**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, 2006**
 **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.





Atlas
      South Sea Pearl Limited had 89,313,280 Ordinary Shares of Common Stock
      outstanding as of December 31, 2006.


*
      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 filer. 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





**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
            37**ITEM
                7**
            Major
                Shareholders and Related Party Transactions
            41**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
            52**ITEM
                12**
            Not
                Required
            54**PART
                II**
            **ITEM
                13**
            Defaults,
                Dividend Arrearages and Delinquencies
            55**ITEM
                14**
            Material
                Modifications to the Rights of Security Holders and Use of
                Proceeds
            55**ITEM
                15**
            Controls
                and Procedures
            55**ITEM
                16A**
            Audit
                Committee Financial Expert
            55**ITEM
                16B**
            Code
                of Ethics
            56**ITEM
                16C**
            Principal
                Accountant Fees and Services
            56**ITEM
                16D**
            Exemptions
                from Listing Standards for Audit Committees
            56**ITEM
                16E**
            Purchases
                of Equity Securities by the Issuer and Affiliated
                Purchasers
            56**PART
                III**
            **ITEM
                17**
            Financial
                Statements
            58**ITEM
                18**
            Not
                Required
            58**ITEM
                19**
            Exhibits
            58


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. 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”).
      For comparative purposes, the Company has restated its financial statements
      for
      the year ended December 31, 2004 to reflect the new AIFRS format of reporting.
      Compliance with AIFRS as shown in this Annual Report also infers compliance
      with
      IFRS as published by the IASB. 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 33 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$0.7884, 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 29, 2006. 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,
      2006
      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 is 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.”


**Income
                  Statement Data**
              
              **Years
                  Ended December 31,****2006****(1)**
                **(US$)**
              
              **2006**
                **(A$)**
              
              **2005**
                **(A$)**
              
              **2004**
                **(A$)**
              
              **2003****(a)**
                **(A$)**
              
              **2002****(a)**
                **(A$)**AIFRS
                  or AGAAP Accounting Principles:Revenue
              
              
              10,427,165
              
              
              13,225,729
              
              
              9,876,856
              
              
              6,837,523
              
              
              9,637,393
              
              
              11,341,448Net
                  income (loss) from operations
              
              
              2,550,920
              
              
              3,235,566
              
              
              2,060,587
              
              
              (594,274
              )
              
              1,244,733
              
              
              3,499,017Net
                  income (loss) from continuing operations
              
              
              2,550,920
              
              
              3,235,566
              
              
              2,060,587
              
              
              (594,274
              )
              
              1,244,733
              
              
              3,499,017Net
                  income (loss)
              
              
              2,550,920
              
              
              3,235,566
              
              
              2,060,587
              
              
              (594,274
              )
              
              1,244,733
              
              
              3,499,017Net
                  income (loss) per share-basic
              
              
              0.03
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )
              
              0.0142
              
              
              0.0423Net
                  income (loss) per share-diluted
              
              
              0.03
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )
              
              0.0142
              
              
              0.0403Weighted
                  average number of basic ordinary shares outstanding
              
              
              89,313,280
              
              
              89,313,280
              
              
              87,810,254
              
              
              87,810,254
              
              
              87,810,254
              
              
              82,724,884Weighted
                  average number of diluted ordinary shares outstanding
              
              
              89,313,280
              
              
              89,313,280
              
              
              87,810,254
              
              
              87,810,254
              
              
              87,810,254
              
              
              87,910,235Dividends
                  per share
              
              
              0.03
              
              
              0.04
              
              
              0.01
              
              
              —
              
              
              —
              
              
              0.04Dividends
                  per ADS
              
              
              0.03
              
              
              0.04
              
              
              0.01
              
              
              —
              
              
              —
              
              
              0.04
 (a)  Amounts
        shown prior to the year end December 31, 2003 are represented as Australian
        Accounting Principles (AGAAP)


3


**Years
                  Ended December 31,****Income
                  Statement Data**
              
              **2006****(1)**
                **(US$)**
              
              **2006**
                **(A$)**
              
              **2005**
                **(A$)**
              
              **2004**
                **(A$)**
              
              **2003**
                **(A$)**
              
              **2002**
                **(A$)**U.S.
                  Generally Accepted Accounting Principles:Revenue
              
              
              10,427,165
              
              
              13,225,729
              
              
              9,876,856
              
              
              6,837,523
              
              
              9,637,393
              
              
              11,341,448Amortization
                  of goodwill(2)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              247,777
              
              
              251,941Gain/(loss)
                  on foreign exchange derivatives(3)
              
              
              —
              
              
              —
              
              
              —
              
              
              (691,709
              )
              
              782,327
              
              
              (6,318
              )Stock
                  options issued to employees
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (36,400
              )Capitalization
                  of administration
                costs(4)
              
              
              —
              
              
              —
              
              
              —
              
              
              168,508
              
              
              426,448
              
              
              487,022Foreign
                  Currency Balances(5)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,116,101
              )
              
              320,234Prior
                  year adjustment(6)
              
              
              —
              
              
              —
              
              
              12,770
              
              
              —
              
              
              —
              
              
              —Net
                  income (loss) from operations
              
              
              2,550,920
              
              
              3,235,566
              
              
              2,073,357
              
              
              (1,117,475
              )
              
              1,585,184
              
              
              4,515,498Net
                  income (loss) from continuing operations
              
              
              2,550,920
              
              
              3,235,566
              
              
              2,073,357
              
              
              (1,117,475
              )
              
              1,585,184
              
              
              4,515,498Net
                  income (loss)
              
              
              2,550,920
              
              
              3,235,556
              
              
              2,073,357
              
              
              (1,117,475
              )
              
              1,585,184
              
              
              4,515,498Net
                  income (loss) per share - basic (before cumulative effect of change
                  in
                  accounting policy)
              
              
              0.03
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )
              
              0.02
              
              
              0.05Net
                  income loss) per share - basic (after cumulative effect of change
                  in
                  accounting policy)
              
              
              0.03
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )
              
              0.02
              
              
              0.05Net
                  income (loss) per share - diluted (before cumulative effect of
                  change in
                  accounting policy)
              
              
              0.03
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )
              
              0.02
              
              
              0.05Net
                  income (loss) per share - diluted (after cumulative effect of change
                  in
                  accounting policy)
              
              
              0.03
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )
              
              0.02
              
              
              0.05Weighted
                  average number of
                basic
                  ordinary shares
                  outstanding
              
              
              89,313,280
              
              
              89,313,280
              
              
              87,810,254
              
              
              87,810,254
              
              
              87,810,254
              
              
              82,724,884Weighted
                  average number of
                diluted
                  ordinary shares outstanding
              
              
              89,313,280
              
              
              89,313,280
              
              
              87,810,254
              
              
              87,810,254
              
              
              87,810,254
              
              
              89,284,659


4




**At
                December 31,****Balance
                Sheet Data**
            
            **2006****(1)**
              **(US$)**
            
            **2006**
              **(A$)**
            
            **2005**
              **(A$)**
            
            **2004**
              **(A$)**
            
            **2003****(a)**
              **(A$)**
            
            **2002****(a)**
              **(A$)**AIFRS
                or AGAAP Accounting PrinciplesCash
                and cash equivalents
            
            
            2,075,052
            
            
            2,631,979
            
            
            1,475,480
            
            
            3,208,996
            
            
            4,301,918
            
            
            6,119,808Total
                assets
            
            
            17,756,073
            
            
            22,521,655
            
            
            24,510,368
            
            
            17,385,121
            
            
            22,192,134
            
            
            23,715,481Total
                current liabilities
            
            
            3,369,232
            
            
            4,273,506
            
            
            6,707,667
            
            
            1,355,061
            
            
            889,926
            
            
            2,780,309Shareholders’
                equity (excluding minority interests) (AIFRS or AGAAP)
            
            
            14,348,090
            
            
            18,198,998
            
            
            17,633,641
            
            
            16,029,948
            
            
            21,301,802
            
            
            20,935,172


(a)  Amounts
      shown prior to the year end December 31, 2003 are represented as Australian
      Accounting Principles (AGAAP)







**At
                December 31,****Balance
                Sheet Data**
            
            **2006****(1)**
              **(US$)**
            
            **2006**
              **(A$)**
            
            **2005**
              **(A$)**
            
            **2004**
              **(A$)**
            
            **2003**
              **(A$)**
            
            **2002**
              **(A$)**U.S.
                Generally Accepted Accounting Principles:Goodwill(2)
            
            
            393,978
            
            
            499,718
            
            
            499,718
            
            
            499,718
            
            
            499,718
            
            
            251,941Financial
                instruments(3)
            
            
            —
            
            
            —
            
            
            —
            
            
            289,911
            
            
            981,620
            
            
            199,292Inventory(4)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (168,508
            )
            
            (594,956
            )Loan
                to employees (7)
            
            
            (432,240)
            
            
            (548,250)
            
            
            —
            
            
            —
            
            
            —
            
            
            —Cash
                and cash equivalents
            
            
            2,075,052
            
            
            2,631,979
            
            
            1,475,480
            
            
            3,208,996
            
            
            5,614,748
            
            
            5,976,085Total
                assets
            
            
            17,717,818
            
            
            22,473,133
            
            
            25,010,368
            
            
            18,174,750
            
            
            20,703,635
            
            
            22,397,898Total
                current liabilities
            
            
            3,369,232
            
            
            4,273,506
            
            
            6,707,667
            
            
            1,355,061
            
            
            889,463
            
            
            2,793,441Foreign
                Currency Translation(5)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,004,591
            )
            
            (1,507,226
            )Shareholders’
                equity (excluding minority interests) (US GAAP)
            
            
            14,309,827
            
            
            18,150,466
            
            
            18,133,359
            
            
            16,819,577
            
            
            19,734,174
            
            
            19,604,454





(1)
            US
                Dollar amounts have been translated at the Noon Buying Rate on December
                29, 2006 of A$1.00 = US$0.7884. 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 33.4 of “Item 17. Financial
                Statements.”





(3)
            US
                GAAP requires that the loss or gain on forward exchange contracts
                noted in
                Note 33 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
                33.1 of “Item 17. Financial
                Statements.”




5


(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 33.2 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 2005 income statement to reflect this. See
                Note 33.2 of “Item
                17.
                Financial Statements”




(7)
              Under
                    USGAAP Statement 123 (R) loans are classified as contra equity
                    until
                    physically repaid and are not reflected in financial assets.
                    Consequently
                    there is an adjustment to the balance sheet to reflect the different
                    treatment of these loans as at December 31,
                    2006


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 33 to
      Financial Statements.”





***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 20, 2007 was A$1.00 = US$0.8458




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, 2006
            
            $
            0.7914
            
            $
            0.7795January
                31, 2007
            
            
            0.7960
            
            
            0.7724February
                28, 2007
            
            
            0.7933
            
            
            0.7726March
                31, 2007
            
            
            0.8104
            
            
            0.7728April
                30, 2007
            
            
            0.8367
            
            
            0.8131May
                31, 2007
            
            
            0.8348
            
            
            0.8190




6




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)**2002
            
            
            0.54482003
            
            
            0.65892004
            
            
            0.73782005
            
            
            0.76202006
            
            
            0.7584





(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.*




**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.




7




**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. This is
      particularly relevant in Juvenile oysters under 12 months of age.




**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 discretionary income. Consumption is strongly influenced by
      fashion trends. The Company’s South Sea pearls compete with other types of
      pearls as well as other types of jewelry such as precious metals and precious
      gem stones for consumer disposable income. Unfavorable general economic
      conditions can have an adverse effect on consumer spending for such items,
      which
      would affect the Company’s sales.




**The
      price for pearls is subject to fluctuation based on supply.** 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. In
      the
      ten year period up to 2004, there was an increase in the supply of pearls
      globally. Most of the increase in South Sea pearl production came from Indonesia
      and the Philippines, and there is evidence of increased production from
      Australia .
      This
      increase in supply 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. 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
      price
      of pearls is subject to quality. Although the Company takes all steps possible
      to ensure that its farming procedures meet best practice, the procedure of
      a
      pearl is a natural process. The price of a pearl depends on the quality
      characteristics of shape, color, size, skin quality and lustre. A deterioration
      in pearl quality from diseases, poor farming practice or environmental factors
      would adversely affect pearl prices and revenue for the Company.




**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.




8




**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 affect 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 17.9% per annum for the period from
      2003
      to 2006. The official inflation rate in Indonesia at the end of 2006 was 6.6%
      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
      activities. 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).




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
      ventures. 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.




9




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, 2006, 72% (A$16.3 million)
      of the Company’s total assets were employed in Indonesia, principally in oyster
      stocks, plant and equipment. The Company’s remaining 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. Up to
      30%
      of cultivated mollusks will 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.




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
      nations.




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.


10


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, 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.




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.




***The
      South Sea Pearl Industry***




Australia
      has historically had the most successful producers 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 oysters shared
      among sixteen pearl 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 largest pearling operators controls 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 way to increase profitability
      for Australian pearl producers is 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.




11




By
      comparison, the pearling industry in Indonesia and the Philippines is relatively
      unregulated. Although there are a few farmers in these regions capable of
      producing quantities of pearls equal to the largest Australian operations,
      there
      are a lot more pearl producers, many with small operations. Due to a lesser
      abundance of wild oysters and lower labor costs, there is much heavier emphasis
      on hatchery breeding programs in S.E. Asia than in Australia. Production has
      grown substantially in the last decade and Indonesia now produces approximately
      the same volume of pearls as Australia with the Philippines third in terms
      of
      pearl production by volume. 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 and harvesting of pearls can take place over a longer period of time
      each year.




The
      Company has overcome the inferior quality of most of the other Indonesian pearl
      producers by investing in research and development projects to improve its
      breeding and farming techniques.




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.


12


***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 this 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 two nearby villages while in
      excess of 150 staff are accommodated at the three 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, N. Bali.




13




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 oyster 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
      Abadi venture 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. This facility can accommodate
      approximately 500,000 oysters. The Company’s transport vessel, the “Sahabat,”
delivers oysters from Penyabangan to Alyui Bay. Combined production at Alyui
      Bay
      and Penyabangan allowed seedings in excess of 375,000 oysters in 2006. The
      hatchery at Penyabangan has ensured successful Juvenile production for the
      Company since its development in 2004.




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.




14




The
      Company established a joint hatchery operation in West Lombok in 2005 to replace
      the Bacan Island Project (Cemerlang venture). The initial term of the unexecuted
      joint operation agreement with PT Autore Cultured Pearls was for one year.
      In
      July 2006, this was extended for another year on the same terms as the original
      agreement. 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 now produces all of 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 57,000 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. Commitment to local communities remains a
      cornerstone of the Company’s corporate philosophy. In Bali the Company supported
      16 underprivileged children in order that they can attend school during 2006.
      Likewise in West Papua, the Company continue to provide scholarships to talented
      local young people to attend tertiary education. These scholarship programs
      will
      continue to expand. The Company has provided key funding and resources to repair
      schools in both Bali and West Papua.




15




West
      Papua is considered an area of extreme risk in terms of the spread of HIV.
      During 2006, the Company sponsored the largest HIV screening and education
      program ever conducted in the province with the support of AusAid (Australian
      Aid Agency) and the regional medical authorities. The HIV awareness program
      will
      continue as an ongoing community initiative that is supported by the
      company.




In
      addition to the above, the Company continues to seek ways of providing
      alternative employment and support for cottage industry of the most
      disadvantaged people within the community. It has developed a system of “piece
      work” for the repair of certain farm equipment (nets etc). This work is
      undertaken from home and is offered to the many widows, particularly on Bali’s
      north coast, who would otherwise find earning an income difficult due to social
      circumstances.




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 steel framed panels.
      These panels are 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, the spat, 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.




16




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 tissue, known as saibo tissue,
      from a “donor oyster.” This nacreous producing tissue is naturally found only on
      the outer mantle tissue of the oyster. This tissue is inserted at the same
      location as the nucleus where it encourages nacre secretion 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 regularly clean
      the oysters, the panels and the long lines because naturally occurring marine
      growth will compete with the oysters for nutrients. In addition, foreign
      organisms can enter the oysters and either eat the oysters or cause disease.
      Under normal conditions, up to 30% of the oysters will reject the nucleus and
      an
      additional 10% to 20% die of natural causes. The oysters are x-rayed
      approximately eight months after being nucleated to determine which animals
      have
      rejected the nucleus. Any oysters which reject the nucleus can be re-seeded.
      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.




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. Alternative juvenile production facilities now exist in Bali and
      Lombok which has spread the Company’s geographical risk.




17




***Pearl
      Sales and Revenue***




Wholesale
      pearl sales accounted for 91% of the Company’s revenue in 2006. 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 years commencing on January 1, 2006. According to the terms
      of the agreement, PAI is 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. The Company’s 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 2006 was the
      enhancement of its 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.
      In 2006, the Company opened a second retail operation at the Company’s facility
      on the island of Nusa Lembongan and a third retail outlet in its premises at
      Sanur. Demand for the pearl shell (MOP) and pearl meat by-products have remained
      constant over the last 2 years. The Company now employs three senior expatriate
      managers in the retail and manufacturing side of the business. There are a
      further 12 Indonesian staff employed as retail assistants, jeweler and support
      staff.




***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.




18




Up
      until
      the last decade, approximately 90% of Australia’s South Sea pearl production was
      sold in Japan. This proportion 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.




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.




19




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.




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.




20




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.




On
      June
      27, 2007, the Company announced its intention to voluntarily delist its ADRs
      from the Nasdaq Small Cap Market. When the delisting 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
                    
                    4.Provides
                      ongoing funding of Cendana operations
                  
                  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 in Cendana
  PT
        CENDANA INDOPEARLS (100% owned by Tansim Pty Ltd) - Indonesian
        Company
  **Functions**
              
              **Assets**
              
              **Risks**1.Breeding/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.    
                  Jewelinventory
              
              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 had a term of three (3) years. An option to renew the
        lease
        under the same terms for three (3) additional years has been exercised and
        the
        new lease expires on June 30, 2010. 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, 2006 was A$19,123.
  ***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 were 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$44,140 (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 is no longer liable for the annual lease payments to be made to the
        government and all of its property rights at this site have been
        extinguished.
  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
        of 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 Timor, following
        civil
        unrest in the area and a deterioration of conditions suitable for pearling.
        In
        2003, the Waigeo hatchery was closed down and converted to oyster operating
        facility and the Company’s juvenile production was moved to its new farms in N.
        Bali.
  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. The main infrastructure at the
        Waigeo site is now complete and facilities undergo maintenance and replacement
        as required.
  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
        was no longer reliant upon its joint venture partner, Abadi, for juvenile
        oysters. This facility is now producing 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 Penyabangan land
        site
        also has a small retail showroom with an office and kitchenette. Educational
        tours of the farm infrastructure are carved out from the facility as part
        of the
        retailing operations.
  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.
        The site was partially developed in 2006. Negotiations are ongoing with local
        fishermen in relation to the establishment of surface line farming
        infrastructure. 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.
  25
  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 was opened in April 2006.
  In
        June
        2006, the Company relocated its Indonesian head office to a three level
        commercial building in the area of Sanur which is in the capital of Bali,
        Denpasar. The office consists of approximately 600 square meters of space.
        The
        Company has entered into a lease term of two years (with a two year option
        to
        extend the lease under the same terms and conditions) and will pay rent of
        Rp120,000,000 (A$ 17,000) per annum which is paid in advance for the full
        term
        of the lease. The top two levels of the premises are used for finance,
        administration and logistical support. The ground floor has been fitted out
        for
        the purpose of a retail outlet. The Company has spent approximately A$12,000
        on
        fitout and furniture for the retail outlet. The Company’s office is well located
        with excellent access to communication and transportation infrastructure.
        The
        Company uses local Indonesian staff to manage the Indonesian operations from
        the
        Denpasar office.
  ***Bacan,
        N. Maluku***
 
 During
        2004, the Company entered into a 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 12 months,
        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 mutually terminated
        the joint arrangement. The Company has no residual financial obligation to
        Cemerlang.
  26
 ***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 agreement was effective from July
        2005
        and the term of the joint operation agreement is for one year. Each July,
        the
        agreement is reviewed and extended for another year on mutually agreed upon
        terms. The agreement was extended in 2006. 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.
  **ITEM
        5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS**
  The
        Company’s consolidated financial statements are prepared in accordance with
        AIFRS. 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 33 to Financial Statements.” The following discussion
        references only the amounts computed in accordance with AIFRS for the years
        ended December 31, 2006, 2005 and 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
        three fiscal years is set forth in the following table:
  **2006**
              
              
              **2005**
              
              
              **2004****A$**
              
              
              **A$**
              
              
              **A$**Interest
                  received
              
              
              99,423
              
              
              101,618
              
              
              156,262Sales
                  of oysters
              
              
              31,300
              
              
              176,577
              
              
              98,620Sales
                  of pearls (loose wholesale)
              
              
              11,860,940
              
              
              9,094,562
              
              
              5,212,130Sales
                  of MOP, meat and jewelry
              
              
              598,754
              
              
              317,171
              
              
              508,208Miscellaneous
              
              
              115,061
              
              
              183,928
              
              
              72,21912,705,478
              
              
              9,876,856
              
              
              6,047,439Foreign
                  exchange gain
              
              
              520,251
              
              
              -
              
              
              790,08413,225,729
              
              
              9,876,856
              
              
              6,837,523
  27
  The
        following table provides additional details in relation to the results of
        the
        Company’s pearl sales for its last three fiscal years:
 
 **2006**
              
              **2005**
              
              **2004****Revenue
                  from sale of pearls (wholesale)****Sellable
                  Grade Pearls:**Value
                  (A$)
              
              
              11,575,890
              
              
              8,861,360
              
              
              4,288,583Quantity
                  (No.)
              
              
              187,034
              
              
              117,816
              
              
              57,374Weight
                  (momme)
              
              
              78,109
              
              
              50,746
              
              
              27,939Average
                  price per momme (A$)
              
              
              148
              
              
              175
              
              
              153Average
                  weight per pearl (momme)
              
              
              0.42
              
              
              0.431
              
              
              0.487**Commercial
                  Grade Pearls:**Value
                  (A$)
              
              
              283,961
              
              
              69,090
              
              
              690,879Quantity
                  (No)
              
              
              12,095
              
              
              9,043
              
              
              59,170Weight
                  (momme)
              
              
              3,406
              
              
              3,832
              
              
              23,601**Keshi
                  (seedless) pearls:**Value
                  (A$)
              
              
              1,089
              
              
              164,112
              
              
              232,668Weight
                  (momme)
              
              
              6
              
              
              1,386
              
              
              2,250
  **A.**
              **Operating
                  Results**
  The
        total
        revenue increased by A$3,348,873, or 34%, from 2005 to 2006. The details
        regarding this movement in each category of revenue are described
        below.
  **Pearl
        Sales**
  The
        Company’s revenue from the sale of loose pearls into the wholesale market for
        2006 was A$11,860,940, which represented an increase of A$2,766,378, or 30%,
        when compared to 2005. 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 2006 include:
  o
                  An
                      increase in the number of “sellable” grade pearls. There was an increase
                      of 69,218 pieces or 59% in the number of sellable grade pearls
                      that were
                      sold in 2006 compared to 2005. The average size of the pearls
                      sold in 2006
                      was comparable with those in 2005. However, the pearls sold
                      in 2006 had a
                      larger percentage of poor shaped pearls (drop, button & baroque) which
                      resulted in overall lower average prices.
  o
              Although
                  demand for pearls remained constant from 2005 to 2006, it was more
                  difficult to sell the pearls that had poor shape profiles which
                  the
                  Company produced more of during the
                  year.
  28
  o
              Average
                  prices for pearls that had a superior shape profile (round & near
                  round) increased during 2006 compared to the previous
                  year.
  o
                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.
 o
                The
                    number of keshi pearls sold as loose wholesale goods in 2006
                    was minimal.
                    Most of the keshi pearls were used in the manufacture of pearl
                    jewelry
                    which was sold through the Company’s retail operations in
                    Indonesia.
  There
        was
        an increase in the number of sellable grade pearls in 2005 (117,816) compared
        to
        2004 (57, 374). The overall number of pearls sold in 2004 and 2005 was similar
        but an increase in the overall quality resulted in a significant increase
        in
        revenue of $3,882,432 or 74% from 2004 to 2005. The improved quality resulted
        from a recovery in oyster numbers and health which had been adversely affected
        by El Nino climate conditions at the Alyui Bay farm in 2001 and 2002. With
        an
        increase in unseeded oyster numbers and an improvement on oyster quality
        in
        2003, an improved pearl harvest in terms of quality was the result in
        2005.
  During
        2006, the Company seeded 329,874 virgin, or first-time seeded, pearl oysters.
        This compares to 325,480 in 2005. A further 46,895 oysters that had already
        produced a pearl were reseeded in 2006 compared to 12,259 oysters that were
        reseeded in 2005. The reseeded oysters will produce a larger pearl at harvest
        than virgin operated oysters. Growing conditions for oysters during 2005
        and
        2006 were favorable for both juvenile and mature pearl oysters at Alyui Bay
        and
        Bali, which has led to high survival, excellent health and good growth results.
        It is anticipated that these improved seeding results and good growing
        conditions will improve the quality and average size of pearls in the
        future.
  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 and its efforts in this regard have
        been
        enhanced with the collaborative research that is being undertaken with the
        James
        Cook University in Australia.
  **MOP,
        Oyster Meat and Jewelry**
  Revenue
        from the sale of MOP, oyster meat and jewelry increased in 2006 by A$281,583,
        or
        89%, from A$317,171 in 2005 to A$598,754 in 2006. A significant proportion
        of
        this improvement came about from improved jewelry retail sales which accounted
        for A$263,551 of revenue in 2006 compared to only A$20,884 in 2005. The improved
        retail sales have resulted from an increase in the number of outlets from
        one to
        three. The revenue from raw MOP & oyster meat sales was relatively unchanged
        in 2006 (A$262,000) compared to 2005 (A$285,000). There was a decrease in
        the
        sale of MOP, oyster meat & jewelry in 2005 by A$191,037 or $38% compared to
        2004 (A$508,208). 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. The Company has recruited
        new retail and production managers, and increased the number of staff in
        the
        sales areas of the business. Resources have been allocated to promote the
        Company’s brand within the Bali tourist trade with efforts made to attract
        customers from most of the luxury resorts in the South Bali
        district.
  29
  **Juvenile
        Oysters Sales**
  The
        Company sold less than 5,000 juvenile oysters during 2006, compared to
        approximately 20,000 oysters sold in 2005. This resulted in a decrease in
        revenue of 82%, from A$176,577 in 2005 to A$31,300 in 2006. These oysters
        were
        sold to other pearl farmers in Bali. The price for the sale of oysters did
        not
        change significantly between 2005 and 2006. The
        Company made a conscious decision to not sell large amounts of juvenile oysters
        to competitors and to increase reserves of juvenile oyster stocks for future
        growth.
  **Interest
        Income**
  Interest
        income decreased by A$2,195, or 2%, from A$101,618 in 2005 to A$99,423 in
        2006.
        Cash reserves were higher in 2006 than 2005 but a strategy of leaving the
        funds
        in JPY which attracted a lower level of interest resulted in a lower interest
        income level.
  **Foreign
        Exchange Gains/Losses**
  In
        2006,
        there was a foreign exchange gain of A$520,251. This was made up of A$328,026
        of
        realized foreign exchange gains from pearl and jewelry sales transacted in
        currencies other that Australian Dollars and A$192,225 of unrealized foreign
        exchange gains from revaluation of foreign denominated assets.
  In
        2005,
        there was a loss of A$(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 Australian 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 in 2006 was A$5,019,759 which resulted in a gross profit margin
        of
        60%. The unit cost of production of pearls in 2006 is A$25/pearl compared
        to the
        unit cost in 2005 of $40. The decrease in unit cost of production of A$15/pearl
        or 38% is a result of economics of scale from increased oyster production
        at a
        relatively fixed cost of operation.
  The
        cost
        of goods sold decreased marginally from A$4,414,357 in 2004 to A$4,275,378
        in
        2005. The overall number of sellable and commercial pearls sold in 2005 was
        comparable with 2004. The gross profit margin of 56% in 2005 was significantly
        higher than the 13% recorded in 2004 as a result of lower revenue in 2004.
        The
        unit cost of production remained relatively constant from 2004 to
        2005.
  **Marketing
        Costs**
  Marketing
        costs increased from A$870,543 in 2005 to A$1,287,345 in 2006. This represents
        an increase of 48%. As a proportion of pearl sales revenue, the marketing
        costs
        have increased from 9.6% in 2005 to 10.9% in 2006. This reflects the fact
        that a
        higher portion of pearls are being value added when they are prepared for
        sale
        which in turn attracts a higher rate of commission from the Company’s selling
        agent, Pearlautore International. The Company expects to achieve a selling
        price
        of between 10-15% higher for valued added goods to offset the higher rate
        of
        commission.
  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 contributed to higher marketing
        costs.
  **Administration
        Costs**
  Administration
        expenses increased by 35% from A$1,730,268 in 2005 to A$2,333,568 in 2006
        and by
        5.9% from 2004, to A$1,632,767 in 2005. Labor costs have increased by A$433,000
        (53%) from A$817,000 in 2005 to A$1,250,000 in 2006, mainly as a result of
        an
        increase in retail and marketing personnel. The remainder of the administration
        cost increase in line with inflation. The increase from 2004 to 2005 was
        in line
        with overall group inflation in Australia and Indonesia combined.
  **Other
        Expenses**
  Other
        expenses decreased by 34% from A$557,041 in 2005 to A$366,736 in 2006. A$320,396
        of the other expenses in 2006 are represented by foreign exchange losses
        from
        foreign currency transactions during the year and unrealized losses from
        revaluing foreign currency assets and liabilities at the end of the year.
        In
        2005, there was a tax penalty of A$457,742 which arose from the underpayment
        of
        tax in Indonesia in prior years.
  31
  **Income
        Tax**
  The
        income tax expense for 2006 was A$932,755 compared to A$295,539 in 2005.
        There
        were losses carried forward to offset profits in Atlas South Sea Pearl Ltd.
        Prior year losses were available in the Indonesian subsidiary to offset the
        profit in that entity.
  In
        2004,
        the Company’s income tax expense was A$96,946. In 2004, a provision was made for
        prior year income tax due to reviews carried out by the Indonesian tax
        authorities and this resulted in an income tax expense for 2004 despite a
        consolidated loss before tax. In 2005, as a result of concluding this Indonesian
        tax audit, the income tax expense was reduced from A$706,838 to A$295,539
        with
        the reversal of an overstatement of income tax expense for the prior period
        of
        A$373,047.
  ***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 on the North Bali coast. The joint hatchery operation in West
        Lombok, will be operated as a backup supply of spat and juvenile oysters.
        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.
  The
        Company is actively investigating the possibility of establishing a pearl
        farming operation in the State of Sabah in Malaysia. Preliminary site surveys
        have been undertaken and a feasibility study is being completed while the
        Company investigates the availability of land and sea lease site near the
        town
        of Semporna. In order for this project to be taken to a commercial scale,
        a
        small scale pilot project would need to be undertaken to ensure the suitability
        of the ocean sites for the various oyster growth stages. This would utilize
        existing surplus assets and oysters from Indonesia. The Malaysia venture,
        if
        successful, would increase the Company’s geographic and socio-economic
        diversity. This project has not yet been committed to by the Board of Directors
        except to the extent of undertaking a feasibility study to determine its
        potential.
  Research
        into the improvement of pearl oysters and production techniques to assist
        the
        Company in bringing high quality product to the market in the future continues
        to be a focus. 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 2006.
        The first of the research group have been seeded and pearls will be harvested
        from these oysters in 2008. 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 the next two years of the project.
        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 genetics research program will assist
        in
        breeding high performance oysters which should improve pearl production
        results.
  32
  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.
  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. The Australian Dollar has appreciated 17% against the Japanese Yen
        in
        the period from 2003 to 2006. Pearl prices are quoted in Japanese Yen and
        they
        have remained relatively stable during this time. This appreciation has had
        a
        direct adverse effect on operating results.
  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 between 5-17%
        in
        2006. 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 increased in 2006 to A$5,499,531
        from a
        net outflow in 2005 of A$190,691. In 2004, there was an inflow from operating
        activities of A$95,791. There was a 96% increase in proceeds from pearls,
        jewelry, MOP and pearl meat in 2006 (A$14,106,844) compared to 2005
        (A$7,206,538) as a result of higher revenue and a reduction in trade
        receivables. Payments to suppliers increased by 23% from A$7,191,567 in 2005
        to
        A$8,814,906 in 2006.
  33
  Net
        cash
        flow used in investing activities declined from A$824,200 in 2004 to A$753,588
        in 2005 and increased in 2006 to A$993,622. The Company used cash from
        investment activities in 2005 and 2006 primarily to purchase new property,
        plant
        and equipment in the amounts of A$832,582 and A$997,731 respectively. Most
        of
        this expenditure related to equipment and infrastructure expenses in Alyui
        Bay,
        Penyabangan and Denpasar, as well as the development of the Company’s new
        pearling interests in Karang Asem and Nusa Lembongan in South East
        Bali.
  At
        December 31, 2005, the Company had net short term borrowings of A$78,994
        which
        had all been repaid by December 31, 2006. These borrowings were 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 (ANZ 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.
  The
        Company paid dividends of A$3,152,786 in 2006 and a dividend of A$878,103
        in
        2005. The payment of dividends in future periods is dependent upon the
        availability of surplus cash and the outlook for future profits. The Company
        has
        paid a dividend of A$1,784,869 in May 2007.
  The
        Company had cash reserves of A$2,631,979 and trade receivables of $A2,923,298
        at
        December 31, 2006 compared to December 31, 2005 where there was a cash reserve
        of A$1,475,480 and trade receivables of $A4,301,651. In contrast, trade
        payables, borrowings and other current provisions at December 31, 2006 were
        A$1,242,539 compared to A$1,032,134 in the prior year. On a comparative basis,
        this represents a slight improvement in the Company’s working capital (which
        excludes current biological assets as these are not considered to be liquid
        in
        nature) from A$6,007,887 as at December 31, 2005 to A$6,047,150 as at December
        31, 2006. 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 2006 or 2005.
  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$295,000 on new capital
        infrastructure works at proposed farm sites in North Bali in 2007. Of this
        amount, A$65,000 will be spent on the purchase of land, A$125,000 on new
        farm
        based equipment, such as longlines and oyster panels, and A$50,000 will be
        on
        new vessels and oyster cleaning equipment. And further A$55,000 is expected
        to
        be spent on replacing longlines and panel replacement at Alyui Bay and
        Penyabangan in 2007.
  **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:
  34
  o
              Identification of the founder genetic
                  base;
 o
              Identification of the influence that the environment has on family
                  ranking;
 o
              Estimation of the heritability and genetic
                  correlations;
 o
              Genetic diversity analysis;
 o
              Development of a DNA parentage determination marker
                  suite.
  The
        research has progressed well with all the major breeding milestones achieved
        during 2005 and the first seeding of the test oysters took place in 2006.
        The
        survival and growth results have been collected and 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
        2007.
        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.
  The
        Company has committed to an amount of A$150,000 in cash, A$50,000 per year
        over
        three 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 three 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
        2006 and it is expected that this will increase to 100,000 seedings in 2007.
        The
        Company continued to operate a joint hatchery operation in West Lombok during
        2006. Future growth will come from pearl quality improvement and expansion
        into
        these new pearl production farm sites in Indonesia and possibly in
        Malaysia.
  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 2005,
        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.
        In 2006, two additional retail outlets were opened, one on the nearby island
        of
        Nusa Lembongan which attracts day-trip visitors and this centre also provides
        guests with an experiential tour which provides them with information regarding
        the pearling industry and an understanding of pearls. The second facility
        is a
        showroom in the area of Sanur which is a popular tourist destination in Bali.
  **E.**  **Off-balance
        sheet arrangements**
 The
        Company does not have any off-balance sheet arrangements required to be
        disclosed pursuant to Commission rules.
  36
  **F.**  **Tabular
        disclosure of contractual obligations**
 Payments
                    due by periodContractual
                    obligations
                
                
                Total
                
                
                less
                    than 1year
                
                
                1-3years
                
                
                3-5years
                
                
                more
                    than 5yearsLong
                    term debt obligations
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Capital
                    (finance) lease obligations
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Operating
                    lease obligations
                
                
                A$84,004
                
                
                A$19,856
                
                
                A$64,148
                
                
                -
                
                
                -Purchase
                    obligations(1)
                
                
                A$75,000
                
                
                A$50,000
                
                
                A$25,000
                
                
                -
                
                
                -Total
                
                
                A$159,004
                
                
                A$69,856
                
                
                A$89,148
                
                
                -
                
                
                -
  ( 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.
  **GEORGE
        ROBERT WARWICK SNOW, Bachelor in Economics, Fellow of the Australian Institute
        of Company Directors (61 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 (46 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 26 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 (56 years old).** Mr.
        Murchison was appointed a director on July 28, 2004 and last re-elected as
        a
        director May 10, 2007. Mr. Murchison has had over 27 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 31
        years.
  37
  **STEPHEN
        PAUL BIRKBECK (47 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. (40 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.
 
 **SIMON
        CHARLES BUNBURY ADAMS, B.Bus, M.Acc, ACIS (41 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 11 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 (41 years old).** Mr.
        Jorgensen has been involved in the pearling industry for more than 16 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.
 
 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.
  38
  **B.**  **Compensation**
  The
        total
        remuneration paid to each of the Company’s directors and senior managers for
        services in all capacities during 2006 is set forth below:
  **Responsibilities**
              
              **Directors**
                **Fees**
                **A$**
              
              **Other**
                
                **A$**
              
              **Super-**
                **annuation**
                **A$**
              
              **Total**
                
                **A$**G.R.W.
                  Snow
              
              Chairman
              
              76,667
              
              -
              
              6,900
              
              83,567S.J.
                  Arrow
              
              Non-Executive
                  Director
              
              38,333
              
              -
              
              3,450
              
              41,783I.M.
                  Murchison
              
              Non-Executive
                  Director
              
              43,500
              
              -
              
              3,915
              
              47,415S.P.
                  Birkbeck(1)
              
              Non-Executive
                  Director
              
              38,353
              
              -
              
              3,450
              
              41,783J.J.U.
                  Taylor
              
              Managing
                  Director
              
              -
              
              275,714
              
              4,500
              
              285,075S.C.B.
                  Adams
              
              Chief
                  Financial Officer
              
              -
              
              117,000
              
              10,530
              
              129,474J.S.
                  Jorgensen
              
              Pearl
                  Production Manager
              
              -
              
              193,013
              
              -
              
              193,013
 
 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.
  **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)
 
 (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.
  39
  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.
  **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**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004****Australia
                  –**management, administration and support
              
              
              4
              
              
              4
              
              
              4**Indonesia –**Expatriates **–**
                  management and technical support
              
              
              8
              
              
              8
              
              
              7Indonesian
                  locals
              
              
              454
              
              
              463
              
              
              432*Administration*
              
              
              *35*
              
              
              *21*
              
              
              *14**Hatchery*
              
              
              *5*
              
              
              *4*
              
              
              *5**Farm
                  and Growout*
              
              
              *244*
              
              
              *202*
              
              
              *250**Operations
                  and Harvests*
              
              
              *17*
              
              
              *19*
              
              
              *14**Logistics*
              
              
              *55*
              
              
              *55*
              
              
              *59**Electrical
                  and Building*
              
              
              *28*
              
              
              *97*
              
              
              *23**Mechanical
                  and engineering*
              
              
              *23*
              
              
              *20*
              
              
              *20**Security
                  and Community Relations*
              
              
              *48*
              
              
              *45*
              
              
              *47*
  The
        Company continued to promote Indonesian staff into senior positions during
        2006.
        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 more senior positions within the
        Company.
  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.
  40




**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, 2007.




**Name**
            
            **No.
                of Shares**
              **Beneficially
                Owned**
            
            **Percentage
                of Shares**
              **Outstanding**George
                Robert Warwick Snow
            
            
            14,384,556
            
            
            15.97
            %Stephen
                John Arrow
            
            
            1,952,934
            
            
            2.17
            %Stephen
                Paul Birkbeck
            
            
            790,000
            
            
            0.88
            %Ian
                McKenzie Murchison
            
            
            690,000
            
            
            0.77
            %Joseph
                James Uel Taylor(1)
            
            
            1,220,000
            
            
            1.35
            %Simon
                Charles Bunbury Adams(1)
            
            
            500,000
            
            
            0.56
            %Jan
                Seir Jorgensen(1)
            
            
            750,000
            
            
            0.83
            %


(1)
      With
      the exception of 20,000 shares that are beneficially owned by Joseph Taylor,
      all
      of the other beneficially owned shares have been issued under an Executive
      Share
      Plan and are subject to vending terms (see note below)





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.
      A further 1,100,000 were allocated to Company executives in 2007. The employees
      who are entitled to these shares are provided with an interest free 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
            
            
            15.97
            %





(1)
            Based
                on Shares outstanding as of June 30, 2007.


(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.




41




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 2007, 2,116,800Shares, or 2.4%, were held on record by 199 persons with
      U.S.
      addresses. In addition, 26 persons with U.S. addresses were record holders
      of
      4,136,620 ADSs as of May 31, 2007. Accordingly, the Company has a minimum of
      225
      U.S. record holders, who own at least 6,253,420 Shares, or 6.94%, 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$134,221, A$150,820 and A$189,030 during the years
      2006,
      2005, and 2004 respectively, under the terms of the agreement. The Board of
      Directors believe that the terms of the consulting agreement are at or below
      market rate. The agreement expires in 2009.




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$6,972,390 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.


42


**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 2006.




***Dividend
      Policy***





The
      Company paid two dividends of one and a half (1.5) and two (2) cents per share
      (A$3,152,786 in total) in 2006. The Company paid one dividend on one (1) cent
      per share (A$878,103 in total) during 2005. The Company did not pay a dividend
      in 2004. 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
      two
      (2) cents per share (A$1,784,869) was paid by the Company on May 25, 2007.
      The
      Board of Directors has not stated whether any further dividends will be paid
      in
      2007.




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




There
      have been no significant subsequent events following the close of 2006 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
      June
      29, 2007, the Company announced its intention to voluntarily delist its ADRs
      from the Nasdaq Small Cap Market.




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$)**2002
            
            
            5.55
            
            
            3.602003
            
            
            4.91
            
            
            2.652004
            
            
            4.19
            
            
            2.212005
            
            
            4.05
            
            
            2.252006
            
            
            7.60
            
            
            3.90





**For
                the Quarter Ended:**
            
            **High
                Closing Price**
            
            **Low
                Closing Price****(US$)**
            
            **(US$)**2005March
                31
            
            
            3.80
            
            
            2.25June
                30
            
            
            3.39
            
            
            2.80September
                30
            
            
            3.75
            
            
            2.92December
                31
            
            
            4.05
            
            
            3.152006March
                31
            
            
            6.09
            
            
            3.90June
                30
            
            
            5.00
            
            
            4.20Sept
                30
            
            
            5.20
            
            
            4.32December
                31
            
            
            7.60
            
            
            4.74




44





**For
                the**
              **Month
                Ended:**
            
            **High
                Closing Price**
            
            **Low
                Closing Price****(US$)**
            
            **(US$)**December
                31, 2006
            
            
            7.60
            
            
            5.42January
                31, 2007
            
            
            7.99
            
            
            6.47February
                28, 2007
            
            
            7.28
            
            
            6.34March
                31, 2007
            
            
            7.50
            
            
            6.90April
                30, 2007
            
            
            8.30
            
            
            6.80May
                31, 2007
            
            
            8.70
            
            
            7.75




***Trading
      Market for the Shares***


The
      principal non-United States trading market for the Shares is the Australian
      Stock Exchange. 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$)**2002
            
            
            0.52
            
            
            0.352003
            
            
            0.40
            
            
            0.202004
            
            
            0.27
            
            
            0.152005
            
            
            0.27
            
            
            0.172006
            
            
            0.43
            
            
            0.26





**For
                the Quarter Ended:**
            
            **High
                Closing Sale Price**
            
            **Low
                Closing Sale Price****(A$)**
            
            **(A$)**2005March
                31
            
            
            0.24
            
            
            0.17June
                30
            
            
            0.23
            
            
            0.20September
                30
            
            
            0.25
            
            
            0.20December
                31
            
            
            0.27
            
            
            0.222006March
                31
            
            
            0.36
            
            
            0.26June
                30
            
            
            0.34
            
            
            0.29September
                30
            
            
            0.33
            
            
            0.30December
                31
            
            
            0.43
            
            
            0.33





**For
                the Months Ended:**
            
            **High
                Closing Sale Price**
            
            **Low
                Closing Sale Price****(A$)**
            
            **(A$)**December
                31, 2006
            
            
            0.43
            
            
            0.34January
                31, 2007
            
            
            0.46
            
            
            0.42February
                28, 2007
            
            
            0.46
            
            
            0.42March
                31, 2007
            
            
            0.45
            
            
            0.42April
                30, 2007
            
            
            0.50
            
            
            0.41May
                31, 2007
            
            
            0.52
            
            
            0.46




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**







***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 commencing
      January 1, 2006. 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 from
      January 1, 2007 and a complimentary contract between Cendana and Dr. Taylor
      which was also effective from January 1, 2007. These agreements set out the
      terms and conditions of Dr. Taylor’s employment including his duties and
      responsibilities. Dr. Taylor’s combined remuneration from these contracts is
      A$306,000 in salary, A$6,750 in superannuation (retirement benefit contribution)
      and up to A$52,000 in non cash benefits. The agreements both provide for three
      (3) month’s notice of termination by either party. The agreements do not provide
      for any special payments upon termination of the contracts. The contract is
      split between Atlas and Cendana to reflect the different tasks and duties
      carried out by Dr Taylor as an executive officer of 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.




46




***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. 
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
      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. In April 2007, a further 900,000
      share were allocated at an issue price of A$0.40 per share between Mr. Jan
      Jorgensen, Mr. Simon Adams, Mr. Karl Pearce, Mr. Mark Peiper and Mr. Sean
      Cavanagh. In May 2007, following shareholder approval at the Company’s AGM, a
      further 200,000 shares well allocated at an issue price of A$0.40 per share
      to
      Dr. Joseph Taylor. The employees who are entitled to these shares are provided
      with an interest free 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.




47




**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.




48




**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.




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.




***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.




49




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.




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.




***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.




50




**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.


51


**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, 2006 and 2005 and
      the terms of such instruments:




**Fair
                Value at**
              **Dec.
                31, 2006**
            
            **Fair
                Value at**
              **Dec.
                31, 2005**
            
            **Terms****A$**
            
            **A$**Cash
                in hand and at bank
            
            
            1,552,786
            
            
            660,373
            
            
            Current
                account with interest receivable at 1.57% (2005 - 3.22%) and cash
                on handFixed
                Term Deposit
            
            
            1,079,193
            
            
            815,107
            
            
            Interest
                receivable at 4.36% (2005 - 5.58%) maturing within one
                month2,631,979
            
            
            1,475,480





The
      carrying amount of trade accounts payable and trade accounts receivable
      approximate their fair values. Exchange
      differences arising on the translation of non-monetary items are recognized
      directly in equity to the extent that the gain or loss is directly recognized
      in
      equity, otherwise the exchange difference is recognized in the income statement.
      See “Item 17. Financial Statements - Note 30 - 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:




**2006**
            
            **2005****A$**
            
            **A$****Amounts
                receivable:**Indonesia
                Rupiah
            
            
            93,588
            
            
            3,466Japanese
                Yen
            
            
            1,758,646
            
            
            126,261US
                Dollars
            
            
            -
            
            
            19,4881,852,234
            
            
            149,215**Amounts
                Payable:**Indonesian
                Rupiah
            
            
            12,724
            
            
            19,718







***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.


52


***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.




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 30 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 2005
      and 2006 was A$28,997 and A$(24,601) respectively.




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
                average**
              **exchange
                rate**
            
            **Gross
                Value**
              **A$****2006**
            
            **2005**
            
            **2006**
            
            **2005**Sell
              Japanese Yen - Settlement PeriodNot
                later than one year
            
            
            JPY-
            
            
            JPY84.60
            
            $
            -
            
            $
            3,566,985Buy
                Indonesian Rupiah - Settlement PeriodNot
                later than one year
            
            
            IDR7,223
            
            
            IDR7,623
            
            $
            3,000,000
            
            $
            1,600
                000





These
      forward exchange contracts are hedging anticipated sales and payments 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
      future income of the Company may be adversely affected by adverse movements
      in
      the Japanese Yen/Australian Dollar and Indonesian Rupiah / Australian Dollar
      exchange rates.




53




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




Not
      required.


54


**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 our management, including
                our principal executive officer and principal financial officer,
                we
                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, 2006. Based on
                this evaluation, our 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 our 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.




55




**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:




**2006**
            
            **2005**Audit
                Fees
            
            A$
            85,524
            
            A$
            70,127Audit-Related
                Fees
            
            
            -
            
            
            -Tax
                Fees
            
            A$
            7,460
            
            A$
            14,764All
                Other Fees
            
            
            -
            
            
            -





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 2005 or 2006.





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.




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




The
      Company announced a share buyback on May 30, 2006. Details of the shares
      acquired under this buyback are as follows:




56




**Period**
              
              **(a)**
                **Total
                  Number of**
                **Shares
                  (or units)**
                **Purchased**
              
              **(b)**
                **Average
                  Price Paid**
                **Per
                  Share (or unit)**
              
              **(c)**
                **Total
                  Number of**
                **Shares
                  (or units)**
                **Purchased
                  as Part**
                **of
                  Publicly**
                **Announced
                  Plans**
                **or
                  Programs**
              
              **(d)**
                **Maximum
                  Number**
                **(or
                  Approximate**
                **Dollar
                  Value) of**
                **Shares
                  (or units)**
                **that
                  May Yet Be**
                **purchased
                  Under**
                **the
                  Plans or**
                **Programs**June
                  2007
                (June
                  1 to June 30)
              
              Nil
              
              N/A
              
              1,014,364
              
              3,376,148May
                  2007
                (May
                  1 to May 31)
              
              Nil
              
              N/A
              
              1,014,364
              
              3,376,148April
                  2007
                (April
                  1 to April 30)
              
              Nil
              
              N/A
              
              1,014,364
              
              3,376,148March
                  2007
                (March
                  1 to march 31)
              
              177,390
              
              A$0.41
              
              1,014,364
              
              3,376,148February
                  2007
                (February
                  1 to February 28)
              
              190,000
              
              A$.044
              
              836,974
              
              3,553,538January
                  2007
                (January
                  1 to January 31)
              
              Nil
              
              N/A
              
              646,974
              
              3,743,538December
                  2006
                (December
                  1 to December 31)
              
              52,200
              
              A$0.36
              
              646,974
              
              3,743,538November
                  2006
                (November
                  1 to November 30)
              
              84,294
              
              A$0.36
              
              594,774
              
              3,795,738October
                  2006
                (October
                  1 to October 31)
              
              98,500
              
              A$0.34
              
              510,480
              
              3,880,032September
                  2006
                (September
                  1 to September 30)
              
              180,980
              
              A$0.32
              
              411,980
              
              3,978,532August
                  2006
                (August
                  1 to August 31)
              
              231,000
              
              A$0.30
              
              231,000
              
              4,159,512July
                  2006
                (July
                  1 to July 31)
              
              Nil
              
              N/A
              
              N/A
              
              4,390,512June
                  2006
                (June
                  1 to June 30)
              
              Nil
              
              N/A
              
              N/A
              
              4,390,512**TOTAL**
              
              **1,014,364**
              
              
              
              
              
              **4,390,512**




57


**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**
              **Cash
                Flow Statement**
            
            
            **F-4**
              **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(5)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)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)




58




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)(2)4.8
            
            Land
                and water lease dated September 30, 1997 between the Company and
                the Kawe
                tribe at Selpele village with English translation (2xxiv)(2)4.9
            
            Consultancy
                Agreement between the Company and Arrow Pearl Co Pty Ltd for training
                and
                technical expertise, dated March 3, 1999 (2xxiv)(3)4.10
            
            Land
                lease dated July 1, 1999 between the Company and Korinus Ayelouw
                with
                English translation (2xxv)(3)4.11
            
            Form
                of Director’s Access, Insurance and Indemnity Deed between the Company and
                each director (2xxix)(3)4.12
            
            Letter
                of Appointment of Pearlautore International Pty Ltd as exclusive
                valuer
                and distributor of Atlas Pacific Limited’s South Sea Pearls (2xxiii)(4)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)(4)4.14
            
            Letter
                of Extension dated May 3, 2001 for Distribution Agreement with Pearlautore
                International Pty Ltd (4xxvi)(5)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)(6)4.16
            
            Employment
                Agreement dated November 18, 2002 between the Company and Mr. Jan
                Jorgensen (4xx)(6)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)(7)4.18
            
            Office
                lease dated May 20, 2003 between PT Cendana Indopearls and Nyoman
                Ardana
                and Wayan Kariami (English translation)(7)4.19
            
            Water
                lease dated December 15, 2003 between PT Cendana Indopearls and the
                villagers of Pekraman Penyabangan, Sub-district of Gerokgak, Buleleng
                District, Bali (English translation)(7)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)(7)




59




4.21
            
            Employment
                Agreement dated December 30, 2003 between the Company and Dr. Joseph
                Taylor(7)4.22
            
            Employment
                Agreement dated December 30, 2003 between PT Cendana Indopearls and
                Dr.
                Joseph Taylor(7)4.23
            
            Office
                lease dated June 8, 2004 between the Company and Mr. David Morrison(7)4.24
            
            Stand-by
                Finance and Foreign Currency Dealing agreement between the Company
                and
                Australian and New Zealand Banking Group Ltd(8)4.25
            
            Collaborative
                Research Agreement between the Company and James Cook University(8)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(9)4.27
            
            Letter
                of Reappointment dated October 11, 2005 for Pearl Distribution Agreement
                withPearlautore
                International Pty Ltd(9)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(9)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)(9)4.30
            
            Water
                and land lease dated May 23, 2005 between PT Cendana Indopearls and
                Bugbug
                Custom Village Bugbug Village Karang Asem Subdistrict, Karang Asem
                Regency, Bali(English
                translation)(9)4.31
            
            Form
                of Executive Share Plan Rules and Loan Scheme(9)4.32
            
            Employment
                Agreement dated February 22, 2007 between the Company and Dr. Joseph
                Taylor(10)4.33
            
            Employment
                Agreement dated February 22, 2007 between Cendana and Dr. Joseph
                Taylor(10)8.1
            
            List
                of Subsidiaries(5)12.1
            
            Section
                302 Certification of Chief Executive Officer(10)12.2
            
            Section
                302 Certification of Chief Financial Officer(10)




60




13.1
            
            Section
                906 Certification of Chief Executive Officer(10)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.


(2)
            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.


(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, 1999 and incorporated herein
                by
                reference.


(4)
            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.


(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, 2001 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, 2002 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, 2003 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, 2004 and incorporated herein by
                reference.


(9)
            Previously
                filed as an exhibit of the number shown in parenthesis to the Registrant’s
                Annual Report on Form 20-F for the year ended December 31, 2005 and
                incorporated herein by reference.


(10)
            Filed
                herewith.




61


**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,
              2007




62




**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 and
      the
      consolidated entity being Atlas South Sea Pearl Limited and its subsidiary
      entities (the Company) as of December 31, 2006, 2005 and 2004, and the related
      income statement, statement of changes in equity and cash flow statement for
      Atlas South Sea Pearl Limited and the Company for each of the three years in
      the
      period ended December 31, 2006. The preparation of 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 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 circumstances, 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 Atlas South Sea Pearl Limited
      and
      the Company as at December 31, 2006, 2005 and 2004, and the results of its
      operations and its cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with Australian Equivalents to International
      Financial Reporting Standards.


/s/
              S
              AndrawesBDO
              Kendalls Audit and Assurance (WA)




Perth


Western
      Australia, Australia


July
      12,
      2007





F
          - 1





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


**INCOME
      STATEMENT**


**FOR
      THE YEAR ENDED 31 DECEMBER**


**2006**
              
              **2005**
              
              **2004****Note**
              
              **$**
              
              **$**
              
              **$**Revenue
              
              
              2
              
              
              12,701,369
              
              
              9,870,740
              
              
              5,822,982Other
                  income
              
              
              2
              
              
              524,360
              
              
              6,116
              
              
              1,014,541**Total
                  revenue**
              
              
              
              
              
              **13,225,729**
              
              
              **9,876,856**
              
              
              **6,837,523**Cost
                  of goods sold
              
              
              
              
              
              (5,019,759
              )
              
              (4,275,378
              )
              
              (4,414,357
              )Marketing
                  expenses
              
              
              
              
              
              (1,287,345
              )
              
              (870,543
              )
              
              (564,743
              )Administration
                  expenses
              
              
              3
              
              
              (2,333,568
              )
              
              (1,730,268
              )
              
              (1,632,767
              )Research
                  and development
              
              
              
              
              
              (50,000
              )
              
              (87,500
              )
              
              -Other
                  expenses
              
              
              3
              
              
              (366,736
              )
              
              (557,041
              )
              
              (722,984
              )**Total
                  expenses**
              
              
              
              
              
              **(9,057,408**
              **)**
              
              **(7,520,730**
              **)**
              
              **(7,334,851**
              **)****Profit/(Loss)
                  before related income tax expense**
              
              
              
              
              
              **4,168,321**
              
              
              **2,356,126**
              
              
              **(497,329**
              **)**Income
                  tax (expense)/benefit
              
              
              4
              
              
              (932,755
              )
              
              (295,539
              )
              
              (96,946
              )**Profit/(Loss)
                  after income tax attributable to members of the parent
                  entity**
              
              
              
              
              
              **3,235,566**
              
              
              **2,060,587**
              
              
              **(594,274**
              **)**Overall
                  operationsBasic
                  earnings per share
              
              
              5
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )Diluted
                  earnings per share
              
              
              5
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )







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**





**2006**
            
            **2005**
            
            **2004****Note**
            
            **A$**
            
            **A$**
            
            **A$****Current
                assets**Cash
                and cash equivalents
            
            
            6
            
            
            2,631,979
            
            
            1,475,480
            
            
            3,208,996Trade
                and other receivables
            
            
            7
            
            
            2,923,298
            
            
            4,301,651
            
            
            1,934,360Financial
                assets
            
            
            8
            
            
            3,037,797
            
            
            5,631,149
            
            
            -Inventories
            
            
            9
            
            
            1,734,412
            
            
            1,262,890
            
            
            1,034,682Biological
                assets
            
            
            10
            
            
            3,866,868
            
            
            4,176,109
            
            
            2,259,547**Total
                current assets**
            
            
            
            
            
            14,194,354
            
            
            16,847,279
            
            
            8,437,585**Non-current
                assets**Inventories
            
            
            9
            
            
            85,343
            
            
            114,630
            
            
            193,521Biological
                assets
            
            
            10
            
            
            5,572,596
            
            
            5,175,725
            
            
            6,688,662Property,
                plant and equipment
            
            
            11
            
            
            2,586,711
            
            
            2,123,684
            
            
            1,825,434Deferred
                Tax Assets
            
            
            14
            
            
            82,661
            
            
            249,050
            
            
            239,919**Total
                non-current assets**
            
            
            
            
            
            8,327,311
            
            
            7,663,089
            
            
            8,947,536**Total
                assets**
            
            
            
            
            
            22,521,665
            
            
            24,510,368
            
            
            17,385,121**Current
                liabilities**Trade
                and other payables
            
            
            12
            
            
            554,909
            
            
            749,586
            
            
            1,124,581Borrowings
            
            
            13
            
            
            -
            
            
            79,428
            
            
            -Financial
                instruments
            
            
            8
            
            
            3,030,967
            
            
            5,675,533
            
            
            -Current
                tax liabilities
            
            
            14
            
            
            687,630
            
            
            203,120
            
            
            230,480**Total
                current liabilities**
            
            
            
            
            
            4,273,506
            
            
            6,707,667
            
            
            1,355,061**Non-current
                liabilities**Deferred
                tax liabilities
            
            
            14
            
            
            507
            
            
            4,132
            
            
            112Long
                term provisions
            
            
            15
            
            
            48,654
            
            
            164,928
            
            
            -**Total
                non-current liabilities**
            
            
            
            
            
            49,161
            
            
            169,060
            
            
            112**Total
                liabilities**
            
            
            
            
            
            4,322,667
            
            
            6,876,727
            
            
            1,355,173**Net
                assets**
            
            
            
            
            
            18,198,998
            
            
            17,633,641
            
            
            16,029,948**Equity**Issued
                capital
            
            
            16
            
            
            19,260,762
            
            
            18,849,092
            
            
            18,849,092Reserves
            
            
            17
            
            
            (4,488,142
            )
            
            (4,559,049
            )
            
            (4,677,577
            )Retained
                profits
            
            
            18
            
            
            3,426,378
            
            
            3,343,598
            
            
            1,858,433**Total
                equity**
            
            
            
            
            
            18,198,998
            
            
            17,633,641
            
            
            16,029,948




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**




**2006**
            
            **2005**
            
            **2004****Note**
            
            **A$**
            
            **A$**
            
            **A$****Total
                equity at the beginning of the year**
            
            
            
            
            
            17,633,641
            
            
            16,029,948
            
            
            18,276,755Adjustment
                on Adoption of AASB 132 and AASB 139, net of tax:Retained
                Profits
            
            
            
            
            
            -
            
            
            289,911
            
            
            -Exchange
                differences on translation of foreign operations
            
            
            18
            
            
            60,455
            
            
            118,528
            
            
            (1,652,533
            )Prior
                year expenses brought to account in current period
            
            
            
            
            
            -
            
            
            12,770
            
            
            -Net
                income recognized directly in equity
            
            
            
            
            
            60,455
            
            
            421,209
            
            
            (1,652,533
            )Profit/(Loss)
                for the year
            
            
            19
            
            
            3,235,566
            
            
            2,060,587
            
            
            (594,274
            )Total
                recognized income and expenditure for the year
            
            
            
            
            
            3,296,021
            
            
            2,481,796
            
            
            (2,246,807
            )Shares
                issued during the year
            
            
            17
            
            
            812,000
            
            
            -
            
            
            -Shares
                forfeited/cancelled during the year
            
            
            17
            
            
            (400,330
            )
            
            -
            
            
            -Share
                based payments
            
            
            18
            
            
            10,452
            
            
            -
            
            
            -Dividend
                Payment
            
            
            20
            
            
            (3,152,786
            )
            
            (878,103
            )
            
            -**Total
                Movement in Equity**
            
            
            
            
            
            565,357
            
            
            1,603,693
            
            
            (2,246,807
            )**Total
                equity at the end of the year**
            
            
            
            
            
            18,198,998
            
            
            17,633,641
            
            
            16,029,948





The
      accompanying notes form part of these financial statements.




F
          - 4


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


**CASH
      FLOW STATEMENT**


**FOR
      THE YEAR ENDED 31 DECEMBER**




**2006**
            
            **2005**
            
            **2004****A$**
            
            **A$**
            
            **A$****Cash
                flows from operating activities**Proceeds
                from pearl, jewelery and oyster sales
            
            
            14,106,844
            
            
            7,206,358
            
            
            5,839,566Proceeds
                from other operating activities
            
            
            368,964
            
            
            78,799
            
            
            769,835Interest
                paid
            
            
            (3,585
            )
            
            (4,032
            )
            
            (29
            )Interest
                and bill discounts received
            
            
            113,625
            
            
            88,731
            
            
            176,843Payments
                to suppliers
            
            
            (8,814,906
            )
            
            (7,191,567
            )
            
            (6,279,530
            )Income
                tax paid/(received)
            
            
            (271,411
            )
            
            (368,980
            )
            
            (410,894
            )Net
                cash provided by/(used in) operating activities (Note
                25.2)
            
            
            5,499,531
            
            
            (190,691
            )
            
            95,791**Cash
                flows from investing activities**Advances
                to controlled entities
            
            
            -
            
            
            -Payments
                for property, plant and equipment
            
            
            (997,731
            )
            
            (832,582
            )
            
            (788,641
            )Proceeds
                on disposal of fixed assets
            
            
            4,109
            
            
            78,994
            
            
            1,891Payments
                for other financial instruments
            
            
            -
            
            
            -
            
            
            (47,450
            )Net
                cash provided by/(used in) investing activities
            
            
            (993,622
            )
            
            (753,588
            )
            
            (824,200
            )**Cash
                flows from financing activities**Proceeds
                from Borrowings
            
            
            -
            
            
            99,285
            
            
            -Repayment
                of Borrowings
            
            
            (79,428
            )
            
            (19,857
            )
            
            -Proceeds
                from Issue of Shares
            
            
            623,500
            
            
            -
            
            
            -Loan
                to Employees to purchase shares
            
            
            (623,500
            )
            
            -
            
            
            -Repayment
                of Loan to Employees
            
            
            75,250
            
            
            -
            
            
            -Payments
                for Purchase of Company Shares
            
            
            (211,831
            )
            
            -
            
            
            -Dividend
                Payment
            
            
            (3,152,786
            )
            
            (878,103
            )
            
            -Net
                cash provided by/(used in) financing activities
            
            
            (3,368,795
            )
            
            (798,675
            )
            
            -Net
                increase/(decrease) in cash held
            
            
            1,137,114
            
            
            (1,742,954
            )
            
            (728,409
            )Cash
                at the beginning of the financial year
            
            
            1,475,480
            
            
            3,208,996
            
            
            4,301,918Effects
                of exchange rate changes on the balances of cash held in foreign
                currencies
            
            
            19,385
            
            
            9,438
            
            
            (364,513
            )Cash
                and term deposits at the end of the financial year (Note
                25.1)
            
            
            2,631,979
            
            
            1,475,480
            
            
            3,208,996





The
      accompanying notes form part of these financial statements.





F
          - 5


**ATLAS
        SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
        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
      equivalents to International Financial Reporting Standards (AIFRS) and other
      authoritative pronouncements 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 (the Company). Atlas South Sea Pearl Ltd is a listed public
      company, incorporated and domiciled in Australia.





The
      following is a summary of the material accounting policies adopted by the
      Company in the preparation of the financial report. The accounting policies
      have
      been consistently applied, unless otherwise stated.





During
      the 2006 financial year, the company changed its name from Atlas Pacific Limited
      to Atlas South Sea Pearl Limited.




**1.2**
            **Statement of compliance**




The
      financial report is a general purpose financial report which has been prepared
      in accordance with Australian Accounting Standards, which includes AIFRS, and
      the Corporations Act 2001. Compliance with AIFRS ensures that the financial
      report, comprising the financial statements and notes thereto, complies with
      International Financial Reporting Standards (IFRS) as published by the
      IASB.




**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 29 to the financial statements. All
      controlled entities have a December financial year end.





The
      financial statements of the Company comprise consolidated accounts of Atlas
      South Sea Pearl Limited and all controlled entities within the meaning of the
      Corporations Act. All intercompany balances and unrealized 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.





Minority
      equity interests in the equity and results of the entities that are controlled
      are shown as a separate item in the consolidated financial report.




**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 recognized 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 realized 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 recognized to the extent that it is probable that future
      tax profits will be available against which deductible temporary differences
      can
      be utilized.




F
          - 6




**ATLAS
        SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
        Forming Part of the Financial Statements**


The
      amount of benefit brought to account or which may be realized in the future
      is
      based on the assumption that no adverse change will occur in income taxation
      legislation and the anticipation that the Company will derive sufficient future
      assessable income to enable the benefit to be realized 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. The cost of production includes direct
                materials, labor and overheads that are attributable proportionately
                to
                the oyster or group of oysters from which a pearl or batch of pearls
                are
                harvested.


(b)
            Nuclei
                - quantities on hand at the year end are valued at
                cost.


(c)
            Oysters
                - refer note 1.6




**1.6**
            **Biological Assets**




The
      Company 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 recognized as revenue/(expense) in the statement of financial
      performance. The value of the Biological Assets is only recognized 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 Company, 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 materials labor and
      non-administrative overheads, oyster purchases and nuclei used in process of
      producing a pearl.





The
      details of the Biological assets that are held by the Company as at
      31 December are provided at Note 10.




**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 amortized 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




**ATLAS
        SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
        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 Company includes the cost of materials
      and direct labor. 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****2006**
            
            **2005**
            
            **2004**Leasehold
                land & buildings & improvements
            
            
            5-10
            %
            
            5-10
            %
            
            5-10
            %Vessels
            
            
            10
            %
            
            10
            %
            
            10
            %Plant
                & equipment
            
            
            20-50
            %
            
            20-50
            %
            
            20-50
            %




**1.8**
            **Financial Instruments**




From
      January 1, 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 categorized 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 realized within 12 months of the balance sheet date. Realized and
      unrealized 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 Company
      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*




Held-to-maturity
      investments are non-derivative financial assets with fixed or determinable
      payments and fixed maturities that the Company’s management has the intention
      and ability to hold to maturity.




F
          - 8




**ATLAS
        SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
        Forming Part of the Financial Statements**




*(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. Unrealized gains and losses arising from changes in fair value
      are
      taken directly to equity.




*(e)*
            *Recognition*




Purchases
      and sales of investments are recognized on trade-date, the date on which the
      Company commits to purchase or sell the asset. Investments are initially
      recognized at fair value plus transaction costs for all financial assets not
      carried at fair value through profit or loss. Financial assets are derecognized
      when the rights to receive cash flows from the financial assets have expired
      or
      have been transferred and the Company has transferred substantially all the
      risks and rewards of ownership.




*(f)*  *Financial
      liabilities*




Non-derivative
      financial liabilities are recognized at amortized cost, comprising original
      debt
      less principal payments and amortization.




*(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.


Atlas
      South Sea Pearl Limited and its controlled entities designate derivatives as
      either;




(i)
            Hedges
                of the fair value of recognized assets or liabilities or a firm commitment
                (fair value hedge); or




(ii)
            Hedges
                of highly probable forecast transactions (cash flow
                hedges).




At
      the
      inception of the transaction the relationship between the hedging instruments
      and the hedged items, as well as its risk management objectives and strategy
      for
      undertaking various hedge transactions is documented. Assessments, both at
      hedge
      inception and on an ongoing basis, of whether the derivatives that are used
      in
      hedging transactions have been and will continue to be effective in offsetting
      changes in fair values or cash flows of hedged items, are also
      documented.


*Fair
      value hedge –* “Changes
      in the
      fair value of derivatives that are designated and qualify as fair value hedges
      are recorded in the income statement, together with any changes in the fair
      value of the hedge asset or liability that are attributable to the hedged
      risk.


*Cash
      flow hedge* *–*“The effective portion of changes in the fair value of derivatives that
      are
      designated and qualify as cash flow hedges is deferred to a hedge reserve in
      equity. The gain or loss relating to the ineffective portion is recognized
      immediately in the income statement. Amounts accumulated in the hedge reserve
      in
      equity are transferred to the income statement in the periods when the hedged
      item will affect profit and loss.




F
          - 9




**ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
          Forming Part of the Financial Statements**


*(h)*
            *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. Fair value is determined based on current bid prices for all
      quoted investments. Valuation techniques are applied to determining the fair
      value for unlisted securities.




*(i)*
            *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.




*(j)*
            *Investment
                in subsidiaries*




Investments
      in subsidiaries are recognized in the financial statements at the cost method
      less impairment losses as they are unquoted investments.




**1.9**
            **Derivatives**




**From
      1 January 2004 to 31 December 2004**




The
      Company 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 recognized 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 Company do not qualify as an effective
      hedge
      under the accounting standards. Changes in the fair value are recognized
      immediately in the income statement.






**1.10**
            **Foreign
                Currency Transactions and
                Balances**






(a)
            **Functional
                and presentation currency**




Items
      included in the financial statements of each of the subsidiaries within the
      Company 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.


F
          - 10




**ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
          Forming Part of the Financial Statements**


(b)
              **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 recognized 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 recognized
      directly in equity to the extent that the gain or loss is directly recognized
      in
      equity, otherwise the exchange difference is recognized in the income
      statement.




(c)
            **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 recognized as a separate component
                of equity.




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 are repaid, a proportional share
      of such exchange differences are recognized in the income statement as part
      of
      the gain or loss on sale.




**1.11**
            **Employee Benefits**




Provision
      is made for the Company’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 Company 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 Company of the defined benefits that are required to be met
      by
      law.




**1.12**
            **Provisions**




Provisions
      for legal claims are recognized when the Company 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.




F
          - 11




**ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **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 Company. Sales revenue is recognized when
                the
                goods are provided or when the fee in respect of services provided
                is
                receivable. (b)
              Interest
                Income is recognized 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**
 (1)
              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.
 
 (2)
              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.
  **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 amortization. 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.
 
 F
              - 12
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **1.19**
                      **Critical accounting estimates and
                          judgments**
 
 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.
 *Key
        judgments - Doubtful debts provision*
 No
        provision has been recognized in respect of receivables owed to the Company
        for
        the year ended 31 December 2006.
 
 F
              - 13
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **2006**
                
                **2005**
                
                **2004****A$**
                
                **A$**
                
                **A$****2.****REVENUE
                    FROM ORDINARY ACTIVITIES**Revenue
                    from operating activitiesSales
                    revenue
                
                
                12,546,772
                
                
                9,648,366
                
                
                5,822,982Service
                    income
                
                
                44,519
                
                
                72,237
                
                
                -Rental
                    Income
                
                
                -
                
                
                48,073
                
                
                48,804Interest
                    income
                
                
                99,423
                
                
                101,618
                
                
                156,262Other
                    revenue
                
                
                10,655
                
                
                446
                
                
                19,39112,701,369
                
                
                9,870,740
                
                
                6,047,439Other
                    incomeNet
                    foreign exchange gain from operating activities
                
                
                520,251
                
                
                -
                
                
                790,084Gain
                    on sale of non-current asset
                
                
                4,109
                
                
                6,116
                
                
                -524,360
                
                
                6,116
                
                
                790,084Total
                    revenue
                
                
                13,225,729
                
                
                9,876,856
                
                
                6,837,523
  **3.****PROFIT
                  FROM ORDINARY ACTIVITIES BEFORE INCOME TAX
                  EXPENSE****Costs
                  which form part of Administration expenses**Depreciation(1)
              
              
              61,684
              
              
              35,072
              
              
              28,356(Gain)/Loss
                  on financial instruments
              
              
              (48,309
              )
              
              334,295
              
              
              -Share
                  based payment to employees
              
              
              10,451
              
              
              -
              
              
              -Operating
                  lease rental costs
              
              
              66,957
              
              
              39,915
              
              
              46,508**Other
                  expenses**Net
                  foreign exchange loss from non-operating activities
              
              
              320,396
              
              
              28,997
              
              
              -Tax
                  Penalties
              
              
              -
              
              
              457,742
              
              
              -Provision
                  for employee entitlements(2)
              
              
              42,123
              
              
              34,214
              
              
              19,727Interest
                  expense
              
              
              3,585
              
              
              1,399
              
              
              29Write-back
                  of inventory provision
              
              
              -
              
              
              (2,529
              )
              
              -Loss/(profit)
                  on disposal of fixed assets
              
              
              -
              
              
              37,218
              
              
              (20
              )Increase
                  in tax related expenses
              
              
              -
              
              
              -
              
              
              177,442Write-down
                  in oyster inventory value
              
              
              -
              
              
              -
              
              
              525,763Other
              
              
              632
              
              
              -
              
              
              43366,736
              
              
              557,041
              
              
              722,984
 
 1.
              See
                  note 11 for details of full depreciation
                  expense.
 2.
              See
                  note 15 for details of full employee provision
                  expense.
 
 There
        are
        no significant revenue or expense items to report.
 
 F
              - 14
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****4.****INCOME
                  TAX**a)The
                  components of tax expense comprise:Current
                  income tax
              
              
              769,728
              
              
              300,217
              
              
              -Deferred
                  Tax
              
              
              163,027
              
              
              (4,678
              )
              
              96,946932,755
              
              
              295,539
              
              
              96,946b)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
              
              
              4,168,321
              
              
              2,356,126
              
              
              (497,329
              )Prima
                  facie tax expense calculated at 30% on the profit from ordinary
                  activities
              
              
              1,250,497
              
              
              706,838
              
              
              (149,198
              )Tax
                  effect of permanent differences:Non
                  deductible expenses
              
              
              570
              
              
              496
              
              
              963Tax
                  losses not brought to account (Indonesia)
              
              
              (403,161
              )
              
              (220,477
              )
              
              -Over-provision
                  of tax in prior period
              
              
              -
              
              
              (373,047
              )
              
              -Other
                  assessable income
              
              
              -
              
              
              -
              
              
              778Permanent
                  Differences (Indonesia)
              
              
              88,635
              
              
              176,100
              
              
              43,144Non-deductible
                  expenses (Indonesian tax audit)
              
              
              -
              
              
              -
              
              
              53,233Restatement
                  of closing stock
              
              
              -
              
              
              -
              
              
              91,697Foreign
                  currency movements
              
              
              -
              
              
              -
              
              
              (232,963
              )Inventory
                  valuation adjustment
              
              
              -
              
              
              -
              
              
              68,308Current
                  year losses not brought to account
              
              
              -
              
              
              162
              
              
              251,672Income
                  tax under/(over) provided in prior years
              
              
              (3,766
              )
              
              5,467
              
              
              (30,688
              )Income
                  tax attributable to operating result
              
              
              932,775
              
              
              295,539
              
              
              96,946Weighted
                  average effective tax rates
              
              
              22.38
              %
              
              12.54
              %
              
              N/A
 
 The
        effective tax rate in 2005 and 2006 for the Company is reduced by the
        utilization of losses not brought to account in Indonesia. The 2005 tax position
        is also effected by the reversal of an over accrual for tax in prior
        periods.
 
 An
        income
        tax expense was created in 2004 as a result of tax assessments for prior
        periods
        in Indonesia.
 
 The
        tax
        losses in Indonesia are under dispute by the tax authorities in that
        jurisdiction but the Company believes that its case is strong for retaining
        the
        losses. In the event that these losses are rejected by the tax courts in
        Indonesia, relief would be sought from the Australian tax authorities under
        the
        double tax treaty between the two countries, to claim the losses arising
        from
        the disputed transactions.
  F
              - 15
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **2006**
              
              **2005**
              
              **2004****4.****INCOME
                  TAX****(Cont.)**
              
              **A$**
              
              **A$**
              
              **A$**c)Deferred
                  income tax at 31 December relates to the following:Deferred
                  tax liabilitiesAccrued
                  interest
              
              
              154
              
              
              3,866
              
              
              -Prepayments
              
              
              3,470
              
              
              154
              
              
              292Deferred
                  tax assetsDifference
                  in accounting and tax depreciation
              
              
              (44,480
              )
              
              6,604
              
              
              53,306Trade
                  debtors
              
              
              -
              
              
              2,186
              
              
              5,448Accruals
              
              
              262
              
              
              1,931
              
              
              9,297Provisions
              
              
              12,141
              
              
              (38,198
              )
              
              5,621Unrealized
                  foreign exchange losses
              
              
              (88,700
              )
              
              (89,538
              )
              
              2,146Revenue
                  losses carried forward
              
              
              -
              
              
              114,555
              
              
              (114,556
              )Other
              
              
              5,722
              
              
              (6,238
              )
              
              135,392Deferred
                  tax income/(expense)
              
              
              (111,431
              )
              
              (4,678
              )
              
              96,946
 
 For
        details of the franking account, refer to Note 19.
  **2006**
              
              **2005**
              
              **2004****5.****EARNINGS
                  PER SHARE**
              
              **A$**
              
              **A$**
              
              **A$**Basic
                  earnings per share
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )Diluted
                  earnings per share
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )**Earnings
                  reconciliation**Net
                  profit/(loss) used for basic earnings
              
              
              3,235,566
              
              
              2,060,587
              
              
              (594,274
              )After
                  tax effect of dilutive securities
              
              
              -
              
              
              -
              
              
              -Diluted
                  earnings
              
              
              3,235,566
              
              
              2,060,587
              
              
              (594,274
              )No.
              
              
              No.
              
              
              No.Weighted
                  average number of ordinary shares outstanding during the year used
                  for
                  calculation of basic earnings per share
              
              
              88,960,771
              
              
              87,810,254
              
              
              87,810,254Weighted
                  average number of potential ordinary shares outstanding during
                  the year
                  used for calculation of diluted earnings per share
              
              
              88,960,771
              
              
              87,810,254
              
              
              87,810,254
  F
              - 16
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 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 which may have a dilutive effect on the profit
        of
        the Consolidated group. There were no options or other equities on issue
        that
        would create a dilutive effect as at 31 December.
 
 Ordinary
        shares issued to employees are included in the weighted average number of
        potential ordinary shares. They do not have a dilutive effect on earnings
        as
        they are already issued.
 
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****6.****CASH
                  AND CASH EQUIVALENTS**Cash
                  at bank
              
              
              1,552,786
              
              
              660,373
              
              
              1,908,996Deposits
                  at Call
              
              
              1,079,193
              
              
              815,107
              
              
              1,300,0002,631,979
              
              
              1,475,480
              
              
              3,208,996
 
 The
        effective interest rate on short term bank deposits was 2.72% (2005 4.53%),
        these deposits have an average maturity of 30 days.
 
 **7.****TRADE
                  & OTHER RECEIVABLES**CURRENTTrade
                  receivables
              
              
              1,852,234
              
              
              3,717,225
              
              
              764,916Income
                  tax receivable
              
              
              32,683
              
              
              53,301
              
              
              827,755Sundry
                  debtors & prepayments
              
              
              515,631
              
              
              531,125
              
              
              341,689Loans
                  to key management personnel
              
              
              522,750
              
              
              -
              
              
              -2,923,298
              
              
              4,301,651
              
              
              1,934,360
 
 Details
        regarding the credit risk and effective interest rate of receivables are
        discussed in note 31.
 
 Details
        regarding Loans to employees are set out in note 26.
 
 **8.****FINANCIAL
                  INSTRUMENTS –
                  CURRENT**Derivative
                  financial assets
              
              
              3,037,797
              
              
              5,631,149
              
              
              -Derivative
                  financial liabilities
              
              
              (3,030,967
              )
              
              (5,675,533
              )
              
              -
 
 Derivative
        financial assets and liabilities comprise forward foreign exchange contracts
        which are in place as cash flow hedges. Gains and losses arising from changes
        in
        fair value of foreign exchange contracts are recognized in the income statement
        in the period in which they arise. These financial instruments are classed
        as
        held for trading.
  F
              - 17
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **2006**
                
                **2005**
                
                **2004****A$**
                
                **A$**
                
                **A$****9.****INVENTORIES**CURRENTPearls –
                    at
                    cost
                
                
                1,434,492
                
                
                1,156,004
                
                
                1,027,433Other –
                    at cost
                
                
                299,920
                
                
                106,886
                
                
                7,2491,734,412
                
                
                1,262,890
                
                
                1,034,682NON
                    CURRENTNuclei –
                    at cost
                
                
                85,343
                
                
                114,630
                
                
                116,304Other – at
                    cost
                
                
                -
                
                
                -
                
                
                77,21785,343
                
                
                114,630
                
                
                193,521TOTAL
                    INVENTORY
                
                
                1,819
                    755
                
                
                1,377,520
                
                
                1,228,203
  **10.****BIOLOGICAL
                    ASSETS**CURRENTOysters
                
                
                3,866,868
                
                
                4,176,109
                
                
                2,259,547NON
                    CURRENTOysters
                
                
                5,572,596
                
                
                5,175,725
                
                
                6,688,662Total
                    Biological Assets
                
                
                9,439,464
                
                
                9,351,834
                
                
                8,948,209
  Current
        Biological Assets are those oysters which are to be harvested within the
        next 12
        months. These will be oysters that have been surgically nucleated, or operated,
        more than 12 months prior to the period end. They will be of harvesting age
        within 12 months of the reporting date. Non-current Biological Assets are
        those
        oysters that will not have a pearl harvested within 12 months. The categories
        of
        oysters in this group are juveniles (up to 12 months old), virgin oysters
        (12-24
        months old that have not been operated) and first year operated oysters (oysters
        that were operated less than 12 months prior to the reporting
        date).
 
 Up
        to 30%
        of oysters may reject the nucleus after operation. Oysters that are re-nucleated
        will retain the costs that it has accumulated up to the point that it has
        been
        determined as having rejected its nucleus and is ready to be seeded again.
        If
        the oyster will not be reseeded, it will be processed as oyster meat and
        Mother
        of Pearl shell. The costs of the oyster that are rejected and not re-operated
        are allocated to the remaining live oysters within the group from which these
        reject oysters originated.
 
 10-20%
        of
        the nucleated oysters will not produce a pearl. The costs associated with
        the
        oysters that do not produce a pearl are allocated evenly to the pearls that
        are
        produced. In the event that the non-productive rate is higher than normal,
        there
        will be a higher cost of production and visa-versa.
  F
              - 18
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 The
        details of the Biological Assets that are held by the Company as at year
        end are
        as follows:
 
 Nature:- Oysters
        ( *Pinctada
        Maxima* )
  Number
              
              **2006**
                **No.**
              
              **2005**
                **No.**
              
              **2004**
                **No.**Quantity
                  held within the economic entities operations:-Juvenile
                  oysters which are not nucleated
              
              
              1,100,839
              
              
              520,660
              
              
              749,889Nucleated
                  oysters
              
              
              658,161
              
              
              605,760
              
              
              385,578Other
                  oysters used for brood-stock, saibo tissue and research
              
              
              6,525
              
              
              2,050
              
              
              3,0061,765,525
              
              
              1,128,470
              
              
              1,138,473Quantity
                  owned by the Company within joint operations:2,314Nucleated
                  oysters
              
              
              -
              
              
              11,173
              
              
              97,628-
              
              
              -
              
              
              11,173
              
              
              97,628
 
 It
        is the
        view of the Directors that there is no market for pearl oysters and therefore
        the most reliable basis for valuation is their cost. Therefore there is no
        incremental change in the net market value that needs to be accounted for
        as a
        gain or loss in the Income Statement.
 
 The
        Company is exposed to financial risk in respect of its involvement in primary
        production which consists of the breeding and rearing of oysters for the
        purpose
        of producing pearls. The primary financial risk associated with this activity
        occurs due to the length of time between the expenditure of cash in relation
        to
        the operation of the farm and the harvesting of the pearls and realization
        of
        cash receipts from the sales to third parties. The Company ensures that it
        maintains sufficient working capital to ensure that it can sustain its operation
        through any delays in cash flow that may be reasonably foreseen.
 
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****11.****PROPERTY,
                  PLANT AND EQUIPMENT**(a)Non-Pearling
                  AssetsPlant
                  and equipment-
                  at cost
              
              
              91,860
              
              
              71,546
              
              
              100,475-
                  accumulated depreciation
              
              
              (61,632
              )
              
              (47,108
              )
              
              (69,950
              )30,228
              
              
              24,438
              
              
              30,525(b)Pearling
                  projectLand
                  (leasehold and freehold) and buildings-
                  at cost
              
              
              1,276,882
              
              
              1,200,261
              
              
              943,653-
                  accumulated depreciation
              
              
              (515,109
              )
              
              (430,265
              )
              
              (345,063
              )761,773
              
              
              769,996
              
              
              598,590Plant
                  and equipment, vessels, vehicles-
                  at cost
              
              
              4,243,578
              
              
              4,900,172
              
              
              4,356,773-
                  accumulated depreciation
              
              
              (2,448,868
              )
              
              (3,570,922
              )
              
              (3,160,454
              )1,794,710
              
              
              1,329,250
              
              
              1,196,319Total
                  pearling project
              
              
              2,556,483
              
              
              2,099,246
              
              
              1,794,909Total
                  property, plant and equipment
              
              
              2,586,711
              
              
              2,123,684
              
              
              1,825,434
 
 Included
        in Pearling project land (leasehold and freehold) and buildings is A$99,267
        (2005 - 306,868, 2004 - A$155,080) which represents construction of buildings
        in
        progress at cost.
 
 During
        2006, the Company acquired freehold land in North Bali at a cost of A$20,415
        with the intention of constructing land based infrastructure to support its
        pearl farming activities.
 
 F
              - 19
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****11.****PROPERTY,
                  PLANT AND EQUIPMENT (Cont)**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
              
              
              24,438
              
              
              30,525
              
              
              14,671Additions
              
              
              20,314
              
              
              4,294
              
              
              23,082Disposals
              
              
              -
              
              
              (398
              )
              
              -Depreciation
              
              
              (14,524
              )
              
              (9,983
              )
              
              (7,228
              )Carrying
                  amount at end of the year
              
              
              30,228
              
              
              24,438
              
              
              30,525(b)Pearling
                  projectLeasehold
                  land and buildingsCarrying
                  amount at beginning of the year
              
              
              769,996
              
              
              598,590
              
              
              721,180Additions
              
              
              69,360
              
              
              291,029
              
              
              45,914Disposals
              
              
              (3,021
              )
              
              (51,016
              )
              
              -Depreciation
              
              
              (83,004
              )
              
              (76,104
              )
              
              (12
              )Foreign
                  exchange movement
              
              
              8,442
              
              
              7,497
              
              
              (168,492
              )Carrying
                  amount at end of the year
              
              
              761,773
              
              
              769,996
              
              
              598,590(c)Plant
                  and equipment, vessels, vehiclesCarrying
                  amount at beginning of the year
              
              
              1,329,250
              
              
              1,199,143
              
              
              1,124,556Additions
              
              
              841,816
              
              
              616,083
              
              
              705,287Disposals
              
              
              (17,392
              )
              
              (107,387
              )
              
              -Depreciation
              
              
              (358,132
              )
              
              (388,570
              )
              
              (461,078
              )Foreign
                  exchange movement
              
              
              (832
              )
              
              9,981
              
              
              (172,446
              )Carrying
                  amount at end of the year
              
              
              1,794,710
              
              
              1,329,250
              
              
              1,196,319Total
                  Carrying amount
              
              
              2,586,711
              
              
              2,123,684
              
              
              1,825,434
 
 Depreciation
        of property, plant and equipment shown at Note 3 represents the proportion
        of
        the depreciation which is expensed directly as an administration cost. A
        reconciliation of the depreciation expense is shown below:
 
 Depreciation
                  expensed in the current year
              
              
              61,684
              
              
              35,072
              
              
              28,356Depreciation
                  capitalised to the cost of production
              
              
              393,976
              
              
              439,585
              
              
              516,523Total
                  depreciation
              
              
              455,660
              
              
              474,657
              
              
              544,879
  F
            - 20
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****12.****TRADE
                  AND OTHER PAYABLES**CURRENTTrade
                  payables
              
              
              246,311
              
              
              68,491
              
              
              332,361Other
                  payables and accrued expenses
              
              
              308,598
              
              
              681,095
              
              
              792,220554,909
              
              
              749,586
              
              
              1,124,581
 
 Information
        regarding the effective interest rate risk of current payables is set out
        in
        Note 30. Trade and other payables are non-interest bearing and are normally
        settled on a 30 day term.
 
 **13.****BORROWINGS**CURRENTUnsecured
                  Loan
              
              
              -
              
              
              79,428
              
              
              -
 
 Financing
        Arrangements –
 As
        at 31
        December 2006, the Company had in place a trade discounting facility with
        the
        ANZ Bank with a limit of A$2,000,000. To date, this facility has not been
        utilized. This facility is secured by a registered first debenture charge
        over
        the assets of the Company.
 Information
        regarding the effective interest rate risk of borrowings is set out in Note
        30.
 
 **14.****TAX**(a)**Liabilities**CURRENTIncome
                  tax payable
              
              
              687,630
              
              
              203,120
              
              
              230,480NON-CURRENTDeferred
                  tax liabilities comprise -Accrued
                  interest income
              
              
              507
              
              
              3,978
              
              
              112Prepayments
                  denominated in foreign currency
              
              
              -
              
              
              154
              
              
              -507
              
              
              4,132
              
              
              112(b)**Assets**Deferred
                  tax assets comprise -Tax
                  allowances relating to property, plant & equipment
              
              
              (26,871
              )
              
              17,609
              
              
              24,212Trade
                  debtors denominated in foreign currency
              
              
              -
              
              
              -
              
              
              2,186Accruals
              
              
              12,660
              
              
              12,398
              
              
              14,328Provisions
              
              
              81,602
              
              
              69,461
              
              
              31,264Unrealized
                  foreign exchange losses
              
              
              838
              
              
              89,538
              
              
              -Revenue
                  losses carried forward
              
              
              -
              
              
              -
              
              
              114,556Other
              
              
              14,432
              
              
              60,044
              
              
              53,37382,661
              
              
              249,050
              
              
              239,919
 
 F
              - 21
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****14.****TAX
                  (Cont)**(c)**Reconciliations**The
                  overall movement in deferred tax account is as follows:Opening
                  balance
              
              
              244,918
              
              
              239,807
              
              
              142,861(Charge)/credit
                  to income statement
              
              
              (163,027
              )
              
              4,678
              
              
              (96,946
              )Other
                  movements
              
              
              263
              
              
              433
              
              
              -Closing
                  balance
              
              
              82,154
              
              
              244,918
              
              
              239,807
 
 **15.****PROVISIONS**NON
                  CURRENTEmployee
                  benefits
              
              
              48,654
              
              
              164,928
              
              
              -
 
 Employee
        benefits provisions have been recognized in relation to long service leave
        for
        Australian and Expatriate employees and retirement benefits for Indonesian
        national employees.
 
 Reconciliation
                  of provisions:Balance
                  at beginning of year
              
              
              164,928
              
              
              -
              
              
              -Provision
                  used
              
              
              -
              
              
              -
              
              
              -Unused
                  provisions reversed
              
              
              (157,543
              )
              
              -
              
              
              -Provisions
                  added
              
              
              41,269
              
              
              164,928
              
              
              -Closing
                  balance
              
              
              48,654
              
              
              164,928
              
              
              -
 
 **16.****ISSUED
                  CAPITAL**Issued
                  and paid-up capital
              
              
              19,260,762
              
              
              18,849,092
              
              
              18,849,092Reconciliation
                  of Issued Capital -Balance
                  at beginning of year
              
              
              18,849,092
              
              
              18,849,092
              
              
              18,849,092Shares
                  issued(1)
              
              
              812,000
              
              
              -
              
              
              -Shares
                  forfeiture(1)
              
              
              (188,500
              )
              
              -
              
              
              -Shares
                  bought back and cancelled
              
              
              (211,830
              )
              
              -
              
              
              -Balance
                  at end of year
              
              
              19,260,762
              
              
              18,849,092
              
              
              18,849,092
 
 (1)  Refer
        Note 23 for details of shares issued to employees.
 
 F
              - 22
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **16.** **ISSUED
        CAPITAL (** **Cont)**
 
 **(i)**
              **Rights**
 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 in proportion to the number of shares held
 
 **(ii)**
              **Share
                  Buyback**
 In
        July
        2006, the company commenced an on-market share buyback of up to 4,390,512
        shares. Up until 31 December 2006, 646,974 shares had been bought for a total
        consideration of A$211,830. The average price paid for these shares was 32.7
        cents with the price ranging from 30 cents to 36.7 cents per share. All shares
        acquired under this buy-back are cancelled by the company.
 The
        share
        buy-back remains in place as at the date of this report.
 
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****17.****RESERVES**Foreign
                  Currency Translation Reserve
              
              
              4,498,594
              
              
              4,559,049
              
              
              4,677,577Employee
                  Share Reserve
              
              
              (10,452
              )
              
              -
              
              
              -Total
                  Reserves
              
              
              4,488,142
              
              
              4,559,049
              
              
              4,677,577Reconciliation
                  of Foreign Currency Translation Reserve -Balance
                  at beginning of year
              
              
              4,559,049
              
              
              4,677,577
              
              
              3,025,044Currency
                  translation differences arising during the year
              
              
              (60,455
              )
              
              (118,528
              )
              
              1652,533Balance
                  at end of year
              
              
              4,498,594
              
              
              4,559,049
              
              
              4,677,577The
                  foreign currency translation reserve records exchange differences
                  arising
                  on translation of foreign controlled subsidiaries to the reporting
                  currency.Reconciliation
                  of Employee Share Reserve -Balance
                  at beginning of year
              
              
              -
              
              
              -
              
              
              -Movement
                  in Employee Share reserve
              
              
              (10,452
              )
              
              -
              
              
              -Balance
                  at end of year
              
              
              (10,452
              )
              
              -
              
              
              -The
                  employee share reserve records the value of equity portion of remuneration
                  paid to employees in the form of shares or other equity
                  instruments.
  F
              - 23
 **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****18.****RETAINED
                  PROFITS**Reconciliation
                  of retained earnings :Balance
                  at beginning of year
              
              
              3,343,598
              
              
              1,858,433
              
              
              2,452,710Adjustment
                  on adoption of AASB 132 and AASB 139, net of tax
              
              
              -
              
              
              289,911
              
              
              -Net
                  profit attributable to members of the parent entity
              
              
              3,235,566
              
              
              2,060,587
              
              
              (594,274
              )Prior
                  year adjustment
              
              
              -
              
              
              12,770
              
              
              -Dividends
                  paid
              
              
              (3,152,786
              )
              
              (878,103
              )
              
              -Balance
                  at end of year
              
              
              3,426,378
              
              
              3,343,598
              
              
              1,858,433
 
 **19.****DIVIDENDS****CENTS**
                **PER**
                **SHARE**
              
              **TOTAL**
                **AMOUNT**
                **A$**
              
              **%**
                **FRANKED**
              
              **DATE**
                **PAID**Dividends
                  recognized in the current year by the company are:**2006**Interim
                  2006
              
              
              1.5
              
              
              1,359,155
              
              
              100
              %
              
              26/06/06Final
                  2006
              
              
              2.0
              
              
              1,793,631
              
              
              100
              %
              
              08/12/063,152,786**2005**Final
                  2005
              
              
              1.0
              
              
              878,103
              
              
              100
              %
              
              29/12/05**2004**Nil
                  Dividend
              
              
              -
              
              
              -
              
              
              -
              
              
              -
 
 Franked
        dividends declared or paid during the year were franked at the tax rate of 30%.
 
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$**Dividend
                  Franking AccountFranking
                  credits available to shareholders of the Company for subsequent
                  financial
                  years based on a tax rate of 30%.
              
              
              1,821,610
              
              
              2,315,731
              
              
              2,572,711
 
 The
        above
        amounts represent the balance of the franking account as at the end of the
        financial year for:
 (i)
              Franking
                  credits that will arise from the payment of the amount of the provision
                  for income tax;
 (ii)
              Franking
                  credits that will arise from the payment of dividends recognized
                  as a
                  liability at the reporting date;
                  and
 (iii)
              Franking
                  credits that will arise from the receipt of dividends recognized
                  as
                  receivables at the reporting date.
 
 F
              - 24
 
 **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **20.****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.
 **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****21.****COMMITMENTS**Operating
                  leases contracted for but not capitalized in the financial statements
                  are:Less
                  than one year
              
              
              19,856
              
              
              18,964
              
              
              18,270Longer
                  than one year, but less than 5 years
              
              
              64,148
              
              
              9,911
              
              
              28,36684,004
              
              
              28,875
              
              
              46,636
 
 The
        Company has commitments in relation to the rental of its current office
        premises. The current lease expires in July 2007 but an option to lease the
        premises for a further three (3) years has been exercised. The lease agreement
        requires the rent to be increased by the greater of CPI or 3% per
        annum.
 
 There
        are
        no capital commitments in place in relation to the acquisition of property,
        plant and equipment. Fixed assets are replaced in the normal course of business
        operations and the company does not anticipate any material capital outlay
        for
        such replacement costs in the coming year.
 
 **22.** **CONTINGENT
        LIABILITIES**
 
 There
        are
        no contingent liabilities that the Directors are aware of at the date of
        this
        report.
 
 F
              - 25
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **23.** **SHARE
        BASED PAYMENTS**
 
 In
        May
        2006, an employee share plan was established which entitles the Board of
        Directors to offer shares to key management personnel within the group. A
        total
        of 2,800,000 shares were issued to five (5) employees including the managing
        director at a price of 29 cents per share which was a two (2) cent discount
        to
        the market. An interest free loan was provided to the key management staff
        to
        pay for these shares. This loan will be repaid by the employees from the
        proceeds of dividends that they are entitled to from the ownership of the
        shares. 50% of the shares will vest to the employees after two (2) years
        employment from the time of issuing the shares and the remaining 50% will
        vest
        to the employees after they have completed three (3) years of employment
        from
        the time of issuing the shares. Employees are only entitled to the shares
        if the
        loan is repaid in full.
 
 During
        the year, one of the key executives who was issued shares under this plan
        resigned from the company and the shares that were issued to him were forfeited.
        2,150,000 shares remain on issue as at 31 December 2006 with debt of A$548,250
        outstanding to employees from the initial loan of A$812,000 that was made
        when
        the shares were allocated to employees. The names of key management personnel
        with an outstanding loan to the company in excess of A$100,000 are as
        follows:
 
 Name
              
              No.
                  of shares
                allocated
              
              Highest
                  amount of
                indebtedness
              
              Amount
                  of loan
                repaid
              
              Remaining
                indebtedness
                (31
                  Dec 2006)J.
                  Taylor
              
              
              1,000,000
              
              A$
              290,000
              
              A$
              (35,000
              )
              A$
              255,000J.
                  Jorgensen
              
              
              650,000
              
              A$
              188,500
              
              A$
              (22,750
              )
              A$
              165,750S.
                  Adams
              
              
              400,000
              
              A$
              116,000
              
              A$
              (14,000
              )
              A$
              102,000
 
 Refer
        note 25 for details of equity held and loans outstanding to Key Management
        Personnel.
 
 At
        the
        company’s annual general meeting in May 2006, shareholders approved the
        allocation of a maximum of 4,000,000 shares to senior executives under the
        employee share plan within three years of the approval of the plan. The
        directors intend to issue more shares to senior executives under this plan
        in
        the future.
 
 Included
        in administration expenses in the income statement is A$10,451 (2005 - A$nil),
        which relates, in full, to equity-settled share based payment transactions
        (Refer Note 3).
 
 24. NOTES
            TO
            THE STATEMENT OF CASH FLOWS
 
 24.1. Reconciliation  of
            cash
 
 For
        the
        purposes of the cash flow statement, 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:-
 
 2006
              
              2005
              
              2004A$
              
              A$
              
              A$Cash
                  at bank (Note 6)
              
              
              1,552,786
              
              
              660,373
              
              
              1,908,996Deposits
                  on call (Note 6)
              
              
              1,079,193
              
              
              815,107
              
              
              1,300,000Cash
                  and cash equivalents
              
              
              2,631,979
              
              
              1,475,480
              
              
              3,208,996
 
 
 F
              - 26
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **24.2.** **Reconciliation
          of net cash from operating activities to profit after income
          tax**
 
 2006
              
              2005
              
              2004A$
              
              A$
              
              A$Profit
                  after income tax
              
              
              3,235,566
              
              
              2,060,587
              
              
              (594,274
              )Inventories
              
              
              (589,956
              )
              
              (552,937
              )
              
              319,011Increase/(decrease)
                  in interest accrual
              
              
              11,568
              
              
              (12,887
              )
              
              17,988Non
                  cash changes in debtors, prepayments and creditors
              
              
              2,379,577
              
              
              (3,175,623
              )
              
              (398,751
              )Purchase
                  of unprocessed pearls
              
              
              (91,584
              )
              
              -
              
              
              -Provision
                  for depreciation
              
              
              455,660
              
              
              473,584
              
              
              546,849Provision
                  for employee entitlements
              
              
              66,971
              
              
              127,328
              
              
              (13,458
              )Share
                  Based Remuneration
              
              
              10,451
              
              
              -
              
              
              -(Profit)/loss
                  on disposal of fixed assets
              
              
              (1,088
              )
              
              37,218
              
              
              (20
              )Increase/(decrease)
                  in value of financial assets
              
              
              (50,027
              )
              
              44,384
              
              
              -Change
                  in retained earnings – AASB139
              
              
              -
              
              
              289,910
              
              
              -Movement
                  in foreign exchange
              
              
              (576,010
              )
              
              87,078
              
              
              -Increase/(decrease)
                  in taxes payable
              
              
              667,783
              
              
              417,904
              
              
              218,446Foreign
                  Exchange Differences
              
              
              (19,380
              )
              
              12,763
              
              
              -Net
                  cash provided by/(used in) operating activities
              
              
              5,499,531
              
              
              (190,691
              )
              
              95,791
 
 As
        at the
        date of this report the Company has not entered into any non-cash financing
        or
        investing activities.
 
 **24.3.** **Credit
        facilities**
 
 As
        at 31
        December 2006, the Company had in place a trade discounting facility with
        the
        ANZ Bank with a limit of A$2,000,000. To date, this facility has not been
        utilized. This facility is secured by a registered first debenture charge
        over
        the assets of the Company.
 
 **25.** **KEY
        MANAGEMENT PERSONNEL DISCLOSURE**
 
 The
        information contained in this section of the annual report includes remuneration
        disclosures that are required under Accounting Standard AASB 124 *Related
        Party Disclosures* .
 
 a.
              Directors
 
 The
        following persons were directors of the company during the financial
        year:
 
 Non-executive
                  Directors:Mr
                  G.R.W SnowChairmanMr
                  S.J.
                  ArrowDirectorMr
                  S.P.
                  BirkbeckDirectorMr
                  I.M. MurchisonDirectorExecutive
                  Director:Mr
                  J.J.U.
                  Taylor.Managing
                  Director
 
 F
              - 27
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 **25.** **KEY
        MANAGEMENT PERSONNEL DISCLOSURE (** **Cont** **)**
 
 b.
              Other
                  key management personnel:
 
 The
        following persons had authority and responsibility for planning, directing
        and
        controlling the activities of the Company, directly or indirectly, during
        the
        financial year:
 
 Mr
                  J.S. JorgensenProduction
                  Manager & Director, PT Cendana IndopearlsMr
                  S.C.B. AdamsCompany Secretary and General Manager (Corporate)Mr
                  J. KnauerTechnical
                  Manager, PT Cendana Indopearls (from 1-Jan-06 to
                  30-Sep-2007)
 
 All
        of
        the above persons were key management personnel during the year ended 31
        December 2005 and 2004.
 
 **25.1.**
              **Principals
                  used to determine the nature and amount of
                  remuneration**
 
 The
        objectives of the Company’s remuneration framework is to ensure that reward for
        performance is competitive and appropriate for the results delivered and
        recognizes the environment within which its executives operate. Remuneration
        of
        senior executives is set with the objectives of:
 (i)
              retaining
                  and motivating key staff;
 (ii)
              attracting
                  quality management skills to the organization; and
 (iii)
              alignment
                  of executive reward with the achievement of strategic objectives
                  and the
                  creation of value for shareholders.
 
 25.1.1.
              Remuneration
                  structure of Non-Executive
                  Directors
  Fees
        and
        payments to non-executive directors reflect the demands which are made on,
        and
        the responsibilities of, the directors. Non-executive directors’ fees are
        reviewed annually by the Board. Consideration is given to the remuneration
        of
        comparable companies when setting fee levels.
 
 The
        Non
        Executive Directors’ aggregate annual remuneration may not exceed A$250,000. In
        the year ending 2006, the total non-executive directors’ fees including
        retirement benefit contributions were A$214,548.
 
 25.1.2.
              Remuneration
                  Structure of Executives
 
 Employment
        contracts are in place between the company (or its subsidiaries) and all
        key
        management personnel. Under these contracts, key management personnel are
        paid a
        base salary (which may be provided in the form of cash or non-financial
        benefits) in accordance with their skills and experience as well as entitlements
        including superannuation and accrued annual leave and long service leave
        in the
        event of termination.
 
 Employee
        salaries are reviewed annually and are adjusted to take into consideration
        the
        individuals’ responsibilities and skills compared to others within the Company
        and the industry.
 
 There
        were no short or medium term cash incentives provided to any executives of
        the
        company during the last financial year. Short or medium cash incentives are
        not
        incorporated into any executives salary packages at the time of this
        report.
 
 An
        Employee Share Plan (ESP) provides some senior executives with incentive
        over
        and above their base salary (refer 25.3 below). The allocation of shares
        under
        the Employee Share Plan (ESP) is not subject to performance conditions of
        the
        company. The reasons for establishing the ESP were:
 **·**
              To
                  aligning the interests of senior management with shareholders.
                  The ESP
                  provides employees with incentive to strive for long term profitability
                  which is in line with shareholder objectives;
                  and
 
 F
              - 28
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **Notes
            Forming Part of the Financial Statements**
 25.1.2 Remuneration
        Structure of Executives (Cont)
 
 **·**
              To
                  provide an incentive for employees to extend their employment terms
                  with
                  the company. Pearl farming is a long term business and the experience
                  of
                  long serving senior employees is an important factor in the long
                  term
                  success of the Company.
 
 Many
        of
        the factors attributable to the short term success or failure of the pearling
        business such as exchange rate fluctuations, environmental factors eg: climate,
        and socio-political conditions, are outside the control of management and
        as a
        result, the board does not believe that the remuneration should be benchmarked
        against the short term performance of the company. By providing long term
        incentive for senior employees to benefit from improved performance of the
        company is viewed by the Board as the best form of incentive outside for
        employees other than appropriate salary payments.
  F
            - 29




**ATLAS
        SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **NOTES
        FORMING PART OF THE FINANCIAL STATEMENTS**
  25.2.
              Details
                  of Directors’ and Key Management Personnel
                  remuneration
 
 Details
        of the nature and amount of each element of the remuneration of each director
        of
        the Company and its economic entities and each of the key management personnel
        of the Company and its economic entities are:
 
 **Short
                  term benefits**
              
              
              
              **Post-****Name**
              
              
              
              **Cash
                  salary & fees**
              
              **Short
                  term**
                **incentive
                  cash**
                **bonus**
              
              **Non-cash**
                **monetary
                  benefit**
              
              **Total
                    cash**
                  **salary,
                    fees and**
                  **short**
                **term
                  benefits**
              
              **employment**
                  **benefits**
                **Super-**
                **annuation**
                **benefit**
              
              **Share
                    based**
                  **Payments**
                  **compensation**
              
              **Total****A$**
              
              **A$**
              
              **A$**
              
              **A$**
              
              **A$**
              
              **A$**
              
              **A$****Directors**
                **(Non-Executive)**G.R.W.
                  Snow
              
              
              2006
              
              
              76,667
              
              
              -
              
              
              -
              
              
              76,667
              
              
              6,900
              
              
              -
              
              
              83,5672005
              
              
              60,000
              
              
              -
              
              
              -
              
              
              60,000
              
              
              5,400
              
              
              -
              
              
              65,4002004
              
              
              44,687
              
              
              -
              
              
              -
              
              
              44,687
              
              
              4,022
              
              
              -
              
              
              48,709I.M.
                  Murchison 1
              
              
              2006
              
              
              43,500
              
              
              -
              
              
              -
              
              
              43,500
              
              
              3,915
              
              
              -
              
              
              47,4152005
              
              
              36,000
              
              
              -
              
              
              -
              
              
              36,000
              
              
              3,240
              
              
              -
              
              
              39,2402004
              
              
              14,063
              
              
              -
              
              
              -
              
              
              14,063
              
              
              1,265
              
              
              -
              
              
              15,328S.J.
                  Arrow
              
              
              2006
              
              
              38,333
              
              
              -
              
              
              -
              
              
              38,333
              
              
              3,450
              
              
              -
              
              
              41,7832005
              
              
              30,000
              
              
              -
              
              
              -
              
              
              30,000
              
              
              2,700
              
              
              -
              
              
              32,7002004
              
              
              30,000
              
              
              -
              
              
              -
              
              
              30,000
              
              
              2,700
              
              
              -
              
              
              32,700S.P.
                  Birkbeck 2
              
              
              2006
              
              
              38,333
              
              
              -
              
              
              -
              
              
              38,333
              
              
              3,450
              
              
              -
              
              
              41,7832005
              
              
              21,250
              
              
              -
              
              
              -
              
              
              21,250
              
              
              1,913
              
              
              -
              
              
              23,163W.F.
                  James 3
              
              
              2004
              
              
              35,000
              
              
              -
              
              
              -
              
              
              35,000
              
              
              3,150
              
              
              -
              
              
              38,150**(Executive)**J.J.U.
                  Taylor 4,5,7
              
              
              2006
              
              
              246,483
              
              
              -
              
              
              29,231
              
              
              275,714
              
              
              4,500
              
              
              4,861
              
              
              285,0752005
              
              
              225,443
              
              
              -
              
              
              28,114
              
              
              253,557
              
              
              4,075
              
              
              -
              
              
              257,6322004
              
              
              214,227
              
              
              -
              
              
              65,026
              
              
              279,253
              
              
              21,687
              
              
              -
              
              
              300,940
 
 F
              - 30
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **NOTES
          FORMING PART OF THE FINANCIAL STATEMENTS**
 25.2 Details
        of Directors’ and Key Management Personnel remuneration (Cont)
  **Short
                    term benefits**
                
                
                
                **Post-****Name**
                
                
                
                **Cash
                    Salary**
                  **&
                    Fees**
                
                **Short
                    term**
                  **incentive
                    cash**
                  **bonus**
                
                **Non-cash**
                  **monetary
                    benefit**
                
                **Total
                    cash**
                  **salary,
                    fees and**
                  **short
                    term**
                  **benefits**
                
                **employment**
                  **benefits**
                  **Super-**
                  **annuation**
                  **benefit**
                
                **Share
                    Based**
                  **Payments**
                  **Compensation**
                
                **Total****A$**
                
                **A$**
                
                **A$**
                
                **A$**
                
                **A$**
                
                **A$**
                
                **A$****Key
                    Management Personnel**S.C.B.
                    Adams 6,7
                
                
                2006
                
                
                117,000
                
                
                -
                
                
                -
                
                
                117,000
                
                
                10,530
                
                
                1,944
                
                
                129,4742005
                
                
                110,000
                
                
                -
                
                
                -
                
                
                110,000
                
                
                9,900
                
                
                -
                
                
                119,9002004
                
                
                105,000
                
                
                -
                
                
                -
                
                
                105,000
                
                
                9,450
                
                
                -
                
                
                114,450J.S.
                    Jorgensen 4,5,7
                
                
                2006
                
                
                191,763
                
                
                -
                
                
                1,250
                
                
                193,013
                
                
                -
                
                
                3,160
                
                
                196,1732005
                
                
                183,775
                
                
                -
                
                
                -
                
                
                183,775
                
                
                -
                
                
                -
                
                
                183,7752004
                
                
                160,305
                
                
                -
                
                
                -
                
                
                160,305
                
                
                -
                
                
                -
                
                
                160,305J.
                    Knauer 4,5,7,8
                
                
                2006
                
                
                99,472
                
                
                -
                
                
                -
                
                
                99,472
                
                
                -
                
                
                -
                
                
                99,4722005
                
                
                129,837
                
                
                -
                
                
                -
                
                
                129,837
                
                
                -
                
                
                -
                
                
                129,8372004
                
                
                106,382
                
                
                -
                
                
                -
                
                
                106,382
                
                
                -
                
                
                -
                
                
                106,382
 
 Notes:
 1.
              Mr
                  Murchison was appointed as a director on 28 July
                  2004.
 2.
              Mr
                  Birkbeck was appointed to the Board on 15 April
                  2005.
 3.
              Mr
                  James retired as a director on 28 July
                  2004.
 4.
              Dr
                  J Taylor, Mr J Jorgensen and Dr Knauer are Directors of the Company’s
                  Indonesian subsidiary, P.T. Cendana
                  Indopearls.
 5.
              Dr
                  J Taylor Mr J Jorgensen and Dr Knauer are key management personnel
                  of the
                  economic entity with the titles of Managing Director, Production
                  Manager
                  and Technical Manager respectively.
 6.
              Mr
                  S Adams is the Company Secretary and Chief Financial Officer of
                  the
                  economic entity.
 7.
              It
                  is the opinion of the Board that the only officers of the Company
                  who meet
                  the definition of key management personnel as set out by the Corporations
                  Act 2001 or the Australian Accounting Standards are the Company
                  Secretary,
                  the Production Manager and the Technical
                  Manager.
 8.
              Mr
                  Knauer resigned from the company and ceased employment and his
                  directorship of PT Cendana Indopearls in October
                  2006.
 
 F
              - 31
  **ATLAS
          SOUTH SEA PEARL LIMITED AND ITS CONTROLLED ENTITIES**
 **NOTES
          FORMING PART OF THE FINANCIAL STATEMENTS**
 25.3.
              Share
                  based payments compensation
 
 In
        2006,
        ordinary shares have were issued to key management personnel of Atlas South
        Sea
        Pearl Ltd under an Executive Share Plan (ESP) that was approved by shareholders
        at the company’s annual general meeting in May 2006. These shares have been
        issued to employees under the following terms:
 
 25.3.1.
              Shares
                  were issued at a price of 29 cents each on 30 May 2006 when the
                  market
                  price was 31 cents per share;
 
 25.3.2.
              Entitlement
                  to 50% of the beneficial interest on the shares will vest to employees
                  after they have completed two (2) years of employment with the
                  company
                  from the date of issue of the shares (30 May 2006) and entitlement
                  to the
                  remaining 50% of the beneficial interest in the shares will vest
                  to
                  employees after they have completed three (3) years of employment
                  with the
                  company from the date of issue of the
                  shares.
 
 25.3.3.
              Shares
                  issued under the ESP have been paid for by employees who have been
                  provided with an interest free loan by the Company. This loan is
                  to be
                  repaid from the proceeds of dividends paid in relation to these
                  shares.
 
 25.3.4.
              The
                  details relating to the allocation of shares to executive directors
                  and
                  key management personnel under the ESP are as
                  follows:
  **Name**
                
                **Date
                    of**
                  **Issue**
                
                **No.
                    of**
                  **Shares**
                  **Issued**
                
                **Shares**
                  **Vested
                    in**
                  **the
                    year**
                
                **Shares**
                  **Forfeited
                    in**
                  **the
                    year**
                
                **Financial
                    Year**
                  **in
                    which shares**
                  **may
                    vest**
                
                **Nature
                    of**
                  **shares**
                
                **Minimum**
                  **value
                    of**
                  **grant
                    yet to**
                  **be
                    vested (2)**
                
                **Maximum**
                  **value
                    of**
                  **grant
                    yet to**
                  **be
                    vested (3)**
                
                **Remuneration**
                  **consisting
                    of**
                  **Shares
                    (4)**Joseph
                    Taylor
                  (Managing
                    Director)
                
                
                30
                    May 2006
                
                
                1,000,000
                
                
                0
                %
                
                0
                %
                
                2008
                    - 50
                  2009
                    - 50
                %
                  %
                
                Ordinary
                    Shares
                
                A$
                -
                
                A$
                20,000
                
                
                1.7
                %Jan
                    Jorgensen
                  (Pearl
                    Production Manager)
                
                
                30
                    May 2006
                
                
                650,000
                
                
                0
                %
                
                0
                %
                
                2008
                    - 50
                  2009
                    - 50
                %
                  %
                
                Ordinary
                    Shares
                
                A$
                -
                
                A$
                13,000
                
                
                1.6
                %Jens
                    Knauer
                  (Technical
                    Manager) (1)
                
                
                30
                    May 2006
                
                
                650,000
                
                
                0
                %
                
                100
                %
                
                N/A
                
                
                Ordinary
                    Shares
                
                A$
                -
                
                A$
                -
                
                
                -Simon
                    Adams
                  (General
                    Manager / Company secretary)
                
                
                30
                    May 2006
                
                
                400,000
                
                
                0
                %
                
                0
                %
                
                2008
                    - 50
                  2009
                    - 50
                %
                  %
                
                Ordinary
                    Shares
                
                A$
                -
                
                A$
                8,000
                
                
                1.5
                %
  Notes
        -
  1.
              Mr
                  Jens Knauer resigned from employment in October 2006 and the shares
                  that
                  were allocated to him have been forfeited as he did not attain
                  the minimum
                  employment term of two (2) years from the date of
                  issue.
 2.
              The
                  minimum benefit is based on the fact that the vesting criteria
                  for the
                  shares on issue have not yet been
                  met.
 3.
              The
                  maximum value is based on the value that is associated with the
                  discount
                  to the market price at the time that the shares were
                  issued.
 4.
              Based
                  on the cost allocated to the share based remuneration for the current
                  year.
  F
              - 32
  25.4.
                Service
                      Agreements
  Details
        of key management personnel contracts as at 31 December 2006 are set out
        below:
 
 25.4.1.
              Dr
                  J Taylor (Managing Director)
 
 ·
              Employed
                  under a fixed term contract which expires on 31 December
                  2009.
 ·
              Employment
                  agreement specifies the duties and responsibilities of his
                  role.
 ·
              Base
                  salary including superannuation and various non-financial allowances
                  relating to living in Indonesia of A$280,214 for the last financial
                  year,
                  reviewed annually.
 ·
              Not
                  entitled to any special termination payments under this
                  contract.
 ·
              The
                  current contract for the Managing Director does not provide for
                  incentive
                  payments in the form of cash or options linked to performance
                  targets.
 
 25.4.2.
              Mr Jan Jorgensen (Pearl Production
                  Manager)
 
 ·
              Contract
                  terminates on retirement.
 ·
              Base
                  salary including various non-financial allowances relating to living
                  in
                  Indonesia of A$193,013 for the last financial year, reviewed
                  annually.
 ·
              Not
                  entitled to any special termination payments under this
                  contract.
 
 25.4.3.
              Mr Simon Adams (General Manager and Company
                  Secretary)
 
 ·
              Contract
                  terminates on retirement.
 ·
              Base
                  salary inclusive of superannuation for the last financial year
                  of
                  A$127,530, reviewed annually.
 ·
              Not
                  entitled to any special termination payments under this
                  contract.
 
 25.5.
              Additional
                  Information
 
 25.5.1.
              Loans to Directors and Executives
 
 Details
        relating to the loans to Key Management Personnel including amounts, interest
        rates and repayment terms are set out in note 25.6 to the financial
        statements.
 
 25.5.2.
              Options
 
 There
        were no options issued to directors or key management personnel in the last
        financial year. There were no options on issue to key management personnel
        during 2006, 2005 or 2004
 
 25.6.
              Loans
                  to key management personnel
 
 Details
        of loans made to Key Management Personnel of the Company, including their
        personally related parties, are set out below.
 
 i.
              Aggregates
                  for key management personnel
  **Group**
                
                **Balance
                    at**
                  **the
                    start of**
                  **the
                    year**
                
                **Loans**
                  **provided**
                  **during
                    the**
                  **year**
                
                **Interest
                    paid**
                  **and
                    payable**
                  **for
                    the year**
                
                **Interest
                    not**
                  **charged**
                
                **Balance
                    at**
                  **the
                    end of**
                  **the
                    year**
                
                **Highest**
                  **indebtedness**
                  **during
                    the**
                  **year**
                
                **Interest**
                  **Rate****A$**
                
                **A$**
                
                **A$**
                
                **A$**
                
                **A$**
                
                **A$**2006
                
                
                -
                
                
                783,000
                
                
                -
                
                
                26,685
                
                
                522,750
                
                
                783,000
                
                
                0
                %2005
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                N/A2004
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                N/A
 F
              - 33
 ii.
              Individuals
                  with loans above A$100,000 during the financial
                  year
  **2006**
                  
                  
                  **Name**
                
                **Balance
                    at**
                  **the
                    start of**
                  **the
                    year**
                
                **Loans**
                  **provided**
                  **during
                    the**
                  **year**
                
                **Interest
                    paid**
                  **and
                    payable**
                  **for
                    the year**
                
                **Interest
                    not**
                  **charged**
                
                **Balance
                    at**
                  **the
                    end of**
                  **the
                    year**
                
                **Highest**
                  **indebtedness**
                  **during
                    the**
                  **year****A$**
                
                **A$**
                
                **A$**
                
                **A$**
                
                **A$**
                
                **A$**J.
                    Taylor
                
                
                -
                
                
                290,000
                
                
                -
                
                
                13,017
                
                
                255,000
                
                
                290,000J.
                    Jorgensen
                
                
                -
                
                
                188,500
                
                
                -
                
                
                8,461
                
                
                165,750
                
                
                188,500S.
                    Adams
                
                
                -
                
                
                116,000
                
                
                -
                
                
                5,207
                
                
                102,000
                
                
                116,000J
                    Knauer
                
                
                -
                
                
                188,500
                
                
                -
                
                
                -
                
                
                -
                
                
                188,500-
                
                
                783,000
                
                
                -
                
                
                26,685
                
                
                522,750
                
                
                783,000
  There
        were no loans outstanding to key management personnel during 2005 and
        2004.
 
 25.7.
              Shareholdings
 
 The
        number of shares in the company held during the financial year by each director
        of the Company and the other key management personnel of the Company, including
        their personally related parties, are set out below.
 Details
        of shares that were granted as compensation during the reporting period are
        provided at note 25.
 
 Balance
                1/1/06
              
              Granted
                  as compensation
              
              Options
                Exercised
              
              Other
                Changes
                  *
              
              Balance
                31/12/06***Parent
                  Entity Directors***Mr
                  S.J. Arrow
              
              
              1,952,934
              
              
              -
              
              
              -
              
              
              -
              
              
              1,952,934Mr
                  S.P. Birkbeck
              
              
              790,000
              
              
              -
              
              
              -
              
              
              -
              
              
              790,000Mr
                  I.M. Murchison
              
              
              706,667
              
              
              -
              
              
              -
              
              
              (16,667
              )
              
              690,000Mr
                  G.R.W Snow
              
              
              14,315,139
              
              
              -
              
              
              -
              
              
              69,417
              
              
              14,384,556Mr
                  J.J.U. Taylor
              
              
              20,000
              
              
              1,000,000
              
              
              -
              
              
              -
              
              
              1,020,000***Other
                  key management personnel***Mr
                  S.C.B. Adams
              
              
              -
              
              
              400,000
              
              
              -
              
              
              -
              
              
              400,000Mr
                  J.S. Jorgensen
              
              
              34,034
              
              
              650,000
              
              
              -
              
              
              -
              
              
              684,03417,818,774
              
              
              2,050,000
              
              
              -
              
              
              52,750
              
              
              19,921,524
  *
        Other
        changes other refers to shares purchased or sold during the financial
        year
 
 **25.8.**
              **Related
                  Party Transactions**
 
 i.
              Key
                  management personnel
 
 The
        Company has a consultancy agreement with Arrow Pearling Co Pty Ltd, a company
        of
        which Mr S Arrow is a director, under which staff of the Company have been
        trained as pearl operation technicians at the Indonesian pearl farm. During
        the
        year, A$134,221 (2005 - A$150,820, 2004 - A$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.
 
 The
        Company also had an agreement with Arrow Pearling Co Pty Ltd to sub-lease
        office
        space on commercial terms. Rent of A$18,072 was paid during the year. The
        rental
        arrangements with Arrow Pearling Co Pty Ltd ceased on 30 June 2004.
 
 During
        the 2004, an employment contract was entered into between the Company and
        Claire
        Taylor, the wife of the Managing Director, Dr Joseph Taylor. Under this
        contract, Mrs Taylor received remuneration of A$48,556 for her
        services.
 
 During
        the year, sales of individual pearls of small quantities were made to some
        staff
        and Directors on normal commercial terms.
 
 Aggregate
        amounts of each of the above types of other transactions with key management
        personnel of the Consolidated Entity are:
 
 F
              - 34
  **2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$****Amounts
                  recognized as expense**Royalty
              
              
              134,221
              
              
              150,820
              
              
              189,030Rental
              
              
              -
              
              
              -
              
              
              18,072Salaries
              
              
              -
              
              
              -
              
              
              48,556134,221
              
              
              150,820
              
              
              255,658**Amounts
                  recognized as liability**Other
                  Payables
              
              
              92,197
              
              
              60,820
              
              
              70,000
 
 ii.
              Subsidiaries
 
 The
        Company purchased pearls to the value of A$6,972,390 (2005 - A$4,342,019,
        2004 -
        A$2,986,614) from its wholly owned controlled subsidiary PT Cendana Indopearls.
        These transactions are in the normal course of business. There were loans
        in
        place between the Company and its subsidiaries (refer Note 7).
 
 **26.** **REMUNERATION
        OF AUDITORS**
 
 During the year, the following fees were paid or payable for services provided
        by the auditor of the parent entity, its related practices and non-related
        audit
        firms:
 
 a.Audit
                  ServicesBDO
                  -Audit
                  and review of financial reports and other audit work under the
                  Corporations Act 2001
              
              
              42,581
              
              
              34,342
              
              
              17,732Non
                  BDO audit firms - Audit and review of financial reports of subsidiary
                  in
                  Indonesia
              
              
              31,776
              
              
              27,700
              
              
              24,862Total
                  remuneration for audit services
              
              
              74,357
              
              
              62,042
              
              
              42,594b.Taxation
                  ServicesBDO
                  -International
                  tax consulting and tax advice on offshore structure
              
              
              7,460
              
              
              -
              
              
              -Non
                  BDO audit firms - Tax advice in relation to compliance audit in
                  Indonesia
              
              
              -
              
              
              14,764
              
              
              1,5957,460
              
              
              14,764
              
              
              1,595c.Advisory
                  ServicesBDO
                  -Review
                  of financial report relating to compliance in the USA
              
              
              11,167
              
              
              8,085
              
              
              7,326
 
 
 F
              - 35
 
 **27.** **SEGMENT
        REPORTING**
 (a)  Business Segment (Primary Reporting)
 
 The
        Company 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****A$**
              
              **A$**
              
              **A$**
              
              **A$****2006****Revenue**External
                  segment revenue
              
              
              729,947
              
              
              11,960,449
              
              
              -
              
              
              12,690,396Inter-segment
                  revenue
              
              
              6,972,390
              
              
              -
              
              
              (6,972,390
              )
              
              -**Total
                  segment revenue**
              
              
              7,702,337
              
              
              11,960,449
              
              
              (6,972,390
              )
              
              12,690,396Other
                  unallocated revenue
              
              
              228,046
              
              
              432,289
              
              
              (125,002
              )
              
              535,333**Total
                  revenue**
              
              
              
              
              
              
              
              
              
              
              
              13,225,729**Result**Segment
                  result
              
              
              1,083,050
              
              
              4,331,325
              
              
              (200,227
              )
              
              5,214,148Unallocated
                  corporate (expenses)/revenue
              
              
              272,551
              
              
              (1,193,375
              )
              
              (125,002
              )
              
              (1,045,827
              )Profit
                  from ordinary activities before income tax
              
              
              
              
              
              
              
              
              
              
              
              4,168,321Income
                  tax expense
              
              
              
              
              
              
              
              
              
              
              
              (932,755
              )**Net
                  profit**
              
              
              
              
              
              
              
              
              
              
              
              3,235,566Depreciation
                  and amortization of segment assets
              
              
              47,160
              
              
              14,524
              
              
              -
              
              
              61,684Other
                  non-cash segment expenses
              
              
              119,681
              
              
              12,753
              
              
              -
              
              
              132,434**Assets**Segment
                  assets
              
              
              12,890,193
              
              
              3,522,246
              
              
              (264,335
              )
              
              16,148,105Unallocated
                  corporate assets
              
              
              3,439,870
              
              
              3,457,329
              
              
              (523,637
              )
              
              6,373,560**Consolidated
                  total assets**
              
              
              16,330,063
              
              
              6,979,577
              
              
              (787,972
              )
              
              22,521,665**Liabilities**Segment
                  liabilities
              
              
              (242,048
              )
              
              (276,267
              )
              
              -
              
              
              (518,315
              )Unallocated
                  corporate liabilities
              
              
              (3,322,528
              )
              
              (481,824
              )
              
              -
              
              
              (3,804,352
              )**Consolidated
                  total liabilities**
              
              
              (3,564,575
              )
              
              (758,093
              )
              
              -
              
              
              (4,322,667
              )Acquisitions
                  of non-current segment assets
              
              
              910,487
              
              
              -
              
              
              -
              
              
              910,487Unallocated
                  acquisitions of non-current assets
              
              
              -
              
              
              20,314
              
              
              -
              
              
              20,314930,801
 
 F
              - 36
  **27.****SEGMENT
                  REPORTING (CONT.)**
  (b) Geographical
          (continued)
  **Indonesia**
              
              **Australia**
              
              **Eliminations**
              
              **Total****A$**
              
              **A$**
              
              **A$**
              
              **A$****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
              
              
              3,327,394
              
              
              (364,171
              )
              
              3,870,665Unallocated
                  corporate (expenses)/revenue
              
              
              (228,613
              )
              
              (1,285,171
              )
              
              (756
              )
              
              (1,514,539
              )Profit
                  from ordinary activities before income tax
              
              
              
              
              
              
              
              
              
              
              
              2,356,126Income
                  tax expense
              
              
              
              
              
              
              
              
              
              
              
              (295,539
              )**Net
                  profit**
              
              
              
              
              
              
              
              
              
              
              
              2,060,587Depreciation
                  and amortization of segment assets
              
              
              24,689
              
              
              10,382
              
              
              -
              
              
              35,072Other
                  non-cash segment 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
              )
              
              -
              
              
              (300,031
              )Unallocated
                  corporate liabilities
              
              
              (1,968,777
              )
              
              (4,607,917
              )
              
              -
              
              
              (6,576,697
              )**Consolidated
                  total liabilities**
              
              
              (2,188,281
              )
              
              (4,688,444
              )
              
              -
              
              
              (6,876,728
              )Acquisitions
                  of non-current segment assets
              
              
              856,096
              
              
              -
              
              
              -
              
              
              856,096Unallocated
                  acquisitions of non-current assets
              
              
              -
              
              
              4,294
              
              
              -
              
              
              4,294860,390
  F
              - 37
  **27.****SEGMENT
                  REPORTING (CONT.)**
  (b) Geographical
          (continued)
 **Indonesia**
              
              **Australia**
              
              **Eliminations**
              
              **Total****A$**
              
              **A$**
              
              **A$**
              
              **A$****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)/revenue
              
              
              (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 amortization of segment assets
              
              
              21,128
              
              
              7,228
              
              
              -
              
              
              28,356Other
                  non-cash segment 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 segment assets
              
              
              755,558
              
              
              
              
              
              
              
              
              755,558Unallocated
                  acquisitions of non-current assets
              
              
              
              
              
              23,083
              
              
              
              
              
              23,083778,641
  F
            - 38
  **28.** **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.
 
 **29.****SUBSIDIARIES**
  **Class
                  of**
                **shares**
              
              **Percentage
                  owned**
              
              **Place
                  of incorporation**
              
              **Book
                  value of Company's investment****2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$**Sharcon
                  Pty Ltd
              
              
              Ord
              
              
              100
              %
              
              Australia
              
              
              -
              
              
              -
              
              
              -Tansim
                  Pty Ltd
              
              
              Ord
              
              
              100
              %
              
              Australia
              
              
              -
              
              
              -
              
              
              -P.T.
                  Cendana Indopearls
              
              
              Ord
              
              
              100
              %
              
              Indonesia
              
              
              8,507
              
              
              -
              
              
              -8,507
              
              
              -
              
              
              -
 
 The
        ultimate parent entity, Atlas South Sea Pearl Limited, is incorporated in
        Australia.
  30.     
**FINANCIAL
        INSTRUMENTS**
 The
        group’s financial instruments consist mainly of deposits with banks, accounts
        receivable and payable, loans to and from subsidiaries and derivative
        instruments for the purpose of hedging foreign exchange movements that relate
        to
        the company’s revenue and expenditure. The financial derivatives 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 reviewed by the Board from time to time. Interest
        rate and exchange rate exposure are managed through strategies which are
        set in
        the context of the most recent economic conditions and forecasts.
 
 (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 unutilized borrowing facilities are maintained.
 
 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
        Company 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.
  F
            - 39




**30.** **FINANCIAL
            INSTRUMENTS** **(Cont)**
 (c)
                Financial
                    Instruments
  Derivative
        financial instruments –
 Derivative
        financial instruments are used by the Company 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 into derivative contracts is to protect the Company
        against unfavorable 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:
 **2006**
              
              **2005**
              
              **2004**
              
              **2006**
              
              **2005**
              
              **2004****Weighted
                  average rate**
              
              **AUD**
              
              **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
              
              
              7,223
              
              
              7,623
              
              
              -
              
              
              3,000,000
              
              
              1,600,000
              
              
              -
 
 At
        balance date, the details of the outstanding option contracts are:
 **2006**
              
              **2005**
              
              **2004**
              
              **2006**
              
              **2005**
              
              **2004****Weighted
                  average rate**
              
              **AUD**
              
              **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
        Company'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 Company intends to hold fixed rate assets
        and
        liabilities to maturity
 
 F
              - 40
 
 **30** **FINANCIAL
        INSTRUMENTS (Cont)**
 
 **Note**
              
              **Weighted**
                **average**
                **interest**
                **rate**
              
              **Floating**
                **interest****rate**
              
              **Fixed
                  interest**
                **rate
                  maturing in**
                **1
                  year or less**
              
              **Non
                  interest**
                **bearing**
              
              **Total****%**
              
              **A$**
              
              **A$**
              
              **A$**
              
              **A$****2006**Financial
                  AssetsCash
              
              
              6
              
              
              2.72
              
              
              1,519,018
              
              
              1,079,193
              
              
              33,768
              
              
              2,631,979Receivables
              
              
              7
              
              
              0.00
              
              
              -
              
              
              -
              
              
              2,923,298
              
              
              2,923,2981,519,018
              
              
              1,079,193
              
              
              2,957,066
              
              
              5,555,277Financial
                  LiabilitiesPayables
              
              
              13
              
              
              0.00
              
              
              -
              
              
              -
              
              
              (331,557
              )
              
              (331,557
              )-
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              (331,557
              )
              
              (331,557
              )Net
                  Financial Asset/(Liabilities)
              
              
              
              
              
              
              
              
              1,519,018
              
              
              1,079,193
              
              
              2,625,509
              
              
              5,223,720
 
 **Note**
              
              **Weighted
                  average**
                **interest**
                **rate**
              
              **Floating**
                **interest
                  rate**
              
              **Fixed
                  interest**
                **rate
                  maturing in**
                **1
                  year or less**
              
              **Non
                  interest bearing**
              
              **Total****%**
              
              **A$**
              
              **A$**
              
              **A$**
              
              **A$****2005**Financial
                  AssetsCash
              
              
              6
              
              
              4.53
              
              
              639,787
              
              
              815,107
              
              
              20,586
              
              
              1,475,480Receivables
              
              
              7
              
              
              0.00
              
              
              -
              
              
              -
              
              
              4,301,652
              
              
              4,301,652639,787
              
              
              815,107
              
              
              4,322,238
              
              
              5,777,132Financial
                  LiabilitiesPayables
              
              
              13
              
              
              0.00
              
              
              -
              
              
              -
              
              
              (682,975
              )
              
              (682,975
              )-
              
              
              -
              
              
              (682,975
              )
              
              (682,975
              )Net
                  Financial Asset/(Liabilities)
              
              
              
              
              
              
              
              
              639,787
              
              
              815,107
              
              
              3,639,263
              
              
              5,094,157
  F
              - 41
 
 **30** **FINANCIAL
        INSTRUMENTS (Cont)**
 
 **Note**
              
              **Weighted**
                **average**
                **interest**
                **rate**
              
              **Floating**
                **interest
                  rate**
              
              **Fixed
                  interest**
                **rate
                  maturing in**
                **1
                  year or less**
              
              **Non
                  interest bearing**
              
              **Total****%**
              
              **A$**
              
              **A$**
              
              **A$**
              
              **A$****2004**Financial
                  AssetsCash
              
              
              6
              
              
              4.29
              
              
              1,886,833
              
              
              1,300,000
              
              
              22,163
              
              
              3,208,996Receivables
              
              
              7
              
              
              0.00
              
              
              -
              
              
              -
              
              
              1,934,360
              
              
              1,934,3601,886,833
              
              
              1,300,000
              
              
              1,956,523
              
              
              5,143,356Financial
                  LiabilitiesPayables
              
              
              13
              
              
              0.00
              
              
              -
              
              
              -
              
              
              (1,020,396
              )
              
              (1,020,396
              )-
              
              
              -
              
              
              (1,020,396
              )
              
              (1,020,396
              )Net
                  Financial Asset/(Liabilities)
              
              
              
              
              
              
              
              
              1,886,833
              
              
              1,300,000
              
              
              936,127
              
              
              4,122,960
 
 Payables
        as shown at note 13 include employee provisions of A$223,352 (2005 - A$66,611,
        2004 - A$104,212) which are not included as part of financial
        instruments.
 
  (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 organized 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 recognized unrealized
                  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 organized
        markets in standardized 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 Company
        intends to hold these assets to maturity.
 
 **31.** **CHANGE
        IN ACCOUNTING POLICIES**
 
 The
        company has early adopted AASB 2007-1 in relation to AASB 2 - *Group
        and Treasury Share Transactions* .
        This
        interpretation deals with the accounting for shares issued by a company to
        employees of a subsidiary of the company.
 
 Australian
        Accounting Standards and Interpretations that have recently been issued or
        amended but are not yet effective have not been adopted by the Company for
        the
        annual reporting period ending 31 December 2006. These are outlined in the
        table
        below:
 
 F
              - 42
 
 **31.** **CHANGE
        IN ACCOUNTING POLICIES (Cont)**
  **Reference**
                
                **Title**
                
                **Summary**
                
                **Application**
                  **Date
                    of**
                  **Standard**
                
                **Impact
                    on****The**
                  **Company****’s
                    financial**
                  **report**AASB
                    2005-10
                
                Amendment
                    to Australian Accounting Standards [AASB 132, AASB 101, AASB
                    114, AASB
                    117, AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023 & AASB
                    1038]
                
                Amendments
                    arise from the release in August 2005 of AASB 7*Financial
                    Instruments: Disclosures*
                
                1-Jan-07
                
                AASB
                    7 is a disclosure statement so will have no impact on the amounts
                    included
                    in theCompany’s
                    financial statements. The amendments will result in changes to
                    the
                    financial instruments and share capital disclosure included in
                    theCompany’s
                    financial report.AASB2007-2
                
                Amendments
                    to Australian Accounting Standards arising from AASB Interpretation
                    12
                    [AASB 1, AASB 117, AASB 118, AASB 120, AASB 121, AASB 127, AASB
                    131 &
                    AASB 139]
                
                Amendments
                    arising from AASB Interpretation 12*Service
                    Concession Agreements*
                
                1-Jan-08
                
                AASB
                    Interpretation 12 is a disclosure statement so will have no impact
                    on the
                    amounts included in theCompany’s
                    financial statements. The amendments will result in changes to
                    the
                    financial instruments and share capital disclosure included in
                    theCompany’s
                    financial report.AASB2007-3
                
                Amendments
                    to Australian Accounting Standards arising from AASB 8 [AASB
                    5, AASB 6,
                    AASB 102, AASB 107, AASB 119, AASB 127, AASB 134, AASB 136, AASB
                    1023
                    & AASB 1038]
                
                Amendments
                    arising from the release in February 2007 of AASB 8*Operating
                    Segments.*AASB 8 supersedes AASB 14*Segment
                    Reporting*
                
                1-Jan-09
                
                AASB
                    Interpretation 12 is a disclosure statement so will have no impact
                    on the
                    amounts included in theCompany’s
                    financial statements. The amendments will result in changes to
                    the
                    financial instruments and share capital disclosure included in
                    theCompany’s
                    financial report.AASB
                    7
                
                Financial
                    Instruments: Disclosures
                
                New
                    Standard replacing disclosure requirements of AASB 132
                
                1-Jan-07
                
                As
                    above.AASB
                    101
                
                Presentation
                    of Financial Statements
                
                Replaces
                    the previous Illustrative Financial Statement Structure and provides
                    directives on the content required for Financial Reports of disclosing
                    entities.
                
                1-Jan-07
                
                The
                    amendments will result in changes to the disclosure included
                    in theCompany’s
                    financial report.
   F
              - 43
  **Reference**
                
                **Title**
                
                **Summary**
                
                **Application**
                  **Date
                    of**
                  **Standard**
                
                **Impact
                    on****The**
                  **Company****’s
                    financial**
                  **report**
 AASB
                    4
                
                Insurance
                    Contracts
                
                Not
                    applicable
                
                1-Jan-07
                
                Not
                    applicableAASB
                    117
                
                Leases
                
                Not
                    applicable as theCompanyhas not entered into any leases
                
                1-Jan-07
                
                Not
                    applicableAASB
                    1023
                
                General
                    Insurance Contracts
                
                Not
                    applicable because theCompanydoes not have any insurance contracts that are covered by this
                    standard
                
                1-Jan-07
                
                Not
                    ApplicableAASB
                    1038
                
                Life
                    Insurance Contracts
                
                Not
                    applicable because theCompanydoes not have any insurance contracts that are covered by this
                    standard
                
                1-Jan-07
                
                Not
                    ApplicableAASB
                    1049
                
                Financial
                    Reporting of General Government Sectors by Government
                
                Not
                    applicable
                
                1-Jul-08
                
                Not
                    Applicable
 **First
        Time Adoption of Australian Equivalent to international Financial Reporting
        Standards (AIFRS)**
 
 The
        Company 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 Company 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 Company 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:
 
 A
        gain of
        $289,911 was recognized in retained earnings as an unrealized foreign exchange
        movement on financial instruments from the prior year.
 
 F
            - 44
  **32.** **POST
        BALANCE DATE EVENTS**
 
 Subsequent
        to the balance date, the company has bought back a further 367,390 shares
        for a
        total consideration of A$155,947.
 
 The
        Remuneration Committee has approved the allocation of an additional 1,100,000
        shares to employees under the existing Employee Share Plan. 900,000 of these
        shares were issued in April and a further 200,000 were issued in May
        2007.
 
 **33.** **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
        Standards (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 income statement and the balance sheet from the adjustments
        that
        are required to reflect US GAAP for the above stated accounts are as
        follows:
 
 **YEARS
                  ENDED 31 DECEMBER****2006**
              
              **2005**
              
              **2004****INCOME
                  STATEMENT**Net
                  income/(loss) under AIFRS
              
              
              3,235,566
              
              
              2,060,587
              
              
              (594,274
              )33.1Change
                  in Fair Value of Derivative Instruments
              
              
              -
              
              
              -
              
              
              (691,709
              )33.2Capitalization
                  of Administration Expenses to Inventory
              
              
              -
              
              
              -
              
              
              168,50833.3Prior
                  year adjustment
              
              
              -
              
              
              12,770
              
              
              -33.4Amortization
                  of Goodwill
              
              
              -
              
              
              -
              
              
              -Net
                  income before cumulative effect of change in Accounting Principle
                  under US
                  GAAP
              
              
              3,235,566
              
              
              2,073,357
              
              
              (1,117,475
              )Cumulative
                  effect of change in Accounting Principle
              
              
              -
              
              
              -
              
              
              -Net
                  income under US GAAP
              
              
              3,235,566
              
              
              2,073,357
              
              
              (1,117,475
              )
 
 **YEARS
                  ENDED 31 DECEMBER****2006**
              
              **2005**
              
              **2004****BALANCE
                  SHEET**Equity
                  under AIFRS
              
              
              18,198,998
              
              
              17,633,641
              
              
              16,029,94833.4 Goodwill
              
              
              499,718
              
              
              499,718
              
              
              499,71833.1 Financial
                  Instruments
              
              
              -
              
              
              -
              
              
              289,91133.6 Loan
                    to Employees
              
              
              (548,250
              )
              
              -
              
              
              -US
                  GAAP
              
              
              17,700,466
              
              
              18,133,359
              
              
              16,819,577Total
                  Assets under AIFRS
              
              
              22,521,665
              
              
              24,510,368
              
              
              17,385,12133.4 Goodwill
              
              
              499,718
              
              
              499,718
              
              
              499,71833.1 Financial
                  Instruments
              
              
              -
              
              
              -
              
              
              289,91133.6 Loan
                    to Employees
              
              
              (548,250
              )
              
              -
              
              
              -US
                  GAAP
              
              
              22,473,133
              
              
              25,010,086
              
              
              18,174,750
  F
              - 45
  33.1.
              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 30 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:
 
 **YEARS
                  ENDED 31 DECEMBER****2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$**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.
 
 33.2.
              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 DECEMBER****2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$**Administration
                  costs capitalized
              
              
              -
              
              
              -
              
              
              -Cumulative
                  effect on Total Assets
              
              
              -
              
              
              -
              
              
              -Cumulative
                  effect on Equity
              
              
              -
              
              
              -
              
              
              -Effect
                  on Net Income
              
              
              -
              
              
              -
              
              
              168,508
 
 33.3.
              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.
 
 33.4.
              GOODWILL
 
 Under
        AIFRS, goodwill relating to the acquisition of a business is not required
        to be
        amortized but is subject to annual impairment testing, however under AGAAP
        it
        was amortized over 20 years. Effective from January 1, 2002, goodwill may
        not be
        amortized under US GAAP. Goodwill was recorded by the Company prior to 2004
        but
        was fully written off by December 31, 2003. Consequently, there is no need
        for
        an adjustment to the income statement however, there is an adjustment to
        the
        balance sheet to reflect the different treatment of goodwill under US GAAP
        from
        January 1, 2002 to December 31, 2003.
  F
              - 46
  33.5.
              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 DECEMBER****2006**
              
              **2005**
              
              **2004****A$**
              
              **A$**
              
              **A$**Basic
                  Earnings per share underAIFRS
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )US
                  GAAP (before cumulative effect of change in Accounting
                  Principal)
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )US
                  GAAP (after effect of change in Accounting Principal)
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )Earnings
                  per ADR under US GAAP-
                  20 shares equivalent to 1 ADRbefore
                  change in Acc. Princ.
              
              
              0.73
              
              
              0.47
              
              
              (0.25
              )after
                  change in Acc. Princ.
              
              
              0.73
              
              
              0.47
              
              
              (0.25
              )Diluted
                  Earnings per share underAIFRS
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )US
                  GAAP (before cumulative effect of change in Accounting
                  Principal)
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )US
                  GAAP (after effect of change in Accounting Principal)
              
              
              0.04
              
              
              0.02
              
              
              (0.01
              )Earnings
                  per ADR under US GAAP-
                  20 shares equivalent to 1 ADRbefore
                  change in Acc. Princ.
              
              
              0.73
              
              
              0.47
              
              
              (0.25
              )after
                  change in Acc. Princ.
              
              
              0.73
              
              
              0.47
              
              
              (0.25
              )Reconciliation
                  of Diluted EarningsBefore
                  cumulative effect of change in Accounting PrincipalNet
                  Profit - Basic EPS (USGAAP)
              
              
              3,235,566
              
              
              2,073,357
              
              
              (1,117,475
              )Add
                  Back Interest on Convertible Notes
              
              
              -
              
              
              -
              
              
              -Net
                  Profit - Diluted EPS (US GAAP)
              
              
              3,235,566
              
              
              2,073,357
              
              
              (1,117,475
              )Outstanding
                  Shares - Basic EPS
              
              
              89,313,280
              
              
              87,810,254
              
              
              87,810,254Add
                  dilutive options (US GAAP)
              
              
              -
              
              
              -
              
              
              -Add
                  dilutive convertible notes (US GAAP)
              
              
              -
              
              
              -
              
              
              -Outstanding
                  Shares - Diluted EPS (US GAAP)
              
              
              89,313,280
              
              
              87,810,254
              
              
              87,810,254After
                  cumulative effect of change in Accounting PrincipalNet
                  Profit - Basic EPS (US GAAP)
              
              
              3,235,566
              
              
              2,073,357
              
              
              (1,117,475
              )Add
                  Back Interest on Convertible Notes
              
              
              -
              
              
              -
              
              
              -Net
                  Profit - Diluted EPS (US GAAP)
              
              
              3,235,566
              
              
              2,073,357
              
              
              (1,117,475
              )Outstanding
                  Shares - Basic EPS
              
              
              89,313,280
              
              
              87,810,254
              
              
              87,810,254Add
                  dilutive options (US GAAP)
              
              
              -
              
              
              -
              
              
              -Add
                  dilutive convertible notes (US GAAP)
              
              
              -
              
              
              -
              
              
              -Outstanding
                  Shares - Diluted EPS (US GAAP)
              
              
              89,313,280
              
              
              87,810,254
              
              
              87,810,254




F
          -
          47




33.6.
              LOANS
                  TO EMPLOYEES
  As
        disclosed in Note 25.3 and 25.5 shares were issued to key management personnel
        of the Company under an executive share plan (ESP). Shares issued under the
        ESP
        have been paid for by employees who have been provided with an interest free,
        loan by the Company.
 
 Under
        AIFRS interest free loans are included within loans and receivables and measured
        in accordance with AASB 139 : Financial Instruments Recognition and Measurement.
        The receivables have initially been recognized at fair value and subsequently
        measured at amortized cost using the effective interest method.
 
 Under
        USGAAP Statement 123 (R) loans are classified as contra equity until physically
        repaid and are not reflected in financial assets. Consequently there is an
        adjustment to the balance sheet to reflect the different treatment of these
        loans as at December 31, 2006.
  33.7.
              ACCOUNTING
                  FOR UNCERTAINTY IN INCOME TAXES
  In
        June
        2006, the Financial Accounting Standard Board (FASB) issued Interpretation
        No.
        48, Accounting for Uncertainty in Income Taxes —An Interpretation of FASB
        Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty
        in
        income taxes recognized in the financial statements with SFAS No. 109,
        Accounting for Income Taxes. This interpretation prescribes a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of a tax position taken or expected to be taken in a tax return.
        FIN
        48 also provides guidance on derecognizing, classification, interest and
        penalties, accounting in interim periods, disclosure, and transition. FIN
        48 is
        effective for fiscal years beginning after December 15, 2006.
 
 The
        effect of the adoption of FIN 48 on the Company’s consolidated financial
        statements are not expected to be material but the full impact will be
        determined and disclosed in future years. The Company wishes to highlight
        that
        there are tax losses in Indonesia which are under dispute by the tax authorities
        in that jurisdiction but the Company believes that its case is strong for
        retaining the losses. In the event that these losses are rejected by the
        tax
        courts in Indonesia, relief would be sought from the Australian tax authorities
        under the double tax treaty between the two countries, to claim the losses
        arising from the disputed transactions (See Note 4 to Financial Statements
        above).
  F
            -
            48