##### Table of Contents



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
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 Commission file number: 000-31212
 METAL STORM LIMITED
 (Exact Name of Registrant as Specified in its Charter)
 Australia
(Jurisdiction of Incorporation or Organization)
 29 Sudbury Street
Darra, Queensland 4076
Australia
(Address of principal executive offices)
 Brett Farmer
Company Secretary
Telephone: +61 7 3147 8600
Facsimile: +61 7 3147 8610
29 Sudbury Street
Darra, Queensland 4076
 Australia
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
 Ordinary Shares in the form of American Depositary Shares, 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
    o þ
  o þ
  þ o
  o þ
  Large accelerated filer o   
    Accelerated filer o
    Non-accelerated filer þ
    Smaller reporting company o(Do not check if a smaller reporting company)
  U.S. GAAP o
    
    International Financial Reporting Standards as issued þ 
by the International Accounting Standards Board
    
    Other o
  o o
  o þ




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##### 



Table of Contents
 PageItem 1. Identity of Directors, Senior Management and Advisors
    
    
    2Item 2. Offer Statistics and Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2Item 4. Information on Metal Storm
    
    
    11Item 4A. Unresolved Staff Comments
    
    
    19Item 5. Operating and Financial Review and Prospects
    
    
    19Item 6. Directors, Senior Management and Employees
    
    
    26Item 7. Major Shareholders and Related Party Transactions
    
    
    30Item 8. Financial Information
    
    
    31Item 9. The Offer and Listing
    
    
    31Item 10. Additional Information
    
    
    33Item 11. Quantitative and Qualitative Disclosure about Market Risk
    
    
    45Item 12. Description of Securities Other than Equity Securities
    
    
    45Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    47Item 14. Material Modifications to the Rights of Security Holders and the Use of Proceeds
    
    
    47Item 15. Controls and Procedures
    
    
    47Item 16A. Audit Committee Financial Expert
    
    
    48Item 16B. Code of Ethics
    
    
    48Item 16C. Principal Accountant Fees and Services
    
    
    48Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    48Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    48Item 16F. Change in Registrants Certifying Accountant
    
    
    48Item 16G. Corporate Governance
    
    
    48Item 17. Financial Statements
    
    
    49Item 18. Financial Statements
    
    
    49Item 19. Exhibits
    
    
    49EX-4.8EX-4.9EX-8.0EX-12.1EX-12.2EX-13.1EX-13.2
  i




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CURRENCY OF PRESENTATION AND EXCHANGE RATES
    AtPeriod
    
    AverageEnd
    
    Rate(1)
    
    High
    
    LowYear ended December 31,2006
    
    
    0.7884
    
    
    
    0.7582
    
    
    
    0.7914
    
    
    
    0.70562007
    
    
    0.8776
    
    
    
    0.8444
    
    
    
    0.9369
    
    
    
    0.77242008
    
    
    0.6983
    
    
    
    0.8499
    
    
    
    0.9797
    
    
    
    0.60732009
    
    
    0.8979
    
    
    
    0.7988
    
    
    
    0.9293
    
    
    
    0.63012010
    
    
    1.0122
    
    
    
    0.9199
    
    
    
    1.0153
    
    
    
    0.8172MonthDecember 2010
    
    
    1.0122
    
    
    
    0.9929
    
    
    
    1.0153
    
    
    
    0.9675January 2011
    
    
    0.9976
    
    
    
    0.9962
    
    
    
    1.0200
    
    
    
    0.9868February 2011
    
    
    1.0174
    
    
    
    1.0084
    
    
    
    1.0176
    
    
    
    0.9984March 2011
    
    
    1.0358
    
    
    
    1.0113
    
    
    
    1.0358
    
    
    
    0.9984April 2011
    
    
    1.0937
    
    
    
    1.0588
    
    
    
    1.0937
    
    
    
    1.0346May 2011
    
    
    1.0660
    
    
    
    1.0675
    
    
    
    1.0970
    
    
    
    1.0496
 
 (1)
    
    Determined by averaging noon buying rates on the last day of each full month during
the period. FORWARD-LOOKING STATEMENTS
  1




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PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected Financial Data
     As of and for the year ended December 31,2010
    
    2009
    
    2008
    
    2007
    
    2006A$
    
    A$
    
    A$
    
    A$
    
    A$Income Statement data in accordance with IFRS:Revenue
    
    
    3,345,016
    
    
    
    1,112,481
    
    
    
    2,933,346
    
    
    
    3,205,381
    
    
    
    2,339,310Expenses
    
    
    (7,978,366
    )
    
    
    (6,670,590
    )
    
    
    (7,220,211
    )
    
    
    (8,269,116
    )
    
    
    (15,454,051
    )Loss before finance costs and tax from
continuing operations
    
    
    (4,633,350
    )
    
    
    (5,558,109
    )
    
    
    (4,286,865
    )
    
    
    (5,063,735
    )
    
    
    (13,114,741
    )Finance costs
    
    
    (4,304,903
    )
    
    
    (5,749,555
    )
    
    
    (6,369,138
    )
    
    
    (4,934,415
    )
    
    
    (2,183,013
    )Income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss after tax from continuing operations
    
    
    (8,938,253
    )
    
    
    (11,307,664
    )
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,297,754
    )Loss after tax from discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,256
    )Loss attributable to members of the parent
    
    
    (8,938,253
    )
    
    
    (11,307,664
    )
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )Basic and diluted loss per share(1)
    
    
    (0.0064
    )
    
    
    (0.0122
    )
    
    
    (0.0122
    )
    
    
    (0.0117
    )
    
    
    (0.0189
    )Weighted average ordinary number of shares
outstanding
    
    
    1,395,910,416
    
    
    
    930,322,973
    
    
    
    871,930,746
    
    
    
    855,496,215
    
    
    
    813,066,261Balance Sheet data in accordance with IFRS:Total current assets
    
    
    1,722,527
    
    
    
    376,634
    
    
    
    8,701,884
    
    
    
    17,069,966
    
    
    
    26,605,477Total assets
    
    
    2,146,956
    
    
    
    829,640
    
    
    
    9,267,524
    
    
    
    18,788,277
    
    
    
    27,856,081Total current liabilities
    
    
    20,636,341
    
    
    
    20,006,958
    
    
    
    22,397,651
    
    
    
    21,812,546
    
    
    
    26,424,955Long term obligations (including finance leases)
    
    
    
    
    
    
    23,686
    
    
    
    63,168
    
    
    
    283,301
    
    
    
    333,794Total liabilities
    
    
    20,636,341
    
    
    
    20,030,644
    
    
    
    22,460,789
    
    
    
    22,095,847
    
    
    
    26,758,749Contributed equity
    
    
    77,683,753
    
    
    
    70,075,033
    
    
    
    66,209,718
    
    
    
    65,428,400
    
    
    
    59,985,634Total equity
    
    
    (18,489,385
    )
    
    
    (19,201,004
    )
    
    
    (13,193,265
    )
    
    
    (3,307,570
    )
    
    
    1,097,332Other financial data:Dividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Basic and diluted loss per share is calculated as net loss for the period divided by
adjusted weighted average number of ordinary shares outstanding for the same period. The number of
ordinary shares outstanding is adjusted to include ordinary shares subsequently issued for no
consideration. A significant number of shares could be issued upon conversion of the convertible
notes 2




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and exercise of the options issued to noteholders. These are not included in EPS because the
Company has incurred net losses and recognising them in diluted shares outstanding would be
anti-dilutive. B. Capitalization and Indebtedness
  C. Reasons for Offer and Use of Proceeds
  D. Risk Factors
 There is substantial doubt regarding Metal Storms ability to continue as a going concern.
      3




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We may be required to redeem convertible notes before the Maturity Date, which redemption could
cause us to become insolvent.
  We will need to raise additional capital and this may not be on favorable terms.
    We are in the product engineering phase and do not yet have any product for sale based on our core
technology.
  We cannot be certain of market acceptance of our technology or the rate of any market acceptance.
  4




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We are dependent on retaining key personnel.
  Any catastrophic event involving our technology could adversely affect Metal Storms reputation.
  Changes in funding or export regulation by the U.S. or Australian governments could impact our
ability to develop and sell our products.
  There are some design and performance limitations of our technology.
  We may not have adequate protection for our intellectual property.
    5




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
    
    any of the pending or future patent applications filed by us or on our behalf will be approved;
    
    we will develop any additional proprietary products or processes that are patentable; or
    
    third parties will not independently develop similar products or processes, duplicate any
of the products or processes we have or are developing relating to our technology, or design
around the patents we own with competitive advantages.
  Protecting our proprietary technology from infringement by others may affect our business.
   We may be subject to patent infringement claims from our competitors and other third parties.
   The Australian and U.S. governments may take action on patent applications and patents.
    6




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There are potential adverse effects from competition and technological changes.
    There may be reductions or changes in military expenditures.
  We are subject to government regulation.
  7




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There are risks inherent in U.S. government contracts.
  
    
    Contract Termination
  
    
    Loss of Appropriations
  
    
    Procurement and Other Related Laws and Regulations
  
    
    Protection of Proprietary Technology
  
    
    Changes and Adjustments
 8




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
    
    Competitive Bidding and Domestic Preferences
   We may have product liability exposure in the future.
  We may be dependent on third party manufacturers, suppliers and teaming partners.
    Our share price has been and will likely continue to be volatile.
  9




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
    
    variations in our anticipated or actual operating results;
    
    sales of substantial amounts of our shares;
    
    announcements about us or about our competitors, including new products;
    
    litigation and other developments relating to our patents or other proprietary rights or
those of our competitors;
    
    governmental regulation and legislation;
    
    our available cash resources or the need to seek additional funding through public or
private equity or debt financings; and
    
    changes in securities analysts estimates of our performance, or our failure to meet
analysts expectations.
   We are not currently paying dividends and we may not pay dividends in the future.
  We have been, and may be again, classified as a passive foreign investment company for U.S. federal
income tax purposes.
    Our ADS holders are not shareholders and do not have shareholder rights.
  10




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Item 4. Information on Metal Storm
 A. History and Development of Metal Storm
        11




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B. Business Overview
  Strategy
       Engineering
  12




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Business Development
       Technology
      
    
    electronically programmable rates of fire from single shots to ultra-rapid rates;
    
    no moving parts, resulting in increased reliability and availability because there is
less maintenance required and decreased possibility of malfunction;
    
    increased firepower to weight ratio resulting in a lighter weapon system with greater
firepower compared to conventional systems;
    
    modular pods that could operate as a complete weapons system in one container;
    
    digital electronic operation;
    
    ideally suited to mounting on robotic and remotely operated platforms
    
    the potential of grouping multiple calibres and multiple lethalities in one gun
system allowing the user to vary the use to a specific situation; and
    
    numerous hybrid configurations and Special Forces applications.
 Joint Collaboration Agreement with Singapore Technologies Kinetics
  13




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Internal Product Development
  
    
    3GL  semi-automatic three shot 40mm modular underbarrel grenade launcher;
    
    FireStorm  four barrel 16 shot 40mm remotely operated weapon system;
    
    MAUL  semi automatic 18mm (12 gauge) multi-shot accessory under-barrel launcher;
and
    
    A range of 40mm and 18mm lethal and less-lethal ammunition.
  3GL
    Redback
  14




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FireStorm
      MAUL
 TM
     Systems for Unmanned Vehicles
   15




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Ammunition
  40mm lethal ammunition
  40mm less-lethal ammunition
  18mm (12 gauge) ammunition
  Fireworks
  Handgun
  External Development Programs
  Papua New Guinea Correctional Service  MAUL weapons
 16




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U.S. Marine Corps  Mission Payload Module  Non-lethal Weapon System
   United States Army Joint Munitions and Lethality Contracting Center  Directional
Fragmentation and Advanced Fuzing project
  U.S. Marine Corps Explosive Ordnance Disposal ( EOD)/Improvised Explosive Device ( IED)
Training Kits
  Competition
   Regulation
  Australia
  17




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United States
   Intellectual Property
   
    
    stacked projectile delivery systems and stacked projectile weapon systems, in particular
the sealing, reload and ignition thereof;
    
    technology related to encoding weapons to permit authorized access only;
    
    ammunition and projectiles;
    
    electronic firing technology;
    
    area denial;
    
    fire fighting;
    
    seismic testing;
    
    multi-barrel systems;
    
    fireworks;
    
    missile defense and target interception;
    
    directional control of missiles;
    
    unmanned aerial vehicle weaponization;
    
    adapting conventional munitions to Metal Storm configuration; and
    
    selectable kinetic energy systems.
  
    
    35 granted U.S. patents and nine pending U.S. patent applications;
    
    15 granted Australian patents and four pending Australian patent applications; and
    
    44 other patents granted outside the United States and Australia and 33 pending
applications outside the United States and Australia, including one Patent Cooperation
Treaty (international) application and seven European Patent Convention applications.
  18




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Raw Materials
  Seasonality
  C. Organizational Structure
  D. Property, Plant and Equipment
    
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  A. Operating Results
 Overview
   19




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Where We Derive Our Revenue
  Critical Accounting Policies
   Revenue Recognition
  Sale of goods
  Rendering of services
  20




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Construction contracts
    Share-based payment transactions
    Comparison of Annual Results of Operations
 2010 compared with 2009
 Revenue.
  
    
    In April 2010, Metal Storm was awarded a US$1.5 million contract by the U.S. Marine Corps
for its Mission Payload Module  Non-lethal Weapon System, which is a new weapon system
designed to provide the Marine Corps with improved counter-personnel capabilities. The
contract was completed in May 2011.
    
    Directional Fragmentation and Advanced Fuzing project with the United States Army Joint
Munitions and Lethality Contracting Center.This contract was to develop and demonstrate new
and innovative technologies capable of providing significant improvements in lethality over
current inventory warheads by controlling the directionality of the fragmentation pattern.
The project was completed in August 2010.
    
    In March 2010, Metal Storm was awarded a contract by the U.S. Marine Corps for the
assembly and delivery of explosive ordnance disposal and improvised explosive device
training kitsto multiple U.S. Marine Corps training centers across the United States. The
final kits were delivered in July 2010.
  21




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##### Table of Contents



Expenses.
 
    
    Increase in consumables used of A$581,184 that directly relates to the increased contract
revenue.
    
    In 2010 we had a fair value movement gain on the embedded derivative of A$407,041 that
reflects the movement in the fair value of the conversion option included in the convertible
notes issued in 2006. In 2009, we had a fair value loss of A$224,611.
    
    In 2009 we had a fair value gain on the extinguishment of convertible note debt of
A$2,467,609 due to the substantial changes we made to the convertible note terms. In 2010 we
had no such item recorded in the income statement.
    
    Finance costs decreased by A$1,444,652 from A$5,749,555 in 2009 to A$4,304,903 in 2010.
This is due to the decrease in accretion expense of the convertible notes resulting from the
substantial changes we made to the convertible note terms and conditions in 2009.
 Net Loss.
 2009 compared with 2008
 Revenue.
 Expenses.
 
    
    In 2009 we made substantial changes to the terms of the convertible notes issued in 2006,
including extending the maturity date of our convertible notes from September 1, 2009 to
September 1, 2011 and in some instances granting options and providing security in lieu of
cash coupon payments. These changes called for an extinguishment of the original liability
and recognition of a new liability, resulting in a gain on extinguishment of debt of
A$2,467,609.
    
    In 2009 we had a fair value movement loss of A$224,611 on the embedded derivative that
reflects the movement in the fair value of the conversion option embedded in the convertible
notes issued in 2006. In 2008, we had a fair value gain of A$3,620,682.
    
    In 2008 we had an impairment expense of A$769,200 representing the decrease in fair value
of floating rate notes that were held by Metal Storm. In 2009 these notes were sold at
A$75,000 above their fair value recorded, which resulted in the reversal of impairment
expenses of A$75,000.
    
    Research and development expenses decreased by A$1,324,603 to A$976,994 in 2009 from
A$2,301,597 in 2008. Reduced fees to external contractors is the predominate cause for the
reduction in R&D expenses.
 Net Loss. .
 Effects of Currency Fluctuations
    22




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B. Liquidity and Capital Resources
 Overview
   Year ended December 312010
    
    2009
    
    2008A$
    
    A$
    
    A$Net cash used in operating activities
    
    
    (6,189,600
    )
    
    
    (8,704,228
    )
    
    
    (10,180,514
    )Net cash provided by investing activities
    
    
    6,726
    
    
    
    197,606
    
    
    
    965,807Net cash provided by financing activities
    
    
    7,280,450
    
    
    
    1,048,665
    
    
    
    1,964,543Effect of exchange rate changes on cash
    
    
    1,735
    
    
    
    (45,985
    )
    
    
    93,908Net movement in cash and cash equivalents
    
    
    1,099,311
    
    
    
    (7,503,942
    )
    
    
    (7,156,256
    )
     Borrowings
    23




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Equity Line Facility Agreements
    Placements of ordinary shares
    No capital expenditure commitments
  Future Cash Needs
  24




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C. Research and Development: Patents and Licenses
  D. Trend Information
  E. Off-Balance sheet arrangements
  F. Tabular disclosure of contractual obligations
  Payments due by periodTotal
    
    Less Than
    
    
    
    
    
    
    
    
    
    More thanA$
    
    1  Year
    
    1  3 Years
    
    3   5 Years
    
    5 YearsCapital (finance) lease obligations
    
    
    7,764
    
    
    
    4,234
    
    
    
    3,530
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    1,279,325
    
    
    
    312,820
    
    
    
    810,154
    
    
    
    156,351
    
    
    
    Loans
    
    
    214,848
    
    
    
    214,848
    
    
    
    
    
    
    
    
    
    
    
    Convertible Notes
    
    
    18,880,675
    
    
    
    18,880,675
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    20,382,612
    
    
    
    19,412,577
    
    
    
    813,684
    
    
    
    156,351
    
    
    
    
 25




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Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  Name
    
    PositionTerence J. ODwyer
    
    ChairmanJohn R. Nicholls
    
    DirectorTrevor W. Tappenden
    
    DirectorWilliam Henkel
    
    DirectorLee J. Finniear
    
    Chief Executive Officer and Managing DirectorBrett I. Farmer
    
    Chief Financial Officer and Company SecretaryPeter D. Faulkner
    
    President  Metal Storm Inc.George A. Orrison
    
    Director of Sales  Metal Storm Inc.
 Terence J. ODwyer.
 John R. Nicholls.
 Trevor Tappenden.
 William Henkel.
 Lee J. Finniear.
 Brett I. Farmer.
 Peter D. Faulkner.
 26




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George A. Orrison.
 B. Compensation
   Short Term Employee BenefitsNon
    
    
    
    
    
    Post
    
    ShareSalary &
    
    Cash
    
    Monetary
    
    
    
    
    
    Employment
    
    Based
    
    
    
    
    
    Total
    
    PerformanceName and
    
    Fees
    
    Bonus
    
    Benefit
    
    Other
    
    Benefits
    
    Payments
    
    Termination
    
    Remuneration
    
    RelatedPosition
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    $
    
    %Terence J. ODwyer
Chairman (Non-Executive)
    
    
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000John R. Nicholls
Director (Non-Executive)
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Trevor W. Tappenden
Director (Non-Executive)
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,000William Henkel
Director (Non-Executive)
Appointed 11/2/10
    
    
    8,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,333Total Non Executive Directors
    
    
    198,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198,333Lee J. Finniear
Managing Director &
Chief Executive Officer
    
    
    320,000
    
    
    
    97,088
    
    
    
    
    
    
    
    
    
    
    
    37,538
    
    
    
    
    
    
    
    
    
    
    
    454,626
    
    
    
    21.4
    %Total Executive Directors
    
    
    320,000
    
    
    
    97,088
    
    
    
    
    
    
    
    
    
    
    
    37,538
    
    
    
    
    
    
    
    
    
    
    
    454,626
    
    
    
    Brett I. Farmer
Chief Financial Officer &
Company Secretary
    
    
    159,558
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    16,610
    
    
    
    
    
    
    
    
    
    
    
    201,168
    
    
    
    12.4
    %Peter D. Faulkner
President  Metal Storm Inc.
    
    
    237,344
    
    
    
    19,682
    
    
    
    12,997
    
    
    
    
    
    
    
    7,711
    
    
    
    
    
    
    
    
    
    
    
    277,734
    
    
    
    7.1
    %Neil J. Partridge
Managing Engineer
Appointed 7/5/10
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,750
    
    
    
    
    
    
    
    
    
    
    
    81,750
    
    
    
    George A. Orrison
Director of Sales  Metal 
Storm Inc.
Appointed 11/1/10
    
    
    21,062
    
    
    
    
    
    
    
    1,818
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,880
    
    
    
    Peter R. Wetzig
Company Secretary
Resigned 9/24/10
    
    
    79,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,184
    
    
    
    David M. Pashen
Chief Engineer
Resigned 10/15/10
    
    
    117,692
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    12,991
    
    
    
    15,000
    
    
    
    
    
    
    
    157,683
    
    
    
    7.6
    %Arthur D. Schatz
Vice President
 Business Development
Resigned 1/4/11
    
    
    175,806
    
    
    
    
    
    
    
    980
    
    
    
    2,744
    
    
    
    5,072
    
    
    
    
    
    
    
    
    
    
    
    184,602
    
    
    
    Total Other Key Management
    
    
    865,646
    
    
    
    56,682
    
    
    
    15,795
    
    
    
    2,744
    
    
    
    49,134
    
    
    
    15,000
    
    
    
    
    
    
    
    1,005,001
    
    
    
    Total Remuneration of Key Management Personnel
    
    
    1,383,979
    
    
    
    153,770
    
    
    
    15,795
    
    
    
    2,744
    
    
    
    86,672
    
    
    
    15,000
    
    
    
    
    
    
    
    1,657,960
    
    
    
    
 27




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##### Table of Contents



C. Board Practices
     
    
    retains independent auditors and reviews and discusses the independence of the auditors;
    
    sets the engagement policies for the independent auditors;
    
    reviews and discusses the audit plan, the conduct of the audit and the audit results;
    
    reviews and discusses financial statements and disclosures;
    
    determines and administers internal audit procedures;
    
    reviews and discusses the systems of internal accounting controls;
    
    reviews and discusses the recommendations of independent auditors;
    
    approves related party transactions; and
    
    establishes procedures for complaints regarding financial statements or accounting policies.
      
    
    salary/fees;
    
    benefits  including the provision of retirement and health benefits; and
    
    incentive schemes  including performance-related bonuses and share options under the
discretionary share option plan.
  28




---



##### Table of Contents



D. Employees
  Queensland
    
    VirginiaAustralia
    
    USAAdministration
    
    
    7
    
    
    
    4Engineering
    
    
    10
    
    
    
    6
 At December 31, 2009, we had 27 staff. At December 31, 2008, we had 32 staff.
 E. Share Ownership
   Number of Shares Held
    
    Number of Options ExercisableTerence J. ODwyer
    
    
    1,318,724
    (1)
    
    
    839,546
    (2)John R. Nicholls(3)
    
    
    
    
    
    
    Trevor W. Tappenden
    
    
    125,000
    
    
    
    75,000
    (4)William Henkel
    
    
    
    
    
    
    Lee J. Finniear
    
    
    558,828
    
    
    
    1,335,298
    (5)Brett I. Farmer
    
    
    500,000
    
    
    
    544,407
    (4)Peter D. Faulkner
    
    
    
    
    
    
    200,000
    (6)George A. Orrison
    
    
    
    
    
    
    
 
 (1)
    
    672,869 shares are owned by Mr. ODwyer and Mrs. P.M. ODwyer and 645,855 shares are owned
by Louclaben Pty Ltd in trust for the ODwyer Family Account.(2)
    
    27,042 unquoted options with an exercise price of A$0.001 per share and an expiry date of
September 24, 2012 and 403,722 unquoted options with an exercise price of A$0.015 per share and an
expiry date of September 13, 2013 are owned by Mr. Terence J. ODwyer and Mrs. P.M. ODwyer.
21,269 unquoted options with an exercise price of A$0.001 per share and an expiry date of September
24, 2012 and 387,513 unquoted options with an exercise price of A$0.015 per share and an expiry
date of September 13, 2013 are owned by Louclaben Pty Ltd in trust for the ODwyer Family Account.(3)
    
    Mr. Nicholls is a director of Metal Storm and a director and investment manager of Harmony
Capital Partners Pte Limited (Harmony). Harmony Investment Fund Limited (Harmony Investment) is
an entity that is managed by Harmony and which owns securities in Metal Storm. As of June 6, 2011,
Harmony Investment held 24,870,644 ordinary shares, 97,902,659 quoted secured convertible notes and
25,930,470 unquoted options. Mr. Nicholls disclaims beneficial ownership of securities owned by
Harmony Investment.(4)
    
    These are unquoted options with an exercise price of A$0.015 per share and an expiry date
of September 13, 2013. 29




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##### Table of Contents



(5)
    
    1,000,000 options held by Mr. Finniear have an exercise price of A$0.19 per share and
expire in March 2012 and 335,298 options have an exercise price of A$0.015 per share and an expiry
date of September 13, 2013.(6)
    
    Options held by Mr. Faulkner have an exercise price of A$0.40 per share and expire between
December 2010 and September 2012.  
 Item 7. Major Shareholders and Related Party Transactions
 A. Major Shareholders
        30




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##### Table of Contents



B. Related Party Transactions
  C. Interest of Experts and Counsel
  
 Item 8. Financial Information
 A. Consolidated Financial Statements and Other Financial Information
  Legal Proceedings
  Dividends
  B. Significant Changes
  
 Item 9. The Offer and Listing
 A. Listing Details  Price History
 Australian Securities Exchange
  Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    A$
    
    A$December 31, 2010First Quarter
    
    $
    0.03
    
    
    $
    0.01
 31




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##### Table of Contents



Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    A$
    
    A$Second Quarter
    
    $
    0.02
    
    
    $
    0.01Third Quarter
    
    $
    0.01
    
    
    $
    0.01Fourth Quarter
    
    $
    0.01
    
    
    $
    0.01December 31, 2009First Quarter
    
    $
    0.06
    
    
    $
    0.03Second Quarter
    
    $
    0.04
    
    
    $
    0.02Third Quarter
    
    $
    0.03
    
    
    $
    0.02Fourth Quarter
    
    $
    0.08
    
    
    $
    0.02December 31, 2008Annual
    
    $
    0.09
    
    
    $
    0.03December 31, 2007Annual
    
    $
    0.21
    
    
    $
    0.08December 31, 2006Annual
    
    $
    0.28
    
    
    $
    0.10
 Price PerOrdinary ShareHigh
    
    LowMonth Ended
    
    A$
    
    A$May 2011
    
    $
    0.01
    
    
    $
    0.00April 2011
    
    $
    0.01
    
    
    $
    0.01March 2011
    
    $
    0.01
    
    
    $
    0.01February 2011
    
    $
    0.01
    
    
    $
    0.01January 2011
    
    $
    0.01
    
    
    $
    0.01December 2010
    
    $
    0.01
    
    
    $
    0.01
 American Depositary Shares
  Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    US$
    
    US$December 31, 2010First Quarter
    
    $
    0.52
    
    
    $
    0.25Second Quarter
    
    $
    0.31
    
    
    $
    0.12Third Quarter
    
    $
    0.48
    
    
    $
    0.14Fourth Quarter
    
    $
    0.33
    
    
    $
    0.17December 31, 2009First Quarter
    
    $
    0.73
    
    
    $
    0.37Second Quarter
    
    $
    0.63
    
    
    $
    0.37Third Quarter
    
    $
    0.52
    
    
    $
    0.38Fourth Quarter
    
    $
    0.90
    
    
    $
    0.28December 31, 2008Annual
    
    $
    1.57
    
    
    $
    0.31December 31, 2007Annual
    
    $
    3.38
    
    
    $
    1.15December 31, 2006Annual
    
    $
    4.04
    
    
    $
    1.75
 Price PerOrdinary ShareHigh
    
    LowMonth Ended
    
    US$
    
    US$May 2011
    
    $
    0.17
    
    
    $
    0.16April 2011
    
    $
    0.18
    
    
    $
    0.13March 2011
    
    $
    0.18
    
    
    $
    0.16February 2011
    
    $
    0.20
    
    
    $
    0.16January 2011
    
    $
    0.21
    
    
    $
    0.16December 2010
    
    $
    0.22
    
    
    $
    0.18
 32




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##### Table of Contents



B. Plan of Distribution
  C. Markets
  D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 Item 10. Additional Information
 A. Share Capital
  B. Our Constitution
   Directors
 Interested Directors
   Directors Compensation
  33




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##### Table of Contents



Borrowing Powers Exercisable by Directors
  Retirement of directors
  Share Qualifications
  Rights and Restrictions on Classes of Shares
  Dividend Rights
  Voting Rights
  34




---



##### Table of Contents



Right to Share in our Profits
  Rights to Share in the Surplus in the Event of Liquidation
  Redemption Provisions
  Sinking Fund Provisions
  Liability for Further Capital Calls
  Provisions Discriminating Against Holders of a Substantial Number of Shares
  Variation of Share Rights
  General Meetings of Shareholders
   35




---



##### Table of Contents



Foreign Ownership Regulation
     Merger, Acquisition or Restructure
  Ownership Threshold
  Conditions for Change of Capital
  Stock Issues and Takeover Attempts
  
    
    that the acquisition of control over voting shares takes place in a efficient, competitive
and informed market;
    
    that shareholders have enough information to assess the merits of a proposal; and
    
    that shareholders all have a reasonable and equal opportunity to participate in any
benefits accruing to the shareholders through any proposal under which a person would
acquire a substantial interest.
   
    
    an issuance or agreement to issue which we have notified the ASX of before we are told a
person is making or proposes to make a takeover offer for our shares;
    
    an issuance to our ordinary shareholders on a pro-rata basis;
    
    an issuance made due to an exercise of rights of conversion already in existence;
 36




---



##### Table of Contents




    
    an issuance by us as consideration for an off-market takeover bid made by us where we are
required to comply with the provisions of the Corporations Act;
    
    an issuance under a dividend stock distribution plan that is in operation before we are
told a person is making or proposes to make a takeover for our shares; and
    
    if there is an agreement to issue shares and such agreement is conditional on ordinary
shareholders approving the issuance before the issuance is made.
 Access to and Inspection of Documents
  CHESS
  C. Material Contracts
 Terms of convertible notes
      37




---



##### Table of Contents



Trust Deed in connection with the Rights Offer
   Equity Line Facility Agreements
           D. Exchange Controls
  38




---



##### Table of Contents



E. Taxation
  U.S. Federal Income Tax Considerations
 To ensure compliance with U.S. Treasury Department Circular 230, investors are hereby notified
that: (a) any discussion of U.S. Federal tax issues in this document is not intended or written by
Metal Storm to be relied upon, and cannot be relied upon by investors in the ADSs or ordinary
shares, for the purpose of avoiding penalties that may be imposed on investors in the ADSs or
ordinary shares under the U.S. Internal Revenue Code of 1986, as amended (the Code), (b) such
discussion is written in connection with the promotion or marketing of the transactions or matters
addressed herein by Metal Storm, and (c) investors in the ADSs or ordinary shares should seek
advice based on their particular circumstances from their own independent tax advisors. U.S.
counsel does not intend to be, and is not, engaged in the promotion or marketing of the
transactions or matters described in this offering memorandum, and no inference to the contrary
shall be implied by reason of the U.S. tax discussion set forth herein.
    
    
    an individual who is a citizen or resident of the United States for U.S. federal income
tax purposes;
    
    a corporation, or other entity treated as a corporation for U.S. federal income tax
purposes, created or organized in or under the laws of the United States or any state
thereof or the District of Columbia;
    
    an estate the income of which is subject to U.S. federal income taxation regardless of
its source; or
    
    a trust the administration of which is subject to the primary supervision of a court in
the United States and for which one or more U.S. persons have the authority to control all
substantial decisions.
  You should consult your tax advisor with respect to the U.S. federal, as well as state, local
and non-U.S., tax consequences to you of an investment in ADSs or ordinary shares.
 Ownership of ADSs in General
  39




---



##### Table of Contents



Dividends
 pro rata
       Sale or Exchange of ADSs or Ordinary Shares
  40




---



##### Table of Contents



Medicare Tax on Unearned Income
  Passive Foreign Investment Company Status
     pro rata
 41




---



##### Table of Contents



U.S. holders are urged to consult their tax advisors as to the effect on them of the PFIC
rules and the desirability of making, and the availability of, either a QEF election or a
mark-to-market election with respect to our ADSs or ordinary shares. Metal Storm provides no advice
on your taxation matters. The above should not be taken as advice by the reader of this document.
 Backup Withholding Tax and Information Reporting Requirements
   42




---



##### Table of Contents



The discussion above is not intended to constitute a complete analysis of all tax
considerations applicable to an investment in ADSs or ordinary shares. You should consult with your
tax advisor concerning the tax consequences to you in your particular situation.
 Australian Tax Considerations
  Nature of ADRs for Australian Taxation Purposes
  Taxation of Dividends
   Tax on Sales or other Dispositions of SharesCapital gains tax
   43




---



##### Table of Contents



Tax on Sales or other Dispositions of SharesShareholders Holding Shares on Revenue Account
    Dual Residency
  Stamp Duty
  Australian Death Duty
  Goods and Services Tax
  F. Dividends and Paying Agents
  G. Statements by Experts
  H. Documents on Display
 www.sec.gov
 I. Subsidiary Information
  44




---



##### Table of Contents



Item 11. Quantitative and Qualitative Disclosure about Market Risk
     
 Item 12. Description of Securities Other than Equity Securities
 A. Debt Securities
  B. Warrants and Rights
  C. Other Securities
  D. American Depositary Shares
   Associated Fee
    
    Depositary Action$5.00 or less per 100 ADSs (or portion thereof)
    
     Issuance of ADSs,
including issuances
resulting from a
distribution of shares
or rights or other
property. Cancellation of ADSs
for the purpose of
withdrawal, including
in case of termination
of the Deposit
Agreement.$.02 or less per ADS
    
     Any cash
distribution to ADS
registered holders
made pursuant to the
Deposit Agreement.A fee equivalent to the fee that would be payable
if securities distributed to you had been shares
and the shares had been deposited for issuance of
ADSs
    
     Distribution of
securities distributed
to holders of
deposited securities
which are distributed
by the depositary to
ADS registered
holders.Taxes and other governmental charges
    
    As necessaryRegistration and transfer fees
    
     Transfer and
registration of shares
on our share register
to or from the name of
the depositary or its
agent when you deposit
or withdraw sharesA fee equivalent to the fee that would be payable
for execution and delivery of ADSs as a result of
the deposit of such securities, but which
securities are instead distributed
    
     Issuance of ADS or
shares received
in exercise of rights
distributed, but
whose securities or
rights are instead
sold by the depositary
and the net proceeds
distributedAny charges incurred by the depositary or its 
agents for servicing the deposited securities
    
    As necessaryExpenses of the depositary
    
     Cable, telex and
facsimile
transmissions (when
expressly provided in
the deposit agreement) Expenses incurred
converting foreign
currency to U.S.
dollars
 45




---



##### Table of Contents



PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and the Use of Proceeds
  
 Item 15. Controls and Procedures
 46




---



##### Table of Contents




    
    pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of its assets and its consolidated entities;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Metal Storm are being made only in
accordance with authorizations of management and directors of Metal Storm and its
consolidated entities; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the assets of Metal Storm and its consolidated
entities that could have a material effect on the financial statements.
       47




---



##### Table of Contents



Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  
    
    responsibilities to shareholders;
    
    compliance with laws and regulations;
    
    relations with customers and suppliers;
    
    ethical responsibilities;
    
    employment practices; and
    
    responsibilities to the environment and the community.
   
 Item 16C. Principal Accountant Fees and Services
  December 31,2010
    
    2009A$
    
    A$Audit fees
    
    
    305,000
    
    
    
    341,500Audit-related fees
    
    
    30,400
    
    
    
    All other fees
    
    
    
    
    
    
    69,000Total
    
    
    335,400
    
    
    
    410,500
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 Item 16F. Changes in Registrants Certifying Accountant
  
 Item 16G. Corporate Governance
  48




---



##### Table of Contents



PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Constitution of Metal Storm*4.1
    
    Convertible Notes Trust Deed, dated July 30, 2009****4.2
    
    GEM Equity Line Facility Agreement, dated December 30, 2009, among GEM Global Yield Fund Ltd, GEM
Investment Advisors, Inc. and Metal Storm Limited ****4.3
    
    Line Agreement, dated June 22, 2010, between Dutchess Opportunity Fund II LP and Metal Storm Limited****4.4
    
    DSTO Technology License Agreement dated April 20, 2001, as amended (portions omitted pursuant to a
request for confidential treatment; non-public information has been filed with the SEC)*4.5
    
    Employment Agreement of Dr. Lee Finniear**4.6
    
    Letter of Offer to Peter D. Faulkner**4.7
    
    Employment Agreement of Brett Farmer***4.8
    
    Letter of Offer to George A. Orrison4.9
    
    Subscription Agreement, dated April 8, 2011 between Andrew Doyle and Metal Storm Limited4.11
    
    Discretionary Share Option Scheme*8.0
    
    List of Subsidiaries of Metal Storm Limited12.1
    
    Certification by the Chief Executive Officer of Metal Storm Limited in accordance with Section 302 of
the Sarbanes-Oxley Act12.2
    
    Certification by the Chief Financial Officer of Metal Storm Limited in accordance with Section 302 of
the Sarbanes-Oxley Act13.1
    
    Certification by the Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act13.2
    
    Certification by the Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act
 
 *
    
    Incorporated by reference from our Registration Statement on Form 20-F filed on December 12,
2001, File No. 000-31212.**
    
    Incorporated by reference from our annual report on Form 20-F filed on May 18, 2007.***
    
    Incorporated by reference from our annual report on Form 20-F filed on July 15, 2009.****
    
    Incorporated by reference from our annual report on Form 20-F filed on July 15, 2010. 49




---



##### Table of Contents



SIGNATURES
  METAL STORM LIMITEDBy:
    
    /S/ Lee FinniearName:
    
    Lee J. FinniearTitle:
    
    Chief Executive Officer




---



##### Table of Contents



Report of Independent Registered Public Accounting firm
    
    
    F-2Consolidated Statement of Comprehensive Income
    
    
    F-3Consolidated Statement of Financial Position
    
    
    F-4Consolidated Statement of Cash Flow
    
    
    F-5Consolidated Statement of Changes in Equity
    
    
    F-6Notes to the financial statements
    
    
    F-7
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
     
 PricewaterhouseCoopers, ABN 52 780 433 757  Riverside Centre,123 Eagle Street, GPO BOX 150, BRISBANE QLD 4001
DX 77 Brisbane, Australia
T +61 7 3257 5000, F +61 7 3257 5999, www.pwc.com.au




---



##### Table of Contents



Consolidated Statement of Comprehensive Income
 For the year ended 31 December 2010
 2010
    
    
    2009
    
    
    2008Note
    
    $
    
    
    $
    
    
    $Revenue
    
    6
    
    
    3,345,016
    
    
    
    1,112,481
    
    
    
    2,933,346Gain on extinguishment of debt
    
    18
    
    
    
    
    
    
    2,467,609
    
    
    
    Fair value movement in derivative
    
    16
    
    
    407,041
    
    
    
    (224,611
    )
    
    
    3,620,682Consumables used
    
    
    
    
    (736,144
    )
    
    
    (154,960
    )
    
    
    (131,896
    )Finance costs
    
    7
    
    
    (4,304,903
    )
    
    
    (5,749,555
    )
    
    
    (6,369,138
    )Employee expenses
    
    7
    
    
    (4,237,269
    )
    
    
    (4,491,565
    )
    
    
    (4,229,674
    )Professional fees
    
    
    
    
    (991,581
    )
    
    
    (1,187,842
    )
    
    
    (1,449,621
    )Research and development
    
    
    
    
    (603,413
    )
    
    
    (976,994
    )
    
    
    (2,301,597
    )Facilities and equipment
    
    
    
    
    (465,073
    )
    
    
    (755,798
    )
    
    
    (713,699
    )Administrative expenses
    
    
    
    
    (480,752
    )
    
    
    (515,215
    )
    
    
    (623,687
    )Public relations and compliance
    
    
    
    
    (563,762
    )
    
    
    (403,830
    )
    
    
    (423,223
    )Travel expenses
    
    
    
    
    (127,602
    )
    
    
    (246,809
    )
    
    
    (346,412
    )Communication and technology
    
    
    
    
    (159,139
    )
    
    
    (234,022
    )
    
    
    (296,482
    )Impairment of available-for-sale financial assets
    
    7 & 10
    
    
    
    
    
    
    75,000
    
    
    
    (769,200
    )Net foreign exchange differences
    
    
    
    
    (20,672
    )
    
    
    (21,553
    )
    
    
    444,598Loss before Income tax
    
    
    
    
    (8,938,253
    )
    
    
    (11,307,664
    )
    
    
    (10,656,003
    )Income tax expense
    
    8
    
    
    
    
    
    
    
    
    
    
    Loss for the year
    
    
    
    
    (8,938,253
    )
    
    
    (11,307,664
    )
    
    
    (10,656,003
    )Other comprehensive income- Currency translation difference
    
    
    
    
    17,149
    
    
    
    41,523
    
    
    
    (38,242
    )- Other comprehensive income for the year
    
    
    
    
    17,149
    
    
    
    41,523
    
    
    
    (38,242
    )Total Comprehensive income for the year
    
    
    
    
    (8,921,104
    )
    
    
    (11,266,141
    )
    
    
    (10,694,245
    )Earnings per share (cents per share)- Basic and diluted loss for the year
attributable to ordinary owners of the
parent
    
    31
    
    
    (0.6
    )
    
    
    (1.2
    )
    
    
    (1.2
    )
  F-3




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##### Table of Contents



Consolidated Statement of Financial Position
 As at 31 December 2010
 2010
    
    
    2009Note
    
    $
    
    
    $AssetsCurrent assetsCash and cash equivalents
    
    9
    
    
    1,166,661
    
    
    
    67,350Trade and other receivables
    
    11
    
    
    555,866
    
    
    
    309,284Total current assets
    
    
    
    
    1,722,527
    
    
    
    376,634Non-current assetsOther assets
    
    12
    
    
    78,210
    
    
    
    28,679Property, plant and equipment
    
    13
    
    
    346,219
    
    
    
    423,715Intangible assets and goodwill
    
    14
    
    
    
    
    
    
    612Total non-current assets
    
    
    
    
    424,429
    
    
    
    453,006Total assets
    
    
    
    
    2,146,956
    
    
    
    829,640LiabilitiesCurrent liabilitiesTrade and other payables
    
    15
    
    
    1,187,070
    
    
    
    1,417,188Conversion derivative
    
    16
    
    
    1,888,067
    
    
    
    2,337,200Non-interest bearing loans and borrowings
    
    17
    
    
    13,339,952
    
    
    
    11,822,962Interest-bearing loans and borrowings
    
    18
    
    
    4,198,777
    
    
    
    4,070,584Provisions
    
    19
    
    
    22,475
    
    
    
    359,024Total current liabilities
    
    
    
    
    20,636,341
    
    
    
    20,006,958Non-current liabilitiesInterest-bearing loans and borrowings
    
    20
    
    
    
    
    
    
    7,630Other
    
    
    
    
    
    
    
    
    16,056Total non-current liabilities
    
    
    
    
    
    
    
    
    23,686Total liabilities
    
    
    
    
    20,636,341
    
    
    
    20,030,644Net assets (liabilities)
    
    
    
    
    (18,489,385
    )
    
    
    (19,201,004
    )EquityContributed equity
    
    21
    
    
    77,683,753
    
    
    
    70,075,033Reserves
    
    22
    
    
    12,511,176
    
    
    
    10,470,024Accumulated losses
    
    23
    
    
    (108,684,314
    )
    
    
    (99,746,061
    )Total equity (deficiency)
    
    
    
    
    (18,489,385
    )
    
    
    (19,201,004
    )
  F-4




---



##### Table of Contents



Consolidated Statement of Cash Flow
 For the year ended 31 December 2010
 2010
    
    
    2009
    
    
    2008Note
    
    $
    
    
    $
    
    
    $Cash Flows From Operating ActivitiesReceipts from customers (inclusive of GST)
    
    
    
    
    2,550,535
    
    
    
    1,576,199
    
    
    
    926,582Payments to suppliers and employees (inclusive of GST)
    
    
    
    
    (8,888,703
    )
    
    
    (8,693,671
    )
    
    
    (9,573,667
    )Interest and other costs of finance paid
    
    
    
    
    (479,722
    )
    
    
    (1,586,756
    )
    
    
    (2,265,444
    )Research and development tax rebate
    
    6
    
    
    628,290
    
    
    
    
    
    
    
    732,015Net cash outflow from operating activities
    
    30
    
    
    (6,189,600
    )
    
    
    (8,704,228
    )
    
    
    (10,180,514
    )Cash Flows From Investing ActivitiesPurchase of property, plant and equipment
    
    
    
    
    (16,732
    )
    
    
    (77,426
    )
    
    
    (23,774
    )Interest received
    
    
    
    
    23,458
    
    
    
    190,032
    
    
    
    988,900Proceeds from the disposal of property plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    681Proceeds from sale of available-for-sale financial assets
    
    
    
    
    
    
    
    
    85,000
    
    
    
    Net cash inflow from investing activities
    
    
    
    
    6,726
    
    
    
    197,606
    
    
    
    965,807Cash Flows From Financing ActivitiesProceeds from issues of shares
    
    
    
    
    7,071,247
    
    
    
    3,326,194
    
    
    
    Share issue costs
    
    
    
    
    (203,683
    )
    
    
    (160,701
    )
    
    
    Proceeds from borrowings
    
    
    
    
    884,024
    
    
    
    426,714
    
    
    
    4,464,459Repayment of borrowings
    
    
    
    
    (471,138
    )
    
    
    (2,543,542
    )
    
    
    (2,499,916
    )Net cash inflow from financing activities
    
    
    
    
    7,280,450
    
    
    
    1,048,665
    
    
    
    1,964,543Net movement in cash and cash equivalents
    
    
    
    
    1,097,576
    
    
    
    (7,457,957
    )
    
    
    (7,250,164
    )Net foreign exchange differences
    
    
    
    
    1,735
    
    
    
    (45,985
    )
    
    
    93,908Cash and cash equivalents at beginning of period
    
    
    
    
    67,350
    
    
    
    7,571,292
    
    
    
    14,727,548Cash and cash equivalents at year end
    
    9
    
    
    1,166,661
    
    
    
    67,350
    
    
    
    7,571,292
  F-5




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##### Table of Contents



Consolidated Statement of Changes in Equity
 For the year ended 31 December 2010
 Issued capital
    
    
    Reserves
    
    
    Accumulated
 losses
    
    
    Total equityConsolidated
    
    $
    
    
    $
    
    
    $
    
    
    $At 1 January 2008
    
    
    65,428,400
    
    
    
    9,046,424
    
    
    
    (77,782,394
    )
    
    
    (3,307,570
    )Total comprehensive income for the year
    
    
    
    
    
    
    (38,242
    )
    
    
    (10,656,003
    )
    
    
    (10,694,245
    )Transactions with the owners in their capacity as ownersNet increase in option and share reserves
    
    
    
    
    
    
    27,232
    
    
    
    
    
    
    
    27,232Exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of notes
    
    
    657,204
    
    
    
    
    
    
    
    
    
    
    
    657,204Issue of share capital
    
    
    124,114
    
    
    
    
    
    
    
    
    
    
    
    124,114Share issue cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At 1 January 2009
    
    
    66,209,718
    
    
    
    9,035,414
    
    
    
    (88,438,397
    )
    
    
    (13,193,265
    )At 1 January 2009
    
    
    66,209,718
    
    
    
    9,035,414
    
    
    
    (88,438,397
    )
    
    
    (13,193,265
    )Total comprehensive income for the year
    
    
    
    
    
    
    41,523
    
    
    
    (11,307,664
    )
    
    
    (11,266,141
    )Transactions with the owners in their capacity as ownersNet increase in option and share reserves
    
    
    
    
    
    
    1,393,087
    
    
    
    
    
    
    
    1,393,087Exercise of options
    
    
    1,294
    
    
    
    
    
    
    
    
    
    
    
    1,294Conversion of notes
    
    
    662,772
    
    
    
    
    
    
    
    
    
    
    
    662,772Issue of share capital
    
    
    3,361,950
    
    
    
    
    
    
    
    
    
    
    
    3,361,950Share issue cost
    
    
    (160,701
    )
    
    
    
    
    
    
    
    
    
    
    (160,701
    )At 1 January 2010
    
    
    70,075,033
    
    
    
    10,470,024
    
    
    
    (99,746,061
    )
    
    
    (19,201,004
    )Total comprehensive income for the year
    
    
    
    
    
    
    17,149
    
    
    
    (8,938,253
    )
    
    
    (8,921,104
    )Transactions with the owners in their capacity as ownersNet increase in option and share reserves
    
    
    
    
    
    
    2,024,003
    
    
    
    
    
    
    
    2,024,003Exercise of options
    
    
    55,540
    
    
    
    
    
    
    
    
    
    
    
    55,540Conversion of notes
    
    
    342,791
    
    
    
    
    
    
    
    
    
    
    
    342,791Issue of share capital
    
    
    7,260,692
    
    
    
    
    
    
    
    
    
    
    
    7,260,692Share issue costs
    
    
    (50,303
    )
    
    
    
    
    
    
    
    
    
    
    (50,303
    )At 31 December 2010
    
    
    77,683,753
    
    
    
    12,511,176
    
    
    
    (108,684,314
    )
    
    
    (18,489,385
    )
  F-6




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##### Table of Contents



Notes to the financial statements
 For the year ended 31 December 2010
 Contents
 1. GOING CONCERN
    
    
    82. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
    
    93. FINANCIAL RISK MANAGEMENT
    
    
    194. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
    
    
    235. SEGMENT INFORMATION
    
    
    246. REVENUE
    
    
    257. EXPENSES
    
    
    268. INCOME TAX
    
    
    279. CURRENT ASSETS  CASH AND CASH EQUIVALENTS
    
    
    2810. AVAILABLE-FOR-SALE FINANCIAL ASSETS
    
    
    2811. CURRENT ASSETS  TRADE AND OTHER RECEIVABLES
    
    
    2912. NON-CURRENT ASSETS  OTHER ASSETS
    
    
    2913. NON-CURRENT ASSETS  PROPERTY, PLANT AND EQUIPMENT
    
    
    3014. NON-CURRENT ASSETS  INTANGIBLE ASSETS AND GOODWILL
    
    
    3115. CURRENT LIABILITIES  TRADE AND OTHER PAYABLES
    
    
    3216. CURRENT LIABILITIES  CONVERSION DERIVATIVE
    
    
    3217. CURRENT LIABILITIES  NON-INTEREST BEARING LOANS AND BORROWINGS
    
    
    3218. CURRENT LIABILITIES  INTEREST BEARING LOANS AND BORROWINGS
    
    
    3319. CURRENT LIABILITIES  PROVISIONS
    
    
    3520. NON-CURRENT LIABILITIES  INTEREST BEARING LOANS AND BORROWINGS
    
    
    3521. CONTRIBUTED EQUITY
    
    
    3622. RESERVES
    
    
    3823. ACCUMULATED LOSSES
    
    
    3924. KEY MANAGEMENT PERSONNEL DISCLOSURES
    
    
    3925. REMUNERATION OF AUDITORS
    
    
    4126. COMMITMENTS
    
    
    4227. RELATED PARTY TRANSACTIONS
    
    
    4328. SUBSIDIARIES
    
    
    4329. EVENTS OCCURRING AFTER THE END OF THE REPORTING PERIOD
    
    
    4330. RECONCILIATION OF LOSS AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES
    
    
    4431. EARNINGS PER SHARE
    
    
    4432. SHARE-BASED PAYMENTS
    
    
    4533. PARENT ENTITY DISCLOSURES
    
    
    47
 F-7




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##### Table of Contents



1. Going concern
   2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Cash at Bank
    
    
    1,166,661
    
    
    
    67,350
    
    
    
    7,571,292Loss for the Year
    
    
    (8,938,253
    )
    
    
    (11,307,664
    )
    
    
    (10,656,003
    )Net cash outflow from operating activities
    
    
    (6,189,600
    )
    
    
    (8,704,228
    )
    
    
    (10,180,514
    )Net liabilities
    
    
    (18,489,385
    )
    
    
    (19,201,004
    )
    
    
    (13,193,265
    )
          F-8




---



##### Table of Contents



2. Summary of significant accounting policies
  a. Basis of preparation
  i. Financial statement presentation.
  ii. Compliance with IFRS
   iii. Historical cost convention
  iv. Critical accounting estimates
  v. Change in accounting policy
  Original
    
    Revised2010
    
    2010Revenue
    
    
    2,716,726
    
    
    
    3,345,016Research and development expenditure
    
    
    24,877
    
    
    
    (603,413
    )Net loss for the year
    
    
    (8,938,253
    )
    
    
    (8,938,253
    )Basic and diluted earnings per share
    
    
    (0.06
    )
    
    
    (0.06
    )
 2009
    
    2009Revenue
    
    
    1,112,481
    
    
    
    1,112,481Research and development expenditure
    
    
    (976,994
    )
    
    
    (976,994
    )Net loss for the year
    
    
    (11,307,664
    )
    
    
    (11,307,664
    )Basic and diluted earnings per share
    
    
    (1.2
    )
    
    
    (1.2
    )
 2008
    
    2008Revenue
    
    
    2,201,331
    
    
    
    2,933,346Research and development expenditure
    
    
    (1,569,582
    )
    
    
    (2,301,597
    )Net loss for the year
    
    
    (10,656,003
    )
    
    
    (10,656,003
    )Basic and diluted earnings per share
    
    
    (1.2
    )
    
    
    (1.2
    )
 F-9




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##### Table of Contents



b. Principles of consolidation
       c. Segment reporting
  d. Foreign currency translation
 i. Functional and presentation currency
  ii. Transactions and balances
   iii. Group companies
  
    
    assets and liabilities for each statement of financial position presented are translated at
the closing rate at the date of that statement of financial position;
    
    income and expenses for each Statement of Comprehensive Income are translated at average
exchange rates (unless this is not a reasonable approximation of the cumulative effect of the
rates prevailing on the transaction dates, in which case income and expenses are translated at
the dates of the transactions); and
    
    all resulting exchange differences are recognised in other comprehensive income.
 F-10




---



##### Table of Contents



e. Revenue recognition
    i. Contract Revenue
     ii. Interest income
  iii. Sale of goods
  f. Government grants
    g. Research and development
  h. Income tax
  F-11




---



##### Table of Contents



i. Leases
   j. Business combinations
     k. Impairment of assets
  F-12




---



##### Table of Contents



l. Cash and cash equivalents
  m. Trade receivables
    n. Investments and other financial assets
 i. Classification
  Financial assets at fair value through profit or loss
  Loans and receivables
  Held-to-maturity investments
  Available-for- sale assets
  i. Recognition and derecognition
 F-13




---



##### Table of Contents



ii. Subsequent measurement
    iii. Fair value
  iv. Impairment
  o. Derivatives
  p. Fair value estimation
     q. Property, plant and equipment
  F-14




---



##### Table of Contents



Machinery
    
    5  10 years
    
    Leasehold improvements
    
    5 yearsFurniture, fittings and equipment
    
    2  5 years
    
    Leased plant and equipment
    
    1  5 years
    r. Intangible assets
 i. Goodwill
   ii. Software
   s. Trade and other payables
  t. Borrowings
      F-15




---



##### Table of Contents



u. Borrowing costs
   v. Provisions
    w. Employee benefits
 i. Wages and salaries, annual leave and sick leave
  ii. Long service leave
  iii. Share-based payments
    F-16




---



##### Table of Contents



iv. Post employment benefits
  v. Bonus plans
  x. Share-based payments
   y. Contributed equity
   z.
    
    Goods and services tax (GST)
    aa. Earnings per share
 i. Basic earnings per share
  ii. Diluted earnings per shares
  bb. Parent entity financial information
  i. Investments in subsidiaries
  cc. New accounting standards and interpretations
  F-17




---



##### Table of Contents



i.
    
    IAS 32 Classification of Rights Issues (effective from 1 February 2010)
  ii.
    
    IFRS 9 Financial Instruments (effective from 1 January 2013)
  iii.
    
    IFRIC 19 Extinguishing financial liabilities with equity instruments (effective from 1
July 2010)
  iv.
    
    Revised IAS 24 Related Party Disclosures (effective for annual reporting periods
beginning on or after 1 January 2011)
  v.
    
    IAS Standard Imporovements to IFRS issued in May 2010
  vi.
    
    IFRS 7 Disclosures on Transfers of Financial Assets (effective for annual reporting
periods beginning on or after 1 July 2011)
  vii.
    
    IAS 12 Deferred Tax: Recovery of Underlying Assets (effective from 1 January 2012)
  viii.
    
    IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters
(effective from 1 July 2011)
  F-18




---



##### Table of Contents



3. Financial risk management
   a. Market risk
 i. Foreign exchange risk
     ii. Fair value interest rate risk
      Increase in
    
    
    Decrease inGroup
    
    
    GroupLoss
    
    
    Loss$
    
    
    $Risk Factor2010 actual loss
    
    
    (8,938,253
    )
    
    
    (8,938,253
    )(i) Australian Dollar stronger/(weaker) by 10% against the US Dollar
    
    
    7,107
    
    
    
    (7,107
    )(ii) Interest rate increase/(decrease) by 10%
    
    
    2,346
    
    
    
    (2,346
    )2010 loss after adjusting for market risk sensitivity factors
    
    
    (8,928,800
    )
    
    
    (8,947,706
    )
  Increase in
    
    
    Decrease inGroup
    
    
    GroupDeficiency
    
    
    Deficiency$
    
    
    $Risk Factor2010 actual shareholders deficiency
    
    
    (18,489,385
    )
    
    
    (18,489,385
    )(i) Australian Dollar stronger/(weaker) by 10% against the US Dollar
    
    
    7,107
    
    
    
    (7,107
    )(ii) Interest rate increase/(decrease) by 10%
    
    
    2,346
    
    
    
    (2,346
    )2010 total shareholder deficiency after adjusting for market risk sensitivity factors
    
    
    (18,479,932
    )
    
    
    (18,498,838
    )
 F-19




---



##### Table of Contents



Increase in
    
    
    Decrease inGroup
    
    
    GroupLoss
    
    
    Loss$
    
    
    $Risk Factor2009 actual loss
    
    
    (11,307,664
    )
    
    
    (11,307,664
    )(i) Australian Dollar (weaker)/stronger by 10% against the US Dollar
    
    
    (10,172
    )
    
    
    10,172(ii) Interest rate increase/(decrease) by 10%
    
    
    (13,683
    )
    
    
    13,6832009 loss after adjusting for market risk sensitivity factors
    
    
    (11,331,519
    )
    
    
    (11,283,809
    )
  Increase in
    
    
    Decrease inGroup
    
    
    GroupDeficiency
    
    
    Deficiency$
    
    
    $Risk Factor2009 actual shareholders deficiency
    
    
    (19,201,004
    )
    
    
    (19,201,004
    )(i) Australian Dollar (weaker)/stronger by 10% against the US Dollar
    
    
    (10,172
    )
    
    
    10,172(ii) Interest rate increase/(decrease) by 10%
    
    
    (13,683
    )
    
    
    13,6832009 total shareholder deficiency after adjusting for market risk sensitivity factors
    
    
    (19,224,859
    )
    
    
    (19,177,149
    )
  Increase in
    
    
    Decrease inGroup
    
    
    GroupLoss
    
    
    Loss$
    
    
    $Risk Factor2008 actual loss
    
    
    (10,656,003
    )
    
    
    (10,656,003
    )(i) Australian Dollar (weaker)/stronger by 10% against the US Dollar
    
    
    (20,905
    )
    
    
    20,905(ii) Interest rate increase/(decrease) by 10%
    
    
    (54,257
    )
    
    
    54,257(iii) Change in Fair value of available for sale
financial assets (increased)/decreased by 10%
    
    
    (1,000
    )
    
    
    1,0002008 loss after adjusting for market risk sensitivity factors
    
    
    (10,732,165
    )
    
    
    (10,579,841
    )
  Increase in
    
    
    Decrease inGroup
    
    
    GroupDeficiency
    
    
    Deficiency$
    
    
    $Risk Factor2008 actual shareholders deficiency
    
    
    (13,193,265
    )
    
    
    (13,193,265
    )(i) Australian Dollar (weaker)/stronger by 10% against the US Dollar
    
    
    (20,905
    )
    
    
    20,905(ii) Interest rate increase/(decrease) by 10%
    
    
    (54,257
    )
    
    
    54,257financial assets (increased)/decreased by 10%
    
    
    (1,000
    )
    
    
    1,0002008 total shareholder deficiency after adjusting for market risk sensitivity factors
    
    
    (13,269,427
    )
    
    
    (13,117,103
    )
 b. Credit risk
     F-20




---



##### Table of Contents



c. Liquidity risk
     Later thanone month
    
    
    Later than
    
    
    Later than
    
    
    TotalNot later

    
    
    and not later
    
    
    three months
    
    
    one year and
    
    
    Contractthan one
    
    
    than three
    
    
    and not later
    
    
    not later than
    
    
    Cash
    
    
    Carryingmonth
    
    
    months
    
    
    than one year
    
    
    five years
    
    
    Flows
    
    
    Amount$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Group  2010Payables
    
    
    187,238
    
    
    
    122,337
    
    
    
    
    
    
    
    
    
    
    
    309,575
    
    
    
    309,575Finance Leases
    
    
    353
    
    
    
    706
    
    
    
    3,176
    
    
    
    3,529
    
    
    
    7,764
    
    
    
    226Convertible Notes
    
    
    
    
    
    
    
    
    
    
    18,880,675
    
    
    
    
    
    
    
    18,880,675
    
    
    
    17,323,655Loan
    
    
    
    
    
    
    214,848
    
    
    
    
    
    
    
    
    
    
    
    214,848
    
    
    
    214,848Total
    
    
    187,591
    
    
    
    337,891
    
    
    
    18,883,851
    
    
    
    3,529
    
    
    
    19,412,862
    
    
    
    17,848,304Group  2009Payables
    
    
    379,555
    
    
    
    132,217
    
    
    
    
    
    
    
    
    
    
    
    511,772
    
    
    
    511,772Finance Leases
    
    
    664
    
    
    
    1,327
    
    
    
    4,599
    
    
    
    8,556
    
    
    
    15,146
    
    
    
    5,344Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,239,143
    
    
    
    19,239,143
    
    
    
    15,561,488Loan
    
    
    
    
    
    
    326,714
    
    
    
    
    
    
    
    
    
    
    
    326,714
    
    
    
    326,714Total
    
    
    380,219
    
    
    
    460,258
    
    
    
    4,599
    
    
    
    19,247,699
    
    
    
    20,092,775
    
    
    
    16,405,318Group  2008Payables
    
    
    90,537
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,537
    
    
    
    90,537Finance Leases
    
    
    7,208
    
    
    
    14,418
    
    
    
    64,880
    
    
    
    19,592
    
    
    
    106,098
    
    
    
    220,482Convertible Notes
    
    
    
    
    
    
    
    
    
    
    21,250,295
    
    
    
    
    
    
    
    21,250,295
    
    
    
    16,262,963Loan
    
    
    2,067,615
    
    
    
    80,983
    
    
    
    121,474
    
    
    
    
    
    
    
    2,270,072
    
    
    
    2,270,072Total
    
    
    2,165,360
    
    
    
    95,401
    
    
    
    21,436,649
    
    
    
    19,592
    
    
    
    23,717,002
    
    
    
    18,844,054
 d.
 e. Fair value estimation
  Financial Instruments:
Disclosures
 a)
    
    Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level
1);b)
    
    Inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly (as prices) or indirectly (derived from prices) (Level
2); andc)
    
    Inputs for the asset or liability that are not based on observable market data
(unobservable inputs) (Level 3).
  F-21




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##### Table of Contents



Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total$
    
    
    $
    
    
    $
    
    
    $LiabilitiesConversion derivative
    
    
    
    
    
    
    
    
    
    
    1,888,067
    
    
    
    1,888,067Total Liabilities
    
    
    
    
    
    
    
    
    
    
    1,888,067
    
    
    
    1,888,067
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total$
    
    
    $
    
    
    $
    
    
    $LiabilitiesConversion derivative
    
    
    
    
    
    
    
    
    
    
    2,337,200
    
    
    
    2,337,200Total Liabilities
    
    
    
    
    
    
    
    
    
    
    2,337,200
    
    
    
    2,337,200
   2010
    
    
    2009
    
    
    2008Conversion
    
    
    Conversion
    
    
    Conversionderivative
    
    
    derivative
    
    
    derivative$
    
    
    $
    
    
    $ConsolidatedOpening balance
    
    
    2,337,200
    
    
    
    2,187,934
    
    
    
    5,963,793Conversions
    
    
    (42,092
    )
    
    
    (75,345
    )
    
    
    (155,177
    )(Losses)/Gains recognised in profit or loss
    
    
    (407,041
    )
    
    
    224,611
    
    
    
    (3,620,682
    )Closing Balance
    
    
    1,888,067
    
    
    
    2,337,200
    
    
    
    2,187,934
 f. Capital risk management
     F-22




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##### Table of Contents



4. Critical accounting estimates and judgements
 a. Conversion derivatives
  2010
    
    2009
    
    2008
    
    DetailShare Price
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.05
    
    
    Determined as the
closing share price
on the ASX at year
end.Exercise Price
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.15
    
    
    As per the terms
and conditions of
the contract.
Exercise price of
the convertible
notes option should
shares trade above
$0.15 (or 10%
higher than
$0.135).Share Price
Volatility
    
    
    90.17
    %
    
    
    118.76
    %
    
    
    87.25
    %
    
    Determined having
regard to a number
of factors
including recent
Metal Storm market
trading prices.Risk Free Rate
    
    
    4.7
    %
    
    
    4.4
    %
    
    
    3.70
    %
    
    Yield as at year
end for a
commonwealth
security maturing
on 15 June 2011.
 b. Convertible notes and attaching options
 Extension
    
    Bifurcationof Notes
    
    of Notes
    
    Options
    
    DetailShare Price
    
    $
    0.029
    
    
    $
    0.026
    
    
    $
    0.026
    
    
    Closing share price of Metal Storm on 31 July
2009 and 24 September 2009.Exercise Price
    
    
    
    
    
    
    
    
    
    $
    0.001
    
    
    As per the convertible note terms.Share Price
Volatility
    
    
    87.25
    %
    
    
    90.0
    %
    
    
    90.0
    %
    
    Determined having regard to a number of factors
including recent Metal Storm market trading
prices.Risk Free Rate
    
    
    4.41
    %
    
    
    4.57
    %
    
    
    4.57
    %
    
    Interest rate for a two year Commonwealth
Government treasury bond at 30 July 2009 and 24
September 2009 and a five year Commonwealth
Government treasury bond weighted based on time
to maturity.Time to Maturity
    
    2 years
    
    2 Years
    
    2 Years
    
    As per the terms and conditions of the contract.Annual Dividend
Yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    Metal Storm is unlikely to pay a dividend
before the Convertible Notes mature.
 c. Rights issue option
 Options
    
    DetailShare Price
    
    $
    0.008
    
    
    Determined as the closing share price on the ASX at
year end.Exercise Price
    
    $
    0.015
    
    
    As per the terms and conditions of the Rights Issue.Share Price Volatility
    
    
    108.4
    %
    
    Determined having regard to a number of factors
including recent Metal Storm market trading prices.Risk Free Rate
    
    
    4.7
    %
    
    Yield as at year end for a commonwealth security
maturing in September 2013.
 d. Revenue recognition
  F -23




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##### Table of Contents



5. Segment information
 a. Description of segments
     b. Segment information provided to the Chief Executive Officer and Chief Financial Officer
 Inter-segmentAustralia
    
    United States
    
    eliminations
    
    Consolidated2010
    
    $
    
    $
    
    $
    
    $Revenue
    
    
    663,396
    
    
    
    2,681,620
    
    
    
    
    
    
    
    3,345,016Expenses
    
    
    (10,095,076
    )
    
    
    (3,000,942
    )
    
    
    812,749
    
    
    
    (12,283,269
    )Segment loss
    
    
    (9,431,680
    )
    
    
    (319,322
    )
    
    
    812,749
    
    
    
    (8,938,253
    )Current assets
    
    
    1,397,367
    
    
    
    325,160
    
    
    
    
    
    
    
    1,722,527Current liabilities
    
    
    (20,370,520
    )
    
    
    (22,343,178
    )
    
    
    22,077,357
    
    
    
    (20,636,341
    )Net current assets/(liabilities)
    
    
    (18,973,153
    )
    
    
    (22,018,018
    )
    
    
    22,077,357
    
    
    
    (18,913,814
    )Net operating cash flows
    
    
    (5,533,625
    )
    
    
    (655,975
    )
    
    
    
    
    
    
    (6,189,600
    )Net investing cash flows
    
    
    (748,838
    )
    
    
    (1,252
    )
    
    
    756,816
    
    
    
    6,726Net financing cash flows
    
    
    7,293,200
    
    
    
    744,066
    
    
    
    (756,816
    )
    
    
    7,280,450Net movement in cash and cash
equivalents
    
    
    1,010,737
    
    
    
    86,839
    
    
    
    
    
    
    
    1,097,576
 Inter-segmentAustralia
    
    United States
    
    eliminations
    
    Consolidated2009
    
    $
    
    $
    
    $
    
    $Revenue
    
    
    136,708
    
    
    
    975,773
    
    
    
    
    
    
    
    1,112,481Expenses
    
    
    (10,882,739
    )
    
    
    (2,972,831
    )
    
    
    1,435,425
    
    
    
    (12,420,145
    )Segment loss
    
    
    (10,746,031
    )
    
    
    (1,997,058
    )
    
    
    1,435,425
    
    
    
    (11,307,664
    )Current assets
    
    
    168,690
    
    
    
    207,944
    
    
    
    
    
    
    
    376,634Current liabilities
    
    
    (19,344,629
    )
    
    
    (22,269,498
    )
    
    
    21,607,169
    
    
    
    (20,006,958
    )Net current assets/(liabilities)
    
    
    (19,175,939
    )
    
    
    (22,061,554
    )
    
    
    21,607,169
    
    
    
    (19,630,324
    )Net operating cash flows
    
    
    (7,153,819
    )
    
    
    (1,550,409
    )
    
    
    
    
    
    
    (8,704,228
    )Net investing cash flows
    
    
    (1,221,021
    )
    
    
    (16,798
    )
    
    
    1,435,425
    
    
    
    197,606Net financing cash flows
    
    
    1,060,196
    
    
    
    1,423,894
    
    
    
    (1,435,425
    )
    
    
    1,048,665Net movement in cash and cash
equivalents
    
    
    (7,314,644
    )
    
    
    (143,313
    )
    
    
    
    
    
    
    (7,457,957
    )
 F -24




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##### Table of Contents



Inter-segmentAustralia
    
    United States
    
    eliminations
    
    Consolidated2008
    
    $
    
    $
    
    $
    
    $Revenue
    
    
    1,782,501
    
    
    
    1,150,845
    
    
    
    
    
    
    
    2,933,346Expenses
    
    
    (12,544,747
    )
    
    
    (2,508,912
    )
    
    
    1,464,310
    
    
    
    (13,589,349
    )Segment loss
    
    
    (10,762,246
    )
    
    
    (1,358,067
    )
    
    
    1,464,310
    
    
    
    (10,656,003
    )Current assets
    
    
    8,307,855
    
    
    
    394,029
    
    
    
    
    
    
    
    8,701,884Current liabilities
    
    
    (22,091,291
    )
    
    
    (21,584,979
    )
    
    
    21,278,619
    
    
    
    (22,397,651
    )Net current assets/(liabilities)
    
    
    (13,783,436
    )
    
    
    (21,190,950
    )
    
    
    21,278,619
    
    
    
    (13,695,767
    )Net operating cash flows
    
    
    (7,740,745
    )
    
    
    (2,439,769
    )
    
    
    
    
    
    
    (10,180,514
    )Net investing cash flows
    
    
    927,793
    
    
    
    (2,123,170
    )
    
    
    2,161,184
    
    
    
    965,807Net financing cash flows
    
    
    (196,390
    )
    
    
    4,322,117
    
    
    
    (2,161,184
    )
    
    
    1,964,543Net movement in cash and cash
equivalents
    
    
    (7,009,342
    )
    
    
    (240,822
    )
    
    
    
    
    
    
    (7,250,164
    )
 c. Notes to and forming part of the segment information
 i. Accounting policies
   ii. Inter-segment transfers
  
 6. Revenue
 2010
    
    2009
    
    2008$
    
    $
    
    $Contract revenue
    
    
    
    
    
    
    1,452,481
    
    
    
    964,272
    
    
    
    1,109,411Sale of goods
    
    
    
    
    
    
    785,078
    
    
    
    
    
    
    
    Interest revenue
    
    
    
    
    
    
    23,458
    
    
    
    136,833
    
    
    
    1,040,699Australian Research and Development Tax Rebate
    
    
    
    
    
    
    628,290
    
    
    
    
    
    
    
    732,015Other
    
    
    (i
    )
    
    
    455,709
    
    
    
    11,376
    
    
    
    51,2213,345,016
    
    
    
    1,112,481
    
    
    
    2,933,346
 
 (i)
    
    Settlement proceeds, refer Note 11. F -25




---



##### Table of Contents



7. Expenses
  2010
    
    2009
    
    2008Note
    
    $
    
    $
    
    $Employee expensesWages and salaries
    
    
    
    
    
    
    (3,627,702
    )
    
    
    (3,901,523
    )
    
    
    (3,566,615
    )Post employment
    
    
    
    
    
    
    (208,110
    )
    
    
    (229,408
    )
    
    
    (192,698
    )Share-based payments
    
    
    32
    (d)
    
    
    (50,303
    )
    
    
    (22,230
    )
    
    
    (36,832
    )Directors fees
    
    
    
    
    
    
    (218,514
    )
    
    
    (197,499
    )
    
    
    (250,215
    )Other
    
    
    
    
    
    
    (132,640
    )
    
    
    (140,905
    )
    
    
    (183,314
    )Total employee expenses
    
    
    
    
    
    
    (4,237,269
    )
    
    
    (4,491,565
    )
    
    
    (4,229,674
    )Finance costsInterest expense
    
    
    
    
    
    
    (479,723
    )
    
    
    (1,586,756
    )
    
    
    (2,265,445
    )Accretion expense
    
    
    (i
    )
    
    
    (2,062,867
    )
    
    
    (3,184,692
    )
    
    
    (3,238,228
    )Transaction cost amortisation
    
    
    
    
    
    
    
    
    
    
    (876,393
    )
    
    
    (865,465
    )Transaction cost
    
    
    
    
    
    
    (1,762,313
    )
    
    
    (101,714
    )
    
    
    Total finance costs
    
    
    
    
    
    
    (4,304,903
    )
    
    
    (5,749,555
    )
    
    
    (6,369,138
    )Depreciation and AmortisationDepreciation
    
    
    
    
    
    
    (94,227
    )
    
    
    (162,065
    )
    
    
    (169,841
    )Amortisation
    
    
    
    
    
    
    (612
    )
    
    
    (22,472
    )
    
    
    (51,065
    )Total depreciation and amortisation
    
    
    
    
    
    
    (94,839
    )
    
    
    (184,537
    )
    
    
    (220,906
    )Rental expense relating to operating leasesOperating lease payments
    
    
    
    
    
    
    (220,654
    )
    
    
    (589,793
    )
    
    
    (464,163
    )Total lease payments
    
    
    
    
    
    
    (220,654
    )
    
    
    (589,793
    )
    
    
    (464,163
    )Impairment of available-for-sale financial assetsGain on available-for-sale financial assets
    
    
    10
    
    
    
    
    
    
    
    75,000
    
    
    
    Impairment of available-for-sale financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (769,200
    )
    
    
    
    75,000
    
    
    
    (769,200
    )
 
 (i)
    
    Accretion expense is the recognition in the financial statements of the difference in
value between the fair value at initial recognition and the face value. The expense is
recognised using an effective interest rate method over the life of the convertible notes. F -26




---



##### Table of Contents



8. Income tax
 a. Income tax expense
 2010
    
    2009
    
    2008$
    
    $
    
    $Current tax (benefit)
    
    
    
    
    
    
    (2,724,940
    )
    
    
    (2,640,250
    )Deferred tax (benefit)
    
    
    (2,305,718
    )
    
    
    (218,219
    )
    
    
    (334,330
    )Adjustment for prior years
    
    
    
    
    
    
    68,233
    
    
    
    (235,758
    )Deferred tax assets not recognised
    
    
    2,305,718
    
    
    
    2,874,926
    
    
    
    3,210,338
 b. Numerical reconciliation of income tax expense to prima facie tax payable
 2010
    
    2009
    
    2008$
    
    $
    
    $Loss before income tax
    
    
    (8,938,253
    )
    
    
    (11,307,664
    )
    
    
    (10,656,003
    )Tax at the Australia tax rate of 30% (2009:30%)
    
    
    (2,681,476
    )
    
    
    (3,392,299
    )
    
    
    (3,196,801
    )Tax effect of amounts which are not deductible
(taxable) in calculating taxable income:Research and development accounting costs
    
    
    
    
    
    
    
    
    
    
    273,383Research and development tax concession
received
    
    
    (188,487
    )
    
    
    
    
    
    
    (102,519
    )Entertainment
    
    
    1,257
    
    
    
    1,530
    
    
    
    1,007Fair value movement in embedded derivative
    
    
    (122,112
    )
    
    
    67,383
    
    
    
    (1,086,205
    )Gain on extinguishment
    
    
    
    
    
    
    (733,614
    )
    
    
    Non-deductible interest expense
    
    
    25,973
    
    
    
    80,492
    
    
    
    148,571Option costs expensed  employees
    
    
    77,921
    
    
    
    
    
    
    
    11,050Borrowing costs accretion
    
    
    618,860
    
    
    
    1,044,872
    
    
    
    970,805Other
    
    
    (37,654
    )
    
    
    (11,523
    )
    
    
    6,129(2,305,718
    )
    
    
    (2,943,159
    )
    
    
    (2,974,580
    )Adjustment for prior years
    
    
    
    
    
    
    68,233
    
    
    
    (235,758
    )Deferred tax assets not recognised
    
    
    2,305,718
    
    
    
    2,874,926
    
    
    
    3,210,338Income tax expense
    
    
    
    
    
    
    
    
    
    
    
 c. Unrecognised temporary differences
 iii. Temporary differences for which deferred tax assets or deferred tax liabilities have
not been recognised.
 2010
    
    2009
    
    2008$
    
    $
    
    $Sundry creditors and accruals
    
    
    41,971
    
    
    
    48,797
    
    
    
    45,642General accruals
    
    
    572,589
    
    
    
    626,083
    
    
    
    687,885Provision for doubtful debts
    
    
    
    
    
    
    958,885
    
    
    
    1,223,838Employee entitlements
    
    
    198,515
    
    
    
    175,905
    
    
    
    147,499Asset retirement obligation
    
    
    22,475
    
    
    
    31,932
    
    
    
    33,508Lease make good
    
    
    16,165
    
    
    
    16,165
    
    
    
    13,470Deferred rent
    
    
    
    
    
    
    16,056
    
    
    
    46,355Transaction cost amortisation (S40-880)
    
    
    132,358
    
    
    
    234,095
    
    
    
    460,845Patent costs
    
    
    3,541,605
    
    
    
    3,796,804
    
    
    
    3,986,834Borrowing costs
    
    
    
    
    
    
    
    
    
    
    311,111Unrealised foreign exchange difference
    
    
    20,672
    
    
    
    829,410
    
    
    
    Losses available for offset against future income
    
    
    86,393,145
    
    
    
    76,519,638
    
    
    
    67,436,505Capital losses available for offset against future income
    
    
    915,000
    
    
    
    915,000
    
    
    
    Gross deferred income tax assets
    
    
    91,854,495
    
    
    
    84,168,770
    
    
    
    74,393,492Deferred tax liabilitiesUnrealised foreign exchange differences
    
    
    
    
    
    
    
    
    
    
    (744,610
    )Interest receivable on available-for-sale financial asset
    
    
    
    
    
    
    
    
    
    
    (53,200
    )91,854,495
    
    
    
    84,168,770
    
    
    
    73,595,682Potential tax benefit @ 30%
    
    
    27,556,349
    
    
    
    25,250,631
    
    
    
    22,078,705
 F -27




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##### Table of Contents



d. Tax losses
  2010
    
    2009
    
    2008$
    
    $
    
    $Australian tax losses
    
    
    65,638,347
    
    
    
    56,836,046
    
    
    
    49,244,958United States federal net operating loss carry-forwards
    
    
    19,443,248
    
    
    
    18,286,837
    
    
    
    19,284,262United States state net operating loss carry-forwards
    
    
    13,638,689
    
    
    
    12,482,278
    
    
    
    14,693,549
   
 9. Current assets  Cash and cash equivalents
 2010
    
    2009$
    
    $Cash at bank and on hand
    
    
    1,166,661
    
    
    
    67,3501,166,661
    
    
    
    67,350
 iv. Cash at bank and on hand
  
 10. Available-for-sale financial assets
 2010
    
    2009$
    
    $Floating rate notes:Opening fair value
    
    
    
    
    
    
    10,000Disposal of investments
    
    
    
    
    
    
    (85,000
    )Gain on sale
    
    
    
    
    
    
    75,000Closing Fair Value
    
    
    
    
    
    
    -
 F -28




---



##### Table of Contents



11. Current assets  Trade and other receivables
 2010
    
    2009Notes
    
    $
    
    $Trade receivables
    
    
    
    
    
    
    261,969
    
    
    
    1,152,115Other receivables
    
    
    
    
    
    
    4,230
    
    
    
    9,147Security deposits
    
    
    (i
    )
    
    
    44,910
    
    
    
    44,910Goods and services tax recoverable
    
    
    
    
    
    
    55,728
    
    
    
    27,613Prepayments
    
    
    
    
    
    
    189,029
    
    
    
    34,384Provision for doubtful debts
    
    
    
    
    
    
    
    
    
    
    (958,885
    )555,866
    
    
    
    309,284
 
 (i)
    
    Represents restricted cash deposits held as security for operating and finance lease
commitments.   2010
    
    2009$
    
    $Opening balance
    
    
    (958,885
    )
    
    
    (1,223,838
    )Provision reduction
    
    
    958,885
    
    
    
    Foreign exchange movement
    
    
    
    
    
    
    264,953Closing balance
    
    
    
    
    
    
    (958,885
    )
   
 12. Non-current assets  Other assets
 2010
    
    2009$
    
    $Security deposits
    
    
    (i
    )
    
    
    78,210
    
    
    
    28,67978,210
    
    
    
    28,679
 
 (i)
    
    Represents restricted cash deposits held as security for operating and finance lease
commitments. F -29




---



##### Table of Contents



13. Non-current assets  Property, plant and equipment
 Leasehold
    
    
    
    
    
    Leased plantimprove-
    
    Plant and
    
    andments
    
    equipment
    
    equipment
    
    Total$
    
    $
    
    $
    
    $At 1 January 2009Cost
    
    
    188,536
    
    
    
    577,287
    
    
    
    333,573
    
    
    
    1,099,396Accumulated depreciation
    
    
    (114,783
    )
    
    
    (403,957
    )
    
    
    (72,302
    )
    
    
    (591,042
    )Net book amount
    
    
    73,753
    
    
    
    173,330
    
    
    
    261,271
    
    
    
    508,354Year ended 31 December 2009Opening net book amount
    
    
    73,753
    
    
    
    173,330
    
    
    
    261,271
    
    
    
    508,354Additions
    
    
    
    
    
    
    77,426
    
    
    
    
    
    
    
    77,426Transfers in / (out)
    
    
    
    
    
    
    234,724
    
    
    
    (234,724
    )
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation charge
    
    
    (45,496
    )
    
    
    (95,404
    )
    
    
    (21,165
    )
    
    
    (162,065
    )Closing net book amount
    
    
    28,257
    
    
    
    390,076
    
    
    
    5,382
    
    
    
    423,715At 1 January 2010Cost
    
    
    188,536
    
    
    
    889,437
    
    
    
    27,393
    
    
    
    1,105,366Accumulated depreciation
    
    
    (160,279
    )
    
    
    (499,361
    )
    
    
    (22,011
    )
    
    
    (681,651
    )Net book amount
    
    
    28,257
    
    
    
    390,076
    
    
    
    5,382
    
    
    
    423,715Year ended 31 December 2010Opening net book amount
    
    
    28,257
    
    
    
    390,076
    
    
    
    5,382
    
    
    
    423,715Additions
    
    
    15,392
    
    
    
    1,339
    
    
    
    
    
    
    
    16,731Transfers in / (out)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation charge
    
    
    (19,644
    )
    
    
    (69,201
    )
    
    
    (5,382
    )
    
    
    (94,227
    )Closing net book amount
    
    
    24,005
    
    
    
    322,214
    
    
    
    
    
    
    
    346,219At 31 December 2010Cost
    
    
    203,928
    
    
    
    890,776
    
    
    
    27,393
    
    
    
    1,122,097Accumulated depreciation
    
    
    (179,923
    )
    
    
    (568,562
    )
    
    
    (27,393
    )
    
    
    (775,878
    )Net book amount
    
    
    24,005
    
    
    
    322,214
    
    
    
    
    
    
    
    346,219
 F -30




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##### Table of Contents



14. Non-current assets  Intangible assets and goodwill
 Software
    
    Goodwill
    
    Total$
    
    $
    
    $At 1 January 2009Cost
    
    
    131,982
    
    
    
    1,861,726
    
    
    
    1,993,708Accumulated amortisation
    
    
    (108,898
    )
    
    
    (27,574
    )
    
    
    (136,472
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    23,084
    
    
    
    
    
    
    
    23,084Year ended 31 December 2009Opening net book amount
    
    
    23,084
    
    
    
    
    
    
    
    23,084Additions
    
    
    
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    Amortisation charge
    
    
    (22,472
    )
    
    
    
    
    
    
    (22,472
    )Closing net book amount
    
    
    612
    
    
    
    
    
    
    
    612At 1 January 2010Cost
    
    
    89,291
    
    
    
    1,861,726
    
    
    
    1,951,017Accumulated amortisation
    
    
    (88,679
    )
    
    
    (27,574
    )
    
    
    (116,253
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    612
    
    
    
    
    
    
    
    612Year ended 31 December 2010Opening net book amount
    
    
    612
    
    
    
    
    
    
    
    612Additions
    
    
    
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    Amortisation charge
    
    
    (612
    )
    
    
    
    
    
    
    (612
    )Closing net book amount
    
    
    
    
    
    
    
    
    
    
    At 31 December 2010Cost
    
    
    89,291
    
    
    
    
    
    
    
    89,291Accumulated amortisation
    
    
    (89,291
    )
    
    
    
    
    
    
    (89,291
    )Accumulated impairment loss
    
    
    
    
    
    
    
    
    
    
    Net book amount
    
    
    
    
    
    
    
    
    
    
    
   F -31




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##### Table of Contents



15. Current liabilities  Trade and other payables
 2010
    
    
    2009$
    
    
    $Trade payables
    
    
    225,837
    
    
    
    411,329Deferred revenue
    
    
    54,928
    
    
    
    168,807Accrued payables
    
    
    897,972
    
    
    
    796,2331,178,737
    
    
    
    1,376,369Related party payables:Directors fees payable
    (i)
    
    8,333
    
    
    
    40,8191,187,070
    
    
    
    1,417,188
 
 (i)
    
    Refer note 24 (d) for further details. 
 16. Current liabilities  Conversion derivative
 2010
    
    
    2009$
    
    
    $Balance at beginning of year
    
    
    2,337,200
    
    
    
    2,187,934Conversion of convertible notes to shares
    
    
    (42,092
    )
    
    
    (75,345
    )Fair value movement
    
    
    (407,041
    )
    
    
    224,611Balance at end of year
    
    
    1,888,067
    
    
    
    2,337,200
  
 17. Current liabilities  Non-interest bearing loans and borrowings
 2010
    
    
    2009$
    
    
    $Convertible notes
    (i)
    
    13,125,104
    
    
    
    11,496,248Short term loan
    
    
    214,848
    
    
    
    326,71413,339,952
    
    
    
    11,822,962
 
 (i)
    
    Secured by fixed and floating charge over the Companys assets, matures 2011  2010
    
    
    2009$
    
    
    $Balance at beginning of year
    
    
    11,496,248
    
    
    
    Fair value of issue
    
    
    
    
    
    
    11,070,869Accretion expense
    
    
    1,845,539
    
    
    
    428,692Conversion of convertible notes to shares
    
    
    (216,683
    )
    
    
    (3,313
    )Balance at end of year
    
    
    13,125,104
    
    
    
    11,496,248
 2010
    
    
    2009Number
    
    
    NumberBalance at beginning of year
    
    
    109,471,371
    
    
    
    Issued for interest bearing notes
    
    
    
    
    
    
    109,504,140Conversions
    
    
    (1,982,240
    )
    
    
    (32,769
    )Balance at end of year
    
    
    107,489,131
    
    
    
    109,471,371
 F - 32




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##### Table of Contents



18. Current liabilities  Interest bearing loans and borrowings
 2010
    
    
    2009$
    
    
    $Obligations under finance leases
    
    
    226
    
    
    
    5,344Convertible notes
    (i)
    
    4,198,551
    
    
    
    4,065,2404,198,777
    
    
    
    4,070,584
 
 (i)
    
    Unsecured, matures 2011. i.
    
    Convertible Notes
     
    
    Notes issued at a fixed purchase price of A$0.135 per Note
 
    
    Notes have a 3 year term from issue date, maturing on 1 September 2011 and bear annual
interest of 10% payable quarterly
 
    
    Convertible to ordinary shares on the first business day of each quarter prior to maturity
date or at maturity date except for any note holders who hold more than 5% of notes on
issuance may convert at any time.
 
    
    Convertible at a conversion price equal to the lesser of A$0.135 or 90% of the volume
weighted average price per share for the preceding 30 business days prior to conversion date.
 
    
    The options had the following terms and features:
 
    
    Each Option entitles the holder to subscribe for one ordinary share upon exercise
 
    
    Fixed exercise price of A$0.15
 
    
    Exercisable anytime between issuance and 1 September 2011
     2010
    
    
    2009Number
    
    
    NumberBalance at beginning of year
    
    
    33,040,799
    
    
    
    147,584,129Conversions
    
    
    (673,079
    )
    
    
    (5,039,190
    )Exchanged for secured notes
    
    
    
    
    
    
    (109,504,140
    )Balance at end of year
    
    
    32,367,720
    
    
    
    33,040,799
 F - 33




---



##### Table of Contents



InterestBearingConvertibleNotes$Balance at 1 January 2009
    
    
    16,263,964Accretion /Transaction Cost Amortisation 1 January to 31 July 2009
    
    
    3,108,110Conversions 1 January To 31 July 2009
    
    
    (544,578
    )Extinguishment of Notes Maturing 1 September 2009
    
    
    (18,827,496
    )Issuance of Notes Maturing 1 September 2011
    
    
    16,887,375Interest Bearing Notes Extinguished in Exchange for Secured Notes
    
    
    (13,006,264
    )Accretion/Transaction Cost Amortisation 1 August to 31 December 2009
    
    
    223,665Conversions 26 September to 31 December 2009
    
    
    (39,536
    )Balance at 1 January 2010
    
    
    4,065,240Accretion expense
    
    
    217,328Transaction cost amortisation
    
    
    Movement on extinguishment of debt
    
    
    Exchanged for secured notes
    
    
    Conversion of convertible notes to shares
    
    
    (84,017
    )Balance at end of year
    
    
    4,198,551
  2009Note
    
    
    $Movement on extinguishment of debt
    
    
    
    
    
    
    3,875,516Fair value of options issued to holders of secured notes
    
    
    22
    
    
    
    (1,407,907
    )Gain on extinguishment of debt
    
    
    
    
    
    
    2,467,609Fair Value of Consideration Given:New Debt
    
    
    
    
    
    
    16,887,375Options Issued
    
    
    
    
    
    
    1,407,907Gain on Election of Secured Notes
    
    
    
    
    
    
    (1,935,395
    )Total
    
    
    
    
    
    
    16,359,887Less: Carrying Value of Old Convertible Notes
    
    
    
    
    
    
    (18,827,496
    )Gain On Extinguishment Of Debt
    
    
    
    
    
    
    (2,467,609
    )
 F - 34




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##### Table of Contents



19. Current liabilities  Provisions
 OnerousLeaseMake Good
    
    
    Contracts
    
    
    Total$
    
    
    $
    
    
    $Carrying amount at 1 January 2010
    
    
    31,932
    
    
    
    151,187
    
    
    
    183,119Additional provisions recognised
    
    
    
    
    
    
    
    
    
    
    Amounts used during the year
    
    
    (9,457
    )
    
    
    
    
    
    
    (9,457
    )Derecognition
    
    
    
    
    
    
    (132,853
    )
    
    
    (132,853
    )Foreign Exchange movements
    
    
    
    
    
    
    (18,334
    )
    
    
    (18,334
    )Unwinding and discount rate adjustment
    
    
    
    
    
    
    
    
    
    
    Carrying amount at 31 December 2010
    
    
    22,475
    
    
    
    
    
    
    
    22,475
 
 20. Non-current liabilities  Interest bearing loans and borrowings
 2010
    
    
    2009$
    
    
    $Obligations under finance leases
    
    
    
    
    
    
    7,630
    
    
    
    7,630
  F - 35




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##### Table of Contents



21. Contributed equity
 2010
    
    2009$
    
    $Ordinary shares  issued and fully paid
    
    
    77,683,753
    
    
    
    70,075,033
 Issues of ordinary shares during the year
    
    Number
    
    
    Issue Price
    
    
    ValueAt 1 January 2008
    
    
    598,680,579
    
    
    
    
    
    
    
    65,428,400Conversion of notes second quarter
    
    
    7,683,897
    
    
    $
    0.0600
    
    
    
    470,479Conversion of notes third quarter
    
    
    1,890,000
    
    
    $
    0.0500
    
    
    
    76,028Conversion of notes fourth quarter
    
    
    3,232,203
    
    
    $
    0.0400
    
    
    
    110,697Shares issued to employees
    
    
    160,000
    
    
    $
    0.0600
    
    
    
    9,600Shares issued to consultant
    
    
    1,908,573
    
    
    $
    0.0600
    
    
    
    114,514At 1 January 2009
    
    
    613,555,252
    
    
    
    
    
    
    
    66,209,718Conversion of notes first quarter
    
    
    7,287,985
    
    
    $
    0.0400
    
    
    
    269,982Conversion of notes second quarter
    
    
    7,278,292
    
    
    $
    0.0400
    
    
    
    287,738Conversion of notes third quarter
    
    
    1,786,500
    
    
    $
    0.0400
    
    
    
    56,200Conversion of notes fourth quarter
    
    
    2,423,417
    
    
    $
    0.0200
    
    
    
    48,851Shares issued in accordance with SPP
    
    
    114,724,259
    
    
    $
    0.0229
    
    
    
    2,464,199Exercise of Options
    
    
    1,293,758
    
    
    $
    0.0010
    
    
    
    1,294Issue of Shares
    
    
    6,666,666
    
    
    $
    0.0150
    
    
    
    100,000Issue of Shares
    
    
    17,142,857
    
    
    $
    0.0175
    
    
    
    300,000Issue of Shares
    
    
    18,750,000
    
    
    $
    0.0160
    
    
    
    300,000Issue of Shares
    
    
    950,000
    
    
    $
    0.0039
    
    
    
    37,050At 1 January 2010
    
    
    791,858,986
    
    
    
    
    
    
    
    70,075,033Conversion of notes first quarter
    (i)
    
    2,201,216
    
    
    $
    0.0200
    
    
    
    43,920Conversion of notes second quarter
    (i)
    
    24,664,175
    
    
    $
    0.0100
    
    
    
    229,740Conversion of notes third quarter
    (i)
    
    5,246,262
    
    
    $
    0.0100
    
    
    
    54,240Conversion of notes fourth quarter
    (i)
    
    1,533,937
    
    
    $
    0.0100
    
    
    
    14,890Shares issued in accordance with Rights Issue
    
    
    305,622,333
    
    
    $
    0.0049
    
    
    
    1,509,259Exercise of Unlisted Options
    
    
    52,707,495
    
    
    $
    0.0010
    
    
    
    52,708Exercise of Listed Options
    
    
    18,888
    
    
    $
    0.1500
    
    
    
    2,833Issue of Shares
    
    
    7,946,273
    
    
    $
    0.0010
    
    
    
    7,946Issue of Shares
    
    
    25,510,203
    
    
    $
    0.0079
    
    
    
    202,687Issue of Shares
    
    
    51,178,022
    
    
    $
    0.0080
    
    
    
    409,424Issue of Shares
    
    
    41,333,333
    
    
    $
    0.0081
    
    
    
    334,010Issue of Shares
    
    
    39,655,678
    
    
    $
    0.0090
    
    
    
    358,000Issue of Shares
    
    
    21,978,022
    
    
    $
    0.0091
    
    
    
    200,000Issue of Shares
    
    
    20,636,715
    
    
    $
    0.0097
    
    
    
    200,000Issue of Shares
    
    
    26,250,000
    
    
    $
    0.0052
    
    
    
    136,500Issue of Shares
    
    
    40,724,658
    
    
    $
    0.0056
    
    
    
    227,247Issue of Shares
    
    
    1,931,152
    
    
    $
    0.0115
    
    
    
    22,159Issue of Shares
    
    
    25,000,000
    
    
    $
    0.0126
    
    
    
    315,000Issue of Shares
    
    
    52,669,568
    
    
    $
    0.0133
    
    
    
    700,000Issue of Shares
    
    
    2,022,592
    
    
    $
    0.0139
    
    
    
    28,144Issue of Shares
    
    
    14,285,714
    
    
    $
    0.0140
    
    
    
    159,787Issue of Shares
    
    
    27,900,794
    
    
    $
    0.0143
    
    
    
    400,000Issue of Shares
    
    
    12,500,000
    
    
    $
    0.0160
    
    
    
    200,000Issue of Shares
    
    
    49,444,444
    
    
    $
    0.0162
    
    
    
    800,000Issue of Shares
    
    
    17,719,298
    
    
    $
    0.0171
    
    
    
    303,000Issue of Shares
    
    
    40,000,000
    
    
    $
    0.0174
    
    
    
    697,226At 31 December 2010
    
    
    1,702,539,758
    
    
    
    
    
    
    
    77,683,753
 
 i
    
    Issue price is based on calculation according with Convertible Note terms. Value is based
on the amortised cost of the notes converted. F - 36




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##### Table of Contents



a. Movement in listed options
  Number
    
    
    WAEP
    
    
    Number
    
    
    WAEP2010
    
    
    2010
    
    
    2009
    
    
    2009Outstanding at beginning of the year
    
    
    
    
    
    
    
    
    
    
    176,756,604
    
    
    
    0.15Granted during the year
    
    
    27,875,734
    
    
    
    0.15
    
    
    
    
    
    
    
    Exercised during the year
    
    
    (18,888
    )
    
    
    0.15
    
    
    
    
    
    
    
    Expired during the year
    
    
    
    
    
    
    
    
    
    
    (176,756,604
    )
    
    
    0.15Outstanding at the end of the year
    
    
    27,856,846
    
    
    
    0.15
    
    
    
    
    
    
    
    Exercisable at the end of the year
    
    
    27,856,846
    
    
    
    0.15
    
    
    
    
    
    
    
    
 b. Movement in unlisted options
  Number
    
    
    WAEP
    
    
    Number
    
    
    WAEP2010
    
    
    2010
    
    
    2009
    
    
    2009Outstanding at beginning of the year
    
    
    90,195,809
    
    
    
    
    
    
    
    18,989,688
    
    
    
    0.300Granted during the year
    
    
    1,238,067,976
    
    
    
    0.015
    
    
    
    78,217,067
    
    
    
    0.001Exercised during the year
    
    
    (60,653,768
    )
    
    
    0.001
    
    
    
    (1,293,758
    )
    
    
    0.001Expired during the year
    
    
    (3,407,500
    )
    
    
    0.400
    
    
    
    (5,717,188
    )
    
    
    0.430Outstanding at the end of the year
    
    
    1,264,202,517
    
    
    
    0.016
    
    
    
    90,195,809
    
    
    
    0.036Exercisable at the end of the year
    
    
    1,259,202,517
    
    
    
    0.016
    
    
    
    85,195,809
    
    
    
    0.037
  F - 37




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##### Table of Contents



22. Reserves
 2010
    
    
    2009$
    
    
    $Unlisted option reserve
    
    
    5,637,859
    
    
    
    3,641,736Share reserves
    
    
    
    
    
    
    Listed option reserve
    
    
    6,921,446
    
    
    
    6,893,566Accumulated translation reserve
    
    
    (48,129
    )
    
    
    (65,278
    )12,511,176
    
    
    
    10,470,024Movements:Unlisted option reserveBalance at 1 January
    
    
    3,641,736
    
    
    
    2,233,829New Issues
    
    
    1,996,123
    
    
    
    Expenses recognised
    18
    
    
    
    
    
    1,407,907Balance at 31 December
    
    
    5,637,859
    
    
    
    3,641,736Share reservesBalance at 1 January
    
    
    
    
    
    
    14,820New Issues
    
    
    
    
    
    
    (37,050
    )Expenses recognised
    
    
    
    
    
    
    22,230Balance at 31 December
    
    
    
    
    
    
    Listed option reserveBalance at 1 January
    
    
    6,893,566
    
    
    
    6,893,566Issue of options
    
    
    27,880
    
    
    
    Balance at 31 December
    
    
    6,921,446
    
    
    
    6,893,566Accumulated translation reserveBalance at 1 January
    
    
    (65,278
    )
    
    
    (106,801
    )Currency translation differences
    
    
    17,149
    
    
    
    41,523Balance at 31 December
    
    
    (48,129
    )
    
    
    (65,278
    )
  i.
    
    Unlisted options reserve
  ii.
    
    Share reserve
  iii.
    
    Listed options reserve
  iv.
    
    Accumulated translation reserve
  F - 38




---



##### Table of Contents



23. Accumulated losses
 2010
    
    
    2009$
    
    
    $Balance at 1 January
    
    
    (99,746,061
    )
    
    
    (88,438,397
    )Net loss
    
    
    (8,938,253
    )
    
    
    (11,307,664
    )Balance at 31 December
    
    
    (108,684,314
    )
    
    
    (99,746,061
    )
 
 24. Key management personnel disclosures
 a. Key management personnel compensation
 2010
    
    
    2009
    
    
    2008$
    
    
    $
    
    
    $Short-term employee benefits
    
    
    1,556,288
    
    
    
    1,564,097
    
    
    
    1,414,357Post-employment benefits
    
    
    86,672
    
    
    
    86,139
    
    
    
    68,494Share-based payments
    
    
    15,000
    
    
    
    4,680
    
    
    
    10,5951,657,960
    
    
    
    1,654,916
    
    
    
    1,493,446
 b. Equity instrument disclosures relating to key management personnel
 i.
    
    Option holdings
   OptionsBalance at
    
    
    
    
    
    
    purchasedstart of the
    
    
    Granted as
    
    
    under Rights
    
    
    
    
    
    
    
    
    
    
    Balance at end
    
    
    Vested andName
    
    year
    
    
    compensation
    
    
    Issue
    
    
    Exercised
    
    
    Expired
    
    
    of the year
    
    
    exercisable
    
    
    UnvestedDirectorsTJ ODwyer
    
    
    48,311
    
    
    
    
    
    
    
    791,235
    
    
    
    
    
    
    
    
    
    
    
    839,546
    
    
    
    839,546
    
    
    
    L J Finniear
    
    
    1,000,000
    
    
    
    
    
    
    
    335,298
    
    
    
    
    
    
    
    
    
    
    
    1,335,298
    
    
    
    1,335,298
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    T W Tappenden
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    W Henkel
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupP R Wetzig
    
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    120,000
    
    
    
    120,000
    
    
    
    B I Farmer
    
    
    
    
    
    
    
    
    
    
    544,407
    
    
    
    
    
    
    
    
    
    
    
    544,407
    
    
    
    544,407
    
    
    
    P D Faulkner
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    D M Pashen
    
    
    
    
    
    
    
    
    
    
    2,400,000
    
    
    
    
    
    
    
    
    
    
    
    2400,000
    
    
    
    2,400,000
    
    
    
    N J Partridge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G A Orrison
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,248,311
    
    
    
    
    
    
    
    4,265,940
    
    
    
    
    
    
    
    
    
    
    
    5,514,251
    
    
    
    5,514,251
    
    
    
    
 F - 39




---



##### Table of Contents



Balance atstart of the
    
    
    Granted as
    
    
    On election of
    
    
    
    
    
    
    
    
    
    
    Balance at end
    
    
    Vested andName
    
    year
    
    
    compensation
    
    
    Secured Notes
    
    
    Exercised
    
    
    Expired
    
    
    of the year
    
    
    exercisable
    
    
    UnvestedDirectorsTJ ODwyer
    
    
    33,819
    
    
    
    
    
    
    
    48,311
    
    
    
    
    
    
    
    (33,819
    )
    
    
    48,311
    
    
    
    48,311
    
    
    
    L J Finniear
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    T W Tappenden
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupP R Wetzig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B I Farmer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    D M Pashen
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N J Partridge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,233,819
    
    
    
    
    
    
    
    48,311
    
    
    
    
    
    
    
    (33,819
    )
    
    
    1,248,311
    
    
    
    1,248,311
    
    
    
    
  ii.
    
    Share holdings
  Balance at
    
    
    Changes
    
    
    Balance atstart of the
    
    
    during the
    
    
    end of theyear
    
    
    year
    
    
    year2010DirectorsT J ODwyer
    
    
    1,054,979
    
    
    
    263,745
    
    
    
    1,318,724L J Finniear
    
    
    447,062
    
    
    
    111,766
    
    
    
    558,828J R Nicholls
    
    
    
    
    
    
    
    
    
    
    T W Tappenden
    
    
    100,000
    
    
    
    25,000
    
    
    
    125,000W Henkel
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupB I Farmer
    
    
    318,531
    
    
    
    181,469
    
    
    
    500,000P D Faulkner
    
    
    
    
    
    
    
    
    
    
    N J Partridge
    
    
    
    
    
    
    
    
    
    
    G A Orrison
    
    
    
    
    
    
    
    
    
    
    P R Wetzig
    
    
    44,106
    
    
    
    40,000
    
    
    
    84,106D M Pashen
    
    
    209,265
    
    
    
    800,000
    
    
    
    1,009,2652,173,943
    
    
    
    1,421,980
    
    
    
    3,595,9232009DirectorsT J ODwyer
    
    
    180,855
    
    
    
    874,124
    
    
    
    1,054,979L J Finniear
    
    
    
    
    
    
    447,062
    
    
    
    447,062J R Nicholls
    
    
    
    
    
    
    
    
    
    
    T W Tappenden
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupB I Farmer
    
    
    100,000
    
    
    
    218,531
    
    
    
    318,531P D Faulkner
    
    
    
    
    
    
    
    
    
    
    P R Wetzig
    
    
    400
    
    
    
    43,706
    
    
    
    44,106D M Pashen
    
    
    100,000
    
    
    
    109,265
    
    
    
    209,265381,255
    
    
    
    1,692,688
    
    
    
    2,073,943
 F - 40




---



##### Table of Contents



c.
 d. Loans to key management personnel
  e. Other transactions and balances with key management personnel
 iii. Directors fees
  2010
    
    2009$
    
    $T J ODwyer
    
    
    
    
    
    
    13,333J R Nicholls
    
    
    
    
    
    
    15,000T W Tappenden
    
    
    
    
    
    
    12,486W Henkel
    
    
    8,333
    
    
    
    8,333
    
    
    
    40,819
 
 25. Remuneration of auditors
  a. Audit Services
 2010
    
    2009
    
    2008$
    
    $
    
    $PricewaterhouseCoopersAudit and review of financial statements
    
    
    305,000
    
    
    
    341,500
    
    
    
    445,330Other assurance services
    
    
    30,400
    
    
    
    
    
    
    
    Non-PricewaterhouseCoopersAudit and review of financial statements
    
    
    
    
    
    
    
    
    
    
    335,400
    
    
    
    341,500
    
    
    
    445,330
 b. Non-audit Services
 2010
    
    2009
    
    2008$
    
    $
    
    $PricewaterhouseCoopersNon-audit services
    
    
    
    
    
    
    69,000
    
    
    
    70,750
 F - 41




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##### Table of Contents



26. Commitments
 a. Operating leases
  2010
    
    2009
    
    2008$
    
    $
    
    $Within one year
    
    
    312,820
    
    
    
    138,494
    
    
    
    442,874After one year but not more than 5 years
    
    
    966,505
    
    
    
    
    
    
    
    161,771More than 5 years
    
    
    
    
    
    
    
    
    
    
    Total minimum lease payments
    
    
    1,279,325
    
    
    
    138,494
    
    
    
    604,645
 b. Finance leases
  Minimum
    
    Present valuelease
    
    of leasepayments
    
    payments2010$
    
    $Within one year
    
    
    4,235
    
    
    
    3,471After one year but not more than 5 years
    
    
    3,417
    
    
    
    3,234Total minimum lease payments
    
    
    7,652
    
    
    
    6,705Less amounts representing finance charges
    
    
    (947
    )
    
    
    6,705
    
    
    
    6,7052009$
    
    $Within one year
    
    
    6,590
    
    
    
    5,344After one year but not more than 5 years
    
    
    8,556
    
    
    
    7,630Total minimum lease payments
    
    
    15,146
    
    
    
    12,974Less amounts representing finance charges
    
    
    (2,172
    )
    
    
    12,974
    
    
    
    12,9742008$
    
    $Within one year
    
    
    219,517
    
    
    
    203,699After one year but not more than 5 years
    
    
    19,594
    
    
    
    16,783Total minimum lease payments
    
    
    239,111
    
    
    
    220,482Less amounts representing finance charges
    
    
    (18,629
    )
    
    
    220,482
    
    
    
    220,482
 F - 42




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##### Table of Contents



27. Related party transactions
 a. Loans to/from related parties
   b. Transactions with related parties
    
 28. Subsidiaries
 Country of
    
    Percentage of equity held by theIncorporation
    
    Group
    
    Investment2010
    
    2009
    
    2010
    
    2009Metal Storm Inc.
    
    USA
    
    
    49
    %
    
    
    49
    %
    
    
    2,920
    
    
    
    2,920ProCam Machine LLC
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    Metal Storm USA Limited
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    Digigun LLC
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    
  
 29. Events occurring after the end of the reporting period
  F - 43




---



##### Table of Contents



30. Reconciliation of loss after income tax to net cash inflow from operating activities
 2010
    
    2009
    
    2008$
    
    $
    
    $Net Loss
    
    
    (8,938,253
    )
    
    
    (11,307,664
    )
    
    
    (10,656,003
    )Adjustments for:Depreciation and amortisation
    
    
    94,839
    
    
    
    184,537
    
    
    
    220,906Accretion expense
    
    
    2,062,867
    
    
    
    3,183,491
    
    
    
    3,236,015Net Loss on disposal of plant and equipment
    
    
    
    
    
    
    
    
    
    
    1,159Amortisation of transaction costs
    
    
    1,552,878
    
    
    
    576,976
    
    
    
    865,465Foreign exchange differences
    
    
    15,414
    
    
    
    87,508
    
    
    
    (132,150
    )Fair value of services paid for via issue of options
    
    
    209,435
    
    
    
    22,230
    
    
    
    12,412Fair value of services paid for via issue of shares
    
    
    82,553
    
    
    
    
    
    
    
    138,935Fair value adjustment to conversion derivative
    
    
    (407,041
    )
    
    
    224,611
    
    
    
    (3,620,682
    )Gain on extinguishment of debt
    
    
    
    
    
    
    (2,467,609
    )
    
    
    Gain on sale of available-for-sale financial assets
    
    
    
    
    
    
    (75,000
    )
    
    
    Impairment loss on available-for-sales financial assets
    
    
    
    
    
    
    
    
    
    
    769,200Interest received
    
    
    (23,458
    )
    
    
    (136,833
    )
    
    
    (1,040,700
    )Changes in assets and liabilities:(Increase) / decrease in trade and other receivables
    
    
    (51,937
    )
    
    
    461,352
    
    
    
    1,445,602(Increase) / decrease in prepayments
    
    
    (140,071
    )
    
    
    302,279
    
    
    
    2,524(Decrease) / increase in trade and other payables
    
    
    (478,162
    )
    
    
    287,751
    
    
    
    (1,475,708
    )(Decrease) / increase in provisions
    
    
    (138,034
    )
    
    
    (17,558
    )
    
    
    74,421(Decrease) / increase in other liabilities
    
    
    (30,630
    )
    
    
    (30,299
    )
    
    
    (21,910
    )Net cash used in operating activities
    
    
    (6,189,600
    )
    
    
    (8,704,228
    )
    
    
    (10,180,514
    )
 
 31. Earnings per share
 a. Basic and diluted earnings per share
 2010
    
    2009
    
    2008$
    
    $
    
    $Loss for the year
    
    
    (8,938,252
    )
    
    
    (11,307,664
    )
    
    
    (10,656,003
    )Basic and diluted earnings per share (cents per share)
    
    
    (0.6
    )
    
    
    (1.2
    )
    
    
    (1.2
    )
 b. Weighted average number of shares used as the denominator
 2010
    
    2009
    
    2008Number
    
    Number
    
    NumberWeighted average number of
ordinary shares for basic
and diluted earnings per
share
    
    
    1,395,910,416
    
    
    
    930,322,973
    
    
    
    871,930,746
  c. Information concerning the classification of securities
  2010
    
    2009Number
    
    NumberInterest bearing convertible notes
    
    
    32,367,720
    
    
    
    33,040,799Secured convertible notes
    
    
    107,489,131
    
    
    
    109,471,371Listed options
    
    
    27,856,846
    
    
    
    Unlisted options
    
    
    1,264,202,517
    
    
    
    90,345,809
 F - 44




---



##### Table of Contents



32. Share-based payments
 a. Employee share option plan
       b. Options issued under the constitution
          F - 45




---



##### Table of Contents



c. Shares issued at the discretion of the Board
   d. Expenses arising from share based payment transactions
 2010
    
    2009
    
    2008$
    
    $
    
    $Options expense
    
    
    209,435
    
    
    
    22,230
    
    
    
    12,412Shares granted but not yet issued to employees
    
    
    
    
    
    
    
    
    
    
    14,820Shares granted and issued to employees
    
    
    50,303
    
    
    
    
    
    
    
    9,600259,738
    
    
    
    22,230
    
    
    
    36,832
 e. Unlisted options issued
  Exercise Price
    
    2010
    
    2009
    
    2008Expiry Date
    
    $
    
    Number
    
    Number
    
    Number14 January 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    125,00002 February 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    100,00016 February 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    14,43824 February 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    81,25010 March 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    8,25031 March 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    62,50005 April 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    29,50014 April 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    1,100,00010 May 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    25,00008 June 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    25,00021 June 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    3,225,00021 June 2009
    
    
    1.100
    
    
    
    
    
    
    
    
    
    
    
    40,00021 June 2009
    
    
    1.150
    
    
    
    
    
    
    
    
    
    
    
    200,00030 June 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    62,50005 July 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    75,00014 July 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    125,00004 September 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    31,25030 September 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    62,50014 October 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    125,00024 November 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    6,25004 December 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    31,25007 December 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    12,50031 December 2009
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    150,00018 March 2010
    
    
    0.400
    
    
    
    
    
    
    
    20,000
    
    
    
    20,00031 March 2010
    
    
    0.400
    
    
    
    
    
    
    
    200,000
    
    
    
    200,00021 June 2010
    
    
    0.400
    
    
    
    
    
    
    
    578,750
    
    
    
    578,75024 June 2010
    
    
    0.400
    
    
    
    
    
    
    
    1,990,000
    
    
    
    1,990,00030 June 2010
    
    
    0.400
    
    
    
    
    
    
    
    200,000
    
    
    
    200,00030 September 2010
    
    
    0.400
    
    
    
    
    
    
    
    200,000
    
    
    
    200,00031 December 2010
    
    
    0.400
    
    
    
    
    
    
    
    218,750
    
    
    
    218,75031 March 2011
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75028 April 2011
    
    
    0.400
    
    
    
    940,000
    
    
    
    940,000
    
    
    
    940,00030 June 2011
    
    
    0.400
    
    
    
    818,750
    
    
    
    818,750
    
    
    
    818,75002 July 2011
    
    
    0.010
    
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,000,00030 September 2011
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    125,00027 October 2011
    
    
    0.400
    
    
    
    506,250
    
    
    
    506,250
    
    
    
    506,25031 December 2011
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75023 Feb 2012
    
    
    0.018
    
    
    
    101,062,425
    
    
    
    
    
    
    
    08 March 2012
    
    
    0.180
    
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    1,000,000
 F - 46




---



##### Table of Contents



Exercise Price
    
    2010
    
    2009
    
    2008Expiry Date
    
    $
    
    Number
    
    Number
    
    Number31 March 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75030 June 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75024 September 2012
    
    
    0.001
    
    
    
    32,889,282
    
    
    
    76,923,309
    
    
    
    30 September 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75031 December 2012
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    168,75011 Feb 2013
    
    
    0.035
    
    
    
    8,000,000
    
    
    
    
    
    
    
    31 March 2013
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    168,75016 April 2013
    
    
    0.035
    
    
    
    4,268,811
    
    
    
    
    
    
    
    30 June 2013
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    168,75013 September 2013
    
    
    0.015
    
    
    
    1,108,116,999
    
    
    
    
    
    
    
    1,264,202,517
    
    
    
    90,195,809
    
    
    
    90,195,809
 
 33. Parent Entity Disclosures
 a. Summary of financial information
  2010
    
    2009Balance SheetCurrent assets
    
    
    1,397,367
    
    
    
    168,690Non-current assets
    
    
    399,169
    
    
    
    400,911Total assets
    
    
    1,796,536
    
    
    
    569,601Current liabilities
    
    
    20,370,520
    
    
    
    19,344,629Non-current liabilities
    
    
    
    
    
    
    Total liabilities
    
    
    20,370,520
    
    
    
    19,344,629Net Liabilities
    
    
    (18,573,984
    )
    
    
    (18,775,028
    )Issued capital
    
    
    77,683,754
    
    
    
    70,075,033Reserves
    
    
    12,559,305
    
    
    
    10,535,302Retained earnings
    
    
    (108,817,043
    )
    
    
    (99,385,363
    )Total Equity
    
    
    (18,573,984
    )
    
    
    (18,755,028
    )
 2010
    
    2009
    
    2008Profit or loss for the year
    
    
    (9,431,680
    )
    
    
    (10,746,031
    )
    
    
    (10,762,246
    )Total comprehensive income
    
    
    (9,431,680
    )
    
    
    (10,746,031
    )
    
    
    (10,762,246
    )
 b. Contingent liabilities of the parent entity
  c. Contractual commitments
  F - 47