##### 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, 2005
 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
 Date of event requiring this shell company report
 If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. o o
 
 METAL STORM LIMITED
 (Exact Name of Registrant as Specified in its Charter)
 
 Australia
(Jurisdiction of Incorporation or Organization)
 Level 34, Central Plaza One
345 Queen Street
Brisbane, QLD, 4000
Australia
(Address of principal executive offices)
 
 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
(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 o
 þ o
 o þ




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##### 



Table of Contents
 Item 1.
    
    Identity of Directors, Senior Management and Advisors
    
    
    4Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    4Item 3.
    
    Key Information
    
    
    4Item 4.
    
    Information on Metal Storm
    
    
    13Item 4A.
    
    Unresolved Staff Comments
    
    
    21Item 5.
    
    Operating and Financial Review and Prospects
    
    
    22Item 6.
    
    Directors, Senior Management and Employees
    
    
    28Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    34Item 8.
    
    Financial Information
    
    
    34Item 9.
    
    The Offer and Listing
    
    
    36Item 10.
    
    Additional Information
    
    
    38Item 11.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    49Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    49Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    50Item 14.
    
    Material Modifications to the Rights of Security Holders and the Use of Proceeds
    
    
    50Item 15.
    
    Controls and Procedures
    
    
    50Item 16A.
    
    Audit Committee Financial Expert
    
    
    51Item 16B.
    
    Code of Ethics
    
    
    51Item 16C.
    
    Principal Accountant Fees and Services
    
    
    51Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    51Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    52Item 17.
    
    Financial Statements
    
    
    53Item 18.
    
    Financial Statements
    
    
    53Item 19.
    
    Exhibits
    
    
    53EX-4.7: DEED OF TERMINATION AGREEMENTEX-4.10: CASH ADVANCE FACILITY AGREEMENTEX-8.0: LIST OF SUBSIDIARIESEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONEX-13.2: CERTIFICATION
  2




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##### Table of Contents



CURRENCY OF PRESENTATION AND EXCHANGE RATES
    AtPeriod
    
    AverageEnd
    
    Rate(1)
    
    High
    
    LowYear ended December 31,2001
    
    
    0.5117
    
    
    
    0.5127
    
    
    
    0.5712
    
    
    
    0.48282002
    
    
    0.5625
    
    
    
    0.5448
    
    
    
    0.5748
    
    
    
    0.50602003
    
    
    0.7520
    
    
    
    0.6589
    
    
    
    0.7520
    
    
    
    0.56292004
    
    
    0.7805
    
    
    
    0.7384
    
    
    
    0.7979
    
    
    
    0.68402005
    
    
    0.7342
    
    
    
    0.7620
    
    
    
    0.7974
    
    
    
    0.7261PeriodJanuary 2006
    
    
    0.7572
    
    
    
    
    
    
    
    0.7572
    
    
    
    0.7379February 2006
    
    
    0.7430
    
    
    
    
    
    
    
    0.7548
    
    
    
    0.7363March 2006
    
    
    0.7165
    
    
    
    
    
    
    
    0.7458
    
    
    
    0.7056April 2006
    
    
    0.7593
    
    
    
    
    
    
    
    0.7593
    
    
    
    0.7177May 2006
    
    
    0.7519
    
    
    
    
    
    
    
    0.7781
    
    
    
    0.7509June 2006
    
    
    0.7423
    
    
    
    
    
    
    
    0.7527
    
    
    
    0.7284
 
 (1)
    
    Determined by averaging noon buying rates on the last day of each full month during the
period. FORWARD-LOOKING STATEMENTS
  3




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisors
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected Financial Data
      As of and for the year endedDecember 31,2005
    
    
    2004A$
    
    
    A$Income Statement data in accordance with A-IFRS:Revenue
    
    
    830,645
    
    
    
    837,201Expenses
    
    
    (10,755,679
    )
    
    
    (12,714,745
    )Loss from continuing operations
    
    
    (9,925,034
    )
    
    
    (11,877,544
    )Finance costs
    
    
    (35,496
    )
    
    
    (43,568
    )Income tax benefit
    
    
    648,320
    
    
    
    332,744Loss after tax from continuing operations
    
    
    (9,312,210
    )
    
    
    (11,588,368
    )Loss after tax from discontinued operation
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Loss attributable to members of the parent
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Basic and diluted loss per share(1)
    
    
    (0.0209
    )
    
    
    (0.0262
    )Weighted average ordinary number of shares outstanding
    
    
    521,970,978
    
    
    
    500,886,725Income Statement data in accordance with U.S. GAAP:Revenue
    
    
    230,743
    
    
    
    42,636Loss attributable to members of the parent
    
    
    (12,016,844
    )
    
    
    (13,121,233
    )Basic and diluted loss per share
    
    
    (0.0220
    )
    
    
    (0.0262
    )Balance Sheet data in accordance with A-IFRS:Total current assets
    
    
    7,137,322
    
    
    
    17,349,971Total assets
    
    
    7,429,721
    
    
    
    20,327,317Total current liabilities
    
    
    1,564,696
    
    
    
    3,507,365Total liabilities
    
    
    1,649,859
    
    
    
    4,127,324Contributed equity
    
    
    56,559,039
    
    
    
    56,559,039Total equity
    
    
    5,779,862
    
    
    
    16,199,993
 4




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As of and for the year endedDecember 31,2005
    
    
    2004A$
    
    
    A$Balance Sheet data in accordance with U.S. GAAP:Total assets
    
    
    7,102,472
    
    
    
    20,627,396Total equity
    
    
    5,151,734
    
    
    
    16,674,109Other Financial Data:Dividends per share
    
    
    
    
    
    
    
 
 (1)
    
    Net loss per ordinary share  basic and diluted is calculated as net loss for the period
divided by adjusted weighted average number of ordinary shares outstanding for the same
period.  As of and for the year ended December 31,2003
    
    
    2002
    
    
    2001A$
    
    
    A$
    
    
    A$Amounts in accordance with U.S. GAAP
Statement of Operations data:Total operating income
    
    
    348,570
    
    
    
    22,711
    
    
    
    688,863Total operating expenses
    
    
    (8,153,088
    )
    
    
    (9,949,420
    )
    
    
    (6,423,033
    )Loss from operations
    
    
    (7,804,518
    )
    
    
    (9,926,709
    )
    
    
    (5,734,170
    )Total other income
    
    
    997,985
    
    
    
    52,272
    
    
    
    564,765Loss after tax from discontinued operations
    
    
    (373,244
    )
    
    
    
    
    
    
    Net loss
    
    
    (7,179,777
    )
    
    
    (9,874,437
    )
    
    
    (5,169,405
    )Net loss per ordinary share  basic and diluted (1)
    
    
    (0.016
    )
    
    
    (0.023
    )
    
    
    (0.012
    )Weighted average ordinary number of shares
outstanding
    
    
    442,525,034
    
    
    
    428,974,260
    
    
    
    422,326,884Balance Sheet data:Total current assets
    
    
    9,451,860
    
    
    
    8,661,303
    
    
    
    6,669,488Total current liabilities
    
    
    4,100,085
    
    
    
    2,184,357
    
    
    
    454,079Total assets
    
    
    15,101,660
    
    
    
    8,825,556
    
    
    
    6,892,701Ordinary share capital
    
    
    31,506,515
    
    
    
    29,615,104
    
    
    
    22,801,980Total stockholders equity
    
    
    9,353,392
    
    
    
    6,578,228
    
    
    
    6,378,059Other financial data:Dividends per share
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Net loss per ordinary share  basic and diluted is calculated as net loss for the period
divided by adjusted weighted average number of ordinary shares outstanding for the same
period. B.
    
    Capitalization and Indebtedness
  C. Reasons for Offer and Use of Proceeds
  D. Risk Factors
 There is uncertainty regarding Metal Storm continuing as a going concern.
  5




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We will need additional capital and may not be able to raise additional capital on favorable terms,
if at all.
    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.
  We are dependent on retaining key personnel.
  6




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Any catastrophic event involving our technology could adversely affect Metal Storms reputation.
  We work on research and development programs.
  There are some limitations relating to our technology.
  We may not have adequate protection for our intellectual property.
     
    
    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.
 7




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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.
     8




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##### Table of Contents



We have contracted to perform some systems integration work at a fixed price, which could turn out
to be less than our costs.
  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.
  9




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##### Table of Contents



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
  10




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##### Table of Contents




    
    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.
  
    
    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
 11




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##### Table of Contents




    
    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 likely will be again, classified as a passive foreign investment company for U.S.
federal income tax purposes.
     12




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Item 4. Information on Metal Storm
 A. History and Development of Metal Storm
       B. Business Overview
  Strategy
   §
    
    Completing the engineering of current Metal Storm 40mm weapon system components to a
standard suitable for certification by relevant government agencies;§
    
    Building and demonstrating new and selected existing weapon prototypes designed to
attract demand for early adoption by end-users;§
    
    Producing weapon prototypes to customer specifications in funded programs;§
    
    Obtaining certification of components and product prototypes by relevant government
agencies, particularly the U.S. Department of Defense;
 13




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##### Table of Contents



§
    
    Merging our technology into fully integrated weapons systems that are adaptable to a
variety of applications in current demand by military customers;§
    
    Securing customer production orders for certified products; and§
    
    Using the successful commercialization of 40mm weapons systems as a platform from which
we can then branch out into other weapons categories and other applications of our core
technology.
    Recent achievements
  §
    
    Live firing trials and demonstrations held at the U.S. Armys Picatinny Arsenal range
facility of a purpose-built Metal Storm 40mm weapon system integrated with a Talon unmanned
ground vehicle, special mount and optical targeting systems in March 2005;§
    
    Demonstration by Australian Defense Science and Technology Organization (DSTO) of the
Area Denial Weapon System concept prototype using Metal Storm 40mm weapon technology in
July 2005;§
    
    Demonstration by DSTO of the Advanced Individual Combat Weapon concept prototype using
Metal Storm 40mm weapon technology in August 2005;§
    
    The test firing of Metal Storm 40mm grenade launchers from the Dragonfly Unmanned Aerial
Vehicle in a tethered position to test the stability of mounts and test remote control
systems.;§
    
    The successful test firing of high explosive, enhanced blast explosive and high
explosive air burst munitions in conjunction with ST Kinetics in February 2006;§
    
    The successful test firing of the Redback TM Weapon System and munitions in
collaboration with Electro Optic Systems and ST Kinetics in February 2006; and§
    
    The initial test firing and trials of a prototype high explosive 40mm grenade assembly
developed in collaboration with ARDEC in March 2006.
 Engineering
  14




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TM TM
 TM
 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 with greater firepower
compared to conventional weapons;
    
    modular pods that could operate as a complete weapon system in one container;
    
    100% electronic operation;
 15




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
    
    the potential of grouping multiple calibers and multiple lethalities in one gun allowing
the user to vary the use to a specific situation;
    
    numerous hybrid configurations and Special Forces applications that could result in
enhanced capabilities for use behind enemy lines; and
    
    fast second round strike capability before recoil effect.
 Internal Product Development
 TM
 Redback TM
 TM TM
 TM TM
  3GL
  Fireworks
  Systems for Unmanned Vehicles
  16




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Handgun
    Low Velocity and Less Than Lethal munitions development  U.S. Army ARDEC
    Low Velocity 40mm launcher  Systems Upgrade
  17




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##### Table of Contents



Electronically Initiated Munitions Development  ST Kinetics
   External Development Programs
  U.S. Department of Energy Contract  Short Range Protection System
  U.S. Navy SBIR Contract  Metal Storm Active Protection System
  U.S. Army SBIR Contract  Metal Storm Crowd Control System
  18




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##### Table of Contents



StarChase Contract  Pursuit Management System Phase II Lead System Integrator
  U.S. Marine Corps  18mm Stacked Round Firing System
  Research Agreements with Government Agencies
 DSTO Research Agreement
   DSTO Technology License Agreement
   Competition
    Regulation
  19




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##### Table of Contents



Australia
    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;
    
    increased first shot kill probability;
    
    fireworks;
    
    missile defense and target interception;
    
    directional control of missiles;
    
    unmanned aerial vehicle weaponization;
    
    adapting conventional munitions to Metal Storm configuration; and
 20




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
    
    selectable kinetic energy weapons
  
    
    17 granted U.S. patents and 20 pending U.S. patent applications;
    
    20 granted Australian patents and 15 pending Australian patent applications; and
    
    100 other patents granted outside the United States and Australia and 235 pending
applications outside the United States and Australia.
 Raw Materials
  Seasonality
  C. Organizational Structure
  D. Property, Plant and Equipment
    
 Item 4A. Unresolved Staff Comments
  21




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Item 5. Operating and Financial Review and Prospects
  A. Operating Results
 Overview
          22




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Where We Derive Our Revenue
  Critical Accounting Policies
   Revenue Recognition for Rendering of Services
   Share-based Payment Transactions
             23




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Comparison of Annual Results of Operations
 2005 compared with 2004
 Revenue.
 Expenses.
 
    
    Employee expenses increased A$717,181 (19.1%) from A$3,751,459 in 2004 to A$4,468,640 in
2005, primarily due to a termination payment of A$500,000 made to Mr. J M ODwyer upon his
resignation in 2005 plus the costs of additional engineering staff in Australia.
    
    Professional fees decreased A$247,204 (12.2%) from A$2,021,573 in 2004 to A$1,774,369 in
2005 due to cost savings achieved through performing more work in-house rather than using
external consultants.
    
    Research and development expenses increased A$181,319 (11.2%) from A$1,613,365 in 2004 to
A$1,794,684 in 2005 principally due to higher research and development activity in both the
United States and Australia, particularly higher research and development activity related
to our core 40mm technology.
    
    Administrative expenses decreased A$397,966 (30.0%) from A$1,326,897 in 2004 to A$928,931
in 2005 primarily due to aggressive cost saving activities.
    
    Facilities and equipment expenses increased A$103,579 (24.7%) from A$419,114 in 2004 to
A$522,693 in 2005 primarily due to higher rental costs at our Arlington, Virginia office,
which was expanded in late 2004 to support our greater R&D and business development focus.
    
    Travel and entertainment expenses decreased A$362,752 (45.5%) from A$796,611 in 2004 to
A$433,859 in 2005 primarily due to an increased focus on cost savings during the year,
particularly in lower travel expenses.
    
    Public relations and compliance expenses decreased A$122,924 (19.9%) from A$617,710 in
2004 to A$494,786 in 2005 primarily due to savings achieved through more work performed
in-house rather than using external consultants.
    
    In 2004 we had an A$1,834,152 impairment loss on the goodwill arising from the
acquisition of ProCam. We had no goodwill impairment in 2005.
 Net Loss.
 24




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##### Table of Contents



Effects of Currency Fluctuations
    B. Liquidity and Capital Resources
 Overview
   Year ended December 31,2005
    
    
    2004A$
    
    
    A$Net cash used in operating activities
    
    
    (11,241,259
    )
    
    
    (11,236,655
    )Net cash used in investing activities
    
    
    (1,470,492
    )
    
    
    (311,499
    )Net cash (used in) provided by financing activities
    
    
    (1,760,025
    )
    
    
    18,603,071Effect of exchange rate changes on cash
    
    
    (1,959
    )
    
    
    Net movement in cash and cash equivalents
    
    
    (14,473,735
    )
    
    
    7,054,917
    Borrowings
   25




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Proposed New Financing
   Other Material Commitments
  Future Cash Needs
   C. Research and Development: Patents and Licenses
  D. Trend Information
  26




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##### Table of Contents



Recent Pronouncements
 Inventory Costs, Exchanges of Non-Monetary Assets, Accounting Changes
and Error Corrections, Accounting for Certain Hybrid Financial Instruments, Accounting for Servicing of Financial Assets
   E. Off-Balance sheet arrangements
  F. Tabular disclosure of contractual obligations
  Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsA$
    
    A$
    
    A$
    
    A$
    
    A$Operating leases of Metal Storm
    
    
    1,553,972
    
    
    
    468,067
    
    
    
    588,033
    
    
    
    497,872
    
    
    
    Other (1)
    
    
    687,044
    
    
    
    515,287
    
    
    
    171,757
    
    
    
    
    
    
    
    Total
    
    
    2,241,016
    
    
    
    938,354
    
    
    
    759,790
    
    
    
    497,872
    
    
    
    
 
 (1)
    
    Other includes an onerous lease for a property occupied by ProCam.  27




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Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  Name
    
    PositionTerence J. ODwyer
    
    Executive ChairmanGeneral Wayne A. Downing
    
    Deputy ChairmanBruce S. McComish
    
    DirectorJames M. Crunk
    
    DirectorDr. Peter D. Jonson
    
    DirectorIan A. Gillespie
    
    Chief Operating OfficerJames D. MacDonald
    
    Chief Financial Officer and Company SecretaryGeorge L. Bergeron III
    
    Chief Technology Officer
 
 Terence J. ODwyer.
 General Wayne A. Downing (U.S. Army (retired)).
 Bruce S. McComish.
 James M. Crunk.
 Dr. Peter D. Jonson.
 Ian A. Gillespie.
 28




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##### Table of Contents



James D. MacDonald.
 George L. Bergeron III.
 Proposed New Director
   B. Compensation
   Share
    
    
    


    
    TotalBased
    

Termination
    
    
    
    
    
    PerformancePrimary Benefits
    
    Post Employment
    
    Payment
    

Benefits
    
    Total
    
    RelatedSalary &
    
    Cash
    
    Non
    
    Super-
    
    Retirement
    
    OptionsFees
    
    Bonus
    
    Monetary
    
    annuation
    
    Benefits
    
    (12)Benefits
    
    (10) /Life &MedicalInsurance(11)A$
    
    A$
    
    A$
    
    A$
    
    
    
    
    
    A$
    
    A$
    
    A$
    
    %DirectorsT J ODwyer
    
    
    
    
    
    
    70,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,000
    
    
    
    W A Downing
    
    
    (1)(2)
    
    
    110,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,569
    
    
    
    
    
    
    
    330,680
    
    
    
    B S McComish
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    D A Smith
    
    
    (3)(4)
    
    
    278,123
    
    
    
    
    
    
    
    
    
    
    
    7,156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285,279
    
    
    
    D L Alspach
    
    
    (5
    )
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    J M Crunk
    
    
    (6
    )
    
    
    27,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,015
    
    
    
    J M ODwyer
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,523
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    523,523
    
    
    
    ExecutivesI A Gillespie
    
    
    (8
    )
    
    
    223,104
    
    
    
    146,000
    
    
    
    
    
    
    
    21,031
    
    
    
    
    
    
    
    17,349
    
    
    
    
    
    
    
    407,484
    
    
    
    35.8J D MacDonald
    
    
    
    
    
    
    184,759
    
    
    
    
    
    
    
    
    
    
    
    16,628
    
    
    
    
    
    
    
    41,833
    
    
    
    
    
    
    
    243,220
    
    
    
    G L Bergeron III
    
    
    (3
    )
    
    
    235,286
    
    
    
    
    
    
    
    
    
    
    
    17,560
    
    
    
    
    
    
    
    23,844
    
    
    
    
    
    
    
    276,690
    
    
    
    J C Chehansky
    
    
    (3)(9)
    
    
    19,891
    
    
    
    
    
    
    
    
    
    
    
    1,522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,413
    
    
    
    Total
    
    
    
    
    
    
    1,273,289
    
    
    
    146,000
    
    
    
    
    
    
    
    87,420
    
    
    
    
    
    
    
    303,595
    
    
    
    500,000
    
    
    
    2,310,304
 29




---



##### Table of Contents



1
    
    In 2005, W A Downing entered into a call option agreement with J M ODwyer, Metal Storms
major shareholder. Under this agreement, W A Downing has the option to acquire 2,000,000 of
the shares owned and held by J M ODwyer if he holds office as a Director of Metal Storm for
a continuous period of three years. The value of this right is to be amortized over the
three year vesting period.2
    
    Directors fees of A$65,111 settled in cash with the remaining A$49,000 to be settled in options.3
    
    Paid in U.S. dollars.4
    
    Appointed CEO in February 2005, appointed Managing Director in May 2005 and resigned in April 2006.5
    
    Directors fees of A$30,000 settled in cash with the remaining A$45,000 to be settled in options. Resigned in July 2006.6
    
    Appointed in September 2005.7
    
    Resigned in February 2005.8
    
    Bonus for the 2004 financial year (approved and paid in the 2005 financial year) included
A$100,000 settled in cash with the remaining A$46,000 settled in shares.9
    
    Appointed in December 2005 and resigned in May 2006.10
    
    Superannuation (Australia)11
    
    Life and medical insurance (USA)12
    
    Options are valued using the Black-Scholes model. See Note 18 to the accompanying consolidated financial statements.  Fair
    
    
    
    
    
    
    
    
    
    Total value ofValue
    
    Value of
    
    
    
    
    
    optionsper
    
    options
    
    
    
    
    
    granted,option at
    
    granted
    
    Total value of
    
    exercised and
    
    % of remunerationgrant
    
    during the
    
    options lapsed
    
    lapsed during
    
    consisting ofdate (1)
    
    year
    
    during the year
    
    the year
    
    options for theGrant Date
    
    No.
    
    A$
    
    A$
    
    A$
    
    A$
    
    yearDirectorsW A Downing
    
    
    24/05/05
    
    
    
    450,000
    
    
    
    0.03
    
    
    
    13,500
    
    
    
    
    
    
    
    13,500
    
    
    
    100
    %D L Alspach
    
    
    24/05/05
    
    
    
    675,000
    
    
    
    0.03
    
    
    
    20,250
    
    
    
    
    
    
    
    20,250
    
    
    
    100
    %J M ODwyer
    
    
    24/05/05
    
    
    
    450,000
    
    
    
    0.03
    
    
    
    13,500
    
    
    
    
    
    
    
    13,500
    
    
    
    100
    %W A Owens
    
    
    24/05/05
    
    
    
    150,000
    
    
    
    0.03
    
    
    
    4,500
    
    
    
    
    
    
    
    4,500
    
    
    
    100
    %D W Christman
    
    
    24/05/05
    
    
    
    618,750
    
    
    
    0.03
    
    
    
    18,563
    
    
    
    
    
    
    
    18,563
    
    
    
    100
    %C A Vehlow
    
    
    24/05/05
    
    
    
    225,000
    
    
    
    0.03
    
    
    
    6,750
    
    
    
    
    
    
    
    6,750
    
    
    
    1
    %2,568,750
    
    
    
    
    
    
    
    77,063
    
    
    
    
    
    
    
    77,063ExecutivesI A Gillespie (2)
    
    
    01/01/04
    
    
    
    62,500
    
    
    
    0.28
    
    
    
    17,500
    
    
    
    
    
    
    
    17,50001/01/04
    
    
    
    62,500
    
    
    
    0.28
    
    
    
    17,500
    
    
    
    
    
    
    
    17,50001/01/04
    
    
    
    62,500
    
    
    
    0.29
    
    
    
    18,125
    
    
    
    
    
    
    
    18,12501/01/04
    
    
    
    62,500
    
    
    
    0.29
    
    
    
    18,125
    
    
    
    
    
    
    
    18,125250,000
    
    
    
    
    
    
    
    71,250
    
    
    
    
    
    
    
    71,250
    
    
    
    18
    %J D MacDonald (2)
    
    
    26/08/05
    
    
    
    62,500
    
    
    
    0.09
    
    
    
    5,625
    
    
    
    
    
    
    
    5,62526/08/05
    
    
    
    62,500
    
    
    
    0.10
    
    
    
    6,250
    
    
    
    
    
    
    
    6,25026/08/05
    
    
    
    62,500
    
    
    
    0.10
    
    
    
    6,250
    
    
    
    
    
    
    
    6,25026/08/05
    
    
    
    62,500
    
    
    
    0.11
    
    
    
    6,875
    
    
    
    
    
    
    
    6,87526/08/05
    
    
    
    62,500
    
    
    
    0.11
    
    
    
    6,875
    
    
    
    
    
    
    
    6,875312,500
    
    
    
    
    
    
    
    31,875
    
    
    
    
    
    
    
    31,875
    
    
    
    13
    %G L Bergeron III (2)
    
    
    11/06/04
    
    
    
    31,250
    
    
    
    0.25
    
    
    
    7,813
    
    
    
    
    
    
    
    7,81311/06/04
    
    
    
    31,250
    
    
    
    0.25
    
    
    
    7,813
    
    
    
    
    
    
    
    7,81311/06/04
    
    
    
    31,250
    
    
    
    0.25
    
    
    
    7,813
    
    
    
    
    
    
    
    7,81311/06/04
    
    
    
    31,250
    
    
    
    0.26
    
    
    
    8,125
    
    
    
    
    
    
    
    8,125125,000
    
    
    
    
    
    
    
    31,564
    
    
    
    
    
    
    
    31,564
    
    
    
    11
    %Total
    
    
    
    
    
    
    3,256,250
    
    
    
    
    
    
    
    211,752
    
    
    
    
    
    
    
    211,752
 
 (1)
    
    See Note 18 to the accompanying consolidated financial statements for a discussion of our
share-based payment plan.(2)
    
    See Notes 29(b)(ii) and 31(c) to the accompanying consolidated financial statements for the
portion of options value recognized as remuneration expense during the year. 30




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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.
  31




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##### Table of Contents



D. Employees
  E. Share Ownership
  PercentageNumber of
    
    of
    
    Number ofShares
    
    Outstanding
    
    OptionsName
    
    Owned(1)
    
    Shares
    
    Owned(1)Terence James ODwyer
    
    
    180,855
    (2)
    
    
    0.033
    %
    
    
    Wayne A. Downing
    
    
    500,000
    
    
    
    0.091
    %
    
    
    3,890,000
    (3)Bruce McComish
    
    
    
    
    
    
    
    
    
    
    James M. Crunk
    
    
    
    
    
    
    
    
    
    
    Peter D. Jonson
    
    
    
    
    
    
    
    
    
    
    Ian A. Gillespie
    
    
    89,396
    
    
    
    0.016
    %
    
    
    1,100,000
    (4)James D. MacDonald
    
    
    
    
    
    
    
    
    
    
    500,000
    (5)George L. Bergeron III
    
    
    
    
    
    
    
    
    
    
    250,000
    (6)
 
 (1)
    
    At June 22, 2006, the number of outstanding shares was 544,709,065 and the number of
outstanding options (all unlisted) was 17,206,438, of which 418,750 were granted but not
issued.(2)
    
    101,233 shares are owned by Mr. Terence J. ODwyer and Mrs. P.M. ODwyer, 79,622 shares are
owned by Louclaben Pty Ltd in trust for the ODwyer Family Account.(3)
    
    Represents: (a) 2,500,000 unlisted options to purchase ordinary shares of Metal Storm that
are exercisable only upon certain conditions on or before July 2, 2011 at an exercise price of
A$0.01 per share (the purchase price for the 2,500,000 unlisted options was nil); (b) 450,000
unlisted options to purchase ordinary shares of Metal Storm on or before June 21, 2009 at an
exercise price of A$0.40 per share (the purchase price for the 450,000 unlisted options was
A$0.10); (c) 450,000 unlisted options to purchase ordinary shares on or before June 24, 2010;
and (d) 490,000 unlisted options to purchase ordinary shared on or before April 28, 2011. 32




---



##### Table of Contents



(4)
    
    Represents 600,000 unlisted options to purchase ordinary
shares of Metal Storm on or before April 14, 2009. The remaining 500,000 options to purchase ordinary shares of Metal Storm are
represented by eight tranches of 62,500 options expiring at quarterly intervals between March
31, 2009 and December 31, 2010. These options are identical in every other manner. The
exercise price for these option is A$0.40 and no purchase consideration was provided.(5)
    
    Represents 500,000 options to purchase ordinary shares of Metal Storm, which are represented
by eight tranches of 62,500 options expiring at quarterly intervals between December 31, 2009
and September 30, 2011. These options are identical in every other manner. The exercise
price for these option is A$0.40 and no purchase consideration was provided.(6)
    
    Represents 250,000 options to purchase ordinary shares of Metal Storm, which are represented
by eight tranches of 31,250 options expiring at quarterly intervals between September 4, 2009
and June 30, 2011. These options are identical in every other manner. The exercise price for
these option is A$0.40 and no purchase consideration was provided.  33




---



##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 A. Major Stockholders
  Ordinary Shares Beneficially Ownedas at June 22, 2006Number of
    
    Percent ofName
    
    Shares owned
    
    ClassJames Michael ODwyer
    
    
    199,804,908
    (1)
    
    
    36.68
    %
 
 (1)
    
    131,554,681 shares are owned by Mr. J.M. ODwyer, 68,250,122 shares are
owned by ODwyer Investments Pty Ltd as trustee for the ODwyer Family
Discretionary Trust and 105 shares owned by Rhonda Clare ODwyer in trust
for Mr. J.M. ODwyer.    B. Related Party Transactions
    C. Interest of Experts and Counsel
  
 Item 8. Financial Information
 A. Consolidated Financial Statements and Other Financial Information
  Export Sales
  34




---



##### Table of Contents



Legal Proceedings
  Dividends
  B. Significant Changes
  35




---



##### Table of Contents



Item 9. The Offer and Listing
 A. Listing Details
 Australian Stock Exchange
  AveragePrice Per
    
    DailyOrdinary Share
    
    TradingHigh
    
    Low
    
    VolumeYear Ended
    
    A$
    
    A$December 31, 2005First Quarter
    
    $
    0.27
    
    
    $
    0.17
    
    
    
    1,025,253Second Quarter
    
    $
    0.18
    
    
    $
    0.10
    
    
    
    689,969Third Quarter
    
    $
    0.31
    
    
    $
    0.12
    
    
    
    1,755,116Fourth Quarter
    
    $
    0.29
    
    
    $
    0.19
    
    
    
    529,162December 31, 2004First Quarter
    
    $
    0.50
    
    
    $
    0.41
    
    
    
    318,003Second Quarter
    
    $
    0.66
    
    
    $
    0.37
    
    
    
    2,927,093Third Quarter
    
    $
    0.38
    
    
    $
    0.24
    
    
    
    1,463,448Fourth Quarter
    
    $
    0.33
    
    
    $
    0.20
    
    
    
    2,925,739December 31, 2003Annual
    
    $
    0.68
    
    
    $
    0.32
    
    
    
    273,307December 31, 2002Annual
    
    $
    1.58
    
    
    $
    0.42
    
    
    
    254,020December 31, 2001Annual
    
    $
    2.11
    
    
    $
    0.80
    
    
    
    191,255
 AveragePrice Per
    
    DailyOrdinary Share
    
    TradingHigh
    
    Low
    
    VolumeMonth Ended
    
    A$
    
    A$June 30, 2006
    
    $
    0.17
    
    
    $
    0.12
    
    
    
    494,447May 31, 2006
    
    $
    0.19
    
    
    $
    0.14
    
    
    
    989,930April 30, 2006
    
    $
    0.21
    
    
    $
    0.15
    
    
    
    685,868March 31, 2006
    
    $
    0.27
    
    
    $
    0.19
    
    
    
    485,450February 28, 2006
    
    $
    0.28
    
    
    $
    0.22
    
    
    
    862,248January 31, 2006
    
    $
    0.23
    
    
    $
    0.18
    
    
    
    846,872
 36




---



##### Table of Contents



Nasdaq SmallCap Market
  AveragePrice Per
    
    DailyADR
    
    TradingYear Ended
    
    High
    
    Low
    
    VolumeUS$
    
    US$December 31, 2005First Quarter
    
    $
    4.26
    
    
    $
    2.55
    
    
    
    99,102Second Quarter
    
    $
    3.00
    
    
    $
    1.75
    
    
    
    41,994Third Quarter
    
    $
    4.84
    
    
    $
    1.81
    
    
    
    130,117Fourth Quarter
    
    $
    4.70
    
    
    $
    2.76
    
    
    
    43,002December 31, 2004First Quarter
    
    $
    8.00
    
    
    $
    6.40
    
    
    
    7,685Second Quarter
    
    $
    14.47
    
    
    $
    4.90
    
    
    
    682,510Third Quarter
    
    $
    5.60
    
    
    $
    3.50
    
    
    
    90,903Fourth Quarter
    
    $
    5.74
    
    
    $
    2.95
    
    
    
    250,094December 31, 2003Annual
    
    $
    8.53
    
    
    $
    3.97
    
    
    
    3,702December 31, 2002Annual
    
    $
    15.77
    
    
    $
    4.90
    
    
    
    3,877December 31, 2001Annual
    
    $
    28.10
    
    
    $
    12.85
    
    
    
    
 AveragePrice Per
    
    DailyADR
    
    TradingMonth Ended:
    
    High
    
    Low
    
    VolumeUS$
    
    US$June 30, 2006
    
    $
    2.58
    
    
    $
    1.75
    
    
    
    23,160May 31, 2006
    
    $
    3.05
    
    
    $
    2.23
    
    
    
    51,082April 30, 2006
    
    $
    3.04
    
    
    $
    2.06
    
    
    
    38,034March 31, 2006
    
    $
    3.80
    
    
    $
    2.82
    
    
    
    25,477February 28, 2006
    
    $
    4.04
    
    
    $
    3.00
    
    
    
    74,192January 31, 2006
    
    $
    3.66
    
    
    $
    2.32
    
    
    
    94,302
 B. Plan of Distribution
  C. Markets
  Exemptions from certain Nasdaq Corporate Governance Rules
  37




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##### Table of Contents




    
    Metal Storm was exempt from Nasdaqs audit committee composition
requirements until July 31, 2005. The recommendations set forth in the
Australian Stock Exchange Corporate Governance Principles relating to
composition of audit committees differ to Nasdaqs audit committee
composition requirements. For example, the Corporate Governance
Principles recommend that an audit committee comprise at least three
members and that at least one member be independent, whereas Nasdaq
requires that all members of the committee be independent. From
January through July 2005, Metal Storm had an audit committee
consisting of two directors, both of whom were independent within the
meaning of the Nasdaq rules, and appointed a third member who was an
independent director at the end of July 2005.
    
    Metal Storm was exempt from Nasdaqs independence requirements for a
majority of the board of directors. The Australian Stock Exchange
Listing Rules did not require Metal Storm to have a majority of
independent directors on the board during 2005. During most of the
fiscal year ended December 31, 2005, Metal Storm did, however, have a
majority of directors who were independent as defined in the
Australian Stock Exchange Corporate Governance Principles, which
definition differs from Nasdaqs definition. Accordingly, because
Australian law and generally accepted business practices in Australia
regarding director independence differ to Nasdaqs independence
requirements, Metal Storm claimed this exemption in 2005.
    
    Metal Storm was exempt from Nasdaqs quorum requirements applicable to
meetings of shareholders. Consistent with Australian law, Metal
Storms constitution provides that five shareholders present shall
constitute a quorum for a general meeting. Nasdaq requires that an
issuer provide for a quorum as specified in its by-laws for any
meeting of the holders of common stock, which quorum may not be less
than 33 1/3 % of the outstanding shares of an issuers voting common
stock. Accordingly, because applicable Australian law and rules
governing quorums at shareholder meetings differ to Nasdaqs quorum
requirements, Metal Storm claimed this exemption in 2005.
    
    Metal Storm was exempt from the Nasdaq requirement that an issuers
auditors be subject to a peer review. Neither Australian law nor the
Australian Stock Exchange Listing Rules required peer review of
independent public accountants during 2005. Accordingly, Metal Storm
claimed this exemption in 2005.
    
    Metal Storm was exempt from the Nasdaq requirement that issuers obtain
shareholder approval prior to the issuance of securities in connection
with the establishment or amendment of certain stock option, purchase
or other compensation plans. Applicable Australian law and rules
differ to the Nasdaq requirements, with the Australian Stock Exchange
Listing Rules providing generally for prior shareholder approval in
numerous circumstances, including (i) issuance of equity securities
exceeding 15% of the issued share capital of the company in any 12
month period (but in determining the 15% limit, securities issued
under an exception to the rule or with shareholder approval are not
counted), (ii) issuance of equity securities to related parties (as
defined in the Australian Stock Exchange Listing Rules), and (iii)
directors or their associates acquiring securities under an employee
incentive plan. Generally accepted business practices in Australia
also provide for plans involving the issue of shares to directors and
employees being capped at no more than 5% of the total number of shares on issue. Metal Storms Discretionary Share Option Scheme
applies this 5% cap. Due to differences between Australian law and
rules and the Nasdaq shareholder approval requirements, Metal Storm
claimed this exemption in 2005.
 D. Selling Stockholders
  E. Dilution
  F. Expenses of the Issue
  
 Item 10. Additional Information
 A. Share Capital
  38




---



##### Table of Contents



B.
    
    Our Constitution
   Directors
 Interested Directors
   Directors Compensation
     Borrowing Powers Exercisable by Directors
  Retirement of directors
   39




---



##### Table of Contents



Share Qualifications
  Rights and Restrictions on Classes of Shares
  Dividend Rights
  Voting Rights
  Right to Share in our Profits
  Rights to Share in the Surplus in the Event of Liquidation
  Redemption Provisions
  Sinking Fund Provisions
  40




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##### Table of Contents



Liability for Further Capital Calls
  Provisions Discriminating Against Holders of a Substantial Number of Shares
  Variation of Share Rights
  General Meetings of Stockholders
   Foreign Ownership Regulation
  (a)
    
    by a foreign person, as defined in the Foreign Acquisitions and Takeovers Act, or
associated foreign persons which would result in such persons having an interest in 15%
or more of the issued shares of, or control of 15% or more of the voting power in, an
Australian company, and(b)
    
    by a non-associated foreign person which would result in such foreign person having
an interest in 40% or more of the issued shares of, or control of 40% or more of the
voting power in, an Australian company.
  Merger, Acquisition or Restructure
  41




---



##### Table of Contents



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 stockholders have enough information to assess the merits of a proposal; and
    
    that stockholders all have a reasonable and equal opportunity to participate in any
benefits accruing to the stockholders through any proposal under which a person would
acquire a substantial interest.
   
    
    an issuance or agreement to issue which we have notified the Australian Stock Exchange of
before we are told a person is making or proposes to make a takeover for our shares;
    
    an issuance to our ordinary stockholders on a pro-rata basis;
    
    an issuance made due to an exercise of rights of conversion already in existence;
    
    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 Australian 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
stockholders approving the issuance before the issuance is made.
 Access to and Inspection of Documents
  CHESS
  42




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##### Table of Contents



C. Material Contracts
 Asset Purchase Agreement for the Sale of ProCam
  Cash Advance Facility Agreement
  D. Exchange Controls
  E. Taxation
  U.S. Federal Income Tax Considerations
  43




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##### Table of Contents




    
    an individual who is a citizen or resident of the United States;
    
    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
  Dividends
 pro rata
    44




---



##### Table of Contents



Sale or Exchange of ADSs or Ordinary Shares
   Passive Foreign Investment Company Status
     pro rata
 45




---



##### 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
  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
  46




---



##### Table of Contents



Nature of ADRs for Australian Taxation Purposes
  Taxation of Dividends
   Tax on Sales or other Dispositions of SharesCapital gains tax
   Tax on Sales or other Dispositions of SharesStockholders Holding Shares on Revenue Account
    47




---



##### Table of Contents



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
 48




---



##### Table of Contents



Item 11. Quantitative and Qualitative Disclosure about Market Risk
   
 Item 12. Description of Securities Other than Equity Securities
  49




---



##### 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
    U.S. GAAP Knowledge
   Segregation of Duties
   Financial Statement Close Process
    50




---



##### 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 31,2005
    
    2004A$
    
    A$Audit Fees
    
    
    385,410
    
    
    
    437,661Audit-Related Fees
    
    
    31,500
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    6,279Total
    
    
    416,910
    
    
    
    443,940
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees.
  51




---



##### Table of Contents



Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  52




---



##### 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
    
    DSTO Research Agreement dated April 20, 2001*4.2
    
    Deed of Amendment to the DSTO Research Agreement dated September 13, 2002 (portions omitted pursuant to a
request for confidential treatment; non-public information has been filed with the SEC)**4.3
    
    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)*4.4
    
    Asset Purchase Agreement, dated May 24, 2005, with Monroe Machined Products, Inc. (MMP) for the sale of
the ProCam business to MMP.****4.5
    
    Employment Agreement of David A. Smith****4.6
    
    Separation Agreement, dated February 8, 2005, of J.M. ODwyer****4.7
    
    Deed of Termination Agreement, dated May 20, 2006, of David A. Smith4.8
    
    Employment Agreement of James D. MacDonald****4.9
    
    Employment Agreement of George L. Bergeron***4.10
    
    Cash Advance Facility Agreement, dated June 16, 2006, between Metal Storm and Harmony Investment Fund Limited4.11
    
    Discretionary Share Option Scheme*4.12
    
    Employment Agreement of Ian A. Gillespie***8.0
    
    List of Subsidiaries of Metal Storm Limited12.1
    
    Certification by the Executive Chairman 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 Executive Chairman 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 July 14, 2003.***
    
    Incorporated by reference from our Annual Report on Form 20-F filed on July 15, 2004.****
    
    Incorporated by reference from our Annual Report on Form 20-F filed on June 15, 2005. 53




---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 PageMetal Storm LimitedReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Income Statement for the years ended December 31, 2005 and 2004
    
    F-3Consolidated Balance Sheet as at December 31, 2005 and 2004
    
    F-4Consolidated
Statement of Cash Flows for the years ended December 31, 2005 and 2004
    
    F-5Consolidated Statement of Changes in Equity for the years ended December 31, 2005 and 2004
    
    F-6Notes to the Consolidated Financial Statements
    
    F-7
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Shareholders of Metal Storm Limited
      
 F-2




---



##### Table of Contents



Metal Storm Limited
 
 Consolidated Income Statement (Australian Dollars)
 For the Years Ended 31 December 2005 and 2004
 2005
    
    2004Note
    
    A$
    
    A$Continuing operationsRevenue
    
    
    5
    
    
    
    830,645
    
    
    
    837,201ExpensesConsumables used
    
    
    
    
    
    
    (4,360
    )
    
    
    Employee expenses
    
    
    5
    
    
    
    (4,468,640
    )
    
    
    (3,751,459
    )Professional fees
    
    
    
    
    
    
    (1,774,369
    )
    
    
    (2,021,573
    )Research and development
    
    
    
    
    
    
    (1,794,684
    )
    
    
    (1,613,365
    )Administrative expenditure
    
    
    
    
    
    
    (928,931
    )
    
    
    (1,326,897
    )Facilities and equipment
    
    
    
    
    
    
    (522,693
    )
    
    
    (419,114
    )Travel and entertainment
    
    
    
    
    
    
    (433,859
    )
    
    
    (796,611
    )Communication and technology
    
    
    
    
    
    
    (306,335
    )
    
    
    (342,549
    )Public relations and compliance
    
    
    
    
    
    
    (494,786
    )
    
    
    (617,710
    )Unrealised net foreign exchange differences
    
    
    5
    
    
    
    (785
    )
    
    
    1,378Realised net foreign exchange differences
    
    
    5
    
    
    
    (26,237
    )
    
    
    7,307Impairment loss on goodwill
    
    
    5,17
    
    
    
    
    
    
    
    (1,834,152
    )Finance costs
    
    
    5
    
    
    
    (35,496
    )
    
    
    (43,568
    )Loss before income tax
    
    
    
    
    
    
    (9,960,530
    )
    
    
    (11,921,112
    )Income tax benefit
    
    
    6
    
    
    
    648,320
    
    
    
    332,744Loss after tax from continuing operations
    
    
    
    
    
    
    (9,312,210
    )
    
    
    (11,588,368
    )Discontinued operationLoss after tax from discontinued operation
    
    
    7
    
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Loss attributable to members of the parent
    
    
    8
    
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Earnings per share (cents per share) Basic and diluted loss for the year
attributable to ordinary equity holders of the
parent
    
    
    8
    
    
    
    (2.09
    )
    
    
    (2.62
    ) Basic and diluted loss for the year from
continuing operations attributable to ordinary
equity holders of the parent
    
    
    8
    
    
    
    (1.78
    )
    
    
    (2.31
    )Dividends per share
    
    
    
    
    
    
    
    
    
    
    
 F-3




---



##### Table of Contents



Metal Storm Limited
 
 Consolidated Balance Sheet (Australian Dollars)
 As at 31 December 2005 and 2004
 2005
    
    2004Note
    
    A$
    
    A$AssetsCurrent assetsCash and cash equivalents
    
    
    9
    
    
    
    635,861
    
    
    
    15,109,596Available-for-sale financial investments
    
    
    10
    
    
    
    5,056,140
    
    
    
    Trade and other receivables
    
    
    11
    
    
    
    635,209
    
    
    
    590,188Inventories
    
    
    12
    
    
    
    
    
    
    
    250,982Prepayments
    
    
    
    
    
    
    810,112
    
    
    
    553,759Other financial assets
    
    
    13
    
    
    
    
    
    
    
    845,446Total current assets
    
    
    
    
    
    
    7,137,322
    
    
    
    17,349,971Non-current assetsTrade and other receivables
    
    
    11
    
    
    
    8,832
    
    
    
    3,397Property, plant and equipment
    
    
    15
    
    
    
    231,629
    
    
    
    2,947,804Intangible assets and goodwill
    
    
    16
    
    
    
    51,938
    
    
    
    26,145Total non-current assets
    
    
    
    
    
    
    292,399
    
    
    
    2,977,346Total assets
    
    
    
    
    
    
    7,429,721
    
    
    
    20,327,317LiabilitiesCurrent liabilitiesTrade and other payables
    
    
    19
    
    
    
    890,550
    
    
    
    1,696,033Interest-bearing loans and borrowings
    
    
    20
    
    
    
    353,674
    
    
    
    1,478,836Provisions
    
    
    21
    
    
    
    277,448
    
    
    
    332,496Other
    
    
    
    
    
    
    43,024
    
    
    
    Total current liabilities
    
    
    
    
    
    
    1,564,696
    
    
    
    3,507,365Non-current liabilitiesInterest-bearing loans and borrowings
    
    
    20
    
    
    
    
    
    
    
    578,160Provisions
    
    
    21
    
    
    
    
    
    
    
    41,403Other
    
    
    
    
    
    
    85,163
    
    
    
    396Total non-current liabilities
    
    
    
    
    
    
    85,163
    
    
    
    619,959Total liabilities
    
    
    
    
    
    
    1,649,859
    
    
    
    4,127,324Net assets
    
    
    
    
    
    
    5,779,862
    
    
    
    16,199,993EquityContributed equity
    
    
    22
    
    
    
    56,559,039
    
    
    
    56,559,039Share-based payment reserves
    
    
    22
    
    
    
    1,726,182
    
    
    
    1,316,454Other reserves
    
    
    22
    
    
    
    (58,125
    )
    
    
    (142,866
    )Retained losses
    
    
    22
    
    
    
    (52,447,234
    )
    
    
    (41,532,634
    )Total equity
    
    
    
    
    
    
    5,779,862
    
    
    
    16,199,993
 F-4




---



##### Table of Contents



Metal Storm Limited
 
 Consolidated
Statement of Cash Flows (Australian Dollars)
 For the Years Ended 31 December 2005 and 2004
 2005
    
    2004Note
    
    A$
    
    A$Cash Flows From Operating ActivitiesReceipts from customers
    
    
    
    
    
    
    1,299,567
    
    
    
    5,396,079Contract revenue funding received
    
    
    
    
    
    
    188,794
    
    
    
    42,610Payments to suppliers and employees
    
    
    
    
    
    
    (13,205,669
    )
    
    
    (17,006,485
    )Interest and other costs of finance paid
    
    
    
    
    
    
    (96,157
    )
    
    
    (295,435
    )Income tax refund  research & development
    
    
    
    
    
    
    310,755
    
    
    
    332,744Other  GST received
    
    
    
    
    
    
    261,451
    
    
    
    293,832Net cash flows used in operating activities
    
    
    9
    
    
    
    (11,241,259
    )
    
    
    (11,236,655
    )Cash Flows From Investing ActivitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (104,292
    )
    
    
    (257,325
    )Proceeds from the disposal of discontinued operation
    
    
    7
    
    
    
    2,256,721
    
    
    
    Purchase of intangible assets
    
    
    
    
    
    
    (74,007
    )
    
    
    (19,030
    )Interest received
    
    
    
    
    
    
    613,030
    
    
    
    810,302Purchase of available-for-sale financial assets
    
    
    
    
    
    
    (8,633,480
    )
    
    
    Proceeds from sale of available-for-sale financial assets
    
    
    
    
    
    
    3,614,000
    
    
    
    Purchase of other financial asset
    
    
    13
    
    
    
    
    
    
    
    (845,446
    )Proceeds from other financial asset
    
    
    13
    
    
    
    857,536
    
    
    
    Net cash flows used in investing activities
    
    
    
    
    
    
    (1,470,492
    )
    
    
    (311,499
    )Cash Flows From Financing ActivitiesProceeds from issues of equity securities
    
    
    
    
    
    
    
    
    
    
    21,511,418Share issue costs
    
    
    
    
    
    
    
    
    
    
    (1,705,107
    )Proceeds from exercise of options
    
    
    
    
    
    
    
    
    
    
    3,007Proceeds from borrowings
    
    
    
    
    
    
    706,698
    
    
    
    1,113,146Repayment of borrowings
    
    
    
    
    
    
    (2,466,723
    )
    
    
    (2,319,393
    )Net cash flows (used in)/from financing activities
    
    
    
    
    
    
    (1,760,025
    )
    
    
    18,603,071Net movement in cash and cash equivalents
    
    
    
    
    
    
    (14,471,776
    )
    
    
    7,054,917Net foreign exchange differences
    
    
    
    
    
    
    (1,959
    )
    
    
    Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    15,109,596
    
    
    
    8,054,679Cash and cash equivalents at end of period
    
    
    9
    
    
    
    635,861
    
    
    
    15,109,596
 Supplementary Information of Non-Cash Investing and Financing Activities
  F-5




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##### Table of Contents



Metal Storm Limited
 
 Consolidated Statement of Changes in Equity (Australian Dollars)
For the Years Ended 31 December 2005 and 2004
 Share-basedIssued
    
    payment
    
    Other
    
    Retained
    
    Totalcapital
    
    reserves
    
    reserves
    
    losses
    
    equityA$
    
    A$
    
    A$
    
    A$
    
    A$At 1 January 2004
    
    
    36,638,128
    
    
    
    515,009
    
    
    
    (22,883
    )
    
    
    (28,428,507
    )
    
    
    8,701,747Currency translation differences
    
    
    
    
    
    
    
    
    
    
    (119,983
    )
    
    
    
    
    
    
    (119,983
    )Share issue costs
    
    
    (1,705,107
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,705,107
    )Total income and expense for the year
recognised directly in equity
    
    
    (1,705,107
    )
    
    
    
    
    
    
    (119,983
    )
    
    
    
    
    
    
    (1,825,090
    )Loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,104,127
    )
    
    
    (13,104,127
    )Total income/expense for the year
    
    
    (1,705,107
    )
    
    
    
    
    
    
    (119,983
    )
    
    
    (13,104,127
    )
    
    
    (14,929,217
    )Exercise of options
    
    
    3,007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,007Net increase in share-based payment reserves
    
    
    
    
    
    
    801,445
    
    
    
    
    
    
    
    
    
    
    
    801,445Issue of share capital
    
    
    21,511,418
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,511,418Fair value of services paid for via issue of
shares
    
    
    111,593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,593At 31 December 2004
    
    
    56,559,039
    
    
    
    1,316,454
    
    
    
    (142,866
    )
    
    
    (41,532,634
    )
    
    
    16,199,993Net gains on available-for-sale financial
assets
    
    
    
    
    
    
    
    
    
    
    36,660
    
    
    
    
    
    
    
    36,660Currency translation differences
    
    
    
    
    
    
    
    
    
    
    48,081
    
    
    
    
    
    
    
    48,081Total income and expense for the year
recognised directly in equity
    
    
    
    
    
    
    
    
    
    
    84,741
    
    
    
    
    
    
    
    84,741Loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,914,600
    )
    
    
    (10,914,600
    )Total income/expense for the year
    
    
    
    
    
    
    
    
    
    
    84,741
    
    
    
    (10,914,600
    )
    
    
    (10,829,859
    )Net increase in share-based payment reserves
    
    
    
    
    
    
    409,728
    
    
    
    
    
    
    
    
    
    
    
    409,728At 31 December 2005
    
    
    56,559,039
    
    
    
    1,726,182
    
    
    
    (58,125
    )
    
    
    (52,447,234
    )
    
    
    5,779,862
 F-6




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##### Table of Contents



1. Going Concern
   2005
    
    2004A$
    
    A$Loss attributable to members of the parent
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Cumulative losses from inception
    
    
    (52,447,234
    )
    
    
    (41,532,634
    )Net cash flows used in operating activities
    
    
    (11,241,259
    )
    
    
    (11,236,655
    )Cash including available-for-sale financial investments
    
    
    5,692,001
    
    
    
    15,109,596Working capital
    
    
    5,572,626
    
    
    
    13,842,606Shareholders equity
    
    
    5,779,862
    
    
    
    16,199,993
      F-7




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##### Table of Contents



2. Corporate Information
    F-8




---



##### Table of Contents



3. Summary of Significant Accounting Policies
 (a) Basis of Preparation
   (b) Statement of Compliance
  Financial Instruments: Disclosure and Presentation Financial
Instruments: Recognition and Measurement First-time Adoption of Australian Equivalents to International Financial Reporting Standards
  ApplicationAASB
    
    
    
    Nature of change to
    
    date of
    
    Application dateAmendment
    
    Affected Standard(s)
    
    accounting policy
    
    Standard*
    
    for Company2005-1
    
    AASB 139: Financial
Instrument:
Recognition and
measurement(IAS
39)
    
    No change to
accounting policy
required. Therefore
no impact.
    
    1 January 2006
    
    1 January 20062005-5
    
    AASB 1: First-time
adoption of AIFRS
(IFRS 1), AASB 139:
Financial
Instrument: Recognition and
measurement(IAS 39)
    
    No change to
accounting policy
required. Therefore
no impact.
    
    1 January 2006
    
    1 January 20062005-6
    
    AASB 3: Business
Combinations(IAS 3)
    
    No change to
accounting policy
required. Therefore
no impact.
    
    1 January 2006
    
    1 January 20062005-10
    
    AASB 132: Financial
Instruments: Disclosure and
Presentation(IAS 32), AASB
101: Presentation of Financial
Statements(IAS 1),AASB 114:
    
    No change to
accounting policy
required. Therefore
no impact.
    
    1 January 2007
    
    1 January 2007Segment Reporting(IAS 14),
AASB 117: Leases(IAS 17),
AASB 113: Earnings per Share
(IAS 33), AASB 139: Financial
Instrument: Recognition and
measurement(IAS 39),AASB 1: First-time adoption of AIFRS
(IFRS 1)2006-1
    
    AASB 121: The Effects of
Changes in Foreign Exchange
Rates(IAS 21)
    
    No change to
accounting policy
required. Therefore
no impact.
    
    1 January 2006
    
    1 January 2006New Standard
    
    AASB 7: Financial Instruments:
Disclosures(IFRS 7)
    
    No change to
accounting policy
required. Therefore
no impact.
    
    1 January 2007
    
    1 January 2007
 
 *
    
    Application date is for the annual reporting periods beginning on or after the date shown in
the above table. F-9




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##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (b) Statement of Compliance (continued)
  AASB
    
    AffectedAmendment
    
    Standard(s)2005-2
    
    AASB 1023 General Insurance Contracts2005-4
    
    AASB 139 Financial Instruments: Recognition and Measurement(IAS 39), AASB
132 Financial Instruments: Disclosure and Presentation(IAS 32), AASB 1
First-time adoption of AIFRS(IFRS 1), AASB 1023 General Insurance
Contractsand AASB 1028 Life Insurance Contracts2005-9
    
    AASB 4 Insurance Contracts(IAS 4), AASB 1023 General Insurance Contracts,
AASB 139 Financial Instruments: Recognition and Measurementand AASB 132
Financial Instruments: Disclosure and Presentation(IAS 32)2005-12
    
    AASB 1038 Life Insurance Contractsand AASB 1023 General Insurance Contracts2005-13
    
    AAS 25 Financial Reporting by Superannuation Plans
 (c) Basis of Consolidation
     (d) Significant Accounting Judgements, Estimates and Assumptions
 Significant accounting estimates and assumptions
  Impairment of goodwill and intangibles with indefinite useful lives
   Share-based payment transactions
  F-10




---



##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (e) Foreign Currency Translation
        (f) Property, Plant and Equipment
     Derecognition and disposal
    Impairment
    F-11




---



##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (f) Property, Plant and Equipment (continued)
 Impairment (continued)
   (g) Borrowing Costs
  (h) Goodwill
       (i) Intangible Assets
 Acquired both separately and from a business combination
    F-12




---



##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (i) Intangible Assets (continued)
  Research and development costs
    Policy
    
    SoftwareUseful life
    
    FiniteAmortisation method used
    
    Depreciated over useful lifeInternally generated or acquired
    
    AcquiredImpairment testing
    
    Annually where an indicator of impairment exists
  (j) Impairment of assets
    F-13




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3. Summary of Significant Accounting Policies (continued)
 (j) Impairment of assets (continued)
  (k) Investments and Other Financial Assets
  Accounting policies applicable for the year ending 31 December 2005
  (i) Financial assets at fair value through profit or loss
  (ii) Held-to-maturity investments
  (iii) Available-for-sale investments
  F-14




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##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (l) Inventories
     (m) Trade and Other Receivables
  Accounting policies applicable for the year ending 31 December 2005
   Accounting policies applicable for the year ending 31 December 2004
  (n) Cash and Cash Equivalents
   (o) Interest-bearing Loans and Borrowings
  Accounting policies applicable for the year ending 31 December 2005
   F-15




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##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (o) Interest-bearing Loans and Borrowings (continued)
  Accounting policies applicable for the year ending 31 December 2004
   (p) Provisions
     (q) Employee Leave Benefits
  (r) Share-based Payment Transactions
   (i)
    
    options issued to executives and employees as part of a remuneration package issued in
accordance with the power contained in the Companys constitution, and(ii)
    
    the Employee Share Option Plan (ESOP).
   F-16




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##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (r) Share-based Payment Transactions (continued)
       First-time Adoption of Australian Equivalents to
International Financial Reporting Standards Share-Based Payments
  (s) Leases
     F-17




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##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (t) Revenue Recognition
  Sale of goods
  Rendering of services
  Interest
  (u) Government Grants
    (v) Income Tax
   
    
    except where the deferred income tax liability arises from the initial
recognition of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects
neither the accounting profit nor taxable profit or loss; and
    
    in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, except where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
differences will not reverse in the foreseeable future.
  F-18




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##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (v) Income Tax (continued)
 
    
    except where the deferred income tax asset relating to the deductible
temporary difference arises from the initial recognition of an asset
or liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting profit
nor taxable profit or loss; and
    
    in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint
ventures, deferred tax assets are only recognised to the extent that
it is probable that the temporary differences will reverse in the
foreseeable future and taxable profit will be available against which
the temporary differences can be utilised.
      (w) Other Taxes
       (x) Financial Instruments Issued by the Company
 Transaction Costs on the Issue of Equity Instruments
  F-19




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##### Table of Contents



3. Summary of Significant Accounting Policies (continued)
 (x) Financial Instruments Issued by the Company (continued)
 Interest and Dividends
  (y) Technology Development
  (z) AASB 1 transitional exemption
 First-time Adoption of Australian Equivalents to International Financial Reporting Standards
 Business combinations
 Business Combinations
 Share-based payment transactions
 Share-Based Payments
 Exemption from the requirement to restate comparative information for AASB 132 and AASB 139
 Financial Instruments:
Presentation and Disclosure Financial Instruments: Recognition and Measurement
  (aa) Change in Financial Statement Basis and Presentation Currency
      F-20




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##### Table of Contents



4. Segment Information
    Business segments
  Research &
    
    DiscontinuedDevelopment
    
    Operation
    
    Elimination
    
    ConsolidatedA$
    
    A$
    
    A$
    
    A$2005RevenueSales to customers outside the economic entity
    
    
    230,743
    
    
    
    1,287,223
    
    
    
    
    
    
    
    1,517,966Total segment revenue
    
    
    230,743
    
    
    
    1,287,223
    
    
    
    
    
    
    
    1,517,966Non-segment revenueInterest revenue
    
    
    599,902
    
    
    
    3,047
    
    
    
    
    
    
    
    602,949Total consolidated revenue
    
    
    830,645
    
    
    
    1,290,270
    
    
    
    
    
    
    
    2,120,915ResultSegment results
    
    
    (15,811,766
    )
    
    
    (1,541,729
    )
    
    
    6,197,640
    
    
    
    (11,155,855
    )Unallocated expenses
    
    
    (310,908
    )
    
    
    
    
    
    
    
    
    
    
    (310,908
    )Profit/(loss) before tax and finance costs
    
    
    (16,122,674
    )
    
    
    (1,541,729
    )
    
    
    6,197,640
    
    
    
    (11,466,763
    )Finance costs
    
    
    (35,496
    )
    
    
    (60,661
    )
    
    
    
    
    
    
    (96,157
    )Profit/(loss) before income tax
    
    
    (16,158,170
    )
    
    
    (1,602,390
    )
    
    
    6,197,640
    
    
    
    (11,562,920
    )Income tax benefit
    
    
    648,320
    
    
    
    
    
    
    
    
    
    
    
    648,320Net loss for the year
    
    
    (15,509,850
    )
    
    
    (1,602,390
    )
    
    
    6,197,640
    
    
    
    (10,914,600
    )Assets and liabilitiesSegment assets
    
    
    7,900,790
    
    
    
    25,731
    
    
    
    (496,800
    )
    
    
    7,429,721Segment liabilities
    
    
    13,127,206
    
    
    
    3,592,079
    
    
    
    (15,069,426
    )
    
    
    1,649,859Other segment informationCapital expenditure
    
    
    104,292
    
    
    
    
    
    
    
    
    
    
    
    104,292Depreciation
    
    
    (69,686
    )
    
    
    (141,859
    )
    
    
    
    
    
    
    (211,545
    )Amortisation
    
    
    (48,214
    )
    
    
    
    
    
    
    
    
    
    
    (48,214
    )Cash flow informationNet cash flow from operating activities
    
    
    (10,352,652
    )
    
    
    (888,607
    )
    
    
    
    
    
    
    (11,241,259
    )Net cash flow from investing activities
    
    
    (3,727,214
    )
    
    
    2,256,722
    
    
    
    
    
    
    
    (1,470,492
    )Net cash flow from financing activities
    
    
    (75,865
    )
    
    
    (1,684,160
    )
    
    
    
    
    
    
    (1,760,025
    )
 F-21




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##### Table of Contents



4. Segment Information (continued)
 Business segments (continued)
 Research &
    
    DiscontinuedDevelopment
    
    Operation
    
    Elimination
    
    ConsolidatedA$
    
    A$
    
    A$
    
    A$2004RevenueSales to customers outside the economic entity
    
    
    42,636
    
    
    
    5,309,298
    
    
    
    (77,294
    )
    
    
    5,274,640Other revenue
    
    
    
    
    
    
    14,099
    
    
    
    
    
    
    
    14,099Total segment revenue
    
    
    42,636
    
    
    
    5,323,397
    
    
    
    (77,294
    )
    
    
    5,288,739Non-segment revenueInterest revenue
    
    
    794,565
    
    
    
    15,737
    
    
    
    
    
    
    
    810,302Total consolidated revenue
    
    
    837,201
    
    
    
    5,339,134
    
    
    
    (77,294
    )
    
    
    6,099,041ResultSegment results
    
    
    (17,631,138
    )
    
    
    (1,252,663
    )
    
    
    6,216,902
    
    
    
    (12,666,899
    )Unallocated expenses
    
    
    (474,537
    )
    
    
    
    
    
    
    
    
    
    
    (474,537
    )Profit/(loss) before tax and finance costs
    
    
    (18,105,675
    )
    
    
    (1,252,663
    )
    
    
    6,216,902
    
    
    
    (13,141,436
    )Finance costs
    
    
    (43,568
    )
    
    
    (342,041
    )
    
    
    90,174
    
    
    
    (295,435
    )Profit/(loss) before tax
    
    
    (18,149,243
    )
    
    
    (1,594,704
    )
    
    
    6,307,076
    
    
    
    (13,436,871
    )Income tax benefit
    
    
    332,744
    
    
    
    
    
    
    
    
    
    
    
    332,744Net loss for the year
    
    
    (17,816,499
    )
    
    
    (1,594,704
    )
    
    
    6,307,076
    
    
    
    (13,104,127
    )Assets and liabilitiesSegment assets
    
    
    19,082,535
    
    
    
    4,649,742
    
    
    
    (3,404,960
    )
    
    
    20,327,317Segment liabilities
    
    
    9,426,925
    
    
    
    6,354,788
    
    
    
    (11,654,389
    )
    
    
    4,127,324Other segment informationCapital expenditure
    
    
    107,400
    
    
    
    149,925
    
    
    
    
    
    
    
    257,325Depreciation
    
    
    (98,341
    )
    
    
    (349,479
    )
    
    
    
    
    
    
    (447,820
    )Amortisation
    
    
    (16,953
    )
    
    
    
    
    
    
    
    
    
    
    (16,953
    )Cash flow informationNet cash flow from operating activities
    
    
    (9,982,762
    )
    
    
    (1,253,893
    )
    
    
    
    
    
    
    (11,236,655
    )Net cash flow from investing activities
    
    
    683,872
    
    
    
    (995,371
    )
    
    
    
    
    
    
    (311,499
    )Net cash flow from financing activities
    
    
    16,140,488
    
    
    
    2,462,583
    
    
    
    
    
    
    
    18,603,071
 F-22




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##### Table of Contents



4. Segment Information (continued)
 Geographic Segment
   NorthAustralia
    
    America
    
    Elimination
    
    ConsolidatedA$
    
    A$
    
    A$
    
    A$2005RevenueSales to customers outside the economic entity
    
    
    
    
    
    
    1,517,966
    
    
    
    
    
    
    
    1,517,966Other revenue
    
    
    597,650
    
    
    
    5,299
    
    
    
    
    
    
    
    602,949Less revenue attributable to discontinued operations
    
    
    
    
    
    
    (1,290,270
    )
    
    
    
    
    
    
    (1,290,270
    )Revenue from continued operations
    
    
    597,650
    
    
    
    232,995
    
    
    
    
    
    
    
    830,645Total segment revenue
    
    
    597,650
    
    
    
    232,995
    
    
    
    
    
    
    
    830,645Other segment informationSegment assets
    
    
    7,388,239
    
    
    
    538,282
    
    
    
    (496,800
    )
    
    
    7,429,721Capital expenditure
    
    
    26,227
    
    
    
    78,065
    
    
    
    
    
    
    
    104,2922004RevenueSales to customers outside the economic entity
    
    
    
    
    
    
    5,351,934
    
    
    
    (77,294
    )
    
    
    5,351,934Other revenue
    
    
    793,065
    
    
    
    31,336
    
    
    
    
    
    
    
    824,401Less revenue attributable to discontinued operations
    
    
    
    
    
    
    (5,261,840
    )
    
    
    
    
    
    
    (5,261,840
    )Revenue from continued operations
    
    
    793,065
    
    
    
    121,430
    
    
    
    (77,294
    )
    
    
    837,201Total segment revenue
    
    
    793,065
    
    
    
    121,430
    
    
    
    (77,294
    )
    
    
    837,201Other segment informationSegment assets
    
    
    18,379,503
    
    
    
    5,352,774
    
    
    
    (3,404,960
    )
    
    
    20,327,317Capital expenditure
    
    
    54,348
    
    
    
    202,977
    
    
    
    
    
    
    
    257,325
 F-23




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##### Table of Contents



5. Revenue and Expenses from Continuing Operations
 2005
    
    2004A$
    
    A$(a
    )
    
    RevenueContract revenue
    
    
    230,743
    
    
    
    42,636Interest revenue
    
    
    599,902
    
    
    
    794,565830,645
    
    
    
    837,201(b
    )
    
    Employee benefits expenseWages & salaries
    
    
    (3,089,934
    )
    
    
    (2,502,161
    )Termination payments
    
    
    (500,000
    )
    
    
    (375,458
    )Superannuation
    
    
    (126,187
    )
    
    
    (79,109
    )Share-based payments expense
    
    
    (409,728
    )
    
    
    (277,779
    )Directors fees
    
    
    (310,908
    )
    
    
    (474,537
    )Fringe benefits tax
    
    
    (31,883
    )
    
    
    (42,415
    )(4,468,640
    )
    
    
    (3,751,459
    )(c
    )
    
    Lease payments included in the Income Statement in:Facilities and equipment
    
    
    (370,311
    )
    
    
    (212,672
    )Communication and technology
    
    
    (71,506
    )
    
    
    (35,356
    )(d
    )
    
    Finance CostsInterest expense
    
    
    (35,496
    )
    
    
    (43,568
    )(e
    )
    
    Depreciation, impairment and foreign exchange differencesDepreciation
    
    
    (69,686
    )
    
    
    (68,341
    )Amortisation
    
    
    (48,214
    )
    
    
    (16,953
    )Impairment of goodwill
    
    
    
    
    
    
    (1,834,152
    )Unrealised net foreign exchange difference
    
    
    (785
    )
    
    
    1,378Realised net foreign exchange difference
    
    
    (26,237
    )
    
    
    7,307
 6. Income Tax
  Income Statement
 Current income taxCurrent income tax benefit
    
    
    (648,320
    )
    
    
    (332,744
    )Income tax benefit reported in the Income Statement
    
    
    (648,320
    )
    
    
    (332,744
    )
 F-24




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##### Table of Contents



6. Income Tax (continued)
  2005
    
    2004A$
    
    A$Accounting loss before income tax from continuing operations
    
    
    (9,960,530
    )
    
    
    (11,921,112
    )Loss before tax from discontinued operation
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Accounting loss before income tax
    
    
    (11,562,920
    )
    
    
    (13,436,871
    )At the Groups statutory income tax rate of 30% (2004: 30%)
    
    
    (3,468,876
    )
    
    
    (4,031,061
    )Other tax adjustments
    
    
    166,182
    
    
    
    978,240Research & development  accounting expense add back
    
    
    266,774
    
    
    
    66,549Research & development  current year tax offset
    
    
    (337,565
    )
    
    
    Research & development  prior year tax offset
    
    
    (310,755
    )
    
    
    (332,744
    )Unrecognised tax losses
    
    
    3,035,920
    
    
    
    2,986,273(648,320
    )
    
    
    (332,744
    )Income tax benefit reported in the consolidated Income Statement
    
    
    (648,320
    )
    
    
    (332,744
    )Income tax attributable to discontinued operation
    
    
    
    
    
    
    (648,320
    )
    
    
    (332,744
    )
 Balance sheet2005
    
    2004A$
    
    A$Deferred income taxDeferred income tax at 31 December relates to the following:CONSOLIDATEDDeferred tax assetsProvision  investment in ProCam Machine LLC
    
    
    575,216
    
    
    
    575,216Sundry creditors and accruals
    
    
    55,230
    
    
    
    Employee entitlements
    
    
    42,040
    
    
    
    84,521Asset retirement obligation
    
    
    13,508
    
    
    
    Deferred rent
    
    
    25,549
    
    
    
    S40-880 costs
    
    
    388,848
    
    
    
    520,835Patent costs
    
    
    964,569
    
    
    
    959,026Losses available for offset against future taxable income
    
    
    12,915,808
    
    
    
    9,879,887Gross deferred income tax assets
    
    
    14,980,768
    
    
    
    12,019,485Deferred tax assets not recognisable
    
    
    (14,980,768
    )
    
    
    (12,019,485
    )Deferred tax income/(expense)
    
    
    
    
    
    
    
  2005
    
    2004A$
    
    A$Deferred tax assets not recognisable at 1 January 2005
    
    
    (12,019,485
    )
    
    
    (7,872,311
    )Increase in unrecognised tax losses
    
    
    (3,035,920
    )
    
    
    (2,986,273
    )Decrease in deferred tax assets
    
    
    74,637
    
    
    
    (1,160,901
    )Deferred tax assets utilised
    
    
    Deferred tax assets not recognisable at 31 December 2005
    
    
    (14,980,768
    )
    
    
    (12,019,485
    )
  F-25




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##### Table of Contents



6. Income Tax (continued)
 Tax Loss Carryforwards
 2005
    
    2004A$
    
    A$Australian
    
    
    26,992,992
    
    
    
    23,466,147United States  federal
    
    
    13,124,360
    
    
    
    7,461,428United States  state
    
    
    9,160,116
    
    
    
    5,153,678Total tax loss carryforwards
    
    
    49,277,468
    
    
    
    36,081,253
   7. Discontinued Operation
    2005
    
    2004A$
    
    A$Revenue
    
    
    1,290,270
    
    
    
    5,261,840Expenses
    
    
    (2,831,999
    )
    
    
    (6,525,732
    )Gross loss
    
    
    (1,541,729
    )
    
    
    (1,263,892
    )Finance costs
    
    
    (60,661
    )
    
    
    (251,867
    )Net loss attributable to discontinued operation
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Earnings per share (cents per share):Basic and diluted from discontinued operation
    
    
    (0.31
    )
    
    
    (0.31
    )
 F-26




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##### Table of Contents



7. Discontinued Operation (continued)
  2005
    
    2004A$
    
    A$AssetsCash and cash equivalents
    
    
    
    
    
    
    316,045Trade and other receivables
    
    
    23,373
    
    
    
    393,596Inventory
    
    
    
    
    
    
    250,981Property plant and equipment
    
    
    
    
    
    
    2,753,319Other
    
    
    2,358
    
    
    
    876,085Total Assets
    
    
    25,731
    
    
    
    4,590,026LiabilitiesTrade and other payables
    
    
    17,175
    
    
    
    474,970Interest bearing liabilities
    
    
    
    
    
    
    1,684,160Provisions
    
    
    146,594
    
    
    
    55,229Total Liabilities
    
    
    163,769
    
    
    
    2,214,359Net Assets/(Liabilities)
    
    
    (138,038
    )
    
    
    2,375,667
  Operating
    
    
    (888,607
    )
    
    
    (1,253,893
    )Investing
    
    
    2,256,722
    
    
    
    (995,371
    )Financing
    
    
    (1,684,160
    )
    
    
    2,462,583Net cash inflow/(outflow)
    
    
    (316,045
    )
    
    
    213,319
 Details of disposal of ProCam are as follows:
  2005A$Accounts Receivable
    
    
    360,812Inventory
    
    
    456,510Property, plant and equipment
    
    
    2,212,631Accounts payable
    
    
    (77,946
    )Accrued property tax
    
    
    (36,681
    )Net assets attributable to discontinued operation
    
    
    2,915,326Consideration received as cash and cash equivalents
    
    
    2,256,721Loss on sale of the assets and liabilities
    
    
    (658,605
    )
 F-27




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##### Table of Contents



8. Earnings per Share
    2005
    
    2004A$
    
    A$Net loss attributable to ordinary equity holders of the parent from continuing operations
    
    
    (9,312,210
    )
    
    
    (11,588,368
    )Net loss attributable to ordinary equity holders of the parent from discontinued
operation
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Net loss attributable to ordinary equity holders of the parent (used in calculating
basic and diluted earnings per share)
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Number
    
    NumberWeighted average number of ordinary shares for basic and diluted earnings per share
    
    
    521,970,978
    
    
    
    500,886,725
  F-28




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##### Table of Contents



9. Cash and Cash Equivalents
 2005
    
    2004A$
    
    A$Cash at bank and in hand
    
    
    635,861
    
    
    
    1,109,596Short term deposits
    
    
    
    
    
    
    14,000,000635,861
    
    
    
    15,109,596
    Reconciliation to Cash Flow Statement
 Cash at bank and in hand
    
    
    635,861
    
    
    
    1,109,596Short term deposits
    
    
    
    
    
    
    14,000,000635,861
    
    
    
    15,109,596
 Reconciliation from the net loss after tax to the net cash flows from operations
 Net Loss
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Adjustments for:Depreciation and amortisation
    
    
    259,759
    
    
    
    464,773Net loss on disposal of discontinued operation
    
    
    658,605
    
    
    
    Foreign exchange (gains)/losses
    
    
    27,022
    
    
    
    (19,694
    )Impairment loss on investment
    
    
    
    
    
    
    1,834,152Fair value of services paid for via issue of options
    
    
    409,728
    
    
    
    801,445Fair value of services paid for via issue of shares
    
    
    
    
    
    
    111,595Inventory provision movements
    
    
    
    
    
    
    (90,415
    )Interest revenue
    
    
    (602,949
    )
    
    
    (810,302
    )Changes in assets and liabilities:(Increase)/decrease in trade and other receivables
    
    
    (412,492
    )
    
    
    106,607(Increase)/decrease in inventories
    
    
    250,982
    
    
    
    97,355(Increase)/decrease in prepayments
    
    
    (255,129
    )
    
    
    11,578(Decrease)/increase in trade and other payables
    
    
    (700,396
    )
    
    
    (484,279
    )(Decrease)/increase in provisions
    
    
    (55,049
    )
    
    
    (155,343
    )(Decrease)/increase in other current liabilities
    
    
    93,260
    
    
    
    Net cash from operating activities
    
    
    (11,241,259
    )
    
    
    (11,236,655
    )
 F-29




---



##### Table of Contents



10. Available-for-sale Financial Investments
 2005
    
    2004A$
    
    A$Securities  Fair value
    
    
    5,056,140
    
    
    
    
   11. Trade and Other Receivables
 CurrentTrade receivables
    
    
    (i)
    
    
    
    98,532
    
    
    
    377,057Goods and services tax  recoverable
    
    
    
    
    
    
    107,564
    
    
    
    70,824Interest receivable
    
    
    
    
    
    
    17,695
    
    
    
    33,740Income tax receivable
    
    
    
    
    
    
    337,565
    
    
    
    Other
    
    
    
    
    
    
    88,167
    
    
    
    107,342Provision for doubtful debts
    
    (ii)
    
    
    (27,750
    )
    
    
    621,773
    
    
    
    588,963Related party receivables:
    
    (iii)Key management personnel
    
    
    
    
    
    
    13,436
    
    
    
    1,225635,209
    
    
    
    590,188Non-currentOther
    
    
    
    
    
    
    8,832
    
    
    
    3,397
 
 (i)
    
    Trade receivables are non-interest bearing and are generally on 30 day terms.(ii)
    
    Provision for doubtful debts is determined by assessing evidence as to the recoverability of
each debt.(iii)
    
    For terms and conditions relating to related party receivables refer to Note 26 and Note
29(h).  Balance at 1 January
    
    
    
    
    
    
    Arising during year
    
    
    27,750
    
    
    
    Utilised during year
    
    
    
    
    
    
    Balance at 31 December
    
    
    27,750
    
    
    
    
 F-30




---



##### Table of Contents



12. Inventories
 2005
    
    2004A$
    
    A$Raw materials (at cost)
    
    
    
    
    
    
    48,328Work-in-progress (at cost)
    
    
    
    
    
    
    161,154Finished goods
    
    
    
    
    
    
    115,303Provision for diminution in value
    
    
    
    
    
    
    (73,803
    )
    
    
    
    250,982
  Balance at 1 January
    
    
    73,803
    
    
    
    Arising during year
    
    
    
    
    
    
    86,606Utilised during year
    
    
    (73,803
    )
    
    
    (12,803
    )Balance at 31 December
    
    
    
    
    
    
    73,803
 13. Other Financial Assets
 Current
 Short term deposit
    
    
    
    
    
    
    845,446
  14. Interests in Controlled Entities
 Country of
    
    Percentage of equity heldIncorporation
    
    by the consolidated entity
    
    Investment2005
    
    2004
    
    2005
    
    2004Metal 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
    %
    
    
    
    
    
    
    
  F-31




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##### Table of Contents



15. Property, Plant and Equipment
 2005
    
    2004A$
    
    A$Leasehold improvementsAt 1 January, net of accumulated depreciation
    
    
    35,059
    
    
    
    19,805Additions
    
    
    726
    
    
    
    28,991Depreciation charge for the year
    
    
    (15,715
    )
    
    
    (13,737
    )At 31 December, net of accumulated depreciation
    
    
    20,070
    
    
    
    35,059At 1 JanuaryCost
    
    
    62,658
    
    
    
    33,667Accumulated depreciation
    
    
    (27,599
    )
    
    
    (13,862
    )Net carrying amount
    
    
    35,059
    
    
    
    19,805At 31 DecemberCost
    
    
    63,384
    
    
    
    62,658Accumulated depreciation
    
    
    (43,314
    )
    
    
    (27,599
    )Net carrying amount
    
    
    20,070
    
    
    
    35,059Plant and equipmentAt 1 January, net of accumulated depreciation
    
    
    2,912,745
    
    
    
    3,270,967Additions
    
    
    103,566
    
    
    
    228,334Attributable to discontinued operation
    
    
    (2,608,922
    )
    
    
    Depreciation charge for the year
    
    
    (195,830
    )
    
    
    (434,083
    )Exchange adjustment
    
    
    
    
    
    
    (152,473
    )At 31 December, net of accumulated depreciation
    
    
    211,559
    
    
    
    2,912,745At 1 JanuaryCost
    
    
    4,021,626
    
    
    
    3,945,765Accumulated depreciation
    
    
    (1,108,881
    )
    
    
    (674,798
    )Net carrying amount
    
    
    2,912,745
    
    
    
    3,270,967At 31 DecemberCost
    
    
    492,216
    
    
    
    4,021,626Accumulated depreciation
    
    
    (280,657
    )
    
    
    (1,108,881
    )Net carrying amount
    
    
    211,559
    
    
    
    2,912,745Total property, plant and equipmentAt 1 January, net of accumulated depreciation
    
    
    2,947,804
    
    
    
    3,290,772Additions
    
    
    104,292
    
    
    
    257,325Attributable to discontinued operation
    
    
    (2,608,922
    )
    
    
    Depreciation charge for the year
    
    
    (211,545
    )
    
    
    (447,820
    )Exchange adjustment
    
    
    
    
    
    
    (152,473
    )At 31 December, net of accumulated depreciation
    
    
    231,629
    
    
    
    2,947,804At 1 JanuaryCost
    
    
    4,084,284
    
    
    
    3,979,432Accumulated depreciation
    
    
    (1,136,480
    )
    
    
    (688,660
    )Net carrying amount
    
    
    2,947,804
    
    
    
    3,290,772At 31 DecemberCost
    
    
    555,600
    
    
    
    4,084,284Accumulated depreciation
    
    
    (323,971
    )
    
    
    (1,136,480
    )Net carrying amount
    
    
    231,629
    
    
    
    2,947,804
 F-32




---



##### Table of Contents



15. Property, Plant and Equipment (continued)
    16. Intangible Assets and Goodwill
 2005
    
    2004A$
    
    A$SoftwareAt 1 January, net of accumulated amortisation
    
    
    26,145
    
    
    
    24,068Additions
    
    
    74,007
    
    
    
    19,030Amortisation charge for the year
    
    
    (48,214
    )
    
    
    (16,953
    )At 31 December, net of accumulated amortisation
    
    
    51,938
    
    
    
    26,145At 1 JanuaryCost
    
    
    48,882
    
    
    
    29,852Accumulated amortisation
    
    
    (22,737
    )
    
    
    (5,784
    )Net carrying amount
    
    
    26,145
    
    
    
    24,068At 31 DecemberCost
    
    
    122,889
    
    
    
    48,882Accumulated amortisation
    
    
    (70,951
    )
    
    
    (22,737
    )Net carrying amount
    
    
    51,938
    
    
    
    26,145GoodwillAt 1 January, net of accumulated impairment
    
    
    
    
    
    
    1,631,412Additions
    
    
    
    
    
    
    202,740Impairment loss
    
    
    
    
    
    
    (1,834,152
    )At 31 December, net of accumulated impairment
    
    
    
    
    
    
    At 1 JanuaryCost
    
    
    1,861,726
    
    
    
    1,658,986Accumulated amortisation
    
    
    (27,574
    )
    
    
    (27,574
    )Accumulated impairment losses
    
    
    (1,834,152
    )
    
    
    Net carrying amount
    
    
    
    
    
    
    1,631,412At 31 DecemberCost
    
    
    1,861,726
    
    
    
    1,861,726Accumulated amortisation
    
    
    (27,574
    )
    
    
    (27,574
    )Accumulated impairment losses
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net carrying amount
    
    
    
    
    
    
    
 F-33




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##### Table of Contents



16. Intangible Assets and Goodwill (continued)
 2005
    
    2004A$
    
    A$Total IntangiblesAt 1 January, net of accumulated amortisation and impairment
    
    
    26,145
    
    
    
    1,655,480Additions
    
    
    74,007
    
    
    
    221,770Impairment loss
    
    
    
    
    
    
    (1,834,152
    )Amortisation charge for the year
    
    
    (48,214
    )
    
    
    (16,953
    )At 31 December, net of accumulated amortisation and impairment
    
    
    51,938
    
    
    
    26,145At 1 JanuaryCost
    
    
    1,910,608
    
    
    
    1,688,838Accumulated amortisation
    
    
    (50,311
    )
    
    
    (33,358
    )Accumulated impairment losses
    
    
    (1,834,152
    )
    
    
    Net carrying amount
    
    
    26,145
    
    
    
    1,655,480At 31 DecemberCost
    
    
    1,984,615
    
    
    
    1,910,608Accumulated amortisation
    
    
    (98,525
    )
    
    
    (50,311
    )Accumulated impairment losses
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net carrying amount
    
    
    51,938
    
    
    
    26,145
  17. Impairment Testing of Goodwill
       F-34




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##### Table of Contents



17. Impairment Testing of Goodwill (continued)
  18. Share-based Payment Plans
 Options Issued under the Constitution
           2005
    
    
    
    
    
    2004No.
    
    WAEP
    
    
    
    
    
    No.
    
    WAEPOutstanding at the beginning of the year
    
    
    (i
    )
    
    
    12,399,353
    
    
    
    0.28
    
    
    (ii)
    
    
    7,532,165
    
    
    
    0.31Granted during the year
    
    
    
    
    
    
    3,268,750
    
    
    
    0.40
    
    
    
    
    
    
    
    6,042,188
    
    
    
    0.44Exercised during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired during the year
    
    
    
    
    
    
    (204,165
    )
    
    
    0.87
    
    
    
    
    
    
    
    (1,175,000
    )
    
    
    1.28Outstanding at the end of the year
    
    
    
    
    
    
    15,463,938
    
    
    
    0.30
    
    
    
    
    
    
    
    12,399,353
    
    
    
    0.28Exercisable at the end of the year
    
    
    
    
    
    
    10,113,938
    
    
    
    0.32
    
    
    
    
    
    
    
    7,105,603
    
    
    
    0.46
 F-35




---



##### Table of Contents



18. Share-based Payment Plans (continued)
 (i)
    
    Included in this balance are options over 11,651,438 shares for which an expense has not been
recognised in accordance with AASB 2 as the options were granted on or before 7 November 2002
or vest prior to 1 January 2005. These options have not subsequently been modified and
therefore do not need to be accounted for in accordance with AASB 2.(ii)
    
    An additional 350,000 options were recognised upon transition to AIFRS on 1 January 2004.
  Exercise PriceExpiry Date
    
    (A$)
    
    2005 No.
    
    2004 No.9 April 2005
    
    
    1.162
    
    
    
    
    
    
    
    31,25025 June 2005
    
    
    1.162
    
    
    
    
    
    
    
    50,0003 September 2005
    
    
    0.400
    
    
    
    
    
    
    
    25,0008 October 2005
    
    
    1.162
    
    
    
    
    
    
    
    31,25017 October 2005
    
    
    0.556
    
    
    
    
    
    
    
    16,6658 January 2006
    
    
    1.162
    
    
    
    62,500
    
    
    
    62,5003 March 2006
    
    
    0.400
    
    
    
    55,000
    
    
    
    55,0004 June 2006
    
    
    1.162
    
    
    
    62,500
    
    
    
    62,5003 September 2006
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,5003 September 2006
    
    
    1.162
    
    
    
    62,500
    
    
    
    62,50019 October 2006
    
    
    0.400
    
    
    
    118,000
    
    
    
    118,00031 October 2006
    
    
    0.400
    
    
    
    500,000
    
    
    
    500,00031 October 2006
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50031 December 2006
    
    
    0.556
    
    
    
    25,000
    
    
    
    25,0006 February 2007
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50014 April 2007
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50014 September 2007
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50014 December 2007
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50031 December 2007
    
    
    0.400
    
    
    
    6,250
    
    
    
    6,25031 March 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,5004 June 2008
    
    
    0.388
    
    
    
    5,000
    
    
    
    5,00030 June 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50030 September 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50031 December 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50014 January 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,0002 February 2009
    
    
    0.400
    
    
    
    100,000
    
    
    
    100,00016 February 2009
    
    
    0.400
    
    
    
    14,438
    
    
    
    14,43824 February 2009
    
    
    0.400
    
    
    
    81,250
    
    
    
    81,25010 March 2009
    
    
    0.400
    
    
    
    8,250
    
    
    
    8,25031 March 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,50031 March 2009
    
    
    0.556
    
    
    
    
    
    
    
    12,5005 April 2009
    
    
    0.400
    
    
    
    29,500
    
    
    
    29,50014 April 2009
    
    
    0.400
    
    
    
    1,100,000
    
    
    
    1,100,00010 May 2009
    
    
    0.400
    
    
    
    25,000
    
    
    
    25,0008 June 2009
    
    
    0.400
    
    
    
    25,000
    
    
    
    25,00021 June 2009
    
    
    0.400
    
    
    
    3,225,000
    
    
    
    3,225,00021 June 2009
    
    
    1.100
    
    
    
    40,000
    
    
    
    40,00021 June 2009
    
    
    1.150
    
    
    
    200,000
    
    
    
    200,00030 June 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,50030 June 2009
    
    
    0.556
    
    
    
    
    
    
    
    12,5005 July 2009
    
    
    0.400
    
    
    
    75,000
    
    
    
    75,00014 July 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,0004 September 2009
    
    
    0.400
    
    
    
    31,250
    
    
    
    31,25030 September 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,50030 September 2009
    
    
    0.556
    
    
    
    
    
    
    
    12,50014 October 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,00024 November 2009
    
    
    0.400
    
    
    
    6,250
    
    
    
    6,2504 December 2009
    
    
    0.400
    
    
    
    31,250
    
    
    
    31,2507 December 2009
    
    
    0.400
    
    
    
    12,500
    
    
    
    12,50031 December 2009
    
    
    0.400
    
    
    
    150,000
    
    
    
    62,500
 F-36




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##### Table of Contents



18. Share-based Payment Plans (continued)
 Exercise PriceExpiry Date
    
    (A$)
    
    2005 No.
    
    2004 No.31 December 2009
    
    
    0.556
    
    
    
    
    
    
    
    12,50031 March 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    112,50021 June 2010
    
    
    0.400
    
    
    
    578,750
    
    
    
    24 June 2010
    
    
    0.400
    
    
    
    1,990,000
    
    
    
    30 June 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    112,50030 September 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    112,50031 December 2010
    
    
    0.400
    
    
    
    193,750
    
    
    
    106,25031 March 2011
    
    
    0.400
    
    
    
    131,250
    
    
    
    43,75030 June 2011
    
    
    0.400
    
    
    
    131,250
    
    
    
    43,7502 July 2011
    
    
    0.010
    
    
    
    5,000,000
    
    
    
    5,000,00030 September 2011
    
    
    0.400
    
    
    
    100,000
    
    
    
    12,50015,463,938
    
    
    
    12,399,353
 Employee Share Option Plan
       F-37




---



##### Table of Contents



19. Trade and Other Payables
 2005
    
    2004A$
    
    A$Trade payables
    
    
    (i)
    
    
    
    609,134
    
    
    
    414,150Other payables
    
    (ii)
    
    
    161,856
    
    
    
    1,101,883770,990
    
    
    
    1,516,033Related party payables:Key management personnel
    
    (iii)
    
    
    119,560
    
    
    
    180,000890,550
    
    
    
    1,696,033
 
     20. Interest-bearing Loans and Borrowings
 CurrentLease liability
    
    
    (i)
    
    
    
    
    
    
    
    276,111Bank loan
    
    (ii)
    
    
    
    
    
    
    829,890Other loan
    
    (iii)
    
    
    353,674
    
    
    
    372,835353,674
    
    
    
    1,478,836Non-currentLease liability
    
    
    
    
    
    
    
    
    
    
    578,160
 
 (i)
    
    Leases have an average lease term on 5 years and a weighted average interest rate of 8.3%(ii)
    
    Bank loan bears interest at 4.6%(iii)
    
    Other loan bears interest at 4.1% (2004: 4.2%)
 21. Provisions
 Consolidated
 Asset
    
    OnerousRetirement
    
    LeaseObligation
    
    Contracts
    
    Payroll
    
    TotalA$
    
    A$
    
    A$
    
    A$At 1 January 2005
    
    
    41,403
    
    
    
    
    
    
    
    332,496
    
    
    
    373,899Arising during year
    
    
    
    
    
    
    136,203
    
    
    
    176,936
    
    
    
    313,139Utilised during year
    
    
    
    
    
    
    
    
    
    
    (413,213
    )
    
    
    (413,213
    )Discount rate accretion
    
    
    3,623
    
    
    
    
    
    
    
    
    
    
    
    3,623At 31 December 2005
    
    
    45,026
    
    
    
    136,203
    
    
    
    96,219
    
    
    
    277,448Current 2005
    
    
    45,026
    
    
    
    136,203
    
    
    
    96,219
    
    
    
    277,448Non-current 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,026
    
    
    
    136,203
    
    
    
    96,219
    
    
    
    277,448Current 2004
    
    
    
    
    
    
    
    
    
    
    332,496
    
    
    
    332,496Non-current 2004
    
    
    41,403
    
    
    
    
    
    
    
    
    
    
    
    41,40341,403
    
    
    
    
    
    
    
    332,496
    
    
    
    373,899
 F-38




---



##### Table of Contents



21. Provisions (continued)
 Asset retirement obligation
  Onerous lease contract
  Payroll
  22. Contributed Equity and Reserves
 2005
    
    2004A$
    
    A$Ordinary SharesIssued and fully paid
    
    
    56,559,039
    
    
    
    56,559,039
 Share-based Payment Reserves
 Options
    
    AccumulatedOptions
    
    granted not
    
    unearnedreserve
    
    yet issued
    
    compensation
    
    TotalConsolidated:At 1 January 2004
    
    
    1,107,864
    
    
    
    70,568
    
    
    
    (663,423
    )
    
    
    515,009Options granted during period
    
    
    
    
    
    
    232,920
    
    
    
    (67,586
    )
    
    
    165,334Options issued during period
    
    
    358,332
    
    
    
    
    
    
    
    
    
    
    
    358,332Expenses recognised for the period
    
    
    
    
    
    
    
    
    
    
    277,779
    
    
    
    277,779At 31 December 2004
    
    
    1,466,196
    
    
    
    303,488
    
    
    
    (453,230
    )
    
    
    1,316,454Options granted during period
    
    
    
    
    
    
    39,499
    
    
    
    (39,499
    )
    
    
    Options issued during period
    
    
    365,069
    
    
    
    (251,824
    )
    
    
    (113,245
    )
    
    
    Expenses recognised for the period
    
    
    
    
    
    
    
    
    
    
    409,728
    
    
    
    409,728At 31 December 2005
    
    
    1,831,265
    
    
    
    91,163
    
    
    
    (196,246
    )
    
    
    1,726,182
 Other Reserves
 Bond
    
    Accumulatedvaluation
    
    translationreserve
    
    reserve
    
    TotalConsolidated:At 1 January 2004
    
    
    
    
    
    
    (22,883
    )
    
    
    (22,883
    )Currency translation differences
    
    
    
    
    
    
    (120,003
    )
    
    
    (120,003
    )At 31 December 2004
    
    
    
    
    
    
    (142,886
    )
    
    
    (142,886
    )Currency translation differences
    
    
    
    
    
    
    48,101
    
    
    
    48,101Net gains on available-for-sale financial assets
    
    
    36,660
    
    
    
    
    
    
    
    36,660At 31 December 2005
    
    
    36,660
    
    
    
    (94,785
    )
    
    
    (58,125
    )
 F-39




---



##### Table of Contents



22. Contributed Equity and Reserves (continued)
 Retained Losses
 2005
    
    2004A$
    
    A$At 1 January
    
    
    (41,532,634
    )
    
    
    (28,428,507
    )Net loss
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )At 31 December
    
    
    (52,447,234
    )
    
    
    (41,532,634
    )
 Nature and purpose of reserves
 Options reserve
  Options granted not yet issued
  Accumulated unearned compensation
  Bond valuation reserve
  Accumulated translation reserve
  23. Financial Risk Management Objectives and Policies
     Interest rate risk
   F-40




---



##### Table of Contents



23. Financial Risk Management Objectives and Policies (continued)
 Foreign currency risk
    Credit risk
    Liquidity risk
   24. Financial Instruments
 Fair values
  Carrying amount
    
    Fair value2005
    
    2004
    
    2005
    
    2004A$
    
    A$
    
    A$
    
    A$ConsolidatedFinancial assetsCash
    
    
    635,861
    
    
    
    15,109,596
    
    
    
    635,861
    
    
    
    15,109,596Trade receivables
    
    
    200,437
    
    
    
    377,057
    
    
    
    200,437
    
    
    
    377,057Other receivables
    
    
    443,604
    
    
    
    215,303
    
    
    
    443,604
    
    
    
    215,303Financial liabilitiesTrade payables
    
    
    890,550
    
    
    
    1,696,033
    
    
    
    890,550
    
    
    
    1,696,033Interest bearing loans
    
    
    353,674
    
    
    
    2,056,996
    
    
    
    353,674
    
    
    
    2,056,996
 F-41




---



##### Table of Contents



24. Financial Instruments (continued)
 Interest rate risk
  Year ended 31 December 2005  Consolidated
 1 to less
    
    2 to less
    
    3 to less
    
    4 to lessLess than
    
    than 2
    
    than 3
    
    than 4
    
    than 5
    
    More than1 Year
    
    Years
    
    Years
    
    Years
    
    Years
    
    5 Years
    
    TotalA$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$Fixed rateShort term loans
    
    
    (353,674
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (353,674
    )Floating rateCash
    
    
    635,861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    635,861Fixed interest securities
    
    
    5,056,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,056,140
 Year ended 31 December 2004  Consolidated
 1 to less
    
    2 to less
    
    3 to less
    
    4 to lessLess than
    
    than 2
    
    than 3
    
    than 4
    
    than 5
    
    More than1 Year
    
    Years
    
    Years
    
    Years
    
    Years
    
    5 Years
    
    TotalA$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$Fixed rateCash
    
    
    14,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,000,000Short term deposits
    
    
    845,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845,446Bank loans
    
    
    (829,890
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (829,890
    )Finance lease
    
    
    (276,110
    )
    
    
    (258,339
    )
    
    
    (124,682
    )
    
    
    (189,265
    )
    
    
    (5,874
    )
    
    
    
    
    
    
    (854,270
    )Short term loans
    
    
    (372,835
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (372,835
    )Floating rateCash
    
    
    1,109,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,109,596
 Effectiveinterest
    
    2005
    
    2004rate %
    
    A$
    
    A$CurrentCash
    
    
    4.6
    
    
    
    635,861
    
    
    
    15,109,596Fixed interest securities
    
    BBSW + 1.3
    
    
    5,056,140
    
    
    
    Short term deposits
    
    
    2.4
    
    
    
    
    
    
    
    845,446Bank loans
    
    
    4.6
    
    
    
    
    
    
    
    (829,890
    )Finance lease
    
    
    8.3
    
    
    
    
    
    
    
    (276,110
    )Short term loans
    
    
    4.1
    
    
    
    (353,674
    )
    
    
    (372,835
    )5,338,327
    
    
    
    14,476,207
  http://www.rba.gov.au
 Non-currentFinance lease
    
    
    8.3
    
    
    
    
    
    
    
    578,160
 F-42




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##### Table of Contents



25. Commitments and Contingencies
 Operating lease commitments  Company as lessee
   2005
    
    2004A$
    
    A$Within one year
    
    
    468,068
    
    
    
    713,605After one year but not more than five years
    
    
    1,085,904
    
    
    
    1,727,931More than 5 years
    
    
    
    
    
    
    288,8871,553,991
    
    
    
    2,730,423
 Contracts and Agreements
 Singapore Technologies Kinetics Ltd (STK)
  Potential claim concerning lease of two photocopies  ProCam Machine LLC
  Employment contracts
  F-43




---



##### Table of Contents



26. Related Party Disclosure
 Mr James M. ODwyer
  Mr Bruce McComish
  Call option agreement
  Share-based Payments
 27. Events after the Balance Sheet Date
     28. Auditors Remuneration
  2005
    
    2004A$
    
    A$An audit or review of the consolidated financial statements of the
Company
    
    
    385,410
    
    
    
    437,661Other services in relation to the Company
    
    
    31,500
    
    
    
    6,279416,910
    
    
    
    443,940
 F-44




---



##### Table of Contents



29. Director and Executive Disclosures
 (a) Details of Key Management Personnel
 DirectorsT J ODwyer
    
    Non-executive ChairmanW A Downing
    
    Non-executive Deputy ChairmanD A Smith
    
    Managing Director and Chief Executive Officer  appointed CEO
8 February 2005 and Managing Director 25 May 2005  resigned
28 May 2006D L Alspach
    
    Non-executive Director  resigned 1 July 2006B S McComish
    
    Non-executive DirectorJ M Crunk
    
    Non-executive Director  appointed 29 September 2005P D Jonson
    
    Non-executive Director  appointed 7 February 2006J M ODwyer
    
    Non-executive Director  resigned 8 February 2005J D Heipt
    
    Non-executive Director  resigned 8 February 2005ExecutivesI A Gillespie
    
    Chief Operating OfficerJ D MacDonald
    
    Chief Financial Officer & Company SecretaryG L Bergeron III
    
    Chief Technology OfficerJ C Chehansky
    
    Senior VP Business Development  appointed 1 December 2005  resigned 1 May 2006C A Vehlow
    
    Chief Executive Officer  resigned 17 December 2004S Moser-Savage
    
    Company Secretary  resigned 8 October 2004
   (b) Compensation of Key Management Personnel
 (i) Compensation policy
   
    
    Provide competitive rewards to attract high calibre executives;
    
    Link executive rewards to long-term shareholder value;
    
    Significant portion of executive compensation at risk, dependent upon meeting pre-determined performance benchmarks; and
    
    Establish appropriate, demanding performance hurdles in relation to variable executive compensation.
 (A) Remuneration Committee
   F-45




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##### Table of Contents



29. Director and Executive Disclosures (continued)
 (b) Compensation of Key Management Personnel (continued)
 (B) Compensation structure
  (C) Non-executive Director Compensation
 Objective
  Structure
      (D) Executive Compensation
 Objective
  
    
    reward executives for Company and individual performance against targets set by reference to appropriate benchmarks;
    
    align the interests of executives with those of shareholders;
    
    link reward with the strategic goals and performance of the Company; and
    
    ensure total compensation is competitive by market standards.
 Structure
    
    
    Fixed Compensation
    
    Variable Compensation   Short Term Incentive (STI);
  F-46




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##### Table of Contents



29. Director and Executive Disclosures (continued)
 (b) Compensation of Key Management Personnel (continued)
 (E) Fixed Compensation
 Objective
   Structure
  (F) Variable Compensation  Short Term Incentive (STI)
 Objective
  Structure
     F-47




---



##### Table of Contents



29. Director and Executive Disclosures (continued)
 (b) Compensation of Key Management Personnel (continued)
 (ii) Compensation of Key Management Personnel (consolidated) for the year ended 31 December 2005
 TotalShare Based
    
    Termination
    
    
    
    
    
    PerformanceShort -Term
    
    Post Employment
    
    Payment
    
    Benefits
    
    Total
    
    RelatedSuperannuation(10)Non Monetary
    
    /Life & Medical
    
    RetirementSalary & Fees
    
    Cash Bonus
    
    Benefits
    
    Insurance(11)
    
    Benefits
    
    Options(12)A$
    
    A$
    
    A$
    
    A$
    
    
    
    A$
    
    A$
    
    A$
    
    %DirectorsT J ODwyer
    
    
    
    
    
    
    70,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,000
    
    
    
    W A Downing
    
    
    (1)(2)
    
    
    
    110,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,569
    
    
    
    
    
    
    
    330,680
    
    
    
    D A Smith
    
    
    (3)(4)
    
    
    
    278,123
    
    
    
    
    
    
    
    
    
    
    
    7,156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285,279
    
    
    
    D L Alspach
    
    
    (5)
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    B S McComish
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    J M Crunk
    
    
    (6)
    
    
    
    27,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,015
    
    
    
    J M ODwyer
    
    
    (7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,523
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    523,523
    
    
    
    J D Heipt
    
    
    (7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExecutivesI A Gillespie
    
    
    (8)
    
    
    
    223,104
    
    
    
    146,000
    
    
    
    
    
    
    
    21,031
    
    
    
    
    
    
    
    17,349
    
    
    
    
    
    
    
    407,484
    
    
    
    35.8J D MacDonald
    
    
    
    
    
    
    184,759
    
    
    
    
    
    
    
    
    
    
    
    16,628
    
    
    
    
    
    
    
    41,833
    
    
    
    
    
    
    
    243,220
    
    
    
    G L Bergeron III
    
    
    (3)
    
    
    
    235,286
    
    
    
    
    
    
    
    
    
    
    
    17,560
    
    
    
    
    
    
    
    23,844
    
    
    
    
    
    
    
    276,690
    
    
    
    J C Chehansky
    
    
    (3)(9)
    
    
    
    19,891
    
    
    
    
    
    
    
    
    
    
    
    1,522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,413
    
    
    
    Total
    
    
    
    
    
    
    1,273,289
    
    
    
    146,000
    
    
    
    
    
    
    
    87,420
    
    
    
    
    
    
    
    303,595
    
    
    
    500,000
    
    
    
    2,310,304
 1
    
    In 2005, W A Downing entered into a call option agreement with J M ODwyer, the Companys
major shareholder. Under this agreement, W A Downing has the option to acquire 2,000,000 of
the shares owned and held by J M ODwyer if he holds office as a Director of the Company for a
continuous period of three years. The value of this right is to be amortised over the three
year vesting period.2
    
    Directors fees of $65,111 settled in cash with the remaining $49,000 to be settled in options.3
    
    Based in the USA and paid in US dollars.4
    
    Appointed CEO 8 February 2005, appointed Managing Director 25 May 2005.5
    
    Directors fees of $30,000 settled in cash with the remaining $45,000 to be settled in options.6
    
    Appointed 29 September 2005.7
    
    Resigned 8 February 2005.8
    
    Bonus for 2004 financial year (approved and paid in the 2005 financial year) included $100,000 settled in cash with the remaining $46,000 settled in shares.9
    
    Appointed 1 December 2005.10
    
    Superannuation (Australia)11
    
    Life & Medical Insurance (USA)12
    
    Options are valued using the Black-Scholes model. See Note 18 of the consolidated financial statements. F-48




---



##### Table of Contents



29. Director and Executive Disclosures (continued)
 (b) Compensation of Key Management Personnel (continued)
 (ii) Compensation of Key Management Personnel (consolidated) for the year ended 31 December 2004
 TotalShare Based
    
    Termination
    
    
    
    
    
    PerformanceShort -Term
    
    Post Employment
    
    Payment
    
    Benefits
    
    Total
    
    RelatedSuperannuation(8)Non Monetary
    
    /Life & Medical
    
    RetirementSalary & Fees
    
    Cash Bonus
    
    Benefits
    
    Insurance(9)
    
    Benefits
    
    Options(10)A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    %DirectorsT J ODwyer
    
    
    
    
    
    
    87,662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,662
    
    
    
    W A Downing
    
    
    (1)(2)
    
    
    
    45,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,569
    
    
    
    
    
    
    
    265,569
    
    
    
    D L Alspach
    
    
    (2)
    
    
    
    67,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,500
    
    
    
    B S McComish
    
    
    
    
    
    
    11,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,250
    
    
    
    J M ODwyer
    
    
    
    
    
    
    318,693
    
    
    
    
    
    
    
    10,920
    
    
    
    23,523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353,136
    
    
    
    W A Owens
    
    
    (2)
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    D W Christman
    
    
    (2)
    
    
    
    61,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,875
    
    
    
    J D Heipt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExecutivesI A Gillespie
    
    
    
    
    
    
    217,378
    
    
    
    10,000
    
    
    
    
    
    
    
    17,565
    
    
    
    
    
    
    
    283,903
    
    
    
    
    
    
    
    528,846
    
    
    
    1.9J D MacDonald
    
    
    (3)
    
    
    
    48,461
    
    
    
    
    
    
    
    
    
    
    
    4,631
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,092
    
    
    
    G L Bergeron III
    
    
    (4)
    
    
    
    187,062
    
    
    
    
    
    
    
    
    
    
    
    17,352
    
    
    
    
    
    
    
    32,769
    
    
    
    
    
    
    
    237,183
    
    
    
    C A Vehlow
    
    
    (4)(5)(6)
    
    
    
    335,481
    
    
    
    
    
    
    
    
    
    
    
    18,468
    
    
    
    
    
    
    
    193,125
    
    
    
    339,248
    
    
    
    886,322S Moser-Savage
    
    
    (7)
    
    
    
    68,842
    
    
    
    
    
    
    
    
    
    
    
    6,196
    
    
    
    
    
    
    
    12,000
    
    
    
    
    
    
    
    87,038
    
    
    
    Total
    
    
    
    
    
    
    1,464,204
    
    
    
    10,000
    
    
    
    10,920
    
    
    
    87,735
    
    
    
    
    
    
    
    742,366
    
    
    
    339,248
    
    
    
    2,654,473
 1
    
    In 2005, W A Downing entered into a call option agreement with J M ODwyer, the Companys
major shareholder. Under this agreement, W A Downing has the option to acquire 2,000,000 of
the shares owned and held by J M ODwyer if he holds office as a Director of the Company for
a continuous period of three years. The value of this right is to be amortised over the
three year vesting period.2
    
    Directors fees earned in 2004 however settled in options during 2005.3
    
    Appointed 4 October 2004.4
    
    Based in the USA and paid in US dollars.5
    
    Includes Directors fees $12,500.6
    
    Resigned 17 December 2004.7
    
    Resigned 8 October 2004.8
    
    Superannuation (Australia).9
    
    Life & Medical Insurance (USA).10
    
    Options are valued using the Black-Scholes model. See Note 18 of the consolidated financial statements.  F-49




---



##### Table of Contents



29. Director and Executive Disclosures (continued)
 (b) Compensation of Key Management Personnel (continued)
 (iii) Compensation by Category: Key Management Personnel
 Consolidated2005
    
    2004A$
    
    A$Short-Term
    
    
    1,419,289
    
    
    
    1,485,124Post Employment
    
    
    87,420
    
    
    
    87,735Other Long-Term
    
    
    
    
    
    
    Termination Benefits
    
    
    500,000
    
    
    
    339,248Share Based Payments
    
    
    303,595
    
    
    
    742,366Totals
    
    
    2,310,304
    
    
    
    2,654,473
 (iv) Contract for Services
  I A Gillespie, Chief Operating Officer
    J D MacDonald, Chief Financial Officer & Company Secretary
    G L Bergeron III, Chief Technology Officer
  F-50




---



##### Table of Contents



29. Director and Executive Disclosures (continued)
 (b) Compensation of Key Management Personnel (continued)
 (iv) Contract for Services (continued)
    F-51




---



##### Table of Contents



29. Director and Executive Disclosures (continued)
 (c)
    
    Compensation options: Granted and vested during the year (consolidated)
  Vested
    
    Granted
    
    Terms & Conditions for each GrantFair Value per
    
    Exercise priceoption at grant
    
    per optiondate (Note 18)
    
    (Note 18)
    
    
    
    
    
    First Exercise
    
    Last Exercise31 December 2005
    
    No.
    
    No.
    
    Grant Date
    
    A$
    
    A$
    
    Expiry date
    
    Date
    
    DateDirectorsW A Downing
    
    
    450,000
    
    
    
    450,000
    
    
    
    24/05/2005
    
    
    
    0.03
    
    
    
    0.4
    
    
    
    24/05/2010
    
    
    
    24/05/2005
    
    
    
    24/05/2010D L Alspach
    
    
    675,000
    
    
    
    675,000
    
    
    
    24/05/2005
    
    
    
    0.03
    
    
    
    0.4
    
    
    
    24/05/2010
    
    
    
    24/05/2005
    
    
    
    24/05/2010J M ODwyer
    
    
    450,000
    
    
    
    450,000
    
    
    
    24/05/2005
    
    
    
    0.03
    
    
    
    0.4
    
    
    
    24/05/2010
    
    
    
    24/05/2005
    
    
    
    24/05/2010W A Owens
    
    
    150,000
    
    
    
    150,000
    
    
    
    24/05/2005
    
    
    
    0.03
    
    
    
    0.4
    
    
    
    24/05/2010
    
    
    
    24/05/2005
    
    
    
    24/05/2010D W Christman
    
    
    40,000
    
    
    
    40,000
    
    
    
    24/05/2005
    
    
    
    0.03
    
    
    
    0.4
    
    
    
    24/05/2010
    
    
    
    24/05/2005
    
    
    
    24/05/2010578,750
    
    
    
    578,750
    
    
    
    24/05/2005
    
    
    
    0.03
    
    
    
    0.4
    
    
    
    24/05/2010
    
    
    
    24/05/2005
    
    
    
    24/05/2010C A Vehlow
    
    
    225,000
    
    
    
    225,000
    
    
    
    24/05/2005
    
    
    
    0.03
    
    
    
    0.4
    
    
    
    24/05/2010
    
    
    
    24/05/2005
    
    
    
    24/05/2010ExecutivesJ D MacDonald
    
    
    62,500
    
    
    
    62,500
    
    
    
    26/08/2005
    
    
    
    0.09
    
    
    
    0.4
    
    
    
    31/12/2009
    
    
    
    26/08/2005
    
    
    
    31/12/200962,500
    
    
    
    62,500
    
    
    
    26/08/2005
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    31/03/2010
    
    
    
    26/08/2005
    
    
    
    31/03/201062,500
    
    
    
    62,500
    
    
    
    26/08/2005
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    30/06/2010
    
    
    
    26/08/2005
    
    
    
    30/06/201062,500
    
    
    
    62,500
    
    
    
    26/08/2005
    
    
    
    0.11
    
    
    
    0.4
    
    
    
    30/09/2010
    
    
    
    30/09/2005
    
    
    
    30/09/201062,500
    
    
    
    62,500
    
    
    
    26/08/2005
    
    
    
    0.11
    
    
    
    0.4
    
    
    
    31/12/2010
    
    
    
    31/12/2005
    
    
    
    31/12/201062,500
    
    
    
    26/08/2005
    
    
    
    0.11
    
    
    
    0.4
    
    
    
    31/03/2011
    
    
    
    31/03/2006
    
    
    
    31/03/201162,500
    
    
    
    26/08/2005
    
    
    
    0.11
    
    
    
    0.4
    
    
    
    30/06/2011
    
    
    
    30/06/2006
    
    
    
    30/06/201162,500
    
    
    
    26/08/2005
    
    
    
    0.12
    
    
    
    0.4
    
    
    
    30/09/2011
    
    
    
    30/09/2006
    
    
    
    30/09/2011G L Bergeron III
    
    
    31,250
    
    
    
    
    
    
    
    11/06/2004
    
    
    
    0.25
    
    
    
    0.4
    
    
    
    31/03/2010
    
    
    
    31/03/2005
    
    
    
    31/03/201031,250
    
    
    
    
    
    
    
    11/06/2004
    
    
    
    0.25
    
    
    
    0.4
    
    
    
    30/06/2010
    
    
    
    30/06/2005
    
    
    
    30/06/201031,250
    
    
    
    
    
    
    
    11/06/2004
    
    
    
    0.25
    
    
    
    0.4
    
    
    
    30/09/2010
    
    
    
    30/09/2005
    
    
    
    30/09/201031,250
    
    
    
    
    
    
    
    11/06/2004
    
    
    
    0.26
    
    
    
    0.4
    
    
    
    31/12/2010
    
    
    
    31/12/2005
    
    
    
    31/12/2010I A Gillespie
    
    
    62,500
    
    
    
    
    
    
    
    1/01/2004
    
    
    
    0.28
    
    
    
    0.4
    
    
    
    31/03/2010
    
    
    
    31/03/2005
    
    
    
    31/03/201062,500
    
    
    
    
    
    
    
    1/01/2004
    
    
    
    0.28
    
    
    
    0.4
    
    
    
    30/06/2010
    
    
    
    30/06/2005
    
    
    
    30/06/201062,500
    
    
    
    
    
    
    
    1/01/2004
    
    
    
    0.29
    
    
    
    0.4
    
    
    
    30/09/2010
    
    
    
    30/09/2005
    
    
    
    30/09/201062,500
    
    
    
    
    
    
    
    1/01/2004
    
    
    
    0.29
    
    
    
    0.4
    
    
    
    31/12/2010
    
    
    
    31/12/2005
    
    
    
    31/12/2010Total
    
    
    3,256,250
    
    
    
    3,068,750
 F - 52




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##### Table of Contents



29. Director and Executive Disclosures (continued)
 (c)
    
    Compensation options: Granted and vested during the year (consolidated) (continued)
  Vested
    
    Granted
    
    Terms & Conditions for each GrantFair Value peroption at grant
    
    Exercise pricedate
    
    per optionA$
    
    (Note 18)
    
    
    
    
    
    First Exercise
    
    Last Exercise31 December 2004
    
    No.
    
    No.
    
    Grant Date
    
    (i)
    
    A$
    
    Expiry date
    
    Date
    
    DateDirectorsW A Downing
    
    
    450,000
    
    
    
    450,000
    
    
    
    21/06/2004
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    21/06/2009
    
    
    
    21/06/2004
    
    
    
    21/06/2009D L Alspach
    
    
    675,000
    
    
    
    675,000
    
    
    
    21/06/2004
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    21/06/2009
    
    
    
    21/06/2004
    
    
    
    21/06/2009J M ODwyer
    
    
    450,000
    
    
    
    450,000
    
    
    
    21/06/2004
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    21/06/2009
    
    
    
    21/06/2004
    
    
    
    21/06/2009W A Owens
    
    
    450,000
    
    
    
    450,000
    
    
    
    21/06/2004
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    21/06/2009
    
    
    
    21/06/2004
    
    
    
    21/06/2009D W Christman
    
    
    675,000
    
    
    
    675,000
    
    
    
    21/06/2004
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    21/06/2009
    
    
    
    21/06/2004
    
    
    
    21/06/2009200,000
    
    
    
    200,000
    
    
    
    21/06/2004
    
    
    
    0.15
    
    
    
    1.15
    
    
    
    21/06/2009
    
    
    
    21/06/2004
    
    
    
    21/06/200940,000
    
    
    
    40,000
    
    
    
    21/06/2004
    
    
    
    0.15
    
    
    
    1.1
    
    
    
    21/06/2009
    
    
    
    21/06/2004
    
    
    
    21/06/2009Executives
    
    
    
    
    
    
    
    
    
    
    
    
    
    (ii)G L Bergeron III
    
    
    31,250
    
    
    
    31,250
    
    
    
    11/06/2004
    
    
    
    0.19
    
    
    
    0.4
    
    
    
    4/09/2009
    
    
    
    4/09/2004
    
    
    
    4/09/200931,250
    
    
    
    31,250
    
    
    
    11/06/2004
    
    
    
    0.19
    
    
    
    0.4
    
    
    
    4/12/2009
    
    
    
    4/12/2004
    
    
    
    4/12/200931,250
    
    
    
    11/06/2004
    
    
    
    0.25
    
    
    
    0.4
    
    
    
    31/03/2010
    
    
    
    31/03/2005
    
    
    
    31/03/201031,250
    
    
    
    11/06/2004
    
    
    
    0.25
    
    
    
    0.4
    
    
    
    30/06/2010
    
    
    
    30/06/2005
    
    
    
    30/06/201031,250
    
    
    
    11/06/2004
    
    
    
    0.25
    
    
    
    0.4
    
    
    
    30/09/2010
    
    
    
    30/09/2005
    
    
    
    30/09/201031,250
    
    
    
    11/06/2004
    
    
    
    0.26
    
    
    
    0.4
    
    
    
    31/12/2010
    
    
    
    31/12/2005
    
    
    
    31/12/201031,250
    
    
    
    11/06/2004
    
    
    
    0.26
    
    
    
    0.4
    
    
    
    31/03/2011
    
    
    
    31/03/2006
    
    
    
    31/03/201131,250
    
    
    
    11/06/2004
    
    
    
    0.26
    
    
    
    0.4
    
    
    
    30/06/2011
    
    
    
    30/06/2006
    
    
    
    30/06/2011C A Vehlow
    
    
    500,000
    
    
    
    500,000
    
    
    
    14/04/2004
    
    
    
    0.17
    
    
    
    0.4
    
    
    
    14/04/2009
    
    
    
    14/04/2004
    
    
    
    14/04/2009125,000
    
    
    
    125,000
    
    
    
    14/01/2004
    
    
    
    0.32
    
    
    
    0.4
    
    
    
    14/01/2009
    
    
    
    14/01/2004
    
    
    
    14/01/2009125,000
    
    
    
    125,000
    
    
    
    14/07/2004
    
    
    
    0.22
    
    
    
    0.4
    
    
    
    14/07/2009
    
    
    
    14/07/2004
    
    
    
    14/07/2009125,000
    
    
    
    125,000
    
    
    
    14/10/2004
    
    
    
    0.13
    
    
    
    0.4
    
    
    
    14/10/2009
    
    
    
    14/10/2004
    
    
    
    14/10/2009(iii)225,000
    
    
    225,000
    
    
    
    21/06/2004
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    21/06/2009
    
    
    
    21/06/2004
    
    
    
    21/06/2009I A Gillespie
    
    
    62,500
    
    
    
    62,500
    
    
    
    31/03/2004
    
    
    
    0.35
    
    
    
    0.4
    
    
    
    31/09/09
    
    
    
    31/09/04
    
    
    
    31/09/09600,000
    
    
    
    600,000
    
    
    
    14/04/2004
    
    
    
    0.33
    
    
    
    0.4
    
    
    
    14/04/2009
    
    
    
    14/04/2004
    
    
    
    14/04/200962,500
    
    
    
    62,500
    
    
    
    30/06/2004
    
    
    
    0.27
    
    
    
    0.4
    
    
    
    30/06/2009
    
    
    
    30/06/2004
    
    
    
    30/06/200962,500
    
    
    
    62,500
    
    
    
    30/09/2004
    
    
    
    0.17
    
    
    
    0.4
    
    
    
    30/09/2009
    
    
    
    30/09/2004
    
    
    
    30/09/200962,500
    
    
    
    62,500
    
    
    
    31/12/2004
    
    
    
    0.12
    
    
    
    0.4
    
    
    
    31/12/2009
    
    
    
    31/12/2004
    
    
    
    31/12/200962,500
    
    
    
    1/01/2004
    
    
    
    0.28
    
    
    
    0.4
    
    
    
    31/03/2010
    
    
    
    31/03/2005
    
    
    
    31/03/201062,500
    
    
    
    1/01/2004
    
    
    
    0.28
    
    
    
    0.4
    
    
    
    30/06/2010
    
    
    
    30/06/2005
    
    
    
    30/06/201062,500
    
    
    
    1/01/2004
    
    
    
    0.29
    
    
    
    0.4
    
    
    
    30/09/2010
    
    
    
    30/09/2005
    
    
    
    30/09/201062,500
    
    
    
    1/01/2004
    
    
    
    0.29
    
    
    
    0.4
    
    
    
    31/12/2010
    
    
    
    31/12/2005
    
    
    
    31/12/2010Total
    
    
    4,952,500
    
    
    
    5,390,000
 (i)
    
    Valued based on cash liability settled,(ii)
    
    Fair valued using Black-Scholes as per Note 18.(iii)
    
    Issued for settlement of 2003 Directors fees.
 F - 53




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##### Table of Contents



29. Director and Executive Disclosures (continued)
 (d)
    
    Shares issued on exercise of compensation options (consolidated)
  (e)
    
    Option holdings of Key Management Personnel (consolidated)
 Vested at 31 December 2005Balance atbeginning of
    
    Granted as
    
    
    
    
    
    Balance at end of
    
    
    
    
    
    Not31 December 2005
    
    period
    
    Compensation
    
    Options exercised
    
    period
    
    Exercisable
    
    exercisableDirectorsT J ODwyer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Downing
    
    
    2,950,000
    
    
    
    450,000
    
    
    
    
    
    
    
    3,400,000
    
    
    
    900,000
    
    
    
    2,500,000D A Smith
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D L Alspach
    
    
    675,000
    
    
    
    675,000
    
    
    
    
    
    
    
    1,350,000
    
    
    
    1,350,000
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M ODwyer
    
    
    450,000
    
    
    
    450,000
    
    
    
    
    
    
    
    900,000
    
    
    
    900,000
    
    
    
    J D Heipt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Owens
    
    
    2,950,000
    
    
    
    150,000
    
    
    
    
    
    
    
    3,100,000
    
    
    
    600,000
    
    
    
    2,500,000D W Christman
    
    
    915,000
    
    
    
    618,750
    
    
    
    
    
    
    
    1,533,750
    
    
    
    1,533,750
    
    
    
    ExecutivesI A Gillespie
    
    
    1,100,000
    
    
    
    
    
    
    
    
    
    
    
    1,100,000
    
    
    
    1,100,000
    
    
    
    J D MacDonald
    
    
    
    
    
    
    500,000
    
    
    
    
    
    
    
    500,000
    
    
    
    312,500
    
    
    
    187,500G L Bergeron III
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    187,500
    
    
    
    62,500J C Chehansky
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    C A Vehlow
    
    
    1,787,500
    
    
    
    225,000
    
    
    
    
    
    
    
    2,012,500
    
    
    
    2,012,500
    
    
    
    Total
    
    
    11,077,500
    
    
    
    3,068,750
    
    
    
    
    
    
    
    14,146,250
    
    
    
    8,896,250
    
    
    
    5,250,000
 F - 54




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##### Table of Contents



29. Director and Executive Disclosures (continued)
 (e)
    
    Option holdings of Key Management Personnel (consolidated) (continued)
 Vested at 31 December 2004Balance atbeginning of
    
    Granted as
    
    
    
    
    
    Balance at end of
    
    
    
    
    
    Not31 December 2004
    
    period
    
    Compensation
    
    Options exercised
    
    period
    
    Exercisable
    
    exercisableDirectorsT J ODwyer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Downing
    
    
    2,500,000
    
    
    
    450,000
    
    
    
    
    
    
    
    2,950,000
    
    
    
    450,000
    
    
    
    2,500,000D L Alspach
    
    
    
    
    
    
    675,000
    
    
    
    
    
    
    
    675,000
    
    
    
    675,000
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M ODwyer
    
    
    
    
    
    
    450,000
    
    
    
    
    
    
    
    450,000
    
    
    
    450,000
    
    
    
    J D Heipt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Owens
    
    
    2,500,000
    
    
    
    450,000
    
    
    
    
    
    
    
    2,950,000
    
    
    
    450,000
    
    
    
    2,500,000D W Christman
    
    
    
    
    
    
    915,000
    
    
    
    
    
    
    
    915,000
    
    
    
    915,000
    
    
    
    ExecutivesI A Gillespie
    
    
    
    
    
    
    1,100,000
    
    
    
    
    
    
    
    1,100,000
    
    
    
    850,000
    
    
    
    250,000J D MacDonald
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    250,000
    
    
    
    
    
    
    
    250,000
    
    
    
    62,500
    
    
    
    187,500C A Vehlow
    
    
    687,500
    
    
    
    1,100,000
    
    
    
    
    
    
    
    1,787,500
    
    
    
    1,787,500
    
    
    
    Total
    
    
    5,687,500
    
    
    
    5,390,000
    
    
    
    
    
    
    
    11,077,500
    
    
    
    5,640,000
    
    
    
    5,437,500
 F - 55




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##### Table of Contents





29. Director and Executive Disclosures (continued)
 (f)
    
    Shareholdings of Key Management Personnel (consolidated)
 Balance atbeginning of
    
    Granted as
    
    Options
    
    Net Change
    
    Balance at end31 December 2005
    
    period
    
    Compensation
    
    exercised
    
    Other
    
    of periodDirectorsT J ODwyer
    
    
    63,611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,611W A Downing
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000D A Smith
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D L Alspach
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M ODwyer
    
    
    199,729,559
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199,729,559J D Heipt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Owens
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D W Christman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExecutivesI A Gillespie *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J D MacDonald
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J C Chehansky
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    C A Vehlow
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    200,293,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,293,170
 
 *
    
    Subsequent to year end, I A Gillespie was issued 89,396 shares in part settlement of bonus due
for the 2004 financial year. Balance atbeginning of
    
    Granted as
    
    Options
    
    Net Change
    
    Balance at end31 December 2004
    
    period
    
    Compensation
    
    exercised
    
    Other
    
    of periodDirectorsT J ODwyer
    
    
    61,111
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    63,611W A Downing
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000D L Alspach
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M ODwyer
    
    
    199,729,559
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199,729,559J D Heipt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Owens
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D W Christman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExecutivesI A Gillespie
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J D MacDonald
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    C A Vehlow
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    200,290,670
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    200,293,170
 (g)
    
    Loans to Key Management Personnel (consolidated)
  F - 56




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##### Table of Contents



29. Director and Executive Disclosures (continued)
 (h)
    
    Other transactions and balances with Key Management Personnel (consolidated)
 Directors fees
 2005
    
    2004A$
    
    A$W A Downing
    
    
    44,560
    
    
    
    45,000D L Alspach
    
    
    75,000
    
    
    
    67,500B S McComish
    
    
    
    
    
    
    11,250J M ODwyer
    
    
    
    
    
    
    45,000D Heipt
    
    
    
    
    
    
    11,250119,560
    
    
    
    180,000
 Receivables due from key management personnel
  2005
    
    2004A$
    
    A$I A Gillespie
    
    
    13,436
    
    
    
    
 30. Reconciliation of AIFRS to USGAAP
  (a)
    
    Reconciliation of Net Loss
 2005
    
    2004Note
    
    A$
    
    A$Net loss reported using IFRS
    
    
    
    
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )USGAAP
adjustments  Amortisation of non-compete agreements
    
    
    31
    (a)
    
    
    (33,153
    )
    
    
    (66,306
    ) Write back of non-compete agreements included in
goodwill under IFRS
    
    
    31
    (a)
    
    
    
    
    
    
    193,809 Write-off of non-compete agreements
    
    
    31
    (a)
    
    
    (94,350
    )
    
    
     Goodwill purchase price adjustment made for USGAAP
    
    
    31
    (b)
    
    
    
    
    
    
    (638,688
    ) Share based payment
    
    
    31
    (c)
    
    
    
    
    
    
    335,624 Write-off costs pertaining to capital raising
    
    
    31
    (d)
    
    
    (327,248
    )
    
    
     Onerous lease contract
    
    
    31
    (e)
    
    
    (485,829
    )
    
    
     Other
    
    
    31
    (g)
    
    
    (161,664
    )
    
    
    158,455Net adjustments
    
    
    
    
    
    
    (1,102,244
    )
    
    
    (17,106
    )Net loss in accordance with USGAAP
    
    
    
    
    
    
    (12,016,844
    )
    
    
    (13,121,233
    )
 F - 57




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##### Table of Contents



30. Reconciliation of AIFRS to USGAAP (continued)
 (b)
    
    Earnings per Share
 Weighted average number of shares
    
    
    31
    (f)
    
    
    521,970,987
    
    
    
    500,886,725Basic and
diluted loss per share from continuing operations (dollars per share)
    
    
    31
    (f)
    
    
    0.0187
    
    
    
    0.0185Basic and
diluted loss per share from discontinued operations (dollars per share)
    
    
    31
    (f)
    
    
    0.0042
    
    
    
    0.0077
 (c)
    
    Reconciliation of Shareholders Equity
 2005
    
    2004Note
    
    A$
    
    A$Total Equity reported using IFRS
    
    
    
    
    
    
    5,779,862
    
    
    
    16,199,993USGAAP
adjustments  Amortisation of non-compete agreements
    
    
    31
    (a)
    
    
    
    
    
    
    (66,306
    ) Write back of non-compete agreements included in
goodwill under AIFRS
    
    
    31
    (a)
    
    
    
    
    
    
    193,809 Write-off capitalised costs pertaining to capital raising
    
    
    31
    (d)
    
    
    (327,248
    )
    
    
     Onerous lease contract
    
    
    31
    (e)
    
    
    (485,829
    )
    
    
     Other
    
    
    31
    (g)
    
    
    184,949
    
    
    
    346,613Net adjustments
    
    
    
    
    
    
    (628,128
    )
    
    
    474,116Shareholders Equity according to US GAAP
    
    
    
    
    
    
    5,151,734
    
    
    
    16,674,109
 (d)
    
    Reconciliation of Income
 2005
    
    2004A$
    
    A$Revenue under AIFRS
    
    
    830,645
    
    
    
    837,201 Interest revenue
    
    
    (599,902
    )
    
    
    (794,565
    )Operating income under USGAAP
    
    
    230,743
    
    
    
    42,636Other income/(expense) under AIFRS
    
    
    
    
    
    
     Interest income
    
    
    599,902
    
    
    
    794,565 Research & development rebate received
    
    
    648,320
    
    
    
    332,744 Interest expense
    
    
    (35,496
    )
    
    
    (43,568
    ) Foreign exchange
    
    
    (27,022
    )
    
    
    8,685Other income/(expense) under USGAAP
    
    
    1,185,704
    
    
    
    1,092,426
 (e)
    
    Condensed Income Statement under USGAAP
 2005
    
    2004A$
    
    A$Operating Income
    
    
    230,743
    
    
    
    42,636Operating Expenses
    
    
    (11,217,569
    )
    
    
    (10,395,199
    )Loss from operations
    
    
    (10,986,826
    )
    
    
    (10,352,563
    )Other income
    
    
    1,185,704
    
    
    
    1,092,426Loss from continuing operations
    
    
    (9,801,122
    )
    
    
    (9,260,137
    )Loss from discontinued operations net of tax
    
    
    (2,215,722
    )
    
    
    (3,861,096
    )Net loss
    
    
    (12,016,844
    )
    
    
    (13,121,233
    )
 F - 58




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##### Table of Contents



31. Significant Differences between AIFRS and USGAAP
 (a)
    
    Non-compete Agreements
      (b)
    
    Goodwill
 i.
    
    Recognition
  ii.
    
    Impairment loss
  (c)
    
    Share-based Payment
   F - 59




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##### Table of Contents



31. Major Differences between AIFRS and USGAAP (continued)
 (c)
    
    Share-based Payment (continued)
      (d)
    
    Capital Raise Costs
  (e)
    
    Onerous Lease Contract
  (f)
    
    Earnings per Share
  (g)
    
    Other
  (h)
    
    Recent Pronouncements
   F - 60




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##### Table of Contents



31. Major Differences between AIFRS and USGAAP (continued)
 (h)
    
    Recent Pronouncements (continued)
  32. Additional Information
 Non-compete Agreements
 2005
    
    2004A$
    
    A$At cost
    
    
    198,917
    
    
    
    198,917Less accumulated amortisation
    
    
    (104,567
    )
    
    
    (71,414
    )Less impairment loss
    
    
    (94,350
    )
    
    
    Net value
    
    
    
    
    
    
    127,503
 F - 61




---



##### Table of Contents



SIGNATURES
  
 By:
    
    
    
    /s/ James MacDonaldName
    
    James MacDonaldTitle:
    
    Chief Financial Officer




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Constitution of Metal Storm*4.1
    
    DSTO Research Agreement dated April 20, 2001*4.2
    
    Deed of Amendment to the DSTO Research Agreement dated September 13, 2002 (portions omitted pursuant to a
request for confidential treatment; non-public information has been filed with the SEC)**4.3
    
    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)*4.4
    
    Asset Purchase Agreement, dated May 24, 2005, with Monroe Machined Products, Inc. (MMP) for the sale of
the ProCam business to MMP.****4.5
    
    Employment Agreement of David A. Smith****4.6
    
    Separation Agreement, dated February 8, 2005, of J.M. ODwyer****4.7
    
    Deed of Termination Agreement, dated May 20, 2006, of David A. Smith4.8
    
    Employment Agreement of James D. MacDonald****4.9
    
    Employment Agreement of George L. Bergeron***4.10
    
    Cash Advance Facility Agreement, dated June 16, 2006, between Metal Storm and Harmony Investment Fund Limited4.11
    
    Discretionary Share Option Scheme*4.12
    
    Employment Agreement of Ian A. Gillespie***8.0
    
    List of Subsidiaries of Metal Storm Limited12.1
    
    Certification by the Executive Chairman 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 Executive Chairman 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 July 14, 2003.***
    
    Incorporated by reference from our Annual Report on Form 20-F filed on July 15, 2004.****
    
    Incorporated by reference from our Annual Report on Form 20-F filed on June 15, 2005.