Notes to the Half-yearly report

1 GENERAL INFORMATION

2 BASIS OF PREPARATION

3 ACCOUNTING POLICIES

4 SEGMENTAL INFORMATION

5 SEASONALITY

6 SHARE CAPITAL AND SHARE PREMIUM

7 RETIREMENT BENEFIT LIABILITIES

8 FINANCE INCOME AND FINANCE COSTS (CONTINUING OPERATIONS)

9 EARNINGS PER SHARE

10 CASH USED IN OPERATIONS

11 NET DEBT

12 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

13 CONTINGENCIES

1 GENERAL INFORMATION

AEA is one of the world's leading consultancies in Energy and Climate Change. The Group employs many of the world’s experts in air quality, energy policy, carbon trading and management, resource minimisation and waste management, transport and knowledge management. Its major customers are UK Government, Scottish Government, the London Development Agency, and the private sector in the UK and EU. AEA has been voted by its customers the UK’s Best Consultancy in Climate Change and Renewables in this year’s Environmental Data Interactive Exchange (EDIE) Awards.

The Company is a public limited company, incorporated and domiciled in the United Kingdom. The address of the registered office is 329 Harwell, Didcot, Oxfordshire, OX11 0QJ.

The Company is listed on the London Stock Exchange.

These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies described in the annual financial statements for the year ended 31 March 2007.

The Board approved this condensed consolidated half-yearly financial information for issue on 29 November 2007.

These half-yearly results do not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985. Statutory accounts for the year ended 31 March 2007 were approved by the Board of Directors on 14 June 2007 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an 'emphasis of matter' paragraph and did not contain any statement under Section 237 of the Companies Act 1985.

2 BASIS OF PREPARATION

This condensed consolidated financial information for the half-year ended 30 September 2007 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, ‘Interim Financial Reporting’ as adopted by the European Union. The half-yearly condensed consolidated financial report should be read in conjunction with the annual financial statements for the year ended 31 March 2007, which were prepared in accordance with IFRSs as adopted by the European Union.

3 ACCOUNTING POLICIES

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 March 2007, as described in pages 35 to 41 of those annual financial statements.

The following new standards, amendments to existing standards or interpretations are mandatory for the first time for the financial year ending 31 March 2008:

IFRS 7, 'Financial Instruments: Disclosures' and the complementary amendment to IAS 1, 'Presentation of Financial Statements', 'Capital Disclosures', both effective for annual periods beginning on or after 1 January 2007. As this Half-Yearly Report contains only condensed financial statements, and there are no material financial instrument related transactions in the period, full IFRS 7 disclosures are not required at this stage. The full disclosures will be given in the next annual financial statements.
IFRIC 8, 'Scope of IFRS 2', effective for annual periods beginning on or after 1 May 2006. This interpretation has not had any impact on the recognition of share-based payments in the Group.
IFRIC 9, 'Reassessment of Embedded Derivatives', effective for annual periods beginning on or after 1 June 2006. This interpretation has not had a material impact on the financial results of the Group.
IFRIC 10, 'Interim Financial Reporting and Impairment', effective for annual periods beginning on or after 1 November 2006. This interpretation has not had a material impact on the financial results of the Group.
IFRIC 11, 'Group and Treasury Share Transactions', effective for annual periods beginning on or after 1 March 2007. This interpretation has not had a material impact on the financial results of the Group.

The following new standards, amendments to existing standards or interpretations have been issued, but are not effective for the financial year ending 31 March 2008 and have not been adopted early:

IFRS 8, 'Operating Segments', effective for annual periods beginning on or after 1 January 2009, subject to EU endorsement.
IFRIC 12, 'Service Concession Arrangements', effective for annual periods beginning on or after 1 January 2008. Management do not expect this interpretation to be relevant to the Group.

4 SEGMENTAL INFORMATION

Based on risks and returns the Directors consider that the primary reporting format is by business segment. The Directors consider that there is only one business segment, being consultancy, policy support and programme management. Therefore, the disclosures for the primary segment are already given in these half-yearly financial statements.

5 SEASONALITY

Sales of the consulting services provided by the Group are subject to seasonal fluctuations, with peak demand in the fourth quarter of the financial year. This reflects the pattern of purchasing/procurement by Governments, the Group’s most significant customers.

6 SHARE CAPITAL AND SHARE PREMIUM

	Number of ordinary shares (millions)	Nominal value of ordinary shares £m	Value of share premium £m	Total share capital and premium £m
At 1 April 2006, 30 September 2006 and 31 March 2007	118.3	14.5	34.7	49.2
Placing issue	5.8	0.7	5.7	6.4
At 30 September 2007	124.1	15.2	40.4	55.6

The total authorised number of ordinary shares is 196,363,620 shares (March 2007 and September 2006: 196,363,620 shares) with a par value of 12.2 pence per share. All issued shares are fully paid.

On 26 July the Company successfully placed 5,814,610 new ordinary shares at a price of 115.0 pence per share raising £6.7 million before expenses (£6.4 million net of expenses). The funds raised will be used to help the Company grow the business both organically and by acquisition and will provide greater financial flexibility. The shares were admitted to the Official List and commenced trading on 1 August 2007.

Warrants
The placing of new ordinary shares in July 2007 entitled the holders of the Company’s warrant instruments to additional shares on exercise of those warrants. The Company has in issue 5,987,560 (March 2007 and September 2006: 5,707,047) warrants giving the holders the right to subscribe in cash for shares in the Company.

7 RETIREMENT BENEFIT LIABILITIES

	At 30 September 2007 £m	At 30 September 2006 £m	At 31 March 2007 £m
Balance sheet liabilities for:
Pension benefits	57.2	95.7	92.2
Post-employment medical benefits	-	-	-
	57.2	95.7	92.2
Income statement charge / (credit) for:
Pension benefits	1.0	(0.5)	3.2
Post-employment medical benefits	-	0.3	0.3
	1.0	(0.2)	3.5

The amounts recognised in the balance sheet are determined as follows:

	At 30 September 2007 £m	At 30 September 2006 £m	At 31 March 2007 £m
Present value of funded obligations	335.2	357.5	363.2
Fair value of plan assets	(281.5)	(265.3)	(274.7)
	53.7	92.2	88.5
Present value of unfunded benefits	3.5	3.5	3.7
	57.2	95.7	92.2

The net balance sheet liability for retirement benefits has reduced to £57.2 million (March 2007: £92.2 million). A significant reduction has occurred through changes to the financial assumptions used in calculating the present value of funded obligations. These values, calculated under IAS 19, are impacted by changes in market conditions.

As at 31 March 2007 a discount rate of 5.3% was used. Due to changes in market conditions this assumption, which must be based on market conditions at the balance sheet date, has been updated to 5.8% as at 30 September 2007, with the resultant effect of significantly reducing the present value of the obligations. There have been no other significant changes to the assumptions used and disclosed in the 2007 Annual Report.

The amounts recognised in respect of pension benefits in the income statement are as follows:

	Six months ended 30 September 2007 £m	Six months ended 30 September 2006 £m	Year ended 31 March 2007 £m
Continuing operations
Current service cost	0.9	1.2	2.2
Interest cost	9.4	6.3	14.4
Expected return on plan assets	(9.3)	(6.4)	(14.6)
Curtailment loss during the period	-	0.5	0.8
Past service income	-	(4.6)	(2.0)
Continuing operations	1.0	(3.0)	0.8

Discontinued operations
Current service cost	-	1.8	1.8
Interest cost	-	5.9	6.5
Expected return on plan assets	-	(7.0)	(7.7)
Discontinued operations	-	0.7	0.6
Profit on disposal of business – curtailment loss	-	1.8	1.8
Total expense / (income) in the income statement	1.0	(0.5)	3.2

The continuing operations curtailment loss in the year to March 2007 of £0.8 million arises from a reduction in numbers of members of the pension scheme due to the Company’s redundancy programme. A curtailment loss also arose in the prior year due to the disposal of businesses and this was charged to the profit on disposal.

The past service income reported in the prior year relates to 'A-day' changes. From 6 April 2006 new legislation allowed for a larger lump sum to be provided to pension scheme members on retirement. As a result of this increase there is expected to be a reduction in the pension scheme’s obligation. This expected reduction was credited to the income statement.

There have been no events in the six months to 30 September 2007 that would have given rise to curtailment income/expense or past service income/expense.

8 FINANCE INCOME AND FINANCE COSTS (CONTINUING OPERATIONS)

	Six months ended 30 September 2007 £m	Six months ended 30 September 2006 £m	Year ended 31 March 2007 £m
Finance costs
Interest on bank overdrafts and loans	(0.9)	(1.1)	(2.2)
Interest on finance leases	-	-	(0.1)
Accretion of discount of defined pension contribution obligation	(9.4)	(6.3)	(14.4)
Finance costs	(10.3)	(7.4)	(16.7)
Finance income
Interest income	0.1	0.1	0.7
Expected return on defined pension scheme assets	9.3	6.4	14.6
Finance income	9.4	6.5	15.3
Net finance costs	(0.9)	(0.9)	(1.4)

9 EARNINGS PER SHARE

(a) Basic (continuing operations)
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period.

	Six months ended 30 September 2007 £m	Six months ended 30 September 2006 £m	Year ended 31 March 2007 £m
Profit attributable to equity holders of the Company – continuing operations (£ millions)	2.8	5.9	8.0
Weighted average number of ordinary shares in issue (millions)	120.2	118.3	118.3
Basic earnings per share – continuing operations (pence)	2.3p	5.0p	6.8p

(b) Diluted (continuing operations)
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue to assume conversion of all potential dilutive ordinary shares. The Company has two categories of potential dilutive ordinary shares; share options and warrants. The calculation is performed for the share options and warrants to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options and warrants. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options and warrants to give the number of shares deemed to be issued at nil consideration. These dilutive shares are added to the weighted average number of ordinary shares in issue.

	Six months ended 30 September 2007 £m	Six months ended 30 September 20061 £m	Year ended 31 March 2007 £m
Profit attributable to equity holders of the Company – continuing operations (£ millions)	2.8	5.9	8.0
Weighted average number of ordinary shares in issue (millions)	120.2	118.3	118.3
Adjustment for share options (millions)	0.2	2.2	0.1
Adjustment for warrants (millions)	2.1	1.7	1.6
Weighted average number of ordinary shares for diluted earnings per share (millions)	122.5	122.2	120.0
Diluted earnings per share – continuing operations (pence)	2.3p	4.8p	6.7p


1	The comparative figures for the six months ended 30 September 2006 have been restated to correct the adjustments for share options and warrants.

(c) Adjusted earnings basis (continuing operations)
The adjusted earnings per share is calculated as follows:

	Six months ended 30 September 2007 £m	Six months ended 30 September 2006 £m	Year ended 31 March 2007 £m
Profit attributable to equity holders of the Company – continuing operations (£ millions)	2.8	5.9	8.0
Pension curtailment loss (£ millions)	-	0.5	0.8
Exceptional credit for pension past service cost (£ millions)	-	(4.6)	(2.0)
Re-financing costs (£ millions)	-	0.4	0.4
Adjusted earnings attributable to equity holders of the Company – continuing operations (£ millions)	2.8	2.2	7.2
Weighted average number of ordinary shares in issue (millions)	120.2	118.3	118.3
Adjusted earnings per share (pence)	2.3p	1.9p	6.1p

(d) Basic (continuing and discontinued operations)

	Six months ended 30 September 2007 £m	Six months ended 30 September 2006 £m	Year ended 31 March 2007 £m
Profit attributable to equity holders of the Company (£ millions)	2.8	22.5	24.7
Weighted average number of ordinary shares in issue (millions)	120.2	118.3	118.3
Basic earnings per share (pence)	2.3p	19.0p	20.9p

(e) Diluted (continuing and discontinued operations)

	Six months ended 30 September 2007 £m	Six months ended 30 September 20061 £m	Year ended 31 March 2007 £m
Profit attributable to equity holders of the Company (£ millions)	2.8	22.5	24.7
Weighted average number of ordinary shares in issue (millions)	120.2	118.3	118.3
Adjustment for share options (millions)	0.2	2.2	0.1
Adjustment for warrants (millions)	2.1	1.7	1.6
Weighted average number of ordinary shares for diluted earnings per share (millions)	122.5	122.2	120.0
Diluted earnings per share (pence)	2.3p	18.4p	20.6p


1	The comparative figures for the six months ended 30 September 2006 have been restated to correct the adjustments for share options and warrants.

(f) Adjusted earnings (continuing and discontinued operations)
The adjusted earnings per share is calculated as follows:

	Six months ended 30 September 2007 £m	Six months ended 30 September 2006 £m	Year ended 31 March 2007 £m
Profit attributable to equity holders of the Company (£ millions)	2.8	22.5	24.7
Pension curtailment loss (£ millions)	-	0.5	0.8
Exceptional pension past service income (£ millions)	-	(4.6)	(2.0)
Re-financing costs (£ millions)	-	0.4	0.4
Profit on disposal of businesses (£ millions)	-	(16.7)	(17.4)
Adjusted earnings attributable to equity holders of the Company (£ millions)	2.8	2.1	6.5
Weighted average number of ordinary shares in issue (millions)	120.2	118.3	118.3
Adjusted earnings per share (pence)	2.3p	1.8p	5.5p

10 CASH USED IN OPERATIONS

	Six months ended 30 September 2007 £m	Six months ended 30 September 2006 £m	Year ended 31 March 2007 £m
Profit for the period	2.8	22.5	24.7
Adjustments for:
tax	-	0.4	0.5
depreciation and amortisation	0.7	1.6	2.9
share option charge	-	0.4	0.3
profit on disposal of subsidiaries	-	(16.7)	(17.4)
interest expense	10.3	14.3	24.1
interest income	(9.4)	(14.1)	(23.1)
other	-	0.4	0.4
Changes in working capital:
inventories	(0.1)	0.3	2.1
trade and other receivables	2.5	6.1	4.9
trade and other payables	(7.7)	(7.0)	(8.0)
Changes in retirement benefit liabilities	(0.9)	(5.8)	(3.6)
Changes in provisions for liabilities and charges	(2.6)	(6.6)	(12.6)
Cash used in operations	(4.4)	(4.2)	(4.8)

11 NET DEBT

The movement in the Group’s total net debt is as follows:

	31 March 2007 £m	Cash inflows £m	Cash outflows £m	30 September 2007 £m
Cash in hand and at bank	3.6	-	(2.1)	1.5
Bank overdrafts	-	-	-	-
	3.6	-	(2.1)	1.5
Current borrowings	(24.9)	11.1	(8.0)	(21.8)
Non-current borrowings	(0.1)	-	-	(0.1)
	(21.4)	11.1	(10.1)	(20.4)

	31 March 2006 £m	Cash inflows £m	Cash outflows £m	30 September 2006 £m
Cash in hand and at bank	8.4	-	(8.4)	-
Bank overdrafts	-	-	(2.4)	(2.4)
	8.4	-	(10.8)	(2.4)
Current borrowings	(36.8)	69.0	(50.0)	(17.8)
Non-current borrowings	(0.9)	0.6	-	(0.3)
	(29.3)	69.6	(60.8)	(20.5)

12 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

	Attributable to equity holders of the Company
	Share capital (note 6) £m	Share premium (note 6) £m	Fair value and other reserves £m	Capital redemption reserves £m	Cumulative translation adjustment £m	Retained deficit £m	Total equity £m
Balance as at 1 April 2006	14.5	34.7	14.0	0.7	0.7	(218.3)	(153.7)
Currency translation difference	-	-	-	-	(0.5)	-	(0.5)
Fair value of share option schemes	-	-	0.4	-	-	-	0.4
Actuarial losses on defined benefit plans	-	-	(21.1)	-	-	-	(21.1)
Profit for the period	-	-	-	-	-	22.5	22.5
Disposal of subsidiaries	-	-	5.4	-	(0.2)	(5.4)	(0.2)
Balance as at 30 September 2006	14.5	34.7	(1.3)	0.7	-	(201.2)	(152.6)
Actuarial gains on defined benefit plans	-	-	5.9	-	-	-	5.9
Profit for the period	-	-	-	-	-	2.2	2.2
Balance as at 31 March 2007	14.5	34.7	4.6	0.7	-	(199.0)	(144.5)
Issue of shares	0.7	5.7	-	-	-	-	6.4
Actuarial gains on defined benefit plans	-	-	34.2	-	-	-	34.2
Profit for the period	-	-	-	-	-	2.8	2.8
Balance as at 30 September 2007	15.2	40.4	38.8	0.7	-	(196.2)	(101.1)

13 CONTINGENCIES

The Group has contingent liabilities in respect of contracts entered into in the normal course of business and in respect of previous and current disposals of companies and businesses. It is not expected that these will have a material effect on the financial position of the Group.