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Annual Report & Accounts 2005

T o r o t r a k a n n u a l r e p o r t & a c c o u n t s 2 0 0 5 T o r o t r a k a n n u a l r e p o r t & a c c o u n t s 2 0 0 5 1

Torotrak is the world leader in the design and development of tractiondrive Infinitely Variable Transmission (IVT) systems with competitivebenefits for the automotive and off-highway industries. In automotive,IVT offers significant improvements in fuel economy, performance andsmoothness combined with innovative driving control features.In off-highway, IVT offers a cost effective and mechanically efficienttechnology that can be used across product ranges. Torotrak’s principalcommercial strategy is to generate royalty income from high volumemanufacture of IVT technology by our licensed customers.

1 Highlights

2 Chairman's statement

3 Chief executive's review

6 Finance director's review

8 Directors, secretary and advisors

10 Directors' report

19 Remuneration report

24 Auditors' report

25 Accounts 2005

28 Accounting policies

30 Notes to the accounts

39 Financial record

40 Notice of annual general meeting

contents

• Off-highway: strategy to broaden product and market portfolio increasingly successfulincluding a series of agreements, announced on 3 May 2005, with a new partner to exploitIVT technology.

• Automotive: latest prototype production representative compact IVT transmissions installedand under development, as planned, in target customer's vehicle.

• Revenues double again: trend should continue as significant financial and engineeringresources applied by our automotive customers are combined with our activities in off-highway.

• Continuing tight control of costs: down by further 12% this financial year: cash burn inline with expectations; £7.3m cash at end of year.

“We have established a new and wider customer base as we continue to execute ourstrategy to broaden the application of our IVT into the agriculture and constructionindustries. Supporting these new customers en route to market will, in turn, generateincreased revenues for Torotrak. We expect the earlier revenue and royalty streams from thissector to provide a sustainable business platform from which the longer-term shareholderreturns from high-volume automotive royalties can be delivered.

Although the automotive industry is moving at its own pace, our customers are increasingtheir resources in hardware, manpower and finance. This investment in the development ofthe IVT technology is at a level which represents a serious intent to deliver.”

highlights

2 T o r o t r a k a n n u a l r e p o r t & a c c o u n t s 2 0 0 5 T o r o t r a k a n n u a l r e p o r t & a c c o u n t s 2 0 0 5 3

Off-highwayIn line with our strategy to broaden our product and marketportfolio we have been targeting the high-volume, medium-sized vehicle sector of the off-highway industry. As a firstdemonstration of success, we were delighted to announce on3 May 2005 the signing of agreements with a new partner, toenable them to exploit our IVT technology.

This new partner is one of the major suppliers of transmissionand axle systems to the global off-highway vehiclemanufacturers. It is also part of a group of companies thatmanufactures agricultural vehicles. Another company in thesame group is the world's market leader in a specific type ofvehicle in this sector with over 50% market share.

Our new partner has purchased the non-exclusive right todevelop and manufacture the IVT technology for its own andthird party use as well as an option over global exclusivity forthe right to produce IVT technology for the specific type ofvehicle in which their group is the world's market leader. Theseagreements support our partner's strategic plan to expandtheir transmission business and maintain market leadership intheir vehicle range.

In financial terms, over the next two years these agreementsmean that Torotrak will receive in excess of £800k, includingexclusivity and licence option payments, with subsequentroyalties following start of production. The royalty ratessecured through these agreements meet our target for thissector. The series of agreements we have signed with this newpartner represent a joint commitment to take IVT toproduction.

In developing our strategy for the off-highway sector, we haverecognised that off-highway vehicle manufacturers approachtheir transmission sourcing in a similar way to the automotiveindustry: 80% of the transmissions used are built by the off-highway vehicle manufacturers themselves with 20%purchased from a group of established global transmissionsuppliers. Further, in off-highway, standardised componentsare integrated with the manufacturer's own parts to createbrand-specific features and benefits.

As a result, we have developed our business model to suit theneeds of this sector. Through the creation of new licenceagreements and the engineering development of off-highwayIVT systems, Torotrak is now able to offer the off-highwayvehicle manufacturers access to IVT technology in three ways:

• Developing and manufacturing their own completetransmission system.

• Buying a complete transmission from an establishedtransmission supplier.

• Using the cartridge, a self-contained variable drivestandardised unit developed by Torotrak, to build directlyinto their own transmission.

The agreements with our new transmission supplier partnerallow them to exploit our IVT technology either in fulltransmission or cartridge forms.

Another of our confirmed customers, a vehicle manufacturer inthis off-highway sector, has been developing its own completetransmission system and continues with its prototype trials.This customer has confirmed its intent to progress toproduction by making its final licence down payment on 31March 2005 but has yet to finalise its launch plans. Torotrakexpects to earn consultancy revenue in the current financialyear as we assist this customer with the remaining vehicleengineering prior to pilot production.

Further work with other major international off-highwaycompanies includes Torotrak's support for engineeringevaluations, transfer of our technology and negotiation oflegal and commercial agreements. We expect these activities tolead to further announcements in the current financial year.

This momentum in the medium sized off-highway vehiclesector, characterised by vehicles in the 50 - 110kW powerrange, has led to a new opportunity. Through growingawareness of our IVT technology, we have been introduced toa manufacturer of off-highway vehicles in the 5 – 50kW range.This is a high-volume market characterised by rapid productinnovation and this manufacturer has recognised thatsignificant competitive advantage can be gained by applyingIVT technology. We have already started negotiations to form apartnership to bring together our technology and know-howwith their low-cost manufacturing expertise to give bothparties the opportunity to exploit that advantage jointly.

Since I reported on the truck and bus sectors in 2004, aEuropean-based bus manufacturer has now committed to ademonstration bus equipped with IVT to show to theircustomers, the main fleet operators. The first stage of thisprogramme is underway. Also, a European truck manufacturer,new to Torotrak, has initiated a study to determine how IVT candeliver their fuel economy and emissions targets.

chief executive's review

Torotrak's principal strategy is to generate royalty incomefrom the high-volume manufacture of our IVT technology byour licensed customers, the vehicle and transmissionmanufacturers in the automotive and off-highway markets.Our business objectives are to maximise royalty income fromthe combination of production volume and royalty ratesappropriate for these markets.

Our prime target remains the high-volume automotivemarket as this offers the highest long-term shareholderreturn. In this industry, there is a highly structured processbetween the transmission manufacturers and the carcompanies for the launch of new technology, the pace ofwhich is dictated by the car companies. I am pleased to reporttangible signs of continuing commitment by the carcompanies and transmission manufacturers to the IVTtechnology as we support their progress to production.

As a result, our consulting revenues have again increased thisyear and combined with our activities in the off-highwaysector have led to a doubling of our revenue in line withexpectations.

In the last financial year, we have also continued toimplement our strategy to broaden the application of our IVTsystems into a more diverse product and customer base bytargeting the off-highway sector. This sector covers a rangeof products from forklift trucks to agricultural tractors andconstruction equipment. In general terms, the productdevelopment lead times in this sector are shorter than inhigh-volume automotive, providing Torotrak with the abilityto access revenue streams from production royalties earlier.

To secure this shorter-term position, we have engaged withthe majority of the global off-highway vehicle andtransmission manufacturers. With some we are at the level ofinitial enquiry; with others we are at the stage of securing thecontractual and legal framework to enable them to exploit IVTtechnology; and one vehicle manufacturer is already atprototype testing stage.

This broadening of Torotrak's business into off-highway hasstrengthened both our short and long-term positions. Aprimary business objective is to cover cash burn throughrevenues from both this sector and from consulting, andachieve a cash neutral position. We believe that this willresult in a sustainable business, with automotive royaltiesdelivering substantial shareholder return.

With our strategy firmly in place and proving successful andthe reshaping of the board over the last two years, I havedecided not to offer myself for re-election at the annualgeneral meeting on 21 July. Over the eight years that I havebeen chairman I have seen the group grow from the earlydays of technology development through the transition to acommercially focused organisation. One of the mostsatisfying rewards during this time has been the opportunityto work alongside such a skilled and enthusiastic team. I amgrateful to my colleagues past and present on the board, andto all of Torotrak's current and former employees, for theircontribution to making this business a clear world leader inIVT transmission technology.

I am delighted to report that John Grant, who is currentlychairman of the audit committee and has been our seniorindependent director since 1999, will be appointed chairman.In addition David MacKay, who joined the board in November2003 will be appointed the senior independent director andchairman of the audit committee.

David WallisChairman16 May 2005

chairman's statement


The industry view is that, in this decade, growth in complexhybrid vehicles will be led by Japan with a strong focus on theirhome market. In Europe, there is a commitment to the continueddevelopment of diesel engine technology. This Europeanapproach is delivering a similar level of fuel economy to that ofthe complex hybrid vehicles emerging from Japan, such as theToyota Prius. In North America, the largest market, there hasbeen no widespread adoption of either complex hybrids or dieseland it is not yet clear which approach the manufacturers and carbuyers will favour.

The success of the technically complex hybrid Prius is wellunderstood within the car industry but those following inToyota's footsteps find that it is difficult to establish a robustbusiness case for widespread and profitable application, due tothe high cost of this particular type of complex hybridtechnology.

This uncertain market outlook represents a two-fold opportunityfor Torotrak to assert itself as a comprehensive fuel economysolution that is relevant to car manufacturers. First, our workwith the car companies and transmission manufacturers hasshown that the IVT can deliver further fuel economy advantagewhen combined with the advancements in diesel and petrolengines. Second, the IVT provides a mechanism for improvingthe business case of hybrids themselves.

The combination of IVT with a cost effective parallel (simple)hybrid layout provides the principal benefits of a complex hybridbut at much lower cost. The car companies we are working withaccept the co-existence of the simple hybrid and IVTtechnologies. We are exploring the potential of this pragmaticsolution with one of the global car companies already involvedin the manufacture of hybrid vehicles.

Competition - off-highway In off-highway, currently only the very large, high-poweredpremium vehicles are served with commercially viable variabledrive technology. These are hydrostatic drives that are expensiveand mechanically inefficient. Some manufacturers have beentrying without success to produce a lower cost hydrostatic driveto penetrate their high-volume, medium-sized vehicle sector.Currently, this sector is served by less costly manual andpowershift fixed ratio transmissions. Torotrak's cost effectiveand efficient IVT provides variable drive technology atpowershift cost. As a result, the vehicle manufacturers continueto see IVT as an opportunity to broaden their use of variabledrives significantly.

TechnologyThe growing commitment to IVT from our customers inautomotive and off-highway has led to an increase in theamount of customer applications' work by Torotrak. Tocomplement this consultancy work, our internal researchactivity has been focusing on concepts to reduce further thecost structure of the IVT to reflect the continuing downwardcost pressure across the manufacturing industry.

We have continued research to reduce radically the parts countand cost of a key area within our core technology, namely thecontrol mechanism for the discs and rollers that make up thevariator. I am pleased to report that the low cost conceptsassociated with this work appear possible and are now beingfully proven and validated. We are confident that this work willhave real benefit in production applications in both automotiveand off-highway markets.

OutlookIn the last year, we have established a new and wider customerbase as we continue to execute our strategy to broaden theapplication of our IVT into the agriculture and constructionindustries. Supporting these new customers en route to marketwill, in turn, generate increased revenues for Torotrak. We expectthe earlier revenue and royalty streams from this sector toprovide a sustainable business platform from which the longer-term shareholder returns from high-volume automotiveroyalties can be delivered.

Although the automotive industry is moving at its own pace, ourcustomers are increasing their resources in hardware, manpowerand finance. This investment in the development of the IVTtechnology is at a level which, in my experience, represents aserious intent to deliver.

Dick ElsyChief executive16 May 2005

chief executive's review cont...

AutomotiveTorotrak continues to be bound by the strict confidentialityterms that it has entered into with its customers, which arecommon in the development of new products for theautomotive industry. Our obligations relating to confidentialityrestrict the extent to which I can disclose specific detailrelating to the progress that is being made. Against this wehave seen recent public recognition for IVT from one of ourtransmission manufacturer partners, ZF, who said:

"ZF recognises Torotrak as an innovative and highly competentpartner in Full Toroidal Traction Drive (IVT) technology. We willcontinue in partnership with Torotrak to explore the fullpotential of IVT to meet the demanding requirements of ourautomotive and off-highway customers.”

Endorsements of this kind help to signal the strength of thecontinuing business relationships which support our route tomarket with IVT.

I am also able to report that, since the November 2004 interimreport, the three-way project to develop a productionrepresentative compact automotive transmission with Equosand Koyo has moved into the next phase. Prototypetransmissions are being tested on rigs and are installed in thetarget customer's vehicle. The current work phase is nowfocused on calibrating and optimising the driveability and fueleconomy of the target vehicle by the parent company of Equos.This work is customer specific development, with Torotrak nowearning revenue on a consultancy basis.

I can also report that the technical evaluation between one ofour existing transmission manufacturer customers and a majorglobal car company, begun in 2004, has now concluded. Thecar company involved in the evaluation has recently askedTorotrak to undertake further development and modelling workto assess the performance of the new compact IVT in specificvehicles that they manufacture.

The transmission manufacturer that participated in theevaluation has completed its engineering work in support ofthe technical evaluation and is undertaking a detailed cost andbusiness case study. Since the beginning of 2005 we havereached the stage where the focus of this customer has movedon from the engineering work to detailed negotiations withTorotrak. As part of this process, James Batchelor, Torotrak'scommercial director and Chris Greenwood, head of intellectualproperty rights, are developing the commercial and legal

framework with this customer. The long-term nature of theagreements resulting from these discussions, and thecommitments and obligations contained in them, demandsnegotiation at the highest level in both companies. For us,these agreements represent the basis on which our futurerevenue depends and for the transmission manufacturer, theyrepresent the securing of their right to exploit our IVTtechnology.

In addition, in November 2004 I reported that formal requestshad been issued by another global car company fortransmission manufacturers to respond with their plans todevelop IVT. The outcome of this continuing competitive bid process, if successful, will be a formally approvedtechnology programme between the car company and itschosen partner.

Competition - automotiveThe benefits of Torotrak's IVT versus other variable drivetransmission systems in the automotive market remainunchallenged. With our close links to the transmissionmanufacturers and car companies, we are aware of their futuretransmission strategies and it is clear that there are noemerging technologies in this field to challenge Torotrak'sposition.

Our previously reported fuel economy advantage over fixedratio 6-speed automatic transmissions has been furthervalidated by a detailed study conducted for one of our carcompany customers. This study, begun earlier this year,demonstrates that an IVT transmission can achieve a greaterthan 12% improvement in fuel economy with a corresponding20% improvement in 0-100 mph acceleration when comparedto the current 6-speed equipped vehicle. This combination offuel economy and performance gain is described by the globalmarketing director of this car company as "outstanding – thisis just what we need - better fuel economy and performancewith no downside.”

This typifies the continuing requirement of the automotiveindustry to produce an appealing and competitive productagainst a backdrop of fuel economy pressure from high fuelprices and fiscal penalties.

The last financial year has seen increased car industry publicityaround complex hybrid vehicles with most majormanufacturers revealing vehicles and concepts at motor showsand even introducing limited volume production.

"ZF recognises Torotrak as an innovative and highly competent partner in Full Toroidal Traction Drive (IVT) technology. We will continue in partnership withTorotrak to explore the full potential of IVT to meet the demanding requirements

of our automotive and off-highway customers."

pleased to report that, subject to contract, we have agreedheads of terms to sell a freehold interest in the land andbuildings. This will result in a cash inflow of c.£3.5m duringthe current financial year. At the same time, we will alsoenter into a 20-year lease on the building at an open marketrental of £280k per annum. This increase in costs will beoffset by other planned savings and I do not expect anyoverall increase in costs as a result of this transaction.

Cash flow and treasuryThe net cash outflow (movement in net funds) for the yearof £4.4m (2004: £4.6m) is in line with expectations.

At 31 March 2005 our cash resources were £7.3m. Theincreasing trend in revenues apparent over the last few yearsshould continue in this current financial year as evidenced byrecent contract gains and down payments due from licenceagreements. This, together with the inflow of funds from thesale of the building and the tax credits above, means that Iexpect our net cash outflow to be very low in the currentfinancial year. Accordingly, the group remains well resourced.

We continue to maintain strong internal control over our cashbalances with regular reporting of balances and cash flowforecasts. Our investment policy remains conservative with theobjective of optimising interest receipts whilst maintainingflexibility. Balances at the year-end are invested in moneymarket managed funds.

During the year the group had no significant transactions inforeign currency and exposure to foreign exchange risks wasminimal. In the coming year a significant proportion of ourrevenue is expected to be received in foreign currency and thegroup will use appropriate hedging techniques to minimise theimpact of exchange rate risks.

Rebecca JoyceFinance director16 May 2005


RevenueOur customers in automotive and off-highway have continuedto demonstrate the value of the IVT technology and are nowcommitting financial as well as engineering resources. As aresult, I am pleased to report that, in line with expectations,revenue has more than doubled in this financial year from£244k in 2004 to £534k.

Licence down payments, which are received from each licenseeduring their evaluation and development of the IVT beforeproduction starts, vary considerably in amount and timing. In2005, licence income included the final down payment fromone off-highway customer, giving it full rights to go toproduction. In the new financial year, we expect to earncontract income from this customer from vehicle engineeringprior to pilot production.

At the half year, I reported that under a partnership with oneof our customers, who provided us with hardware andprototypes, Torotrak provided engineering time in lieu ofcontract income. That phase of work is now complete and sinceJanuary 2005 this customer has paid for applicationsengineering on a contract basis. This income is expected tocontinue in the current financial year.

As a result, the revenue trend started in 2003 should continuein the new financial year. This is underpinned by licence,exclusivity and option payments in excess of £800k due overthe next two years, under agreements announced on 3 May2005.

Development expenses and administration costsDevelopment expenses, which include the cost of technicalstaff and hardware for technology development, have reducedby 12% to £5,096k from £5,758k in 2004. Hardware andprototypes are now being supplied to us directly by ourlicensees, contributing to this reduction.

Internally, our development activity has been focused on theexpansion of our technology to meet the needs of our newcustomers in the off-highway market. Of the 12 newinventions we have secured in the last year, six are in off-highway and four of these specifically adapt our technologyfor specialist agricultural use. Our commitment to further costreductions in automotive has led to the creation of morepatentable concepts which maintain the long-termcompetitive position of IVT.

This continual innovation benefits us in two ways:

First, it underpins our long-term royalty income. By offeringour licensees this continuous stream of innovation wedemonstrate the value to them of our long-term commitmentto the development of the IVT technology.

Second, it extends our revenue earning life because ourlicences last as long as the longest patent. As of now, ourrevenue earning life extends to 2025.

Administration costs of £1,798k (2004: £2,033k) remain tightlycontrolled.

Loss and taxationInterest receipts of £418k (2004: £522k) have benefited fromincreasing interest rates in the UK, although rates remain at alow absolute level.

Research and Development (R&D) tax credit of £0.8m has beencredited in respect of the 2004/5 financial year. The 2003/4credit of £0.9m has been agreed with and received from theInland Revenue during the financial year.

The loss before taxation of £5.9m (2004: £7.0m) led to a lossper share of 4.46p (2004: 5.36p), in line with expectations dueto the reductions in both development and administrationcosts.

International Financial Reporting Standards In line with new reporting requirements the group has adoptedInternational Financial Reporting Standards (IFRS) to replaceUK standards with effect from 1 April 2005. We will reportunder those new standards for the first time this financial yearcommencing with the interim report in November 2005. I donot expect the adoption of IFRS to have a significant impact onour results.

Capital expenditure and fixed assetsCapital expenditure of £0.1m (2004: £0.1m) remains at a lowlevel. In the interim report in November I reported that, inline with our policy of sound financial management of theassets of our business, we would investigate the benefits ofa sale and lease back agreement on our freehold land andbuildings. Following this review, the board concluded that itwas in the interests of the group to utilise its assets to investin further development of our technology and we are

finance director's review

David WallisNon-executive chairman and chairmanof the nomination committee, aged 67.1, 2, 3

Following nearly 40 years of experiencein the automotive industry with GM,David Wallis joined Torotrak in 1997.He was previously the executivedirector of the Low Carbon VehiclePartnership (Low CVP), a governmentsponsored action and advisory group,to help maximise the potentialcompetitive advantage for UK businessfrom the shift to clean low carbonvehicle technology and fuels in the UK.He is also chairman of the ConsultancyBusiness Limited.

Dick ElsyChief executive, aged 45.

Dick Elsy joined Torotrak as chiefexecutive in January 2003. He wasmost recently product developmentdirector at Jaguar Cars Limited (part ofFord Motor Company). He previouslyspent 16 years at BMW AG/RoverGroup where he held various seniorengineering and commercial positions.In 1998 he won an award from theRoyal Academy of Engineering foroutstanding contribution to Britishengineering. He is a Chartered Engineerand a Fellow of the Institution ofMechanical Engineers.

David MacKayNon-executive director, chairman ofthe intellectual property committee,aged 48. 1, 2, 4

David MacKay was appointed as adirector of Torotrak in November 2003.He was formerly executive vice presidentand general counsel for ARM Holdingsplc, one of the most successful UKtechnology companies, whose corebusiness is founded upon the designand licensing of world-leadingtechnology. His principal responsibilitiesthere included negotiating and draftingtechnology-related agreements includingintellectual property licences, internationalmanufacturing and distributionagreements and joint venture agreements.

He is a non-executive director of NXTplc, the flat panel loudspeakertechnology licensing company, wherehe will assume the role of chairman on1 June 2005.

David PriceChief technical officer, aged 50.

David Price joined Torotrak as productengineering director in 1998 and wasappointed to the board as chieftechnical officer in 2002. He joinedTorotrak from Prodrive, the motorsportand automotive engineeringconsultancy, where he was generalmanager of the Engineering Divisionhaving previously spent 18 years atFord in Truck Transmission Engineeringand Powertrain Research. He is a Fellowof the Institution of MechanicalEngineers and a member of theInstitute of Directors.

James BatchelorCommercial director, aged 49.

James Batchelor joined Torotrak inMarch 2003. Immediately prior to thishe was commercial director ofTrafficmaster Automotive, thetelematics and traffic informationgroup. He spent six years at BMW AG,including four years for the parentcompany in Munich and latterly asproject director for Land Rover havingpreviously spent 13 years at RoverGroup. He has an MBA from CranfieldSchool of Management, is a CharteredEngineer and a Fellow of the Institutionof Mechanical Engineers.

Rebecca JoyceFinance director, aged 44.

Rebecca Joyce joined Torotrak in 1997having spent 12 years at Touche Ross and Grant Thornton where she became a partner in 1994. She joined Torotrak from L. Gardner Group plc, anengineering group in the automotiveand aerospace sectors, where she wasgroup company secretary. She is aFellow of the Chartered Association ofCertified Accountants.

John GrantNon-executive director, chairman of the audit committee and the seniorindependent non-executive director,aged 59. 1, 2, 3

John Grant was appointed as a directorof Torotrak in 1998. He is chairman ofa specialist engineering group, HasgoGroup Limited and the RoyalAutomobile Club Motor SportsAssociation Limited (the UK governingbody for motor sport). He was chiefexecutive of Ascot plc from 1997 to2000 and finance director of LucasIndustries plc (subsequently LucasVarity plc) from 1992 to 1996. Hepreviously spent 25 years at Ford,where he was a vice-president of Fordof Europe; director of corporatestrategy, Ford US and executive deputychairman of Jaguar. He is also a non-executive director of National GridTransco plc, Corac Group plc and theRoyal Automobile Club Limited.

Nick BarterNon-executive director, chairman of theremuneration committee, aged 64. 1, 2, 3

Nick Barter was appointed as a directorof Torotrak in November 2003, havingretired from Ford Motor Company in2002 after 22 years. He was mostrecently director of ProductDevelopment for Jaguar and LandRover, part of Ford’s PremierAutomotive Group. He was responsiblefor all aspects of planning, design,development, sign off and introductionof all Jaguar and Land Rover vehicles,leading a team of around 5,000engineers, designers and analysts.

Following his retirement from Ford, hewas appointed programme director ofthe government funded automotiveresearch programme, Foresight Vehicle,where he is now responsible forsponsoring cutting-edge technologiesfocused on developing more fuelefficient vehicles.

1 Member of the remuneration committee

2 Member of the audit committee

3 Member of the nomination committee

4 Member of the intellectual property committee

Company secretaryRebecca Joyce FCCA

StockbrokersEvolution Beeson Gregory,100 Wood Street,London EC2V 7AN

RegistrarCapita Registrars,Northern House, Woodsome Park,Fenay Bridge, Huddersfield HD8 0LA

AuditorsKPMG Audit Plc, Edward VII Quay,Navigation Way, Ashton-on-Ribble,Preston PR2 2YF

BankersBarclays Bank plc, 54 Lombard Street,London EC3V 9EX

SolicitorsHammonds, 2 Park Lane,Leeds LS3 1ES

Registered office1 Aston Way, Leyland,Lancashire PR26 7UX

Registered number3580465


directors, secretary and advisors


The boardThe board currently consists of the non-executive chairman, four executive directors and three other independent non-executivedirectors. Brief biographies of each of the directors appear on pages 8 and 9.

The non-executive directors provide a blend of experience and considerable knowledge to the board's deliberations. The non-executive directors are independent in character and judgement and there are no relationships or circumstances which are likely toaffect the judgement of any of them. John Grant and Nick Barter both have many years of experience at senior levels at Ford, oneof our licensees. The board considers that the knowledge and expertise of general automotive practice and car manufacturerpractice in particular continues to be of great importance to the group at this stage. Mr Grant has not been employed by Ford forover 10 years. Dr Barter left Ford in 2002, and prior to becoming a non-executive director of Torotrak, had no dealings with thegroup. Accordingly the board considers them both to be independent. Mr Grant is the board's senior independent non-executivedirector.

The board structure creates a balance of power such that no individual or small group of individuals can dominate the board'sdecisions. The company does not combine the role of chairman and chief executive. The chairman is responsible for the running ofthe board, and the non-executive directors have particular responsibility to ensure that the strategies proposed by the executivedirectors are fully discussed and critically examined. The executive directors are responsible for managing the group andimplementing board strategy and policy. The company secretary is responsible for ensuring that board procedures are followed andall directors have access to her advice. All directors are entitled to take independent professional advice at the company's expensein appropriate circumstances. The company maintains Directors and Officers insurance which provides, amongst other things,appropriate cover in respect of legal action against its directors, as recommended by the Combined Code.

The board met 10 times during the year which were all attended by all the directors with the exception of the May and Octobermeetings when David MacKay was absent, the September meeting when John Grant was unable to attend, the June meeting whenDavid Price and James Batchelor were absent on company business, the December meeting when Dick Elsy was absent on companybusiness and the January meeting when David Price was unable to attend. Additional meetings on any pertinent issues can beorganised as necessary during the year. In addition the chairman held a meeting with the non-executive directors without theexecutives present and the non-executive directors met on one occasion without the chairman being present to appraise thechairman's performance.

The board is responsible for setting the company's strategic aims and ensuring that the necessary financial and human resourcesare in place for it to meet its objectives. The board has a schedule of matters reserved for its decision which includes the approvalof major business matters, operating and capital expenditure budgets, major items of capital expenditure and patent abandonmentand ensuring high standards of corporate governance.

Before each meeting the board is supplied with information in a form and of a quality appropriate for it to discharge its dutiesconcerning the state of the business and its performance. The chairman ensures that all directors are properly briefed on issuesarising at board meetings. The ultimate responsibility for reviewing and approving the annual report and accounts and the interimreport, and for ensuring that they present a balanced assessment of the group's position, lies with the board. The board delegatesday-to-day responsibility for managing the group to the executive committee and has a number of other committees, details ofwhich are set out below.

During the year the board undertook a formal evaluation of its own performance, processes, committees, composition and skills bya process of self-evaluation. It is intended that this evaluation will be reviewed and updated by the board each year. For individualperformance evaluation, executive directors are assessed by the remuneration committee against annual performance objectives,the chairman has met with each non-executive director to review their performance and the senior non-executive director met withthe chairman. Recommendation for re-election of directors by the board is subject to continued effective performance. The grouphas a commitment to training and all directors are encouraged to attend suitable training courses.

Major shareholders are encouraged to meet and talk to the chairman, the senior independent director and other non-executivedirectors at any time. None of the company's major shareholders took advantage of the opportunity for dialogue during the year.

The directors present their report on the results and affairs of the group for the year ended 31 March 2005.

Business activity

The Torotrak group is the world leader in the design and development of traction drive Infinitely Variable Transmission (IVT) systemswith competitive benefits for the automotive and off-highway industries. In automotive, IVT offers significant improvements in fueleconomy, performance and smoothness combined with innovative driving control features. In off-highway, IVT offers a costeffective and mechanically efficient technology that can be used across product ranges. Torotrak's principal commercial strategy isto generate royalty income from high volume manufacture of IVT technology by our licensed customers.

Operating and financial reviews

The business is reviewed in the chairman's statement on page 2, chief executive's review on pages 3 to 5 and the finance director'sreview on pages 6 and 7. Information on likely future developments in the business is included in these reviews.

Dividend

The directors do not recommend the payment of a dividend.

Directors

The directors who held office during the year are set out below:

David WallisRichard ElsyRebecca JoyceDavid PriceJames BatchelorJohn GrantNicolas BarterDavid MacKay

Biographical details of the directors in office at the year end are shown on pages 8 and 9.

Directors' remuneration, service contracts and shareholdings

Information on directors' remuneration, contracts and beneficial interests in the shares of the company are included in theremuneration report on pages 19 to 22.

Corporate governance

The board is committed to the highest standards of corporate governance. All of the directors are equally responsible toshareholders for the management of the group and the protection of its assets. As such, the board is ultimately responsible forensuring that the group maintains adequate systems of internal control and reviewing its effectiveness. The internal control systemsare designed to meet the group's particular needs and the risks to which it is exposed. The systems are designed to manage ratherthan eliminate risk and can only provide reasonable but not absolute assurance against material mis-statement or loss.

Combined CodeThe company complies, and complied throughout the year ended 31 March 2005, with the relevant provisions of the CombinedCode, including the recommendations of 'Internal Control: Guidance for Directors on the Combined Code' (the Turnbull guidance).

directors' report


Major commercial, technological and financial risks are formally assessed during the annual business planning process which takesplace in the last quarter of the financial year.

The board monitors exposure to key business risks and progress towards achieving strategic aims. The board reviews the annualbudgets and the capital expenditure programmes of the trading subsidiaries and considers environmental, health and safety andemployee issues.

There is a comprehensive system of financial reporting. The annual budget, which is derived from the business plan, is reviewed indetail and approved by the board. The finance director presents a report to the board each month detailing the results of eachprincipal business unit, variances against budget and other performance data.

The principal system for evaluating and managing risk is the regular meeting of the executive committee. The executive committeeconsists of the executive directors and senior management of subsidiaries. The purpose of the meeting is to monitor and controloperations. Performance is reviewed, risks identified, financial and other implications assessed and corrective actions agreed asnecessary. Each month the chief executive presents the outputs of this weekly meeting to the board who review matters arising.

Given the group's small size and the high degree of centralisation in the way the business is run, the board does not consider thatit would be practicable to have its own financial internal audit function at present. Instead it has chosen to date to contract outsuch activities on a project by project basis. The group does however have an internal review function that carries out activitiesdesigned to improve processes within the group. These include reviewing progress on engineering projects to ensure that these arecarried out to the highest industry standards, establishing improved information flows, and developing better project managementsystems.

Key risks facing the group

TechnicalMany of the risks identified at time of flotation in 1998 have been successfully eliminated. However, whilst solutions to these issueshave been developed and work continues to optimise performance there can be no guarantee that further technical issues will notarise in the future.

License agreementsThe group's long-term commercial success is dependent on successfully exploiting existing and future license agreements togenerate revenue from license fees and royalty payments. As the group does not intend to manufacture the Torotrak IVT in volume,the group is dependent on its licensees manufacturing or procuring the IVT to incorporate into their products in sufficient volumeto satisfy initial demand and thereafter to attain market share successfully.

Patent protectionOur success will also depend on our continuing ability to establish, protect and enforce our proprietary rights relating to the IVT.Patents that have been granted or applied for currently expire during the period up to 2025. We also rely on know-how and softwareto maintain our technological lead although protection of this type of intellectual property is more difficult to enforce than patents.

Our patents or applications may become involved in opposition or revocation proceedings instituted by third parties or we may findit necessary to take action against infringers ourselves. If such proceedings were initiated the defence of our rights could involvesubstantial costs and the outcome cannot be predicted with certainty.

CompetitionIt is possible that competitors may develop more effective technologies or produce superior products. An assessment of otheremerging technologies is given in the chief executive's review on pages 3 to 5.

Board committeesThe board has delegated specific responsibilities to four committees. Each committee is chaired by a non-executive director andoperates within defined terms of reference set by the board.

Audit committee – The committee has responsibility for, among other things, monitoring the integrity of the financial statementsof the company and any formal announcements relating to the company's financial performance, and for reviewing any significantfinancial reporting judgements contained in them; reviewing the company's internal controls and risk management systems; makingrecommendations to the board in relation to the appointment, remuneration and resignation or dismissal of the group's externalauditors; reviewing and monitoring the external auditors' independence and objectivity, including the nature and extent of the non-audit services provided by their affiliated firms, and the effectiveness of the audit process; and considering compliance with legalrequirements, accounting standards and the Listing Rules of the Financial Services Authority.

The committee has discussed with the external auditors their independence and has received and reviewed written disclosures fromthem as required by the Auditing Standards Board's Statement of Auditing Standard No 610, 'Communication of matters to thosecharged with governance'. To avoid the possibility of the auditors objectivity and independence being compromised, the group's taxconsulting work is carried out by the auditors only in cases where they are best suited to perform the work, for example, taxcompliance work. The group does not normally award general consulting work to the auditors.

The committee is chaired by John Grant and its members are David Wallis, Nick Barter and David MacKay. Both John Grant and DavidMacKay have recent and relevant experience of the financial and governance matters affecting listed companies. The committeemet twice during the year. All members were present at each meeting, with the exception of David MacKay for the May meeting.The external auditors and the finance director attend all meetings to ensure that all of the information required by the auditcommittee is available to enable it to operate effectively. The external auditors have the opportunity to meet with the committeewithout the executive directors being present as required.

Remuneration committee – A description of the composition, responsibility and operation of the remuneration committee is set outin the remuneration report on pages 19 to 22.

Nomination committee – The committee leads the process for board appointments and makes recommendations to the board onproposals for the appointment of executive and non-executive directors and on board composition and balance. There were no newappointments in the year.

Intellectual Property committee – The committee advises and informs the board on Intellectual Property matters. It assists theexecutive directors with the evolution and implementation of patenting strategies and optimising protection under licensingarrangements. The committee is chaired by David MacKay and its members are the executive directors and Chris Greenwood, headof IPR.

Risk management

There is a continuous process for identifying, evaluating and managing the significant risks the group faces, which has been in placefor the year under review and up to the date of approval of the financial statements. This process is regularly reviewed by the boardand accords with the Turnbull guidance.

There is a strong control framework within which the group operates. This contains the following key elements:

• A strong control conscious culture across all areas of operation.• An organisational structure with clearly defined lines of responsibility, delegation of authority and reporting requirements.• Defined expenditure authorisation limits.• Clear segregation of duties.

directors' report cont...


At 31 March 2005, 89 employees and former employees held options to acquire 2,827,701 shares representing 2.41% of the allottedshare capital with exercise dates and prices as follows:

Grant date Number of employees Number of shares Exercise date Exercise price

July 2002 71 2,615,073 Sept 2005 £0.21July 2004 18 212,628 Sept 2007 £0.50

The share option schemesThe company operates two share schemes, an Inland Revenue approved share option scheme ('the approved scheme') and anunapproved scheme. Except as described below the rules of both schemes are substantially the same.

The schemes are open to all employees, including executive directors. The unapproved scheme is open to both UK and non-UKresident employees and executive directors. The grant of options is at the discretion of the directors upon recommendation by theremuneration committee. The annual exercise price of shares under option granted to an individual under both schemes cannotnormally exceed two times the employee's salary. The latest date for exercise of options under both schemes is ten years from thedate of grant. The earliest date is dependent on achievement of the performance 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.

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 test will be performed on the third, fourth and fifth anniversaries.

The performance criteria for the options granted in 2003 and 2004 are that:

• an average closing mid-share price over a period of 30 days leading up to the performance testing date of 250p for one thirdof the options to vest;

• confirmation of a production decision by a major car manufacturer and/or Tier 1 transmission supplier for one third of theoptions to vest;

• market launch of the Torotrak IVT in series production vehicles for the final third of the options to vest.

CommercialThe successful take-up of Torotrak's IVT is dependent on its licensees' ability to produce the Torotrak IVT at an acceptable cost ofproduction and invest in mass production capability. However, the production process utilises existing materials and manufacturingprocesses without the need for high precision tolerances beyond what is required for normal automotive standards for similar parts,the components are capable of being sourced from existing automotive suppliers and the variator itself utilises existing bearingtechnology.

Relations with shareholders

The group welcomes dialogue with its shareholders and communicates with them through its interim and annual reports; throughinformation placed on its website and through updates to the market of any material developments in the business in a timelyfashion and in accordance with the relevant rules.

The board makes considerable efforts to establish and maintain good relationships with shareholders by means of an active investorrelations programme. The chief executive and finance director meet regularly with institutional shareholders and analysts, forexample, after the publication of the annual and interim results and undertake a 15-month rolling programme of presentations toprivate investor intermediaries all over the country. The group's website provides accurate and timely information for all investorsincluding comprehensive information about the group.

The board seeks to develop an understanding of the views of major shareholders through any direct contact that may be initiatedby shareholders and reports from the company's advisors who obtain feedback from institutional shareholders, analysts andintermediaries following the meetings with the chief executive and finance director.

All shareholders are welcomed to the annual general meeting (agm), notice of which is on page 40, at which a business and financialpresentation is given, with several hours set aside for shareholders' questions, both formally and informally, with members of theboard together with senior management and employees. The board views this as the main opportunity for the directors to engagepersonally with a wide range of shareholders. The agm presentation is also put on the website for shareholders who could not attendthe agm.

The company's interim and annual reports are available from the company's head office free of charge. They are also available onthe company website (www.torotrak.com). Shareholders may register to receive notification of the group's announcements via theinternet.

Going concern

After making enquiries, the directors have a reasonable expectation that the group has adequate resources to continue inoperational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparingthe financial statements.

Share option schemes

At 31 March 2005 the total number of shares over which options have been granted to directors and employees under all shareschemes was 6,712,404, representing 5.72% of the allotted share capital of the company.

The Sharesave schemeThe Inland Revenue approved savings-related share option scheme ('the Sharesave scheme') is open to all employees, includingexecutive directors, who enter into an approved savings contract for a period of three or five years. Inland Revenue rules limit themaximum amount that may be saved to £250 per month. Options are granted when the savings contract is commenced, to acquirethe number of shares that the total savings will buy when the savings contract expires. Under current regulations tax free bonusesare paid at the end of the savings contract and, if the savings contract continues for another two years, an additional tax free bonusis paid but no shares may be purchased.



On 28 July 2004 the trustees distributed 538,500 shares (before tax) to 90 employees of the company including the executivedirectors, Dick Elsy, Rebecca Joyce, James Batchelor and David Price who were awarded 86,000; 25,000; 35,000 and 30,000 sharesrespectively. These awards are shown as share bonus in the remuneration report. The market price of the shares on 28 July 2004was £0.61 per share and the market value of the shares distributed was £328,485.

During the year the trustees distributed 17,000 shares as part of the arrangements for compensating directors and employees ofthe group who retained options in BTG, the former parent company, under the BTG employee share schemes for the diminution invalue of those options following the demerger in 1998.

All of the distributions during the year have been charged to operating loss at market value in accordance with UITF 17.

At 31 March 2005 the EST owned 1,468,481 shares (2004: 2,069,079) in the company with a nominal value of £0.1m (2004: £0.2m)and a market value of £0.7m (2004: £1.5m) representing 1.25% (2004: 1.76%) of the allotted share capital of the company. None ofthe shares held were under option or conditionally gifted.

Payment to creditors

The group does not follow any code or standard on payment practice but it is group policy to pay all of its suppliers at the end ofthe month following the month of invoice. Terms of payment are stipulated in the group's terms and conditions of purchase.

At 31 March 2005 the number of days purchases outstanding to trade creditors was 30 for the group and 38 for the company (2004: 7 days and 2 days respectively).

Employment policies and donations

As an intellectual property group we are more reliant than most on the creativity, drive and goodwill of our employees. Culture andvalues are at the heart of our business plan and we seek to establish a partnership, consulting with and involving all levels ofemployee, valuing their ideas and suggestions. Regular team briefing sessions and a consultation committee combined with acomprehensive suggestion scheme, personal development plans and the performance assessment system encourage open channelsof communication.

Employee share ownership is actively encouraged and the group has established five schemes to incentivise, reward and motivateall employees, details of which are given on pages 14 to 16.

The group has a strong demand for highly qualified staff and, as such, we strive for equal opportunity and a non-discriminatorywork environment for all present and future employees. Disability is not seen to be an inhibitor to employment or careerdevelopment within the group.

We provide clean, healthy and safe working conditions. As a group, we pride ourselves on providing our employees with a veryattractive working environment. We encourage proactive participation by all our employees in identifying and controlling hazards.The health and safety performance is monitored by the board and we are pleased to report that we had no RIDDOR reportableaccidents during the year.

Torotrak is also involved in a number of charitable causes and the staff consultation committee has authority to donate sums ofmoney at their discretion from an amount set aside by the group. In addition, employees are involved in a number of fund raisingactivities. Charitable donations by the group during the year amounted to £1,000 (2004: £1,000). No political donations were made(2004: nil). The group and the employees were pleased to support local and national charities during the year including McMillanCancer; The Multiple Sclerosis Society, Leyland; Preston Women's Refuge and the National Deaf Children Society.

At 31 March 2005, employees held options to acquire 3,884,703 shares under the share option schemes, representing 3.31% of theallotted share capital as follows:

Grant date Number of employees Number of shares Exercise price

Unapproved schemeJuly 1998 25 703,586 £3.40Aug 1998 6 6,307 £2.625

June 1999 2 16,927 £1.565Dec 1999 6 61,453 £2.69July 2000 7 31,676 £3.765Dec 2000 2 15,346 £1.29July 2001 2 7,454 £1.69Aug 2002 2 37,930 £0.47Jan 2003 1 393,659 £0.205Mar 2003 1 121,452 £0.155

June 2004 3 650,898 £0.635

Approved schemeAug 1998 32 251,222 £2.625Jun 1999 16 119,348 £1.565Dec 1999 7 54,522 £2.69July 2000 9 55,027 £3.765Dec 2000 6 46,962 £1.29July 2001 5 31,894 £1.69Aug 2002 73 769,683 £0.47Dec 2002 11 83,938 £0.25Jan 2003 1 146,341 £0.205Mar 2003 1 193,548 £0.155

June 2003 4 36,000 £0.27Dec 2003 4 30,000 £0.80

June 2004 2 19,500 £0.635

Long-term incentive planThe company has established a long-term incentive plan ('LTIP') for the benefit of UK and non-UK resident directors and employees.At 31 March 2005 no awards have been made under the scheme.

Share Incentive Plan Awards made under the plan enjoy tax-favoured treatment and encourage long-term employee share ownership. During the year,an award of free shares was made under the plan which was performance related.

At 31 March 2005, 144,439 shares (2004: 140,225) in the company, with a market value of £69,331 (2004: £100,962) were held intrust on behalf of participating employees. The trustee is Torotrak (Trustee) Ltd, a subsidiary of Torotrak plc.

The Torotrak Employee Share Trust

The Torotrak Employee Share Trust ('the EST') is a discretionary trust established for the benefit of past, present and futureemployees of the group and their immediate families. The trustee is Bacon & Woodrow Trust Company (CI) Limited. The trustee candistribute shares at its discretion, on the recommendation of the board, either directly to a beneficiary or through the company'sshare schemes. All administrative costs associated with the EST are met by the company.


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This report complies with the Directors' Remuneration Report Regulations 2002, the Listing Rules of the Financial Services Authorityand the Combined Code. A resolution inviting shareholders to approve the report will be tabled at the annual general meeting on21 July 2005.

Remuneration committee

The remuneration committee is responsible for determining, within agreed terms of reference, the policy for the remuneration ofthe executive directors. The committee is also responsible for determining the individual remuneration packages for executivedirectors including basic salary and annual bonuses, the level and terms of grants of options and awards and the terms of anyperformance conditions to apply to the exercise of such options and awards, pension rights and other benefits. Where theremuneration committee considers it appropriate, the committee will also make recommendations in relation to the remunerationof senior management.

The remuneration committee consists exclusively of independent non-executive directors. The chairman of the committee is NickBarter and its other members are David Wallis, John Grant and David MacKay. The committee met three times during the year andall meetings were attended by all the committee members, with the exception of the May meeting which David MacKay was unableto attend. Given their diverse experience the independent non-executive directors are able to offer a balanced view with respect toremuneration issues for the group. The committee has access to professional advice from external advisers and during the year drewon data provided by New Bridge Street Consultants, Incomes Data Services and Independent Remuneration Solutions, and internalexpertise. The committee consults with the chief executive on the remuneration of the other executive directors and directors ofsubsidiaries. The chief executive and the finance director normally attend part of the remuneration committee meetings. No directoris involved in deciding his or her own remuneration.

Remuneration policy

The objective of the remuneration policy is to provide remuneration in a form and amount that will attract, retain, motivate andreward high calibre directors and senior management. The committee believes that base salary and benefits for executive directorsshould represent a fair return for employment, but that over time a substantial proportion of the total reward should be derivedfrom performance-related elements of the remuneration package. The performance-related elements of the executive directors'packages seek to align their interests closely with those of shareholders and provide incentives for performance. They are alsodesigned to be long term in their nature.

Performance chart

The chart below compares the total cumulative shareholder return of Torotrak plc with the performance of the FTSE Techmark 100index over the last five years. The committee is of the view that the FTSE Techmark 100 index constitutes a relevant broad equitymarket index.

Environment

Torotrak is an intellectual property group. Our principal end products are patents, design rules, models, know-how and the transferof our knowledge to our licensees.

Our premises are composed entirely of offices and test facilities since we have no manufacturing capability. 'Resources' principallycomprise employees and equipment, while 'production processes' are largely cerebral involving the skill, knowledge and ingenuityof our employees. They do not involve any hazardous substances or complex waste. Our operations are therefore 'low impact' inenvironmental terms.

Our activities are focused on the development of the Torotrak IVT, which offers very significant improvements in fuel economy andemissions. The IVT is principally aimed at passenger cars, one of the world's major sources of environmental concern.

Our environmental policy is published on our website. The group does not encourage the provision of company cars, which numberonly two. The provision of cycle sheds, showers and changing facilities encourages greener commuting and telephone and videoconferencing are used extensively, providing alternatives to international travel. Wherever possible the group continues to adoptinitiatives to lessen our environmental impact even further.

Substantial shareholdings

At 31 March 2005 the company had been notified of material interests held, directly or indirectly, in 3% or more of the company'sallotted share capital by Henderson Investors Limited (8.60%) and Scottish Widows Investment Partnership Limited (3.17%).

Annual general meeting

The seventh annual general meeting of the company will be held at 12 noon on Thursday 21 July 2005 at Best Western LeylandHotel, Leyland Way, Leyland, Lancashire, PR25 4JX. The notice of the annual general meeting is on page 40 of this report.

The company will convey the results of proxy votes cast at the annual general meeting. Shareholders are invited to submit writtenquestions in advance of the meeting. Questions should be sent to the Company Secretary, Torotrak plc, 1 Aston Way, Leyland,Lancashire, PR26 7UX.

The auditors, KPMG Audit Plc, have indicated their willingness to continue in office and in accordance with S284 Companies Act1985. Resolution 4 proposes to re-appoint them and authorises the directors to agree its remuneration.

Resolution 5, which is an ordinary resolution, renews the authority given to the directors at last year’s annual general meeting toissue up to 1/3 of the current issued share capital.

Resolution 6, which is a special resolution, renews the authority given to the directors at last year’s annual general meeting to allotup to 5 percent of the current issued share capital for cash without first being required to offer such securities to existingshareholders.

Resolution 7, which is a special resolution, renews the authority given to the directors at last year’s annual general meeting andenables the company to purchase up to 33 percent of the current issued share capital.

Resolutions 5 to 7 relate to the issue, allotment and purchase of the company's shares. The directors have no present intention toissue shares in the company other than pursuant to the terms of Torotrak's share option schemes.

By order of the board

Rebecca Joyce 1 Aston Way,Secretary Leyland,16 May 2005 Lancashire,

PR26 7UX

directors' report cont... remuneration report

Directors’ remuneration (audited information)Total Total(excl (incl

Salary and Share pension) Company pension) Totalbenefits Fees bonus 2005 pension 2005 2004

£000 £000 £000 £000 £000 £000 £000

Executive directorsDick Elsy 229 - 52 281 33 314 264 Rebecca Joyce 137 - 15 152 20 172 153 David Price 124 - 18 142 18 160 135James Batchelor 122 - 21 143 18 161 130

Non-executive directorsDavid Wallis - 45 - 45 - 45 45 Malcolm Coster note (i) - - - - - - 11 John Grant - 20 - 20 - 20 19 Ian Macpherson note (i) - - - - - - 13 David Burnicle note (i) - - - - - - 11 Nick Barter note (ii) - 20 - 20 - 20 8David MacKay note (ii) - 20 - 20 - 20 8

Total directors’ emoluments 612 105 106 823 89 912 797

Notes: (i) 2004: to date of retirement (ii) 2004: from date of appointment

Share options (audited information)The number of options over Torotrak plc shares held by the executive directors under the approved and unapproved share option schemesand the savings related share option scheme were as follows:

At 1 April Granted during Lapsed during At 31 March Exercise Expiry2004 the year the year 2005 price date

Notes Number Number Number Number £

Dick Elsy (i) (ii) 540,000 - - 540,000 0.205 Jan 2013(iii) - 18,850 - 18,850 0.50 April 2007

Rebecca Joyce (ii) 162,940 - - 162,940 3.40 July 2008(i) (ii) 92,058 - - 92,058 0.47 July 2012(iii) 42,857 - - 42,857 0.21 Sep 2005(ii) - 222,942 - 222,942 0.635 June 2014

David Price (ii) 67,646 - - 67,646 3.40 July 2008(i) 2,018 - - 2,018 2.625 July 2008(i) 41,753 - - 41,753 0.47 July 2012(i) 20,305 - - 20,305 0.25 Dec 2012(iii) 42,857 - - 42,857 0.21 Sep 2005(ii) - 252,942 - 252,942 0.635 June 2014

James Batchelor (i) (ii) 315,000 - - 315,000 0.155 Mar 2013(iii) - 18,850 - 18,850 0.50 April 2007

Notes: (i) approved (ii) unapproved (iii) sharesave

The performance criteria applicable to the approved and unapproved share option schemes before the options can be exercised aredetailed in the directors’ report on page 15.

The mid-market price of the ordinary shares at 31 March 2005 was £0.48. During the year the highest mid-market price was £0.855 andthe lowest was £0.39.


Executive directors' employment contracts

The executive directors' employment contracts are continuing contracts subject to termination by 12 months written notice by thecompany. There are no provisions for compensation on early termination in any of the executive directors' employment contracts.

Executive directors' remuneration packages

Details of individual executive directors' remuneration are included in the table on page 21. Remuneration packages for executivedirectors consist of the following elements:

Fixed elementsBase salary and other 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 and lifeinsurance.

Pension contributions - Executive directors are eligible to participate in The Torotrak Pension Scheme, a defined contribution moneypurchase scheme that is open to all employees of the group. Executive directors have the option of having their contributions paidinto a personal pension scheme of their choice. Pension contributions are made on basic salary only.

Variable elementsPerformance-related share bonus - The level of share bonus (if any) recommended by the committee is determined on the basis offinancial and operational targets established at the beginning of each financial year. The share bonus is distributed from shares heldby the Employee Share Trust. Further details of the Employee Share Trust are given in the directors' report on pages 16 and 17.

The share bonus is given in the form of shares. The value of the bonus is dependent on the market price on the date of the award.As a consequence, the performance-related element of executive directors' remuneration varies from year to year in accordancewith the share price on the date of the award and is not related to a specific percentage of directors base salary. In 2005 theperformance-related element of executive directors' remuneration was 7% (2004: 3%).

Share option schemes - The company operates the Torotrak approved and unapproved share option schemes and the Torotraksavings related share option scheme, details of which are given in the directors' report on pages 14 to 16. Under the schemes,options over the company's ordinary shares may be granted to all employees, including executive directors. Exercise of optionsgranted under the approved and unapproved schemes are subject to satisfaction of the performance criteria which are given in thedirectors' report on page 15. Options granted to the executive directors are set out on page 21.

Non-executive directors

The remuneration of non-executive directors is established by the board within the limits set out in the articles of association. Thenon-executive directors do not participate in the company's employee share option schemes, are not eligible for bonuses and donot receive any other benefits or pension rights under the pension scheme.

The non-executive directors do not have service contracts; their letters of appointment contain a notice period of three months. Theletters of appointment set out the expected time commitment, any other significant time commitments of the non-executivedirectors are disclosed to the board and substantial changes brought to the board's attention. Non-executive directors are notappointed for specified terms but are subject to re-election by shareholders every three years.

Details of individual non-executive directors' remuneration are included in the table on page 21. In the case of the chairman, partof his remuneration is paid to a company nominated by him.

remuneration report cont...

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 2005 were as follows:

31 March 2005 31 March 2004 or date of appointmentNo. of shares No. of shares

David Wallis 46,681 46,681Dick Elsy 169,414 116,658Rebecca Joyce 113,890 99,140David Price 46,179 26,463James Batchelor 22,666 –John Grant 226,003 226,003Nick Barter 28,374 28,374David MacKay - –

There have been no changes to any directors’ interests in the share capital of the company between 31 March 2005 and the date of this report.

Approved by the board and signed on its behalf by:

Nick Barter

Chairman of the remuneration committee.


remuneration report cont... statement of directors' responsibilities

Company law requires the directors to prepare financial statements for each financial period which give a true and fair view of the state of affairsof the company and the group and of the profit or loss for that period. In preparing those financial statements the directors are required to:

• Select suitable accounting policies and apply them consistently;• Make judgements and estimates that are reasonable and prudent;• State whether applicable accounting standards have been followed, subject to any material

departures disclosed and explained in the financial statements; and• Prepare the financial statements on the going concern basis unless it is inappropriate to presume

that the group will continue in business.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financialposition of the company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They havegeneral responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detectfraud and other irregularities.

Consolidated profit and loss account

for the year ended 31 March 2005

Notes 2005 2004

£000 £000

Turnover 1 534 244 Development expenses (5,096) (5,758)Administrative expenses (1,798) (2,033)

Operating loss (6,360) (7,547)Net interest receivable 6 418 522

Loss on ordinary activities before taxation 2 (5,942) (7,025)Taxation 7 786 859

Loss on ordinary activities after taxationretained for the financial year 17 (5,156) (6,166)

Loss per share 9 (4.46p) (5.36p)

Diluted loss per share 9 (4.46p) (5.36p)

All of the results derive from continuing operations during the current and previous year.There were no recognised gains and losses in the current and previous year other than those reported above.The accounting policies and notes on pages 28 to 38 form part of these financial statements.


accounts 2005auditors' report

Independent auditors' report to the members of Torotrak plcWe have audited the financial statements on pages 25 to 38. We have also audited the information in the directors' remuneration reportthat is described as having been audited.

This report is made solely to the company's members, as a body, in accordance with section 235 of the Companies Act 1985. Our auditwork has been undertaken so that we might state to the company's members those matters we are required to state to them in anauditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyoneother than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsThe directors are responsible for preparing the Annual Report and the directors' remuneration report. As described on page 23, thisincludes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accountingstandards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board,the Listing Rules of the Financial Services Authority, and by our profession’s ethical guidance.

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements andthe part of the directors' remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985.We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the group has not keptproper accounting records, if we have not received all the information and explanations we require for our audit, or if informationspecified by law regarding directors’ remuneration and transactions with the group is not disclosed.

We review whether the corporate governance statement on pages 10 to 14 reflects the company’s compliance with the nine provisionsof the 2003 FRC Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whetherthe board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the company’s corporategovernance procedures or its risk and control procedures.

We read the other information contained in the Annual Report, including the corporate governance statement and the unaudited part ofthe directors' remuneration report, and consider whether it is consistent with the audited financial statements. We consider theimplications for our report if we become aware of any apparent mis-statements or material inconsistencies with the financial statements.

Basis of audit opinionWe conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination,on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the directors' remunerationreported to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in thepreparation of the financial statements, and of whether the accounting policies are appropriate to the group’s circumstances, consistentlyapplied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which weconsidered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and thepart of the directors' remuneration report to be audited are free from material mis-statement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financialstatements and the part of the directors' remuneration report to be audited.

OpinionIn our opinion: • The financial statements give a true and fair view of the state of affairs of the company and the group as at 31 March 2005 and of

the loss of the group for the year then ended; and • The financial statements and the part of the directors' remuneration report to be audited have been properly prepared in accordance

with the Companies Act 1985.

KPMG Audit Plc, Chartered Accountants Registered Auditor Preston16 May 2005

Consolidated cashflow statement

for the year ended 31 March 2005

Notes 2005 2004

£000 £000

Net cash outflow from operating activities 22 (5,521) (6,818)

Return on investments and servicing of financeInterest received 487 505

Net cash inflow from returns oninvestments and servicing of finance 487 505

Taxation 876 2,016

Capital expenditurePurchase of tangible fixed assets (56) (145)Proceeds from sale of tangible fixed assets – 13Investment in patents (220) (184)

Net cash outflow on capital expenditure (276) (316)

Net cash outflow before managementof liquid resources and financing (4,434) (4,613)

Management of liquid resourcesCash withdrawn from money market 4,381 5,248

FinancingIncrease in share capital 23 23

(Decrease)/increase in cash in the year 23 (30) 658

The accounting policies and notes on pages 28 to 38 form part of these financial statements.


Balance sheets

as at 31 March 2005 Group Group Company Company

Notes 2005 2004 2005 2004

£000 £000 £000 £000

Fixed assetsIntangible assets - Patents 10 989 877 - -Tangible assets 11 5,731 6,044 - -Investments 12 - – 9,270 9,270

6,720 6,921 9,270 9,270Current assetsDebtors 13 1,159 1,251 53,335 48,632Investments - Money market deposits 5,650 10,031 5,650 10,031Cash at bank and in hand 1,668 1,698 - –

8,477 12,980 58,985 58,663CreditorsAmounts falling due within one year 14 (637) (543) (2,882) (2,879)

Net current assets 7,840 12,437 56,103 55,784

Total assets less current liabilities 14,560 19,358 65,373 65,054

Capital and reservesCalled up share capital 16 11,729 11,718 11,729 11,718Share premium account 17 48,009 47,997 48,009 47,997Other reserve 17 (2,705) (3,807) (2,705) (3,807)Profit and loss account 17 (42,473) (36,550) 8,340 9,146

Equity shareholders' funds 18 14,560 19,358 65,373 65,054

The accounting policies and notes on pages 28 to 38 form part of these financial statements.

The financial statements were approved by the board of directors on 16 May 2005 and signed on its behalf by:

Rebecca JoyceFinance director

accounts 2005 cont.

InvestmentsInvestments are carried at cost, less provisions for impairment.

Pension costsThe pension scheme operated by the group is a defined contribution money purchase scheme and pension costs are charged to the profitand loss account in respect of the period to which they relate.

Research & developmentResearch & development expenditure is written off as incurred.

LeasesOperating lease rentals are charged to the profit and loss account on a straight line basis over the period of the lease.

Long-term contractsThe amount of profit attributed to the stage of completion of a long-term contract is recognised when the outcome of the contract canbe foreseen with reasonable certainty. Turnover for such contracts is stated at cost appropriate to their stage of completion plusattributable profits, less amounts recognised in previous years. Provision is made for any losses which are foreseeable.

Contract work in progress is stated at costs incurred, less those transferred to the profit and loss account, after deducting foreseeablelosses and payments on account not matched with turnover.

Amounts recoverable on contracts are included in debtors and represent turnover recognised in excess of payments on account.

TaxationThe charge/credit for taxation is based on the profit/loss for the year and takes into account taxation deferred because of timing differencesbetween the treatment of certain items for taxation and accounting purposes.

Deferred tax is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation andaccounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required in FRS 19.

Related party transactionsThe group has taken advantage of the exemption contained in FRS 8 and has therefore not disclosed transactions or balances with entitieswhich have been eliminated on consolidation.

Financial instrumentsShort-term debtors and creditors that meet the definition of a financial asset or liability respectively have been excluded from FRS 13 analysis where permitted by that standard.

Employee share schemesThe cost of awards to employees that take the form of shares or rights to shares are recognised over the period of the employee's relatedperformance. Where there are no future performance criteria the cost is recognised when the employee becomes unconditionally entitledto shares. No cost is recognised in respect of Sharesave schemes that are offered on similar terms to all or substantially all employees.


accounting policies

The accounting policies deal with items that are judged material in determining the loss for the year and in stating the financial position.The following paragraphs describe the principal accounting policies of the group and have been applied consistently.

Basis of accountingThe financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards.

Basis of consolidationThe financial statements consolidate the financial statements of the company and its subsidiaries, all of which are made up to 31 March.

Treatment of foreign currenciesTransactions denominated in foreign currencies are translated into sterling and recorded at the rate of exchange ruling at the date ofthe transaction. Assets and liabilities outstanding at the year end have been translated using year end rates and profits and losses arisinghave been taken to the profit and loss account.

Patent and other intellectual property rightsPatents are stated at cost less amortisation. Cost includes the cost of obtaining patent protection for intellectual property rights (IPR)on technologies arising from inventive ideas. Income from patents is derived through licensing and other agreements.

Such expenditure is amortised in a manner calculated to write off the cost, in equal annual proportions, over the effective life of theunderlying patent or other IPR up to a maximum of 20 years. In the event that a patent is abandoned or is considered to have sufferedan impairment in value at any time before the expiry of its granted life, the balance of unamortised expenditure is written off in the yearin which such abandonment takes place.

Cash and liquid resourcesCash, for the purposes of the cashflow statement, comprises cash in hand and deposits repayable on demand, less overdrafts repayableon demand. Liquid resources comprise investments in money market managed funds which mature within one year of the date ofinvestment.

DepreciationFreehold land is not depreciated. Other tangible fixed assets are stated at cost less depreciation, which is calculated to write off the costless estimated residual value of fixed assets over their estimated useful lives on a straight line basis, at the following rates per annum:

%

Plant, machinery & equipment 25 Straight lineCars 25 Reducing balanceComputer hardware 33 1/3 Straight lineComputer software 33 1/3 Straight lineOffice furniture and fittings 20 Straight lineTest vehicles 50 Reducing balanceFreehold buildings 02 1/2 Straight line

4. Employee costs and numbersThe aggregated payroll costs (including directors' emoluments) were as follows:

31 March 31 March2005 2004

£000 £000

Salaries 3,274 3,614 Social security costs 410 406Pension costs 289 417

3,973 4,437

The average number of persons employed (including executive and non-executive directors) during the year analysed by category wasas follows:

31 March 31 March

2005 2004

Directors - company 8 8- subsidiaries 1 3

Engineers 69 80Administrative 18 18

96 109

5. Pension fundThe group operates a defined contribution money purchase scheme for its staff which was set up on 1 January 1988. The assets of thescheme are held separately from the group in an independently administered fund with Standard Life as trustee. The scheme has beencontracted into the State Earnings Related Pension Scheme since 6 April 1997. Pension charges are charged to the profit and loss accountin respect of the period to which they relate. The charge to the profit and loss account was £217,000 (2004: £349,000). The scheme isavailable to all full-time employees aged between 18 and 64 years and currently has approximately 83 members. Retirement age isbetween 60 and 75 years. The minimum contribution rates as a percentage of basic earnings calculated at 6 June each year are 7.5 percent by Torotrak and 3.5 per cent by the relevant employee. The maximum pension on retirement is 1/30th of final earnings for each yearof service up to 20 years. The part of a pension bought with contributions paid after 5 April 1997 must increase by at least 5 per cent,in line with the cost of living. Part of the pension may be received as a tax-free cash sum. The maximum amount is the greater of (i)3/80ths of the final salary for each year of service with a maximum of 40 years; and (ii) 2.25 times the initial pension amount. The schemeis not the subject of any investigation by the Occupational Pension Regulatory Authority or subject to any litigation or claim before thePensions Ombudsman 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 by the group paidinto a personal pension scheme. The charge to the profit and loss account was £72,000 (2004: £68,000).


notes to the accounts

1. Turnover and segmental analysisTurnover consists of income from exploitation of the group's technology. There were no sales between group companies. The source ofall turnover, loss before taxation and net assets is the UK.

Turnover by destination is analysed below:31 March 31 March

2005 2004

£000 £000

UK 11 -US 108 -Europe 88 115Far East 327 129

534 244

2. Loss on ordinary activities before taxationLoss on ordinary activities before taxation, is stated after charging:

31 March 31 March

2005 2004

£000 £000

Patent renewal fees 135 190Amortisation of patent costs 86 98Depreciation of tangible fixed assets - owned 372 602Auditors' remuneration - audit (group) 36 33

- audit (company) 5 5- fees for other services to the auditors

and their associates 8 11Research and development costs 5,096 5,758

3. Directors' remuneration31 March 31 March

2005 2004

£000 £000

Directors' emoluments 823 714

Company contributions to pension schemes 89 83

912 797

More detailed information concerning directors' remuneration, shareholdings, options and pension benefits is shown in theremuneration report on pages 19 to 22.

8. Loss for the financial periodNo profit and loss account is presented for the company as permitted by section 230(4) of the Companies Act 1985. The company's lossfor the year was £39,000 (2004: loss £137,000).

9. Loss per ordinary shareBasic loss per share is based on the loss after tax of £5,156,000 (2004: £6,166,000) and 115.6 million ordinary shares (2004: 115.1 million)being the weighted average number of shares in issue during the year.

Reconciliation of the weighted average number of shares used in calculating basic loss per share and that used in calculating diluted lossper share:

31 March 31 March2005 2004

Number Number

Shares issued and used in calculating basic and diluted loss per share 115,577,949 115,107,042

In accordance with FRS 14 the number of shares used in the calculation excludes shares held by the Employee Share Trust.

10. Intangible assets - Patents31 March 31 March

2005 2004

£000 £000

CostAt 1 April 1,459 1,394Expenditure in year 220 182Abandoned in year (39) (117)

At 31 March 1,640 1,459

AmortisationAt 1 April 582 531 Charge for the year 86 98Abandoned in year (17) (47)

At 31 March 651 582

Net book value at 31 March 989 877


notes to the accounts cont...

6. Net interest receivable31 March 31 March

2005 2004

£000 £000

Bank interest receivable 418 522

7. Taxation on loss on ordinary activities31 March 31 March

2005 2004

£000 £000

UK corporation taxCurrent tax for the year 801 859

Overseas taxCurrent tax for the year (15) -

Total current tax 786 859Deferred tax - -

786 859

Factors affecting the tax credit for the current period:The Finance Act 2000 introduced the Research and Development Tax Credit which allows companies with qualifying expenditure tosurrender their tax losses for cash. The effective tax rate for these credits is 24% compared to the current UK corporation tax rate of 30%.

The current tax credit for the period is lower (2004: lower) than the standard rate of corporation tax in the UK of 30% (2004: 30%). The differences are as follows:

31 March 31 March2005 2004

£000 £000

Loss before taxation (5,942) (7,025)

Expected current tax credit at 30% (2004: 30%) 1,782 2,108

Expenses not deductable for tax purposes 23 (72)Depreciation in excess of capital allowances (59) (135)R & D tax credit given at an effective rate of 24% (187) (215)Tax losses carried forward (763) (827)Rate difference on overseas tax (10) -

Total current tax credit 786 859

Factors 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 and development expenditure.In addition, the group has approximately £28m of tax losses and approximately £8.5m of unclaimed capital allowances that may be offsetagainst future taxable profits. If the tax credit in respect of research and development expenditure is not available in the future, or is notclaimed, the tax losses available for offset against future taxable profits would be increased.

14. Creditors: amounts falling due within one yearGroup Group Company Company

31 March 31 March 31 March 31 March

2005 2004 2005 2004

£000 £000 £000 £000

Trade creditors 210 56 – –Amounts owed to subsidiary undertakings – – 2,798 2,798Accruals and deferred income 427 487 84 81

637 543 2,882 2,879

15. Deferred taxationGroup Group

2005 2004

£000 £000

Accelerated allowances onpatents and other IPR 297 263Other - available losses (251) (239)

- timing differences (46) (24)

- -

There is no deferred tax in respect of the company.

16. Share capital31 March 31 March

2005 2004

Number £000 £000

AuthorisedOrdinary shares of 10p each 200,000,000 20,000 20,000 Allotted and fully paidOrdinary shares of 10p each 117,285,747 11,729 11,718

Details of ordinary shares under option under the company’s employee share schemes are included in the directors’ report on pages 15and 16.

109,626 shares were allotted during the year pursuant to the exercise of options granted under the sharesave scheme by certain formeremployees. The nominal value of the shares allotted was £10,962 and the consideration received was £23,021.



11. Tangible assetsFreehold Office Plant, Computer Test

land and furniture machinery equipment vehicles Totalbuildings and and

fittings equipment

£000 £000 £000 £000 £000 £000

CostAt 1 April 2004 6,372 134 4,113 1,887 304 12,810Additions (3) – 6 57 – 60Disposals – – (54) (5) – (59)

At 31 March 2005 6,369 134 4,065 1,939 304 12,811

DepreciationAt 1 April 2004 700 129 3,908 1,725 304 6,766Charge for the year 145 5 130 92 – 372Disposals - - (53) (5) – (58)

At 31 March 2005 845 134 3,985 1,812 304 7,080

Net book valueAt 31 March 2005 5,524 - 80 127 – 5,731

At 31 March 2004 5,672 5 205 162 – 6,044

Freehold land and buildings includes land, which is not depreciated, at a cost of £551,000 (2004: £551,000).

12. InvestmentsShares

in subsidiary Companyundertakings Total

£000 £000

Cost and net book valueAt 1 April 2004 and 31 March 2005 9,270 9,270

Details of subsidiary undertakings are set out in note 27.

13. DebtorsGroup Group Company Company

31 March 31 March 31 March 31 March2005 2004 2005 2004£000 £000 £000 £000

Amounts owed by subsidiary undertakings – – 53,305 48,515Trade debtors 53 147 – –Other debtors, prepayments and accrued income 1,106 1,104 30 117

1,159 1,251 53,335 48,632

Other debtors include UK corporation tax of £0.8m (2004: £0.8m). Further details are set in out note 7.

Amounts owed by subsidiary undertakings are recoverable on demand but are expected to be recovered after more than one year.

21. Significant contractsUnder an agreement dated 6 July 1998 between the group and BTG International Ltd (‘BTG’) the group has agreed to pay a certainpercentage (not exceeding 5 per cent and subject to specified thresholds) of aggregate turnover to BTG. Turnover for the purposes of thisagreement is derived from exploitation of the group's intellectual property rights. Principal exclusions from the definition of turnover areincome derived from providing research, evaluation or consultancy services or any business not carried on by the group at the time ofdemerger.

The agreement terminates on 30 June 2020. Total payments made to BTG under the terms of the agreement for the period since demergerare £11,064 (2004: £10,564).

22. Reconciliation of operating loss to net cash outflow from operating activities31 March 31 March

2005 2004

£000 £000

Operating loss (6,360) (7,547)Depreciation charge 372 602Amortisation charge 86 98Share award by Employee Share Trust 335 144Loss on disposal of fixed assets 23 80Increase in debtors (89) (26)Increase/(Decrease) in creditors 112 (169)

Net cash outflow from operating activities (5,521) (6,818)

23. Analysis of changes in cash31 March 31 March

2005 2004

£000 £000

As at 1 April - cash at bank and in hand 1,698 1,040

As at 31 March - cash at bank and in hand 1,668 1,698

(Decrease)/Increase in cash (30) 658

24. Analysis of net fundsBalance Balance at

at 1 April 31 March

2004 Cashflow 2005

£000 £000 £000

Cash at bank and in hand 1,698 (30) 1,668Money market deposits 10,031 (4,381) 5,650

Net funds 11,729 (4,411) 7,318



17. Movement in reservesGroup and Company Group Group Company

Share and Company Profit and Profit and

premium Other loss loss

account reserve account account

£000 £000 £000 £000

At 1 April 2004 47,997 (3,807) (36,550) 9,146

Movements during the year:Employee Share Trust - share award – 1,102 (767) (767)Shares issued 12 – – –Loss for the financial year - – (5,156) (39)

At 31 March 2005 48,009 (2,705) (42,473) 8,340

Details of the share award by the Employee Share Trust are given in the directors’ report on pages 16 and 17.

Other reserveThe other reserve represents 1,470,749 ordinary shares of 10p each issued to the Employee Share Trust in 2001 at a price of £1.84, whichhave been written off. As the Employee Share Trust distributes these shares to the beneficiaries of the trust (principally the employees)an amount will be transferred between the other reserve and the profit and loss account reserve.

A reserve transfer has been made between the other reserve (cost of shares purchased by the trust) and the profit and loss reserve for£767k to reflect the cost of shares awarded during the year.

18. Reconciliations of movements in shareholders' fundsGroup Group Company Company

31 March 31 March 31 March 31 March

2005 2004 2005 2004

£000 £000 £000 £000

Opening shareholders' funds 19,358 25,360 65,054 65,027 Loss for the financial year (5,156) (6,166) (39) (137) Shares issued 23 23 23 23Share award by Employee Share Trust 335 141 335 141

Closing shareholders' funds 14,560 19,358 65,373 65,054

19. Operating lease commitments31 March 31 March

2005 2004

£000 £000

Operating leases which expirebetween 2 and 5 years 38 53

20. Capital commitmentsAt 31 March 2005 capital commitments totalled £900 (2004: £2,400).

For the years ended 31 March

2005 2004 2003 2002 2001£000 £000 £000 £000 £000

Turnover 534 244 145 214 187

Loss on ordinaryactivities before taxation (5,942) (7,025) (6,380) (4,057) (8,227)

Loss on ordinary activities after taxation retained for the financial year (5,156) (6,166) (5,580) (1,410) (8,228)

Loss earnings per share (4.46p) (5.36p) (4.88p) (1.24p) (7.25p)

Diluted loss per share (4.46p) (5.36p) (4.88p) (1.24p) (7.25p)

Total assets less current liabilities 14,560 19,358 25,360 30,822 31,407

Equity shareholders’ funds 14,560 19,358 25,360 30,822 31,407

Net cash outflow from operating activities (5,521) (6,818) (6,270) (7,740) (8,638)

Management of liquid resources 4,381 5,248 5,221 2,267 9,603

(Decrease)/increase in cash in each year (30) 658 823 (45) 217

Financial calendar

Annual general meeting 21 July 2005

Interim results announcement November 2005

Interim report posted to shareholders November 2005


financial record

25. Reconciliation of net cash flow to movement in net funds31 March 31 March

2005 2004

£000 £000

(Decrease)/Increase in cash in the year (30) 658Withdrawn from money market (4,381) (5,248)

Movements in net funds in the period (4,411) (4,590)Net funds at 1 April 11,729 16,319

Net funds at 31 March 7,318 11,729

26. Financial instrumentsDetails of the group's treasury objectives and policies can be found in the finance director’s review on pages 6 and 7. The group has nofinancial liabilities other than short-term creditors. Disclosure dealt with in this note excludes short-term debtors and creditors wherepermitted by FRS 13.

The profile of the financial assets of the group was:31 March 31 March

2005 2004

£000 £000

Cash 1,668 1,698Sterling cash deposits 5,650 10,031

7,318 11,729

The sterling cash deposits comprise deposits placed on money markets at call and terms up to six months. The weighted average interestrate on the deposits is 4.64% (2004: 3.66%) and the weighted average time for which the rate is fixed is 2.2 months (2004: 3.1 months).

27. Subsidiary undertakingsThe subsidiary undertakings of the company at 31 March 2005, all of which are wholly owned and incorporated in Great Britain andregistered in England and Wales, are as follows:

Class of capital Principal activity

Torotrak Group Ltd Ordinary Intermediate holding companyTorotrak (Holdings) Ltd Ordinary Commercialisation of infinitely variable

transmission technologyTorotrak (Development) Ltd Ordinary Research and development of infinitely variable

transmissionsTorotrak (Property) Ltd Ordinary Ownership of land and buildingsTorotrak (Trustee) Ltd Ordinary Trustee of shares held under the Share Incentive Plan

(formerly All Employee Share Ownership Plan)

The investments in Torotrak Group Ltd and Torotrak (Trustee) Ltd are held by the company. The investments in all other subsidiaries areheld through Torotrak Group Ltd.



Notice is hereby given that the seventh annual general meeting of the company will be held at Best Western Leyland Hotel, Leyland Way, Leyland, Lancashire PR25 4JX on 21 July 2005 at 12 noon for the following purposes:1. To receive and adopt the accounts and the reports of the directors and auditors for the year ended 31 March 2005 (resolution 1).2. To approve the remuneration report (resolution 2).3. To approve the remuneration policy set out in the remuneration report (resolution 3).4. To re-appoint KPMG Audit Plc as auditors and to authorise the directors to agree its remuneration (resolution 4).Special businessTo consider and, if thought fit, to pass the following resolutions of which resolution 5 will be proposed as an ordinary resolution;resolutions 6 and 7 will be proposed as special resolutions:5. That the directors be and they are hereby generally and unconditionally authorised to exercise powers of the company to allot,

grant options over, offer or otherwise deal with or dispose of relevant securities (within the meaning of section 80 of theCompanies Act 1985) up to an amount equal to 33 percent of the aggregate nominal value of the ordinary shares in issue at 16May 2005 with an aggregate nominal value of £3,870,430 provided that: (a) this authority shall expire at the close of the nextannual general meeting of the company after passing of this resolution unless previously renewed, varied or revoked by thecompany in general meeting save that before such expiry the company may make any offer or agreement which would or mightrequire relevant securities of the company to be allotted after such expiry and the directors may allot relevant securities inpursuance of such offer or agreement as if the authority conferred by this resolution had not expired; and the authority conferredby this resolution shall be in substitution for all existing powers conferred on the directors pursuant to the said section 80(resolution 5).

6. That, subject to the passing of resolution 5, the directors be and they are hereby empowered pursuant to section 95 of theCompanies Act 1985 to allot equity securities (within the meaning of section 94 of the said Act) for cash pursuant to the authorityconferred by the foregoing resolution as if sub-section (1) of section 89 of the said Act did not apply to any such allotmentprovided that this power shall be limited: (a) to the allotment of equity securities in connection with a rights issue in favour ofordinary shareholders where the equity securities respectively attributable to the interests of all ordinary shareholders areproportionate (as nearly as may be but subject to such exclusions or other arrangements as the directors may deem necessary ordesirable to deal with fractional entitlement or legal or practical problems under the laws of, or the requirements of any recognisedregulatory body or any stock exchange in, any territory) to the respective number of ordinary shares held by them; and to theallotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an amount equal to 5 percent of theaggregate nominal value of the ordinary shares in issue at 16 May 2005 with an aggregate nominal value of £586,429 and shallexpire at the close of the next annual general meeting of the company after passing of this resolution save that the company maybefore such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry andthe directors may allot equity securities in pursuant of such an offer or agreement as if the power conferred hereby had not expired(resolution 6).

7. That, in accordance with regulation 52(4) of the articles of association, a general authority is hereby given for the purposes ofsection 166 of the Companies Act 1985 for market purchases (as defined in section 163 of the said Act) by the company of any ofits ordinary shares subject to the following restrictions but otherwise unconditionally: (a) the maximum aggregate number ofordinary shares to be so acquired shall not exceed 11,728,574 ordinary shares of 10p each representing 10 percent of the ordinaryshares in issue at 16 May 2005 ordinary shares may only be purchased at a price per share (exclusive of expenses) no higher than 5 percent above the average of the middle market quotations of the ordinary shares in the capital of the company, as derived fromthe London Stock Exchange Daily Official List, for the five business days preceding the date of purchase but the minimum price thatmay be paid for such shares shall be the nominal value of 10p per share (exclusive of expenses) this authority shall expire at theconclusion of the next annual general meeting of the company, but the company may before such expiry make contracts for suchpurposes which would or might be executed wholly or partly after such expiry (resolution 7).

1 Aston Way By order of the board Leyland Rebecca JoyceLancashire SecretaryPR26 7UX 16 May 2005

Notes

1. Any member entitled to attend and vote at the annual general meeting may appoint one or more proxies to attend and, on a poll, tovote instead of him and such proxy need not be a member of the company. To be effective, the instrument appointing a proxy (and thepower of attorney or other authority (if any) under which it is signed or a notarially certified or office copy thereof) must be depositedat Capita Registrars not less than 48 hours before the time of holding the meeting or adjourned meeting. Completion and return of theform of proxy will not preclude shareholders from attending the annual general meeting and voting in person if they wish to do so.

2. There will be available for inspection at the registered office of the company during normal business hours on any weekday,Saturdays excepted, from the date of this notice until the date of the meeting, and at 7 Devonshire Square, Cutlers Gardens, LondonEC2M 4YH from 9.00am on 21July 2005 until the close of the meeting, copies of all directors' service contracts where the unexpiredportion of the term exceeds twelve months or the contract is not determinable by the company within such period without thepayment of compensation.

notice of annual general meeting Location of the 2005Torotrak plc annual general meeting

on Thursday 21 July 2005

M6

M65

M61

M61

Leyland

A49

A6

A6

B5256LeylandStation

J8

J28

J29

J9/2

Best Western Leyland Hotel(formerly known as the Jarvis Hotel)Leyland Way, Leyland,Lancashire PR25 4JXTelephone 01772 422922

By roadFrom the M6 North – Turn off the motorway at Junction 28 and follow theslip road under the motorway for 500 yards. Take the second left along this

road to the hotel.

From the M6 South – Turn off the motorway at Junction 28. Take the nextleft along this road to the hotel.

By railLeyland Station – 1 mile

Preston Station – 6 miles

There is ample parking at the hotel including disabled parking spaces.

How to find the Best Western Leyland Hotel (formerly known as the Jarvis Hotel)

Torotrak plc

1 Aston Way Leyland

Lancashire PR26 7UX

United Kingdom

Tel: +44 (0)1772 900900

Fax: +44 (0)1772 900929

www.torotrak.com

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