-costentry level vehicle which was the focus of the initialprototype programme.At this stage a firm target production date is yet to bedeclared and the first application is yet to be fully defined.However, the vehicle manufacturer has stated to us thattheir ambition is to be amongst the very first to launchproducts incorporating Torotrak’s toroidal drivetechnology in the automotive market.This development and new relationship represents asignificant breakthrough in our automotive market place.6Annual Report and Financial Statement 2007

‘Torotrak is developing real momentum. We have launched production of our first transmissions… and have a growing order book across a range of markets and applications. With increasingenvironmental pressures, as well as appetite from emerging economies to embrace newtechnology, we have considerable opportunities ahead’.Unlike their developed market counterparts, carcompanies in emerging economies are not encumberedwith legacy investment in conventional technology andthey are keen to adopt new technologies to fuel theirambitious growth plans. For Torotrak, this developmentwill mean that we will have a new customer hungry toexploit its investment in our technology and which islooking to proceed rapidly with a full engineeringprogramme.This news also confirms our ability to compete strongly inemerging economy markets and acts as a positivereminder to Torotrak’s other automotive customers of theambition and competitive drive that is emerging fromAsia.Premium automotiveIn the developed car market, the installed manufacturingcapacity of current technology, including six, seven andnow eight speed automatic transmissions, represents acontinuing impediment to the early adoption of newtechnologies such as IVT.This year will see the production of around five million six,seven and eight speed automatics with manytransmission manufacturers reporting further increases inoutput and sales. However, it is already clear that thislatest stepped ratio technology is becoming a commoditytechnology and is being adopted on a large scale for inhousemanufacture by the global car makers. This leavesthe transmission manufacturers to look for the nextpremium technology to offer the premium car sector.Although the inertia effect of sunk investment inconventional technology means that the prospect ofrevenues from royalties in the premium automotive sectoris still some years away, there remains continuedcommitment and ambition within the industry to developour technology.This is exemplified by our continued programme of workwith industry leader, Aisin AW. With Aisin, we havestretched the boundaries of our new Epicycloidal RollerControl (ERC) transmission configuration and have nowproven the capability of the system, in hardware, througha regime of specific tests in conjunction with Aisin and thebearing manufacturer, JTEKT. This activity is part of anoverall programme of continued development work onapplying IVT for the premium car market which continuesto bring consultancy-based revenues into Torotrak.Our work with Aisin has, more recently, involved us indirect discussions with Aisin’s principal customer, a globalvehicle manufacturer, as we have jointly progressed thedevelopment of the transmission for their target vehicle.The future of this programme of work is now centredaround the ERC concept as this is seen to deliver the besttransmission configuration for premium car applications.We await confirmation of the next step in thisprogramme, which is to progress to a next generation offully functioning prototype IVT featuring the ERC variator.We continue to be encouraged by Aisin’s long-standingsupport and commitment to Torotrak technology.Legislative pressuresWhilst a long gestation period for a substantive newtechnology is not atypical within the mainstream carindustry, the sense of urgency for our existing andprospective automotive customers in the USA, Europeand Japan to adopt toroidal drive technology couldchange radically if new proposed legislation isimplemented.As an example, the European Commission has indicatedthat it is planning to implement legally defined limits forC0 2 emissions and fuel consumption levels. This is inresponse to the failure of the European car industry toachieve the voluntary targets previously agreed (theACEA commitment) in time for 2008 production. Giventhis failure, the EU Commission is proposing mandatorytargets for 2012.Similarly in the USA, Congress proposed a bill in March ofthis year (HR1506) to mandate a significant fuel economyimprovement to be in place for US cars and light trucksby 2012, with a further improvement required by 2018.The level of improvement that the bill recommendsequates to around 4% improvement in average fuelconsumption, year on year, from now to 2018.Annual Report and Financial Statement 20077

Chief Executive’s Review - continuedIf these proposed legislative changes become ratifiedthey would intensify the industry’s requirement foraccessible technologies which can deliver fuel economysavings to meet the mandatory deadlines. Torotrak will bewell positioned to capitalise on any such developmentswith its proven implementation-ready technology.Truck and BusThe truck and bus market now represents a significantopportunity for our technology. As part of our strategy oftargeting broader applications, we have accelerated ourdevelopment of this market. I am pleased to report thatwe are beginning to see a positive contribution from ourbusiness development initiatives in this market, throughthe earning of early-stage revenues.In parallel to this development, we have continued ourwork in conjunction with another European busmanufacturer, as previously reported in the interimresults. With further development of the transmissionfitted to a prototype bus we have delivered a measuredimprovement of 20% in fuel consumption. We have alsocalculated that, with an IVT specifically configured for thisapplication, a further improvement in fuel economy wouldbe possible. Although we have a clearly defined productproposition with measurable environmental benefits, thisparticular bus manufacturer is not large enough tosupport a stand-alone development programme for aseries production transmission. We have therefore agreedto look at ways in which we can work together tostimulate broader interest and support for this valuableopportunity for fuel economy improvement.We have found that the product development processesin this market are generally of greater duration than is thecase in other markets (around five years from start ofdevelopment to series production), but the industry isalso looking for new technologies to help it address thechallenge of maintaining good fuel economy levels whilstalso meeting the requirements of planned emissionslegislation.In particular, during the past year our relationship with aleading European truck and bus manufacturer hasstrengthened and we have now completed a detailed coststudy on a proposed main-drive transmission for one oftheir vehicles. The results of this study look veryappealing and show that a Torotrak IVT, as a maintransmission in a distribution truck, a heavy haulagetruck, or a bus, can offer significant technical andfunctional benefits at very attractive cost levels. This newinformation is a further major breakthrough for ourbusiness and gives third party endorsement to our beliefthat Torotrak’s IVT is a compelling commercial andtechnical proposition for both the truck and bus sectors.We anticipate that these promising results will lead to adeeper working relationship with this vehiclemanufacturer that will add to our future order book.Competitive LandscapeIn the OPE market, our main competition is the existinghydrostatic variable drive technology. We know from ourwork to take into production the TTT through Infinitrakthat we have a highly competitive product offering whichis more efficient, quieter and easier to control than theincumbent technology. We have also demonstrated thatwe have been able to deliver the transmission at a costadvantage to an established technology which has hadthe benefit of some 40 years of work on cost efficiency inproduct and manufacturing. The fact that we arecompetitive at our first launch makes a compellingcommercial proposition.Competitive advantage and market share in OPE is driventhrough product innovation. Our JV partner, MTD, seesthe benefit that IVT can bring to its brand developmentand to lawn tractor sales.In the off-highway market, our work with partnersand industry-leading businesses continues todemonstrate that there is a gap in the market for avariable drive which delivers performance, robustnessand controllability at an affordable price.Small and compact tractors are available with hydrostatic8Annual Report and Financial Statement 2007

drives in simple, inexpensive but inefficient forms. Thesecrude hydrostatics have been successful becauseexpectations for the performance and refinement of lowcostvehicles have been low. In the small and compacttractor sector, our product designs offer superiorperformance, efficiency, refinement and control atcomparable or lower cost.In the high-volume medium sized tractor sector, ourtechnology provides an affordable variable drive with theperformance, features and functionality of a typical large,expensive hydrostatic tractor. There is currently novariable drive technology available for this sector, otherthan Torotrak’s technology, which satisfies the cost andfunctionality requirements for high-volume, medium sizedtractors.Large tractors are also available with hydrostatic drivesbut these are expensive and complex. In the longerterm,once Torotrak’s technology has become establishedin compact and medium-sized tractor applications, thenthe large tractor sector will also be targeted.In our new sector of materials handling, we are able tooffer a full variable drive for fork lift trucks which iscapable of providing the functional capability of ahydrostatic drive but more efficiently and for lower unitcost, establishing a good basis for future businessprospects.In the automotive market, the car manufacturerscontinue to pursue a number of fuel economyimprovement technologies. Many are active with hybridprogrammes, but these remain a significant commercialand technical challenge for widespread application andtherefore sales volumes remain low. There are alsodivided views amongst the car manufacturers about thelonger term application and best type of hybrid which, inturn, has created a level of uncertainty over the futuretrends in this technology. There is agreement across theindustry, however, that transmission technology is themost cost effective route to delivering improvements infuel economy.Our technology has shown improvements in fuel economyof 20% on typical North American vehicles and gains of14% for typical premium sector European or Japanesevehicles. These gains in fuel economy can be achieved atcomparable unit cost to today’s incumbent technologyand without the need for substantial changes toconventional car platforms.Additional benefits can be targeted at specific automotivesectors or applications since our transmission technologycan be configured as either an IVT or as a ContinuouslyVariable Transmission (CVT):• For luxury cars, our technology delivers excellentfuel economy and mechanical refinement and canbe used in either IVT or CVT configurations to suitboth front-drive and rear-drive vehicle layouts• In 4x4 vehicles, the IVT can provide full off-roadcapability without the need for a conventionalratio-reduction transfer box and can provide a widerange of commercially valuable features. Theseinclude the ability to shuttle the vehicle seamlesslyfrom forwards to reverse, and to provide an ‘offroadcruise control’ to hold the vehicle at a givenspeed through changes in terrain and incline or tohold the vehicle stationary on gradients or slopes• In mainstream and small cars, our technologyin a CVT format can provide cost effective andhighly compact transmissions that are ideallysuited to front wheel drive installations• Finally, in low-cost automotive, our technologycan be configured as either low-cost IVT or CVTtransmissions which offer better fuel economy,refinement and ease of control than competingtechnology.The most significant competitors for Torotrak in theautomotive market are the currently investedtechnologies, such as fixed ratio automatic (typically thesix, seven and now eight speed automatic transmissions),dual clutch transmissions (which make use of existingmanual gearbox manufacturing facilities in Europe) andthe belt and pulley CVTs favoured predominantly inJapan.Annual Report and Financial Statement 20079

Chief Executive’s Review - continuedIn the sphere of new transmission technologies we areaware of other traction drive technologies from ourinvolvement in the automotive industry conferencecircuit. Whilst some of this is competitive to Torotrak,such as half-toroidal technology, all of thesedevelopments are adding to the overall credibility andacceptance of traction drive within the industry.Finally in the truck and bus market we have worked inmore detail through the year to understand thetransmission needs of this sector. It is becomingincreasingly clear that there are currently no knownalternative variable drive systems that can be configuredto handle the high powers and heavy duty performancelevels needed. In trucks we have begun to see evidenceof a highly compelling business case for IVT, which isbeing confirmed through the work we are carrying out tovalidate transmission costs in conjunction with ourEuropean truck customer. We already know from thisstudy that a full size truck IVT can be produced for lesscost than the currently available automatic transmissionswhich serve the market.The continued growth in our engineering services, ourstrong order book for the year ahead including theopportunity to secure licence down payments, the start ofproduction at Infinitrak and our reduced operating costbase, all underpin our expectation for continuedimprovement in operating performance and furtherprogress towards our goal that operating cash flow willturn positive during the financial year ending 31 March2009.OutlookIn the past 12 months, our provision of engineeringservices has contributed strongly to our full year revenuesand this is expected to be maintained in the short tomedium timescale. The recent addition of a fork lift truckprogramme, together with continuing projects inautomotive, agricultural vehicle and trucks provide astrong forward order book for this important revenuegenerating activity.We also have a number of customers with whom we arein various stages of negotiation regarding long-termaccess to our intellectual property. These negotiations areexpected, in turn, to lead to additional income streamsarising from lump-sum licence payments and, in thelonger-term, royalties as customers secure access to, andthen exploit, Torotrak’s toroidal drive know-how andpatent portfolio.10Annual Report and Financial Statement 2007

Financial ReviewOverviewTorotrak has made substantial progress during the year inincreasing both current year revenues and the strength ofour revenue base for the future as well as improvingefficiency within the business. As a result, operating cashconsumption continued to reduce during the year ended31 March 2007 (2007).Torotrak has moved closer to its goal of transitioning frombeing a research and development based organization,building valuable intellectual property (IP), to a cashgenerative enterprise exploiting that IP. A reducedoperating cost base is driving increasing revenues and ourexpectation is that the Group will achieve the point atwhich operating cash flows turn positive during the next24 months.The key performance indicators of the Group for 2007support this assessment of progress as follows:should reverse in the 2008 financial year, asexplained further below.Overall, loss after tax improved by £2,863k from £5,762kto £2,899k. However, the comparative year on yearperformance is complicated by the number of nonrecurringitems of income and expenditure, such as theloss on sale of our Leyland property last year and theincome received in both years in relation to a longstandingclaim dating back to de-merger. In addition,administrative expenses have included some nonrecurringitems which are explained further below and innote 5 to the Financial Information. Excluding theseitems, underlying operating performance improved by£1,696k and underlying improvement in loss after tax was£1,567k as shown below.Year ended31.03.07change overprior year£000• Revenues continue to build, from £2,054k in theyear ended 31 March 2006 (2006) to £2,691k in2007. Equally as important is the increased varietyof sources from which the revenues were earnedand the positive implications for future earningsgrowth. This is discussed further below• Operating costs reduced by £1,392k on a Groupbasis and by £1,137k excluding Infinitrak and nonrecurringcostsIncreased revenuesReduced development and recurringadministrative costsImprovement in year on yearunderlying operating performanceDecrease in tax credits and financeincomeImprovement in year on yearunderlying loss after taxReduction in non-recurring costs net ofnon-recurring incomeReduction in loss after tax after2,863• Engineering resources have been usednon-recurring itemseffectively; 55% of engineers’ and technicians’available time was spent on revenue generating Joint Venture Accountingprojects, with the balance focused on business andtechnical development. This higher application of We have adopted this year the proportionateour engineering time on customer projects isleading to more focused product developmentconsolidation basis of accounting for our joint venturewith MTD, Infinitrak. This method includes 50% of theactivity and greater success in securing Joint Venture’s results, assets and liabilities into each lineopportunities for commercialisation of our IPof the Consolidated Income Statement, Balance Sheetand Cash Flow statements. Proportionate consolidation• Operating cash consumption continues to has been introduced as a result of the start of pilotmaterially reduce by £754k to £3,515k in 2007,despite funding £895k of working capital thatproduction build in Infinitrak and the full commitment offunding to the Joint Venture. We believe that this formmmAnnual Report and Financial Statement 20076371,0591,696(129)1,5671,29611

Financial Review - continuedof accounting, in line with the preferred method underInternational Financial Reporting Standards, is moreappropriate in terms of giving more visibility of thefinancial impact of the Joint Venture on Groupperformance as well as better reflecting the economicsubstance of the enterprise. The directors consider thatthe revised policy provides more relevant and reliableinformation for investors and other users of the financialstatements.The change of accounting policy has no impact this yearon revenues. The impact on disclosed operating costs,cash flow and fixed assets is discussed in the paragraphsbelow with further explanation in note 2 to the FinancialInformation.RevenueYear ended Year ended31.03.07 31.03.06£000 £000Engineering services 1,757 1,254Licence and option fees 147 240Sale of IP rights to Infinitrak 787 560Total 2,691 2,054The revenue increase of £637k is driven by £503kadditional revenues earned from engineering services anda net increase of £134k in licence, option and IP fees.Engineering servicesThe increase in engineering services is encouraging notjust in terms of the revenue contribution to the currentyear, but as an important indicator as to where Torotrakis building future revenue growth opportunities. Activityon engineering programmes is an important precursor topotentially valuable customer agreements and to openingup opportunities in new sectors.In 2006, our major engineering programme related toInfinitrak within the new market of OPE. The level of feesrelating to this reduced in 2007 as the prototypeprogramme completed, with start of pilot productionbeing announced in March 2007.In 2007, the substantial engineering services undertakenrelated to the prototype programme with a major Asianmanufacturer in the automotive market. In addition, weundertook significant work in the premium automotivesector. Both automotive programmes offer realopportunities for future customer development andpotential licence agreements. Elsewhere, we continued toprovide support to our major off-highway licensees asthey prepare for volume production, whilst opening up apotentially valuable new customer in the truck and busmarket which we expect to take forward into the currentfinancial year ending 31 March 2008 with a moresubstantial programme.The current order book position is very encouraging, bothin terms of the monetary value of the programmes as wellas the quality of the customers and market opportunitiesthat they address. Several contracts are currently in theprocess of final negotiation and we expect to announcefurther progress in the first half of the year ending 31March 2008. The timing of the programmes in the yearending 31 March 2008 is expected to impact revenues inthe second half more materially, reversing the patternexperienced in the year ended 31 March 2007.Sale of licence rights to InfinitrakAs announced at the half year, completion of theprototype programme with Infinitrak led to the sale oflicence rights to Infinitrak worth £787k, in addition to the£560k achieved in 2006. The cumulative revenue of£1,347k reflects the realised profit on the sale of theglobal licence rights in the 0 – 25kW power rangetogether with exclusive North American rights in the 25 –45kW power range for compact tractors.The sale of licence rights is included in the ConsolidatedIncome Statement after eliminating the unrealisedelement of revenue that relates to our 50% share in theJoint Venture (see note 4 to the Financial Information).12Annual Report and Financial Statement 2007

‘Activity on engineering programmes is an important precursor to potentially valuable customeragreements and to opening up opportunities in new sectors’.The cumulative total value of the sale before theaccounting elimination was £2,694k; this satisfiedTorotrak’s equity contribution to the Joint Venture,matching the equivalent cash contribution (US$5m) byour partners MTD.Expenditure Charged to the Consolidated IncomeStatementOur development and administrative costs are analysedbelow:Year Restatedended Year ended31.03.07 31.03.06£000 £000Recurring development andadministrative costs beforeshare of Infinitrak 5,780 6,917Patent write off costs 122 29Infinitrak’s operating costs –50% share 337 352Operating costs beforenon-recurring items 6,239 7,298Non-recurring operating costs(see note 5 to the FinancialInformation) 176 509represents the write-off of the associated capital costsincurred when the patents were established net of thecumulative amortisation that has been charged to theConsolidated Income Statement.Other costsWe were very pleased during the year to have finallysettled a claim dating back to contractual arrangementsat the time of the Stock Exchange listing in 1998. £557kwas received in 2006 and a further £225k final negotiatedamount was received in 2007. Both amounts are includedas exceptional items in the Consolidated IncomeStatement.TaxationThe tax credit of £328k (2006: £434k) reflects mainly theclaim to be made for research and development taxcredits net of overseas withholding taxes.Total administrative anddevelopment costs 6,415 7,807Overall operating costs including our share of Infinitrak’scosts reduced by £1,392k to £6,415k and by £1,059k to£6,239k before non-recurring costs.Excluding Infinitrak, Torotrak’s underlying costs excludingthe non-cash related patent write-off costs discussedbelow, reduced by £1,137k to £5,780k reflecting therestructuring measures implemented in the second half of2006.Patent costsOur patent portfolio is continually reviewed, with newpatent expenditure assessed for appropriateness in linewith Board agreed policy. Patents are abandoned whereno longer of commercial or territorial significance. As aresult of a comprehensive review undertaken during theyear, £122k of patent abandonment costs were incurred,being a non-cash charge in the financial statements. ThisAnnual Report and Financial Statement 200713

Financial Review - continuedCash and TreasuryYear ended Year ended Restated Restated31.03.07 31.03.07 Year ended Year ended31.03.06 31.03.06Group Excluding JV Group Excluding JV£000 £000 £000 £000Cash flows from operating activities (3,515) (3,250) (4,269) (3,715)Net cash used in investing activities (422) (128) 3,314 3,314Cash flows from financing activities 805 - 1,110 550Foreign exchange loss (34) (16) - -Cash and cash equivalents at start of year 7,473 7,467 7,318 7,318Cash and cash equivalents at end of year 4,307 4,073 7,473 7,467Year end Group cash balances include our 50% share ofamounts held in the Infinitrak joint venture. Excludingthe impact of Infinitrak, cash balances reduced by£3,394k during the year to a closing cash position of£4,073k. The net cash outflow was slightly higher thanplanned due to the impact of an £895k receivable forengineering services being delayed until after the yearend.We do not currently actively hedge against these currencyexposures although this policy will be kept under review.Exposure to interest rate risk is low and the Companycurrently does not undertake any form of interest ratehedging. The Company deposits and invests cash with acombination of both fixed and floating rates. The cashbalances at year–end were invested in a combination ofmarket-managed funds and bank deposits.The Group cash resources at the year end provide theGroup, in the directors’ opinion, with an acceptable levelof working capital in terms of our 18 month forwardworking capital review from 31 March 2007. Beyond thatperiod, our target is to achieve positive operating cashflow to fund future working capital requirements.However, we continue to monitor the future fundingrequirement of the business very carefully, keeping alloptions under consideration and maintaining a carefulreview of cash headroom and resilience. In particular, anymaterial investment opportunities within the next threeyears to secure greater value from the commercialisationof Torotrak IP, or significant further product developmentvia an existing or future joint venture, would requirefurther funding.The treasury function does not operate as a profit centre.Credit risk is managed by limiting exposures to authorisedbanks with credit ratings that are approved by the Board.The Company’s exposure to foreign exchange rate riskmainly arises from non-UK sterling denominated receiptsin relation to licence and engineering service agreementsas well as the impact of foreign exchange translation ofour share of Infinitrak’s US dollar denominated results.14Annual Report and Financial Statement 2007

Intangible and Tangible AssetsCapital expenditure during the year was as follows:Year ended Restated31.03.07 Year ended31.03.06£000 £000Excluding share of Infinitrak:Property, plant and equipment 169 80Patent expenditure 220 317Sub total – excludingInfinitrak 389 397Property, plant and equipment– Infinitrak tooling 300 -Total 689 397We successfully completed on 8 November 2006 the subletof part of our premises at Leyland, achieving a £105kper annum net rental and an additional reduction inassociated operating costs. £90k was incurred in relationto leasehold improvement in order to sub-divide andimprove the rental market value of the property. Duringthe year, £220k was incurred in establishing new patents,which are capitalised as intangible fixed assets (2006:£317k).Within Infinitrak, £300k (Torotrak’s 50% share) wasincurred in relation to production tooling for the start ofproduction of the TTT units. This tooling is owned by theJoint Venture. Initial manufacturing is sub contracted toMTD for the first year of operation, thereafter beingsubject to review.Share Capital and Share OptionsNo shares were allotted during the year (2006: 2,615,073shares allotted to satisfy employee share optionsfollowing maturity of the 2002 Sharesave scheme).Hence, the ordinary share capital of the Companyremained at 119.9 million shares of 10p each throughoutthe year. This included at 31 March 2007 142,309 sharesheld in the Torotrak Employee Share Trust (2006:849,301 shares).Awards over 2,210,947 shares were made during the yearunder the terms of the Torotrak Long Term PerformanceShare Plan which are subject to performance conditions.No other options or awards over shares were grantedduring the year other than the discretionary share bonusawards utilising shares in the Torotrak Employee ShareTrust.Whilst noting that the majority of share options from oldschemes that have not been exercised are currently‘underwater’ (i.e. the exercise price is higher than thecurrent share price) as well as the performance conditionsnot currently being met, the theoretical dilution from alllive options or contingent awards over shares is 4.72%,being 5,661,784 shares subject to option or awardagreements compared to the current number of ordinaryshares of 119,900,820 as at 31 March 2007.Annual Report and Financial Statement 200715

Directors’ BiographiesJohn GrantNon-executive Chairman, and Chairman of the Nominations Committee, aged 61. 1, 2, 3John Grant joined the board of Torotrak in 1998 and was appointed Chairman in July2005. He also chairs a specialist engineering group, Hasgo Group Limited. He was ChiefExecutive of Ascot plc from 1997 to 2000 and Finance Director of Lucas Industries plc(subsequently Lucas Varity plc) from 1992 to 1996. He previously spent 25 years atFord, where he was a Vice President of Ford of Europe, Director of Corporate Strategyin Ford US and Deputy Chairman of Jaguar. He is also a Non-executive Director ofMelrose plc, MHP S.A. and the Royal Automobile Club Limited.Dick ElsyChief Executive, aged 47.Dick Elsy joined Torotrak as Chief Executive in January 2003. Prior to this he wasProduct Development Director at Jaguar Cars Limited, part of Ford’s PremierAutomotive Group. He previously spent 16 years at BMW AG/Rover Group where heheld various senior engineering and commercial positions. He is a Chartered Engineerand a Fellow of the Institution of Mechanical Engineers. He is also a Director andTrustee of the Engineering and Technology Board.Jeremy DeeringFinance Director, aged 46.Jeremy Deering was appointed Finance Director in December 2006 following ninemonths working for Torotrak on an interim basis. He has held senior finance positionsin FTSE 100 groups including Tomkins PLC and the United Utilities Group where hebecame Group Financial Controller, and then Finance Director of its major energydivision, Norweb PLC following its acquisition. He was acting Managing Director /Finance Director of Your Communications through its intended IPO. He hassubsequently worked on a number of start-up and growth companies, including, in aninterim capacity, System C Healthcare, through its successful AIM flotation in 2005. Hequalified as a Chartered Accountant with Arthur Andersen.16Annual Report and Financial Statement 2007

James BatchelorCommercial Director, aged 51.James Batchelor joined Torotrak in March 2003. Before this he was Commercial Directorof Trafficmaster Automotive, the telematics and traffic information group. He spent sixyears at BMW AG, including four years for the parent company in Munich and latterlyas Project Director for Land Rover, having previously spent 13 years at Rover Group.He has an MBA from Cranfield School of Management, is a Chartered Engineer and aFellow of the Institution of Mechanical Engineers.David MacKayNon-executive Director, Chairman of the Audit Committee and the Senior Independent Non-executiveDirector, aged 50. 1, 2, 3David MacKay was appointed as a director of Torotrak in November 2003. He wasformerly Executive Vice President and General Counsel for ARM Holdings plc, one of theUK’s most successful technology companies, whose core business is founded upon thedesign and licensing of world-leading technology. He was responsible for intellectualproperty licences, international manufacturing and distribution agreements and jointventure agreements. He is Chairman of NXT plc, the flat panel loudspeaker technologylicensing company.Nick BarterNon-executive Director, Chairman of the Remuneration Committee, aged 66. 1, 2, 3Nick Barter was appointed as a director of Torotrak in November 2003. Prior to this, hewas Director of Product Development for Jaguar and Land Rover, part of Ford’s PremierAutomotive Group. He was responsible for all aspects of planning, design, development,sign off and introduction of all Jaguar and Land Rover vehicles, leading a team ofaround 5,000 engineers, designers and analysts. He is currently Chairman of the SMMTForesight Vehicle Programme, involved in automotive technology Knowledge TransferNetworks and brokering research projects in automotive technologies, in particular inmore fuel efficient vehicles. He is a Trustee Director of RoadSafe and of The BritishMotor Industry Heritage Trust.1 Member of the Remuneration Committee2 Member of the Audit Committee3 Member of the Nomination CommitteeAnnual Report and Financial Statement 200717

Directors’ ReportThe directors present their report on the results and affairs of the Group for the year ended 31 March 2007.Business Activity, Results and DividendsThe Torotrak Group activities are focused on the design and development of full-toroidal traction drive transmissionsystems. Current and future planned earnings derive from engineering services, intellectual property (‘IP’) income andother activities relating to the commercial exploitation of Torotrak’s IP including joint venture arrangements tomanufacture and sell transmission systems. There has been no change in the principal activity of the Group since 31 March2007.The business is reviewed in the Chairman's Review on pages 2 to 3, Chief Executive's Review on pages 4 to 10 and theFinancial Review on page 11 to 15. Information on likely future developments in the business is included in these reviews.The directors do not recommend the payment of a dividend.Key Performance Indicators (‘KPIs’)The Board considers that the following key performance indicators are appropriate in terms of the assessment of theGroup’s progress:Financial• Growth in revenue• Increased efficiency of operational (development andadministrative) costs relative to revenues• Progression towards positive profit after tax• Progression towards positive operating cash flow• Growth in total shareholder returnNon-financial• Milestones relating to start of production for licenseesor joint ventures and future growth in volumes ofrelevant royalty bearing or revenue generating units• Securing new licence arrangements / new customerswith access to appreciable market share• Development and refreshing of new IP appropriate toexisting or new markets• Level of utilisation of engineering resources to secureongoing revenue contribution & businessdevelopment opportunitiesProgress against these KPIs is reported in the Chief Executive and Financial Reviews on pages 4 to 15.Principal RisksThe key risks and uncertainties facing the Group are as follows:Patent protectionThe continuing ability to establish, protect and enforce our proprietary rights is fundamental to the Group. This isprincipally achieved through the process of patent application and establishing patent protection. However, should theseapplications or granted patents be challenged, then the defence of our rights could involve substantial costs and theoutcome cannot be predicted with certainty.CommercialisationThe Group’s commercial progress depends upon its ability to establish and maintain successful relationships withappropriate licensees and other third parties to successfully exploit the Group’s IP through development, manufacturingand distribution agreements.18Annual Report and Financial Statement 2007

CompetitionCompetitors may develop technologies that compete with the Group’s technologies. The ability of the Group to defend itscompetitive advantages rests on maintenance of appropriate development capacity as well as securing thecommercialisation described above within appropriate lead times.FinancialThe Company's current financial resources, whilst believed to be sufficient to support the planned commercialisation ofthe Group’s IP, are limited such that, if sufficient revenue cannot be generated within anticipated timescales fromroyalties, sales of products and services and dividends from joint ventures, or if significant new expenditure is requiredto exploit additional business opportunities, it may become necessary to raise additional funds.Joint VentureThe Infinitrak joint venture is accounted for under the proportionate consolidation method according to note 16 on page46. Future income from the Venture is dependent upon the successful increase in production volumes and the sale ofthese products initially to MTD for use in their vehicles. The Joint Venture is subject to agreements between itsshareholders, MTD and Torotrak, which govern amongst other matters events such as dispute or deadlock and whichcould result in one party’s equity interest in the future being diluted such that joint control no longer exists. In the eventthat Torotrak ceased to have such joint control, then access to joint venture assets and joint control over operationaldecisions could be restricted and accordingly the proportionate consolidation basis of accounting and presentation ofresults would no longer be appropriate.Research and development tax creditsThe Group has benefited in the past and expects to continue to benefit in the future from research and development taxcredits. If there is a change in legislation removing these credits the Group’s cash outflow will increase.Employees and skillsRetention of key employees remains a critical factor in the Group’s successful delivery of its business plan.These areas and uncertainties are reviewed, controlled and mitigated according to risk procedures described on page 24.Directors and their Interest in SharesThe names of the directors currently in office are shown, with their biographical details, on pages 16 and 17. RebeccaJoyce resigned as a director of the Company on 21 December 2006. Information on directors’ remuneration, contractsand beneficial interests in the shares of the Company is included in the remuneration report on pages 25 to 30.In accordance with the Company’s Articles of Association concerning the rotation of directors, John Grant, David MacKayand Nick Barter retire from the Board and, being eligible, offer themselves for re-election at the Annual General Meeting.In addition, Jeremy Deering, who was appointed as a director on 22 December 2006, retires from the Board in accordancewith the Company’s Articles of Association concerning appointments by the Board outside an Annual General Meeting and,being eligible, offers himself for re-appointment at the Annual General Meeting.The interim and annual reports are available from the Company's head office free of charge. They are also available onthe Torotrak website (www.torotrak.com).Payment to CreditorsThe Group has agreed a variety of payment terms with its suppliers. Payments to a supplier are made in accordance withthe general conditions of purchase agreed, provided the supplier complies materially with all relevant terms and conditionsand presents invoices on a timely basis.At 31 March 2007 the number of days purchases outstanding to trade creditors was 19 for the Group and 35 for theCompany (2006: 28 days and 34 days respectively).Annual Report and Financial Statement 200719

Directors’ Report - continuedEmployees and Health and SafetyOur business rests on the creativity, drive and goodwill of our employees. We seek to consult with all levels of employee,valuing their ideas and suggestions. Regular team briefing sessions and consultation combined with a suggestion scheme,personal development plans and a performance assessment system, encourage open channels of communication.Employee share ownership is actively encouraged and the Group has established schemes to incentivise, reward andmotivate all employees, details of which are given in the Remuneration Report and on pages 53 to 55.The Group has a strong demand for highly qualified staff and, as such, we strive for equal opportunity and anondiscriminatory work environment for our employees. Disability is not an inhibitor to employment or careerdevelopment within the Group. We provide clean, healthy and safe working conditions and pride ourselves on providinga very attractive working environment. We encourage proactive participation by all our employees in identifying andcontrolling hazards. The health and safety performance is monitored by the Board and we are pleased to report that wehad no RIDDOR reportable accidents during the year.Political and Charitable DonationsCharitable donations by the Group during the year amounted to £nil (2006: £600). No political donations were made(2006: £nil).EnvironmentTorotrak’s activities are focused on the development of products which offer very significant improvements in fueleconomy and emissions.Our premises are composed mainly of offices and test facilities. The Group does not currently have any manufacturingfacilities, with the Infinitrak joint venture at this stage sub contracting all manufacturing activities. 'Resources' principallycomprise employees and equipment. They do not involve any hazardous substances or complex waste. Our operationsare therefore 'low impact' in environmental terms.Our environmental policy is published on our website. The Group does not encourage the provision of company cars. Theprovision of facilities for cyclists encourages greener commuting and telephone and video conferencing are usedextensively, providing alternatives to international travel. Wherever possible the Group continues to adopt initiatives tolessen our environmental impact even further.AuditorsFollowing the Annual General Meeting held on 20 July 2006, the Board committed to initiate a competitive audit tenderto test both the value and quality of audit services available to the Group. Following this process, PricewaterhouseCoopersLLP were appointed as auditors to Torotrak plc on 24 November 2006, upon the resignation of KPMG Audit plc.PricewaterhouseCoopers LLP have subsequently been appointed as auditors for all subsidiary Group companies followingthe resignation of KPMG Audit plc.Authority to Purchase SharesAt the Annual General Meeting held on 20 July 2006, the shareholders passed a resolution authorising the purchase bythe Company of its own shares to a maximum of 11,990,082 ordinary shares of 10p each. That authority has not beenused and remains in force until the conclusion of the annual general meeting to be held on 19 July 2007.20Annual Report and Financial Statement 2007

Substantial ShareholdingsAt 15 May 2007 the Company had been notified of the following major interests of 3% or more in its ordinary shares towhich voting rights are attached:Shares %Barclays plc 11,956,832 9.97%Cavendish Asset Management Ltd 4,127,300 3.41%As at the date referred to above, the Company is not aware of any person or entity that, directly or indirectly, jointly orseverally, will or could exercise control of the Company.Financial ReportingThe directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware,there is no relevant audit information of which the Company’s auditors are unaware; and each director has taken all thesteps that by his duty as a director of the Company to exercise due care, skill and diligence were required to be taken tomake himself aware of any relevant audit information and to establish that the Company’s auditors are aware of thatinformation.Going ConcernAfter making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continuein operational existence for the foreseeable future. Accordingly, the directors believe that it is appropriate for the financialstatements to continue to be prepared on the going concern basis.Annual General MeetingThe ninth annual general meeting of the Company will be held at 12 noon on Thursday 19 July 2007 at the Best WesternLeyland Hotel, Leyland, Lancashire. The notice of the Annual General Meeting is contained in this Annual Report on pages58 to 60.By order of the BoardJeremy DeeringSecretary15 May 20071 Aston WayLeylandLancashirePR26 7UXAnnual Report and Financial Statement 200721

Corporate GovernanceThe Board is committed to high standards of corporate governance. The Board considers that it has complied throughoutthe year under review with the principles set out in the revised Combined Code on corporate governance published bythe Financial Reporting Council in July 2003 (the 'Combined Code'), except where indicated below (in relation tomembership of the Audit Committee).The Board and its CompositionBrief biographies of the present Board members are given on page 16 and 17. The Board comprises three executivedirectors, a non-executive chairman and two non-executive directors.The non-executive chairman and non-executive directors are considered by the Board to be independent in character andjudgment and to be free from any business or other relationship or circumstance that could impact such independence.The Company's Articles of Association require that all directors are subject to election by the shareholders at the firstannual general meeting after appointment and thereafter at least once every three years.The Board structure creates a balance such that no individual or small group of individuals can dominate decision making.The roles of Chairman and Chief Executive are clearly separated and have defined responsibilities. The Chairman sets theagenda for board meetings and directs the running of the Board. The Board is supplied in advance of its meetings withappropriate financial, operational and other information to enable the meetings to be effective. The Chief Executive'sresponsibilities focus on managing the Group and implementing board strategy and policy. The non-executive directorshave particular responsibility for the scrutiny of management performance, the review of financial information and theconstructive challenge and development of strategy. In addition, the non-executive directors have particular responsibilityfor the Board committees described below.The Chairman is responsible for the process to ensure that directors keep their skills and knowledge up to date and toencourage their professional development. The Company ensures that adequate time and financial resources are availablefor directors to attend appropriate training. The Directors have direct access to the Company Secretary or, if required,independent professional advice at the Company's expense to be informed on all governance and other matters ofimportance to their Board responsibilities.The Board has reserved specific responsibilities to itself including: setting strategy and approving annual budgets;reviewing financial and operational performance; approving policies for controls and risk management; approving majorcapital expenditure, disposals and major business development; reviewing the health & safety policy and performance ofthe Group; approving patent abandonment; approving appointments to the Board and the position of Company Secretary;approving policies relating to directors' remuneration and the severance of directors’ contracts; and the processes toensure that an appropriate and constructive dialogue takes place with shareholders.Board CommitteesThe Board has delegated specific responsibilities to three committees. Each committee operates within defined terms ofreference set by the Board which are available on request from the Company Secretary. Membership of the committeesis detailed on pages 16 to 17.Audit CommitteeThe Audit Committee (AC) is chaired by David MacKay. Whilst the Smith guidance incorporated into the Combined Codesuggests that the Chairman should not be a member of the Audit Committee, the Board has taken the view that JohnGrant's continued membership since becoming Chairman in the year ended 31 March 2006 is appropriate on the basis ofcontinuity, his significant financial experience and to ensure that there is a quorum in the event of one member beingabsent.The Audit Committee meets at least twice a year prior to the publication of the half year and full year results and at othertimes as the Chairman of the Committee shall require. The Committee considers all matters relating to financial controlsand reporting, internal and external audits, risk management policy and procedures, the scope and results of the audits,the independence and objectivity of the auditors and the consideration paid to them. The Board has ultimate responsibilityfor approval.22Annual Report and Financial Statement 2007

The members of the Committee participated as part of a review panel during the competitive audit tender processconducted during the year. The Audit Committee subsequently met on 24 October 2006 to consider the appointment ofPricewaterhouseCoopers LLP as auditors and to recommend their appointment to the Board.The Group does not normally award consulting work to the firm of auditors other than in the area of tax consulting andcompliance, where they are best suited to carry out such work. However, the Group considers awarding other advisoryservices to the firm of auditors in circumstances where there is demonstrable independence from the role of auditors andwhere best value for the Group can be obtained. The Committee has discussed with the external auditors theirindependence and is satisfied that there are not any circumstances where the auditors' objectivity and independence iscompromised.The Chief Executive, Finance Director, and Financial Controller attend the Committee meetings as required, as do theexternal auditors who meet with the Committee at least twice every year. The external auditors also have the opportunityto meet with the Committee without the executive directors being present.Remuneration CommitteeThe Remuneration Committee (RC) is chaired by Nick Barter. The Committee determines the policy for remuneration forthe Chairman, executive directors and directors of subsidiaries and makes recommendations to the Board having takenindependent advice where required and obtained relevant data in order to undertake comparator analysis. Theremuneration of non-executive directors is reviewed by the executive directors of the Board with guidance from theChairman. The remuneration report, on pages 25 to 30, gives further details on the remuneration of directors.Nominations CommitteeThe Nominations Committee (NC) is chaired by John Grant and reviews proposals for the appointment of executive andnon-executive directors or the extension of existing appointments and makes recommendations for approval by the Board.During the year, the Committee met to consider succession planning and the arrangements in relation to the continuingillness of Rebecca Joyce and the appointment of a new Finance Director upon her resignation. The Committeerecommended to the Board the appointment of Jeremy Deering given his proven capability and suitability for the rolehaving worked for nine months on an interim basis and based on his qualifications and relevant experience.Board EffectivenessThe Board's evaluation of the individual performance of its directors, as well as the effectiveness of the Board as a whole,follows a process of a confidential questionnaire to each of the directors. This is supplemented by individual meetings withthe Chairman where development actions may be discussed. The results are fed back individually and to the Board orNominations Committee as appropriate. In addition, the performance of executive directors is appraised according toagreed objectives and performance in relation to annual budgets and the business plan. The Chief Executive'sperformance is appraised by the Chairman and other executives are appraised by the Chief Executive.The Board met 11 times during the year with attendance at the main Board meetings and sub committees as follows:Board AC RC NCJohn Grant 11/11 3/3 9/9 2/2Dick Elsy 11/11 - - -Jeremy Deering (from appointment) (ii) 3/3 - - -James Batchelor 10/11 - - -Nick Barter 11/11 3/3 8/9 2/2David MacKay 11/11 3/3 9/9 2/2Rebecca Joyce (to retirement) (i) 0/8 - - -Notes: (i) Rebecca Joyce's attendance at meetings was impacted by her illness since January 2006. Jeremy Deering was appointed asinterim Finance Director in March 2006 (ii) Jeremy Deering attended in an advisory capacity all eight board meetings prior to hisappointment and during which Rebecca Joyce was absent.Annual Report and Financial Statement 200723

Corporate Governance - continuedRisk Management and Internal ControlsThe Board is ultimately responsible for the Group's system of internal control and meets annually to formally review theeffectiveness of such controls. The control systems are designed to manage, rather than eliminate, various risks of failureto achieve the Company and Group's objectives and therefore are only able to provide reasonable and not absolute,assurance against material misstatement or loss.There is a comprehensive system of financial reporting with monthly performance reports presented to the Board. Theannual budget and the business plan, upon which the budget is based, is reviewed and approved by the Board.There is a continuous process for identifying, evaluating and managing the significant risks the Group faces, which hasbeen in place for the year under review and up to the date of approval of the financial statements. This process is regularlyreviewed by the Board and accords with the Turnbull guidance.Major commercial, technological and financial risks are formally assessed during the annual business planning process,which normally takes place in the last quarter of the financial year. The Board monitors exposure to key business risksand progress towards achieving strategic aims.The Executive Committee, which consists of the executive directors and senior management of subsidiaries, meetsregularly to monitor and control operations. Performance is reviewed, risks & opportunities identified, financial and otherimplications assessed and corrective actions agreed as necessary.Given the Group's scale of operations and centralisation of activities, the Board does not consider it necessary to have adedicated internal audit function. Instead it has chosen to date to contract out such activities as necessary on a projectby project basis.Relations with ShareholderThe Chairman, Chief Executive and Finance Director are the principal points of contact for shareholders. David MacKay asSenior Independent Director is available to shareholders where normal channels of communication may not beappropriate. The Company gives high priority to communications with shareholders by means of an active investorrelations programme, which includes a rolling programme of meetings with institutions and private investor intermediaries.A section of the Company’s web site is dedicated to Investors, the use of which is strongly encouraged. The Company isalso encouraging shareholders to consider greater use of electronic communication which will be quicker, effective, moreenvironmentally friendly and help the Company save printing and mailing costs. A proposal will be put to shareholdersat the Annual General Meeting on 19 July 2007 to accept ongoing Company reports and appropriate notifications inelectronic form.All shareholders are welcomed to the Company's Annual General Meeting which the Board considers to be an importantforum for investor communication, notice of which is contained within this Annual Report on pages 58 to 60. In particular,the meeting provides an opportunity for investors to meet with the Board and chairmen of the committees.24Annual Report and Financial Statement 2007

Remuneration ReportThis report complies with the Directors' Remuneration Report Regulations 2002, the Listing Rules of the Financial ServicesAuthority and the Combined Code. A resolution inviting shareholders to approve the report will be tabled at the AnnualGeneral Meeting on 19 July 2007.The Remuneration Committee is responsible for determining, within agreed terms of reference, the policy for theremuneration of the executive directors. The Committee is also responsible for determining the individual remunerationpackages for executive directors including basic salary and annual bonuses, the level and terms of grants of options andawards and the terms of any performance conditions to apply to the exercise of such options and awards, pension rightsand other benefits. Where the Remuneration Committee considers it appropriate, the Committee will also makerecommendations in relation to the remuneration of senior management.The Remuneration Committee consists exclusively of independent non-executive directors. The Chairman of theCommittee is Nick Barter and its other members are John Grant and David MacKay. Given their diverse experience, theindependent non-executive directors are able to offer a balanced view with respect to remuneration issues of the Group.The Committee has access to professional, independent advice from external advisers who do not have any otherconnection with the Company or Group. During the year the Committee were advised by Hammonds. The Committeeconsults with the Chief Executive on the remuneration of the other executive directors and directors of subsidiaries. TheChief Executive and the Finance Director normally attend part of the Remuneration Committee meetings. No director isinvolved in deciding his or her own remuneration.Remuneration PolicyThe objective of the remuneration policy, which has been applied in the year ended 31 March 2007 and is intended toremain applicable in the year ending 31 March 2008 and beyond, is to provide remuneration in a form and amount thatwill attract, retain, motivate and reward high calibre directors and senior management. The Committee believes that basesalary and benefits for executive directors should represent a fair return for employment, but that over time a substantialproportion of the total reward should be derived from performance-related elements of the remuneration package. Theperformance-related elements of the executive directors' packages seek to align their interests closely with those ofshareholders and provide incentives for performance. They are also designed to be long-term in their nature.Performance ChartThe FTSE TechMARK 100 index has been used in previous years as the benchmark for performance measurement. Goingforward, the Committee has broadened the comparator group to the FTSE TechMARK All-Share index which has beenused as part of the market based performance measure for the awards granted during the year under the Long TermPerformance Share Plan. The chart below compares the total cumulative shareholder return of Torotrak plc with theperformance of the FTSE TechMARK All-Share index over the last five years. The Committee is of the view that this indexconstitutes a relevant broad equity market index.Annual Report and Financial Statement 200725

Remuneration Report - continuedExecutive Directors' Employment ContractsThe executive directors' employment contracts are continuing contracts subject to termination on 6 to 12 months writtennotice by the Company. There are no provisions for compensation on early termination in any of the executive directors'employment contracts.Executive Directors' Remuneration PackagesDetails of individual executive directors' remuneration are included in the tables on pages 29 and 30. Remunerationpackages for executive directors consist of the following elements:Fixed elementsBase salary and benefits - The Committee reviews base salaries annually taking account of relevant external marketcomparisons, the level of responsibility for each executive and movements in basic pay across the Group.Other benefits are health insurance and car benefits (which are subject to income tax), permanent health insurance andlife insurance.Pension contributions - Executive directors are eligible to participate in The Torotrak Pension Scheme, a definedcontribution money purchase scheme that is open to all employees of the Group. Executive directors have the option ofhaving their contributions paid into a personal pension scheme of their choice. Pension contributions are made on basicsalary only.Variable elementsPerformance-related bonus - the level of bonus (if any) recommended by the Committee is determined on the basis offinancial and operational targets established at the beginning of each financial year or on the basis of specific targets orother criteria established in the case of directors appointed during the year where bonuses may be paid as a combinationof shares and cash.The bonus is normally given in the form of shares and is distributed from shares held by the Employee Share Trust, subjectto the agreement of the trustees and the availability of shares to distribute. Further details on the Employee Share Trustare given on page 54. The value of the bonus is dependent on the market price on the date of the award. As aconsequence, the performance-related element of executive directors' remuneration varies from year to year inaccordance with the share price on the date of the award. In 2007 the performance-related element of executive directors'remuneration was 11.3% (2006: 11.2%).Share option schemesThe Company operates the Torotrak Inland Revenue approved share option scheme (‘the approved scheme’) and anunapproved share option scheme (‘the unapproved scheme’). Under the schemes, options over the Company's ordinaryshares may be granted to all employees, including executive directors. No options were granted under these schemesduring the year ended 31 March 2007. Information on previous grants to directors is set out on page 30 and to allemployees on pages 51 and 52. The rules of both schemes and associated performance criteria are substantially thesame and are detailed below.The schemes are open to all employees, including executive directors. The unapproved scheme is open to both UK andnon-UK resident employees and executive directors. The grant of options is at the discretion of the directors uponrecommendation by the Remuneration Committee. The annual exercise price of shares under option granted to anindividual under both schemes cannot normally exceed two times the employee’s salary. The latest date for exercise ofoptions under both schemes is ten years from the date of grant. The earliest date is dependent on achievement of theperformance criteria.The performance criteria for all grants of options prior to 2002 require that the Group has:• Achieved market launch of the Torotrak IVT in series production vehicles and• Earned £20 million in revenue.26Annual Report and Financial Statement 2007

The performance criteria for the options granted in 2002 require that the average share price over the 30 days up to theperformance test date should be:• 75p for one third of the options to vest• 150p for two thirds of the options to vest• 250p for all the options to vest.The performance criteria for the options granted in 2003 to 2005 are that:• An average closing mid-share price over a period of 30 days leading up to the performance testing date of 250pfor one third of the options to vest• Confirmation of a production decision by a major car manufacturer and / or tier-1 transmission supplier for onethird of the options to vest• Market launch of the Torotrak IVT in series production vehicles for the final third of the options to vest.Long term performance share planA new plan, the Torotrak plc 2006 Long Term Performance Share Plan (the ‘LTPSP’), was approved at the Annual GeneralMeeting on 20 July 2006. The purpose of the LTPSP is to link a proportion of participants’ remuneration to the Company’slong-term performance and to strengthen the Company’s ability to attract and retain key senior executives. The provisionof competitive incentives linked to the success of the Company is designed to align the interests of those participants withthe interests of the Company’s shareholders.Awards under the LTPSP are intended to be made to key employees and executive directors of Torotrak plc and itssubsidiaries. The maximum value of shares determined at the grant date for any individual shall in any financial year be100% of basic salary in the case of a director of the Company or 60% of basic salary for other employees, such limitsbeing increased to take into account secondary Class 1 National Insurance contributions which are to be borne byparticipants. Awards under the LTPSP and any other employee share scheme granted at that time or during the previousten year period shall not exceed 10% of the issued share capital of the Company at that time.Awards give participants a right to receive a specified number of shares at the end of a period of at least three years,subject to the satisfaction of performance conditions. These performance conditions are set by the RemunerationCommittee in accordance with the rules of the LTPSP which require that an award is subject to an objective condition orconditions as to the performance of the Group over a period of time.If a participant ceases to be employed in the Group by reason of death, injury, disability or retirement upon reaching theage when the participant becomes bound to retire under his or her employment contract, an award will not lapse byreason of that cessation, but the number of shares to which the award relates will be pro-rated down to reflect thatproportion of the usual three-year period which has elapsed at the time of cessation of employment. The RemunerationCommittee would determine the basis on which the performance conditions would apply in these circumstances. If aparticipant ceases to be employed for any other reason, awards will lapse unless the Remuneration Committee in itsdiscretion permits otherwise. In the event of a change in control of the Company (other than as a result of a reorganisation)participants will normally be entitled to receive the shares in respect of which an award has been made,subject to the application of a modified version of the performance condition that applies to the award. Benefits underthe LTPSP are not pensionable.The first of such awards was made on 29 September 2006 giving participants a right to receive after three years up to amaximum of 1,630,266 ordinary shares subject to the achievement of performance conditions. Included within this wasan award over 748,214 ordinary shares made to Dick Elsy and an award over 415,175 ordinary shares made to JamesBatchelor, both subject to achievement of the performance conditions. The second of such awards was made on 25January 2007 in relation to the appointment of Jeremy Deering as Finance Director giving him the right to receive afterthree years, subject to the achievement of performance conditions, a maximum of 387,317 ordinary shares. A furtheraward over 193,364 shares was made on 25 January 2007 under the same terms of the LTPSP but under a separatearrangement approved by the Remuneration Committee in relation to the new appointment. This brought the totalawards to Jeremy Deering to cover 580,681 shares subject to performance conditions.Annual Report and Financial Statement 200727

Remuneration Report - continuedThe Remuneration Committee considered that the circumstances of the recruitment of Jeremy Deering as Finance Directorfollowing his previous temporary assignment were such that it was necessary on that occasion to exceed the normal limiton annual participation in the LTPSP. The Remuneration Committee therefore adopted a separate arrangement for thepurposes of this award. No further awards will be made under this arrangement other than following additionalshareholder approval or in exceptional circumstances as described in Rule 9.4.2 of the Listing Rules of the United KingdomListing Authority.The performance conditions adopted for these awards made during the year are designed to be challenging and relate toboth market and non-market performance conditions:• Receipt of up to 50% of the shares is based on achieving both an overall increase in share price and on the relativeranking of Torotrak’s total shareholder return (‘TSR’) against the TSR of the FTSE techMARK All-Share index (the‘Comparator Group’). A quarter of the shares in this part of the award would be received if Torotrak’s share pricewas to reach over 60p over the three year period and Torotrak’s TSR was in the top half of the Comparator Group.The maximum number of shares in this part of the award would vest if Torotrak’s share price were to be 120p ormore averaged over a fixed period at the end of the three year period and Torotrak’s TSR was in the top quartileof the Comparator Group. A sliding scale will operate in between the two levels of award. No shares would bereceived in this part of the award if Torotrak’s share price was less than 60p or if Torotrak’s TSR was not in thetop half of the Comparator Group. The Comparator Group chosen was the group of companies comprising theFTSE techMARK All-Share index• Receipt of up to 50% of the shares is based on achieving a measure of Cumulative Operating Cash Flow (‘COCF’)for the three year period commencing on 1 April 2006. A quarter of the shares in this part of the award would bereceived if Torotrak’s COCF achieved a target set in relation to the Business Plan COCF. The maximum number ofshares in this part of the award would vest if a further and significant improvement to COCF was achieved. A slidingscale will operate in between the two levels of award. No shares would be received in this part of the award ifTorotrak’s COCF does not achieve the target set in relation to the Business Plan.In addition to the above long-term incentive scheme, the Company operates a savings related share option scheme,details of which are given on pages 53 and 54.Non-executive Directors' RemunerationThe remuneration of non-executive directors is established by the Board within the limits set out in the Articles ofAssociation. The non-executive directors do not participate in the Company’s employee share option schemes or theLTPSP, are not eligible for bonuses and do not receive any other benefits or pension rights under the pension scheme.The non-executive directors do not have service contracts. However, each of them has a letter of appointment whichcontains a notice period of three months. The letters of appointment set out the expected time commitment, any othersignificant time commitments of the non-executive directors are disclosed to the Board and substantial changes broughtto the Board's attention. Non-executive directors are not appointed for specific terms but are subject to re-election byshareholders every three years.28Annual Report and Financial Statement 2007

Directors' Remuneration (audited information)Salary Benefits Share Compensation Total (excl. Company Total (inc. Total& fees in kind bonus for loss of pension) pension pension) 2006office 2007 2007£000 £000 £000 £000 £000 £000 £000 £000Executive directors (iii) (iv) (v)Dick Elsy 222 21 48 - 291 33 324 348Rebecca Joyce (i) 38 5 12 160 215 13 228 149David Price - - - - - - - 324James Batchelor 145 5 27 - 177 22 199 185Jeremy Deering (ii) 49 4 - - 53 7 60 -Non-executive directorsDavid Wallis - - - - - - - 2John Grant 50 - - - 50 - 50 37Nick Barter 28 - - - 28 - 28 20David MacKay 28 - - - 28 - 28 20Total directors emoluments 560 35 87 160 842 75 917 1,085Notes: (i) To date of retirement (ii) Excludes £176k paid to Core Ventures Ltd for the services of Jeremy Deering whilst Interim FinanceDirector (iii) Benefits in kind include the provision of a company car for Mr Elsy (cancelled July 2006), fuel, medical, death in service andincome protection for all executive directors (iv) The share bonus comprises shares in Torotrak plc that were issued at market value on29 November 2006 (v) The discretionary elements of this compensation were approved by the Remuneration Committee and were paidin respect of her past service to the Company.Directors' Interests in Share Capital (audited information)The interests of the directors (including beneficial interests) in the share capital of the Company at 31 March 2007 wereas follows:31 March 2007 31 March 2006No. of sharesNo. of sharesDick Elsy 359,105 237,726James Batchelor 139,564 39,186Jeremy Deering 75,000 -Rebecca Joyce (i) 198,917 175,317John Grant 326,003 226,003Nick Barter 50,374 40,374David MacKay 28,000 28,000Notes: (i) at the date of resignation 22 December 2006.Annual Report and Financial Statement 200729

Remuneration Report - continuedDirectors’ Interests in Share Options and Awards over Shares under the LTPSP (audited information)Options and LTPSP Exercised Cancelled Option and Exercise Expiryawards over awards over during the during the awards over price dateshares at shares year year shares at 311 April 2006 granted March 2007during theyearNotes Number Number Number Number Number (vi) £ (v)Dick Elsy (i) 146,341 - - - 146,341 0.205 Jan 2013(ii) 393,659 - - - 393,659 0.205 Jan 2013(iii) 22,261 - - - 22,261 0.42 Feb 2009- 748,214 - - 748,214 (vii) Sept 2016Rebecca Joyce (i) 162,940 - - 162,940 - - July 2008(i) 63,829 - - 63,829 - - July 2012(ii) 28,229 - - 28,229 - - July 2012(ii) 222,942 - - 222,942 - - July 2014David Price (ii) 67,646 - - 67,646 - - July 2008(i) 2,018 - - 2,018 - - July 2008(i) 41,753 - - 41,753 - - July 2012(i) 20,305 - - 20,305 - - July 2012(ii) 252,942 - - 252,942 - - July 2014Jeremy Deering - 387,317 - - 387,317 (vii) Jan 2017(iv) - 193,364 - - 193,364 - Jan 2017James Batchelor (i) 193,548 - - - 193,548 0.155 Mar 2013(ii) 121,452 - - - 121,452 0.155 Mar 2013(iii) 22,261 - - - 22,261 0.42 Feb 2009- 415,175 - - 415,175 (vii) Sept 2016Notes: (i) approved (ii) unapproved (iii) sharesave (iv) This award was granted on the terms of the LTPSP but as a separate scheme(v) approved and unapproved share option schemes were granted ten years before the expiry date, sharesave schemes were grantedthree years before the expiry date and the long-term incentive plan was granted 10 years before the expiry date (vi) In the case ofRebecca Joyce figures are shown at the date of cessation of her employment and for David Price at the date he resigned as a director(vii) Each award over shares under the LTPSP is satisfied by the exercise of an option for the sum of £1.00. Dick Elsy and James Batcheloreach received one award of shares in the year and Jeremy Deering received two awards of shares in the year.The mid-market price of the ordinary shares at 31 March 2007 was £0.46. During the year the highest mid-market pricewas £0.5175 and the lowest was £0.22.Approved by the board and signed on its behalf by:Nick Barter - Chairman of the Remuneration Committee30Annual Report and Financial Statement 2007

Statement of Directors’ ResponsibilitiesThe directors are responsible for preparing the Annual Report and the Group and parent Company accounts, in accordancewith applicable laws and regulations.Company law requires the directors to prepare Group and parent Company financial statements for each financial year.Under that law they are required to prepare the Group financial statements in accordance with IFRS as adopted by theEU and have elected also to prepare the parent Company financial statements on the same basis. The Group and parentCompany financial statements are required by law and IFRS as adopted by the EU to present fairly the financial positionand the performance of the Group and parent Company. In this respect, the Companies Act 1985 provides that referencesto a true and fair view are deemed to have the same meaning as to their achieving a fair presentation.In preparing the Group and parent Company financial statements, the directors are required to:• Select suitable accounting policies and then apply them consistently• Make judgements and estimates that are reasonable and prudent• State whether they have been prepared in accordance with IFRS as adopted by the EU, and• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Groupand the parent Company will continue in business.The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any timethe financial position of the parent Company and enable them to ensure that its financial statements comply with theCompanies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguardthe assets of the Group and to prevent and detect fraud and other irregularities.Under applicable law and regulations, the directors are also responsible for preparing a Directors' Report, Directors'Remuneration Report and Corporate Governance statement that comply with that law and those regulations.The directors are responsible for the maintenance and integrity of the corporate and financial information included on theCompany's website. Legislation in the UK governing the preparation and dissemination of financial statements may differfrom legislation in other jurisdictions.Annual Report and Financial Statement 200731

Auditors’ ReportIndependent Auditors’ Report to the Members of Torotrak plcWe have audited the Group and parent Company financial statements (the ‘‘financial statements’’) of Torotrak plc for theyear ended 31 March 2007 which comprise the Consolidated Income Statement, the Consolidated Statement ofRecognised Income and Expense, the Group and Parent Company Balance Sheets, the Group and Parent Company CashFlow Statements and the related notes. These financial statements have been prepared under the accounting policies setout therein. We have also audited the information in the Remuneration Report that is described as having been audited.Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report, the Remuneration Report and the financial statements inaccordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EuropeanUnion are set out in the Statement of Directors’ Responsibilities.Our responsibility is to audit the financial statements and the part of the Remuneration Report to be audited in accordancewith relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report,including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assumeresponsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may comesave where expressly agreed by our prior consent in writing.We report to you our opinion as to whether the financial statements give a true and fair view and whether the financialstatements and the part of the Remuneration Report to be audited have been properly prepared in accordance with theCompanies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report toyou whether in our opinion the information given in the Directors' Report is consistent with the financial statements.In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have notreceived all the information and explanations we require for our audit, or if information specified by law regardingdirectors’ remuneration and other transactions is not disclosed.We review whether the Corporate Governance statement reflects the Company’s compliance with the nine provisions ofthe Combined Code (2003) specified for our review by the Listing Rules of the Financial Services Authority, and we reportif it does not. We are not required to consider whether the Board’s statements on internal control cover all risks andcontrols, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and controlprocedures.We read other information contained in the Annual Report and consider whether it is consistent with the audited FinancialStatements. The other information comprises only the Directors’ Report, the unaudited part of the Remuneration Report,the Chairman’s Review, the Chief Executive’s Review, the Financial Review and the Corporate Governance statement. Weconsider the implications for our report if we become aware of any apparent misstatements or material inconsistencieswith the Financial Statements. Our responsibilities do not extend to any other information.Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the AuditingPractices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures inthe Financial Statements and the part of the Remuneration Report to be audited. It also includes an assessment of thesignificant estimates and judgements made by the directors in the preparation of the Financial Statements, and of whetherthe accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequatelydisclosed.We planned and performed our audit so as to obtain all the information and explanations which we considered necessaryin order to provide us with sufficient evidence to give reasonable assurance that the Financial Statements and the part ofthe Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularityor error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the FinancialStatements and the part of the Remuneration Report to be audited.OpinionIn our opinion:32• The Group Financial Statements give a true and fair view, in accordance with IFRSs as adopted by the EuropeanUnion, of the state of the Group’s affairs as at 31 March 2007 and of its loss and cash flows for the year thenendedAnnual Report and Financial Statement 2007

• The parent Company Financial Statements give a true and fair view, in accordance with IFRSs as adopted by theEuropean Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parentCompany’s affairs as at 31 March 2007 and of it’s cash flows for the year then ended• The Financial Statements and the part of the Remuneration Report to be audited have been properly prepared inaccordance with the Companies Act 1985 and, as regards the Group Financial Statements, Article 4 of the IASRegulation, and• The information given in the Directors' Report is consistent with the Financial Statements.PricewaterhouseCoopers LLPChartered Accountants and Registered AuditorsManchester15 May 2007Annual Report and Financial Statement 200733

Financial Information 2007Financial Information 2007Consolidated Income StatementFor the year ended 31 March 2007 Notes Group Group2007 Restated2006£000 £000Revenue 3 2,691 2,054Development expenses (4,453) (5,504)Administrative expenses 4 (1,962) (2,303)Operating loss 4 (3,724) (5,753)De-merger costs refund claim 8 225 557Loss on sale of property - (1,295)Finance income 9 272 295Loss before taxation (3,227) (6,196)Taxation 10 328 434Loss for the year 23 (2,899) (5,762)Basic and diluted loss per share (pence) 12 (2.43) (4.91)The results above derive from continuing operations.Consolidated Statement of Recognised Income and ExpenseThe accounting policies and notes on pages 37 to 56 form part of these Financial Statements.Notes Group Group2007 Restated2006£000 £000Currency translation differences 23 16 -Net income recognised in equity 16 -Loss for the year (2,899) (5,762)Total recognised expenses for the year (2,883) (5,762)34Annual Report and Financial Statement 2007

Balance SheetsAs at 31 March 2007 Notes Group Group Company Company2007 Restated 2007 20062006£000 £000 £000 £000Non Current AssetsIntangible assets 13 1,027 1,083 - -Property, plant and equipment 14 1,087 785 - -Investments 15 - - 8,713 8,713Trade and other receivables 18 - - 60,460 57,574Total Non Current Assets 2,114 1,868 69,173 66,287Current AssetsInventories 17 46 - - -Trade and other receivables 18 1,326 976 22 199Current tax 20 268 449 - -Cash and cash equivalents 4,307 7,473 3,293 5,879Total Current Assets 5,947 8,898 3,315 6,078Total Assets 8,061 10,766 72,488 72,365Current LiabilitiesTrade and other payables 19 (755) (934) (6,297) (6,370)Total Current Liabilities (755) (934) (6,297) (6,370)Net Assets 7,306 9,832 66,191 65,995Capital and ReservesIssued share capital 22 11,990 11,990 11,990 11,990Share premium 23 48,298 48,298 48,298 48,298Other reserves 23 (262) (1,567) (262) (1,567)Retained earnings 23 (52,720) (48,889) 6,165 7,274Total equity attributable to equity holders of the parent 7,306 9,832 66,191 65,995The accounting policies and notes on pages 37 to 56 form part of these Financial Statements.The Financial Statements on pages 34 to 56 were approved by the Board of directors on 15 May 2007 and signed on itsbehalf by:Dick Elsy - DirectorAnnual Report and Financial Statement 200735

Financial Information 2007 - continuedCash Flow StatementsFor the year ended 31 March 2007 Notes Group Group Company Company2007 Restated 2007 20062006£000 £000 £000 £000Cash flows from operating activitiesLoss for the year (2,899) (5,762) (193) (412)Adjustments for:Sale of licence rights to Infinitrak (787) (560) - -Depreciation 14 166 254 - -Amortisation 13 154 194 - -Finance income receivable 9 (272) (295) (209) (243)Profit on disposal of plant and equipment (15) (11) - -Loss on disposal of intangible assets 122 29 - -Taxation 10 (328) (434) - -Loss on sale of property - 1,295 - -Increase in inventories (46) - - -Increase in trade and other receivables (524) (575) (2,721) (4,446)(Decrease)/increase in trade and other payables (104) 362 (73) 3,487Cost of equity settled employee share schemes and bonuses 389 485 389 485Refund of de-merger costs - - - 557Cash used in operations before tax (4,144) (5,018) (2,807) (572)Taxation received 629 749 - -Net cash used in operating activities (3,515) (4,269) (2,807) (572)Cash flows from investing activitiesAcquisition of property, plant and equipment (469) (144) - -Proceeds from sale of plant and equipment 16 11 - -Proceeds from sale of property - 3,440 - -Acquisition of patents (235) (297) - -Finance income received 266 304 221 251Net cash used in investing activities (422) 3,314 221 251Cash flows from financing activitiesProceeds from the issue of share capital - 550 - 550Issue of share capital by Infinitrak 805 560 - -Net cash generated in financing activities 805 1,110 - -Net (decrease)/increase in cash and cash equivalents (3,132) 155 (2,586) 229Cash and cash equivalents at start of period 7,473 7,318 5,879 5,650Exchange loss on currency translation (34) - - -Cash and cash equivalents at end of period 4,307 7,473 3,293 5,879Cash and cash equivalents held in the JV not under direct controlof the Group 234 6 - -The accounting policies and notes on pages 37 to 56 form part of these financial statements.36Annual Report and Financial Statement 2007

Notes to the Financial Statements1. Significant Accounting PoliciesTorotrak plc (the ‘Company’) is a publicly traded company incorporated and domiciled in the UK. The address for theregistered office is shown on page 61.The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.These policies have been consistently applied to all the years presented, unless otherwise stated. The policy of accountingfor the interests in the jointly controlled entity (‘joint venture’) has changed from equity accounting to proportionateconsolidation. The reason for this change and the impact on the financial statement are described below and in note 16and the prior year balances have been restated accordingly.Basis of preparationThe Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’)and proportionately consolidate the Group’s interest in the jointly controlled entity. The parent Company financialstatements present information about the Company as a separate entity and not about its Group.The financial statements were authorised for issue by the Directors on 15 May 2007.The consolidated financial statements of Torotrak plc have been prepared in accordance with EU Endorsed InternationalFinancial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companiesreporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention.Standards, amendments and interpretations effective in 2006 but not relevantThe following standards, amendments and interpretations to published standards are mandatory for accounting periodsbeginning on or after 1 April 2006 but they are not relevant to the Group’s operations:• IAS 21 (Amendment), Net investment in a foreign operation• IAS 39 (Amendment), Cash flow hedge accounting of forecast intragroup transactions• IAS 39 (Amendment), The fair value option• IAS 39 and IFRS 4 (Amendment), Financial guarantee contracts• IFRS 1 (Amendment), First-time adoption of international financial reporting standards• IFRS 6, Exploration for and evaluation of mineral resources• IFRIC 4, Determining whether an arrangement contains a lease• IFRIC 5, Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds• IFRIC 6, Liabilities arising from participating in a specific market - Waste electrical and electronic equipment.Interpretations to existing standards that are not yet effective and have not been early adopted by theGroupThe following interpretations to existing standards have been published that are mandatory for the Group’s accountingperiods beginning on or after 1 May 2006 or later periods but which the Group has not early adopted:• IFRIC 8, Scope of IFRS 2 (effective from annual periods beginning on or after 1 May 2006). IFRIC requiresconsideration of transactions involving the issuance of equity instruments – where the identifiable considerationreceived is less than the fair value of the equity instruments issued – to establish whether or not they fall withinthe scope of IFRS 2. The Group will apply IFRIC 8 from 1 January 2007, but it is not expected to have any impacton the Group’s accounts• IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1November 2006). IFRIC 10 prohibits the impairment losses recognised in an interim period on goodwill andinvestments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balancesheet date. The Group will apply IFRIC 10 from 1 January 2007 but it is not expected to have any impact on theGroup’s accounts.Interest in jointly controlled entity (‘Joint Venture’)A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that issubject to a joint control, that is when the strategic financial and operating policy decisions relating to the activities requirethe unanimous consent of the parties sharing control.The Group has changed its policy on joint ventures from equity accounting to proportionate consolidation. The Group’sshare of assets, liabilities, income, expenses and cash flows of jointly controlled entities are combined with the equivalentitems in the results on a line-by-line basis.Annual Report and Financial Statement 200737

Notes to the Financial Statements - continuedA full analysis of the affect of the change in policy are detailed in note 16.Basis of consolidationSubsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, togovern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control,potential voting rights that are currently exercisable or convertible are taken into account. The financial statements ofsubsidiaries are included in the consolidated financial statements from the date that control commences until the datethat control ceases.Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractualagreement. The consolidated financial statements include the Group’s share of each line of the Group Income Statement,Balance Sheet, Cash Flow and related notes to the Financial Statements on a proportionate consolidation basis, from thedate that joint control commences until the date that joint control ceases.Foreign currencyTransactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreignexchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the incomestatement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency aretranslated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated inforeign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates the fair valuewas determined.Exchange differences arising on the retranslation of the jointly controlled entity Income Statements and Balance Sheetare taken to reserves.InvestmentsIn the Company’s accounts, investments in jointly controlled entities and subsidiaries are carried at cost less impairment.Patent and other intellectual property rightsPatents are stated at cost less accumulated amortisation and impairment losses. Cost includes the cost of obtaining patentprotection for intellectual property rights (IPR) on technologies arising from inventive ideas. Income from patents isderived through licensing and other agreements.Such expenditure is amortised in a manner calculated to write off the cost, in equal annual proportions, over the effectivelife of the underlying patent or other IPR up to a maximum of 20 years. In the event that a patent is abandoned or isconsidered to have suffered a full impairment in value at any time before the expiry of its granted life, the balance ofunamortised expenditure is charged to the income statement in the year in which the abandonment or other impairmentin value takes place.Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciation and impairment losses.Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separateitems of property, plant and equipment.DepreciationOnce the item of property, plant and equipment has been commissioned for use, depreciation is charged to the incomestatement over the estimated useful lives of each part of an item of property, plant and equipment. The estimated usefullives are as follows:%Plant, machinery & equipment 25 Straight lineComputer hardware 33 1/3 Straight lineComputer software 33 1/3 Straight lineOffice furniture and fittings 20 Straight lineTest vehicles 50 Straight lineLeasehold improvements 10 Straight line38Annual Report and Financial Statement 2007

Trade and other receivablesTrade and other receivables are stated at their nominal amount (discounted if material) less impairment losses.Cash and cash equivalentsCash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less.ImpairmentThe carrying amounts of the Group’s assets, are reviewed at each balance sheet date to determine whether there is anyindication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds itsrecoverable amount. Impairment losses are recognised in the income statement.Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of anygoodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on apro rata basis. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that arelargely independent of the cash inflows from other assets or groups of assets.An impairment loss is reversed when there is an indication that the impairment loss may no longer exist and there hasbeen a change in the estimates used to determine the recoverable amount.An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amountthat would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.Pension costsThe pension scheme operated by the Group is a defined contribution money purchase scheme and pension costs arecharged to the income statement as incurred.Research and developmentExpenditure on research activities is recognised in the income statement as an expense as incurred.Expenditure on development activities is capitalised if it relates to an identified and profitable project with commercialexploitation that carries production targets and start dates. No development expenditure has been capitalised to date.LeasesOperating lease rentals are charged to the income statement on a straight line basis over the period of the lease.Operating lease income is accrued within the income statement on a straight line basis over the minimum lease period.RevenueRevenue is measured at the fair value of the consideration received or receivable net of value added tax.Revenue from the provision of services is recognised when the amount of revenue, stage of completion and costs incurredand to be incurred can all be measured reliably and when it is probable that the economic benefits associated with thetransaction will flow to the Group. Typically the amount of revenue recognised is in proportion to the cost appropriate tothe stage of completion plus attributable profits, less amounts recognised in previous periods.Revenues from royalties are recognised on an accruals basis in accordance with the substance of the relevant agreement.Typically, such revenue is recognised on a straight line basis over the life of the agreement. Revenue from the assignmentof rights is recognised when the rights have been transferred under a non-cancellable contract where the licensee ispermitted to use those rights freely according to the scope of the licence agreement and where the Group (licensor) hasno remaining obligations.InventoryInventory is valued at the lower of cost and net realisable value.TaxationTax on the profit or loss for the year comprises current and deferred tax and is recognised in the income statement.Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantivelyenacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.Annual Report and Financial Statement 200739

Notes to the Financial Statements - continuedDeferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for taxation purposes. The following temporary differences are not providedfor: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxableprofit other than in a business combination, and differences relating to investments in subsidiaries to the extent that theywill probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected mannerof realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantivelyenacted at the balance sheet date.A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available in theimmediate future against which the asset can be utilised.Share-based paymentThe share option programme allows Group employees to acquire shares of the Company. The fair value of share optionsgranted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured atgrant date, using an appropriate pricing model taking into account the terms and conditions upon which the options weregranted, and is spread over the period during which the employees become unconditionally entitled to the options. Theamount recognised as an expense is adjusted to reflect the actual number of share options that vest except whereforfeiture is only due to share prices not achieving the threshold for vesting.For options granted before 7 November 2002 the recognition and measurement principles of IFRS 2 have not been appliedin accordance with the transitional provisions of IFRS 1.Non-recurring itemsNon-recurring items are events or transactions that fall outside of the normal trading activities of the Group and by virtueof the size or incidence have been disclosed separately in order to improve a reader’s understanding of the FinancialStatements.Critical accounting estimates and judgementsThe preparation of Financial Statements in conformity with IFRS requires the use of certain critical accounting estimates.It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. Theareas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant tothe consolidated Financial Statements are as follows:Intangible AssetsThe carrying value of our patent portfolio is assessed by an annual review of the commercial applicability of individualpatent cases for potential abandonment as well as an estimate of the useful lives of the patents.DebtorsThe balance sheet at 31 March 2007 includes £895k of receivables relating to services which had been delivered duringthe year but which, at the date of this report, is subject to overseas government departmental approval of the formalcontract.2. Segmental AnalysisIn the opinion of the directors, the Group operates in one primary segment being the business of the design anddevelopment of traction drive Infinitely Variable Transmission (IVT) systems. In the opinion of the directors, and giventhe early stage of commercialisation of the Group’s intellectual property, the Group does not currently operate in marketsor geographical segments that are materially distinguishable in terms of risks and returns.40Annual Report and Financial Statement 2007

3. RevenueThe Group has eliminated unrealised profits on sales made to its joint venture against gross revenues.Revenue31 March 2007 31 March 2006£000 £000Gross revenue 3,508 2,816Elimination of unrealised profit on licence sales to the Joint Venture (787) (560)Elimination of unrealised profit on services for the Joint Venture (30) (202)Revenue per the income statement 2,691 2,054Revenue from licence sales to the Joint Venture (JV) relates to the contribution of intellectual property to the JV in accordance with theJV agreement. The gross revenue has been eliminated so that only the element that relates to the other venture party remains.Annual Report and Financial Statement 200741

Notes to the Financial Statements - continued4. Operating LossOperating loss is stated after charging the following:31 March 2007 Restated31 March 2006£000 £000Amortisation of intangible assets - patents 154 194Abandonment of patents 122 29Profit on disposal of plant and equipment 15 11Depreciation 166 254Operating lease payments - land and buildings 280 118- office equipment 12 12Research and development costs expensed as incurred 4,453 5,504Auditors’ remunerationAudit services - audit (Group) 38 36- audit (Company) 5 11Non-audit services - tax services 8 19Administrative expensesGroupGroupRestated2007 2006Administrative expenses - Normal (1,786) (1,794)Non-recurring administrative expenses:Interim Finance Director (i) (176) -Restructuring activities - (330)Joint Venture set up - (179)Total administrative expenses (1,962) (2,303)(i) Additional employment costs during the absence of previous Finance Director due to illness.5. Directors' Remuneration31 March 2007 31 March 2006£000 £000Directors’ emoluments 682 851Payments connected to resignation of directors 160 139Company contributions to pension schemes 75 95917 1,085The Company does not consider it has any key management personnel other than the executive and non-executivedirectors.More detailed information concerning directors' remuneration, shareholdings, options and pension benefits is shown in thedirectors’ remuneration report on pages 25 to 30.42Annual Report and Financial Statement 2007

6. Employee Costs and NumbersThe aggregated payroll costs (including directors' emoluments) were as follows:Group31 March 2007 31 March 2006£000 £000Salaries 2,466 2,905Social security costs 314 409Pension costs 217 285Share based payment charge 389 4853,386 4,084The average number of persons employed (including executive and non-executive directors) by the Group during the yearis analysed by category below. The emoluments of the Company’s executive directors are paid by Torotrak (Development)Ltd and are not recharged.Group31 March 2007 31 March 2006NumberNumberDirectors - company 6 7- subsidiaries 2 2Engineers 37 60Administrative 16 1761 86The only employees of the Company are the non-executive directors. Details of their remuneration are given in thedirectors’ remuneration report.7. Defined Contribution Pension SchemeThe Group operates a defined contribution money purchase scheme for its staff which was set up on 1 January 1988. Theassets of the scheme are held separately from the Group in an independently administered fund with Standard Life astrustee. The scheme has been contracted into the State Earnings Related Pension Scheme since 6 April 1997. Pensioncharges are charged to the profit and loss account in respect of the period to which they relate. The charge to the profitand loss account was £217,000 (2006: £285,000). The scheme is available to all full-time employees and currently hasapproximately 53 members. Retirement age is between 60 and 75 years. The minimum contribution rates as a percentageof basic earnings calculated at 6 June each year are 7.5 per cent by Torotrak and 3.5 per cent by the relevant employee.The maximum pension on retirement is 1/30th of final earnings for each year of service up to 20 years. The part of apension bought with contributions paid after 5 April 1997 must increase by at least 5 per cent, in line with the cost ofliving. Part of the pension may be received as a tax-free cash sum. The maximum amount is the greater of (i) 3/80ths ofthe final salary for each year of service with a maximum of 40 years; and (ii) 2.25 times the initial pension amount.Contributions after 6 April 2006 will be eligible to a 25% tax-free cash sum. The scheme is not the subject of anyinvestigation by the Occupational Pension Regulatory Authority or subject to any litigation or claim before the PensionsOmbudsman and complies with the requirements of the Pensions Act 1995. There were no payments due at the year end.Executive directors, directors of subsidiaries and certain employees are entitled to have pension contributions payable bythe Group paid into a personal pension scheme. Of the total charge to the income statement of £217,000 (2006:£285,000) the charge in respect of personal schemes was £68,000 (2006: £86,000).8. Non-recurring ItemsNon–recurring items for the year ended 31 March 2007 represented an additional receipt relating to a further successfulclaim for a refund of costs going back to the Stock Exchange listing in 1998 amounting to £225,000. In the year ended31 March 2006 a sum of £557,000 was received. In addition, in the year ended 31 March 2006 a loss was recognised onthe disposal of the Leyland premises, which the Group now occupies under an operating lease. Non–recurringadministrative expenses are detailed in note 4 above.Annual Report and Financial Statement 200743

Notes to the Financial Statements - continued9. Net Finance Income31 March 2007 31 March 2006£000 £000Bank interest receivable 272 29510. Taxation on Loss on Ordinary Activities31 March 2007 31 March 2006£000 £000UK corporation taxCurrent tax for the year 363 461Prior year tax 75 (12)Total UK Corporation tax 438 449Overseas taxCurrent tax for the year (110) (15)Total tax 328 434Factors affecting the tax credit for the current period:The Finance Act 2000 introduced the Research and Development Tax Credit, which allows companies with qualifyingexpenditure to surrender their tax losses for cash. The effective tax rate for these credits is 24% compared to the currentUK corporation tax rate of 30%.The total tax credit for the period is lower (2006: lower) than the standard rate of corporation tax in the UK of 30% (2006:30%). The differences are as follows:31 March 2007 31 March 2006£000 £000Loss before taxation (3,227) (6,196)Expected current tax credit at 30% (2006:30%) 968 1,859Non taxable income/non tax deductible (expenses) 96 (83)Differences in tax rates on research and development related credits (48) (83)Movement in short term timing differences (651) (1,247)Overseas tax suffered (110) -Prior year adjustment 73 (12)Total tax credit 328 434Factors that may affect future tax credits / (charges):Future tax credits / (charges) will depend on the continued availability of the tax credit in respect of research anddevelopment expenditure. In addition, the Group has approximately £34.1m of tax losses and approximately £8m ofunclaimed capital allowances that may be offset against future taxable profits. If the tax credit in respect of research anddevelopment expenditure in respect of 2006/07 is not claimed the tax losses available for offset against future taxableprofits would be increased.11. Loss for the Financial PeriodNo income statement is presented for the Company as permitted by section 230(4) of the Companies Act 1985. TheCompany's loss for the year was £193,000 (2006: loss £412,000).44Annual Report and Financial Statement 2007

12. Loss per Ordinary ShareBasic loss per share is based on the loss after tax of £2,899,000 (2006: £5,762,000) and 119.3 million ordinary shares(2006: 117.5 million) being the weighted average number of shares in issue during the year.31 March 2007 31 March 2006NumberNumberShares issued and used in calculating basic and diluted loss per share 119,299,841 117,461,791In accordance with IAS 33 the number of shares used in the calculation excludes the weighted average number of sharesheld by the Employee Share Trust of 600,979 (2006: 1,247,988).13. Intangible Assets – Patents£000CostAt 1 April 2005 1,640Expenditure in year 317Abandoned in year (77)At 31 March 2006 1,880Expenditure in year 220Abandoned in year (356)At 31 March 2007 1,744AmortisationAt 1 April 2005 651Charge for the year 194Abandoned in year (48)At 31 March 2006 797Charge for the year 154Abandoned in year (234)At 31 March 2007 717Net book valueAt 31 March 2007 1,027At 31 March 2006 1,083At 1 April 2005 989Annual Report and Financial Statement 200745

Notes to the Financial Statements - continued14. Property, Plant and EquipmentFreehold land Leasehold Office Plant, Computer Test Machine Totaland Improvements furniture machinery equipment vehicles toolingbuildings and fittings and equipment Infinitrak£000 £000 £000 £000 £000 £000 £000 £000CostAt 1 April 2005 6,369 - 134 4,065 1,939 304 - 12,811Additions - - - 10 70 - - 80Disposals (5,548) - - (13) (290) (76) - (5,927)Transfers (821) 821 - - - - - -At 31 March 2006 - 821 134 4,062 1,719 228 - 6,964Additions - 90 - 6 73 - 300 469Disposals - - - (198) (12) (56) - (266)At 31 March 2007 - 911 134 3,870 1,780 172 300 7,167DepreciationAt 31 March 2005 845 - 134 3,985 1,812 304 - 7,080Charge for the year 107 - - 51 96 - - 254Disposals (776) - - (13) (290) (76) - (1,155)Transfers (176) 176 - - - - - -At 31 March 2006 - 176 134 4,023 1,618 228 - 6,179Charge for the year - 71 - 26 69 - - 166Disposals - - - (197) (12) (56) - (265)At 31 March 2007 - 247 134 3,852 1,675 172 - 6,080Net book valueAt 31 March 2007 - 664 - 18 105 - 300 1,087At 31 March 2006 - 645 - 39 101 - - 785At 1 April 2005 5,524 - - 80 127 - - 5,731Machine tooling represents Torotrak’s share of Infinitrak’s fixed assets.15. Investments in Subsidiary Undertakings31 March 2007 31 March 2006Company £000 £000CostAt 1 April 8,713 9,270Refund of de-merger costs - (557)At 31 March 8,713 8,713The refund of de-merger costs in 2006 related to a capital transaction at de-merger and accordingly the refund has been treated as areduction in investment.Details of subsidiary undertakings are set out in note 28.16. Jointly Controlled Entity (Joint Venture)The Group has decided to report the results of the joint venture using proportionate consolidation instead of equityaccounting.46Annual Report and Financial Statement 2007

As the joint venture moves into a greater degree of commercialisation, it is considered that proportionate consolidationbetter reflects the economic substance of the interest in Infinitrak and its impact on Group results and therefore providesmore relevant and reliable information to the readers of the accounts.As a result of the change to proportionate consolidation the Group's share of assets, liabilities, income, expense and cashflows of the jointly controlled entity are combined with items in the results on a line-by-line basis.The impact of the change in accounting policy on the 2006 and 2007 financial statements is detailed below. The netimpact of the change in accounting policy on reserves and net assets is £nil.Consolidated Income StatementFor the year ended 31 March 2007Equity Accounting Proportionate Equity Accounting Proportionateaccounting changes consolidation accounting changes consolidation2007 2007 2007 2006 2006 2006£000 £000 £000 £000 £000 £000Revenue 2,691 - 2,691 2,054 - 2,054Development expenses (4,196) (257) (4,453) (5,212) (292) (5,504)Administrative expenses (1,882) (80) (1,962) (2,243) (60) (2,303)Operating loss (3,387) (337) (3,724) (5,401) (352) (5,753)De-merger refund 225 - 225 557 - 557Loss on sale of property - - - (1,295) - (1,295)Finance income receivable 266 6 272 295 - 295Share of Joint Venture loss (331) (i) 331 - (352) (i) 352 -Loss before taxation (3,227) - (3,227) (6,196) - (6,196)Taxation 328 - 328 434 - 434Loss for the year (2,899) - (2,899) (5,762) - (5,762)Basic and diluted loss per share(pence) (2.43) - (2.43) (4.91) - (4.91)Notes: (i) This eliminates the previous equity accounting for the interest in the Joint Venture.Annual Report and Financial Statement 200747

Notes to the Financial Statements - continuedBalance SheetsAs at 31 March 2007Equity Accounting Proportionate Equity Accounting Proportionateaccounting changes consolidation accounting changes consolidation2007 2007 2007 2006 2006 2006£000 £000 £000 £000 £000 £000AssetsNon Current AssetsIntangible assets 1,027 - 1,027 1,083 - 1,083Property, plant and equipment 787 300 1,087 785 - 785Share of net assets of Joint Venture 434 (i) (434) - 6 (i) (6) -Total Non Current Assets 2,248 (134) 2,114 1,874 (6) 1,868Current AssetsInventories 46 - 46 - - -Trade and other receivables 1,326 - 1,326 779 197 976Current Tax 268 - 268 449 - 449Cash and cash equivalents 4,073 234 4,307 7,467 6 7,473Total Current Assets 5,713 234 5,947 8,695 203 8,898Total Assets 7,961 100 8,061 10,569 197 10,766Current LiabilitiesTrade and other payables (655) (100) (755) (737) (197) (934)Total Current Liabilities (655) (100) (755) (737) (197) (934)Net Assets 7,306 - 7,306 9,832 - 9,832Capital and ReservesIssued share capital 11,990 - 11,990 11,990 - 11,990Share premium 48,298 - 48,298 48,298 - 48,298Other reserves (262) - (262) (1,567) - (1,567)Retained earnings (52,720) - (52,720) (48,889) - (48,889)Total equity attributable to equityholders of the parent 7,306 - 7,306 9,832 - 9,832Notes: (i) This eliminates the previous equity accounting for the interest in the Joint Venture.48Annual Report and Financial Statement 2007

Cash Flow StatementsFor the year ended 31 March 2007Equity Accounting Proportionate Equity Accounting Proportionateaccounting changes consolidation accounting changes consolidation2007 2007 2007 2006 2006 2006£000 £000 £000 £000 £000 £000Cash flows from operating activitiesLoss for the year (2,899) - (2,899) (5,762) - (5,762)Adjustments for:Non cash income - sale of IP to Infinitrak - (787) (787) - (560) (560)Depreciation 166 - 166 254 - 254Amortisation 154 - 154 194 - 194Finance income receivable (266) (6) (272) (295) - (295)Profit on disposal of plant and equipment (15) - (15) (11) - (11)Loss on disposal of intangible assets 122 - 122 29 - 29Taxation (328) - (328) (434) (434)Loss on sale of property - - - 1,295 - 1,295Increase in inventories (46) - (46) - - -Increase in trade and other receivables (721) 197 (524) (378) (197) (575)Increase in net assets of Joint Venture (427) 427 - (6) 6 -(Increase)/decrease in trade and other payables (8) (96) (104) 165 197 362Cost of equity settles employee share schemesand bonuses 389 - 389 485 - 485Cash used in operations before tax (3,879) (265) (4,144) (4,464) (554) (5,018)Taxation received 629 - 629 749 - 749Net cash used in operating activities after tax (3,250) (265) (3,515) (3,715) (554) (4,269)Cash flows from investing activitiesAcquisition of property, plant and equipment (169) (300) (469) (144) - (144)Proceeds from sale of plant and equipment 16 - 16 11 - 11Net proceeds from sale of property - - - 3,440 - 3,440Acquisition of patents (235) - (235) (297) - (297)Finance income received 260 6 266 304 - 304Net cash used in investing activities (128) (294) (422) 3,314 - 3,314Cash flows from financing activitiesProceeds from the issue of share capital - - - 550 - 550Issue of share capital by Infinitrak - 805 805 - 560 560Net cash used in financing activities - 805 805 550 560 1,110Net (decrease)/increase in cash and cashequivalents (3,378) 246 (3,132) 149 6 155Cash and cash equivalents at start of period 7,467 6 7,473 7,318 - 7,318Exchange loss on currency translation (16) (18) (34) - - -Cash and cash equivalents at end of period 4,073 234 4,307 7,467 6 7,473Annual Report and Financial Statement 200749

Notes to the Financial Statements - continued17. InventoriesGroup Group Company Company31 March 2007 31 March 2006 31 March 2007 31 March 2006£000 £000 £000 £000Raw materials 46 - - -The Group values current project raw materials at cost price.18. Trade and Other ReceivablesGroup Group Company Company31 March 2007 31 March 2006 31 March 2007 31 March 2006£000 £000 £000 £000Amounts owed by subsidiary undertakings - - 60,460 57,574Trade receivables 123 381 - -Other receivables and accrued income 980 346 - -Prepayments 223 249 22 1991,326 976 60,482 57,773Amounts owed by subsidiary undertakings are recoverable on demand but are expected to be recovered after more thanone year.19. Trade and Other PayablesGroup Group Company Company31 March 2007 31 March 2006 31 March 2007 31 March 2006£000 £000 £000 £000Amounts owed to subsidiary undertakings - - 6,154 6,224Trade payables 132 182 18 5Overseas tax 116 15 - -Accruals and deferred income 507 737 125 141755 934 6,297 6,370Amounts owed to subsidiary undertakings are payable on demand but are expected to be paid after more than one year.20. Current Taxation ReceivableGroupGroup31 March 2007 31 March 2006£000 £000Taxation 268 449There is no taxation receivable in respect of the Company.50Annual Report and Financial Statement 2007

21. Deferred TaxationGroupGroup31 March 2007 31 March 2006£000 £000Accelerated allowances on patents and other IPR - 319Other - available losses - (260)- timing differences - (59)- -There is no deferred tax in respect of the Company.22. Share Capital31 March 2007 31 March 2006Number £000 £000AuthorisedOrdinary shares of 10p each 200,000,000 20,000 20,000Allotted and fully paidOrdinary shares of 10p each 119,900,820 11,990 11,990Details of ordinary shares under option under the Company’s employee share schemes are given on pages 53 and 54.23. Reconciliation of Share Capital and Reserves Attributable to Equity Holders of the ParentGroup and Group and Group CompanyCompany share Company accumulated accumulatedpremium account other reserve loss profit£000 £000 £000 £000At 31 March 2006 48,298 (1,567) (48,889) 7,274Loss for the period - - (2,899) (193)Currency transaction differences in JV - - (16) -Equity settled employee share schemes and bonuses - - - -Shares awarded at cost price - 1,305 (1,305) (1,305)Shares awarded at market value - - 389 389At 31 March 2007 48,298 (262) (52,720) 6,165Details of the share award by the Employee Share Trust are given on page 54.The other reserve represents 142,309 Ordinary shares of 10p each issued to the Employee Share Trust in 2001 at a priceof £1.84, which have been debited against reserves. As the Employee Share Trust distributes these shares to thebeneficiaries of the trust (principally the employees) an amount will be transferred between the other reserve and theGroup accumulated profit and loss reserve.Annual Report and Financial Statement 200751

Notes to the Financial Statements - continued24. Operating LeasesTotal amounts payable under non-cancellable operating lease rentals are as follows:31 March 2007 31 March 2006£000 £000Office furniture operating leases which expire between 1 and 5 years 15 27Property operating leases which expire after 5 years 2,414 2,694Total amounts receivable under non-cancellable operating lease rentals are as follows:31 March 2007 31 March 2006£000 £000Property operating leases that expire between 1 and 5 years 376 -25. Capital CommitmentsAt 31 March 2007 capital commitments totalled £nil (2006: £nil).26. Financial Instruments, Assets and LiabilitiesDetails of the Group's treasury objectives and policies can be found in the financial review on page 14.The Group’s main financial asset comprises cash and cash equivalents which are shown below:31 March 2007 31 March 2006£000 £000Cash 780 1,588Sterling cash deposits 3,293 5,879Cash held in the Joint Venture 234 64,307 7,473The sterling cash deposits comprise deposits placed on money markets at call and terms up to three months. Theweighted average interest rate on the deposits is 4.78% (2006: 4.60%) and the weighted average time for which the rateis fixed is 0.9 Months (2006: 1.9 months).The Group's only other financial assets / liabilities are trade receivables / trade payables arising from Group activities. TheGroup had no financial liabilities within the scope of IAS 39 as at 31 March 2007 (2006: £nil), apart from trade payables.The fair value of the Group's financial assets / liabilities are not materially different from their carrying values.The Group has not entered into any hedging transactions during the year and considers interest rate, credit and foreigncurrency risks not to be significant.In respect of interest earning financial assets the following table indicates their effective interest rates at the balance sheetdate.2007 2006Effective interest rate Effective interest rateCash and cash equivalents 5.45% 4.48%52Annual Report and Financial Statement 2007

27. Employee BenefitsAt 31 March 2007 the total number of shares over which options have been granted to directors and employees under allshare schemes was 5,661,514 representing 4.72% of the issued share capital of the Company.The Sharesave schemeThe Inland Revenue approved savings-related share option scheme (‘the Sharesave scheme’) is open to all employees,including executive directors, who enter into an approved savings contract for a period of three years. Inland Revenuerules limit the maximum amount that may be saved to £250 per month. Options are granted when the savings contractis commenced to acquire the number of shares that the total savings will buy when the savings contract expires. Undercurrent regulations tax free bonuses are paid at the end of the savings contract and, if the savings contract continues foranother two years, an additional tax free bonus is paid but no shares may be purchased.At 31 March 2007 41 employees held options to acquire 804,242 shares representing 0.67% of the allotted share capitalwith exercise dates and prices as follows:Grant date Number of employees Number of shares Exercise date Exercise priceJuly 2004 5 56,550 Sept 2007 £0.50Jan 2006 38 747,692 Feb 2009 £0.42Share option schemesAt 31 March 2007, employees held approved and unapproved options to acquire 2,646,325 shares under the shareoption schemes, subject to performance conditions, representing 2.21% of the issued share capital as follows:Grant Number of At 1 April Granted Exercised Cancelled At 31 March Exercise Expirydate employees 2006 during during during 2007 price datethe year the year the year NumberNumber Number Number Number (vi) £ (v)Unapproved schemeJuly 1998 20 621,299 - - 162,940 458,359 £3.40 July 2008Aug 1998 6 6,307 - - - 6,307 £2.625 Aug 2008June 1999 2 16,927 - - - 16,927 £1.565 June 2009Dec 1999 3 33,028 - - - 33,028 £2.69 Dec 2009July 2000 3 13,084 - - - 13,084 £3.765 July 2010Dec 2000 1 11,777 - - - 11,777 £1.29 Dec 2010July 2001 1 3,930 - - - 3,930 £1.69 July 2011Aug 2002 1 37,930 - - 28,229 9,701 £0.47 July 2012Jan 2003 1 393,659 - - - 393,659 £0.205 Jan 2013Mar 2003 1 121,452 - - - 121,452 £0.155 Mar 2013June 2004 1 397,956 - - 222,942 175,014 £0.635 June 2014June 2005 1 207,082 - - - 207,082 £0.625 June 2015Annual Report and Financial Statement 200753

Notes to the Financial Statements - continuedGrant Number of At 1 April Granted Exercised Cancelled At 31 March Exercise Expirydate employees 2006 during during during 2007 price datethe year the year the year NumberNumber Number Number Number (vi) £ (v)Approved schemeAug 1998 22 176,728 - - - 176,728 £2.625 Aug 2008Jun 1999 7 51,638 - - - 51,638 £1.565 Jun 2009Dec 1999 2 13,018 - - - 13,018 £2.69 Dec 2009July 2000 3 17,668 - - - 17,668 £3.765 July 2010Dec 2000 2 7,255 - - - 7,255 £1.29 Dec 2010July 2001 3 29,794 - - 1,220 28,574 £1.69 July 2011Aug 2002 39 542,551 - - 64,473 478,078 £0.47 Aug 2012Dec 2002 8 50,157 - - - 50,157 £0.25 Dec 2012Jan 2003 1 146,341 - - - 146,341 £0.205 Jan 2013Mar 2003 1 193,548 - - - 193,548 £0.155 Mar 2013Jun 2003 2 21,000 - - - 21,000 £0.27 Jun 2013Dec 2003 1 12,000 - - 12,000 - £0.80 Dec 2013Jun 2005 1 19,500 - - 7,500 12,000 £0.635 Jun 2015Long-term performance share plan (LTPSP)The Company has established a long-term incentive plan for the benefit of UK and non-UK resident driectors andemployees. Awards were made during the year totalling 2,210,947 shares, subject to performance conditions, (2006: nil)representing 1.84% of the allotted share capital of the Company.Grant date Number of employees Number of shares Exercise priceApproved schemeSep 2006 9 1,630,266 (i)Dec 2606 1 580,681 (i)(i) Each award over shares under the LTPSP is satisfied by the exercise of an option for the sum of £1.00. Dick Elsy and James Batcheloreach received one award of shares in the year and Jeremy Deering received two awards of shares in the year.Share incentive planAwards made under the plan enjoy tax-favoured treatment and encourage long-term employee share ownership. Duringthe year, an award of free shares was made under the plan which was performance related.At 31 March 2007, 85,375 shares (2006: 115,562) in the Company, with a market value of £40,126 (2006: £46,514) wereheld in trust on behalf of participating employees. The trustee is Torotrak (Trustee) Ltd, a subsidiary of Torotrak plc.The Torotrak Employee Share TrustThe Torotrak Employee Share Trust ('the EST') is a discretionary trust established for the benefit of past, present andfuture employees of the Group and their immediate families. The trustee is Bacon & Woodrow Trust Company (CI)Limited. The trustee can distribute shares at its discretion, on the recommendation of the board, either directly to abeneficiary or through the Company’s share schemes. All administrative costs associated with the EST are met by theCompany.On 29 November 2006 the trustees distributed 660,001 shares (before tax) to 53 employees of the Company includingthe executive directors, Dick Elsy, James Batchelor and Rebecca Joyce who were awarded 160,000, 90,000, 40,000 sharesrespectively. These awards are shown as share bonus in the Remuneration Report. The market price of the shares on 29November 2006 was £0.30 per share and the market value of the shares was £198,000.During the year the trustees distributed 30,000 shares to one employee. The market price of the shares on 28 April 2006was £0.40 per share and the market value of the shares distributed was £12,000. All of the distributions during the yearhave been charged to operating loss at market value in accordance with IFRS 2.54Annual Report and Financial Statement 2007

At 31 March 2007, the EST owned 142,309 Shares (2006: 849,301) in the Company with a nominal value of £0.01m(2006: £0.1m) and a market value of £0.06m (2006: £0.7m) representing 0.12% (2006: 0.71%) of the allotted sharecapital of the Company. Except as detailed above none of the shares held were under option or conditionally gifted. TheEST held £3k in cash deposits.Fair value of share options grantedThe fair value of services received in return for share options granted is measured by reference to the fair value of optionsgranted. The estimate of the fair value of the services received is based upon the Black Scoles model. The contractuallife of the option is used as an input into this model.Scheme Fair value at Share Exercise Expected Option Expected Risk freemeasurement price price volatility life dividend ratedateSAYE scheme 1 July 2004 0.37 0.50 0.50 124.16% 3 0 4.25%SAYE scheme 2 January 2006 0.21 0.42 0.42 73.72% 3 0 4.16%Approved share option December 2002 0.21 0.25 0.25 118.26% 5 0 4.25%Approved share option January 2003 0.17 0.21 0.21 118.26% 5 0 4.25%Approved share option March 2003 0.13 0.155 0.155 118.26% 5 0 4.25%Approved share option June 2003 0.22 0.27 0.27 118.26% 5 0 4.25%Approved share option December 2003 0.67 0.80 0.80 118.26% 5 0 4.25%Approved share option June 2004 0.53 0.635 0.635 118.26% 5 0 4.25%Unapproved share option January 2003 0.17 0.21 0.21 118.26% 5 0 4.25%Unapproved share option March 2003 0.13 0.155 0.155 118.26% 5 0 4.25%Unapproved share option June 2004 0.53 0.635 0.635 118.26% 5 0 4.25%Unapproved share option June 2005 0.53 0.63 0.63 124.16% 5 0 4.25%EMI share options September 2006 0.16 0.33 (i) 67.00% 3 0 5.25%EMI share options December 2006 0.16 0.49 (i) 67.00% 3 0 5.25%(i) Each award over shares under the LTPSP is satisfied by the exercise of an option for the sum of £1.00. Dick Elsy and James Batcheloreach received one award of shares in the year and Jeremy Deering received two awards of shares in the year.The forecast future volatility is based upon five year historical volatility. The volatility of the SAYE schemes are basedupon three year historical volatility. The volatility of the EMI scheme is based on a TechMark average.The costs charged to the income statement relating to share options granted were as follows:31 March 2007 31 March 2006£000 £000Share options granted in 2003 38 30Share options granted in 2004 67 85Share options granted in 2005 22 31Share options granted in 2006 54 -Total share option charge 181 146Share bonus 208 339Total charged to the Income Statement 389 485Annual Report and Financial Statement 200755

Notes to the Financial Statements - continued28. Subsidiary Undertakings and Joint VenturesThe Company had the following subsidiary undertakings and joint ventures as at 31 March 2007: The investments inTorotrak Group Ltd and Torotrak (Trustee) Ltd are held by the Company. The investments in all other subsidiaries areheld through Torotrak Group Ltd. The investment in the joint venture Infinitrak is held by Torotrak Inc.Country of Class of Principal activity Ownershipincorporation capital 2007 2006Torotrak Group Ltd UK Ordinary Intermediate holding company 100% 100%Torotrak (Holdings) Ltd UK Ordinary Commercialisation of Infinitely 100% 100%Variable Transmission technologyTorotrak (Development) Ltd UK Ordinary Research and development of 100% 100%Infinitely Variable TransmissionsTorotrak (Property) Ltd UK Ordinary Ownership of land and buildings 100% 100%and property rentalTorotrak (Trustee) Ltd UK Ordinary Trustee of shares held under the 100% 100%Share Incentive Plan (formerly AllEmployee Share Ownership Plan)Torotrak Inc US Ordinary Intermediate holding Company 100% 100%Infinitrak LLC US Ordinary Commercialisation of full-toroidal 50% 50%traction drive technology in the0-45 kW power range subject tolicence agreements.29. Related Party TransactionsThe Company’s transactions with and balances due (to) / from wholly owned subsidiaries are analysed below.Related Party Balance due (to)/from Working capital loans Expenses charged Balance due (to)/fromat 31 March 2006 provided/(received) by plc/(to plc) at 31 March 2007£000 £000 £000 £000Torotrak Group Ltd 2,680 - - 2,680Torotrak (Holdings) Ltd (2,798) - 2 (2,796)Torotrak (Development) Ltd 54,893 2,789 (82) 57,600Torotrak (Property) Ltd (3,428) - (10) (3,438)Torotrak Inc 179 - - 179The Company does not consider it has any key management personnel other than the executive and non-executivedirectors. The current and prior year emoluments of these directors are shown in note 5. There are no amounts due(to)/from these personnel at the start or end of the year.56Annual Report and Financial Statement 2007

Financial RecordFinancial RecordFor the years ended 31 March2007 2006(iii) 2005 (ii) 2004 (i) 2003 (i)£000 £000 £000 £000 £000Revenue 2,691 2,054 534 244 145Loss on ordinary activities before taxation (3,227) (6,196) (6,057) (7,025) (6,380)Loss on ordinary activities after taxation (2,899) (5,762) (5,271) (6,166) (5,580)retained for the financial yearBasic and diluted loss per share (2.43p) (4.91p) (4.55p) (5.36p) (4.88p)Total assets less current liabilities 7,306 9,832 14,560 19,358 25,360Equity shareholders' funds 7,306 9,832 14,560 19,358 25,360Net cash outflow from operating activities (3,515) (4,269) (4,645) (6,795) (6,270)Management of liquid resources (2,586) 229 4,381 5,248 5,221(Decrease)/increase in cash each year (808) (80) (30) 658 823Notes: (i) presented under UK GAAP (ii) as restated under IFRS (iii) as restated for proportionate consolidation of Infinitrak.Annual Report and Financial Statement 200757

Notice of Annual General MeetingTOROTRAK plcNotice of Annual General Meeting – Torotrak plc (the "Company")Notice is hereby given that the ninth Annual General Meeting of the Company will be held at the Best Western Leyland Hotel, Leyland Way,Leyland, PR 25 4JX on 19 July 2007 at 12 noon for the following purposes:1. To receive the Financial Statements and the reports of the directors and auditors for the year ended 31 March 2007 (resolution 1).2. To approve the remuneration report for the year ended 31 March 2007 (resolution 2).3. To approve the remuneration policy set out in the remuneration report (resolution 3).4. To re-elect as a director Mr John Grant who retires as a director in accordance with the Company’s Articles of Association (resolution 4).5. To re-elect as a director Mr Nick Barter who retires as a director in accordance with the Company’s Articles of Association (resolution 5).6. To re-elect as a director Mr David MacKay who retires as a director in accordance with the Company’s Articles of Association (resolution 6).7. To re-elect as a director Mr Jeremy Deering who, having been appointed in December 2006 by the directors upon the resignation of MrsRebecca Joyce, retires as a director in accordance with the Company’s Articles of Association (resolution 7).8. To re-appoint PricewaterhouseCoopers LLP as auditors of the Company, having been appointed during the financial year ended 31 March2007 upon the resignation of KPMG Audit plc (resolution 8).9. To authorise the directors to agree PricewaterhouseCoopers LLP’s remuneration (resolution 9).Special businessTo consider and, if thought fit, to pass the following resolutions of which resolution 10 will be proposed as an ordinary resolution and resolutions11, 12 and 13 will be proposed as special resolutions:10. That the directors be and they are hereby generally and unconditionally authorised to exercise powers of the Company to allot, grant optionsover, offer or otherwise deal with or dispose of relevant securities (within the meaning of section 80 of the Companies Act 1985) up to anamount equal to 33 per cent. of the aggregate nominal value of the Company's ordinary shares in issue at 4 June 2007, being £3,956,727provided that:(a) this authority shall expire on the earlier of the close of the next Annual General Meeting of the Company after passing of this resolution or15 months from the date of the resolution unless previously renewed, varied or revoked by the Company in general meeting save that beforesuch expiry the Company may make any offer or agreement which would or might require relevant securities of the Company to be allottedafter such expiry and the directors may allot relevant securities in pursuance of such offer or agreement as if the authority conferred by thisresolution had not expired; and(b) the authority conferred by this resolution shall be in substitution for all existing powers conferred on the directors pursuant to the said section80 (resolution 10).11. That, subject to the passing of resolution 10, the directors be and they are hereby empowered pursuant to section 95 of the Companies Act1985 to allot equity securities (within the meaning of section 94 of the said Act) for cash pursuant to the authority conferred by the foregoingresolution as if sub-section (1) of section 89 of the said Act did not apply to any such allotment provided that this power shall be limited:(a) to the allotment of equity securities in connection with an issue in favour of holders of ordinary shares in the capital of the Company inproportion as nearly as may be to existing holdings of ordinary shares in the Company, but subject to such exclusions or other arrangementsas the directors may deem necessary or desirable to deal with fractional entitlement or legal or practical problems under the laws of, or therequirements of any recognised regulatory body or any stock exchange in, any territory; and(b) to the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an amount equal to 10 per cent. of theaggregate nominal value of the ordinary shares in issue at 4 June 2007, being £1,199,008; and this authority shall expire on the earlier ofthe close of the next Annual General Meeting of the Company after passing of this resolution or 15 months from the date of this resolutionsave that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allottedafter such expiry and the directors may allot equity securities in pursuant of such an offer or agreement as if the power conferred herebyhad not expired (resolution 11).12. That, in accordance with regulation 52(4) of the Articles of Association, a general authority is hereby unconditionally given for the purposesof section 166 of the Companies Act 1985 for market purchases (as defined in section 163 of the said Act) by the Company of any of itsordinary shares subject to the following restrictions but otherwise unconditionally:58Annual Report and Financial Statement 2007

(a)the maximum aggregate number of ordinary shares to be so acquired shall not exceed 11,990,082 ordinary shares of 10p each representing10 per cent. of the ordinary shares in issue at 4 June 2007; and(b) ordinary shares may only be purchased at a price per share (exclusive of expenses) no higher than 5 per cent. above the average of themiddle market quotations of the ordinary shares in the capital of the Company, as derived from the London Stock Exchange Daily OfficialList, for the five business days preceding the date of purchase but the minimum price that may be paid for such shares shall be the nominalvalue of 10p per share (exclusive of expenses); such authority to expire at the earlier of the conclusion of the next Annual General Meetingof the Company or 15 months from the date of this resolution, but the Company may before such expiry make contracts for such purposeswhich would or might be executed wholly or partly after such expiry (resolution 12).13. That the Company may send or supply any document or information that is required or authorised to be sent or supplied to a member orany other person by the Company by a provision of the Companies Acts (as defined in section 2 of the Companies Act 2006 (the "2006Act")), or pursuant to the Company's Articles of Association or to any other rules or regulations to which the Company may be subject, bymaking it available on a website or by other electronic means, and the provisions of the 2006 Act which apply to sending or supplying adocument or information required or authorised to be sent or supplied by the Companies Acts (as defined in Section 2 of the 2006 Act) bymaking it available on a website or by other electronic means shall, the necessary changes having been made, also apply to sending orsupplying any document or information required or authorised to be sent by the Company's Articles of Association or any other rules orregulations to which the Company may be subject, by making it available on a website or by other electronic means, and this Resolutionshall supersede any provision in the Company's Articles of Association to the extent that it is inconsistent with this Resolution.Notes:a) Any member entitled to attend and vote at the Annual General Meeting may appoint one or more proxies to attend and, on a poll, to vote instead ofhim and such proxy need not be a member of the Company. To be effective, the instrument appointing a proxy (and the power of attorney or otherauthority (if any) under which it is signed or a notarially certified or office copy thereof) must be deposited at the Company's registrars, CapitaRegistrars, Proxy Processing Centre, Telford Road, Bicester OX26 4LD, not less than 48 hours before the time of holding the meeting or adjournedmeeting. Completion and return of the form of proxy will not preclude shareholders from attending the Annual General Meeting and voting in personif they wish to do so.b) Pursuant to Regulation 41 of the Uncertified Securities Regulations 2001, entitlement to attend and vote at the meeting or any adjourned meeting(and also for the purposes of calculation how many votes a person may cast), a person must be entered on the register of members of the Company48 hours before the meeting (or 48 hours before any adjourned meeting).c) There will be available for inspection at the registered office of the Company during normal business hours on any weekday, Saturdays and Sundaysexcepted, from the date of this notice until the date of the meeting, and at 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH from 9.00amon 19 July 2007 until the close of the meeting, and at the place of the meeting from 15 minutes prior to the opening of the meeting until the closeof the meeting, copies of all directors' service contracts where the unexpired portion of the term exceeds twelve months or the contract is notdeterminable by the Company within such period without the payment of compensation.d) It is intended that the chairmen of the audit, remuneration and nomination committees will be available to answer questions at the meeting, as willall other Board directors.e) Biographical details of the directors up for re-election in accordance with Resolutions 4 to 7 are set out in the Directors' Biographies section of theannual report and financial statements.f) In addition to the normal business of the meeting, additional resolutions are proposed to renew the director's general authority to allot un-issuedshares in the Company, allot shares for cash free from the pre-emption restrictions set out in the Companies Act 1985, to give the Company authorityto make market purchases for its shares and to authorise the Company to communicate with shareholders by electronic means. These resolutionsare explained below:Resolution 10This resolution, proposed as an ordinary resolution, renews the directors' authority to allot un-issued shares in Torotrak plc in accordance with section 80of the Companies Act 1985. The resolution authorises the directors to allot shares up to an aggregate nominal amount of £3,956,727 (being 33 per cent.of the issued ordinary share capital of the Company at 4 June 2007 (the date of this notice). The authority will expire at the conclusion of the next AnnualGeneral Meeting of the Company or on the day 15 months from the date of the passing of this resolution (whichever is the earlier). The directors haveno immediate intention to exercise this authority other than in connection with the group's employee share schemes.Resolution 11Under section 89 of the Companies Act 1985, equity securities in the Company may not be allotted for cash (otherwise than in respect of an employeeshare scheme) without first being offered pro rata to existing shareholders, unless the prior approval of the shareholders is given in a general meeting.The directors consider that it is in the best interests of the Company to renew the relevant authority given at the Annual General Meeting in 2006.Accordingly, a special resolution to this effect is proposed as Resolution 11 in the notice of the Annual General Meeting. The proposed authority will expireat the conclusion of the next Annual General Meeting of the Company or on the day 15 months from the date of the passing of this resolution (whicheveris the earlier) and permits the directors during this period to issue up to an aggregate nominal amount of £1,199,008 (representing 10 per cent. of theissued share capital at 4 January 2007) without first offering them to existing shareholders.The Pre-emption Group, which is an investor group that issues guidelines on the dis-application of pre-emption rights, states that a routine dis-applicationof pre-emption rights should not exceed 5 per cent. of the issued share capital. However, the Company believes that there are strong commercial reasonsto justify the 10 per cent. authority being sought. The allotment of shares in excess of 5 per cent. of the aggregate nominal value of the ordinary sharesin issue at 4 June 2007 would only be made in circumstances where:Annual Report and Financial Statement 200759

Notice of Annual General Meeting - continued(a) funding is required for working capital purposes in order to support the commercial exploitation of the Group’s technology ; and/or(b) as part of arrangements with other parties for closer commercial collaboration with the Company and/ or Torotrak Group for actual or potentialcommercial exploitation of the Group’s technology.Any discount at which equity is raised would not exceed a maximum of 5 per cent. of the middle of the best bid and offer prices for the Company’s sharesimmediately prior to the announcement of an issue or proposed issue.Resolution 12Under the terms of the Companies Act 1985 and its Articles of Association, the Company has power to purchase its own shares provided that this powerhas first been sanctioned by shareholders. Resolution 12, proposed as a special resolution, authorises the Company to make purchases of up to 11,990,082shares (representing 10 per cent. of the issued ordinary share capital of the Company as at the date of this notice) at a minimum price of 10p and amaximum price (exclusive of expenses) of not more than 5 per cent. above the average of the middle market quotations for the ordinary shares of theCompany as derived from the London Stock Exchange Daily Official List for the 5 business days prior to the purchase. The authority will expire at theconclusion of the next Annual General Meeting of the Company or on the day 15 months from the date of the passing of this resolution (whichever is theearlier). As at 4 June 2007 (being the last practicable date prior to publication of this notice) 5,661,514 options to subscribe for ordinary shares in theCompany, pursuant to the Share Option Schemes were outstanding. If exercised as at the date of this document, those options would represent 4.72 percent. of the issued share capital of the Company. If the full authority to buy back shares being sought is used, the same options would represent 5.25per cent. of the issued share capital of the Company.The fact that the directors are seeking this authority should not be taken as an indication that the Company will purchase its own shares at any particularprice or indeed at all and the directors would only consider making purchases if they believed that such purchases would be in the best interests ofshareholders generally, having regard to the effect on earnings per share. The directors have no immediate intention to exercise the proposed authorityto purchase shares.Formerly, shares purchased by a company were automatically cancelled. If the Company were to purchase any of its own shares pursuant to the authorityconferred by Resolution 12, the Company would consider at that time whether to hold those shares as treasury shares unless there were some exceptionaland unforeseen reasons at the time of purchase which meant that it were not in the interests of the Company to do so. The Companies (Acquisition ofOwn Shares) (Treasury Shares) Regulations 2003 (the "Regulations") permit a company to hold its own shares as treasury shares, to transfer them forthe purposes of employee share schemes, or to cancel those shares. No dividends would be paid on and no voting rights would attach to any shares whilstheld in treasury. The Company does not currently hold any treasury shares as defined by the Regulations.Resolution 13Resolution 13 is proposed as a special resolution to seek general authority from shareholders to send or supply documents or information to shareholdersin electronic form or by means of a website, so taking advantage of new company legislation regarding electronic communications with shareholders whichbecame effective on 20 January 2007.The new legislation provides that:• all Company notices, documents and other information (“Shareholder Information”) can now be provided to shareholders electronically, provided thatthey agree to this and provide an appropriate (e.g. email) address; and• if shareholders are invited to agree that the Company may send or supply Shareholder Information by means of a website, those who do not respondwithin 28 days are deemed to have agreed to the Company communicating Shareholder Information to them by means of a website.Where shareholders agree (or are deemed to have agreed) to communication of Shareholder Information by means of a website, shareholders must benotified of the availability of the relevant document or information on the website, the address of the website, the place on the website where it may beaccessed and how to access the document or information. This information will be provided to shareholders by post or by email (if they have provided uswith an email address for this purpose).The Company would like to take advantage of the new legislation as early as possible. Increased use of electronic communications will deliver savings tothe Company in terms of administration, printing and postage costs. It will also speed up the communication of information to shareholders in a convenientform, whilst at the same time delivering environmental benefits through reduced use of paper and of the energy required for its production anddistribution. Accordingly, Resolution 13 is being proposed to confer the necessary authority on the Company.You will find enclosed with this report and accompanying documents an invitation to use electronic means for the communication to you of ShareholderInformation. Please read this letter carefully. Action is required by you if you wish to continue to receive Shareholder Information in hardcopy form. Subject to the approval of Resolution 13, if you do not respond to this letter you will be deemed to have agreed to thecommunication of shareholder information by means of a website.By order of the board1 Aston WayJeremy DeeringLeylandCompany SecretaryLancashire4 June 2007 PR26 7UX60Annual Report and Financial Statement 2007

Financial CalendarAnnual general meeting 19 July 2007Interim results November 2007Preliminary results May 2008Company SecretaryJeremy DeeringBankersBarclays Bank plc54 Lombard Street, London EC3V 9EXStockbrokersSolicitorsArbuthnot Securities, Arbuthnot House,Hammonds20 Ropemaker Street, Trinity CourtLondon EC2Y 9AR16 John Dalton StreetManchester M60 8HSRegistrarCapita Registrars LimitedNorthern House, Woodsome Park,Fenay Bridge, Huddersfield HD8 0LARegistered office1 Aston Way, LeylandLancashire PR26 7UXAuditorsRegistered numberPricewaterhouseCoopers LLP 3580465101 Barbirolli Square, Lower Mosley StreetManchester M2 3PWThe Twin Toroidal Transmission – developed through Torotrak’s joint venture company - Infinitrak

Torotrak plc1 Aston WayLeylandLancashirePR26 7UXUnited KingdomTel: +44 (0) 1772 900900Fax: +44 (0) 1772 900929