**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      20-F**




**(Mark
      One)**





o
            **REGISTRATION
                STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES****EXCHANGE
                ACT OF 1934**




**OR**




x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**


**For
      the fiscal year ended December 31, 2005**





**OR**




o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE
                ACT OF 1934**





**OR**






o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE
                ACT OF 1934**
              Date of event requiring this
                shell company
                report......................................
              
              For the transition period from
                _____________________ to
                ____________________




**COMMISSION
      FILE NUMBER** **0-28186**




**ATLAS
      SOUTH SEA PEARL LIMITED**


(Exact
      Name of Registrant as Specified in its Charter)





___________________________________________________________________


(Translation
      of Registrant’s name into English)





**WESTERN
      AUSTRALIA, AUSTRALIA**


(Jurisdiction
      of incorporation or organization)





**43
      YORK STREET, SUBIACO WESTERN AUSTRALIA 6008**


(Address
      of principal executive offices)





Securities
      registered or to be registered pursuant to Section 12(b) of the
      Act:




Title
                of each class
            
            Name
                of each exchange on which registeredNone
            
            None





Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act:





Ordinary
      Shares of Common Stock, as evidenced by American Depositary Shares*


as
      evidenced by American Depositary
      Receipts


(Title
      of
      Class)




Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:





None


(Title
      of
      Class)








Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual
      report.





The
      Company had 87,810,254 Ordinary Shares of Common Stock outstanding as of
      December 31, 2005.


*
      Each
      American Depositary Share represents 20 Ordinary Shares of Common Stock.





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.





Yes
            o
            No
            x





If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934.





Yes
            o
            No
            x




Note—Checking
      the box above will not relieve any registrant required to file reports pursuant
      to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
      obligations under those Sections.





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




Yes
            x
            No
            o





Indicate
      by check mark whether registrant is a large accelerated filer, an accelerated
      filer, or a non-accelerated files. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act.


(Check
      one):




Large
                accelerated
                filer
              o
              Accelerated
                  filer
              o
              Non-accelerated filer
              x





Indicate
      by check mark which financial statement item the registrant has elected to
      follow.




Item
                17
            x
            Item
                18
            o





If
      this
      is an annual report, indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Exchange Act).





Yes
            o
            No
            x





(APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
      YEARS.





Indicate
      by check mark whether the registrant has filed all documents and reports
      required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
      Act
      of 1934 subsequent to the distribution of securities under a plan confirmed
      by a
      court.





Yes
            o
            No
            o




2


**TABLE
      OF CONTENTS**




**Page**Introduction
            
            1**PART
                I**
            
            **ITEM
                1**
            
            Not
                Required
            
            3**ITEM
                2**
            
            Not
                Required
            
            3**ITEM
                3**
            
            Key
                Information
            
            3**ITEM
                4**
            
            Information
                on the Company
            
            9**ITEM
                5**
            
            Operating
                and Financial Review and Prospects
            
            27**ITEM
                6**
            
            Directors,
                Senior Management and Employees
            
            36**ITEM
                7**
            
            Major
                Shareholders and Related Party Transactions
            
            42**ITEM
                8**
            
            Financial
                Information
            
            43**ITEM
                9**
            
            The
                Offer and Listing
            
            44**ITEM
                10**
            
            Additional
                Information
            
            46**ITEM
                11**
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            56**ITEM
                12**
            
            Not
                Required
            
            58**PART
                II**
            
            **ITEM
                13**
            
            Defaults,
                Dividend Arrearages and Delinquencies
            
            59**ITEM
                14**
            
            Material
                Modifications to the Rights of Security Holders and Use of
                Proceeds
            
            59**ITEM
                15**
            
            Controls
                and Procedures
            
            59**ITEM
                16A**
            
            Audit
                Committee Financial Expert
            
            59**ITEM
                16B**
            
            Code
                of Ethics
            
            60**ITEM
                16C**
            
            Principal
                Accountant Fees and Services
            
            60**ITEM
                16D**
            
            Exemptions
                from Listing Standards for Audit Committees
            
            60**ITEM
                16E**
            
            Purchases
                of Equity Securities by the Issuer and Affiliated
                Purchasers
            
            61**PART
                III**
            
            **ITEM
                17**
            
            Financial
                Statements
            
            61**ITEM
                18**
            
            Not
                Required
            
            61**ITEM
                19**
            
            Exhibits
            
            61




i




**INTRODUCTION**




***Currency
      of Presentation and Definitions***





As
      used
      herein, except as the context otherwise requires, the term “Company” refers to
      Atlas South Sea Pearl Limited, an Australian corporation and its subsidiaries.
      The term “ADRs” refers to the American Depositary Receipts of the Company, which
      evidence ownership of American Depositary Shares (“ADSs”) of the Company. Each
      ADR evidences ownership of a specified number of ADSs and each ADS evidences
      ownership of 20 ordinary shares of the Company’s common stock (the “Shares”).




The
      Company’s fiscal year ends on December 31 of each year. References in this
      document to a particular year are to the fiscal year unless otherwise
      indicated.




The
      Company furnishes the Bank of New York, as depositary for its ADSs (the
“Depositary”), with annual reports containing audited consolidated financial
      statements and an opinion thereon by the Company’s independent registered public
      accounting firm. Such financial statements have been audited in accordance
      with
      Australian auditing standards. The Depositary makes such reports available
      for
      inspection by the record holders of ADRs. The Company also furnishes the
      Depositary with financial statements. Until December 31, 2004 these financial
      statements had been prepared in accordance with previous Australian Generally
      Accepted Accounting Principles (“AGAAP”). Effective January 1, 2005, the Company
      began preparing its financial statements in accordance with the Australian
      equivalent of International Financial Reporting Standards (“AIFRS”). These
      financial statements are required to be furnished to shareholders under
      Australian law. AIFRS differs from U.S. Generally Accepted Accounting Principles
      (“US GAAP”) in certain material respects. Accordingly, the Company’s audited
      consolidated financial statements include a reconciliation of certain line
      items
      to US GAAP - See Note 35 of “Item 17. Financial Statements.”




The
      Company publishes its consolidated financial statements expressed in Australian
      Dollars. In this document, references to “US Dollars” or “US$” are to the
      currency of the United States of America and references to “Australian Dollars”
or “A$” are to the currency of Australia. Solely for convenience, this annual
      report on Form 20-F contains translations of certain Australian Dollar amounts
      into US Dollars at specified rates. These translations should not be construed
      as representations that the Australian Dollar amounts actually represent such
      US
      Dollar amounts or could have been or could be converted into US Dollars at
      the
      rates indicated or any other rates. Unless otherwise indicated, the translation
      of Australian Dollars into US Dollars has been made at the rate of A$1.00 =
      US$0.7342, which was the Noon Buying Rate in New York City for cable transfers
      in Australian Dollars as certified for customs purposes by the Federal Reserve
      Bank of New York (the “Noon Buying Rate”) on December 30, 2005. For information
      regarding rates of exchange between Australian Dollars and US Dollars for 2001
      to the present, see “Item 3. A. Selected Financial Consolidated Data - Exchange
      Rates.”




1


***Forward-Looking
      Statements***





This
      Annual Report contains “forward-looking statements” as that term is used in the
      Private Securities Litigation Reform Act of 1995. Forward-looking statements
      are
      based on current expectations rather than historical facts and they are
      indicated by words or phrases such as “anticipate,” “estimate,” “expect,”
“project,” “believe,” “intend,” “envision,” and similar words or phrases. These
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors that may cause actual results, performance or achievements to
      be
      materially different from any future results, performance or achievements
      expressed or implied by such forward-looking statements. Some of the factors
      that would affect our financial performance, cause actual results to differ
      from
      our estimates, or underlie such forward-looking statements, are set forth in
      various places in this report, including but not limited to “Item 3. D Risk
      Factors.”




These
      risks include, but are not limited to, the following:




·
            the
                economic and socio-political climate in the areas in which the Company
                operates;




·
            storms,
                weather patterns, water pollution or other events which increase
                the
                projected mortality rate or decrease the projected quality of the
                Company’s oysters and pearls;




·
            changes
                in the worldwide supply and demand for South Sea
                pearls;




·
            increases
                in labor costs in Indonesia and general economic factors in markets
                where
                the Company plans to sell its pearls;




·
            the
                exchange rate of Japanese Yen, which is the predominant currency
                for
                dealing in pearls, against the Australian Dollar and other currencies;
                and




·
            the
                availability of an adequate supply of quality
                pearls.




2




**PART
      I**




**ITEM
      1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**




Not
      required.




**ITEM
      2. OFFER STATISTICS AND EXPECTED TIMETABLE**




Not
      required.




**ITEM
      3. KEY INFORMATION**




**A.**  **Selected
      Consolidated Financial Data**




The
      selected consolidated financial information set forth below has been derived
      from the Company’s audited financial statements and the notes thereto contained
      elsewhere herein. The financial statements for the year ended December 31,
      2005
      have been prepared in accordance with AIFRS. The Company began using AIFRS
      effective from January 1, 2005. For comparative purposes, the financial
      statements for the year ended December 31, 2004 have been amended to reflect
      the
      new AIFRS format of reporting. However, any financial information that is
      presented in this Annual Report for fiscal years ending on or before December
      31, 2003 are reported under AGAAP. The financial information should be read
      in
      conjunction with, and are qualified in their entirety by reference to, the
      Company’s audited consolidated financial statements and notes thereto. The
      financial results should not be construed as indicative of financial results
      for
      subsequent periods. See “Item 4. Information on the Company” and “Item 5.
      Operating and Financial Review and Prospects.”




**Years
                  Ended December 31,****Income
                Statement Data**
            
            **2005****(1)**
              **(US$)**
            
            **2005**
              **(A$)**
            
            **2004**
              **(A$)**AIFRS
                Accounting Principles:Revenue
            
            $
            7,083,830
            
            $
            9,847,859
            
            $
            6,837,523Net
                income (loss) from operations
            
            
            1,512,883
            
            
            2,060,587
            
            
            (594,274
            )Net
                income (loss) from continuing operations
            
            
            1,512,883
            
            
            2,060,587
            
            
            (594,274
            )Net
                income (loss)
            
            
            1,512,883
            
            
            2,060,587
            
            
            (594,274
            )Net
                income (loss) per share-basic
            
            
            0.0172
            
            
            0.0235
            
            
            (0.0068
            )Net
                income (loss) per share-diluted
            
            
            0.0172
            
            
            0.0235
            
            
            (0.0068
            )Weighted
                average number of basic ordinary shares outstanding
            
            
            87,810,254
            
            
            87,810,254
            
            
            87,810,254Weighted
                average number of diluted ordinary shares outstanding
            
            
            87,810,254
            
            
            87,810,254
            
            
            87,810,254


3






**Years
                  Ended December 31,****Income
                Statement Data**
            
            **2005****(1)**
              **(US$)**
            
            **2005**
              **(A$)**
            
            **2004**
              **(A$)**
            
            **2003**
              **(A$)**
            
            **2002**
              **(A$)**
            
            **2001**
              **(A$)**U.S.
                Generally Accepted Accounting Principles:Revenue
            
            $
            7,230,298
            
            $
            9,847,859
            
            $
            6,837,523
            
            $
            9,637,393
            
            $
            11,341,448
            
            $
            11,335,984Amortization
                of goodwill(2)
            
            
            —
            
            
            —
            
            
            —
            
            
            247,777
            
            
            251,941
            
            
            —Gain/(loss)
                on foreign exchange derivatives(3)
            
            
            —
            
            
            —
            
            
            (691,709)
            
            
            782,327
            
            
            (6,318
            )
            
            205,610Stock
                options issued to employees
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (36,400
            )
            
            (47,250
            )Capitalization
                of administration
              costs(4)
            
            
            —
            
            
            —
            
            
            168,508
            
            
            426,448
            
            
            487,022
            
            
            (170,962
            )Foreign
                Currency Balances(5)
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,116,101
            )
            
            320,234
            
            
            —Prior
              year adjustment (6)
            
            
            9,376
            
            
            12,770
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income (loss) from operations
            
            
            1,522,259
            
            
            2,073,357
            
            
            (1,117,475
            )
            
            1,585,184
            
            
            4,515,498
            
            
            4,138,168Net
                income (loss) from continuing operations
            
            
            1,522,259
            
            
            2,073,357
            
            
            (1,117,475
            )
            
            1,585,184
            
            
            4,515,498
            
            
            4,138,168Net
                income (loss)
            
            
            1,522,259
            
            
            2,073,357
            
            
            (1,117,475
            )
            
            1,585,184
            
            
            4,515,498
            
            
            4,138,168Net
                income (loss) per share - basic (before cumulative effect of change
                in
                accounting policy)
            
            
            0.01725
            
            
            0.0236
            
            
            (0.0127
            )
            
            0.0181
            
            
            0.0546
            
            
            0.0666Net
                income loss) per share - basic (after cumulative effect of change
                in
                accounting policy)
            
            
            0.01725
            
            
            0.0236
            
            
            (0.0127
            )
            
            0.0181
            
            
            0.0546
            
            
            0.0678Net
                income (loss) per share - diluted (before cumulative effect of change
                in
                accounting policy)
            
            
            0.01725
            
            
            0.0236
            
            
            (0.0127
            )
            
            0.0181
            
            
            0.0506
            
            
            0.0542Net
                income (loss) per share - diluted (after cumulative effect of change
                in
                accounting policy)
            
            
            0.01725
            
            
            0.0236
            
            
            (0.0127
            )
            
            0.0181
            
            
            0.0506
            
            
            0.0551Weighted
                average number of basic ordinary shares outstanding
            
            
            87,810,254
            
            
            87,810,254
            
            
            87,810,254
            
            
            87,810,254
            
            
            82,724,884
            
            
            61,013,243Weighted
                average number of diluted ordinary shares outstanding
            
            
            87,810,254
            
            
            87,810,254
            
            
            87,810,254
            
            
            87,810,254
            
            
            89,284,659
            
            
            79,439,026




4




**Years
                  Ended December 31,****Income
                Statement Data**
            
            **2003**
              **(A$)**
            
            **2002**
              **(A$)**
            
            **2001**
                **(A$)**Australian
                Accounting Principles (AGAAP)Revenue
            
            $
            9,637,393
            
            $
            11,341,448
            
            $
            11,335,984Net
                income (loss) from operations
            
            
            1,244,733
            
            
            3,499,017
            
            
            4,150,770Net
                income (loss) from continuing operations
            
            
            1,244,733
            
            
            3,499,017
            
            
            4,150,770Net
                income (loss)
            
            
            1,244,733
            
            
            3,499,017
            
            
            4,150,770Net
                income (loss) per share-basic
            
            
            0.0142
            
            
            0.0423
            
            
            0.0680Net
                income (loss) per share-diluted
            
            
            0.0142
            
            
            0.0403
            
            
            0.0510Weighted
                average number of basic ordinary shares outstanding
            
            
            87,810,254
            
            
            82,724,884
            
            
            61,013,243Weighted
                average number of diluted ordinary shares outstanding
            
            
            87,810,254
            
            
            87,910,235
            
            
            88,026,526




**At
                December 31,****Balance
                Sheet Data**
            
            **2005****(1)**
              **(US$)**
            
            **2005**
              **(A$)**
            
            **2004**
              **(A$)**
            
            **2003**
              **(A$)**
            
            **2002**
              **(A$)**
            
            **2001**
              **(A$)**AIFRS
                Accounting PrinciplesCash
                and cash equivalents
            
            
            1,083,297
            
            
            1,475,480
            
            
            3,208,996Total
                assets
            
            
            17,995,512
            
            
            24,510,368
            
            
            17,385,121Total
                current liabilities
            
            
            4,924,769
            
            
            6,707,667
            
            
            1,355,061Long-term
                debt and capital leaseobligations
            
            
            124,124
            
            
            169,060
            
            
            112Shareholders’
                equity (excluding minority interests) (AIFRS or AGAAP)
            
            
            12,946,619
            
            
            17,633,641
            
            
            16,029,948U.S.
                Generally Accepted Accounting Principles:Goodwill(2)
            
            
            366,893
            
            
            499,718
            
            
            499,718
            
            
            499,718
            
            
            251,941
            
            
            —Financial
                instruments(3)
            
            
            —
            
            
            —
            
            
            289,911
            
            
            981,620
            
            
            199,292
            
            
            205,610Inventory(4)
            
            
            —
            
            
            —
            
            
            —
            
            
            (168,508
            )
            
            (594,956
            )
            
            (1,081,978
            )Cash
                and cash equivalents
            
            
            1,083,297
            
            
            1,475,480
            
            
            3,208,996
            
            
            5,614,748
            
            
            5,976,085
            
            
            4,709,240Total
                assets
            
            
            18,362,612
            
            
            25,010,368
            
            
            18,174,750
            
            
            20,703,635
            
            
            22,397,898
            
            
            20,287,762Total
                current liabilities
            
            
            4,924,769
            
            
            6,707,667
            
            
            1,355,061
            
            
            889,463
            
            
            2,793,441
            
            
            2,985,647Long-term
                debt and capital lease
              obligations
            
            
            124,124
            
            
            169,060
            
            
            112
            
            
            406
            
            
            —
            
            
            1,877Foreign
                Currency Translation(5)
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,004,591
            )
            
            (1,507,226
            )Shareholders’
                equity (excluding minority interests) (US GAAP)
            
            
            13,313,512
            
            
            18,133,359
            
            
            16,819,577
            
            
            19,734,174
            
            
            19,604,454
            
            
            17,300,238Dividends
                paid per share
            
            
            0.0073
            
            
            0.0100
            
            
            —
            
            
            0.0100
            
            
            0.0400
            
            
            0.0200





5




**At
                December 31,****Balance
                Sheet Data**
            
            **2003**
              **(A$)**
            
            **2002**
              **(A$)**
            
            **2001**
              **(A$)**Australian
                Accounting Principles (AGAAP)Cash
                and cash equivalents
            
            
            4,301,918
            
            
            6,119,808
            
            
            5,585,608Total
                assets
            
            
            22,192,134
            
            
            23,715,481
            
            
            21,164,130Total
                current liabilities
            
            
            889,926
            
            
            2,780,309
            
            
            2,985,647Long-term
                debt and capital lease obligations
            
            
            406
            
            
            —
            
            
            1,877Shareholders’
                equity (excluding minority interests) (AIFRS or AGAAP)
            
            
            21,301,802
            
            
            20,935,172
            
            
            18,176,606





(1)
            US
                Dollar amounts have been translated at the Noon Buying Rate on December
                31, 2005 of A$1.00 = US$0.7342. Such translations are provided for
                information purposes only.





(2)
            Under
                AGAAP, goodwill relating to the acquisition of a business was written
                off
                on a straight line basis over the period during which the benefits
                of the
                goodwill are expected to arise which cannot be greater than 20 years.
                Effective January 1, 2002, goodwill may not be amortized under US
                GAAP but
                instead is tested for impairment each year. From January 1, 2005,
                AIFRS
                treatment of Goodwill is harmonized with US GAAP. However, a retrospective
                adjustment to Amortization under AIFRS has only been made from January
                1,
                2004. Consequently, the amount of goodwill on the balance sheet is
                greater
                under US GAAP than under AIFRS and there is an adjustment required
                under
                US GAAP. See Note 35.1 of “Item 17. Financial
                Statements.”





(3)
            US
                GAAP requires that the loss or gain on forward exchange contracts
                noted in
                Note 35 of “Item 17. Financial Statements” be recognized in the income
                statement and reflected on the balance sheet of the Company. This
                loss or
                gain is not reflected on the income statement or the balance sheet
                under
                AGAAP prior to 2004. Under AIFRS, any gain or loss on forward exchange
                contracts that does not form an effective hedge must be recognized
                in the
                income statement and recognized on the balance sheet of the Company.
                Under
                the transition to AIFRS from AGAAP, recording of movements and balances
                relating to foreign currency hedging is only required after January
                1,
                2005. Hence an adjustment to US GAAP still exists for 2004 above.
                See Note
                35.3 of “Item 17. Financial
                Statements.”





(4)
            Under
                AGAAP, the Company capitalized expenditures into inventory which
                were of
                an administrative nature for the year 2001. Under US GAAP, expenditures
                which are of an administrative nature may not be capitalized into
                inventory and must be expensed in the period in which incurred.
                Adjustments to net income and total assets were required under US
                GAAP in
                2001, 2002, 2003 and 2004. See Note 35.5 of “Item 17. Financial
                Statements.”





(5)
            Under
                US GAAP, all balance sheet items that are recorded in a currency
                other
                than the reporting currency are translated at the spot rate at the
                balance
                date. This is referred to as the current rate accounting method.
                The
                foreign currency movements are recorded in a foreign currency revaluation
                reserve on the balance sheet. From January 1, 2004, AIFRS follows
                the same
                accounting treatment as US GAAP and as such the accounting treatment
                for
                the years 2004 and 2005 does not require
                adjustment.  Prior
                to January 1, 2004, applying AGAAP, only monetary items that were
                stated
                in a currency other than Australian Dollars were converted to the
                reporting currency at the exchange rate on the balance date. All
                other
                foreign currency balances were translated to Australian Dollars at
                their
                historic rate.  (6)
            Immaterial
              prior year earnings adjustment was accounted for in retained earnings
              under AIFRS. Under US GAAP, this is not allowed and an adjustment has
              been
              made to the current year income statement to reflect
              this.





The
      Company’s financial statements have been prepared in accordance with either
      AIFRS or AGAAP, as stated above. Certain line items have been reconciled to
      US
      GAAP to assist U.S. persons in evaluating such data. The complete reconciliation
      of such line items is set forth in “Item 17. Financial Statements - Note 35 to
      Financial Statements.”


6





***Exchange
      Rates***




Solely
      for informational purposes, this annual report contains translations of certain
      Australian Dollar amounts into or from US Dollars at a specified rate. See
      “Introduction.” These translations should not be construed as representations
      that the Australian Dollar amounts represent the US Dollar amounts indicated,
      or
      could be converted into or from US Dollars at the rate indicated. The exchange
      rate on June 30, 2006 was A$1.00 = US$0.0.7423.




The
      following table sets forth, for the months indicated, certain information
      concerning the Noon Buying Rate for Australian Dollars expressed in US Dollars
      per A$1.00:




**Month
                Ending**
            
            **High**
            
            **Low**December
                31, 2005
            
            $
            0.7567
            
            $
            0.7261January
                31, 2006
            
            
            0.7572
            
            
            0.7379February
                28, 2006
            
            
            0.7548
            
            
            0.7363March
                31, 2006
            
            
            0.7458
            
            
            0.7056April
                30, 2006
            
            
            0.7593
            
            
            0.7177May
                31, 2006
            
            
            0.7781
            
            
            0.7509June
                30, 2006
            
            
            0.7527
            
            
            0.7284





The
      following table sets forth, for the years indicated, certain information
      concerning the Noon Buying Rate for Australian Dollars expressed in US Dollars
      per A$1.00:




**Year
                Ended December 31,**
            
            **Average****(1)**2001
            
            0.51322002
            
            0.54482003
            
            0.65892004
            
            0.73782005
            
            0.7620





(1)
            Represents
                the average of the Noon Buying Rates on the last day of each month
                during
                the relevant period.





**B.**  **Capitalization
      and Indebtedness**




Not
      required.




**C.**  **Reasons
      for the Offer and Use of Proceeds**




Not
      required.




**D.**  **Risk
      Factors**




*The
      Company’s business, financial condition and operating results could be adversely
      affected by any of the following factors. The risks and uncertainties described
      below are not the only ones that the Company faces. Additional risks and
      uncertainties not currently known to the Company’s management, or that the
      Company’s management currently thinks are immaterial, may also impair the
      Company’s business operations.*




7


**The
      Company’s operations are based in Indonesia, which has been subject to economic
      and socio-political disruption in the past.** Some
      parts of Indonesia have experienced social, ethnic and economic disruption.
      In
      November 1999, the Company abandoned its cultivation site in Kupang, W. Timor
      in
      part due to increasing unrest in the area. The province of West Papua, where
      some of the Company’s water leases are located, is agitating for independence.
      The Company monitors the socio-political situation closely. In the event of
      civil unrest, there is an evacuation plan in place to protect the Company’s
      employees. Security personnel are employed to provide protection to employees
      and the Company’s assets to the best of their ability. It is difficult to
      predict what will occur in the future. If the employees are forced to abandon
      any of the farm projects as a result of an emergency, the Company does not
      expect it will be able to salvage any of the oysters or pearls and this will
      have a material adverse effect on the Company’s business, operations and
      financial condition.




**The
      cultivation process for South Sea pearls requires certain environmental
      conditions and**  **any
      change in weather or water conditions could have a material adverse effect
      on
      the Company’s pearl production** .
      The
      cultivation process depends on certain environmental factors, including
      consistently warm sea water temperature, fully saline water conditions, adequate
      tidal flow to distribute the food supply and availability of phytoplankton
      food.
      There are only a few areas in the world that meet such requirements. The water
      areas encompassed by the Company’s water leases present ideal conditions for
      pearl cultivation. The conditions in these areas, however, are subject to change
      based on normal weather patterns. The Company has no control over these weather
      patterns. In 2002, weather patterns caused by *El
      Niño* adversely
      affected the Company’s ability to raise juvenile oysters. The Company
      established operations in Northern Bali primarily for the production of juvenile
      oysters in response to this problem. Notwithstanding this action, the Company
      anticipates that its rearing of oysters will continue to be affected by natural
      weather patterns. If these weather patterns continue, there can be no assurances
      that the Company will have access to sources of oysters for the pearl
      cultivation process or if available, that they will be available on favorable
      terms. The failure to maintain an adequate supply of juvenile oysters for
      nucleation could have a material adverse effect on the Company’s pearl
      cultivation process.




**The
      Company’s oysters are sensitive to disease.** The
      Company’s oysters are placed in panels in the sea. Although, the Company’s
      employees continuously clean the oysters, certain foreign organisms can enter
      the oyster and eat the oyster or cause diseases. The cultivation process for
      pearls takes approximately two years from the time the oyster is seeded, prior
      to the oyster being seeded, it takes two years for the animal to reach maturity.
      Therefore, the loss of oysters due to disease could have a material adverse
      effect on the Company’s production process and generation of
      revenue.




**The
      sale of pearls is dependent upon a strong economy** .
      The
      sale of pearls is sensitive to fluctuations in the global economic cycle. Pearls
      are categorized as a luxury item and their consumption is dependent upon the
      availability of disposable income. Consumption is strongly influenced by fashion
      trends. The Company’s pearls compete with several other types of jewelry such as
      precious metals and precious gem stones for consumer disposable income.
      Unfavorable general economic conditions have an adverse effect on consumer
      spending for such items, and therefore on the Company’s sales.


8


**The
      price for pearls is subject to fluctuation based on supply and quality.** The
      price
      that the Company can obtain for its pearls is significantly dependent on the
      overall supply of available pearls and the quality of the Company’s pearls. There
      has
      been an increase in the supply of pearls globally. Most of the increase in
      South
      Sea pearl production has come from Indonesia and the Philippines, and there
      is
      evidence of increased production from Australia .
      This
      increase in supply has had an adverse effect on pearl prices, but the potential
      adverse impact of continued increases in supply cannot be determined with any
      certainty. There has also been an increase in supply of fresh water pearls
      from
      China and black pearls from Tahiti.  In
      addition, although the Company closely monitors its pearl cultivation process,
      it is difficult to predict the quality of pearls the Company will harvest in
      any
      given year. Significant increases in the supply of pearls or decreases in the
      quality of the Company’s pearls could have a material adverse effect on the
      Company’s revenues.




**The
      Company is dependent on a small number of key expatriate
      managers.** The
      Company’s cultivation process is very technical. The Company depends on a small
      number of key expatriate managers who supervise the cultivation process. Due
      in
      part to the remote location of the Company’s pearl farms, the Company has
      limited access to a skilled work force, and the replacement of these managers
      could be difficult. The loss of the services of any of these individuals could
      materially and adversely affect the Company’s pearl production, business and
      financial condition.




**The
      Company is exposed**  **to
      fluctuations in exchange rates.** The
      majority of the revenues the Company derives from the sale of its pearls occurs
      in Japanese Yen. The Company’s revenues are reported, however, in Australian
      Dollars. Fluctuation in the exchange rate of Japanese Yen to the Australian
      Dollar could have a material adverse effect on the Company’s revenues. The
      Company’s operating expenditures are predominantly denominated in Indonesian
      Rupiah (“IDR”). Fluctuations in the exchange rate between the IDR and the
      Australian Dollar will have an effect on the operating results of the
      Company.




**The
      Company is exposed**  **to
      the volatile inflation rate in Indonesia.** Inflation in Indonesia has varied up to 17% per annum for the period from 2000
      to 2005. The official inflation rate in Indonesia for 2005 was 17.1% per annum.
      In general, inflation increases all of the Company’s operating costs in
      Indonesia, but specifically impacts wages, food and fuel (diesel and benzene).
      As the Company’s revenues are derived mostly from sources outside of Indonesia,
      the Indonesian inflation rate does not cause a corresponding increase in the
      Company’s revenues. As a result, Indonesia’s inflation could have a material
      adverse effect on the Company’s expense structure.




**ITEM
      4. INFORMATION ON THE COMPANY**




**A.**  **History
      and Development of the Company**




The
      Company is incorporated as a public company in Australia and operates under
      the
      Corporations Act 2001. On May 30, 2006, the Company changed its name from Atlas
      Pacific Limited to Atlas South Sea Pearl Limited to better reflect its business.
      This change in name was made effective on June 9, 2006. The Company operates
      under an Australian Company Number ("ACN”) 009 220 053 and an Australian
      Business Number ("ABN") 32 009 220 053. The Company is listed on the Australian
      Stock Exchange (“ASX”), which is governed by the ASX Listing Rules. The
      Company’s domicile is Australia and its registered office and principal place of
      business are 43 York Street, Subiaco Western Australia 6008 (telephone: +61
      8
      9380-9444, facsimile: +61 8 9380-9970).


9


The
      Company was incorporated on February 28, 1987 as Atlas Pacific Gold N.L. for
      the
      purpose of acquiring all of the capital stock in Sharcon Pty Ltd, (“Sharcon”), a
      company that owned options to acquire mineral and precious metal mining
      tenements. In June 1987, the Company raised A$5 million through an initial
      public offering in Australia and, shortly thereafter, listed its shares on
      the
      ASX. The Company used the proceeds from this offering to acquire the stock
      of
      Sharcon and to explore mining tenements from 1987 through 1988. The Company
      never commenced mining, and between 1988 and 1993 sold its mining interests
      and
      investigated other potential business opportunities. The Company did not
      generate revenue from its mining operations and has since disposed of all its
      mining interests and no longer pursues mineral exploration
      activities.




In
      1993,
      the Company invested in the Indonesian pearling project (the “Pearling Project”)
      through its subsidiary Tansim Pty Ltd (“Tansim”), with a number of other joint
      venturers. The Pearling Project operates an oyster hatchery and farm business
      for the purpose of cultivating South Sea pearls. (See “Business Overview -
      Pearling).” On January 20, 1994, the Company changed its status from a No
      Liability (N.L.) company to a company limited by shares and changed its name
      to
      Atlas Pacific Limited.




PT
      Cendana Indopearls (“Cendana”), an Indonesian-approved foreign investment
      company, owns and operates the Pearling Project. The Company originally acquired
      a 75% interest in the Pearling Project by purchasing all of the capital stock
      of
      Tansim, an Australian corporation, in June 1993. Tansim purchased the remaining
      25% interest in Cendana in October 1999. The Company’s principal focus remains
      on pearl production in Indonesia. As of December 31, 2005, 59% (A$14.4 million)
      of the Company’s total assets were employed in Indonesia, principally in oyster
      stocks, plant and equipment. The remaining Company’s assets are made up of
      pearls, cash and receivables, predominantly in Australia.




During
      the last and current fiscal years, the Company did not receive an indication
      of
      any public takeover offers by third parties in respect of the Company’s Shares
      or by the Company in respect of other companies’ shares.




**B.**  **Business
      Overview - Pearling**




***Introduction***





A
      pearl
      is a lustrous concretion produced by certain bivalve mollusks, including mussels
      and oysters. Natural pearls consist almost entirely of nacre, which is the
      substance forming the inner layers of the mollusk shells. Nacre, also referred
      to as mother-of-pearl, is composed primarily of aragonite crystals. The pearl
      is
      an abnormal growth resulting from the invasion of the body of the mollusk by
      foreign matter, or “nucleus”. The foreign body acts as an irritant in the
      mollusk and becomes coated with layer upon layer of nacreous material.
      Approximately 30% of cultivated mollusks reject the nucleus and do not produce
      pearls. Both marine and freshwater mollusks produce pearls, and the most
      commonly used mollusk for the production of pearls is the
      oyster.


10


There
      are
      several types of pearls cultivated around the world. The four major categories
      of cultured pearls are (1) Akoya pearls produced in the seas around China and
      Japan, (2) freshwater pearls produced mainly in China, (3) South Sea pearls
      produced primarily in Australia, Indonesia, Philippines, and Myanmar, and (4)
      black pearls produced in Tahiti and several other Pacific Islands.




Prices
      of
      pearls vary enormously. There are several factors which determine the value
      of a
      pearl. These factors include size, shape, color, skin quality and luster. As
      the
      size and other characteristics of a pearl improve, its value increases
      exponentially.




With
      respect to shape, the most valuable pearls are spherical. Drop and button shapes
      are less valuable than spherical pearls, but are still considered to be quality
      pearls. Circles and irregular shaped pearls, or baroques, are the least valuable
      shapes of pearls.




Pearl
      coloration varies widely, with the most valuable shades being gold and silver.
      South Sea pearls may be silver, white, cream, yellow or gold. The *Pinctada
      maxima* oyster
      is the species which produces the South Sea pearl. There are two varieties
      of
      this oyster. The silver lip variety produces the valuable silver-white pearl
      and
      the gold lip variety produces cream, yellow and highly sought after gold colored
      pearls.




The
      final
      significant determinant of pearl value is skin quality and luster. The less
      blemishes and “pit” marks the greater the value of the pearl. Luster refers to
      the appearance of a pearl’s surface judged by its brilliance and ability to
      reflect light. The greater the luster, the more valuable the pearl.




***Pearl
      Cultivation***




Pearls
      have been cultured successfully since 1920 using a process developed in Japan
      in
      which the oysters are “nucleated” or “seeded.” In this process, a nucleus is
      introduced into the oyster and the oyster then deposits layers of nacre around
      the bead. This process takes approximately two years for South Sea pearls.
      Today, cultured South Sea pearls are not easily distinguished from naturally
      occurring pearls, which are extremely rare.




Pearl
      cultivation traditionally relied on the availability of wild oysters, or shells,
      which were nucleated to form pearls. However, hatchery-reared oysters have
      become an increasingly popular means of cultivating pearls. By using
      hatchery-reared oysters, pearl farmers are able to control oyster breeding
      to
      improve the quality of the oysters that will be nucleated. This, in turn,
      produces higher quality pearls.




Pearls
      have been successfully cultivated in Japan, China, Tahiti, the Cook Islands,
      Myanmar, Australia, the Philippines and Indonesia. Ideal conditions for the *Pinctada
      maxima* oyster,
      which produces the South Sea pearl, exist in certain select regions of the
      world’s equatorial and tropical waters located 20 degrees north and south of the
      equator between Myanmar in the west and Northern Australia and the Indonesian
      province of West Papua (formerly Irian Jaya) in the east. Indonesia lies in
      the
      middle of this region. These regions provide the following natural environmental
      factors necessary to cultivate pearls: the availability of phytoplankton food
      upon which the filter feeding oysters rely; adequate tidal flow to distribute
      the supply of food; warmer sea water temperatures without abrupt fluctuations
      of
      more than a few degrees and fully saline, as opposed to brackish, water
      conditions.


11


***The
      South Sea Pearl Industry***




Australia
      is traditionally the most successful producer of South Sea pearls in terms
      of
      quality. The bulk of Australian pearls are produced in Western Australia and
      the
      Northern Territory. Australian state governments manage the industry on a quota
      system, with a total permitted annual catch of 572,000 wild shells shared among
      sixteen pearl oyster licenses in Western Australia. In addition to this,
      beginning in 1992, Western Australian license holders became entitled to seed
      an
      additional 350,000 hatchery produced oysters. The quota is not divided equally,
      and the two largest pearling operators control over 50% of the quota. Family
      groups or small partnerships tightly control the licenses. In 1998, the
      authorities in the Northern Territory also issued six pearling licenses for
      a
      total permitted annual seeding limit of 420,000 seedings for wild and hatchery
      produced oysters.




Although
      the technology is available to introduce hatchery programs in Western Australia,
      high production costs, particularly labor costs, have limited the development
      of
      such programs. In addition, Western Australia recently extended its quota system
      to embrace hatchery-reared oysters in addition to wild shells. Because of the
      fixed quota system and restrictive hatchery policy, expansion opportunities
      for
      Australian pearl producers are limited. The only ways to increase profitability
      are through improvement in pearl quality or reduction in costs of production.
      Thus, the Australian pearling industry is virtually closed to new participants
      unless they are prepared to acquire an existing operation.




By
      comparison, the pearling industry in Indonesia is relatively unregulated.
      Although there are a few farmers in Indonesia capable of producing quantities
      of
      pearls equal to the largest Australian operations, there are a lot more pearl
      producers in Indonesia, many with small operations. Due to a lesser abundance
      of
      wild shells and lower labor costs, there is much heavier emphasis on hatchery
      breeding programs in Indonesia than in Australia. Production has grown
      substantially in the last decade and Indonesia now produces approximately the
      same volume of pearls as Australia. The value of such production, however,
      is
      less than that of Australia due to the lower quality and size of the pearls.
      The
      Indonesian pearling industry is significantly less regulated than in Australia
      and technological improvements in the Indonesian cultivation processes are
      taking place.




The
      Company believes that the pearling conditions in Indonesia offer some advantages
      to those in Australia. The waters are warmer for a longer period of time, which
      facilitates a longer growing season for the pearls. The faster growing
      conditions, however, result in a less consistent result for pearls produced
      from
      an oyster that is re-seeded after the first pearl is harvested. This results
      in
less high quality large pearls being produced by the Company. There is also
      less
      variation in water temperature throughout the year, which means that seeding
      of
      oysters can take place over a longer period of time each year.


12


The
      Indonesian government continues to encourage foreign investment. Foreign
      investment entities are required to use an investment structure known as a
“PMA”
company, which offers investors, among other things, tax concessions and
      remissions on duty of essential imports. Likewise, Indonesia does not levy
      sales
      tax on exported products, which includes the Company’s pearls. There can be no
      assurances, however, that the economic or political environment for pearl
      production in Indonesia will remain stable or that the Indonesian government
      will maintain favorable investment vehicles for foreign investments.




The
      Company still believes that the overall advantages of running its operations
      in
      Indonesia as compared to Australia, outweigh the disadvantages of operating
      in
      Indonesia.


13




***The
      Pearling Project***




***General***





In
      1990,
      a group of joint venture parties, of which Tansim was a party, commissioned
      an
      extensive marine review and survey to locate the best possible pearl farm site
      within a narrow belt of equatorial waters centered on the Indonesian Islands
      and
      Northern Australia. Based on the results of such study, they chose a location
      for the pearl farm at Lelindo Point near the town of Kupang in West Timor,
      Indonesia in 1991. They acquired water leases, constructed pearling
      infrastructure and commenced commercial operations. During 1998, the Kupang
      area
      became a less desirable location for the Company’s operations due to an increase
      in local industry which caused pollution and because of increased security
      threats. The Company began to develop facilities at Waigeo Island, in the
      province of West Papua. By the end of January 1999, the Company had reduced
      its
      operations at the Kupang facility to hatchery and grow-out facilities only.
      The
      majority of the nucleated oysters were successfully transported to the Company’s
      new pearl farm at Waigeo Island during 1999. In November 1999, the Company
      decided to close down the Kupang facility and concentrate its resources on
      its
      pearl farming activities at the Company’s newer facility in West
      Papua.




In
      1997,
      Cendana entered into water leases for approximately 2,500 hectares at Alyui
      Bay,
      Waigeo Island, West Papua (formerly known as Irian Jaya) in northern Indonesia.
      Cendana also entered into a land lease for five hectares near these water
      leases. The leases are for 25 years and expire in September 30, 2022. The
      Company developed the site as a pearl farm and hatchery. See “Item 4.D
      Information on the Company - Property, Plant and Equipment.”




Alyui
      Bay
      on the island of Waigeo in West Papua, proved to be a successful pearl farming
      site. The Company commenced commercial pearl harvests at this site in 1999,
      with
      an excellent quality of pearls being produced. Significant infrastructure was
      developed at Alyui Bay including three accommodation camps, a modern hatchery,
      engineering workshop, fuel storage, operating shed and boat building facilities.
      The farm accesses some of its labor force from a nearby village while in excess
      of 150 staff are accommodated at the farm camps in fully equipped
      facilities.




During
      2002, the adverse impact of the *El
      Nino* climatic
      phenomenon on the production of juvenile oysters at Alyui Bay required the
      Company to explore opportunities to source oysters elsewhere. In July 2002,
      the
      Company entered into an arrangement with an Indonesian company called PT Horiko
      Abadi (“Abadi”), which allowed it to have access to a hatchery and associated
      sea leases at a location called Banyupoh on the Indonesian island of Bali.
      The
      Company paid A$90,000 to Abadi for access to this facility for a period of
      three
      (3) years. This Agreement was terminated in September 2005. Under this contract,
      Abadi remained the owner of the land and water leases, but the Company had
      a
      right to operate from this site and share the output (juvenile oysters) from
      this operation in the ratio of 30% to Abadi and 70% for the Company’s Indonesian
      subsidiary. The Company was required to contribute 70% of the ongoing operating
      costs of this facility, which was approximately A$15,000 per month. Equipment
      from the original Kupang hatchery was re-commissioned for use at this facility
      at minimal cost. In September 2005, the Company established its own hatchery
      and
      growout farm at Penyabangan.




14




During
      2003, the Company entered into a second joint production arrangement for
      juvenile oysters with an Indonesian company called Cahaya Cemerlang
      (“Cemerlang”). Cemerlang granted the Company shared access to leases and
      facilities which consisted of over 100 hectares of ocean leases and two camps
      covering a combined area of four hectares which were located around Bacan Island
      in the North Maluku province of Indonesia. In return for access to these
      facilities, the Company had to provide Cemerlang with a share of juvenile
      production from that site. This share was calculated on the basis of an equal
      split if the juveniles that were produced were taken by Cemerlang from this
      facility before the oysters reached 12 months of age or a split of 30% to
      Cemerlang and 70% to the Company if the oysters were taken from this site after
      they turned 12 months of age. During 2003, over 400,000 juvenile oysters were
      successfully reared. The Company’s share of this production was over 200,000
      juvenile oysters. Due to a high level of juvenile oyster mortality, only 110,000
      juvenile oysters were successfully reared from this facility during 2004. The
      joint arrangement was for five years, and the Company had an option to extend
      the term thereafter for five (5) years on similar terms. Because this site
      continuously experienced high levels of mortalities, the use of the site as
      a
      source of juvenile oysters had became severely restricted. As a result, the
      Company reached an agreement with Cemerlang to cease the joint operations by
      the
      end of November 2005. Juvenile oysters from the 2004/05 hatchery breeding season
      were split in accordance with the agreement. All joint assets were also divided
      between the Company and Cemerlang. The Company’s share of the oysters and assets
      were transferred to Karang Asem in East Bali, which it established in
      2005.




In
      December 2003, the Company leased an independent juvenile production and
      grow-out site in Northern Bali near the village of Penyabangan. The Company
      entered into a 30-year lease in relation to 0.2 hectares of land and one hundred
      hectares of ocean with the local authorities with payments of approximately
      A$15,000 paid up front and A$200 payable per month for the term of the lease.
      The Company has the right to construct buildings on the land and use the ocean
      for the production and rearing of pearl oysters. A hatchery center and related
      support infrastructure for the Company’s boat maintenance/building, seeding
      technician training, longline production and support activities was completed
      during 2004. The Company transitioned its activities at the Banyupoh facility
      to
      this hatchery in September 2005. Hatchery production and grow-out of juvenile
      oysters at Penyabangan has proven to be successful and the Company further
      expanded the site in 2005, which now can accommodate approximately 500,000
      oysters. The Company’s transport vessel, the “Sahabat,” then successfully
      delivers oysters from Penyabangan to Alyui Bay. Combined production at Alyui
      Bay
      and Penyabangan allowed seedings in excess of 390,000 oysters in 2005.
      Successful spawnings using specially selected brood stock have resulted in
      commercial batches of juvenile oysters being produced at the Penyabangan site
      in
      2004 and 2005.




In
      May,
      2005, the Company expanded its operations in Bali by opening a new farm site
      at
      Karang Asem on Bali’s east coast and establishing a pearl oyster lease on Nusa
      Lambongan Island in the south of Bali. On May 23, 2005, the Company entered
      into
      a 30-year water lease comprising 235 hectares (580 acres) and a land lease
      for
      an additional 2,000 square meters with the local villagers who have ownership
      of
      the area. Under the lease, the Company paid the local villagers approximately
      A$16,000 and will pay approximately A$200 per month for the use of the site.
      The
      Company has constructed storage, accommodations and oyster meat processing
      facilities at the site, which was established for the purpose of farming pearls.
      On September 16, 2005, the Company entered into a water lease with local village
      leaders on Nusa Lembongan Island in the south of Bali. This lease comprises
      a
      water area of 157 hectares (388 acres), which will be used to grow pearls.
      There
      is no fixed term for the water lease. The Company paid approximately A$2,700
      to
      the local villagers and there are ongoing costs of A$180 per month paid to
      local
      villagers for the continued use of the water lease. There is no associated
      land
      lease for this facility as the Company has an agreement with PT Bali Cruises
      Nusantara (“Bali Hai Cruises”) to use its land for storage of equipment. Apart
      from the obvious benefit of providing a viable alternative source for pearl
      production to the main pearling center of Alyui Bay, the facilities at Karang
      Asem and Nusa Lambongan, with their close proximity to Denpasar, its ready
      and
      available workforce, and its cheaper infrastructure costs, have great potential
      to reduce the Company’s cost of pearl production.




15




The
      Company established a joint hatchery operation in West Lombok in 2005 to replace
      the Bacan Island Project. The term of the unexecuted joint operation agreement
      with PT Autore Cultured Pearls is for one year and each July will be extended
      for another year on mutually agreed upon terms. This facility comprises a small
      hatchery, generator facilities, storage and some accommodations on land along
      with 125 hectares (309 acres) of ocean-based farm. Under the terms of the
      agreement, Cendana contributes half of the costs of operating the facility
      and
      splits the cost of any capital items purchased during the term of the
      arrangement equally with its partner. In exchange, the joint partner and Cendana
      are entitled to an equal share of all pearl oysters produced as this
      facility.





The
      Company is now able to produce its juvenile oysters in its Penyabangan, Bali
      and
      Lombok facilities. The Company has transformed the Alyui Bay project from a
      fully integrated operation covering all the pearl production stages from
      hatchery to harvest to a dedicated pearling center concentrating on seeding
      and
      husbandry of high quality mature pearl oysters. This is delivering an improved
      result in terms of productivity (seeding rates are higher than any prior year)
      and post-seeding results with a higher retention rate of nuclei being
      experienced than in prior periods. Many of the non-essential support tasks
      such
      as boat building and long-line manufacture have been transferred to the lower
      cost center of Penyabangan. In addition to pearl oysters being produced in
      Penyabangan and transported to Alyui Bay, almost 50,000 were seeded in
      Penyabangan and pearls from these oysters will be farmed at the new locations
      of
      Karang Asem and Nusa Lembongan.




The
      Company monitors the socio-political situation in Indonesia closely. The October
      2005 terrorist bombings in the Kuta and Jimbaran tourist precincts of Bali
      had a
      serious detrimental effect on tourism in Bali but no observable effect on the
      general business of the Company. Unrest in Kupang was one of the reasons for
      the
      closure of the Kupang facility in 1999. Indonesia continues to experience
      social, ethnic and economic instability. The province of West Papua where the
      Company’s pearling leases are located is agitating for independence. It is
      difficult to predict how these forces will influence the Pearling
      Project.




The
      Company attempts to manage the instability in Indonesia by maintaining good
      relations with employees, nearby village communities, regional and provincial
      authorities and the community at large. The Company continues to work hard
      in
      the critical areas of government liaison, community relations and security.
      The
      Company is proud of the success it has had in improving the access of local
      communities to facilities such as medical care, education, transportation and
      better general living standards.




16




In
      the
      event civil unrest threatens the Company’s farms at Waigeo Island or North Bali,
      there is an evacuation plan in place to protect the expatriate and Indonesian
      national employees. If the expatriates are forced to leave, the Company does
      not
      expect that any of the Pearling Project could be salvaged.




***Oyster
      Growth and Pearl Cultivation***





The
      cultivation of pearls is a long and labor intensive process which starts with
      the spawning of adult oysters during the months of August to March.
      Approximately two dozen adult oysters are placed in tanks in the hatchery where
      they spawn to produce oyster larvae. The larvae remain in the hatchery tanks
      where they swim and feed on algae. After approximately three weeks, the larvae
      stop swimming and settle on netting material located in the tank. The larvae
      attach themselves to the nets and continue to grow and feed on increasing
      amounts of algae. After about one month, the netting on which they have been
      growing is placed in a protective mesh and moved to the nursery in the open
      waters. The waters are rich in nutrients so that the juvenile oysters, or
“spat,” are able to grow quickly. The netting is suspended from “long lines”
strung between floats in the water. The spat are left in these net structures
      for approximately three to four months. As the spat continue to grow on the
      netting, the nursery workers start to thin out the spat and transfer them from
      the netting when they are large enough to be placed in “28 pocket panels.” These
      panels consist of a metal frame covered in netting that has been divided into
      28
      separate pockets. These panels are moved out of the nursery area to various
      locations of the open-water pearl farms where the spat continue to grow. By
      placing the spat in different locations, the Company is able to reduce the
      risk
      of losing an entire crop due to the presence of adverse conditions in any one
      area.




After
      approximately a year to fifteen months, the spat, now shells, are too large
      for
      the 28 pocket panels and are placed into larger “eight pocket panels.” The shell
      remain in the eight pocket panels until they are ready to be nucleated at 21-24
      months of age.




When
      the
      shell are ready to be nucleated, they are brought to an operations room.
      Technicians then perform the exacting surgical procedure of placing a nucleus
      in
      the oyster. The first step involves opening the oyster so that a nucleus can
      be
      implanted. This is accomplished by a procedure referred to as “pegging the
      shell.” Workers place wedge shaped pegs in the shells as they open and close
      during their normal feeding process. By opening the oysters in this manner
      instead of forcing them open, the strong muscle which holds the shell together
      is not torn, which is fatal to an oyster. After the oyster has been opened
      to a
      certain width, the oyster is ready for surgery.




The
      oyster is placed in an operating cradle where technicians carefully insert
      a
      nucleus composed of a bead, made from the shell of a freshwater mussel, into
      the
      oyster. In addition, they insert a small piece of nacreous tissue, known as
      saibo tissue, from a “donor oyster.” Nacreous producing tissue is naturally
      found only on the outer lip of the oyster. Therefore, this tissue must also
      be
      inserted at the same location as the nucleus in order to produce a pearl.
      Approximately one out of every 20 oysters is used as a donor from which the
      nacreous producing tissue is taken.




After
      the
      oysters have been nucleated, they are placed in an eight pocket panel and
      returned to the ocean where they are hung from the long lines. From the time
      of
      nucleation, it takes approximately two years to develop a pearl of 10 to 12
      millimeters in diameter. Throughout the entire process, workers continuously
      clean the shells, the panels and the long lines because naturally occurring
      marine growth will compete with the oysters for food. In addition, foreign
      organisms can enter the oysters and either eat the oysters or cause disease.
      Finally, under normal conditions, approximately 30% of the oysters will reject
      the nucleus and an additional 10% to 20% die. The oysters are x-rayed
      approximately eight months after being nucleated to determine which animals
      have
      rejected the nucleus. Any shells which reject the nucleus can be re-nucleated.
      Sometimes the oyster will reject the nucleus but the saibo tissue is retained
      and a pearl forms around this. A pearl formed in this manner is called a keshi
      pearl. This is a “seedless” pearl and it will usually have a slightly irregular
      shape.




17




The
      environment has enormous influence over the success of pearling. Successful
      pearling requires careful consideration of environmental issues and the Company
      strives to ensure that its activities have a minimal impact on the environment.
      The Company has procedures in place to mitigate any damage to the environment
      in
      the event of an accidental fuel spillage and it treats all waste in an
      environmentally friendly manner. It adheres strictly to the guidelines
      established in the environmental report it submitted to the Indonesian
      authorities in 2000 as part of its application to obtain a permanent operating
      license.




Towards
      the end of 2001 and throughout 2002, the Alyui Bay site came under the influence
      of *El
      Niño,* which
      had a dramatic influence on the agricultural sector in Australia and parts
      of
      South East Asia. The production of juvenile oysters at Alyui Bay, the then
      lifeblood of the Company’s pearling operation, was severely curtailed by this
      event. The Company took immediate action and was able to source commercial
      quantities of juvenile pearl oysters through an arrangement with a third party
      hatchery. Although *El
      Niño* conditions diminished as 2003 progressed, the Company continues to take steps
      to
      reduce the risks to future production as a result of insufficient juvenile
      oysters being available.




***Pearl
      Sales and Revenue***




Wholesale
      pearl sales accounted for 92% of the Company’s revenue in 2005. The majority of
      the Company’s pearls are sold in the world pearl wholesale market by the
      independent pearl marketing and trading company, Pearlautore International
      (“PAI”). On October 11, 2005, the Company renewed its current agreement with PAI
      for a period of two additional years commencing on January 1, 2006. According
      to
      the terms of the agreement, PAI was appointed as the Company’s exclusive valuer
      and distributor of South Sea pearls. PAI is to receive a commission of between
      7.5% and 25% for cleaning, grading, valuing and selling the Company’s
      pearls.




Pearls
      have traditionally been sold at auction but are also increasingly offered to
      buyers and sold under privately negotiated arrangements. Pearls are harvested
      at
      various times during the year depending on the seeding date of the oyster.
      PAI’s
      wholesale customers are from many geographical locations, accordingly the
      Company does not rely on a single customer to purchase all of its
      pearls.




The
      remainder of the Company’s revenue is derived from sales of jewelry, pearl shell
      and pearl meat by-products. A major focus for the Company in 2005 was the
      development of internal marketing skills including design and manufacture of
      pearl jewelry. The Company opened part of the Penyabangan site in North Bali
      to
      the visiting tourist trade during 2005 as its first exposure to the retail
      market. Since then the Company opened a second retail operation at the Company’s
      facility on the island of Nusa Lembongan in the south of Bali in 2006. Demand
      for the pearl shell (MOP) and pearl meat by-products has increased significantly
      in the last 2 years.




18




***Competition
      and Markets***




Competition
      in the pearling industry is intense. The Company competes with other South
      Sea
      pearl farmers, mainly in Australia, Indonesia, the Philippines and other
      Southeastern Asian regions. Many of these pearlers have significantly greater
      financial resources and experience, and are better known than the Company.
      The
      Company also competes, although not directly because of product differentiation,
      with producers of less expensive types of pearls such as the Akoya, freshwater
      and black pearls produced in Japan, China and the South Pacific, respectively.
      The Company also competes for consumer disposable jewelry dollars with producers
      of other types of gems such as diamonds, other precious stones and precious
      metals such as gold. Public demand for fine jewelry, including South Sea pearls,
      is influenced by general economic conditions.




An
      increase in supply of pearls globally, specifically freshwater and black pearls,
      has had an adverse effect on the market price of South Sea pearls. The increase
      in supply has also lead to a change in distribution methods within the pearl
      industry. Although the auction system has been relied upon for the sale of
      pearls in the past, this system has now been complemented with a “value adding”
process where smaller quantities of more discrete pearl types and grades are
      sold through
      private negotiation. “Value added” means selecting and placing pearls in a
      strand or a set of jewelry. The
      Company expects this method of distribution where there is less reliance on
      the
      auction system to continue. The
      changes that are being experienced in the pearling industry are not dissimilar
      to those experienced in other-commodity based industries. The Company cannot
      predict future demand nor how great an effect increases in the supply of South
      Sea pearls will have on the market price for such pearls. The pearling industry
      and the marketing and distribution arrangements for this product are currently
      undergoing significant change, which is likely to result in a rationalization
      and restructuring of producers. We believe that the Company, with its focus
      being in Indonesia, is well positioned to benefit from any change because of
      the
      relatively low operating costs compared to Australian producers and its
      relatively high quality of production compared to most Indonesian pearl
      farmers.




Up
      until
      the last decade, approximately 90% of Australia’s South Sea pearl production was
      sold in Japan. This amount has been reduced as the demand for such pearls has
      increased in the emerging markets of Hong Kong, South Korea, Singapore, Taiwan,
      Europe and North America. Sales of South Sea pearls are primarily made to the
      gem jewelry trade.




The
      Company offers its pearls in all the major world markets without placing too
      much reliance on any one geographic market. The Company’s principal markets are
      Japan, Hong Kong, Europe and North America.




***Foreign
      Investment Regulations in Indonesia***




In
      Indonesia, all proposed foreign investment and expansion projects require the
      prior approval of the BKPM, Indonesia’s equivalent of a foreign investment
      review board. A company may seek such approval by filing an investment plan
      with
      the BKPM, which contains information regarding the Company’s share capital, loan
      capital, technical assistance agreements, and proposed joint venture agreements.
      Under previous laws and regulations, the BKPM could require a foreign promoter
      of such a project to include a local joint-venture partner.




19




In
      July
      1993, the Company sought approval from the BKPM for participation by foreign
      investors in the Pearling Project. A joint venture agreement and an application
      to form Cendana as an approved foreign investment company, or PMA company,
      was
      lodged with the BKPM. Following approval in 1994, Cendana filed its Articles
      of
      Association with the Indonesian Ministry of Justice, which were approved in
      December 1994.




The
      laws
      and regulations applicable to PMA companies have, at frequent intervals since
      1986, progressively relaxed the restrictions that were imposed by the Indonesian
      Law on Foreign Capital Investment of 1967. **** These
      reform packages were intended to encourage foreign investment in Indonesia
      and
      to boost exports. In 1999, the BKPM granted permission for the Indonesian
      company, Cendana, to become a fully foreign-owned company. At that time, the
      Company acquired 100% of its Indonesian subsidiary.




***Foreign
      Trade Regulations in Indonesia***




In
      general, Indonesian government policy protects local interests. In 1990,
      however, the government implemented certain reforms aimed at facilitating the
      flow of imports and exports into and out of Indonesia. With respect to imports,
      the deregulation plan included the replacement of non-tariff barriers into
      Indonesia with tariffs.




There
      are
      no restrictions on the export of pearls from Indonesia and no export tax is
      payable. Indonesia, however, does impose a provincial “retribution tax,” which
      is applicable to the export of pearls. These payments amount to approximately
      1.5% of the export value of pearls.




Indonesia
      has no exchange controls; therefore, foreigners are able to move funds freely
      in
      and out of the country through accounts denominated in local or foreign
      currency.




***Government
      Regulation***




Australia





The
      activities of the Company are subject to numerous laws and regulations,
      including those described herein.




The
      Australian Corporations and Securities Legislation (“ACSL”) is the main body of
      law governing companies incorporated in Australia, such as the Company. The
      Australian Securities and Investments Commission is an Australian government
      instrumentality that administratively enforces the ACSL. The ACSL covers matters
      such as directors’ duties and responsibilities, preparation of accounts, auditor
      control, issue and transfer of shares, control of shareholders’ meetings, rights
      of minority interests, amendments to capital structure, preparation and filing
      of public documents such as annual reports, changes in directors and changes
      to
      capital.




The
      Australian Stock Exchange imposes listing rules on all listed companies, such
      as
      the Company. The rules cover such issues as immediate notification to the market
      of relevant information, periodic financial reporting and the prior approval
      of
      shareholder reports by the Australian Stock Exchange.




20




The
      Company believes that it is in material compliance with the foregoing Australian
      laws and regulations and with the rules of the Australian Stock Exchange.




Indonesia




Indonesian
      laws require Cendana to obtain certain tax identification numbers and
      miscellaneous occupational licenses. Cendana has obtained all licenses from
      the
      BKPM, including its permanent operating license for the Waigeo and Bali
      sites. **** The
      BKPM
      also requires Cendana to have its accounts audited annually by an Indonesian
      public accountant. Cendana complies with this requirement. Indonesia maintains
      other laws relating to corporate governance that are similar to laws of other
      jurisdictions. The Company believes that Cendana is in material compliance
      with
      these laws and with other applicable Indonesian laws and regulations.
      Environmental approvals are issued with the operating permits for each site.
      These require regular reporting to authorities in relation to fuel usage for
      energy generation, compliance with waste emissions and any incidents that may
      have caused harm to the local environment. The Company is in full compliance
      with its environmental reporting obligations.




United
      States of America





Because
      the Company has registered its Shares with the U.S. Securities and Exchange
      Commission (“SEC”) and listed the ADRs on the Nasdaq Stock Market (“Nasdaq”),
      the Company must comply with U.S. laws and SEC regulations applicable to foreign
      companies that trade their securities in the U.S., including the Sarbanes-Oxley
      Act of 2002 and the listing requirements of Nasdaq. These laws, regulations
      and
      requirements cover matters such as independence of directors, audit committee
      compensation and duties, codes of ethics, independence of auditors, and
      disclosure of fees and services provided by auditors. The Company believes
      that
      it is in material compliance with these laws, regulations and listing
      requirements.




On
      December 1, 2004, the Company announced its intention to voluntarily delist
      its
      ADRs from the Nasdaq Small Cap Market. The Company has not yet finalized all
      of
      the requirements to complete this process. When the process is completed the
      ADRs are expected to be traded on the OTC Bulletin Board. The delisting of
      the
      ADRs is intended to reduce the Company’s listing costs and allow it to more
      easily comply with U.S. listing regulations.




21


**C.**  **Organization
      Structure**




Atlas
      South Sea Pearl Limited owns all of the capital stock of Tansim Pty Ltd, an
      Australian company, which in turn owns all of the capital stock of the
      Indonesian company, PT Cendana Indopearls. The functional relationship of the
      group’s structure is described in the table below.




ATLAS
      SOUTH SEA PEARL LTD - Australian Company


**Functions**
              
              **Assets**
              
              **Risks**1.Marketing
                  of pearls - cleaning, sorting and grading.
                
                2.General
                  business administration
                
                3.Financial
                  reporting and public relations
              
              1.Marketing
                  agreements and established  marketing network.
                
                2.Professional
                  management and technical support with access to industry and business
                  best
                  practice.
                
                3.Listed
                  on Australian and International stock exchanges, relationships
                  with
                  investment brokers and banks.
              
              1.Fluctuations
                  in pearl market prices, fluctuations in exchange rates Yen/A$ and
                  marketing requirements.
                
                2.Investment
                  in S.E. Asia and aquaculture industry; market maker and investor/banker
                  reaction/perception of the business.
  TANSIM
        PTY LTD (100% owned by Atlas South Sea Pearl Limited) - Australian
        Company
  **Functions**
              
              **Assets**
              
              **Risks**1.Holds
                  investment in PT Cendana Indopearls
                
                2.Provided
                  original  project finance.
              
              1.Investment
                  in PT Cendana Indopearls
              
              1.Unable
                  to recover value of investment
  PT
        CENDANA INDOPEARLS (100% owned by Tansim Pty Ltd) - Indonesian
        Company
  **Functions**
              
              **Assets**
              
              **Risks**1.Breedng/hatchery
                
                2.Oyster
                  farming
                
                3.Seeding
                  / nucleation
                
                4.Pearl
                  harvesting
                
                5.Administration
                  of operations, security, logistics, community relations.
                
                
                6.Retailing
              
              1.Operational
                  personnel
                
                2.Fixed
                  assets
                
                ·Boats
                ·Farm
                  equipment
                ·Hatchery
                  buildings & equipment
                ·Nucleation
                  equipment
                ·Accommodation/support 
                  infrastructure
                
                3.
                       Jewelry inventory
              
              1.Environmental
                  and climatic variations - spat and oyster losses.
                
                2.Remote
                  location - limits access to skilled workforce and emergency services,
                  makes logistics more difficult.
                
                3.Security
                  and socio-political issues.
                
                4.Limited
                  access to capital.
                
                5.Stock
                  redundancy in jewelry retailing.
 
 22


**D.**  **Property,
      Plants and Equipment**




***Subiaco,
      W. Australia***





The
      Company rents office space, consisting of approximately 275 square meters,
      in
      the suburb of Subiaco, Western Australia, from Mr. David Morrison. The lease commenced
      on July 1, 2004 and has a term of three (3) years with an option to renew the
      lease under the same terms for three (3) additional years. The lease provides
      for an aggregate rental payment of A$18,000 annually, which rent is paid in
      equal monthly installments. The rental payment is subject to annual increases
      based upon fair market value.
      Annual rent for the year ended December 31, 2005 was A$18,442.




***Kupang,
      W. Timor***





On
      October 6, 1992, the Joint Venture (which later became PT Cendana Indopearls)
      entered into a 20-year lease for five hectares (12.3 acres) of land at Lelindo
      Point and constructed a hatchery, laboratory, administrative offices, workshop,
      store room and accommodations for expatriate managers. On September 4, 1994,
      it
      entered into a 10-year lease for 0.3 hectares (0.74 acres) of land located
      on
      Kambing Island overlooking the nursery. Ardindo Nusa entered into these land
      leases on behalf of the Joint Venture. Pursuant to the Sale Agreement, the
      Joint
      Venture agreed to transfer all assets, including the land leases, to Cendana.
      Accordingly, Ardindo Nusa assigned all beneficial interest in the leases and
      any
      extensions thereof to the Company.




On
      March
      10, 1993, Cendana entered into water leases, which leases were later amended.
      On
      September 4, 1995, Cendana received Presidential approval for its water leases.
      The various water leases are located within a four mile radius of the Kupang
      hatchery and total 725 hectares (2.8 square miles). The leases are for a term
      of
      30 years. Cendana used these waters as a nursery for young oysters and as a
      pearl farm for the nucleated oysters prior to the closure of the Kupang
      facilities in December 1999. The Indonesian government owns all of the land
      and
      water upon which the Kupang pearl farm was located and leased the property
      to
      Cendana for a fee of A$8,400 per annum. All of the government leases are
      conditioned upon Cendana meeting certain requirements, including the development
      and use of the leased property for pearling operations.




During
      November 1999, the Company decided to close the facility at Kupang. See “Item 4.
      Information on the Company - The Pearling Project.” In December 2000, the
      Company finalized negotiations with an Indonesian company for the sub-lease
      of
      the land, buildings and water leases comprising the Kupang facility for a period
      of five years. The sub-lease commenced on February 2001. Cendana received
      A$55,192 (US$34,800) per annum under the sub-lease. Pursuant to the terms of
      the
      sub-lease, on July 10, 2006, Cendana transferred all of its beneficial interest
      in the land and water leases, and the building relating to the Kupang facility,
      to the sub-lessee upon the Company’s receipt of its final sub-lease payment due
      for the five year sub-lease period. The sub-lease arrangement fulfills the
      Indonesian government’s conditions. The Company remains primarily liable for the
      annual lease payments to be made to the government.




23




***Waigeo
      Island, W. Papua***




Cendana
      has water leases that commenced on September 30, 1997 encompassing approximately
      2,500 hectares (6,200 acres) on Waigeo Island, in the W. Papua (formerly Irian
      Jaya) province of Indonesia. The leases are for a term of 25 years and expire
      on
      September 30, 2022. This site is approximately 130 kilometers west of Sorong
      in
      a remote area with excellent waters for pearl farming. It was a condition to
      the
      Indonesia government’s agreement to enter into the leases that the Company
      construct and operate a hatchery at the site. The Company completed construction
      of its hatchery in 1998. The hatchery had its initial production run in December
      1998. The farm has the capacity to hold up to one million mature adult oysters.
      The Company moved its operations and all of its equipment to this site in
      November 1999 when it closed its facility in Kupang, West Temor, following
      civil
      unrest in the area and a deteriation of conditions suitable for
      pearling.




In
      addition to the hatchery, the Company has constructed an office, workshop,
      accommodation buildings and a fuel storage facility over three sites within
      Alyui Bay. The Company has a fleet of approximately 25 work vessels of various
      sizes and two medium size wooden hull transportation ships. A significant part
      of the farm infrastructure is made up of longlines, floats and panels, which
      accommodate the oysters while they are being farmed. The Company has expended
      approximately A$6.8 million since 1997 to construct and purchase the capital
      improvements described above at the Alyui Bay farm. These expenditures were
      funded from the Company’s own cash reserves. Although the facilities continue to
      be developed, the main infrastructure at the Waigeo site is now
      complete.




In
      1998,
      the Company leased approximately five hectares (12.3 acres) of land and 2,000
      hectares (4,920 acres) of water at the Alyui Bay site. The Company pays
      3,000,000 Indonesian Rupiah per annum (A$600) to the Kawe Tribe at Selpele
      village for the 25-year water and land lease, which both expire on July 1,
      2023.
      The Company believes that it is in compliance with all of the terms of the
      lease.




***Bali***





In
      July
      2002, the Company entered into a joint operating arrangement with Abadi whereby
      the Company secured an interest in the right to access a small hatchery and
      associated sea leases in Northern Bali at Banyupoh (the “Bali Hatchery Joint
      Venture”). The infrastructure at Banyupoh occupied approximately two hectares
      (4.9 acres), and was relatively simple but has been sufficient for successful
      oyster spawnings. In addition to the hatchery, there was a simple grading shed,
      accommodations for four employees and an office. Abadi owns all of the land
      and
      buildings located at Banyupoh. In addition, Abadi owns the majority of the
      equipment on the farm. The Company transferred its equipment from the original
      Kupang hatchery, which was re-commissioned for use at this facility at minimal
      cost, to the farm and paid A$30,000 annually (for three years) for the use
      of
      the land, buildings and water leases. Abadi also has a sea lease for
      approximately 38 hectares (93 acres) adjacent to the land area on which the
      hatchery and other infrastructure is built. Abadi pays A$12,500 for the water
      lease in Banyupoh, and the leases expire in 2026. The Bali Hatchery Joint
      Venture used the water leases to hold longline systems to accommodate the
      juvenile oysters once they leave the land-based hatchery. The agreement for
      this
      joint arrangement was terminated in September 2005.




24




In
      addition to the joint operation at Banyupoh, the Company also leased 0.2
      hectares of land and 100 hectares of ocean in December 2003 that were developed
      as an **** independent
      juvenile production and grow-out facility in North Bali near the village of
      Penyabangan, which is approximately 15km east of Banyupoh. The Company paid
      an
      upfront lease payment of A$15,000 for both of the leases and has an obligation
      to pay approximately A$200 per month for the 30-year term of the leases. The
      Company completed the development of the Penyabangan facility during 2004 with
      the construction of a low-cost hatchery center, which supports the Company’s
      research and development program. The site also supports the Company’s boat
      building and other manufacturing/support activities at more remote locations
      elsewhere in Indonesia. By developing an independent hatchery facility, Cendana
      will no longer be reliant upon its joint venture partner, Abadi, for juvenile
      oysters. It is anticipated that this facility will realize 200,000 to 300,000
      juveniles each year. The Company moved its operations from Banyupoh to
      Penyabangan in September 2005 when it terminated the Bali Hatchery Joint
      Venture.




The
      Company expanded its operations in Bali by opening a new farm site during 2005
      at Karang Asem on Bali’s east coast. On May 23, 2005, the Company entered into a
      water lease comprising 235 hectares (580 acres) and a land lease for an
      additional 2,000 square meters with the local villagers who have ownership
      of
      the area. Under the lease, the Company paid the local villages approximately
      A$16,000 and will pay approximately A$200 per month for the use of the site
      until the expiration of the lease on May 22, 2035. The Company has constructed
      storage, accommodations and oyster meat processing facilities at the site.
      Infrastructure costs for the first year were approximately A$200,000. The
      Company has established the facilities at Karang Asem for the purpose of farming
      pearls. It is intended that oysters, which are seeded at Penyabangan in North
      Bali, will be shipped to the Karang Asem farm where conditions are more
      conducive for mature oyster growth. This site has also been developed to allow
      the processing of live oysters to extract the meat for sale as fresh or frozen
      produce. This site is located within one hour’s drive of the main city of
      Denpasar, which allows for more efficient access to logistical
      support.




On
      September 16, 2005, the Company entered into a water lease with local village
      leaders, Nyoman Murta and Wayan Danglod, on Nusa Lembongan Island in the south
      of Bali, for a new pearl production facility. This lease comprises a water
      area
      of 157 hectares (388 acres). There is no fixed term for the water lease. The
      Company paid approximately A$2,700 to the local villagers and there are ongoing
      costs of A$180 per month paid to local villagers for the continued use of the
      water lease. There is no associated land lease for this facility as the Company
      has an agreement with Bali Hai Cruises to use its land for storage of equipment.
      There was no development of this facility in 2005. The Company will use the
      water lease to grow pearls. In the same way as the Karang Asem farm is used,
      Nusa Lembongan will accommodate mature oysters that are transferred from
      Penyabangan in North Bali. This site has a strong tidal flow and it is believed
      that it will be conducive to the production of high quality pearls.




In
      addition to the farming activities at Nusa Lembongan, the Company has also
      commenced operation of a small retail operation on the island. This facility
      is
      located on land owned by a Company called Bali Hai Cruises. The Company entered
      into an agreement on March 24, 2006 with Bali Hai Cruises for the Company to
      run
      the retail facility, which includes a pearling tour and demonstrations of
      seeding and harvesting. The term of this agreement is for five years and because
      the Company is providing a unique tourist attraction to Bali Hai Cruises, the
      Company does not have to pay any rent for the use of approximately 800 square
      meters of retail space. This retail facility did not commence until
      2006.




25




In
      June
      2003, the Company moved its Indonesian headquarters from Sorong to Denpasar,
      Bali. The office consists of approximately 225 square meters. The term of the
      office lease is for three years and four months and rent of A$15,600 per annum
      is paid in full in advance for the full term of the lease. The Company’s office
      is well located with excellent access to communication and transportation
      infrastructure. The Company uses competent local Indonesian staff to manage
      the
      Indonesian operations from the Denpasar office and the Company’s Managing
      Director is based in this office. The Company is developing its internal
      marketing team in Bali, which grew from two to seven employees during 2005.




***Bacan,
      N. Maluku***





During
      2004, the Company entered into a second joint production arrangement with
      Cemerlang. This joint arrangement was for a period of five years, and the
      Company had an option to extend the arrangement thereafter for five years on
      the
      same terms. The Company was granted shared **** use
      of
      the leases and facilities of this operation. The Company was responsible for
      the
      funding of this operation and for the supply of expatriate and Indonesian
      managers for this operation. Cemerlang received a proportion of the juvenile
      oysters that were produced from this facility depending upon the age that the
      juveniles were taken. The split was equal if the juvenile oysters were
      taken from the Bacan facility before they were 12 months of age. After this,
      the
      oysters were split 70% to Cendana and 30% to Cemerlang. The joint venture
      partner continued to retain ownership of the water and land leases and any
      assets which were in existence at the commencement of the arrangement. Any
      removable infrastructure that was paid for by Cendana during the term of the
      agreement was split equally. Fixed
      assets that were paid for by Cendana and could not be removed from the site
      at
      the end of the agreement were purchased by Cemerlang based on their depreciated
      cost value. Although t he
      Bacan
      operations had been expected to produce approximately 300,000 juvenile oysters
      each year for each of the Company and the joint venture partner, high levels
      of
      mortalities among juvenile oysters at the site during 2004 forced the Company
      to
      re-evaluate its continued use of this site. A total of 229,000 juvenile oysters
      were delivered to Alyui Bay from the site over the course of operations during
      2003 and 2004. By the end of 2005, Cemerlang and the Company terminated the
      joint arrangement.




***Lombok***




Under
      an
      unexecuted joint operation agreement, the Company shares a land and sea based
      facility, which is owned by PT Autore Cultured Pearls, its joint partner, at
      Malaka in the north west of Lombok. The term of the joint operation agreement
      is
      for one year and each July will be extended for another year on mutually agreed
      upon terms. This facility comprises a small hatchery, generator facilities,
      storage and some accommodations on land along with 125 hectares (309 acres)
      of
      ocean-based farm. The land and ocean facilities owned by the joint partner
      prior
      to the commencement of the joint operation agreement will remain the property
      of
      the joint partner. Under the terms of the agreement, Cendana contributes 50%
      of
      the costs of operating the facility and splits the cost of any capital items
      purchased during the term of the arrangement equally with its partner. In
      exchange, the joint partner and Cendana are entitled to an equal share of all
      pearl oysters produced as this facility.




26




**ITEM
      5. **OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS****




This
      is
      the first Annual Report for which the Company’s consolidated financial
      statements have been prepared in accordance with AIFRS. “AASB 1 First-time
      adoption of AIFRS” has been applied in preparing these financial statements.
      Certain line items of such financial statements have been reconciled to US
      GAAP
      to assist U.S. persons in evaluating such data. See “Item 17. Financial
      Statements - Note 35 to Financial Statements.” The following discussion
      references only the amounts computed in accordance with AIFRS for the years
      ended December 31, 2005 and December 31, 2004.




***Overview***




The
      following is an analysis of the Company’s results of operations, liquidity and
      capital resources. To the extent that such analysis contains statements that
      are
      not of a historical nature, such statements are forward-looking statements,
      which involve risks and uncertainties. See “Introduction - Forward Looking
      Statements.”




In
      order
      to produce pearls the Company must maintain an ongoing supply of oysters. The
      natural cycle of the oyster dictates that it is approximately four years from
      the spawning of the oyster until the production of a pearl. See “Item 4.B.
      Business Overview.” The Company capitalizes the costs associated with the
      rearing, husbandry and nucleating of an oyster over the pearl production cycle.
      These capitalized costs are disclosed in the financial statements as “Biological
      Assets.” Upon the harvesting of the oyster and the production of the pearl, an
      appropriate portion of this cost is transferred to the pearl inventory and
      ultimately to the cost of sales when the pearls are sold.




Total
      revenue derived by the Company from different sources during its most recent
      two
      fiscal years is set forth in the following table:




**2005**
            
            **2004****A$**
            
            **A$**Interest
                received
            
            $
            101,618
            
            $
            156,262Sales
                of oysters
            
            
            176,577
            
            
            98,620Sales
                of pearls
            
            
            9,094,562
            
            
            5,212,130Sales
                of MOP, meat and jewelry
            
            
            317,171
            
            
            508,208Foreign
                exchange gain/(loss)
            
            
            (24,601
            )
            
            790,084Miscellaneous
            
            
            182,532
            
            
            72,219$
            9,847,859
            
            $
            6,837,523


27


The
      following table provides additional details in relation to the results of the
      Company’s pearl sales for its last two fiscal years:




**2005**
              
              **2004****Revenue
                  from sale of pearls (wholesale)****Sellable
                  Grade Pearls:**Value
                  (A$)
              
              $
              8,861,360
              
              $
              4,288,583Quantity
                  (No.)
              
              
              117,816
              
              
              57,374Weight
                  (Momme)
              
              
              50,746
              
              
              27,939Average
                  price per momme (A$)
              
              $
              175
              
              $
              153Average
                  weight per pearl (momme)
              
              
              0.431
              
              
              0.487**Commercial
                  Grade Pearls:**Value
                  (A$)
              
              $
              69,090
              
              $
              690,879Quantity
                  (No)
              
              
              9,043
              
              
              59,170Weight
                  (Momme)
              
              
              3,832
              
              
              23,601**Keshi
                  (seedless) pearls:**Value
                  (A$)
              
              $
              164,112
              
              $
              232,668Weight
                  (Momme)
              
              
              1,386
              
              
              2,250




**A.**
            **Operating
                Results**




The
      total
      revenue increased by A$3,010,336, or 44%, from 2004 to 2005. This is mainly
      due
      to an increase in pearl sales revenue, which increased by A$3,882,432, or 74%,
      from 2004 to 2005. The details regarding this movement in each category of
      revenue are described below.




**Pearl
      Sales**




The
      Company’s revenue from the sale of pearls for 2005 was A$9,094,562, which
      represented an increase of A$3,882,432, or 74%, when compared to 2004. This
      revenue included revenue from pearls that have been the subject of "value added"
      services , such as having been placed in strands or incorporated into jewelry.
      The major factors that contributed to the rise in the Company’s sales of pearls
      for 2005 include:




·
            An
                increase in the number of “sellable” grade pearls. The pearls harvested in
                2005, although not significantly different in total quantity or size
                (sellable and commercial grades combined) when compared to 2004,
                were of a
                much higher proportion of “sellable” grade. This in turn meant a higher
                sales price per pearl. The reason for the improved pearl quality
                is
                attributed to an improvement in the quality of young oyster stock
                and
                improved conditions for farming
                pearls.





28


·
            An
                improvement in demand for pearls generally. This has resulted in
                some
                improvement in prices being achieved for the higher quantity of sellable
                pearls.





·
            Improved
                results achieved by PAI. PAI has made changes in its organization
                to
                increase its representation world wide with a better exposure to
                wholesale
                and retail world pearling markets.





·
            Continued
                efforts of PAI and within the Company to develop “value added” sales
                within the category of loose pearls. Value added sales are where
                pearls
                are worked into strands or jewelry. Both PAI and the Company have
                continued to explore alternative sales methods, such as, the creation
                and
                sale of jewelry that incorporates the Company’s pearls to increase sales
                of pearls and gross margins.





In
      2004
      the lower quality of the Company’s pearls was due to the lower quality of
      oysters available for seeding in 2001 and 2002 coupled with the effect of the *El
      Nino* climatic
      conditions on these oysters in 2002. The oysters that were seeded in 2002 were
      smaller than in previous years due to stock availability pressures and because
      the oysters from which the Company extracted Saibo tissue in 2001 and 2002
      caused a partial deterioration in the quality and color of the pearls that
      were
      harvested in 2004. Poor quality pearls were also harvested from second operation
      oysters in 2004. These are pearls that are produced from oysters, which have
      already produced one pearl and which are then re-seeded with a second nucleus.
      The average weight of the sellable grade pearls that were harvested in 2004
      also
      decreased. In prior years, pearls were left unharvested for a longer period
      of
      time so they were larger. The Company harvested pearls earlier in 2004 because
      it was anticipating that there was the potential for its selling agent, PAI,
      to
      hold an auction in the early part of the year. This did not occur but these
      pearls were sold later in 2004. Cumulatively, these factors had an adverse
      effect on revenue from the sale of pearls during 2004.




An
      improved supply of juvenile virgin oysters to Alyui Bay in 2003 and 2004 allowed
      the Company to improve the quality and quantity of the seeding program in 2005
      where only the healthiest and best quality oysters were seeded. This started
      to
      have a direct effect on improved pearl quality in 2005.




During
      2005, the Company seeded 376,325 virgin, or first-time seeded, pearl oysters.
      This compares to 342,164 in 2004. Growing conditions for oysters during 2004
      and
      2005 were favorable for both juvenile and mature pearl oysters at Alyui Bay
      and
      Bali, which has led to high survival, excellent health and improved growth
      results. It is anticipated that these improved seeding and oyster growing
      conditions will improve the adverse results that were experienced in sales
      revenue decline during 2004. The average pearl size and the pearl quality is
      expected to improve as a result of seeding better quality oysters.




The
      Company remains committed to the production of high quality pearls. To this
      end,
      the Company is focusing primarily on the production of pearls in white and
      silver color from first time operated pearl oysters. The Company believes that
      these pearls generate the best yield for the cost and that these products remain
      in strong demand. To support this endeavor, the Company will maintain the
      diversified growing centers developed in previous years and continue to
      investigate new opportunities as they emerge. The Company has also committed
      to
      significant research and development projects aimed at enhancing oyster
      selection for improved pearl production.




29




**MOP,
      Oyster Meat and Jewelry**




Revenue
      from the sale of MOP, oyster meat and jewelry decreased in 2005 by A$191,037,
      or
      38%, from A$508,208 in 2004, to A$317,171 in 2005. In 2004 there was an improved
      demand and price for raw MOP, which allowed the Company to significantly reduce
      its accumulated stockpile. In 2005, the Company had insufficient raw MOP to
      meet
      the increased demand, which resulted in lower sales. In 2005, the Company
      focused on developing new markets and products for “value added” pearl and MOP
      jewelry. For instance, the Company now manufactures its own jewelry and gift
      wares from MOP shell and pearls that are produced from its oysters. As a result,
      the Company has recruited a new marketing manager, and increased the number
      of
      staff in this area from two to seven, as well as opened the Penyabangan site
      in
      northern Bali to the visiting public. Although these efforts are expected to
      improve sales of jewelry in future years, sales of jewelry in 2005 remaind
      flat
      compared to 2004.




**Juvenile
      Oysters Sales**




The
      Company sold approximately 20,000 juvenile oysters during 2005, compared to
      approximately 11,000 oysters sold in 2004. This resulted in an increase in
      revenue of 79%, from A$98,620 in 2004 to A$176,577 in 2005. These oysters were
      sold to other pearl farmers in Bali and West Papua. The price for the sale
      of
      oysters did not change significantly between 2004 and 2005.




**Interest
      Income**




Interest
      income decreased by A$54,644, or 34%, from A$156,262 in 2004 to A$101,618 in
      2005, as cash reserves were used to fund operations.




**Foreign
      Exchange Gains/Losses**




In
      2005,
      there was a loss of A$(24,601) resulting from foreign exchange movements
      compared to a gain in 2004 of A$790,084. In 2004, the Company had all of its
      JPY
      receivables hedged at a rate of approximately JPY70:AUD1. There was a
      significant appreciation in the Austrailian Dollar during 2004 and because
      the
      Company was able to utilize the currency hedging that was in place, there was
      a
      gain from exchange rate movements. There was substantially less foreign currency
      hedging available in 2005 to shelter the Company’s sales from the relatively
      strong Australian Dollar. The gain from foreign exchange hedging contracts
      and
      other foreign currency movements relating to pearl sales for 2005 was A$349,300.
      The Company was required to account for any mark-to-market gains or losses
      in
      its hedging portfolio in 2005 for the first time under AIFRS. This accounted
      for
      a loss of A$(334,000) at the end of 2005. The remaining A$(39,900) in foreign
      currency loss for 2005 was generated from adjustments required to the Company’s
      foreign currency denominated assets and liabilities being revalued at the end
      of
      the year.




30




**Cost
      of Goods**  **Sold**




The
      cost
      of goods sold decreased marginally from A$4,414,357 in 2004 to A$4,275,378
      in
      2005. This was despite a higher number of total sellable and commercial pearls
      being produced in 2005. The overall reduction in unit cost of production is
      a
      result of economies of scale from higher oyster quantities and this is expected
      to continue to flow through to lower production costs of pearls in the future.
      This benefit will be in part offset with increasing production costs. Inflation
      in Indonesia was 17.1% in 2005 compared to 6.4% in 2004. In addition, high
      world
      fuel and commodity prices continue to put upward pressure on costs. The Company
      cannot estimate the impact of inflation on its cost of goods sold in 2006 and
      beyond.




**Marketing
      Costs**




Marketing
      costs increased by A$305,800, or 54%, from A$564,743 in 2004 to A$870,543 in
      2005. The increase in revenue from pearl sales is directly related
      to **** commissions
      applied to pearl sales. During the negotiation of the new marketing agreement
      with PAI in 2005, it was agreed that commission rates for pearl sales would
      increase from 5 % to 7.5% for loose pearls and from 12.5% to 15% for pearls
      that
      are used in the value adding process. This has contributed and will continue
      to
      contribute to higher marketing costs. Also linked to sales commissions and
      higher marketing costs is the fact that more of the Company’s loose pearls are
      being allocated to the value adding process that is undertaken by PAI on behalf
      of the Company. The Company expects to be able to achieve a premium of bet6ween
      10-15% for the pearls it sells in the value added category through PAI. This
      enhances revenues and gross margins, but requires additional marketing, which
      incurs a higher commission rate.




**Administration
      Costs**




Administration
      expenses increased by 5.9% from A$1,632,767 in 2004, to A$1,730,268 in 2005.
      This was in line with overall group inflation in Australia and Indonesia
      combined.




**Other
      Expenses**




Other
      expenses decreased by 14% from A$722,984 in 2004 to A$615,544 in 2005. In 2004,
      the Company wrote-down its oyster inventory by A$224,000 to its expected net
      realized value  and
      further wrote-down the same oyster inventory by A$317,000 in reconciliation
      of
      the accounting treatment for the capitalization of inventory under Indonesian
      and Australian Accounting Principles. These write-downs resulted in higher
      other
      expenses during 2004. **** In
      2005,
      other expenses also included research and development costs of A$87,500,
      relating to the project that is being undertaken with James Cook University,
      which costs were not incurred in 2004.




The
      Company recorded a pre-tax operating profit of A$2,356,126 in 2005 compared
      to a
      pre-tax operating loss of A$(497,329) in 2004. This increase of A$2,853,454,
      is
      primarily due to the increase in revenue from the sale of pearls due to the
      improvement in pearl quality.




In
      2004,
      the Company’s income tax expense for 2005 was A$295,539 compared to A$96,946 for
      2004. The Company has had an ongoing review of its Indonesian income tax
      position by the Indonesian Income Tax Authorities. In 2004, a provision was
      made
      for prior year income tax that resulted in an income tax expense for 2004
      despite a consolidated loss before tax. In 2005, as a result of concluding
      this
      audit, the income tax expense was reduced from A$706,838 to A$295,539 for 2005
      with the reversal of an overstatement of tax for the prior period of A$373,047.
      The net after tax profit for 2005 was A$2,060,587 compared to a net loss after
      tax of A$(594,274) in 2004.




31




***Future
      Business Potential and Constraints***





The
      Company remains focused on growing its business within the pearling industry.
      The Company has identified key factors that led to a decline in its revenue
      in
      prior years and implemented steps to address these problems. As a result of
      the
      effort to ensure a continuous supply of oysters for its Alyui Bay production
      facility, the Company has been able to increase the number of virgin oysters
      seeded each year, improve the quality of juvenile oysters being produced and
      develop new farm sites in the Bali region. The Company views the maintenance
      of
      a supply of juvenile oysters as a key to the success of the business growth
      in
      the future.




Future
      growth is expected from the ongoing development of the Company’s own hatchery
      and oyster grow-out farm at Penyabangan in North Bali and the development of
      a
      new farm site at Karang Asem on Bali’s east coast and the establishment of a
      pearl oyster lease on Nusa Lembongan in the south of Bali. In addition, a new
      joint hatchery operation was established in West Lombok, which follows the
      termination of the Bacan venture, which did not perform to expectations. The
      Company will continue to seek out further joint venture and self-owned and
      operated farm sites for expansion of production. This will be done within the
      current resource capabilities of the Company.




Research
      continues to be done on improvements in pearl oyster husbandry and production
      techniques to assist the Company in bringing high quality product to the market
      in the future. A research and development program commenced in late 2004 with
      James Cook University in Queensland, Australia looking into genetic marker
      identification to improved pearl quality and consistency. This has progressed
      well with all the major breeding milestones having been achieved during 2005.
      The first survival and growth results have been collected and are currently
      being analyzed. The technique for DNA pedigree assignment of the offspring
      created for this program has been proven and the Company is looking forward
      to
      further developments during 2006.




The
      increase in seedings from 284,000 in 2003 to 342,000 in 2004 (20%) and 376,000
      in 2005 (10%) should continue to improve the economies of scale and quantity
      of
      pearls the Company produces. The production of a pearl is a natural process,
      which means that the predictability of quality is uncertain. The Company adopts
      best practice farming techniques to try to limit poor quality but it cannot
      influence environmental conditions that may affect the production
      process.




The
      absence of production quotas in Indonesia ensures that the quantity of oysters
      that the Company can nucleate is limited mainly by the Company’s ability to
      produce juvenile oysters and the biomass limitations of the various pearl
      production sites, rather than government regulation. This provides the Company
      with a competitive advantage not available to its Australian competitors. The
      quantity and quality of the Company’s pearl production is also determined by the
      techniques it employs in the nucleation and husbandry of its oysters. Climatic
      and environmental conditions will affect its future results; these factors
      can
      only be managed but not controlled by the Company.




32




The
      Company continues to monitor foreign exchange rates against the Australian
      Dollar, especially that of the Japanese Yen, which is the currency in which
      most
      of the Company’s revenue is denominated. The Company uses forward foreign
      exchange contracts and some derivative products, with terms of not more than
      two
      years, to hedge these risks. Derivative financial instruments are not held
      for
      speculative purposes. Although the Company makes efforts to limit its exposure
      to adverse movements in the Japanese Yen against the Australian Dollar, these
      exchange rates are subject to market influences over which the Company has
      no
      control.




Many
      Asia
      Pacific countries, including Indonesia, have experienced economic difficulties
      including liquidity problems, volatility in prices and significant slowdowns
      in
      business activity in prior years. Operating costs in Indonesia, including wages,
      employee amenities and fuel, have been subject to inflation of 17.1% in 2005.
      Resolution of difficult economic conditions that exist in Indonesia depend
      to a
      large degree on fiscal and monetary measures that may be taken by the Indonesian
      government. Such actions are beyond the Company’s control, and the Company
      cannot predict whether the government will be successful in initiating and
      achieving economic reforms. The Company also cannot determine the future effects
      that the ongoing adverse economic conditions may have on the Company’s liquidity
      and earnings. The ability of the Company to sell its assets in Indonesia depends
      to a large extent on events beyond the Company’s control. If the Company was
      forced to abandon its pearl farms due to political unrest, the Company would
      likely not recover any of its investment in its Indonesian assets.




**B.**  **Liquidity
      and Capital Resources**




Net
      cash
      flow provided from operating activities declined from an inflow of A$95,791
      in
      2004 to an outflow of A$(190,691) in 2005. Overall there was an increase in
      cash
      flow due to an increase in proceeds from pearl sales of A$1,366,792 in 2005.
      A
      significant part of the increase in pearl revenue is reflected in the trade
      receivables which increased by A$2,367,291 to A$4,301,651 at December 31, 2005.
      This increase in cash flow was offset by payments to suppliers, which increased
      by A$912,037 during 2005 resulting in a reduction in cash flow and accounts
      payable at December 31, 2005 by A$337,394 to A$682,975. There was a significant
      decline in proceeds from other operating revenue during 2005 of A$691,036,
      which
      also reduced cash flow. The majority of this decline represented a reduction
      in
      the net foreign exchange gains of A$783,245.




Net
      cash
      flow used in investing activities declined from A$824,200 in 2004 to A$753,588
      in 2005. The Company used cash from investment activities in 2005 primarily
      to
      purchase new property, plant and equipment in the amount of A$832,582 compared
      to A$778,641 in 2004. Most of this expenditure related to equipment and
      infrastructure expenses in Alyui Bay, Panyabangan and Denpasar, as well as
      the
      development of the Company’s new pearling interests in Karang Asem and Nusa
      Lembongan in Indonesia.




At
      December 31, 2005, the Company had net short term borrowings of A$78,994
      compared with nominal borrowing at December 31, 2004. These borrowings are
      unsecured and represent premium funding on insurance costs. In addition to
      this,
      the Company has a borrowing facility in place with a major Australian bank
      with
      a limit of A$2,000,000 to allow it to undertake factoring of its accounts
      receivables and supply letters of credit. To date, this facility has not been
      utilized. The facility is secured by the assets of the Company.




33




The
      Company paid a dividend of A$878,103 in 2005; it did not pay a dividend in
      2004.
      The payment of dividends in future periods is dependent upon the availability
      of
      surplus cash and the outlook for future profits. The Company also paid a
      dividend of A$1,359,154 in June 2006.




The
      Company had cash reserves of A$1,475,480 and trade receivables of $A4,301,651
      at
      December 31, 2005 compared to December 31, 2004 where there was a cash reserve
      of A$3,208,996 and trade receivables of $A1,934,360. In contrast, trade
      payables, borrowings and other current provisions at December 31, 2005 were
      A$1,032,134 compared to A$1,355,061 in the prior year. On a comparative basis,
      this represents an improvement in the Company’s working capital (which excludes
      current biological assets as these are not considered to be liquid in nature)
      from A$4,822,977 to A$5,963,503. This is primarily due to an increase in
      accounts receivable from higher sales during 2005. The Company has continued
      to
      fund its pearling operations from operational cash flow and cash reserves and
      did not raise any additional capital or long term debt in 2005 or 2004.




Future
      investments are currently expected to be funded through operational cash flows
      and cash reserves. The Company believes it has sufficient working capital for
      its present requirements.




The
      Company has budgeted to spend approximately A$230,000 on new capital
      infrastructure works at Karang Asem and Nusa Lembongan in 2006. Of this amount,
      A$85,000 will be spent on a new building, A$95,000 on new farm based equipment,
      such as longlines and oyster panels, and A$50,000 will be on new vessels and
      oyster cleaning equipment. An further A$45,000 is expected to be spent on
      replacing longlines and panel replacement at Alyui Bay and Penyabangan in
      2006.




**C.**  **Research
      and Development**




In
      June
      2004, the Company entered into an agreement with James Cook University to obtain
      information regarding the genetics of silver/gold lipped pearl oyster
      ( *Pinctada
      maxima* )
      populations in Indonesia. This research program is to be undertaken over a
      period of four years. The aim and scope of this research is to develop molecular
      tools and acquire statistical information to allow a well designed selective
      breeding program to be commenced. There are a series of components to this
      research:




·
            Identification
                of the founder genetic base;


·
            Identification
                of the influence that the environment has on family
                ranking;


·
            Estimation
                of the heritability and genetic
                correlations;


·
            Genetic
                diversity analysis; and


·
            Development
                of a DNA parentage determination marker
                suite.




The
      research has progressed well with all the major breeding milestones achieved
      during 2005. The first survival and growth results have been collected and
      are
      currently being analyzed. The technique for DNA pedigree assignment of the
      offspring created for this program has been proven and the Company is looking
      forward to further developments during 2006. Specific results from this research
      will not be realized for some years, but practical techniques for the
      improvement of breeding have already been learned from the work done to
      date.




34




The
      Company has committed to an amount of A$150,000 in cash, A$50,000 per year
      over
      four years, from 2006 to 2008 plus the resources of its staff and facilities
      in
      Bali, estimated at A$63,000 per annum, as a co-contribution to this research
      over the four years of the project. Additional funds are being provided by
      the
      Australian government and James Cook University is providing the research
      expertise and personnel for this project at its own cost.




As
      part
      of its ordinary operations, the Company continues to test and monitor shell
      growth rates, pearl growth rates, pearl quality, hatchery cleanliness and the
      suitability of the surrounding waters as to temperature, pollution and water
      currents. The Company’s in-house marine scientists also continually study and
      test innovative ways to improve shell husbandry, and consequently, the
      production of quality pearls.




The
      Company provides research opportunities for promising Indonesian and Australian
      students in conjunction with universities and fisheries
      departments.




Expenditures
      incurred on research and development in the Company’s last two fiscal years have
      been treated as ordinary operating expenses, and are expensed when incurred.
      Expenses that are identified as pearl production costs are capitalized. See
      “Overview” and “Item 17. Financial Statements.”




**D.**  **Trend
      Information**





The
      Company’s pearl farm and operations are now well established. In 2002, the
      Company experienced the negative impact of climatic and environmental factors,
      such as *El
      Nino* ,
      that
      reduced the size and quality of the pearls the Company produced in its 2003
      and
      2004 harvests. In addition, these factors adversely affected the Company’s
      production of juvenile oysters required for future pearl
      production.




The
      Company has implemented a number of initiatives to ensure that it has an
      adequate supply of oysters for future pearl production by diversifying the
      areas
      from which it can source juvenile oysters. The Company has also refined the
      focus of its pearl production facility at Alyui Bay to maximize the number
      of
      specially selected oysters that can be seeded and to maintain practices that
      will maximize the health of these oysters during the growth and development
      of
      the pearls. The Company has also continued to develop its hatchery and pearl
      farm at Penyabangan, Bali. The increased number of oysters that the Company
      has
      seeded in the last three years combined with improved pearl retention rates
      and
      better quality oysters should increase the Company’s production of pearls in the
      longer term. The Company believes that the Alyui Bay site has reached its
      potential in terms of the number of oysters that it can effectively manage
      in a
      sustainable way. In 2005, the Company opened a new farm site at Karang Asem
      on
      Bali’s east coast and established a pearl oyster lease on Nusa Lembongan Island
      in the South of Bali. Almost 50,000 pearl oysters were seeded in Bali during
      2005. The Company also established a new joint hatchery operation in West Lombok
      during 2005. Future growth will come from pearl quality improvement and
      expansion into these new pearl production farm sites in Indonesia.




35




The
      Company believes pearl prices may have stabilized after a decline in prices
      for
      South Sea pearls from 2000 - 2004. This is due to a small improvement in demand
      and a relatively static level of supply. The pearl market continues to be highly
      competitive. South Sea pearls compete directly with other types of pearls
      including freshwater pearls from China, Akoya pearls from Japan and black pearls
      from Tahiti and other South Pacific nations. Pearls also compete directly with
      other gem stones that are used in the jewelry trade. There has been a
      significant shift in the distribution networks for pearls as the industry
      matures and becomes more competitive. The Company continues to target the
      production of pearls it believes will be most sought after by the market and
      the
      least subject to these price pressures. However, the lead time for the
      production of a pearl is at least two years, and, as such, it is difficult
      to
      react quickly to changes in market trends if they occur.




The
      Company continues to enhance its marketing skills. It is investigating more
      opportunities to add value to its products by becoming more directly involved
      in
      the distribution process for some part of its pearl production. In this regard,
      the Company established a visitor center at its Penyabangan farm in N. Bali,
      which incorporates a small retail operation. The center attracts tourists who
      are staying in the N. Bali region and provides them with an industrial tourism
      experience to gain a greater appreciation for pearls. Visitors are able to
      view
      and purchase loose pearls and pearl jewelry as well as MOP giftware and jewelry.




The
      Company includes all of the revenue, expenses, assets and liabilities of its
      joint ventures in its consolidated financial statements. As a result, the
      Company does not have any off-balance sheet arrangements required to be
      disclosed pursuant to Commission rules.




**E.**  **E.** **Tabular
      disclosure of contractual obligations**





Payments
                due by periodContractual
                obligations
            
            Total
            
            less
              than
                1
              year
            
            1-3
              years
            
            3-5
              years
            
            more
              than
                5
              yearsLong
                term debt obligations
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Capital
                (finance) lease obligations
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Operating
                lease obligations
            
            
            A$28,875
            
            
            A$18,964
            
            
            A$9,911
            
            
            —
            
            
            —Purchase
                obligations (1)
            
            
            A$125,000
            
            
            A$50,000
            
            
            A$75,000
            
            
            —
            
            
            —Total
            
            
            A$153,875
            
            
            A$68,964
            
            
            A$84,911
            
            
            —
            
            
            —





(1) This
      obligation relates to the collaborative genetic research agreement with James
      Cook University.





**ITEM
      6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**




**A.**  **Directors
      and Senior Management**




The
      following sets forth the names of the members of the Company’s Board of
      Directors and its senior management. Generally, each member of the Board of
      Directors (except the Managing Director) serves for a three-year term. Such
      term
      may be shortened, in certain instances, in accordance with the Company’s
      Constitution and the ACSL. The term of office of a certain number of Directors
      expires each year; consequently, the number of Directors who stand for
      re-election each year may vary. The Company’s executive officers are appointed
      by, and serve at the pleasure of, the Board.




36


**GEORGE
      ROBERT WARWICK SNOW, Bachelor in Economics, Fellow of the Australian Institute
      of Company Directors (60 years old)** .
      Mr.
      Snow has served as a director since October 28, 1997 and was appointed Chairman
      of the Board of Directors on July 28, 2004 and was last re-elected as a director
      on May 30, 2006. Mr. Snow is a graduate in Economics from the Australian
      National University and has had 29 years experience in finance, property
      development, real estate management and equity finance. Mr. Snow is the managing
      director of the Sydney-based Dampier Investment Group Pty Limited, an equity
      financier involved in strategic company management and which is a substantial
      shareholder in the company.




**STEPHEN
      JOHN ARROW (45 years old).** Mr.
      Arrow
      has served as a director since June 29, 1999 and was last re-elected as a
      director May 5, 2005. Mr. Arrow has 25 years experience in the pearling industry
      in Western Australia and the Northern Territory and is managing director and
      owner of Arrow Pearl Co Pty Ltd. He has extensive pearling experience from
      many
      regions in the world as well as contacts in the industry.




**IAN
      McKENZIE MURCHISON Bachelor in Commerce, Fellow of Chartered Accountants,
      Diploma of Nautical Science (55 years old).** Mr.
      Murchison was appointed a director on July 28, 2004 and last re-elected as
      a
      director May 5, 2005. Mr. Murchison has had over 26 years experience in finance
      and investment, and has been a director of both listed and unlisted companies
      in
      Australia and overseas. He was an investment director and founding partner
      of
      the Western Australia based private equity investment fund, Foundation Capital,
      and was founding partner of the national chartered accounting firm of
      Southertons. He has been a certified charter accountant for over 30
      years.




**STEPHEN
      PAUL BIRKBECK (46 years old).** Mr.
      Birkbeck was appointed as a director on April 15, 2005 and was re-elected as
      a
      director on May 30, 2006. Mr Birkbeck is the founder and former CEO of Mt
      Romance Australia Pty Ltd, an Australian company, which is one of the world’s
      largest producers of sandalwood oil. Mr Birkbeck has extensive experience in
      the
      marketing of luxury goods in overseas markets, especially Europe.




**JOSEPH
      JAMES UEL TAYLOR, B.Sc. (Biology), Ph.D. (39 years old)** .
      Dr.
      Taylor has served as a director since September 13, 2000. He was appointed
      to
      the role of Managing Director effective September 1, 2001. Dr. Taylor is a
      marine biologist and aquaculturist whose Ph.D. research specialized in the
      husbandry of *Pinctada-maxima* pearl
      oysters. Since 1989, Dr. Taylor has been involved in the management of
      aquaculture operations, mainly associated with South Sea pearl farming. He
      has
      acquired extensive knowledge about the biology of pearl oysters and has
      presented many research papers on this subject. Dr. Taylor commenced employment
      with the Company in 1996 and has overseen the development of the project to
      its
      current level of production. From
      1996
      to 2000, Dr. Taylor held the position of Project Manager with the
      Company.  Prior
      to
      this, he spent 3 years working for PT Mutiara Cemerlang, which is an Indonesian
      pearl company. The constitution of the Company does not require the Managing
      Director to retire by rotation.





37


**SIMON
      CHARLES BUNBURY ADAMS, B.Bus, M.Acc, ACIS (40 years old).** Mr.
      Adams was appointed as the Chief Financial Officer on January 2, 2000 and
      Company’s Secretary on February 1, 2001. He has more than 10 years experience in
      corporate management in the industries of pearling, mining and engineering.
      He
      has been employed with the Company since January 2000 **.** Prior
      to
      joining the Company, Mr. Adams worked for 2 1/2 years as the chief accountant
      of
      Advanced Energy Systems, Ltd, an engineering firm, which specialised in
      renewable energy systems, and for 5 years before that Mr. Adams worked for
      Transcontinental Resources Group, an organization that had several real estate
      and mining interests.




**JAN
      SEIR JORGENSEN (40 years old).** Mr.
      Jorgensen has been involved in the pearling industry for more than 15 years.
      He
      has worked on pearl farms in Australia and Indonesia where he has held senior
      management positions. Mr. Jorgensen has worked for the Company since 1994 with
      the exception of 2 years in 2003 and 2004 when he worked for an Australian
      pearling company. He is currently responsible for the Company’s pearl production
      in Indonesia.





**JENS
      KNAUER, B.Sc (Biochemistry), M.Sc., Ph.D. (40 years old).** Dr
      Knauer has extensive biological experience within a number of marine species.
      Dr
      Knauer's PhD studies involved work with tropical fish species. He has also
      filed
      teaching roles on the area of marine biology, specifically with Giant Clams.
      His
      extensive research and technical training, combined with a high level of
      practical knowledge, has contributed significantly to the company's ongoing
      research programs. He has worked for the company since 1999 in various
      managerial positions and is currently responsible for research and development
      and for juvenile oyster production in Bali.





There
      are
      no arrangements or understandings with major shareholders, customers, suppliers
      or others by which any director or member of senior management was appointed
      to
      his position. There are no family relationships between any directors or
      executive officers and any other directors or executive officers.




**B.**  **Compensation**




The
      total
      remuneration paid to each of the Company’s directors and senior managers for
      services in all capacities during 2005 is set forth below:




**R****ESPONSIBILITIES**
            
            **D****IRECTORS****F****EES**
                **A$**
            
            **O****THER**
                **A$**
            
            **S****UPER****-A****NNUATION**
                **A$**
            
            **T****OTAL**
                **A$**G.R.W.
                Snow
            
            
            Chairman
            
            
            60,000
            
            
            —
            
            
            5,400
            
            
            65,400S.J.
                Arrow
            
            
            Non-Executive
                Director
            
            
            30,000
            
            
            —
            
            
            2,700
            
            
            32,700I.M.
                Murchison
            
            
            Non-Executive
                Director
            
            
            36,000
            
            
            
            
            
            3,240
            
            
            39,240S.P.
                Birkbeck(1)
            
            
            Non-Executive
                Director
            
            
            21,250
            
            
            —
            
            
            1,913
            
            
            23,163J.J.U.
                Taylor
            
            
            Managing
                Director
            
            
            —
            
            
            253,557
            
            
            4,075
            
            
            257,632S.C.B.
                Adams
            
            
            Chief
                Financial Officer
            
            
            —
            
            
            110,000
            
            
            9,900
            
            
            119,900J.S.
                Jorgensen
            
            
            Pearl
                Production Manager
            
            
            —
            
            
            183,775
            
            
            —
            
            
            183,775J.
                Knauer
            
            
            Technical
                Manager
            
            
            —
            
            
            129,837
            
            
            —
            
            
            129,837





(1)  Appointed
      a director of the Company on April 15, 2005.





38


There
      are
      no agreements between the Company and any director or senior manager which
      provide for benefits upon termination or retirement.




The
      Company makes compulsory superannuation contributions (retirement benefit
      contributions) based on a percentage of salary for its Australian directors,
      employees and executive officers. These plans are Australian-mandated retirement
      plans.




39


**C.**  **Board
      Practices**




**Name**
            
            **Position
                with the Company**
            
            **Term**
              **Expires**George
                Robert Warwick Snow(3)
            
            Chairman
                of the Board since July 28, 2004 and a Director since October 28,
                1997.
            
            2009Stephen
                John Arrow(3)
            
            Director
                since June 29, 1999.
            
            2008Ian
                McKenzie Murchison(3)
            
            Director
                since July 28, 2004.
            
            2007Stephen
                Paul Birkbeck(3)
            
            Director
                since April 15, 2005.
            
            2009Joseph
                James Taylor
            
            Managing
                Director since August 31, 2001 and a Director since September 13,
                2000.
            
            (1)Simon
                Charles Bunbury Adams
            
            Chief
                Financial Officer since January 2, 2000 and Secretary since February
                1,
                2001.
            
            (2)Jan
                Seir Jorgensen
            
            Project
                Manager since October 2002 and Pearl Production Manager since February
                2006.
            
            (2)Jens
                Knauer
            
            Technical
                Manager since March, 2005.
            
            (2)





(1)
            The
                Constitution of the Company stipulates that the Managing Director
                does not
                have to retire and be re-appointed. Mr. Taylor’s employment contract has a
                term of three years and expires on December 31, 2007, unless extended
                by
                the mutual agreement of the
                parties.


(2)
            These
                are executive positions within the Company which have no fixed term
                of
                employment.


(3)
            Members
                of the audit committee.





There
      are
      no agreements between the Company and any director which provide for benefits
      upon termination or retirement.




The
      audit
      committee is made up of the four (4) non-executive Directors, and the chair
      of
      the audit committee is Mr. Murchison. The role of the committee is to advise
      on
      the establishment and maintenance of a framework of internal control in relation
      to the financial reporting of the Company’s business activities. The activities
      of the committee ensure that the financial information prepared for use by
      the
      Board in determining policies or for inclusion in the Company’s financial
      reports is of the highest quality and is as reliable as possible. The committee,
      from time to time, requests the external auditor and the Company’s Chief
      Financial Officer to provide information at its meetings.




The
      Company does not have a compensation committee. Remuneration of executives
      is
      set by the Board and when the issue of compensation for the Managing Director
      is
      discussed, the Managing Director abstains from the meeting and is not present
      during such discussions. Compensation for the Directors is set in line with
      current industry standards.




40


**D.**  **Employees**




The
      table
      below sets forth the number of employees of the Company at the end of the
      indicated year **** by
      general category of job position.





**Number
                of Employees**
            
            **2005**
            
            **2004**
            
            **2003****Australia
                -**management, administration and support
            
            
            4
            
            
            4
            
            
            5**Indonesia
                -**Expatriates
                - management and technical support
            
            
            8
            
            
            7
            
            
            7Indonesian
                locals
            
            
            463
            
            
            432
            
            
            339*Administration*
            
            
            *21*
            
            
            *14*
            
            
            *11**Hatchery*
            
            
            *4*
            
            
            *5*
            
            
            *4**Farm
                and Growout*
            
            
            *202*
            
            
            *250*
            
            
            *206**Operations
                and Harvests*
            
            
            *19*
            
            
            *14*
            
            
            *10**Logistics*
            
            
            *55*
            
            
            *59*
            
            
            *42**Electrical
                and Building*
            
            
            *97*
            
            
            *23*
            
            
            *18**Mechanical
                and engineering*
            
            
            *20*
            
            
            *20*
            
            
            *16**Security
                and Community Relations*
            
            
            *45*
            
            
            *47*
            
            
            *32*




The
      Company continued to promote Indonesian staff into senior positions during
      2005.
      With the development of additional operations
      in Bali ,
      several
      key national staff and experienced expatriate managers have been relocated
      to these
      projects, and these relocations have created opportunities for the more
      experienced Indonesian staff to take on senior positions at Alyui
      Bay.




The
      number of employees has increased as a result of the Company’s additional
      operations in Bali and Lombok.




The
      employees are not represented by unions and union membership is not compulsory
      in Indonesia.





**E.**  **Share
      Ownership**




The
      following table sets forth the number of ordinary shares of common stock and
      the
      percentage of total ordinary shares outstanding beneficially owned by each
      of
      the Company’s directors and senior management as of June 30, 2006.




**Name**
            
            **No.
                of Shares**
              **Beneficially
                Owned**
            
            **Percentage
                of Shares Outstanding**George
                Robert Warwick Snow (1)
            
            
            14,384,556
            
            
            15.88
            %Stephen
                John Arrow
            
            
            1,952,934
            
            
            2.16
            %Stephen
                Paul Birkbeck
            
            
            790,000
            
            
            0.87
            %Ian
                McKenzie Murchison
            
            
            650,000
            
            
            0.72
            %Joseph
                James Uel Taylor
            
            
            1,020,000
            
            
            1.10
            %Simon
                Charles Bunbury Adams
            
            
            400,000
            
            
            0.44
            %Jan
                Seir Jorgensen
            
            
            650,000
            
            
            0.72
            %Jens
                Knauer
            
            
            650,000
            
            
            0.72
            %




(1)
      Based
      on Shares outstanding as of June 30, 2006.


41
 There
        are
        currently no outstanding options to purchase Shares of the Company. In May
        2006,
        the shareholders approved an Employee Share Plan which allows for the allocation
        of up to 4,000,000 new shares to senior employees.Of these shares, 2.8
        million  were issued upon the shareholders’ approval of the plan
        at the Company's Annual General Meeting in May 2006. The employees who are
        entitled to these shares are provided with an interest free non-recourse
        loan to
        purchase the shares. Half of the shares vest to the employee after two
        years of employment after issuance and the remaining 50% vest to the employee
        after three years of employment after issuance.




**ITEM
      7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**




**A.**  **Major
      Shareholders**




The
      following table sets out certain information with respect to each person or
      group of affiliated persons who is currently known to the Company to be the
      beneficial owner of 5% or more of the Shares of the Company.


**Title
                of Class**
            
            **Identity
                of Person**
              **or
                Group**
            
            **Amount
                Owned**
            
            **Percentage
                of**
              **Class****(1)**Ordinary
                Shares
            
            
            Dampier
                Investment Group.(2)
            
            
            14,384,556
            
            
            15.88
            %





(1)
            Based
                on Shares outstanding as of June 30, 2006.





(2)
            Includes
                Dampier Investments Pty Ltd and Tempest Pty Ltd. Mr. George Snow
                is the
                beneficial owner of the shares held by the Dampier Investment
                Group.





All
      Shares owned by Dampier Investment Group have the same voting rights as the
      Company’s other Shares.




To
      the
      best of the Company’s knowledge, it is not owned or controlled, directly or
      indirectly, by another corporation or by any foreign government.




To
      the
      best of the Company’s knowledge, there are no agreements in place which could
      result in a change of control of the Company.




As
      of May
      31 2006, 2,207,300 Shares, or 2.5%, were held on record by 205 persons with
      U.S.
      addresses. In addition, 20 persons with U.S. addresses were record holders
      of
      3,962,820 ADSs as of May 31, 2006. Accordingly, the Company has a minimum of
      225
      U.S. record holders, who own at least 6,170,120 Shares, or 6.81%, of the
      Company’s Ordinary Shares.




**B.**  **Related
      Party Transactions**




In
      March
      1999, the Company entered into a consulting agreement with Arrow Pearl Co Pty
      Ltd (“Arrow”), a company owned by Mr. Arrow and for which he serves as managing
      director. Mr. Arrow is a director of the Company. Pursuant to this agreement,
      staff of the Company are trained as pearl operation technicians at the
      Indonesian pearl farm. The Company paid Arrow A$150,820, A$189,030 and A$177,566
      during the years 2005, 2004, and 2003 respectively, under the terms of the
      agreement. We believe the terms of the consulting agreement are at or below
      market rate. The agreement expires in 2009.




42


During
      the year, sales of individual pearls of small quantities were made to some
      staff
      and Directors on normal commercial terms.




The
      Company purchases pearls to the value of A$4,342,019 from its wholly owned
      controlled entity Cendana. These transactions are in the normal course of
      business. There are loans and receivables in place between the Company and
      its
      subsidiaries.




**C.**  **Interest
      of Experts and Counsel**




Not
      required.





**ITEM
      8. FINANCIAL INFORMATION**




**A.** **Consolidated
        Statements and Other Financial Information**




Please
      see Item 17. for a list of the financial statements filed as part of this Annual
      Report.




***Legal
      Proceedings***





The
      Company is not a party to any material legal proceedings, and was not a party
      to
      any material legal proceedings during 2005.




***Dividend
      Policy***





The
      Company paid a dividend of one (1) cent per share (A$878,103 in total) in 2005.
      The Company did not pay any dividends during 2004. The Company paid one dividend
      in April 2003 amounting to A$878,103. In deciding whether to declare a dividend,
      the Company compares the amount of its profits to its anticipated cash needs
      for
      ongoing working capital, taxes and anticipated capital expenditures, and
      evaluates these factors in view of global environmental, political and market
      uncertainties. A dividend of 1.50 cent per share (A$1,359,154) was declared
      by
      the Company on May 30, 2006. The Board of Directors has not stated whether
      any
      further dividends will be paid in 2006.




**B.**  **Significant
      Changes**




There
      have been no significant subsequent events following the close of 2005 up to
      the
      date of this Annual Report that are known to us and which require disclosure
      in
      this Annual Report.




43


**ITEM
      9. THE OFFER AND LISTING**




***Trading
      Market for American Depositary Receipts (ADRs)***




The
      Shares trade in the United States in the form of ADRs issued by the Bank of
      New
      York. Each ADR represents a specified number of ADSs, which each evidence
      ownership of 20 Shares of the Company. On May 31, 1995, the Company’s ADRs began
      trading on the over-the-counter bulletin board service of the National
      Association of Securities Dealers under the symbol APCFY. On September 12,
      1996,
      the Company’s ADRs were listed and began trading on the SmallCap Market of the
      National Association of Securities Dealers, Inc. under the symbol APCFY. On
      December 1, 2004, the Company announced its intention to voluntarily delist
      its
      ADRs from the Nasdaq Small Cap Market. Such delisting has not yet been
      finalized.




The
      quotations set forth below represent the high and low closing prices of the
      Company’s ADRs for the periods specified and, are inter-dealer quotations,
      without retail mark-ups, mark-downs or commissions, do not necessarily represent
      actual transactions, and may reflect only fluctuations in exchange rates between
      the US Dollar and Australian Dollar:




**For
                the Year Ended:**
            
            **High
                Closing Price**
            
            **Low
                Closing Price****(US$)**
            
            **(US$)**2001
            
            $
            4.09
            
            $
            2.002002
            
            
            5.55
            
            
            3.602003
            
            
            4.91
            
            
            2.652004
            
            
            4.19
            
            
            2.212005
            
            
            4.05
            
            
            2.25





**For
                the Quarter Ended:**
            
            **High
                Closing Price**
            
            **Low
                Closing Price****(US$)**
            
            **(US$)**2004March
                31
            
            $
            4.19
            
            $
            2.88June
                30
            
            
            3.35
            
            
            2.21September
                30
            
            
            2.85
            
            
            2.23December
                31
            
            
            2.79
            
            
            2.312005March
                31
            
            $
            3.80
            
            $
            2.25June
                30
            
            
            3.39
            
            
            2.80September
                30
            
            
            3.75
            
            
            2.92December
                31
            
            
            4.05
            
            
            3.15





44





**For
                the****Month
                Ended:**
            
            **High
                Closing Price**
            
            **Low
                Closing Price****(US$)**
            
            **(US$)**December
                31, 2005
            
            $
            4.05
            
            $
            3.15January
                31, 2006
            
            
            4.80
            
            
            3.90February
                28, 2006
            
            
            6.09
            
            
            4.20March
                31, 2006
            
            
            5.42
            
            
            4.23April
                30, 2006
            
            
            4.88
            
            
            4.32May
                31, 2006
            
            
            4.86
            
            
            4.20




***Trading
      Market for the Shares***




The
      principal non-United States trading market for the Shares is the Australian
      Stock Exchange. The Company cannot practicably determine what percentage of
      its
      Shares traded on the Australian Stock Exchange are held by U.S. persons. The
      quotations set forth below represent the high and low closing sales prices
      of
      the Company’s Shares during the periods indicated:




**For
                the Year Ended:**
            
            
            **High
                Closing Sale Price**
            
            
            **Low
                Closing Sale Price****(A$**)****
            
            
            **(A$**)****2001
            
            $
            0.42
            
            $
            0.182002
            
            
            0.52
            
            
            0.352003
            
            
            0.40
            
            
            0.202004
            
            
            0.27
            
            
            0.152005
            
            
            0.27
            
            
            0.17





**For
                the Quarter Ended:**
            
            
            **High
                Closing Sale Price**
            
            
            **Low
                Closing Sale Price****(A$**)****
            
            
            **(A$**)****2004March
                31
            
            $
            0.27
            
            $
            0.20June
                30
            
            
            0.22
            
            
            0.15September
                30
            
            
            0.19
            
            
            0.16December
                31
            
            
            0.18
            
            
            0.162005March
                31
            
            $
            0.24
            
            $
            0.17June
                30
            
            
            0.23
            
            
            0.20September
                30
            
            
            0.25
            
            
            0.20December
                31
            
            
            0.27
            
            
            0.22





**For
                the Months Ended:**
            
            
            **High
                Closing Sale Price**
            
            
            **Low
                Closing Sale Price****(A$**)****
            
            
            **(A$**)****December
                31, 2005
            
            $
            0.27
            
            $
            0.23January
                31, 2006
            
            
            0.31
            
            
            0.26February
                28, 2006
            
            
            0.36
            
            
            0.31March
                31, 2006
            
            
            0.36
            
            
            0.31April
                30, 2006
            
            
            0.34
            
            
            0.30May
                31, 2006
            
            
            0.34
            
            
            0.29





45




**ITEM
      10. ADDITIONAL INFORMATION**




**A.**  **Share
      Capital**




Not
      required.




**B.**  **Memorandum
      and Articles of Association**




A
      description of the Company’s Constitution is contained in Item 10B of its Annual
      Report on Form 20-F for the fiscal year ended December 31, 2001 (Registration
      No. 000-28186), which was filed with the Commission on July 18, 2002. Item
      10B
      of the Company’s 2001 Annual Report is incorporated by reference
      herein.




**C.**  **Material**  **Contracts**




***Office
      Rental Agreement Denpasar Bali***





In
      June
      2003, Cendana entered into a rental agreement with Nyoman Ardana for the use
      of
      an office building of approximately 225 square meters located at Jalan Sekar
      Jepun V Nomor 21 Gatot Subroto Timur - Denpasar 80237 Bali, Indonesia. This
      rental agreement is for a term of three years and four months. The annual rental
      is equivalent to A$15,600 per annum and is paid in advance for the full term
      of
      the lease.




***Production
      and Grow-out site, Penyabangan, North Bali***





In
      December 2003, the Company obtained approval from the Indonesian authorities
      and
      the local village for the establishment of a water lease near the coastal
      village of Penyabangan in Northern Bali. The Company secured this lease to
      ensure its access to juvenile oyster production facilities in the area when
      the
      arrangement at Banyupoh ceases in 2005. In
      March
      2004, another lease was granted by the local village for the exclusive use
      of a
      parcel of land adjacent to the ocean lease that was secured in December 2003. Development
      of this facility included a low cost hatchery center, which was completed in
      2004. The Company intends to develop the site to support its future boat
      building and other manufacturing/support activities for the more remote
      locations elsewhere in Indonesia. The agreements are for a term of 30-years
      in
      relation to 0.2 hectares of land and one hectare of ocean, with payments of
      approximately A$15,000 paid up front and A$200 payable per month for the term
      of
      the lease.




***The
      Bacan Joint Production Agreement***





In
      March
      2004, the Company entered into a joint production agreement with Cahaya
      Cemerlang to access the leases and facilities located around Bacan Island in
      the
      province of North Maluku, Indonesia. In return for the use of the facilities
      and
      leases the Company funded and provided the technical input for the production
      of
      juvenile oysters. Oysters that were produced at this site were divided
      equally after the age of 6 months. Any oysters that were not removed from
      the site before 12 months were divided in the ratio of 70% to Cendana and
      30% to Cahaya Cemerlang. The arrangement had a 5 year term and an option to
      extend if both parties agreed at the end of the arrangement. Cemerlang and
      the
      Company terminated the joint arrangement at the end of November
      2005.




46





***Pearl
      Distribution Agreement between the Company and Pearlautore International Pty
      Ltd***





The
      Company appointed Pearlautore International Pty Ltd as its exclusive valuer
      and
      distributor of South Sea pearls on January 1, 2000. This agreement was renewed
      in January 2004 on substantially the same terms for a period of two years,
      as
      neither party exercised its option to terminate the agreement. In 2005, this
      agreement was renegotiated again for a further period of two years. Pearlautore
      International Pty Ltd receives a commission of between 7.5% and 25% for
      cleaning, grading, valuing and selling the Company’s pearls.




***Employment
      Agreement between the Company and Dr. Joseph James Uel
      Taylor***





The
      Company and Dr. Taylor entered into an employment agreement effective September
      1, 2001 and renewed it effective on January 1, 2004, pursuant to which Dr.
      Taylor serves as the Company’s Managing Director. The Agreement provides for the
      payment of approximately A$250,000 in salary per year. The agreement may be
      terminated by either party upon four months’ notice. Dr. Taylor now resides in
      Indonesia and as such, part of his salary is paid by Cendana, and the balance
      is
      paid by Atlas South Sea Pearl Limited. The contract is bifurcated to reflect
      the
      payments from the different entities within the group.




***Director’s
      Access, Insurance and Indemnity Deed between the Company and each Director***




On
      May
      29, 2003, the Company entered into a contract with each of its directors whereby
      the Company indemnifies each director against all liabilities to another person
      (other than the Company or a related body corporate) that may arise from his
      position as a director, except where the liability arises out of conduct which
      involves negligence, default, breach of duty or a lack of good faith. The
      agreement states that the Company will pay the full amount of any such
      liabilities, including advancing amounts the director to pay for the costs
      and
      expenses of defending any such action.




***Lease
      Agreement between the Company and Mr. David Morrison***




In
      June
      2004, the Company entered into a lease agreement with Mr. David Morrison for
      office space at 43 York Street, Subiaco, Western Australia. The lease
      arrangement commenced on July 1, 2004 and is for a period of three (3) years.
      The Company will pay an amount of A$18,000 per annum in equally monthly
      installments for the term of the lease. The lease has an option which allows
      the
      arrangement to be extended for an additional three (3) years under similar
      terms. The office space is approximately 275 square meters in area.




***Collaborative
      Research Agreement between the Company and James Cook University***




In
      June
      2004, the Company entered into a Collaborative Research Agreement with the
      James
      Cook University of Townsville, Queensland Australia. The agreement has been
      undertaken to investigate options for the genetic improvement of the silver/gold
      lip oyster and to provide the Company with information on the genetics of its
      oyster population. The Company has agreed to fund the research project. The
      total amount of research funds for the research project under this agreement
      is
      A$50,000 per annum for 4 years.




47


***Stand-by
      Finance and Foreign Currency Dealing Agreement between the Company and
      Australian and New Zealand Banking Group Ltd***




In
      October 2004, the Company entered into a Stand-by Finance and Foreign Currency
      Dealing Agreement with Australian and New Zealand Banking Group Limited (the
      “ANZ Facility”). The purpose of the ANZ Facility is to finance certain of the
      Company’s exports. This facility has a limit of A$1,700,000.  In addition,
      A$300,000 has been negotiated to assist with working capital requirements. 
The total of these two financing facilities is A$2,000,000 - See Note 25.3
      of “Item 17. Financial Statements.” An additional credit facility with a limit
      of A$1,500,000 is in place for the purpose of Foreign Currency Dealing which
      enables the Company to enter into foreign currency contracts to hedge its
      foreign exchange exposure.  The total value of these facilities amounts to
      A$3,500,000.




***Pearl
      Cultivation Farm Site, Nusa Lembongan Island, South
      Bali***





On
      September 16, 2005, the Company entered into a water lease with local village
      leaders, Nyoman Murta and Wayan Danglod on Nusa Lembongan Island in the south
      of
      Bali. This water lease comprises a water area of 157 hectares (388 acres).
      There
      is no associated land lease as there is an agreement with the Bali Hai Beach
      Club for the Company to use its land for storage of equipment. There is no
      fixed
      term for the water lease. The Company paid approximately A$2,700 to the local
      villagers and there are ongoing costs of A$180 per month paid to local villagers
      for the continued use of the water leases. There was no development of this
      facility in 2005. The Company will use the water lease to grow pearls. In the
      same way as the Karang Asem farm is used, Nusa Lembongan will accommodate mature
      oysters that are transferred from Penyabangan in North Bali. This site has
      a
      strong tidal flow and it is believed that it will be conducive to the production
      of high quality pearls.




***Pearling
      based Tourism and Retail Agreement***




On
      March
      24, 2006, the Company entered into an agreement with PT Bali Cruises Nusantara
      to develop a pearling based tourism and retail venture within the grounds of
      the
      Bali Hai Beach Club “Hai Tide Huts” facility on Nusa Lembongan Island. Under the
      terms of the agreement, the Company will develop a technical/operational
      facility for seeding, harvesting and grading of pearl oysters and a visitor
      center which will include interpretive material on pearl farming, a pearl
      display, retail area for pearls, MOP jewelry and other associated products,
      as
      well as an audio visual theater. The term of this agreement is for five years
      and because the Company is providing a unique tourist attraction to Bali Hai
      Cruises, the Company does not have to pay any rent for the use of approximately
      800 square meters of retail space.




***Pearl
      Cultivation Farm Site, Karang Asem, East Bali***





On
      May
      23, 2005, the Company expanded its operations in Bali by opening a new farm
      site
      at Karang Asem on Bali’s east coast. The Company entered into water lease
      comprising 235 hectares (580 acres) and a land lease for an additional 2,000
      square meters with the local villagers who have ownership of the area. Under
      the
      lease, the Company paid the local villages approximately A$16,000 and will
      pay
      approximately A$200 per month for the use of the site until the expiration
      of
      the lease on May 22, 2035. The Company has constructed storage, accommodation
      and oyster meat processing facilities at the site. Infrastructure costs for
      the
      first year were approximately A$200,000. The Company has established the
      facilities at Karang Asem for the purpose of farming pearls. The Company intends
      that oysters, which are seeded at Penyabangan in North Bali, will be shipped
      to
      the Karang Asem farm where conditions are more conducive for mature oyster
      growth. This site has also been developed to allow the processing of live
      oysters to extract the meat for sale as fresh or frozen produce. This site
      is
      located within one hour’s drive of the main city of Denpasar, which allows for
      more efficient access to logistical support.





48


***The
      West Lombok Joint Production Agreement***





The
      Company began jointly operating with PT Autore Cultured Pearls a land and
      sea based facility located in West Lombok, Nusa Tenggara Barat. The Company
      and
      its joint partner breed and rear pearl oysters at the facility. Under the terms
      of an unexecuted joint operation agreement, the Company shares a land and sea
      based facility, which is owned by the joint partner, at Malaka in the north
      west
      of Lombok. The term of the joint operation agreement is for one year and each
      July will be extended for another year on mutually agreed upon terms. This
      facility comprises of a small hatchery, generator facilities, storage and some
      accommodation on land along with 125 hectares (309 acres) of ocean based farm.
      The land and ocean facilities owned by the joint partner prior to the
      commencement of the joint operation agreement will remain the property of the
      joint partner. Under the terms of the agreement, Cendana contributes 50% of
      the
      costs of operating the facility and splits the cost of any capital items
      purchased during the term of the arrangement equally with the joint
      partner. In exchange, the joint partner and Cendana are entitled to an equal
      share of all pearl oysters produced as this facility.





***Executive
      Share Plan Rules and Loan Scheme***




On
      May
      30, 2006, the shareholders approved the Executive Share Plan Rules and Loan
      Scheme, which permits a maximum of 4,000,000 new Shares of the Company to be
      offered to the Company’s senior employees. The purpose of the plan is a means of
      rewarding existing senior employees and providing them with an incentive to
      remain with the Company for the long term as well as aligning the incentives
      of
      the senior employees selected to participate in the plan more closely with
      the
      shareholders. The initial duration of the plan is for three years, which may
      be
      extended by the Company at its general meeting for additional periods of up
      to
      three years each. Upon approval of the plan by the shareholders at the Company's
      Annual Meeting in May 2006, 2,800,000 of these shares were issued at an issue
      price of A$0.29 per share to Dr. Joseph Taylor, Mr. Jan Jorgensen, Mr. Jens
      Knauer, Mr. Simon Adams, and Mr. Karl Pearce. The employees who are entitled
      to
      these shares are provided with an interest free non-recourse loan to purchase
      the shares. Half of the shares vest to the employee after two years of
      employment after issuance and the remaining 50% vest to the employee after
      three
      years of employment after issuance.




49


**D.**  **Exchange
      Controls and Other Limitations Affecting Security Holders**




Australia
      has largely abolished exchange controls on investment transactions. The
      Australian Dollar is freely convertible into US Dollars. In addition, there
      are
      currently no specific rules or limitations regarding the export from Australia
      of profits, dividends, capital, or similar funds belonging to foreign investors,
      except that certain payments to non-residents must be reported to the Australian
      Cash Transaction Reports Agency, which monitors such transactions.




The
      Australian Foreign Acquisitions Act (the “Act”) sets forth limitations on the
      rights of non-Australian residents to own or vote the ordinary shares of an
      Australian company. The Act permits the Commonwealth Treasurer to examine
      acquisitions and arrangements that could result in foreign persons controlling
      an Australian business. The Commonwealth Treasurer may prohibit a proposed
      takeover if it would lead to a change of control of a business where the
      resultant control would be against the national interest. The Act contains
      divestiture provisions to ensure it can be enforced, as well as stringent
      monetary-penalty provisions for breaches and the making of false or misleading
      statements.




The
      Act
      requires the prior approval of the Commonwealth Treasurer for certain classes
      of
      persons to enter into an agreement to acquire shares of an Australian company,
      if, after the acquisition, such person or corporation would hold a substantial
      interest in such corporation, as explained herein. The foregoing approval
      requirement applies to the following classes of persons: (i) any natural person
      not ordinarily resident in Australia, (ii) any corporation in which either
      a
      natural person not ordinarily resident in Australia or a foreign corporation
      (as
      defined in the Act) holds a substantial interest, and (iii) two or more such
      persons or corporations which hold an aggregate substantial
      interest.




A
      person
      holds a “substantial interest” in a corporation if the holder alone or together
      with any associates (as defined in the Act) controls 15% or more of the voting
      power in the corporation or holds 15% or more of the issued shares in that
      corporation. Two or more persons hold an aggregate substantial interest in
      a
      corporation if they, together with any associates (as so defined), control
      40%
      or more of the voting power, or own 40% or more of the issued shares, in such
      corporation.




The
      Act
      requires foreign persons or foreign-controlled entities to give 40 days’ notice
      to the Commonwealth Treasurer of a proposal to acquire or increase (or offer
      to
      acquire or increase) a single interest of 15% or more of the ownership or voting
      power of an Australian company. If two or more foreign persons or
      foreign-controlled entities are acting together, the threshold is 40% in the
      aggregate.




The
      Constitution of the Company does not contain any additional limitations on
      a
      nonresident’s right to hold or vote the Company’s securities.




**E.**  **Taxation**




The
      following discussion summarizes certain U.S. federal and Australian tax
      consequences of the ownership of Shares (or ADRs representing them) by a person
      (“U.S. Portfolio Stockholder”) that: (i) is a citizen or resident of the U.S., a
      U.S. corporation or that otherwise will be subject to U.S. federal income tax
      on
      a net income basis in respect of the Shares or ADRs; (ii) is not a resident
      of
      Australia for Australian tax purposes; (iii) has not, within the preceding
      5
      years, beneficially owned 10% of the issued capital or voting stock in the
      Company; and (iv) has not used the Shares or ADRs in carrying on a trade or
      business, wholly or partly through a permanent establishment in
      Australia.




50


The
      statements regarding U.S. and Australian tax laws set forth herein are based
      on
      those laws as in force on the date of this document and are subject to changes
      to those laws subsequent to the date of this document that may affect the tax
      consequences described herein (some of which may have retroactive effect).
      This
      summary is not exhaustive of all possible tax considerations and investors
      are
      advised to satisfy themselves as to the overall tax consequences, including
      specifically the consequences under U.S., state, local and other laws, of the
      acquisition, ownership and disposition of Shares or ADRs by consulting their
      own
      tax advisors.




IRS
      Circular 230 Disclosure: To ensure compliance with requirements imposed by
      the
      U.S. Internal Revenue Service, this is to advise you that the following summary
      of U.S. federal tax consequences is not intended or written to be used, and
      cannot be used, for the purpose of avoiding tax-related penalties.




***Taxation
      of Gains on Sale***




A
      U.S.
      Portfolio Stockholder is not subject to Australian income tax on the sale of
      its
      Shares or ADRs in the Company.




***Passive
      Foreign Investment Company Status***




The
      following discussion of “passive foreign investment companies” (“PFICs”) is of
      particular interest for U.S. Portfolio Stockholders in 2005 whose holding period
      in their Shares or ADRs extends back to 1996.




A
      foreign
      corporation is classified as a passive foreign investment company (a “PFIC”) in
      any year in which at least 75 percent of its gross income is passive income,
      on
      the average percentage of assets held during the taxable year that produce
      passive income or that are held for the production of passive income is at
      least
      50 percent. Passive income includes interest income from cash holdings and
      profits from the sale of marketable securities, even if derived from an active
      business. During 1995 and 1996, substantially all of the Company’s gross income
      was passive income derived from the sale of its investment securities and from
      interest income. Therefore, the Company has determined that it was a PFIC during
      1995 and 1996. However, the Company has not been a PFIC since 1996. While no
      absolute assurance can be given, the Company believes that it most likely will
      have a sufficiently high percentage of non-passive gross income (sales minus
      cost of sales) derived from the sale of pearls, and sufficiently high percentage
      of assets producing non-passive income, for 2005 and for the foreseeable period
      thereafter, to avoid PFIC status in 2005 and for the foreseeable period
      thereafter.




However,
      under a special “once a PFIC - always a PFIC” rule contained in the Internal
      Revenue Code, if a foreign corporation is a PFIC during any year in which a
      U.S.
      shareholder owned shares or ADRs in that foreign corporation, that U.S.
      shareholder forever continues to be subject to the special adverse PFIC tax
      regime with respect to those ADRs or Shares, even if the foreign corporation
      is
      no longer a PFIC, unless a special “purging election” has been made. Thus, a
      U.S. Portfolio Stockholder who owned Shares or ADRs in 1996 will be subject
      to
      the special PFIC rules on gain from the sale of those Shares or ADRs, even
      if
      they are sold in 2005 or thereafter, and even if the Company is not a PFIC
      during 2005 and thereafter, unless that U.S. Portfolio Stockholder has made
      the
      special “purging” election. By contrast, a U.S. Portfolio Stockholder whose
      holding period in its Shares or ADRs began after 1996 will not be subject to
      the
      PFIC rules, if, as anticipated by the Company, the Company is no longer a PFIC
      during 2005 and thereafter. In December, 2005, the Treasury issued final
      Treasury Regulation 1.1298-3, which provides additional guidance with respect
      to
      the “once a PFIC - always a PFIC,” and expands upon the previously issued
      regulations. These regulations permit U.S. Portfolio Stockholders to make deemed
      dividend or deemed sale elections to purge a foreign corporation under certain
      circumstances.




51


Under
      the
      PFIC rules applicable in 2005 and thereafter to a U.S. Portfolio Stockholder
      who
      owned Shares or ADRs in 1996 but does not make a “purging election,” that U.S.
      Portfolio Stockholder who sells the Shares or ADRs at a gain, whether in 2005
      or
      thereafter, will be subject to a special additional tax. To compute this
      additional tax, (i) the gain is allocated ratably over the U.S. Portfolio
      Stockholder’s holding period for the ADRs or Shares, (ii) the amount allocated
      to the current taxable year is taxed as ordinary income, and (iii) the amount
      allocated to other taxable years is taxed at the highest applicable marginal
      rate in effect for each year and an interest charge is imposed to recover the
      deemed benefit from the deferred payment of the tax attributable to each year.
      Such a U.S. Portfolio Stockholder will also be subject to a special additional
      tax on certain excess distributions from the Company, will be denied a step-up
      in tax basis on Shares and ADRs on the death of a U.S. individual shareholder,
      and will be required to comply with burdensome annual reporting
      requirements.




A
      U.S.
      Portfolio Stockholder in 2005 who owned Shares or ADRs in 1996 could have
      avoided the “once a PFIC - always a PFIC” rule, and thus avoided the PFIC rules
      for post-1996 years, by making a “purging election.” Additional information
      concerning the “purging election” is found in Treasury Regulation 1.1297-3T,
      which expands the number of elections available to U.S. Portfolio Stockholders.
      In addition to the “qualified electing fund election” and the “mark-to-market
      election,” each as described below, and the former purging elections, the
      temporary regulations provide a purging election specifically for U.S. Portfolio
      Stockholders subject to the so-called “controlled foreign corporation - passive
      foreign investment company rule” (the “overlapping purging elections”), which
      were not clearly addressed in prior regulations. Specifically, the new temporary
      regulations permit a U.S. Portfolio Stockholder to make a deemed dividend or
      deemed sale purging election if certain conditions are satisfied.




Another
      election that in some cases can reduce the adverse impact of the PFIC rules
      is
      the “qualified electing fund election.” The qualified electing fund election
      would require the U.S. Portfolio Stockholder to provide an analysis of the
      Company’s earnings on a U.S. tax basis, and the Company will not provide this
      analysis. Therefore, the Company expects that the “qualified electing fund”
election will not be available to its U.S. Portfolio Stockholders.




Another
      election that in some cases is available to a U.S. shareholder of a PFIC is
      the
“mark-to-market” election. Under this election, the excess of the fair market
      value of the PFIC stock at the end of the tax year over its adjusted basis
      (as
      increased to reflect net previous inclusions of “mark-to-market” gains over
      previous “mark-to-market” losses) is included as ordinary income in the current
      year. Additional information concerning the “mark-to-market” election is
      contained in Treasury Regulations 1.1296-1 and 1.1296-2. There are some
      technical uncertainties as to the application of the “mark-to-market” rules for
      Atlas shares in 2005, due to the fact that Treasury Regulation 1.1296-1 applies
      to taxable years beginning on or after May 3, 2005, and due to some uncertainty
      as to the circumstances in which NASDAQ-traded ADR’s of Australian Stock
      Exchange - traded companies qualify under Treasury Regulation 1.1296-2 to be
      subjects of the “mark-to-market” election.




52


The
      foregoing is a general summary of the implications of the PFIC rules. Special
      rules may apply to specific types of investors, such as dealers in securities.
      The PFIC rules have been amended frequently, and future amendments are quite
      possible. U.S. Portfolio Stockholders in 2005 whose holding period in its Shares
      or ADRs extends back to 1996 should consult their own tax advisers as to the
      potential application of the PFIC rules as well as the impact of any proposed
      legislation that could affect them.




***Taxation
      of Dividends***




In
      IRS
      Notices 2004-70, 2003-69, 2003-71, and 2003-79, the Internal Revenue Service
      set
      forth the criteria it would apply to determine if dividends paid by an
      Australian or other foreign corporation, such as the Company, can qualify for
      the reduced 2003-2008 individual U.S. tax rates (generally 15%) applicable
      to
      qualifying dividends. Under Notices 2003-69, 2003-71 and 2003-79, an Australian
      corporation is a “qualified foreign corporation” whose dividends can qualify for
      the reduced tax rate if the Australian corporation qualifies as a resident
      of
      Australia, and qualifies under the limitations of benefits clause, for the
      benefits of the Australian - U.S. income tax treaty. An Australian corporation
      can also qualify if the ADR on which the dividend is paid is readily tradable
      on
      NASDAQ or other established securities market in the U.S. Further, to pay
      qualifying dividends, the Australian corporation must not be, for the taxable
      year of the Australian corporation in which the dividend was paid, or the
      preceding taxable year, a foreign personal holding company, a foreign investment
      company, or a PFIC. Certain holding period requirements must also be met. With
      respect to individuals whose holding period in the Company stock began after
      the
      Company’s 1996 PFIC year, the Company believes that its dividends can qualify
      for the reduced post-2002 individual tax rates applicable to qualifying
      dividends.




The
      Company’s dividends to its U.S. Portfolio Stockholders would be exempt from
      Australian dividend withholding tax to the extent such dividends are considered
      to be “franked” for Australian tax purposes. A dividend is considered to be
“franked” to the extent that such dividend is paid out of the Company’s income
      on which Australian corporate tax has been levied. Even if not “franked,” a
      dividend will be exempt from Australian dividend withholding tax if it is paid
      out of the Company’s non-Australian-source dividend income and the Company
      specifies a “foreign dividend account declaration percentage” for such purpose.
      The Company anticipates that when it pays dividends, such dividends would likely
      be either “franked,” or paid from the Company’s non-Australian source dividend
      income as specified in the foreign dividend account declaration percentage,
      and
      therefore would be exempt from Australian dividend withholding tax.




53


If,
      however, dividends are paid by the Company that are not “franked,” nor paid from
      the Company’s non-Australian source dividend income as specified in the foreign
      dividend account declaration percentage, such dividend would then be subject
      to
      Australian dividend withholding tax. However, in accordance with the provisions
      of the Australia/United States Income Tax Treaty, Australian withholding tax
      on
      dividend income derived by a U.S. shareholder would be limited to 15% of the
      gross amount of the dividend. Subject to certain limitations, any Australian
      dividend withholding tax may be claimed as a credit against the federal income
      tax liability of the U.S. shareholder. The overall limitation on non-U.S. taxes
      eligible for U.S. credit is calculated separately with respect to specific
      classes, or “baskets” of income. For this purpose, dividends distributed by the
      Company will generally constitute “passive income” or, in the case of certain
      U.S. Portfolio Stockholders, “financial services income.” The U.S. tax credits
      allowable with respect to each income basket cannot exceed the U.S. federal
      income tax payable with respect to such income. The consequences of the separate
      limitation calculation will depend on the nature and sources of each U.S.
      Portfolio Stockholder’s income and the deductions allocable
      thereto.




Distributions
      on the Shares or ADRs will constitute dividends for U.S. federal income tax
      purposes to the extent paid out of current or accumulated earnings and profits
      of the Company, as determined for U.S. federal income tax purposes. If the
      Company pays a dividend, such dividend would likely be paid in Australian
      dollars. The amount of dividend income for a U.S. Portfolio Stockholder will
      be
      the US Dollar value of the dividend payment on the date of receipt, even if
      the
      dividend is not converted into US Dollars. Gain or loss, if any, realized on
      a
      sale or other disposition of Australian Dollars will be ordinary income or
      loss
      to the U.S. Portfolio Stockholder. Dividends paid by the Company will not be
      eligible for the “inter-corporate dividends received” deduction allowed to U.S.
      corporations.




As
      mentioned above in connection with the PFIC discussion, an excess distribution
      by the Company on a Share or ADR that was owned by the U.S. Portfolio
      Stockholder recipient during 1996 or any subsequent year in which the Company
      is
      a PFIC may be subject to additional U.S. taxes. An excess distribution generally
      includes any annual distribution in excess of 125 percent of the average
      distributions received by the U.S. Portfolio Stockholder from the PFIC stock
      during the three preceding taxable years.




***Estate
      and Gift Tax***




Australia
      does not impose any estate, inheritance or gift taxes. Therefore, no Australian
      estate tax, inheritance tax or gift tax will be imposed on the death of, or
      upon
      a lifetime gift by, a U.S. Portfolio Stockholder.




**F.**  **Dividends
      and Paying Agents**




Not
      required.




**G.**  **Statement
      by Experts**




Not
      required.




54


**H.**  **Documents
      on Display**




The
      Company files annual and semi-annual reports and other information with the
      SEC.
      You may read and copy any report or document the Company files, including the
      exhibits, at the SEC’s public reference room located at 450 Fifth Street, N.W.,
      Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
      information on the public reference rooms. Such materials can also be obtained
      on the SEC’s site on the internet at http://www.sec.gov .




The
      Company will also provide without charge to each person, including any
      beneficial owner, upon written or oral request of that person, a copy of any
      and
      all of the information that has been incorporated by reference in this Annual
      Report. Please direct such requests to the Managing Director, Atlas South Sea
      Pearl Limited, 43 York Street, Subiaco Western Australia 6008, telephone number
      (61) (8) 9380-9444 or facsimile number (61) (8) 9380-9970.




**I.**  **Subsidiary
      Information**




Not
      required.





55


**ITEM
      11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




***Interest
      Rate Risk***




The
      following table sets forth the types of instruments held by the Company that
      are
      subject to fluctuation in interest rates as of December 31, 2005 and the terms
      of such instruments:




**Fair
                Value at**
              **Dec.
                31, 2005**
            
            **Fair
                Value at**
              **Dec.
                31, 2004**
            
            **Terms****A$**
            
            **A$**Cash
                in hand and at bank
            
            $
            660,373
            
            $
            1,908,996
            
            
            Current
                account with interest receivable at 3.22% (2004 - 3.66%) and cash
                on handFixed
                Term Deposit
            
            
            815,107
            
            
            1,300,000
            
            
            Interest
                receivable at 5.58% (2004 - 5.23%) maturing within one
                month$
            1,475,480
            
            $
            3,186,833





The
      carrying amount of trade accounts payable and trade accounts receivable
      approximate their fair values. See “Item 17. Financial Statements - Note 33 -
      Additional Financial Instruments Disclosure.”




The
      Australian Dollar equivalents of unhedged amounts payable or receivable in
      foreign currencies, calculated at year end exchange rates, are as
      follows:




**2005**
            
            **2004****A$**
            
            **A$****Amounts
                receivable:**Indonesia
                Rupiah
            
            $
            3,466
            
            $
            75,543Japanese
                Yen
            
            
            126,261
            
            
            537,846US
                Dollars
            
            
            19,488
            
            
            6,696$
            149,215
            
            $
            620,085**Amounts
                Payable:**Indonesian
                Rupiah
            
            $
            19,718
            
            $
            945,232




***Commodity
      Price Risk***




The
      Company is subject to the risk of price changes in the pearl market. The market
      price of South Sea pearls is similarly determined at auctions held throughout
      the year, although some pearls are now being sold at private events in
      negotiated transactions. The prevailing market price is largely determined
      by
      the quality and the quantity of pearls available. This commodity price risk
      is
      not actively managed by the Company.




***Foreign
      Currency Exchange Rate Risk***




The
      Company’s functional currency is Australian Dollars although a portion of the
      business is transacted in foreign currencies. The Company is exposed to foreign
      currency fluctuations as a result of operations in Indonesia and receipt of
      pearl sales proceeds predominantly in Japanese Yen.




56


The
      Company operates pearl farms in Indonesia. As a result a significant proportion
      of the Company’s ongoing operating expenses are incurred in Indonesian Rupiah.
      Accordingly, the Company is exposed to the risk of adverse changes occurring
      in
      the Indonesian Rupiah/Australian Dollar exchange rate. The Company’s investment
      in its Indonesian subsidiary is accounted for by the current accounting method
      and foreign exchange translation gains and losses are taken in to the Company’s
      current year’s financial statements. The Company does not hedge against this
      investment.




Nearly
      all pearl sales are denominated in Japanese Yen. The Company has entered into
      foreign exchange contracts to hedge certain anticipated sale commitments
      denominated in foreign currencies, particularly Japanese Yen. The terms of
      these
      commitments are not more than 24 months. See “Item 17. Financial Statements -
      Note 33 to Financial Statements.”




The
      net
      foreign exchange gain/(loss) incurred, as a result of movements of both the
      Japanese Yen and the Indonesian Rupiah against the Australian Dollar, in 2004
      and 2005 was A$541,363 and A$(24,601) respectively.




The
      Company’s policy is to enter into forward foreign exchange contracts to hedge up
      to 70% and 40% of foreign currency sales expected within 12 and between 12
      and
      24 months, respectively. The amount of anticipated future sales is forecast
      in
      light of current conditions in foreign markets and experience in the pearling
      industry.




The
      following table sets forth the gross value in Australian Dollars to be received
      under foreign currency contracts, the weighted average contracted exchange
      rates
      and the settlement periods of outstanding contracts for the Company (as of
      December 31):




**Weighted
                averageexchange rate**
            
            **Gross
                Value**
              **A$****2005**
            
            
            **2004**
            
            
            **2005**
            
            
            **2004**Sell
                Japanese Yen - Settlement PeriodNot
                later than one year
            
            
            JPY84.60
            
            
            JPY73.50
            
            $
            3,566,985
            
            $
            3,384,800Buy
                Indonesian Rupiah - Settlement PeriodNot
                later than one year
            
            
            IDR7,623
            
            
            —
            
            $
            1,600,000
            
            
            —





57


These
      forward exchange contracts are hedging anticipated sales that are due within
      12
      months. Any unrealized gains and losses on the hedging contracts, together
      with
      the costs of the contracts, will be recognized in the financial statements
      at
      the time the underlying transaction occurs. The
      gross
      unrealized gains and losses as of December 31, 2005 and 2004 on hedges of
      foreign currency sales anticipated to take place in the future are set forth
      below :




**Gains**
              **A$**
            
            **Losses**
              **A$****2005**
            
            **2004**
            
            **2005**
            
            **2004****Expected
                Sale Year**Not
                later than one year
            
            
            —
            
            $
            289,911
            
            
            —
            
            
            —





The
      future income of the Company may be adversely affected by adverse movements
      in
      the Japanese Yen/Australian Dollar exchange rate.




**ITEM
      12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**




Not
      required.




58




**PART
      II**




**ITEM
      13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES**




There
      has
      been no default of any indebtedness nor is there any arrearage in the payment
      of
      dividends.




**ITEM
      14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
      OF** **PROCEEDS**




There
      have been no changes to the instruments defining the rights of the holders
      of
      any class of registered securities, and the rights of holders of the registered
      securities have not been altered by the issuance or modification of any other
      class of securities. There are no restrictions on working capital and no removal
      or substitution of assets securing any class of the Company’s registered
      securities.




**ITEM
      15. CONTROLS AND PROCEDURES**




(a)
            Under
                the supervision and with the participation of management,
                including the Company's principal executive officer and
                principal financial officer, the Company conducted an evaluation
                of the effectiveness of the design and operation of the Company’s
                disclosure controls and procedures, as defined in Rules 13a-15(e)
                and
                15d-15(e) promulgated under the Securities Exchange Act of 1934,
                as
                amended, (the “Exchange Act”) as of December 31, 2005. Based on this
                evaluation, the Company's principal executive officer and principal
                financial officer concluded that the Company’s disclosure controls and
                procedures have been designed and are being operated in a manner
                that
                provides reasonable assurance that the information required to be
                  disclosed by the Company in reports filed under the Exchange Act
                is
                recorded, processed, summarized and reported within the time periods
                specified in the SEC’s rules and forms.





(b)
            There
                have been no significant changes (including corrective actions with
                regard
                to significant deficiencies or material weakness) in the
                Company's internal controls or in other factors that could
                significantly affect these controls subsequent to the date of the
                evaluation referenced in paragraph (a)
                above.





**ITEM
      16A. AUDIT COMMITTEE FINANCIAL EXPERT**




The
      Company’s audit committee is made up of the four non-executive directors. Mr.
      Ian Murchison meets the definition of an audit committee financial expert,
      as
      defined for the purposes of Item 16A. of Form 20-F and serves as the Company’s
      financial expert. The Company has determined that the number of directors that
      make up the audit committee reflects the appropriate level of governance for
      a
      Company of this type and size. All of the audit committee members have
      experience with the financial management of a company and are familiar with
      the
      reports that are provided by management for the purpose of reporting the
      financial position of the business.




59




**ITEM
      16B. CODE OF ETHICS**




The
      Company has not yet adopted a Code of Ethics relating to the conduct of the
      principal executive officer, the principal financial officer, the principal
      accounting officer or other officers who perform a similar role. All senior
      executives operate on the basis of trust and there is open discussion between
      the chairman and other directors and the senior management. Although, the
      Company planned to develop such a code of conduct, last year, due to attention
      to other priorities, it has not yet done so. The Company plans to develop such
      a
      plan over the next 12 months. Until now, the resources needed to develop such
      a
      set of procedures have not been available.




**ITEM
      16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES**




The
      aggregate fees billed for the last two fiscal years for professional services
      rendered by the Company’s auditor are as follows:




**2005**
              
              **2004**A$
              
              
              A$Audit
                  Fees
              
              $
              70,127
              
              $
              49,920Audit-Related
                  Fees
              
              
              0
              
              
              0Tax
                  Fees
              
              
              14,764
              (1)
              
              1,595
              (1)All
                  Other Fees
              
              
              0
              
              
              0




(1)
                The
                    Company retains a separate company to render professional tax
                    compliance,
                    tax advice and tax planning services. The aggregate fees billed
                    by the
                    separate company was A$119,203 in 2005 and A$48,016 in
                    2004.





Audit
      Fees consist of fees for the audit of our financial statements, and those of
      our
      subsidiaries, and review of documents in connection with filings with the SEC
      and other statutory or regulatory filings. Tax Fees consist of fees for services
      rendered for tax compliance, tax advice and tax planning. All Other Fees consist
      of financial consulting fees. The Company did not pay any Audit-Related Fees
      or
      All Other Fees to its auditors in 2004 or 2005.





The
      Company's audit committee pre-approves all audit, audit-related and
      non-audit services not prohibited by law to be performed by its independent
      auditors and associated fees prior to the engagement of the independent auditor
      with respect to such services **.**





**ITEM
      16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
      COMMITTEES**




Not
      applicable.




60




**ITEM
      16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
      PURCHASERS**




Not
      applicable.




**PART
      III**




**ITEM
      17. FINANCIAL STATEMENTS**




The
      following Financial Statements are filed as part of this Annual
      Report.





**Page**
              **Number****Independent
                Auditor’s Report**
            
            
            **F-1****Income
                Statement**
            
            
            **F-2****Balance
                Sheet**
            
            
            **F-3****Statement
                of Changes in Equity**
            
            
            **F-4****Cash
              Flow Statement**
            
            
            **F-5****Notes
                to and Forming Part of the Financial Statements**
            
            
            **F-6**




**ITEM
      18. FINANCIAL STATEMENTS**




Not
      required.




**ITEM
      19. EXHIBITS**


1.1
              
              Constitution(6)2.1
              
              Form
                  of American Depositary Receipt (2(i))(1)2.2
              
              Form
                  of Stock Certificate (2(ii))(1)2.3
              
              Deposit
                  Agreement between the Company and the Bank of New York (As amended
                  and
                  filed with Form F-6) (2(iii))(1)4.1
              
              Loan
                  Agreement between the Company and Nusantaqua (3(B)(iii))(1)4.2
              
              Joint
                  Funding Agreement between Nusantaqua, Tansim and Cendana
                  (3(B)(iv))(1)4.3
              
              Water
                  lease dated March 11, 1993 between PT Perintis Ardindo Nusa and
                  the
                  Government of Nusa Tenggara Timur Province Fisheries Services,
                  with
                  English translation (3(B)(vi))(1)4.4
              
              Expansion
                  to Water Lease dated March 10, 1995 between PT Perintis Ardindo
                  Nusa and
                  the Investment Coordination Board of the Badan Koordinasi Penanaman
                  Modal,
                  with English translation (3(B)(vii))(1)4.5
              
              Lease
                  of 5 hectares of land dated October 6, 1992 between PT Perintis
                  Ardindo
                  Nusa and the Badan Pertanahan Nasional Sertipikat, with English
                  translation (3(B)(viii))(1)
  61
  4.6
              
              Lease
                  of 3 hectares of land dated September 4, 1994 between Dr. T.P.G.
                  Purchase
                  and Mr. Paulus Bissilisin, with English translation (3(B)(ix))(1)4.7
              
              Water
                  leases dated January 9, 1998 between PT Cendana Indopearls and
                  the
                  Investment Coordination Board of the Badan Koordinasi Penanaman
                  Modal,
                  with English translation (2xx)(3)4.8
              
              Land
                  and water lease dated September 30, 1997 between the Company and
                  the Kawe
                  tribe at Selpele village with English translation (2xxiv)(3)4.9
              
              Consultancy
                  Agreement between the Company and Arrow Pearl Co Pty Ltd for training
                  and
                  technical expertise, dated March 3, 1999 (2xxiv)(4)4.10
              
              Land
                  lease dated July 1, 1999 between the Company and Korinus Ayelouw
                  with
                  English translation (2xxv)(4)4.11
              
              Form
                  of Director’s Access, Insurance and Indemnity Deed between the Company and
                  each director (2xxix)(4)4.12
              
              Letter
                  of Appointment of Pearlautore International Pty Ltd as exclusive
                  valuer
                  and distributor of Atlas Pacific Limited’s South Sea Pearls (2xxiii)(5)4.13
              
              Memorandum
                  of Understanding dated January 9, 2001 for the lease of the Kupang
                  facilities between the Company and PT Timor Otsuki Mutiara (2xxiv)(5)4.14
              
              Letter
                  of Extension dated May 3, 2001 for Distribution Agreement with
                  Pearlautore
                  International Pty Ltd (4xxvi)(6)4.15
              
              Joint
                  Production Agreement dated July 2002 between the Company and PT
                  Horiko
                  Abadi for the joint operation of an oyster hatchery and associated
                  sea
                  leases in Banyupoh, Northern Bali, with English translation (4xix)(7)4.16
              
              Employment
                  Agreement dated November 18, 2002 between the Company and Mr. Jan
                  Jorgensen (4xx)(7)4.17
              
              Joint
                  Production Agreement dated March 21, 2004 between PT Cendana Indopearls
                  and PT Cahaya Cemerlang for the joint operation of an oyster hatchery
                  and
                  associated sea leases in Bacan Island in the North Maluku province
                  of
                  Indonesia (English translation)(8)4.18
              
              Office
                  lease dated May 20, 2003 between PT Cendana Indopearls and Nyoman
                  Ardana
                  and Wayan Kariami (English translation)(8)4.19
              
              Water
                  lease dated December 15, 2003 between PT Cendana Indopearls and
                  the
                  villagers of Pekraman Penyabengan, Sub-district of Gerokgak, Buleleng
                  District, Bali (English translation)(8)
  62
  4.20
              
              Land
                  lease dated March 1, 2004 between PT Cendana Indopearls and the
                  villagers
                  of Pekraman Penyabengan, Sub-district of Gerokgak, Buleleng District,
                  Bali
                  (English translation)(8)4.21
              
              Employment
                  Agreement dated December 30, 2003 between the Company and Dr. Joseph
                  Taylor(8)4.22
              
              Employment
                  Agreement dated December 30, 2003 between PT Cendana Indopearls
                  and Dr.
                  Joseph Taylor(8)4.23
              
              Office
                  lease dated June 8, 2004 between the Company and Mr. David Morrison(8)4.24
              
              Stand-by
                  Finance and Foreign Currency Dealing agreement between the Company
                  and
                  Australian and New Zealand Banking Group Ltd(9)4.25
              
              Collaborative
                  Research Agreement between the Company and James Cook University(9)4.26
              
              Memorandum
                  of Understanding dated March 24, 2006 between PT Cendana Indopearls
                  and PT
                  Bali Cruises Nusantara for the lease grounds on the Bali Hai Beach
                  Club to
                  develop a pearling based tourism and retail operation(10)4.27
              
              Letter
                  of Reappointment dated October 11, 2005 for Pearl Distribution
                  Agreement
                  withPearlautore
                  International Pty Ltd(10)4.28
              
              Memorandum
                  of Understanding between PT Cendana Indopearls and PT Autore Cultured
                  Pearls for the joint production for breeding and rearing pearl
                  oyster at
                  facilities in West Lombok, Nusa Tenggara, Barat(10)4.29
              
              Water
                  lease dated September 16, 2005 between PT Cendana Indopearls, Lembongan
                  Village and Pakraman Lembongan Custom Village, Nusa Penida Subdistrict,
                  Kelungkung Regency, Bali(English
                  translation)(10)4.30
              
              Water
                  and land lease dated May 23, 2005 between PT Cendana Indopearls
                  and Bugbug
                  Custom Village Bugbug Village Karangasem Subdistrict, Karangasem
                  Regency,
                  Bali(English
                  translation)(10)4.31
              
              Form
                  of Executive Share Plan Rules and Loan Scheme(10)8.1
              
              List
                  of Subsidiaries(6)12.1
              
              Section
                302
                Certification of Chief Executive Officer (10)12.2
              
              Section
                  302 Certification of Chief Financial Officer(10)13.1
              
              Section
                  906 Certification of Chief Executive Officer(10)
  63
  13.2
              
              Section
                  906 Certification of Chief Financial Officer(10)





(1)
            Previously
                filed as an Exhibit of the number shown in parenthesis on the Registrant’s
                Registration Statement onForm
                20-F (File No. 0-28186) and incorporated herein by
                reference.




(3)
            Previously
                filed as an Exhibit of the number shown in parenthesis to the Registrant’s
                Annual Report onForm
                20-F for the year ended December 31, 1998 and incorporated herein
                by
                reference.




(4)
            Previously
                filed as an Exhibit of the number shown in parenthesis to the Registrant’s
                Annual Report onForm
                20-F for the year ended December 31, 1999 and incorporated herein
                by
                reference.




(5)
            Previously
                filed as an exhibit of the number shown in parenthesis to the Registrant’s
                Annual Report on Form20-F
                for the year ended December 31, 2000 and incorporated herein by
                reference.




(6)
            Previously
                filed as an exhibit of the number shown in parenthesis to the Registrant’s
                Annual Report on Form20-F
                for the year ended December 31, 2001 and incorporated herein by
                reference.




(7)
            Previously
                filed as an exhibit of the number shown in parenthesis to the Registrant’s
                Annual Report on Form20-F
                for the year ended December 31, 2002 and incorporated herein by
                reference.




(8)
            Previously
                filed as an exhibit of the number shown in parenthesis to the Registrant’s
                Annual Report on Form20-F
                for the year ended December 31, 2003 and incorporated herein by
                reference.




(9)
            Previously
                filed as an exhibit of the number shown in parenthesis to the Registrant’s
                Annual Report on Form20-F
                for the year ended December 31, 2004 and incorporated herein by
                reference.




(10)
            Filed
                herewith.




64


**SIGNATURES**




The
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to sign
      this annual report on its behalf.


**ATLAS
              SOUTH SEA PEARL LIMITED**/s/ G.R.
              SnowG.R.
                Snow,
              ChairmanDated: July 12, 2006




65


**ATLAS
      SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





We
      have
      audited the accompanying balance sheets of Atlas South Sea Pearl Limited as
      of
      December 31, 2005 and 2004, and the related consolidated income statement,
      statement of changes in equity and cash flow statement for each of the two
      years
      in the period ended December 31, 2005. These financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The company is not required to
      have, nor were we engaged to to perform, an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumastances, but not for the purpose of expressing an
      opinion on the effectiveness of the company’s internal control over financial
      reporting. Accordingly we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Company as at December 31,
      2005
      and 2004, and the results of its operations and its cash flows for each of
      the
      two years in the period ended December 31, 2005, in conformity with Australian
      generally accepted accounting principles.




/s/ S
              AndrawesBDO
              Chartered AccountantsPerth
              Western
                Australia, Australia
              July
                15, 2006


F
          - 1




**ATLAS
      SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**


**INCOME
      STATEMENT**


**FOR
      THE YEAR ENDED 31 DECEMBER 2005**





**Note**
            
            **CONSOLIDATED**
            ****
            **THE
                COMPANY**
            ********
            ****
            ****
            ****
            **2005**
            ****
            **2004**
            ****
            **2005**
            ****
            **2004**
            ********
            ****
            
            ****
            **$**
            ****
            **$**
            ****
            **$**
            ****
            **$**Revenue
            
            
            3
            
            
            9,648,366
            
            
            5,822,982
            
            
            9,057,254
            
            
            5,218,743Other
                income
            
            
            3
            
            
            199,493
            
            
            1,014,541
            
            
            196,598
            
            
            974,518**Total
                revenue**
            
            
            
            
            
            **9,847,859**
            
            
            **6,837,523**
            
            
            **9,253,852**
            
            
            **6,193,261**Cost
                of goods sold
            
            
            
            
            
            (4,275,378
            )
            
            (4,414,357
            )
            
            (4,844,054
            )
            
            (4,954,917
            )Marketing
                expenses
            
            
            
            
            
            (870,543
            )
            
            (564,743
            )
            
            (870,543
            )
            
            (564,743
            )Administration
                expenses
            
            
            
            
            
            (1,730,268
            )
            
            (1,632,767
            )
            
            (1,147,620
            )
            
            (1,047,055
            )Other
                expenses
            
            
            4
            
            
            (615,544
            )
            
            (722,984
            )
            
            (420,608
            )
            
            (2,592,386
            )**Total
                expenses**
            
            
            
            
            
            **(7,491,733**
            **)**
            
            **(7,334,851**
            **)**
            
            **(7,282,825**
            **)**
            
            **(9,159,101**
            **)****Profit/(Loss)
                before related income tax expense**
            
            
            
            
            
            **2,356,126**
            
            
            **(497,328**
            **)**
            
            **1,971,027**
            
            
            **(2,965,840**
            **)**Income
                tax (expense)/benefit
            
            
            5
            
            
            (295,539
            )
            
            (96,946
            )
            
            (604,807
            )
            
            117,203**Profit/(Loss)
                after income tax attributable to members of the parent
                entity**
            
            
            
            
            
            **2,060,587**
            
            
            **(594,274**
            **)**
            
            **1,366,220**
            
            
            **(2,848,637**
            **)**Overall
                operationsBasic
                earnings per share**(cents)**
            
            
            6
            
            
            2.35
            
            
            (0.68
            )Diluted
                earnings per share**(cents)**
            
            
            6
            
            
            2.35
            
            
            (0.68
            )





The
      accompanying notes form part of these financial statements.




F
          -
          2




**ATLAS
      SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**


**BALANCE
      SHEET**


**AS
      AT 31 DECEMBER 2005**





**CONSOLIDATED**
            ****
            **THE
                COMPANY**
            ******Note**
            
            
            **2005**
              **$**
            
            
            **2004**
              **$**
            
            
            **2005**
              **$**
            
            
            **2004**
              **$****Current
                assets**Cash
                and cash equivalents
            
            
            7
            
            
            1,475,480
            
            
            3,208,996
            
            
            1,280,339
            
            
            2,659,148Trade
                and other receivables
            
            
            8
            
            
            4,301,651
            
            
            1,934,360
            
            
            4,154,175
            
            
            1,186,113Financial
                assets
            
            
            9
            
            
            5,631,149
            
            
            —
            
            
            4,066,985
            
            
            —Inventories
            
            
            10
            
            
            1,262,890
            
            
            1,034,682
            
            
            899,792
            
            
            1,248,009Biological
                assets
            
            
            11
            
            
            4,176,109
            
            
            2,259,547
            
            
            —
            
            
            —**Total
                current assets**
            
            
            
            
            
            16,847,279
            
            
            8,437,585
            
            
            10,401,291
            
            
            5,093,270**Non-current
                assets**Receivables
            
            
            8
            
            
            —
            
            
            —
            
            
            14,649,066
            
            
            14,979,745Inventories
            
            
            10
            
            
            114,630
            
            
            193,521
            
            
            —
            
            
            —Biological
                assets
            
            
            11
            
            
            5,175,725
            
            
            6,688,662
            
            
            —
            
            
            —Property,
                plant and equipment
            
            
            13
            
            
            2,123,684
            
            
            1,825,434
            
            
            24,438
            
            
            30,525Deferred
                Tax Assets
            
            
            16
            
            
            249,050
            
            
            239,919
            
            
            223,525
            
            
            151,021**Total
                non-current assets**
            
            
            
            
            
            7,663,089
            
            
            8,947,536
            
            
            14,897,029
            
            
            15,161,291**Total
                assets**
            
            
            
            
            
            24,510,368
            
            
            17,385,121
            
            
            25,298,320
            
            
            20,254,561**Current
                liabilities**Trade
                and other payables
            
            
            14
            
            
            682,975
            
            
            1,020,369
            
            
            294,477
            
            
            350,953Borrowings
            
            
            15
            
            
            79,428
            
            
            —
            
            
            79,428
            
            
            —Financial
                instruments
            
            
            9
            
            
            5,675,533
            
            
            —
            
            
            4,075,533
            
            
            —Current
                tax liabilities
            
            
            16
            
            
            203,120
            
            
            230,480
            
            
            203,120
            
            
            —Short
                term provisions
            
            
            17
            
            
            66,611
            
            
            104,212
            
            
            24,369
            
            
            71,648**Total
                current liabilities**
            
            
            
            
            
            6,707,667
            
            
            1,355,061
            
            
            4,676,927
            
            
            422,601**Non-current
                liabilities**Deferred
                tax liabilities
            
            
            16
            
            
            4,132
            
            
            112
            
            
            4,132
            
            
            112Long
                term provisions
            
            
            17
            
            
            164,928
            
            
            —
            
            
            7,385
            
            
            —**Total
                non-current liabilities**
            
            
            
            
            
            169,060
            
            
            112
            
            
            11,517
            
            
            112**Total
                liabilities**
            
            
            
            
            
            6,876,727
            
            
            1,355,173
            
            
            4,688,444
            
            
            422,713**Net
                assets**
            
            
            
            
            
            17,633,641
            
            
            16,029,948
            
            
            20,609,876
            
            
            19,831,848**Equity**Issued
                capital
            
            
            18
            
            
            18,849,092
            
            
            18,849,092
            
            
            18,849,092
            
            
            18,849,092Reserves
            
            
            19
            
            
            (4,559,049
            )
            
            (4,677,577
            )
            
            —
            
            
            —Retained
                profits
            
            
            
            
            
            3,343,598
            
            
            1,858,433
            
            
            1,760,784
            
            
            982,756**Total
                equity**
            
            
            
            
            
            17,633,641
            
            
            16,029,948
            
            
            20,609,876
            
            
            19,831,848




The
      accompanying notes form part of these financial statements.





F
          -
          3


**ATLAS
      SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**


**STATEMENT
      OF CHANGES IN EQUITY**


**FOR
      THE YEAR ENDED 31 DECEMBER 2005**





**CONSOLIDATED**
            ****
            **THE
                COMPANY**
            ******Note**
            
            **2005**
              **$**
            
            **2005**
              **$**
            
            **2005**
              **$**
            
            **2005**
              **$****Total
                equity at the beginning of the year**
            
            
            
            
            
            16,029,948
            
            
            18,276,755
            
            
            19,831,848
            
            
            22,680,485Adjustment
                on Adoption of AASB 132 and AASB 139, net of tax:Retained
                Profits
            
            
            34
            
            
            289,911
            
            
            —
            
            
            289,911
            
            
            —Reserves
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            —Exchange
                differences on translation of foreign operations
            
            
            19
            
            
            118,528
            
            
            (1,652,533
            )
            
            —
            
            
            —**Net
                income recognised directly in equity**
            
            
            
            
            
            408,439
            
            
            (1,652,533
            )
            
            289,911
            
            
            —Prior
                year expenses brought to account in current period
            
            
            
            
            
            12,770
            
            
            —
            
            
            —
            
            
            —Profit/(Loss)
                for the year
            
            
            20
            
            
            2,060,587
            
            
            (594,274
            )
            
            1,366,220
            
            
            (2,848,637
            )Dividend
                Payment
            
            
            21
            
            
            (878,103
            )
            
            —
            
            
            (878,103
            )
            
            —**Total
                equity at the end of the year**
            
            
            
            
            
            17,633,641
            
            
            16,029,948
            
            
            20,609,876
            
            
            19,831,848





The
      accompanying notes form part of these financial statements.





F
          -
          4


**ATLAS
      SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**


**STATEMENT
      OF CASH FLOWS**


**FOR
      THE YEAR ENDED 31 DECEMBER 2005**





**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            
            **$**
            ****
            **$**
            ****
            **$****Cash
                flows from operating activities**Proceeds
                from pearl and oyster sales
            
            
            7,206,358
            
            
            5,839,566
            
            
            6,528,608
            
            
            5,209,858Proceeds
                from other operating activities
            
            
            78,799
            
            
            769,835
            
            
            72,237
            
            
            701,640Interest
                paid
            
            
            (4,032
            )
            
            (29
            )
            
            (4,032
            )
            
            (29
            )Interest
                and bill discounts received
            
            
            88,731
            
            
            176,843
            
            
            79,232
            
            
            163,139Payments
                to suppliers
            
            
            (7,191,567
            )
            
            (6,279,530
            )
            
            (2,341,950
            )
            
            (1,678,098
            )Income
                tax paid/(received)
            
            
            (368,980
            )
            
            (410,894
            )
            
            (119,350
            )
            
            (230,847
            )Net
                cash provided by/(used in) operating activities (Note
                25.2)
            
            
            (190,691
            )
            
            95,791
            
            
            4,214,745
            
            
            4,165,663**Cash
                flows from investing activities**Advances
                to controlled entities
            
            
            —
            
            
            —
            
            
            (4,790,585
            )
            
            (5,605,806
            )Payments
                for property, plant and equipment
            
            
            (832,582
            )
            
            (778,641
            )
            
            (4,294
            )
            
            (23,083
            )Proceeds
                on disposal of fixed assets
            
            
            78,994
            
            
            1,891
            
            
            —
            
            
            —Payment
                for Other Financial Instrument
            
            
            —
            
            
            (47,450
            )
            
            —
            
            
            (47,450
            )Net
                cash provided by/(used in) investing activities
            
            
            (753,588
            )
            
            (824,200
            )
            
            (4,794,879
            )
            
            (5,676,339
            )**Cash
                flows from financing activities**Proceeds
                from Borrowings
            
            
            99,285
            
            
            —
            
            
            99,285
            
            
            —Repayment
                of Borrowings
            
            
            (19,857
            )
            
            —
            
            
            (19,857
            )
            
            —Dividend
                Payment
            
            
            (878,103
            )
            
            —
            
            
            (878,103
            )
            
            —Net
                cash provided by/(used in) financing activities
            
            
            (798,675
            )
            
            —
            
            
            (798,675
            )
            
            —Net
                increase/(decrease) in cash held
            
            
            (1,742,954
            )
            
            (728,409
            )
            
            (1,378,809
            )
            
            (1,510,676
            )Cash
                at the beginning of the financial year
            
            
            3,208,996
            
            
            4,301,918
            
            
            2,659,148
            
            
            4,169,824Effects
                of exchange rate changes on the balances of cash held in foreign
                currencies
            
            
            9,438
            
            
            (364,513
            )
            
            —
            
            
            —Cash
                and term deposits at the end of the financial year (Note
                25.1)
            
            
            1,475,480
            
            
            3,208,996
            
            
            1,280,339
            
            
            2,659,148





The
      accompanying notes form part of these financial statements.





F
          -
          5


**NOTES
          TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
 **1.**
            **STATEMENT
                OF SIGNIFICANT ACCOUNTING
                POLICIES**  **1.1**
            **Basis
                of preparation**  This
        general purpose financial report has been prepared in accordance with Australian
        Accounting Standards, Urgent Issues Group Interpretations and other mandatory
        professional reporting requirements of the Australian Accounting Standards
        Board
        and the Corporations Act 2001.
  The
        financial report covers the economic entity of Atlas South Sea Pearl Ltd
        and its
        controlled entities, and Atlas South Sea Pearl Ltd as an individual parent
        entity. Atlas South Sea Pearl Ltd is a listed public company, incorporated
        and
        domiciled in Australia.
  The
        financial report of Atlas South Sea Pearl Ltd and its controlled entities
        and
        Atlas South Sea Pearl Ltd as an individual parent entity comply with all
        Australian equivalents to International Financial Reporting Standards (AIFRS)
        in
        their entirety.
  The
        following is a summary of the material accounting policies adopted by the
        economic entity in the preparation of the financial report. The accounting
        policies have been consistently applied, unless otherwise stated.
  **1.2**
            ***First-time
                adoption of Australian Equivalent to International Financial Reporting
                Standards (AIFRS)***  This
        financial report is the first annual report that the Company has prepared
        in
        accordance with AIFRS. AASB 1 *First-time
        adoption of Australian Equivalent to International Financial Reporting
        Standards* has been
        applied in preparing these financial statements.
  Financial
        statements of the Company until 31 December 2004 had been prepared in
        accordance with previous Australian Generally Accepted Accounting Principles
        (AGAAP). AGAAP differs in certain respects from AIFRS. When preparing the
        Company’s financial reports for the year ended 31 December 2005, management
        has amended certain accounting, valuation and consolidation methods applied
        in
        the previous AGAAP financial statements to comply with AIFRS. With the exception
        of financial instruments, the comparative figures were restated to reflect
        these
        adjustments. The Group has taken the exemption available under AASB 1 to
        only
        apply AASB 132 *Financial
        Instruments: Disclosure and Presentation* and AASB
        139 *Financial
        Instruments: Recognition and Measurement* from
        1 January 2005. Refer to note 33 for further details.
  Reconciliations
        and descriptions of the effect of transition from previous AGAAP to AIFRS
        on the
        Group’s equity and its net income are given in note 2.
  Reporting
        basis and conventions -
  The
        financial report has been prepared on an accruals basis and are based on
        historical costs, modified by the revaluation of selected non-current assets
        and
        financial assets and liabilities for which the fair value basis of accounting
        has been applied.
  **1.3**
            **Principles
                of consolidation**  A
        controlled entity is any entity that Atlas South Sea Pearl Ltd has the power
        to
        control the financial and operating policies so as to obtain benefits from
        its
        activities.
  A
        list of
        controlled entities is contained in note 30 to the financial statements.
        All
        controlled entities have a December financial year end.
  The
        financial statements of the economic entity comprise consolidated accounts
        of
        Atlas South Sea Pearl Limited and all controlled entities within the meaning
        of
        the ** Corporations
        Act. All intercompany balances and unrealised profits resulting from intra-group
        transactions have been eliminated.
  Where
        a
        controlled entity is acquired during a year, its results are included only
        from
        the date of acquisition. Where there is loss of control of a controlled entity
        during a year, its results are included only for that period of the year
        during
        which the parent entity had control.
  In
        the
        instance of the acquisition of a controlled entity, the cost method of
        accounting is used for all acquisitions of assets regardless of whether shares
        or other assets are acquired. Cost is determined as the fair value
        apportionment, at the date of acquisition, of the purchase consideration
        plus
        costs incidental to the acquisition.
  F
            -
            6
 **NOTES
          TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
  **1.4**
            **Income
                tax**  The
        charge for
        current income tax expense is based on the profit for the year adjusted for
        any
        non-assessable or disallowed items. It is calculated using the tax rates
        that
        have been enacted at the balance date.
  Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising between the tax bases of assets and liabilities
        and their carrying amounts in the financial statements. No deferred income
        tax
        will be recognised from the initial recognition of an asset or liability,
        excluding a business combination, where there is no effect on accounting
        or
        taxable profit or loss.
  Deferred
        tax is calculated at the tax rates that are expected to apply to the period
        when
        the asset is realised or liability is settled. Deferred tax is credited in
        the
        income statement except where it relates to items that may be credited directly
        to equity, in which case the deferred tax is adjusted directly against
        equity.
  Deferred
        income tax assets are recognised to the extent that it is probable that future
        tax profits will be available against which deductible temporary differences
        can
        be utilised.
  The
        amount of benefit brought to account or which may be realised in the future
        is
        based on the assumption that no adverse change will occur in income taxation
        legislation and the anticipation that the economic entity will derive sufficient
        future assessable income to enable the benefit to be realised and comply
        with
        the conditions of deductibility imposed
        by the law.
  **1.5**
            **Inventories**  (a)
            Pearls
                - quantity of pearls as harvested and processed are valued at the
                lower of
                cost or net market value.  (b)
            Nuclei
                - quantities on hand at the year end are valued at
                cost.  (c)
            Oysters
                - refer note 1.6  **1.6**
            **Biological
                Assets**  The
        economic entity has applied AASB141 *Agriculture* .
        The
        standard requires that all inventories, which are non-human, living assets,
        be
        treated separately from other inventory. Biological assets must be measured
        at
        net market value and the increment/(decrement) in net market values of the
        assets is to be recognised as revenue/(expense) in the statement of financial
        performance. The value of the Biological Assets is only recognised when it
        can
        be measured reliably.
  Oysters
        are a living organism which meet the definition of a Biological asset. There
        is
        no market for oysters by which a reliable valuation comparison of this category
        of the asset can be made. Given the uncertainty and risk that exists in the
        process of producing a pearl and other risk factors specific to the operations
        of the economic entity, the Directors believe that the most appropriate market
        valuation for the oysters is their cost of production. Cost is the total
        direct
        hatchery and farm operations and includes the cost of oyster purchases and
        nuclei used in seeding operations.
  The
        details of the Biological assets that are held by the economic entity as
        at
        31 December 2005 are provided at Note 11.
  **1.7**
            **Property,
                Plant & Equipment**  Each
        class of property, plant & equipment is carried at cost or fair value less,
        where applicable, any accumulated depreciation and impairment
        losses.
  **Property**
  Freehold
        land and buildings are shown at their fair value (being the amount for which
        an
        asset could be exchanged between knowledgeable willing parties in an arms
        length
        transaction), based on periodic valuations by external independent valuers,
        less
        subsequent depreciation for buildings.
  Leasehold
        property is shown at cost and amortised over the shorter of the term of the
        unexpired lease on the property or the estimated useful life of the improvements
        on the property.
  F
            -
            7
 **NOTES
          TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
  **Plant
        and Equipment**
  Plant
        and
        equipment are measured on the cost basis less depreciation and impairment
        losses.
  The
        carrying value of plant and equipment is reviewed annually by Directors to
        ensure it is not in excess of the recoverable amount of these assets which
        is
        assessed on the basis of the expected net cash flows that will be received
        from
        the assets employed and subsequent disposal.
  The
        cost
        of fixed assets constructed within the economic entity includes the cost
        of
        materials and direct labour. Repairs and maintenance carried out on the assets
        are expensed unless there is a future economic benefit that will flow to
        the
        group which can be reliably measured, in which case the value of the asset
        is
        increased.
  **Depreciation**
  Depreciation
        on property, plant and equipment is calculated on a straight line basis so as to
        write off the cost or valuation of property, plant and equipment over their
        estimated useful lives commencing from the time the asset is held ready for
        use.
  The
        depreciation rates used for each class of depreciable assets are:
  **Class
                  of fixed asset**
              
              **DEPRECIATION
                  RATE****2005**
              
              **2004**Leasehold
                  land & buildings & improvements
              
              
              5-10
              %
              
              5-10
              %Vessels
              
              
              10
              %
              
              10
              %Plant
                  & equipment
              
              
              20-50
              %
              
              20-50
              %
  **1.8**
            **Financial
                Instruments**  **From
        1 January 2005**
  The
        Group
        classifies its investments in the following categories: financial assets
        at fair
        value through profit or loss, loans and receivables, held-to-maturity
        investments, and available-for-sale financial assets. The classification
        depends
        on the purpose for which the investments were acquired. Management determines
        the classification of its investments at initial recognition and re-evaluates
        this designation at each reporting date.
  *(a)*
            *Financial
                assets at fair value through profit or
                loss*  A
        financial asset is classified in this category if acquired principally for
        the
        purpose of selling in the short term or if so designated by management within
        the requirements of AASB139 *Recognition
        and Measurement of Financial Instruments* .
        The
        policy of management is to designate a financial asset if there exists the
        possibility it will be sold in the short term and the asset is subject to
        frequent changes in fair value. Derivatives are also categorised as held
        for
        trading unless they are designated as hedges. Assets in this category are
        classified as current assets if they are either held for trading or are expected
        to be realised within 12 months of the balance sheet date. Realised and
        unrealised gains and losses arising from changes in the fair value of these
        assets are included in the income statement in the period in which they
        arise.
  *(b)*
            *Loans
                and receivables*  Loans
        and
        receivables are non derivative financial assets with fixed or determinable
        payments that are not quoted in an active market. They arise when the Economic
        Entity provides money, goods or services directly to a debtor with no intention
        of selling the receivable. They are included in current assets, except for
        those
        with maturities greater than 12 months after the balance sheet date which
        are
        classified as non-current assets. Loans and receivables are included in
        receivables in the balance sheet.
  *(c)*
            *Held-to-maturity
                investments*  F
            -
            8
 **NOTES
          TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
  Held-to-maturity
        investments are non-derivative financial assets with fixed or determinable
        payments and fixed maturities that the Economic Entity’s management has the
        positive intention and ability to hold to maturity.
  *(d)*
            *Available-for-sale
                financial assets*  Available-for-sale
        financial assets, comprising principally marketable equity securities, are
        non-derivatives that are either designated in this category or not classified
        in
        any of the other categories. They are included in non-current assets unless
        management intends to dispose of the investment within 12 months of the balance
        sheet date. Unrealised gains and losses arising from changes in fair value
        are
        taken directly to equity.
  *(e)*
            *Recognition*  Purchases
        and sales of investments are recognised on trade-date, the date on which
        the
        Economic Entity commits to purchase or sell the asset. Investments are initially
        recognised at fair value plus transaction costs for all financial assets
        not
        carried at fair value through profit or loss. Financial assets are derecognised
        when the rights to receive cash flows from the financial assets have expired
        or
        have been transferred and the Economic Entity has transferred substantially
        all
        the risks and rewards of ownership.
  *(f)*
            *Financial
                liabilities*  Non-derivative
        financial liabilities are recognised at amortised cost, comprising original
        debt
        less principal payments and amortisation.
  *(g)*
            *Derivative
                instruments*  Derivative
        instruments are measured at fair value. Gains and losses arising from changes
        in
        fair value are taken to the income statement unless they are designated as
        hedges.
  *(h)*
            *Impairment*  At
        each
        reporting date, the group reviews the carrying values of its tangible and
        intangible assets to determine whether there is any indication that those
        assets
        have been impaired. If such an indication exists, the recoverable amount
        of the
        asset, being the higher of the asset’s fair value less costs to sell and value
        in use, is compared to the assets carrying value. Any excess of the assets
        carrying value over its recoverable amount is expensed to the income
        statement.
  *(i)*
            *Fair
                value*  *Valuation
        techniques are applied to determine the fair value of all unlisted securities,
        including arms length transactions, reference to similar instruments and
        option
        pricing models.*
  *(j)*
            *Investment
                in subsidiaries*  Investments
        in subsidiaries are recognised in the financial statements at the cost method
        less impairment losses as they are unquoted investments.
  F
            -
            9
 **NOTES
          TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
  **1.9****
            **Derivatives**  **From
        1 January 2004 to 31 December 2004**
  The
        Economic Entity has taken the exemption available under AASB1 to apply AASB
        132
        and AASB 139 from 1 January 2005. The Group has applied AGAAP to the comparative
        information on financial instruments within the scope of AASB 132 and AASB
        139.
        For further information on previous AGAAP refer to the annual report for
        the
        year ended 31 December 2004.
  **Adjustments
        on transition date: 1 January 2005**
  The
        nature of the main adjustments to make this information comply with AASB
        132 and
        AASB 139 are that derivatives are measured on a fair value basis. Changes
        in
        fair value are either taken to the income statement or an equity reserve
        (refer
        below). At the date of transition (1 January 2005) changes in the carrying
        amounts of derivatives are taken to retained earnings or reserves, depending
        on
        whether the criteria for hedge accounting are satisfied at the transition
        date.
  **From
        1 January 2005**
  Derivatives
        are initially recognised at fair value on the date a derivative contract
        is
        entered into and are subsequently remeasured to their fair value. The hedging
        contracts that are taken out by the Economic Entity do not qualify as an
        effective hedge under the accounting standards. Changes in the fair value
        are
        recognised immediately in the income statement.
  **1.10**
            **Foreign
                Currency Transactions and
                Balances**  **Functional
        and presentation currency**
 Items
        included in the financial statements of each of the subsidiaries within the
        Economic Entity are measured using the currency of the primary economic
        environment in which the entity operates (“the functional currency”). The
        consolidated financial statements are presented in Australian dollars, which
        is
        Atlas South Sea Pearl Ltd’s functional and presentation currency.
 
 **Transactions
        and balances**
 Foreign
        currency transactions are translated into functional currency using the exchange
        rates prevailing at the date of transaction. Foreign currency monetary items
        are
        translated at the year end exchange rate. Non-monetary items measured at
        historical cost continue to be carried at the exchange rate at the date of
        the
        transaction. Non-monetary items measured at fair value are reported at the
        exchange rate at the date when fair values were determined.
  Exchange
        differences arising on the translation of monetary items are recognised in
        the
        income statement, except where deferred in equity as a qualifying cash flow
        or
        net investment hedge.
  Exchange
        differences arising on the translation of non-monetary items are recognised
        directly in equity to the extent that the gain or loss is directly recognised
        in
        equity, otherwise the exchange difference is recognised in the income
        statement.
 
 **Group
        Companies**
  The
        results and financial position of all group entities (none of which has the
        currency of a hyperinflation economy) that have a functional currency different
        from the presentation currency are translated into the presentation currency
        as
        follows:
  ·
            Assets
                and liabilities for each balance sheet presented are translated at
                the
                closing rate at the date of that balance
                sheet;  ·
            Income
                and expenses for each income statement are translated at average
                exchange
                rates;  ·
            and
                all resulting exchange differences are recognised as a separate component
                of equity.  F
            -
            10
  **NOTES
        TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
  On
        consolidation, exchange differences arising from the translation of any net
        investment in foreign entities, and of borrowings and other currency instruments
        designated as hedges of such investments, are taken to shareholders’ equity.
        When a foreign operation is sold or borrowings repaid, a proportional share
        of
        such exchange differences are recognised in the income statement as part
        of the
        gain or loss on sale.
  **1.11**
            **Employee
                Benefits**  Provision
        is made for the Economic Entity’s liability for employee entitlements arising
        from services rendered by employees to balance date. Employee entitlements
        expected to be settled within one year together with entitlements arising
        from
        wages and salaries, annual leave and sick leave which will be settled after
        one
        year, have been measured at their nominal amount. Other employee entitlements
        payable later than one year have been measured at the present value of the
        estimated future cash outflows to be made for those entitlements.
  Contributions
        are made by the economic entity to employee superannuation funds and are
        charged
        as expenses when incurred.
  The
        cost
        of providing defined benefits are determined using the projected unit credit
        method. Actuarial valuations are undertaken periodically to measure the
        liability to the economic entity of the defined benefits that are required
        to be
        met by law.
  **1.12**
            **Provisions**  Provisions
        for legal claims are recognised when the Economic Entity has a present legal
        or
        constructive obligation as a result of a past event; it is more likely than
        not
        that an outflow of resources will be required to settle the obligation; and
        the
        amount has been reliably estimated.
  **1.13**
            **Cash
                and Cash Equivalents**  Cash
        and
        cash equivalents includes cash on hand, deposits held at call with financial
        institutions, other short-term, high liquid investments with original maturity
        or three months or less that are readily convertible to known amounts of
        cash
        and which are subject to an insignificant risk of change in value, and bank
        overdrafts.
  **1.14**
            **Revenue
                recognition**  (a)
            Sales
                Revenue comprises of revenue earned from the sale of products or
                services
                to entities outside the consolidated entity. Sales revenue is recognised
                when the goods are provided or when the fee in respect of services
                provided is receivable. (b)
            Interest
                Income is recognised as it accrues. (c)
            Asset
                Sales Revenue comprises of the gross proceeds of the assets. The
                profit
                and loss on disposal of assets is brought to account at the date
                on which
                an unconditional contract is signed.  **1.15**
            **Leases**  Lease
        payments for operating leases, where substantially all the risk and benefits
        remain with the lessor, are charged as expenses in the period in which they
        are
        incurred.
  **1.16**
            **Earnings
                Per Share**   (a)
            Basic
                earnings per share Basic
        earnings per share is determined by dividing net profit after income tax
        attributable to members of the Company, excluding any costs of service equity
        other than ordinary shares, by the weighted average number of ordinary shares
        outstanding during the financial year, adjusted for bonus elements in ordinary
        shares issued during the year.
  (b)
            Diluted
                earnings per share Diluted
        earnings per share adjusts the figure used in determination of basic earnings
        per share to take into account the after income tax effect of interest and
        other
        financial costs associated with dilutive potential ordinary shares and the
        weighted average number of shares assumed to have been issued for no
        consideration in relation to dilutive potential ordinary shares.
  F
            -
            11
 **NOTES
          TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
  **1.17**
            **Segment
                Reporting**  Segment
        revenues and expenses are those directly attributable to the segment and
        include
        any joint revenue and expenses where a reasonable basis of allocation exists.
        Segment assets include all assets used by a segment and consist principally
        of
        cash, receivables, inventories, intangibles and property, plant and equipment,
        net of allowances and accumulated depreciation and amortisation. Whilst most
        such assets can be directly attributed to individual segments, the carrying
        amount of certain assets used jointly by two or more segments is allocated
        to
        the segments on a reasonable basis. Segment liabilities consist principally
        of
        accounts payable, employee entitlements, accrued expenses, provisions and
        borrowings. Segment assets and liabilities do not include deferred income
        tax.
  Inter-segment
        Transfers - Segment revenues, expenses and results include transfers between
        segments. These transfers are eliminated on consolidation.
  **1.18**
            **Comparative
                Figures**  When
        required by Accounting Standards, comparative figures have been adjusted
        to
        conform to changes in presentation for the current financial
        year.
  **1.19**
            **Critical
                Accounting Estimates and
                Judgements**  The
        Directors evaluate estimates and judgments incorporated into the financial
        report based on historical knowledge and the best available current information.
        Estimates assume a reasonable expectation of future events and are based
        on
        current trends and economic data, obtained both externally and within the
        group.
  *Key
        estimates - Impairment*
  The
        group
        assesses impairment at each reporting date by evaluating conditions specific
        to
        the group that may lead to impairment of assets. Where an impairment trigger
        exists, the recoverable amount of the asset is determined. Value-in-use
        calculations performed in assessing recoverable amounts incorporate a number
        of
        key estimates.
  F
            -
            12
 **NOTES
          TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
  **2.**
            **FIRST
                TIME ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL
                REEPORTING STANDARDS (AIFRS)**  **Economic
                  Entity -**
 Reconciliation
                  of equity reported under Australian Generally Accepted Accounting
                  Principles (AGAAP) to equity under Australian equivalents to IFRSs
                  (AIFRS)
 
 **At
                  date of transition to AIFRS: 1 January
                  2004**
 
 **Previous**
                **AGAAP**
              
              **Consolidated**
                **Effect
                  of**
                **Transition
                  to**
                **AIFRS**
              
              **AIFRS****$**
              ****
              **$**
              ****
              **$****Current
                  Assets**Cash
                  and cash equivalents
              
              
              
              
              
              4,301,918
              
              
              —
              
              
              4,301,918Trade
                  and other receivables
              
              
              
              
              
              1,253,030
              
              
              —
              
              
              1,253,030Inventories
              
              
              (2a)
              
              
              3,333,948
              
              
              (383,445
              )
              
              2,950,503Biological
                  assets
              
              
              (2a)
              
              
              2,165,998
              
              
              (457,410
              )
              
              1,708,588**Total
                  Current Assets**
              
              
              
              
              
              **11,054,894**
              
              
              **(840,855**
              **)**
              
              **10,214,039****Non-current
                  assets**Inventories
              
              
              (2a)
              
              
              121,836
              
              
              (18,830
              )
              
              103,006Biological
                  assets
              
              
              (2a)
              
              
              8,406,627
              
              
              (1,568,575
              )
              
              6,838,052Property,
                  plant and equipment
              
              
              (2a)
              
              
              2,458,214
              
              
              (597,654
              )
              
              1,860,560Deferred
                  tax asset
              
              
              
              
              
              150,563
              
              
              —
              
              
              150,563**Total
                  non-current assets**
              
              
              
              
              
              **11,137,240**
              
              
              **(2,185,059**
              **)**
              
              **8,952,181****Total
                  Assets**
              
              
              
              
              
              **22,192,134**
              
              
              **(3,025,914**
              **)**
              
              **19,166,220****Current
                  liabilities**Trade
                  and other payables
              
              
              
              
              
              766,980
              
              
              (867
              )
              
              766,113Current
                  tax liabilities
              
              
              
              
              
              —
              
              
              —
              
              
              —Short
                  term provisions
              
              
              
              
              
              122,946
              
              
              —
              
              
              122,946**Total
                  current liabilities**
              
              
              
              
              
              **889,926**
              
              
              **—**
              
              
              **889,059****Non-current
                  liabilities**Deferred
                  tax liabilities
              
              
              
              
              
              406
              
              
              —
              
              
              406**Total
                  non-current liabilities**
              
              
              
              
              
              **406**
              
              
              **—**
              
              
              **406****Total
                  liabilities**
              
              
              
              
              
              **890,332**
              
              
              **—**
              
              
              **889,465****Net
                  Assets**
              
              
              
              
              
              **21,301,802**
              
              
              **(3,025,914**
              **)**
              
              **18,276,755****Equity**Issued
                  capital
              
              
              
              
              
              18,849,092
              
              
              —
              
              
              18,849,092Foreign
                  currency translation reserve
              
              
              (2b)
              
              
              —
              
              
              (3,025,914
              )
              
              (3,025,047
              )Retained
                  profits
              
              
              
              
              
              2,452,710
              
              
              —
              
              
              2,452,710**Total
                  equity**
              
              
              
              
              
              **21,301,802**
              
              
              **(3,025,914**
              **)**
              
              **18,276,755**
  F
            -
            13
  **NOTES
        TO AND FORMING PART OF THE FINANCIAL STATEMENTS**
  **2.**
                  **FIRST
                      TIME ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL
                      REPORTING STANDARDS (AIFRS)****(Cont.)**
 
 **Economic
        Entity -**
 
 **At
        the end of last reporting period under previous AGAAP: 31 December
        2004**
 
 **Previous**
                **AGAAP**
              
              **Consolidated**
                **Effect
                  of**
                **Transition
                  to**
                **AIFRS**
              
              **AIFRS****$**
              ****
              **$**
              ****
              **$***Current
                  Assets*Cash
                  and cash equivalents
              
              
              
              
              
              3,208,996
              
              
              —
              
              
              3,208,996Trade
                  and other receivables
              
              
              
              
              
              1,934,360
              
              
              —
              
              
              1,934,360Inventories
              
              
              (2a)
              
              
              1,201,667
              
              
              (166,985
              )
              
              1,034,682Biological
                  assets
              
              
              (2a)
              
              
              2,583,417
              
              
              (323,870
              )
              
              2,259,547**Total
                  Current Assets**
              
              
              
              
              
              **8,928,440**
              
              
              **(490,855**
              **)**
              
              **8,437,585****Non-current
                  assets**Inventories
              
              
              (2a)
              
              
              240,248
              
              
              (46,727
              )
              
              193,521Biological
                  assets
              
              
              (2a)
              
              
              9,090,274
              
              
              (2,401,612
              )
              
              6,688,662Property,
                  plant and equipment
              
              
              (2a)
              
              
              2,688,138
              
              
              (862,704
              )
              
              1,825,434Deferred
                  tax assets
              
              
              
              
              
              239,919
              
              
              —
              
              
              239,919**Total
                  non-current assets**
              
              
              
              
              
              **12,258,579**
              
              
              **(3,311,043**
              **)**
              
              **8,947,536****Total
                  Assets**
              
              
              
              
              
              **21,187,019**
              
              
              **(3,801,898**
              **)**
              
              **17,385,121****Current
                  liabilities**Trade
                  and other payables
              
              
              
              
              
              1,020,369
              
              
              —
              
              
              1,020,369Current
                  tax liabilities
              
              
              
              
              
              230,480
              
              
              —
              
              
              230,480Short
                  term provisions
              
              
              
              
              
              104,212
              
              
              —
              
              
              104,212**Total
                  current liabilities**
              
              
              
              
              
              **1,355,061**
              
              
              **—**
              
              
              **1,355,061****Non-current
                  liabilities**Deferred
                  tax liabilities
              
              
              
              
              
              112
              
              
              —
              
              
              112**Total
                  non-current liabilities**
              
              
              
              
              
              **112**
              
              
              **—**
              
              
              **112****Total
                  liabilities**
              
              
              
              
              
              **1,355,173**
              
              
              **—**
              
              
              **1,355,173****Net
                  Assets**
              
              
              
              
              
              **19,831,846**
              
              
              **(3,801,898**
              **)**
              
              **16,029,948****Equity**Issued
                  capital
              
              
              
              
              
              18,849,092
              
              
              —
              
              
              18,849,092Foreign
                  currency translation reserve
              
              
              (2b)
              
              
              —
              
              
              (4,677,577
              )
              
              (4,677,577
              )Retained
                  profits
              
              
              (2c)
              
              
              982,754
              
              
              875,679
              
              
              1,858,433**Total
                  equity**
              
              
              
              
              
              **19,831,846**
              
              
              **(3,801,898**
              **)**
              
              **16,029,948**
  F
            -
            14
  **NOTES
        TO AND FORMING PART OF THE FINANCIAL STATEMENTS**




**2.**
            **FIRST
                TIME ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL
                REPORTING STANDARDS (AIFRS)****(Cont.)**





**Economic
                Entity -**


Reconciliation
                of profit/(loss) under previous AGAAP to profit/(loss) under Australian
                equivalents to IFRS (AIFRS)





**Reconciliation
      for the profit/(loss) for the year ended 31 December 2004**





**Previous**
              **AGAAP**
            
            **Consolidated**
              **Effect
                of**
              **Transition
                to**
              **AIFRS**
            
            **AIFRS****$**
            ****
            **$**
            ****
            **$**Revenue
            
            
            
            
            
            5,822,982
            
            
            —
            
            
            5,822,982Other
                income
            
            
            
            
            
            1,014,541
            
            
            —
            
            
            1,014,541**Total
                revenue**
            
            
            
            
            
            **6,837,523**
            
            
            **—**
            
            
            **6,837,523**Cost
                of goods sold
            
            
            (2d)
            
            
            5,089,271
            
            
            (674,914
            )
            
            4,414,357Marketing
                expenses
            
            
            
            
            
            564,743
            
            
            —
            
            
            564,743Administration
                expenses
            
            
            
            
            
            1,604,336
            
            
            —
            
            
            1,604,336Borrowing
                costs
            
            
            
            
            
            29
            
            
            —
            
            
            29Depreciation
            
            
            
            
            
            28,356
            
            
            —
            
            
            28,356Write
                down of Oyster Inventory values
            
            
            (2d)
            
            
            541,032
            
            
            (15,269
            )
            
            525,763Other
                expenses
            
            
            (2e)
            
            
            382,766
            
            
            (185,499
            )
            
            197,267**Total
                expenses**
            
            
            
            
            
            **8,210,533**
            
            
            **(875,682**
            **)**
            
            **7,334,851**Profit/(loss)
                before income tax expense
            
            
            (2c)
            
            
            (1,373,010
            )
            
            875,682
            
            
            (497,328
            )Income
                tax expense
            
            
            
            
            
            (96,946
            )
            
            —
            
            
            (96,946
            )**Profit/(loss)
                after income tax attributable to members of the parent
                entity**
            
            
            **(2c)**
            
            
            **(1,469,956**
            **)**
            
            **875,682**
            
            
            **(594,274**
            **)**





F
          -
          15




NOTES TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**2.**
            **FIRST
                TIME ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL
                REPORTING STANDARDS (AIFRS)****(Cont.)**





**The
                Company -**


Reconciliation
                of equity reported under Australian Generally Accepted Accounting
                Principles (AGAAP) to equity under Australian equivalents to IFRSs
                (AIFRS)





**At
                date of transition to AIFRS: 1 January
                2004**





**Previous**
              **AGAAP**
            
            **Consolidated**
              **Effect
                of**
              **Transition
                to**
              **AIFRS**
            
            **AIFRS****$**
            ****
            **$**
            ****
            **$****Current
                Assets**Cash
                and cash equivalents
            
            
            4,169,824
            
            
            —
            
            
            4,169,824Trade
                and other receivables
            
            
            757,832
            
            
            —
            
            
            757,832Inventories
            
            
            3,027,284
            
            
            —
            
            
            3,027,284**Total
                Current Assets**
            
            
            **7,954,940**
            
            
            **—**
            
            
            **7,954,940****Non-current
                assets**Trade
                and other receivables
            
            
            14,936,844
            
            
            —
            
            
            14,936,844Property,
                plant and equipment
            
            
            14,672
            
            
            —
            
            
            14,672Deferred
                tax assets
            
            
            34,107
            
            
            —
            
            
            34,107**Total
                non-current assets**
            
            
            **14,985,623**
            
            
            **—**
            
            
            **14,985,623****Total
                Assets**
            
            
            **22,940,563**
            
            
            **—**
            
            
            **22,940,563****Current
                liabilities**Trade
                and other payables
            
            
            181,329
            
            
            —
            
            
            181,329Current
                tax liabilities
            
            
            —
            
            
            —
            
            
            —Short
                term provisions
            
            
            72,963
            
            
            —
            
            
            72,963**Total
                current liabilities**
            
            
            **254,292**
            
            
            **—**
            
            
            **254,292****Non-current
                liabilities**Deferred
                tax liabilities
            
            
            5,786
            
            
            —
            
            
            5,786**Total
                non-current liabilities**
            
            
            **5,786**
            
            
            **—**
            
            
            **5,786****Total
                liabilities**
            
            
            **260,078**
            
            
            **—**
            
            
            **260,078****Net
                Assets**
            
            
            **22,680,485**
            
            
            **—**
            
            
            **22,680,485****Equity**Issued
                capital
            
            
            18,849,092
            
            
            —
            
            
            18,849,092Foreign
                currency translation reserve
            
            
            —
            
            
            —
            
            
            —Retained
                profits
            
            
            3,831,393
            
            
            —
            
            
            3,831,393**Total
                equity**
            
            
            **22,680,485**
            
            
            **—**
            
            
            **22,680,485**




F
          -
          16




NOTES TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**2.**
            **FIRST
                TIME ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL
                REPORTING STANDARDS (AIFRS)****(Cont.)**





**The
                Company -**





**At
                the end of last reporting period under previous AGAAP: 31 December
                2004**





**Previous**
              **AGAAP**
            
            **Consolidated**
              **Effect
                of**
              **Transition
                to**
              **AIFRS**
            
            **AIFRS****$**
            ****
            **$**
            ****
            **$***Current
                Assets*Cash
                and cash equivalents
            
            
            2,659,148
            
            
            —
            
            
            2,659,148Trade
                and other receivables
            
            
            1,186,113
            
            
            —
            
            
            1,186,113Inventories
            
            
            1,248,009
            
            
            —
            
            
            1,248,009**Total
                Current Assets**
            
            
            **5,093,270**
            
            
            **—**
            
            
            **5,093,270****Non-current
                assets**Trade
                and other receivables
            
            
            14,979,745
            
            
            —
            
            
            14,979,745Property,
                plant and equipment
            
            
            30,525
            
            
            —
            
            
            30,525Deferred
                tax assets
            
            
            151,021
            
            
            —
            
            
            151,021**Total
                non-current assets**
            
            
            **15,161,291**
            
            
            **—**
            
            
            **15,161,291****Total
                Assets**
            
            
            **20,254,561**
            
            
            **—**
            
            
            **20,254,561****Current
                liabilities**Trade
                and other payables
            
            
            350,953
            
            
            —
            
            
            350,953Current
                tax liabilities
            
            
            —
            
            
            —
            
            
            —Short
                term provisions
            
            
            71,648
            
            
            —
            
            
            71,648**Total
                current liabilities**
            
            
            **422,601**
            
            
            **—**
            
            
            **422,601****Non-current
                liabilities**Deferred
                tax liabilities
            
            
            112
            
            
            —
            
            
            112**Total
                non-current liabilities**
            
            
            **112**
            
            
            **—**
            
            
            **112****Total
                liabilities**
            
            
            **422,713**
            
            
            **—**
            
            
            **422,713****Net
                Assets**
            
            
            **19,831,848**
            
            
            **—**
            
            
            **19,831,848****Equity**Issued
                capital
            
            
            18,849,092
            
            
            —
            
            
            18,849,092Foreign
                currency translation reserve
            
            
            —
            
            
            —
            
            
            —Retained
                profits
            
            
            982,756
            
            
            —
            
            
            982,756**Total
                equity**
            
            
            **19,831,848**
            
            
            **—**
            
            
            **19,831,848**




F
          -
          17




NOTES TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**2.**
            **FIRST
                TIME ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL
                REPORTING STANDARDS (AIFRS)****(Cont.)**





**The
                Company -**


Reconciliation
                of profit/(loss) under previous AGAAP to profit/(loss) under Australian
                equivalents to IFRS (AIFRS)





**Reconciliation
                for the profit/(loss) for the year ended 31 December
                2004**





**Previous**
              **AGAAP**
            
            **Consolidated**
              **Effect
                of**
              **Transition
                to**
              **AIFRS**
            
            **AIFRS****$**
            ****
            **$**
            ****
            **$**Revenue
            
            
            5,218,743
            
            
            —
            
            
            5,218,743Other
                income
            
            
            974,518
            
            
            —
            
            
            974,518**Total
                revenue**
            
            
            **6,193,261**
            
            
            **—**
            
            
            **6,193,261**Cost
                of goods sold
            
            
            (4,954,917
            )
            
            —
            
            
            (4,954,917
            )Marketing
                expenses
            
            
            (564,743
            )
            
            —
            
            
            (564,743
            )Administration
                expenses
            
            
            (1,047,055
            )
            
            —
            
            
            (1,047,055
            )Borrowing
                costs
            
            
            (29
            )
            
            —
            
            
            (29
            )Other
                expenses
            
            
            (2,592,357
            )
            
            —
            
            
            (2,592,357
            )**Total
                expenses**
            
            
            **(9,159,101**
            **)**
            
            **—**
            
            
            **(9,159,101**
            **)**Profit/(loss)
                before income tax expense
            
            
            (2,965,840
            )
            
            —
            
            
            (2,965,840
            )Income
                tax expense
            
            
            117,203
            
            
            —
            
            
            117,203**Profit/(loss)
                after income tax attributable to members of the parent
                entity**
            
            
            **(2,848,637**
            **)**
            
            **—**
            
            
            **(2,848,637**
            **)**




**Notes
      to the reconciliation of equity and profit and loss at 1 January 2004 and 31
      December 2004**




a)
            The
                changes in the value of inventory, biological assets and property,
                plant
                and equipment reflects the change from AGAAP where the carrying values
                of
                non-monetary items of the Group’s Indonesian subsidiary were based on
                historic rates using the “Temporal method” to AFIRS where these items are
                translated at the balance sheet rate under the “Current rate method”. The
                functional currency of the Indonesian subsidiary, PT Cendana Indopearls,
                is Indonesian Rupiah which has devalued against the Australian Dollar
                over
                time. This has resulted in a decrease in the book value of these
                assets
                when reported in Australian Dollars using the Current rate method
                of
                accounting as required under AIFRS.




b)
            The
                adjustments that are recognised in 2a are recorded in a foreign currency
                translation reserve. Translation adjustments for non monetary assets
                are
                recorded as a movement in the foreign currency translation
                reserve.




c)
            The
                change in the retained earnings reflects the different treatment
                of
                inventory in the Group’s Indonesian subsidiary under AGAAP and AFIRS which
                has an effect on cost of goods sold and write down in inventory (refer
                2d). This also reflects the change in the treatment of foreign currency
                movements under AIFRS compared to AGAAP (refer
                2e).




F
          -
          18




NOTES TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**2.**
            **FIRST
                TIME ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL
                REPORTING STANDARDS (AIFRS)****(Cont.)**




d)
            The
                change in cost of goods sold and written down value of inventory
                when
                reported under AIFRS compared to AGAAP arises due to the lower asset
                value
                on translation of foreign assets, in particular the oyster
                inventory.




e)
            The
                difference in other expenses under AIFRS reflects the foreign currency
                translation that was expensed when treated under the temporal method
                of
                accounting but which is transferred to the translation reserve under
                AIFRS.




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$****3.****REVENUE
                FROM ORDINARY ACTIVITIES**Revenue
                from operating activitiesSales
                revenue
            
            
            9,648,366
            
            
            5,822,982
            
            
            9,057,254
            
            
            5,218,743Revenue
                from outside operating activitiesInterest
                received - other parties
            
            
            101,618
            
            
            156,262
            
            
            92,119
            
            
            142,558Net
                foreign exchange gain from operating activities
            
            
            6,839
            
            
            790,084
            
            
            32,242
            
            
            831,960Other
                revenues
            
            
            42,963
            
            
            19,391
            
            
            72,237
            
            
            —Property
                rental
            
            
            48,073
            
            
            48,804
            
            
            —
            
            
            —Other
                income
            
            
            199,493
            
            
            1,014,541
            
            
            196,598
            
            
            974,518Total
                revenue
            
            
            9,847,859
            
            
            6,837,523
            
            
            9,253,852
            
            
            6,193,261




**4.**  **PROFIT
          FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE**
 The
        operating result before income tax has been determined after
        charging/(crediting) the following items:


**Finance
                Costs**Interest
                paid - other corporations
            
            
            1,399
            
            
            29
            
            
            1,399
            
            
            29**Administration
                expenses from ordinary activities**Operating
                lease rental costs
            
            
            39,915
            
            
            46,508
            
            
            18,442
            
            
            27,461Movements
                in provisionsDepreciation
                property, plant and equipment
            
            
            35,072
            
            
            28,356
            
            
            10,382
            
            
            7,228**Other
                expenses from ordinary activities**Movements
                in provisionsIncrease
                in tax related expenses
            
            
            —
            
            
            177,442
            
            
            —
            
            
            —Provision
                for employee entitlements
            
            
            34,214
            
            
            19,727
            
            
            (23,959
            )
            
            16,061Write-down
                in oyster inventory value
            
            
            —
            
            
            541,032
            
            
            —
            
            
            —Loss/(profit)
                on disposal of fixed assets
            
            
            6,116
            
            
            (20
            )
            
            —
            
            
            —Research
                and Development costs
            
            
            87,500
            
            
            —
            
            
            87,500
            
            
            —(127,830
            )
            
            738,181
            
            
            63,541
            
            
            16,061**Significant
                revenues and expenses**Provision
                for impairment in loan to subsidiary
            
            
            —
            
            
            —
            
            
            —
            
            
            2,576,296


F -
          19




NOTES TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**5.**  **INCOME
        TAX**




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004**$
            
            $
            
            $
            
            $a)The
                components of tax expense comprise:Current
                income tax
            
            
            300,217
            
            
            —
            
            
            673,291
            
            
            —Deferred
                Tax - relating to origination and reversal of temporary
                differences
            
            
            (4,678
            )
            
            96,946
            
            
            (68,484
            )
            
            (117,202
            )295,539
            
            
            96,946
            
            
            604,807
            
            
            (117,202
            )b)The
                prima facie tax on profit from ordinary activities before income
                tax is
                reconciled to the income tax as follows:Accounting
                profit/(loss) before tax
            
            
            2,356,126
            
            
            (497,328
            )
            
            1,971,027
            
            
            (2,965,840
            )Prima
                facie tax expense calculated at 30% on the profit from ordinary
                activities
            
            
            706,838
            
            
            (149,198
            )
            
            591,308
            
            
            (889,752
            )Tax
                effect of permanent differences:Non
                deductible expenses
            
            
            496
            
            
            963
            
            
            496
            
            
            963Tax
                looses not brought to account (Indonesia)
            
            
            (220,477
            )
            
            —
            
            
            —
            
            
            —Over-provision
                of tax in prior period
            
            
            (373,047
            )
            
            —
            
            
            —
            
            
            —Other
                Assessable Income
            
            
            —
            
            
            778
            
            
            —
            
            
            778Permanent
                Differences (Indonesia)
            
            
            176,100
            
            
            43,144
            
            
            —
            
            
            —Non-Deductible
                Expenses (Indonesian Tax Audit)
            
            
            —
            
            
            53,233
            
            
            —
            
            
            —Restatement
                of closing trading stock
            
            
            —
            
            
            91,697
            
            
            —
            
            
            —Amortisation
                of goodwill
            
            
            
            
            
            —
            
            
            
            
            
            —Provision
                for Investment in Subsidiary
            
            
            —
            
            
            —
            
            
            —
            
            
            772,888Foreign
                currency movements
            
            
            —
            
            
            (232,963
            )
            
            —
            
            
            —Inventory
                valuation adjustment
            
            
            —
            
            
            68,308
            
            
            —
            
            
            —Current
                year losses not brought to account
            
            
            162
            
            
            251,672
            
            
            —
            
            
            —Income
                tax under/(over) provided in prior years
            
            
            5,467
            
            
            (30,688
            )
            
            13,003
            
            
            (2,080
            )Income
                tax attributable to operating result
            
            
            295,539
            
            
            96,946
            
            
            604,807
            
            
            (117,203
            )Weighted
                average effective tax rates
            
            
            12.54
            %
            
            N/A
            
            
            30.68
            %
            
            3.95
            %




The
        effective tax rate in 2005 for the economic entity is reduced by the utilisation
        of losses not brought to account in Indonesia as well as the reversal of
        over
        accrual for tax in prior periods.
  An
        income
        tax expense was created in the economic entity in 2004 as a result of tax
        assessments for prior periods in Indonesia.
  The
        effective tax rate for the Company in 2004 was reduced as a result of a
        significant permanent difference created from a provision for investment
        in
        subsidiaries.


F
          -
          20




**NOTES
      TO AND FORMING PART OF THE FINANCIAL STATEMENTS**





**5.**  **INCOME
      TAX** **(Cont.)**




c)  Deferred
        income tax at 31 December relates to the following:


**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**Deferred
                tax liabilitiesAccrued
                interest
            
            
            3,866
            
            
            —
            
            
            3,866
            
            
            —Prepayments
            
            
            154
            
            
            292
            
            
            154
            
            
            292Deferred
                tax assetsDifference
                in accounting and tax depreciation
            
            
            6,604
            
            
            53,306
            
            
            1,546
            
            
            791Trade
                debtors
            
            
            2,186
            
            
            5,448
            
            
            2,186
            
            
            5,448Accruals
            
            
            1,931
            
            
            9,297
            
            
            1,931
            
            
            10,038Provisions
            
            
            (38,198
            )
            
            5,621
            
            
            6,640
            
            
            4,982Unrealised
                foreign exchange losses
            
            
            (89,538
            )
            
            2,146
            
            
            (193,124
            )
            
            2,146Revenue
                losses carried forward
            
            
            114,555
            
            
            (114,556
            )
            
            114,554
            
            
            (114,556
            )Other
            
            
            (6,238
            )
            
            135,392
            
            
            (6,237
            )
            
            (26,343
            )Deferred
                tax income/(expense)
            
            
            (4,678
            )
            
            96,946
            
            
            (68,484
            )
            
            (117,202
            )





For
      details of the franking account, refer to Note 20.





**6.**  **EARNINGS
      PER SHARE**





**CONSOLIDATED****2005**
            
            **2004****CENTS**
            
            **CENTS**Basic
                earnings per share (cents per share)
            
            
            2.35
            
            
            (0.68
            )Diluted
                earnings per share (cents per share)
            
            
            2.35
            
            
            (0.68
            )





**CONSOLIDATED****2005**
            
            **2004****Earnings
                reconciliation**
            
            **$**
            ****
            **$**Net
                profit/(loss) used for basic earnings
            
            
            2,060,587
            
            
            (594,274
            )After
                tax effect of dilutive securities
            
            
            —
            
            
            —Diluted
                earnings
            
            
            2,060,587
            
            
            (594,274
            )Weighted
                average number of ordinary shares outstanding during the year used
                for
                calculation of basic earnings per share
            
            
            87,810,254
            
            
            87,810,254Weighted
                average number of potential ordinary shares outstanding during the
                year
                used for calculation of diluted earnings per share
            
            
            87,810,254
            
            
            87,810,254




Diluted
      earnings per share is calculated after taking into consideration all options
      and
      any other securities that were on issue that remain unconverted at 31 December
      as potential ordinary shares. There were no options or other equities on issue
      that would create a dilutive effect as at 31 December.


F
          -
          21




NOTES TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**7.**  **CASH
      ASSETS**




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**Cash
                at bank
            
            
            660,373
            
            
            1,908,996
            
            
            465,232
            
            
            1,359,148Deposits
                at Call
            
            
            815,107
            
            
            1,300,000
            
            
            815,107
            
            
            1,300,0001,475,480
            
            
            3,208,996
            
            
            1,280,339
            
            
            2,659,148




The
      effective interest rate on short term bank deposits was 4.53% (2004 3.05%),
      these deposits have an average maturity of 17 days.




**8.**  **RECEIVABLES**




CURRENTTrade
                receivables
            
            
            3,717,225
            
            
            764,916
            
            
            3,694,183
            
            
            705,059Income
                tax receivable
            
            
            53,301
            
            
            827,755
            
            
            —
            
            
            350,823Sundry
                debtors & prepayments
            
            
            531,125
            
            
            341,689
            
            
            459,992
            
            
            130,2314,301,651
            
            
            1,934,360
            
            
            4,154,175
            
            
            1,186,113NON
                CURRENTAmount
                receivable from controlled entities
            
            
            —
            
            
            —
            
            
            18,830,209
            
            
            19,160,886Provision
                for impairment of receivables
            
            
            —
            
            
            —
            
            
            (4,181,143
            )
            
            (4,181,141
            )—
            
            
            —
            
            
            14,649,066
            
            
            14,979,745





**9.**  **FINANCIAL
      INSTRUMENTS - CURRENT**




Derivative
                financial assets
            
            
            5,631,149
            
            
            —
            
            
            4,066,985
            
            
            —Derivative
                financial liabilities
            
            
            (5,675,533
            )
            
            —
            
            
            (4,075,533
            )
            
            —




Derivative
      financial assets and liabilities comprise forward foreign exchange contracts
      and
      determine option contracts which are in place as cash flow hedges. Gains and
      losses arising from changes in fair value of foreign exchange contracts are
      recognised in the income statement in the period in which they arise. These
      financial instruments are classed as held trading.




**10.**  **INVENTORIES**




CURRENTPearls
            
            
            1,156,004
            
            
            1,027,433
            
            
            899,792
            
            
            1,248,009Other
            
            
            106,886
            
            
            7,249
            
            
            —
            
            
            —1,262,890
            
            
            1,034,682
            
            
            899,792
            
            
            1,248,009NON
                CURRENTNuclei
            
            
            114,630
            
            
            116,304
            
            
            —
            
            
            —Other
            
            
            —
            
            
            77,217
            
            
            —
            
            
            —114,630
            
            
            193,521
            
            
            —
            
            
            —TOTAL
                INVENTORY
            
            
            1,377,520
            
            
            1,228,203
            
            
            899,792
            
            
            1,248,009




F
          -
          22




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**11** **.**  **BIOLOGICAL
      ASSETS**




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**CURRENTOysters
            
            
            4,176,109
            
            
            2,259,547
            
            
            —
            
            
            —NON
                CURRENTOysters
            
            
            5,175,725
            
            
            6,688,662
            
            
            —
            
            
            —Total
                Biological Assets
            
            
            9,351,834
            
            
            8,948,209
            
            
            —
            
            
            —





The
      details of the Biological Assets that are held by the economic entity as at
      year
      end are as follows:





Nature:-  Oysters
      ( *Pinctada
      Maxima* )




**2005**
            
            **2004**Number
            
            **No.**
            
            **No.**Quantity
                held within the economic entities operations:-Juvenile
                oysters which are not nucleated
            
            
            520,660
            
            
            749,889Nucleated
                oysters
            
            
            605,760
            
            
            385,578Other
                oysters used for broodstock, saibo tissue and research
            
            
            2,050
            
            
            3,0061,128,470
            
            
            1,138,473Quantity
                owned by the economic entity within joint operations:Nucleated
                oysters
            
            
            11,173
            
            
            97,628Change
                increment in net market value during the financial year
            
            $
            —
            
            $
            —







**12.**  **INVESTMENTS**




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**Controlled
                  entities - unlisted shares (see Note 30)
            
            
            —
            
            
            —
            
            
            2,750,004
            
            
            2,750,004Provision
                for diminution in value
            
            
            —
            
            
            —
            
            
            (2,750,004
            )
            
            (2,750,004
            )—
            
            
            —
            
            
            —
            
            
            —





F
          -
          23




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**13.**  **PROPERTY,
      PLANT AND EQUIPMENT**




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**(a)
                 GeneralPlant
                and equipment-
                at cost
            
            
            71,546
            
            
            100,475
            
            
            71,546
            
            
            100,475-
                accumulated depreciation
            
            
            (47,108
            )
            
            (69,950
            )
            
            (47,108
            )
            
            (69,950
            )24,438
            
            
            30,525
            
            
            24,438
            
            
            30,525(b)
                 Pearling projectLeasehold
                land and buildings-
                at cost
            
            
            1,200,261
            
            
            943,653
            
            
            —
            
            
            —-
                accumulated depreciation
            
            
            (430,265
            )
            
            (345,063
            )
            
            —
            
            
            —769,996
            
            
            598,590
            
            
            —
            
            
            —Plant
                and equipment, vessels, vehicles-
                at cost
            
            
            4,900,172
            
            
            4,356,773
            
            
            —
            
            
            —-
                accumulated depreciation
            
            
            (3,570,922
            )
            
            (3,160,454
            )
            
            —
            
            
            —1,329,250
            
            
            1,196,319
            
            
            —
            
            
            —Total
                pearling project
            
            
            2,099,246
            
            
            1,794,909
            
            
            —
            
            
            —Total
                property, plant and equipment
            
            
            2,123,684
            
            
            1,825,434
            
            
            24,438
            
            
            30,525




Included
      in Pearling Project leasehold land and buildings is $306,868 (2004 - $155,080),
      being construction in progress at cost.


Reconciliations
        of the carrying amount for each class of property, plant and equipment are
        set
        out below:


(a)GeneralCarrying
                amount at beginning of the year
            
            
            30,525
            
            
            14,671
            
            
            30,525
            
            
            14,672Additions
            
            
            4,294
            
            
            23,082
            
            
            4,294
            
            
            23,082Disposals
            
            
            (398
            )
            
            —
            
            
            (398
            )
            
            —Depreciation
            
            
            (9,983
            )
            
            (7,228
            )
            
            (9,983
            )
            
            (7,228
            )Carrying
                amount at end of the year
            
            
            24,438
            
            
            30,525
            
            
            24,438
            
            
            30,525(b)Pearling
                projectLeasehold
                land and buildingsCarrying
                amount at beginning of the year
            
            
            598,590
            
            
            721,180
            
            
            —
            
            
            —Additions
            
            
            240,013
            
            
            45,914
            
            
            —
            
            
            —Depreciation
            
            
            (76,104
            )
            
            (12
            )
            
            —
            
            
            —Foreign
                exchange movement
            
            
            7,497
            
            
            (168,492
            )
            
            —
            
            
            —Carrying
                amount at end of the year
            
            
            769,996
            
            
            598,590
            
            
            —
            
            
            —(c)Plant
                and equipment, vessels, vehiclesCarrying
                amount at beginning of the year
            
            
            1,199,143
            
            
            1,124,556
            
            
            —
            
            
            —Additions
            
            
            616,083
            
            
            705,
                287
            
            
            —
            
            
            —Disposals
            
            
            (107,387
            )
            
            —
            
            
            —
            
            
            —Depreciation
            
            
            (388,570
            )
            
            (461,078
            )
            
            —
            
            
            —Foreign
                exchange movement
            
            
            9,981
            
            
            (172,446
            )
            
            —
            
            
            —Carrying
                amount at end of the year
            
            
            1,329,250
            
            
            1,196,319
            
            
            —
            
            
            —




F
          -
          24




NOTES TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




Depreciation
      of property, plant and equipment shown at Note 4 represents the proportion
      of
      the depreciation expense which is represented as an administration cost. The
      balance of the depreciation provision shown above is capitalised to oyster
      inventories.




**14.**  **PAYABLES**





**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**CURRENTTrade
                payables
            
            
            68,491
            
            
            332,361
            
            
            48,773
            
            
            306,517Other
                payables
            
            
            614,484
            
            
            688,008
            
            
            245,704
            
            
            44,436682,975
            
            
            1,020,369
            
            
            294,477
            
            
            350,953




**15.**  **BORROWINGS**




CURRENTUnsecured
                Loan
            
            
            79,428
            
            
            —
            
            
            79,428
            
            
            —




**16.**  **TAX**




(a)**Liabilities**CURRENTIncome
                tax payable
            
            
            203,120
            
            
            230,480
            
            
            203,120
            
            
            —NON-CURRENTDeferred
                  tax liabilities comprise -Accrued
                interest income
            
            
            3,978
            
            
            112
            
            
            3,866
            
            
            112Prepayments
                denominated in foreign currency
            
            
            154
            
            
            —
            
            
            266
            
            
            —4,132
            
            
            112
            
            
            4,132
            
            
            112(b)**Assets**Deferred
                tax assets comprise -Tax
                allowances relating to property, plant & equipment
            
            
            17,609
            
            
            24,212
            
            
            1,583
            
            
            3,129Trade
                debtors denominated in foreign currency
            
            
            —
            
            
            2,186
            
            
            —
            
            
            2,186Accruals
            
            
            12,398
            
            
            14,328
            
            
            12,398
            
            
            14,328Provisions
            
            
            69,461
            
            
            31,264
            
            
            9,527
            
            
            16,166Unrealised
                foreign exchange losses
            
            
            89,538
            
            
            —
            
            
            193,124
            
            
            —Revenue
                losses carried forward
            
            
            —
            
            
            114,556
            
            
            —
            
            
            114,556Other
            
            
            60,044
            
            
            53,373
            
            
            6,895
            
            
            656249,050
            
            
            239,919
            
            
            223,525
            
            
            151,021(c)ReconciliationsThe
                overall movement in deferred tax account is as follows:Opening
                balance
            
            
            239,807
            
            
            142,861
            
            
            150,909
            
            
            33,707(Charge)/credit
                to income statement
            
            
            4,678
            
            
            (96,946
            )
            
            68,484
            
            
            117,202Other
                movements
            
            
            433
            
            
            —
            
            
            —
            
            
            —Closing
                balance
            
            
            244,918
            
            
            239,807
            
            
            219,393
            
            
            150,909




F
          -
          25




**NOTES
      TO AND FORMING PART OF THE FINANCIAL STATEMENTS**




**17.**  **PROVISIONS**


**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**CURRENTEmployee
                entitlements
            
            
            66,611
            
            
            104,212
            
            
            24,369
            
            
            71,648NON
                CURRENTEmployee
                entitlements
            
            
            164,928
            
            
            —
            
            
            7,385
            
            
            —TOTAL
            
            
            231,539
            
            
            104,212
            
            
            31,754
            
            
            71,648Number
                of full time employees
            
            
            470
            
            
            438
            
            
            5
            
            
            5




Employee
      entitlement provisions have been recognised in relation to annual and long
      service leave as well as retirement benefits for national employees of the
      Indonesian subsidiary (from 2005) as prescribed by laws of that country. Such
      retirement benefits were not included in previous years.




Reconciliation
                of provisions:Balance
                at beginning of year
            
            
            104,212
            
            
            122,946
            
            
            71,648
            
            
            72,963Provision
                used
            
            
            (421,025
            )
            
            (448,230
            )
            
            (220,292
            )
            
            (255,468
            )Provisions
                added
            
            
            548,352
            
            
            429,496
            
            
            180,398
            
            
            254,153Closing
                balance
            
            
            231,539
            
            
            104,212
            
            
            31,754
            
            
            71,648


**18.**  **ISSUED
        CAPITAL**




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**Issued
                and paid-up capital 87,810,254 ordinary shares (2004: 87,810,254
                ordinary
                shares)
            
            
            18,849,092
            
            
            18,849,092
            
            
            18,849,092
            
            
            18,849,092Reconciliation
                of Issued Capital -Balance
                at beginning of year
            
            
            18,849,092
            
            
            18,849,092
            
            
            18,849,092
            
            
            18,849,092Shares
                issued
            
            
            —
            
            
            —
            
            
            —
            
            
            —Balance
                at end of year
            
            
            18,849,092
            
            
            18,849,092
            
            
            18,849,092
            
            
            18,849,092




Holders
      of ordinary shares are entitled to receive dividends as declared from time
      to
      time and are entitled to one vote per share at shareholders’ meetings. In the
      event of winding up of the Company, ordinary shareholders rank after all other
      shareholders (where applicable) and creditors and are fully entitled to any
      proceeds of liquidation.




F
          -
          26




NOTES TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**19.**  **RESERVES**


**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**Foreign
                Currency Translation Reserve
            
            
            4,559,049
            
            
            4,677,577
            
            
            —
            
            
            —Reconciliation
                of Foreign Currency Translation Reserve -Balance
                at beginning of year
            
            
            4,677,577
            
            
            3,025,044
            
            
            —
            
            
            —Movement
                in translation reserve
            
            
            (118,528
            )
            
            1,652,533
            
            
            —
            
            
            —Balance
                at end of year
            
            
            4,559,049
            
            
            4,677,577
            
            
            —
            
            
            —




The
      foreign currency translation reserve records exchange differences arising on
      translation of foreign controlled subsidiaries to the reporting
      currency.


**20.**  **RETAINED
        PROFITS**
  Reconciliation
          of retained earnings :


Balance
                at beginning of year
            
            
            1,858,433
            
            
            2,452,710
            
            
            982,756
            
            
            3,831,393Adjustment
                on adoption of AASB 132 and AASB 139, net of tax
            
            
            289,911
            
            
            —
            
            
            289,911
            
            
            —Net
                profit attributable to members of the parent entity
            
            
            2,060,587
            
            
            (594,274
            )
            
            1,366,220
            
            
            (2,848,637
            )Prior
                year adjustment
            
            
            12,770
            
            
            —
            
            
            —
            
            
            —Dividends
                paid
            
            
            (878,103
            )
            
            —
            
            
            (878,103
            )
            
            —Balance
                at end of year
            
            
            3,343,598
            
            
            1,858,433
            
            
            1,760,784
            
            
            982,756




**21.**  **DIVIDENDS**
  Dividends
          paid and not provided for in previous years by the Company are:


**CENTS**
              **PER**
              **SHARE**
            
            **TOTAL**
              **AMOUNT**
              **$**
            
            **%**
              **FRANKED****2005**29
                December 2005
            
            
            1
                cent
            
            
            878,103
            
            
            100
            %**2004**Nil
            
            
            —
            
            
            —
            
            
            —






**CONSOLIDATED****2005**
            
            **2004****$**
            ****
            **$**Dividend
                Franking AccountFranking
                credits available to shareholders of the Company for subsequent financial
                years
            
            
            2,315,731
            
            
            2,572,711




F
          -
          27




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**22.****OPTIONS**There
                were no options that were issued or exercised during the financial
                years
                relating to this report. There are no options on issue by the Company
                as
                at the date of this report or any time during the period covered
                under
                this report.




**23.**  **COMMITMENTS**


The
        Company has commitments in relation to the rental of its current office
        premises. The commitments for lease payments contracted for but not provided
        for
        are as follows:


**CONSOLIDATED****2005**
            
            **2004****$**
            ****
            **$**Less
                than one year
            
            
            18,964
            
            
            18,270Longer
                than one year, but less than 5 years
            
            
            9,911
            
            
            28,36628,875
            
            
            46,636




**24.**  **CONTINGENT
      LIABILITIES**




There
      are
      no contingent liabilities that the Directors are aware of at the date of this
      report.




**25.** **NOTES
          TO THE STATEMENT OF CASH FLOWS**




**25.1.**
            **RECONCILIATION
                OF CASH**




For
      the
      purposes of the statement of cash flows, cash includes cash on hand and in
      banks, and investments in money market instruments, net of outstanding bank
      overdrafts. Cash at the end of the financial year as shown in the statement
      of
      cash flows is reconciled to the related items in the balance sheet as
      follows:-




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**Cash
                at bank (Note 7)
            
            
            660,373
            
            
            1,908,996
            
            
            465,232
            
            
            1,359,148Deposits
                on call (Note 7)
            
            
            815,107
            
            
            1,300,000
            
            
            815,107
            
            
            1,300,000Cash
                and cash equivalents
            
            
            1,475,480
            
            
            3,208,996
            
            
            1,280,339
            
            
            2,659,148


F
          -
          28




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**25**  **NOTES
      TO THE STATEMENT OF CASH FLOW (Cont)**




**25.2.**  **Reconciliation
      of net cash from operating activities to Operating profit after income
      tax**




**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            
            **$**
            
            **$**
            ****
            **$**Operating
                profit/(loss) after income tax
            
            
            2,060,587
            
            
            (594,274
            )
            
            1,366,220
            
            
            (2,848,637
            )Inventories
            
            
            (552,937
            )
            
            319,011
            
            
            363,982
            
            
            1,779,275Increase/(decrease)
                in interest accrual
            
            
            (12,887
            )
            
            17,988
            
            
            (12,887
            )
            
            17,988Non
                cash changes in debtors, prepayments and creditors
            
            
            (3,175,623
            )
            
            (398,751
            )
            
            (3,351,661
            )
            
            (6,326
            )Purchase
                of unprocessed pearls
            
            
            —
            
            
            —
            
            
            4,714,268
            
            
            2,986,612Provision
                for depreciation
            
            
            473,584
            
            
            546,849
            
            
            10,381
            
            
            7,228Provision
                for employee entitlements
            
            
            127,328
            
            
            (13,458
            )
            
            (39,894
            )
            
            (1,315
            )Provision
                against Loans
            
            
            —
            
            
            —
            
            
            —
            
            
            2,576,295(Profit)/loss
                on disposal of fixed assets
            
            
            37,218
            
            
            (20
            )
            
            —
            
            
            —Increase/(decrease)
                in value of financial assets
            
            
            44,384
            
            
            —
            
            
            8,548
            
            
            —Change
                in retained earnings - AASB139
            
            
            289,910
            
            
            —
            
            
            289,910
            
            
            —Movement
                in foreign exchange
            
            
            87,078
            
            
            —
            
            
            391,232
            
            
            —Increase/(decrease)
                in taxes payable
            
            
            417,904
            
            
            218,446
            
            
            474,646
            
            
            (345,457
            )Foreign
                Exchange Differences
            
            
            12,763
            
            
            —
            
            
            —
            
            
            —Net
                cash provided by/(used in) operating activities
            
            
            (190,691
            )
            
            95,791
            
            
            4,214,745
            
            
            4,165,663




As
      at the
      date of this report the Company has not entered into any non-cash financing
      or
      investing activities.




**25.3.**  **Credit
      facilities**




As
      at 31
      December 2005, the Company had in place a trade discounting facility with the
      ANZ Bank with a limit of $2,000,000. To date, this facility has not been
      utilised. This facility is secured by a registered first debenture charge over
      the assets of the Company.




**26.**  **KEY
      MANAGEMENT PERSONNEL DISCLOSURE**




a.
            Key
                Management Personnel




The
      following persons were key management personnel during the financial
      year::




Parent
                Entity Directors:Mr
              G.R.W
              Snow Chairman
              - Non-ExecutiveMr
                J.J.U. Taylor.Managing
                Director -Executive.Mr
                S.J. Arrow
            
            Director
                - Non-ExecutiveMr
                S.P. Birkbeck
            
            Director
                - Non-Executive (Appointed 15 April 2005)Mr
                I.M. Murchison
            
            Director
                - Non-ExecutiveSpecified
                ExecutivesMr
                S.C.B. Adams
            
            Company
                Secretary and Financial ControllerMr
                J.S. Jorgensen
            
            Production
                Manager & Director, PT Cendana IndopearlsMr
                J Knauer
            
            Technical
                Manager & Director, PT Cendana Indopearls


F
          -
          29




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**26.**  **KEY
      MANAGEMENT PERSONNEL DISCLOSURE (Cont)**




b.
            Compensation
                - Directors




**2005**




Short
                term benefitsSalary,
                Fees &
              Commissions
            
            Non-monetary
              benefits
            
            Post
                  employment
              Super-annuation
            
            Share
                based payments
            
            TotalMr
                S.J. Arrow
            
            
            30,000
            
            
            —
            
            
            2,700
            
            
            —
            
            
            32,700Mr
                S.P. Birkbeck(1)
            
            
            21,250
            
            
            —
            
            
            1,913
            
            
            —
            
            
            23,163Mr
                I.M. Murchison
            
            
            36,000
            
            
            —
            
            
            3,240
            
            
            —
            
            
            39,240Mr
                G.R.W Snow
            
            
            60,000
            
            
            —
            
            
            5,400
            
            
            —
            
            
            65,400Mr
                J.J.U. Taylor
            
            
            225,443
            
            
            28,114
            
            
            4,075
            
            
            —
            
            
            257,632372,693
            
            
            28,114
            
            
            17,328
            
            
            —
            
            
            418,135


1.
      Mr.
      Birkbeck was appointed as a director on 15 April 2005.




**2004**


Short
                term benefitsSalary,
                Fees & Commissions
            
            Non-monetary
                benefits
            
            Post
                  employment
              Super-annuation
            
            Share
                based payments
            
            TotalMr
                S.J. Arrow
            
            
            30,000
            
            
            —
            
            
            2,700
            
            
            —
            
            
            32,700Mr
                W.F. James(2)
            
            
            35,000
            
            
            —
            
            
            3,150
            
            
            —
            
            
            38,150Mr
                I.M. Murchison(3)
            
            
            14,063
            
            
            —
            
            
            1,265
            
            
            —
            
            
            15,328Mr
                G.R.W Snow
            
            
            44,687
            
            
            —
            
            
            4,022
            
            
            —
            
            
            48,709Mr
                J.J.U. Taylor
            
            
            214,227
            
            
            65,026
            
            
            21,687
            
            
            —
            
            
            300,940337,977
            
            
            65,026
            
            
            32,824
            
            
            —
            
            
            435,827




2.
      Mr
      James retired as a director on 28 July 2004


3.
      Mr.
      Murchison was appointed as a director on 28 July 2004




There
      were no other long term employee benefits or termination benefits paid to any
      key management personnel during the reporting periods.




F
          -
          30




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**26.**  **KEY
      MANAGEMENT PERSONNEL DISCLOSURE (Cont)**




c.
            Compensation
                - executives




**2005**




Short
                term benefitsSalary,
                Fees &
              Commissions
            
            Non-monetary
              benefits
            
            Post
                  employment
              Super-annuation
            
            Share
                based payments
            
            TotalMr
                S.C.B. Adams
            
            
            110,000
            
            
            —
            
            
            9,900
            
            
            —
            
            
            119,900Mr
                J.S. Jorgensen
            
            
            183,775
            
            
            —
            
            
            —
            
            
            —
            
            
            183,775Mr
                J. Knauer
            
            
            129,837
            
            
            —
            
            
            —
            
            
            —
            
            
            129,837423,612
            
            
            —
            
            
            9,900
            
            
            —
            
            
            433,512




**2004**




Short
                term benefitsSalary,
                Fees &
              Commissions
            
            Non-monetary
              benefits
            
            Post
                  employment
              Super-annuation
            
            Share
                based payments
            
            TotalMr
                S.C.B. Adams
            
            
            105,000
            
            
            —
            
            
            9,450
            
            
            —
            
            
            114,450Mr
                J.S. Jorgensen
            
            
            160,305
            
            
            —
            
            
            —
            
            
            —
            
            
            160,305Mr
                J. Knauer
            
            
            106,382
            
            
            —
            
            
            —
            
            
            —
            
            
            106,382371,687
            
            
            —
            
            
            9,450
            
            
            —
            
            
            381,137




There
      were no other long term employee benefits or termination benefits paid to any
      key management personnel during the reporting periods.




d.
            Options
                and rights granted as compensation




No
      options were issued to key management personnel as remuneration in 2005 or
      2004.




e.
            Equity
                instruments issued on exercise of remuneration
                options




There
      were no remuneration options on issue to key management personnel during 2005
      or
      2004.




f.
            Options
                and Rights Holdings




There
      were no remuneration options on issue during 2004 and 2005.




F
          -
          31






**NOTES
      TO AND FORMING PART OF THE FINANCIAL STATEMENTS**




**26.**  **KEY
      MANAGEMENT PERSONNEL DISCLOSURE (Cont)**




g.
            Shareholdings




Number
      of
      Shares held by Key management personnel:




Details
      of equity instruments (other than options and rights) held directly, indirectly
      or beneficially by key management personnel and their related parties are as
      follows:





Balance
                1/1/05
            
            Granted
                as compensation
            
            OptionsExercised
            
            Other
                Changes *
            
            Balance
                31/12/05***Parent
                Entity Directors***Mr
                S.J. Arrow
            
            
            1,952,934
            
            
            —
            
            
            —
            
            
            —
            
            
            1,952,934Mr
                S.P. Birkbeck
            
            
            —
            
            
            —
            
            
            —
            
            
            790,000
            
            
            790,000Mr
                I.M. Murchison
            
            
            650,000
            
            
            —
            
            
            —
            
            
            56,667
            
            
            706,667Mr
                G.R.W Snow
            
            
            14,025,744
            
            
            —
            
            
            —
            
            
            289,395
            
            
            14,315,139Mr
                J.J.U. Taylor
            
            
            65,000
            
            
            —
            
            
            —
            
            
            (45,000
            )
            
            20,000***Specified
                Executives***Mr
                S.C.B. Adams
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Mr
                J.S. Jorgensen
            
            
            34,034
            
            
            —
            
            
            —
            
            
            —
            
            
            34,034Mr.
                J. Knauer
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —16,727,712
            
            
            —
            
            
            —
            
            
            1,091,062
            
            
            17,818,774




*
      Other
      changes other refers to shares purchased or sold during the financial
      year





The
      Company’s policy for determining the nature and amount of emoluments of board
      members and senior executives of the company is as follows:




The
      remuneration structure for executive officers, including executive directors,
      is
      based on a number of factors, including length of service, particular experience
      of the individual concerned and overall performance of the company. The
      contracts for service between the company and specified directors and
      executives, with the exception of the Managing Director Mr J Taylor whose
      contract expires in December 2007, are on a continuing basis the terms of which
      are not expected to change in the immediate future. Upon retirement specified
      directors and executives are paid employee benefit entitlements accrued to
      date
      of retirement.




F
          -
          32




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**27.** **RELATED
        PARTY TRANSACTIONS**




Details
      of key management personnel remuneration are set out in note 26.


DIRECTORS
      TRANSACTIONS WITH THE COMPANY OR ITS CONTROLLED ENTITIES




The
      Company has a consultancy agreement with Arrow Pearling Co Pty Ltd, a company
      of
      which Mr S.J. Arrow is a director, under which staff of the economic entity
      have
      been trained as pearl operation technicians at the Indonesian pearl farm. During
      the year, $150,820 (2004 - $189,030) was payable to Arrow Pearling Co Pty Ltd
      as
      consulting fees. This agreement was entered into prior to Mr Arrow becoming
      a
      Director of the Company. It was entered into on commercial terms and expires
      in
      March 2009.


During
      the year, sales of individual pearls of small quantities were made to some
      staff
      and Directors on normal commercial terms


TRANSACTIONS
      WITH RELATED PARTIES




The
      Company purchases pearls to the value of $4,342,019 from its wholly owned
      controlled entity PT Cendana Indopearls. These transactions are in the normal
      course of business. There were loans and receivables in place between the
      Company and its subsidiaries (refer Note 8)




**28.**  **REMUNERATION
        OF AUDITORS**


Remuneration
        of the auditor of the parent entity for:


**CONSOLIDATED**
            
            **THE
                COMPANY****2005**
            
            **2004**
            
            **2005**
            
            **2004****$**
            ****
            **$**
            ****
            **$**
            ****
            **$**Auditing
                or reviewing financial statementsAuditors
                of the Company
            
            
            62,042
            
            
            42,594
            
            
            34,342
            
            
            17,732Other
                ServicesAuditors
                of the Company
            
            
            22,849
            
            
            8,921
            
            
            11,973
            
            
            8,921





Services
                other than auditing that was carried out by the auditor during the
                year
                comprised:




**2005**
            
            **2004****$**
            ****
            **$**Review
                of statutory documentation for lodgement with SEC in relation to
                ADR’s
                listed on NASDAQ
            
            
            8,085
            
            
            7,326Assistance
                with tax audit in Indonesia
            
            
            10,876
            
            
            1,595Other
                tax advice
            
            
            3,888
            
            
            —22,849
            
            
            8,921




F
          -
          33




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**29.** **SEGMENT
        REPORTING**





(a)Business
                Segment (Primary Reporting)The
                economic entity operates predominantly in the pearling industry in
                the
                geographic regions of Australia and Indonesia. Unallocated items
                represent
                amounts that do not directly relate to the pearling
                activities.




(b)Geographical
                Segment (Secondary Reporting)**Indonesia**
            
            **Australia**
            
            **Eliminations**
            
            **Total****$**
            ****
            **$**
            ****
            **$**
            ****
            **$****2005****Revenue**External
                segment revenue
            
            
            600,714
            
            
            9,129,490
            
            
            —
            
            
            9,730,204Inter-segment
                revenue
            
            
            4,715,110
            
            
            —
            
            
            (4,715,110
            )
            
            —**Total
                segment revenue**
            
            
            5,315,824
            
            
            9,129,490
            
            
            (4,715,110
            )
            
            9,730,204Other
                unallocated revenue
            
            
            267,600
            
            
            (149,190
            )
            
            (756
            )
            
            117,655**Total
                revenue**
            
            
            
            
            
            
            
            
            
            
            
            9,847,859**Result**Segment
                result
            
            
            907,442
            
            
            3,327,395
            
            
            (364,171
            )
            
            3,870,666Unallocated
                corporate expenses
            
            
            (457,742
            )
            
            (1,135,981
            )
            
            —
            
            
            (1,593,723
            )Unallocated
                corporate revenue
            
            
            229,129
            
            
            (149,190
            )
            
            (756
            )
            
            79,184Profit
                from ordinary activities before income tax
            
            
            
            
            
            
            
            
            
            
            
            2,356,126Income
                tax expense
            
            
            
            
            
            
            
            
            
            
            
            (295,539
            )**Net
                profit**
            
            
            
            
            
            
            
            
            
            
            
            2,060,587Depreciation
                and amortisation
            
            
            24,689
            
            
            10,382
            
            
            —
            
            
            35,072Other
                non-cash expenses
            
            
            58,173
            
            
            (23,959
            )
            
            —
            
            
            34,214**Assets**Segment
                assets
            
            
            12,664,025
            
            
            4,593,975
            
            
            (201,887
            )
            
            17,056,113Unallocated
                corporate assets
            
            
            1,784,829
            
            
            5,669,422
            
            
            —
            
            
            7,454,251**Consolidated
                total assets**
            
            
            14,448,854
            
            
            10,263,397
            
            
            (201,887
            )
            
            24,510,364**Liabilities**Segment
                liabilities
            
            
            219,504
            
            
            80,527
            
            
            —
            
            
            300,031Unallocated
                corporate liabilities
            
            
            1,968,777
            
            
            4,607,920
            
            
            —
            
            
            6,576,697**Consolidated
                total liabilities**
            
            
            2,188,281
            
            
            4,688,447
            
            
            —
            
            
            6,876,728Acquisitions
                of non-current assets (Property, Plant & Equipment)
            
            
            856,096
            
            
            
            
            
            
            
            
            856,096Unallocated
                acquisitions of non-current assets
            
            
            
            
            
            4,294
            
            
            
            
            
            4,294860,390


F
          -
          34




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS


**29.**  **SEGMENT
        REPORTING (CONT.)**




(b)Geographical
                (continued)**Indonesia**
            
            **Australia**
            
            **Eliminations**
            
            **Total****$**
            ****
            **$**
            ****
            **$**
            ****
            **$****2004****Revenue**External
                segment revenue
            
            
            669,459
            
            
            5,218,743
            
            
            —
            
            
            5,888,202Inter-segment
                revenue
            
            
            2,986,614
            
            
            —
            
            
            (2,986,614
            )
            
            —**Total
                segment revenue**
            
            
            3,656,073
            
            
            5,218,743
            
            
            (2,986,614
            )
            
            5,888,202Other
                unallocated revenue
            
            
            (534,846
            )
            
            974,518
            
            
            509,649
            
            
            949,321**Total
                revenue**
            
            
            
            
            
            
            
            
            
            
            
            6,837,523**Result**Segment
                result
            
            
            261,775
            
            
            (313,683
            )
            
            (218,917
            )
            
            (270,825
            )Unallocated
                corporate expenses
            
            
            (647,114
            )
            
            (2,665,335
            )
            
            3,085,946
            
            
            (226,503
            )Profit
                from ordinary activities before income tax
            
            
            
            
            
            
            
            
            
            
            
            (497,328
            )Income
                tax expense
            
            
            
            
            
            
            
            
            
            
            
            (96,946
            )**Net
                profit**
            
            
            
            
            
            
            
            
            
            
            
            (594,274
            )Depreciation
                and amortisation
            
            
            21,128
            
            
            7,228
            
            
            —
            
            
            28,356Other
                non-cash expenses
            
            
            3,666
            
            
            16,061
            
            
            —
            
            
            19,727**Assets**Segment
                assets
            
            
            11,806,782
            
            
            1,732,492
            
            
            —
            
            
            13,539,274Unallocated
                corporate assets
            
            
            549,848
            
            
            3,295,999
            
            
            —
            
            
            3,845,847**Consolidated
                total assets**
            
            
            12,356,630
            
            
            5,028,491
            
            
            —
            
            
            17,385,121**Liabilities**Segment
                liabilities
            
            
            930,153
            
            
            350,953
            
            
            —
            
            
            1,281,106Unallocated
                corporate liabilities
            
            
            28,054
            
            
            46,013
            
            
            —
            
            
            78,067**Consolidated
                total liabilities**
            
            
            958,207
            
            
            396,966
            
            
            —
            
            
            1,355,173Acquisitions
                of non-current assets (Property, Plant & Equipment)
            
            
            755,558
            
            
            
            
            
            
            
            
            755,558Unallocated
                acquisitions of non-current assets
            
            
            
            
            
            23,083
            
            
            
            
            
            23,083778,641




F
          -
          35


NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**30.** **ECONOMIC
        DEPENDENCY**




The
      company’s pearls are sold by private treaty sales through a distribution
      arrangement with Pearlautore International Pty Ltd in Sydney. Pearls are sold
      to
      a number of wholesale customers with a wide geographic spread.




All
      of
      the company’s pearls are purchased from its wholly owned subsidiary PT Cendana
      Indopearls.




31.  **CONTROLLED
      ENTITIES**




**Percentage
                owned**
            
            **Percentage
                owned**
            
            **Place
                of**
            
            **Book
                value of Company's investment****2005**
            
            **2004**
            
            **incorporation**
            
            **2005**
            
            **2004**$
            
            $Sharcon
                Pty Ltd
            
            
            100
            %
            
            100
            %
            
            Australia
            
            
            —
            
            
            —Tansim
                Pty Ltd
            
            
            100
            %
            
            100
            %
            
            Australia
            
            
            —
            
            
            —P.T.
                Cendana Indopearls
            
            
            100
            %
            
            100
            %
            
            Indonesia
            
            
            —
            
            
            ——
            
            
            —


The
      ultimate parent entity, Atlas South Sea Pearl Limited, is incorporated in
      Australia.




**32.**
            **POST
                BALANCE DATE EVENTS**




There
      have been no significant post balance date events.




**33.**
            **FINANCIAL
                INSTRUMENTS**




The
      group’s financial instruments consist mainly of deposits with banks, accounts
      receivable and payable, loans to and from subsidiaries and derivatives.
      Derivatives are used by the group for hedging purposes. Such instruments include
      forward exchange and currency option contracts. The group does not speculate
      in
      the trading of derivative instruments.




(a)
            Treasury
                Risk Management




Treasury
      risk management strategies are discussed by the Board and a policy is in place
      to control the types and amounts of hedging that can be entered into to manage
      foreign exchange risk.




(b)
            Financial
                Risk Management




The
      main
      risks the group is exposed to through its financial instruments are foreign
      currency risk, liquidity risk, credit risk and price risk.


Foreign
      currency risk -


The
      group
      is exposed to fluctuations in foreign currencies arising from the sale of pearls
      (predominantly in Japanese Yen) and the purchase of goods and services
      (predominantly in Indonesian Rupiah).


Liquidity
      risk -


The
      group
      manages liquidity risk by monitoring forecast cash flows and ensuring that
      adequate unutilised borrowing facilities are maintained.


F
          -
          36


NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**33**  **FINANCIAL
      INSTRUMENTS (Cont)**




Credit
      risk -


The
      maximum exposure to credit risk at balance date to financial assets is the
      carrying amount, net of any provisions for impairment of those assets, as
      disclosed in the balance sheet and notes to the financial statements. The
      economic entity is exposed to credit risk as a result of undertaking most of
      its
      trade with a single customer, being Pearlautore International. Pearls are sold
      for the Company with a large number of clients but all receivables are
      underwritten by Pearlautore International.




Price
      risk -


The
      group
      is exposed to fluctuations in pearl prices. This product is not traded as a
      commodity on an open market and as such, the price risk cannot be
      hedged.




(c)
            Financial
                Instruments




Derivative
      financial instruments -


Derivative
      financial instruments are used by the economic entity to hedge exposure to
      exchange risk associated with foreign currency receivables and payables. The
      group enters into forward exchange contracts and option contracts to buy and
      sell specified amounts of foreign currencies in the future at specified exchange
      rates. The objective of entering forward exchange contracts is to protect the
      economic entity against unfavourable exchange rate movements for both the
      contracted and future sales and purchases undertaken in foreign
      currencies.




At
      balance date, the details of outstanding forward exchange contracts
      are:




**2005**
            
            **2004**
            
            **2005**
            
            **2004****Weighted
                average rate**
            
            **AUD**
            
            **AUD**Sell
                Japanese YenNot
                later than one year
            
            
            84.60
            
            
            73.50
            
            
            3,566,985
            
            
            3,384,800Buy
                Indonesian RupiahNot
                later than one year
            
            
            7,623
            
            
            —
            
            
            1,600,000
            
            
            —




At
      balance date, the details of outstanding option contracts are:




**2005**
            
            **2004**
            
            **2005**
            
            **2004****Weighted
                average rate**
            
            **AUD**
            
            **AUD**Sell
                Japanese YenNot
                later than one year
            
            
            84.08
            
            
            —
            
            
            500,000
            
            
            —




Amounts
      disclosed above represent the currency sold measured at the contract
      rate.




(d)
            Interest
                Rate Risk -




The
      economic entity's exposure to interest rate risk and the effective weighted
      average interest rate for each class of financial asset and financial liability
      is set out below. Exposures arise predominantly from assets and liabilities
      bearing variable interest rates as the economic entity intends to hold fixed
      rate assets and liabilities to maturity




F
          -
          37


**NOTES
      TO AND FORMING PART OF THE FINANCIAL STATEMENTS**




**33**  **FINANCIAL
      INSTRUMENTS (Cont)**




**NOTE**
            
            **Weighted
                average interest rate**
            
            **Floating
                interest rate**
            
            **Fixed
                interest rate maturing in****1
                year or less**
            
            **Non
                interest bearing**
            
            **Total**%
            
            $
            
            $
            
            $
            
            $**2005**Financial
                AssetsCash
            
            
            7
            
            
            4.53
            
            
            639,787
            
            
            815,107
            
            
            20,586
            
            1,475,480Receivables
            
            
            8
            
            
            0.00
            
            
            —
            
            
            —
            
            
            4,301,652
            
            4,301,652639,787
            
            
            815,107
            
            
            4,322,238
            
            5,777,132Financial
                LiabilitiesPayables
            
            
            14
            
            
            0.00
            
            
            —
            
            
            —
            
            
            (682,975
            )
            (682,975)—
            
            
            —
            
            
            (682,975
            )
            (682,975)Net
                Financial Asset/(Liabilities)
            
            
            
            
            
            
            
            
            639,787
            
            
            815,107
            
            
            3,639,263
            
            5,094,157





**NOTE**
            
            **Weighted
                average interest rate**
            
            **Floating
                interest rate**
            
            **Fixed
                interest rate maturing
                in****1
                year or less**
            
            **Non
                interest bearing**
            
            **Total**%
            
            $
            
            $
            
            $
            
            $**2004**Financial
                AssetsCash
            
            
            7
            
            
            4.29
            
            
            1,886,833
            
            
            1,300,000
            
            
            22,163
            
            3,208,996Receivables
            
            
            8
            
            
            0.00
            
            
            —
            
            
            —
            
            
            1,934,360
            
            1,934,3601,886,833
            
            
            1,300,000
            
            
            1,956,523
            
            5,143,356Financial
                LiabilitiesPayables
            
            
            14
            
            
            0.00
            
            
            —
            
            
            —
            
            
            (1,250,849
            )
            (1,250,849)—
            
            
            —
            
            
            (1,250,849
            )
            (1,250,849)Net
                Financial Asset/(Liabilities)
            
            
            
            
            
            
            
            
            1,886,833
            
            
            1,300,000
            
            
            705,674
            
            3,892,507





F
          -
          38




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




(e)
            Net
                fair values -




The
      net
      fair values of:




-
            Term
                receivables are determined by discounting the cash flows, at market
                interest rates of similar securities, to their present
                value;




-
            Unlisted
                investments where there is no organised financial market, the net
                fair
                value is based on reasonable estimation of the underlying net assets
                or
                discounted cash flow of the
                investment;




-
            Other
                loans and amounts due are determined by discounting the cash flows,
                at
                market interest rates of similar borrowings, to their present
                value;




-
            Forward
                exchange contracts and option contracts are the recognised unrealised
                gain
                or loss at balance date determined from the current forward exchange
                rates
                for contracts with similar
                maturities.




No
      financial assets and financial liabilities are readily traded on organised
      markets in standardised form other than listed investments, forward exchange
      contracts and currency option contracts. Financial assets where the carrying
      amount exceeds the net fair values have not been written down as the economic
      entity intends to hold these assets to maturity.




**34.**
            **CHANGE
                IN ACCOUNTING POLICIES**




The
      economic entity adopted the following accounting standards for application
      after
      1 January 2005:




-  AASB
      132: *Financial
      Instruments: Disclosure and Presentation* ;
      and




-  AASB
      139: *Financial
      Instruments: Recognition and Measurement*




The
      changes result from the adoption of AASB 132 relate primarily to increased
      disclosures required under the standard and do not effect value of amounts
      reported in financial statements.


The
      adoption of AASB 139 has resulted in material differences in the recognition
      and
      measurement of the group’s financial instruments. The group has elected not to
      adjust comparative information resulting from the introduction of AASB 139
      as
      permitted under the transitional provisions of this standard. As such, previous
      Australian accounting standards have been applied to comparative
      information.





Derivative
      Financial Instruments -


Under
      AASB 139, derivative financial instruments are measured at fair value at the
      reporting date. Gains and losses resulting from changes to fair value are taken
      to the income statement unless they are designated as effective hedges, in
      which
      case the difference is taken directly to equity. The economic entity held a
      number of forward exchange contracts and options at 31 December 2004. None
      of
      these are classified as effective hedges and so the gains and losses are
      reflected in the income statement.





At
      the
      date of transition to these Standards on 1 January 2005, the resulting
      adjustment under AASB 139 was as follows:


For
      the
      Company and the economic entity:


A
      gain of
      $289,911 was recognised in retained earnings as an unrealised foreign exchange
      movement on financial instruments from the prior year.




**35.**
            **Significant
                differences between Australian IFRS and US
                GAAP**




The
      above
      referred to standards and requirements differ in certain respects from US GAAP.
      However, the differences which had a significant effect on the consolidated
      net
      income and shareholders equity of Atlas South Sea Pearl Ltd in previous years
      no
      longer exist, due to changes in the accounting conventions used in the Company’s
      Australian accounts. While this is not a comprehensive summary of all
      differences between Australian equivalent to International Financial Reporting
      Standads (AIFRS) and US GAAP, other differences are not likely to have a
      significant effect on the consolidated net income or shareholders equity of
      the
      group.





The
      effect on the statement of performance and the statement of position from the
      adjustments that are required to reflect US GAAP for the above stated accounts
      are as follows:


F
          -
          39




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**YEARS
                ENDED 31 DECEMBER****2005**
            
            **2004****INCOME
                STATEMENT**Net
                income/(loss) under AIFRS
            
            
            2,060,587
            
            
            (594,274
            )35.1Amortization
                of Goodwill
            
            
            —
            
            
            —35.3Change
                in Fair Value of Derivative Instruments
            
            
            
            
            
            (691,709
            )35.5Capitalization
                of Administration Expenses to Inventory
            
            
            —
            
            
            168,50835.6
                Prior year adjustment
            
            
            12,770
            
            
            —Net
                income before cumulative effect of change in Accounting Principle
                under US
                GAAP
            
            
            2,073,357
            
            
            (1,117,475
            )Cumulative
                effect of change in Accounting Principle
            
            
            —
            
            
            —Net
                income under US GAAP
            
            
            2,073,357
            
            
            (1,117,475
            )





**YEARS
                ENDED 31 DECEMBER****2005**
            
            **2004****BALANCE
                SHEET**Equity
                under AIFRS
            
            
            17,633,641
            
            
            16,029,94835.1Goodwill
            
            
            499,718
            
            
            499,71835.3Financial
                Instruments
            
            
            —
            
            
            289,911US
                GAAP
            
            
            18,133,359
            
            
            16,819,577Total
                Assets under AIFRS
            
            
            24,510,368
            
            
            17,385,12135.1Goodwill
            
            
            499,718
            
            
            499,71835.3Financial
                Instruments
            
            
            —
            
            
            289,911US
                GAAP
            
            
            25,010,086
            
            
            18,174,750




F
          -
          40




NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**35.1**
            **GOODWILL**





Under
      AIFRS, goodwill relating to the acquisition of a business is not required to
      be
      amortised but is subject to annual impairment testing, however under AGAAP
      it
      was amortised over 20 years. Effective from January 1, 2002, goodwill may not
      be
      amortized under US GAAP. Goodwill was recorded by the Comapany prior to 2004
      but
      was fully written off by December 31, 2003. Consequently, there is no need
      for
      an adjustment to the income statement whoever, there is an adjustment to the
      balance shhet to reflect the different treatment of goodwill underUS GAAP from
      January 1, 2002 to December 31, 2003 and this is reflected as described in
      note
      35 above.





**35.2**
            **VALUATION
                OF INVENTORY**





For
      US
      GAAP purposes inventory is valued at the lower of cost or fair market value.
      Australian GAAP requires inventory to be valued at the lower of cost and net
      of
      realizable value. For the purpose of preparation of the primary financial
      statements, no difference exists between the different methods of valuing
      inventory.





Under
      AIFRS, special disclosures are required in relation to inventory which is
      classified as a Biological Asset. This disclosure is included in the annual
      report but has no effect on the accounting treatment of the inventory for the
      Company.





**35.3**
            **GAINS
                AND LOSSES ON FOREIGN EXCHANGE
                CONTRACTS**





In
      accordance with FAS 133 US GAAP requires that the loss or gain on Forward
      Exchange Contracts (FEC’s) noted in Note 35 above must be recognized in the
      income statement of the Company. The adjustment to the income statement and
      balance sheet has been recognized from 2004 and this difference is as
      follows:





**2005**
            ****
            **2004**$
            
            $Fair
                Value of Forward Exchange Contracts
            
            
            —
            
            
            289,911Gain/(Loss)
                from Forward Exchange Contracts
            
            
            —
            
            
            (691,709
            )





FAS
      133
      was required to be adopted from January 1, 2001 and therefore a cumulative
      effect of change in accounting principle was booked upon adoption.





Under
      AIFRS, Forward Exchange Contracts and any other hedging instruments are to
      be
      treated in the same way as under US GAAP. However, there is an exemption under
      AASB1 which the Company has claimed which means that the treatment under AIFRS
      is only required to be applied from January 1, 2005. Therefore, an adjustment
      has been made above for the 2004 fiscal period.




F
          -
          41




**NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS**




**35.4**
            **EARNINGS
                PER SHARE**





The
      calculation of diluted earnings per share under US GAAP differs from that under
      Australian GAAP. Under US GAAP common stock equivalents are not included in
      diluted earnings per shares unless they are considered dilutive. Also, under
      US
      GAAP the treasury stock method is used to calculate the dilutive effect of
      stock
      options.





YEARS
                ENDED 31 DECEMBER2005
            
            2004(cents)
            
            (cents)Basic
                Earnings per share underAIFRS
            
            
            2.35
            
            
            (0.68
            )US
                GAAP (before cumulative effect of change in Accounting
                Principal)
            
            
            2.36
            
            
            (1.27
            )US
                GAAP (after effect of change in Accounting Principal)
            
            
            2.36
            
            
            (1.27
            )Earnings
                per ADR under US GAAP-
                20 shares equivalent to 1 ADRbefore
                change in Acc. Princ.
            
            
            47.22
            
            
            (25.45
            )after
                change in Acc. Princ.
            
            
            47.22
            
            
            (25.45
            )Diluted
                Earnings per share under
            
            
            2.35
            
            
            (0.68
            )AIFRSUS
                GAAP (before cumulative effect of change in Accounting
                Principal)
            
            
            2.36
            
            
            (1.27
            )US
                GAAP (after effect of change in Accounting Principal)
            
            
            2.36
            
            
            (1.27
            )Earnings
                per ADR under US GAAP-
                20 shares equivalent to 1 ADRbefore
                change in Acc. Princ.
            
            
            47.22
            
            
            (25.45
            )after
                change in Acc. Princ.
            
            
            47.22
            
            
            (25.45
            )




Reconciliation
        of Diluted Earnings




2005
              (A$)
            
            2004
              (A$)Before
                cumulative effect of change in Accounting PrincipalNet
                Profit - Basic EPS (USGAAP)
            
            
            2,073,357
            
            
            (1,117,475
            )Add
                Back Interest on Convertible Notes
            
            
            —
            
            
            —Net
                Profit - Diluted EPS (US GAAP)
            
            
            2,073,357
            
            
            (1,117,475
            )Outstanding
                Shares - Basic EPS
            
            
            87,810,254
            
            
            87,810,254Add
                dilutive options (US GAAP)
            
            
            —
            
            
            —Add
                dilutive convertible notes (US GAAP)
            
            
            —
            
            
            —Outstanding
                Shares - Diluted EPS (US GAAP)
            
            
            87,810,254
            
            
            87,810,254After
                cumulative effect of change in Accounting PrincipalNet
                Profit - Basic EPS (US GAAP)
            
            
            2,073,357
            
            
            (1,117,475
            )Add
                Back Interest on Convertible Notes
            
            
            —
            
            
            —Net
                Profit - Diluted EPS (US GAAP)
            
            
            2,073,357
            
            
            (1,117,475
            )Outstanding
                Shares - Basic EPS
            
            
            87,810,254
            
            
            87,810,254Add
                dilutive options (US GAAP)
            
            
            —
            
            
            —Add
                dilutive convertible notes (US GAAP)
            
            
            —
            
            
            —Outstanding
                Shares - Diluted EPS (US GAAP)
            
            
            87,810,254
            
            
            87,810,254





F
          -
          42


NOTES
      TO AND FORMING PART OF THE FINANCIAL
      STATEMENTS




**35.5**
            **Capitalization
                of Administration Expenses**





The
      Company has capitalized expenditure into inventory which is of an administrative
      nature for the years 2000 and 2001. These costs were capitalized because they
      form part of the cost of running the Indonesian company which is dedicated
      to
      the production of pearls. Under ARB 43, expenditure which is of an
      administrative nature may not be capitalized to inventory and must be expensed
      in the period that it is incurred. The adjustment required to reflect this
      change is as follows:





YEARS
                ENDED 31 DECEMBER2005
            
            2004Administration
                costs capitalized
            
            
            —
            
            
            —Cumulative
                effect on Total Assets
            
            
            —
            
            
            —Cumulative
                effect on Equity
            
            
            —
            
            
            —Effect
                on Net Income
            
            
            —
            
            
            168,508




**35.6**
              **Immaterial
                  Prior Year Earnings**
 Immaterial
          prior year earnings adjustment was accounted for in retained earnings under
          AIFRS. Under US GAAP, this is not allowed and an adjustment has been made
          to the
          current year income statement.




F
          -
          43