##### 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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 000-31212
 METAL STORM LIMITED
 (Exact Name of Registrant as Specified in its Charter)
 Australia
 (Jurisdiction of Incorporation or Organization)
 Building 4
848 Boundary Road
Richlands, Queensland 4077
Australia
 (Address of principal executive offices)
 Peter Wetzig
Company Secretary
Telephone: +61 7 3123 4700
Facsimile: +61 7 3217 0811
Building 4
848 Boundary Road
Richlands, Queensland 4077
Australia
 (Name, telephone, e-mail and/or facsimile number and address of company contact person)
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
 None
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
 Ordinary Shares in the form of American Depositary Shares, evidenced by American Depositary Receipts
 (Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 None
    o þ
  o þ
  þ o
  o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ  U.S. GAAP o
    
    International Financial Reporting Standards as issued þ
by the International Accounting Standards Board
    
    Other o
  o o
  o þ




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##### 



Table of Contents
  
 PageItem 1.
    
    Identity of Directors, Senior Management and Advisors
    
    
    2Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    2Item 3.
    
    Key Information
    
    
    2Item 4.
    
    Information on Metal Storm
    
    
    11Item 4A.
    
    Unresolved Staff Comments
    
    
    20Item 5.
    
    Operating and Financial Review and Prospects
    
    
    20Item 6.
    
    Directors, Senior Management and Employees
    
    
    26Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    30Item 8.
    
    Financial Information
    
    
    31Item 9.
    
    The Offer and Listing
    
    
    32Item 10.
    
    Additional Information
    
    
    34Item 11.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    45Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    45Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    46Item 14.
    
    Material Modifications to the Rights of Security Holders and the Use of Proceeds
    
    
    46Item 15T.
    
    Controls and Procedures
    
    
    46Item 16A.
    
    Audit Committee Financial Expert
    
    
    47Item 16B.
    
    Code of Ethics
    
    
    47Item 16C.
    
    Principal Accountant Fees and Services
    
    
    47Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    47Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    47Item 16F.
    
    Change in Registrants Certifying Accountant
    
    
    47Item 16G.
    
    Corporate Governance
    
    
    47Item 17.
    
    Financial Statements
    
    
    48Item 18.
    
    Financial Statements
    
    
    48Item 19.
    
    Exhibits
    
    
    48EX-4.6EX-4.7EX-8.0EX-12.1EX-12.2EX-13.1EX-13.2
  i




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##### Table of Contents



CURRENCY OF PRESENTATION AND EXCHANGE RATES
    AtPeriod
    
    AverageEnd
    
    Rate(1)
    
    High
    
    LowYear ended December 31,2003
    
    
    0.7520
    
    
    
    0.6589
    
    
    
    0.7520
    
    
    
    0.56292004
    
    
    0.7805
    
    
    
    0.7384
    
    
    
    0.7979
    
    
    
    0.68402005
    
    
    0.7342
    
    
    
    0.7620
    
    
    
    0.7974
    
    
    
    0.72612006
    
    
    0.7884
    
    
    
    0.7535
    
    
    
    0.7914
    
    
    
    0.70562007
    
    
    0.8776
    
    
    
    0.8389
    
    
    
    0.9369
    
    
    
    0.77242008
    
    
    0.6983
    
    
    
    0.8537
    
    
    
    0.9797
    
    
    
    0.6073MonthJanuary 2009
    
    
    0.6380
    
    
    
    0.6754
    
    
    
    0.7212
    
    
    
    0.6380February 2009
    
    
    0.6419
    
    
    
    0.6504
    
    
    
    0.6834
    
    
    
    0.6320March 2009
    
    
    0.6925
    
    
    
    0.6666
    
    
    
    0.7022
    
    
    
    0.6301April 2009
    
    
    0.7317
    
    
    
    0.7166
    
    
    
    0.7317
    
    
    
    0.6941May 2009
    
    
    0.7993
    
    
    
    0.7648
    
    
    
    0.7993
    
    
    
    0.7290June 2009
    
    
    0.8055
    
    
    
    0.8025
    
    
    
    0.8195
    
    
    
    0.7851
 
 (1)
    
    Determined by averaging noon buying rates on the last day of each full month during the
period. FORWARD-LOOKING STATEMENTS
  1




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected Financial Data
     As of and for the year ended December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004A$
    
    A$
    
    A$
    
    A$
    
    A$Income Statement data in accordance with IFRS:Revenue
    
    
    2,201,331
    
    
    
    3,205,381
    
    
    
    2,339,310
    
    
    
    830,645
    
    
    
    837,201Expenses
    
    
    (6,488,196
    )
    
    
    (8,269,116
    )
    
    
    (15,454,051
    )
    
    
    (10,107,359
    )
    
    
    (12,382,001
    )Loss before finance costs and tax from
continuing operations
    
    
    (4,286,865
    )
    
    
    (5,063,735
    )
    
    
    (13,114,741
    )
    
    
    (9,276,714
    )
    
    
    (11,544,800
    )Finance costs
    
    
    (6,369,138
    )
    
    
    (4,934,415
    )
    
    
    (2,183,013
    )
    
    
    (35,496
    )
    
    
    (43,568
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss after tax from continuing operations
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,297,754
    )
    
    
    (9,312,210
    )
    
    
    (11,588,368
    )Loss after tax from discontinued operation
    
    
    
    
    
    
    
    
    
    
    (39,256
    )
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Loss attributable to members of the parent
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Basic and diluted loss per share(1)
    
    
    (0.0175
    )
    
    
    (0.0169
    )
    
    
    (0.0285
    )
    
    
    (0.0209
    )
    
    
    (0.0262
    )Weighted average ordinary number of shares
outstanding
    
    
    607,713,288
    
    
    
    590,721,934
    
    
    
    537,796,067
    
    
    
    521,970,978
    
    
    
    500,886,725Balance Sheet data in accordance with IFRS:Total current assets
    
    
    8,701,884
    
    
    
    17,069,966
    
    
    
    26,605,477
    
    
    
    7,115,554
    
    
    
    17,349,971Total assets
    
    
    9,267,524
    
    
    
    18,788,277
    
    
    
    27,856,081
    
    
    
    7,429,721
    
    
    
    20,327,317Total current liabilities
    
    
    22,397,651
    
    
    
    21,812,546
    
    
    
    26,424,955
    
    
    
    1,564,696
    
    
    
    3,507,365Long term obligations (including finance leases)
    
    
    63,168
    
    
    
    283,301
    
    
    
    333,794
    
    
    
    85,163
    
    
    
    619,959Total liabilities
    
    
    22,460,789
    
    
    
    22,095,847
    
    
    
    26,758,749
    
    
    
    1,649,859
    
    
    
    4,127,324Contributed equity
    
    
    66,209,718
    
    
    
    65,428,400
    
    
    
    59,985,634
    
    
    
    56,559,039
    
    
    
    56,559,039Total equity
    
    
    (13,193,265
    )
    
    
    (3,307,570
    )
    
    
    1,097,332
    
    
    
    5,779,862
    
    
    
    16,199,993Other financial data:Dividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 2




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##### Table of Contents



(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 substantial doubt regarding Metal Storms ability to continue as a going concern.
   
    
    extend the maturity date of the convertible notes until September 1, 2011; and
    
    grant Noteholders the option to exchange their convertible notes, which are
unsecured, for the same principal amount of secured convertible notes.
    3




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We may be required to redeem convertible notes before maturity, which redemption could cause us to
become insolvent.
   We may 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.
  4




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We cannot be certain of market acceptance of our technology or the rate of any market acceptance.
  We are dependent on retaining key personnel.
  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.
   5




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##### Table of Contents



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




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We are obligated to perform some construction contracts 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.
  7




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##### Table of Contents



We are subject to government regulation.
     There are risks inherent in U.S. government contracts.
  
    
    Contract Termination
  
    
    Loss of Appropriations
  
    
    Procurement and Other Related Laws and Regulations
  8




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##### Table of Contents




    
    Protection of Proprietary Technology
  
    
    Changes and Adjustments
  
    
    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.
   9




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##### Table of Contents



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
    
    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.
    Our ADS holders are not shareholders and do not have shareholder rights.
  10




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




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##### Table of Contents



B. Business Overview
  Strategy
       Engineering
    12




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Business Development
      Technology
     13




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##### Table of Contents




    
    electronically programmable rates of fire from single shots to ultra-rapid rates;
    
    no moving parts, resulting in increased reliability and availability because there is
less maintenance required and decreased possibility of malfunction;
    
    increased firepower to weight ratio resulting in a lighter weapon system with greater
firepower compared to conventional systems;
    
    modular pods that could operate as a complete weapons system in one container;
    
    digital electronic operation;
    
    ideally suited to mounting on robotic and remotely operated platforms;
    
    the potential of grouping multiple calibres and multiple lethalities in one gun
system allowing the user to vary the use to a specific situation; and
    
    numerous hybrid configurations and Special Forces applications.
 Joint Collaboration Agreement with Singapore Technologies Kinetics
    Internal Product Development
  
    
    3GL  semi-automatic three shot 40mm modular underbarrel grenade launcher;
    
    FireStorm  four barrel 16 shot 40mm remotely operated weapon system;
    
    MAUL  semi automatic 18mm (12 gauge) multi-shot accessory under-barrel launcher;
and
    
    A range of 40mm and 18mm lethal and less-lethal ammunition.
  3GL
   14




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
    
    successfully firing the weapon with stacked rounds while attached to an M16 assault
rifle;
    
    successfully firing stacks of high explosive rounds;
    
    successful firing of hundreds of rounds of inert, safe-arm and explosive test
ammunition; and
    
    successful systems safety and certification review of the design process by Nova
Defence, an independent defense company.
  Redback
   FireStorm
       
    
    addition of LASER ranging;
    
    addition of day visible sights;
    
    enhanced fire control systems;
 15




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
    
    addition of LASER Dazzler non-lethal response capability; and
    
    testing performed by U.S. Navy and U.S. Marine Corps.
  MAUL
 TM
     Systems for Unmanned Vehicles
      Ammunition
 16




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40mm lethal ammunition
  40mm less-lethal ammunition
  18mm (12 gauge) ammunition
  Fireworks
  Handgun
  External Development Programs
  U.S. Navy SBIR Contract  Metal Storm Active Protection System
  U.S. Army SBIR Contract  Metal Storm Crowd Control System
  17




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##### Table of Contents



U.S. Marine Corps  18mm Stacked Round Firing System
  Commercial Contract  Design Support Services
  U.S. Navy  Multi-Shot Accessory Underbarrel Launcher
  U.S. Marine Corps  Mission Payload Module Demonstration
  Competition
   Regulation
  Australia
   18




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##### Table of Contents



United States
   Intellectual Property
   
    
    stacked projectile delivery systems and stacked projectile weapon systems, in particular
the sealing, reload and ignition thereof;
    
    technology related to encoding weapons to permit authorized access only;
    
    ammunition and projectiles;
    
    electronic firing technology;
    
    area denial;
    
    fire fighting;
    
    seismic testing;
    
    multi-barrel systems;
    
    fireworks;
    
    missile defense and target interception;
    
    directional control of missiles;
    
    unmanned aerial vehicle weaponization;
    
    adapting conventional munitions to Metal Storm configuration; and
    
    selectable kinetic energy systems.
  
    
    26 granted U.S. patents and 18 pending U.S. patents including two allowed application;
    
    24 granted Australian patents and 12 pending Australian patent applications including one
allowed application; and
    
    143 other patents granted outside the United States and Australia and 71 pending
applications outside the United States and Australia, including 6 allowed applications
(including 12 pending European Patent Convention and 1 PCT application).
  Raw Materials
  19




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Seasonality
  C. Organizational Structure
  D. Property, Plant and Equipment
    
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  A. Operating Results
 Overview
    20




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Where We Derive Our Revenue
  Critical Accounting Policies
   Revenue Recognition
  Sale of goods
  Rendering of services
  Construction contracts
  21




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##### Table of Contents



Share-based payment transactions
    Comparison of Annual Results of Operations
 2008 compared with 2007
 Revenue.
  Expenses.
 
    
    In 2008 we had a fair value movement gain of A$3,620,682 on the embedded derivative that
reflects the movement in the fair value of the conversion option embedded in the convertible
notes issued in 2006. In 2007, we had a fair value gain of A$2,421,338.
    
    Foreign exchange differences changed from a loss of (A$68,197) in 2007 to a gain of
A$444,598 in 2008. This is due to the movement in the U.S. dollars to Australian dollars
exchange rate over the year compared to the corresponding movement in the prior year.
    
    Finance expenses increased A$1,434,723 in 2008. Finance expenses primarily relate to the
convertible notes that we issued in September 2006. This increase predominately relates to
the accretion expense on the convertible notes issued in 2006 which were A$1,884,443 in 2007
and A$3,238,228 in 2008. The accretion expense is calculated using the effective interest
rate method which increases the relative dollar value of the expense over time.
    
    Impairment expense increased A$548,400 in 2008. This expense is related to the impairment
of floating rate notes where the fair value decreased from A$779,200 to A$10,000.
 Net Loss.
 22




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2007 compared with 2006
 Revenue.
  Expenses.
 
    
    Employee expenses decreased A$1,133,346 (20.7%) from A$5,481,934 in 2006 to A$4,348,588
in 2007 due to a reduction in share based payments, termination payments and staff
restructuring.
    
    Research and development expenses increased A$681,035 (68.8%) due to the increased costs
of test firings associated with the performance milestones of the Trust Deed.
    
    Professional fees decreased A$410,227 (23.7%) primarily due to a non recurring expense in
2006 of A$399,141 associated with a proposed capital raising that was terminated in 2006.
    
    In 2007 we had a fair value movement gain of A$2,421,388 on the embedded derivative that
reflects the movement in the fair value of the conversion option embedded in the convertible
notes issued in 2006. In 2006, we had a fair value loss of A$4,469,042.
    
    Finance expenses increased A$2,751,402 in 2007. Finance expenses primarily relate to the
convertible notes that we issued in September 2006. Accordingly, interest and accretion
expenses for 2006 reflect the period from September to December whereas finance expenses in
2007 reflect the full year.
 Net Loss.
 Effects of Currency Fluctuations
    B. Liquidity and Capital Resources
 Overview
  23




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Year ended December 312008
    
    2007A$
    
    A$Net cash used in operating activities
    
    
    (10,180,514
    )
    
    
    (11,255,896
    )Net cash provided by investing activities
    
    
    965,807
    
    
    
    2,214,431Net cash provided by (used in) financing activities
    
    
    1,964,543
    
    
    
    (59,772
    )Effect of exchange rate changes on cash
    
    
    93,908
    
    
    
    (1,482
    )Net movement in cash and cash equivalents
    
    
    (7,156,256
    )
    
    
    (9,102,719
    )
     Borrowings
       24




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Other Material Commitments
  Future Cash Needs
     C. Research and Development: Patents and Licenses
  D. Trend Information
  E. Off-Balance sheet arrangements
  F. Tabular disclosure of contractual obligations
  Payments due by periodTotal
    
    Less Than
    
    
    
    
    
    
    
    
    
    More thanA$
    
    1 Year
    

1  3 Years
    

3  5 Years
    
    5 YearsCapital (finance) lease obligations
    
    
    106,098
    
    
    
    86,506
    
    
    
    19,592
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    604,645
    
    
    
    442,874
    
    
    
    161,771
    
    
    
    
    
    
    
    Loans
    
    
    2,270,072
    
    
    
    2,270,072
    
    
    
    
    
    
    
    
    
    
    
    Convertible Notes
    
    
    21,250,295
    
    
    
    21,250,295
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    24,231,110
    
    
    
    24,049,747
    
    
    
    181,363
    
    
    
    
    
    
    
    
 25




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Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  Name
    
    PositionTerence J. ODwyer
    
    ChairmanJohn R. Nicholls
    
    DirectorTrevor W. Tappenden
    
    DirectorDr. Lee J. Finniear
    
    Chief Executive Officer and Managing DirectorBrett I. Farmer
    
    Chief Financial OfficerPeter D. Faulkner
    
    General Manager  Metal Storm Inc.David M. Pashen
    
    Development ManagerPeter R. Wetzig
    
    Company Secretary
 Terence J. ODwyer.
 John R. Nicholls.
 Trevor Tappenden.
 Dr. Lee J. Finniear.
 Brett I. Farmer.
 Peter D. Faulkner.
 David M. Pashen.
 Peter R. Wetzig.
 26




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##### Table of Contents



B. Compensation
   Short Term Employee Benefits
    
    
    
    PostSalary &
    
    Cash
    
    Non Monetary
    
    
    
    Employment
    
    Share Based
    
    
    
    Total
    
    PerformanceName and
    
    Fees
    
    Bonus
    
    Benefit
    
    Other
    
    Benefits
    
    Payments
    
    Termination
    
    Remuneration
    
     RelatedPosition
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$
    
    %T.J. ODwyer
Chairman (Non-Executive)
    
    
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    J.M. Crunk
Director (Non-Executive)
resigned May 2008
    
    
    30,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,215
    
    
    
    P.D. Jonson
Director (Non-Executive)
Resigned Feb 2009
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    J.R. Nicholls
Director (Non-Executive)
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    T.W. Tappenden
Director (Non-Executive)
appointed July 2008
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    Total Non Executive Directors
    
    
    250,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,215L.J. Finniear
Managing Director &
Chief Executive Officer
    
    
    301,148
    
    
    
    85,000
    
    
    
    2,316
    
    
    
    
    
    
    
    34,433
    
    
    
    7,475
    
    
    
    
    
    
    
    430,372
    
    
    
    19.8Total Executive Directors
    
    
    301,148
    
    
    
    85,000
    
    
    
    2,316
    
    
    
    
    
    
    
    34,433
    
    
    
    7,475
    
    
    
    
    
    
    
    430,372
    
    
    
    19.8P.R. Wetzig
Company Secretary
    
    
    83,201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,201
    
    
    
    B.I. Farmer
Chief Financial Officer
    
    
    151,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,638
    
    
    
    1,560
    i
    
    
    
    
    
    
    165,539
    
    
    
    P.D. Faulkner
Senior Vice President
 Director of U.S. Operations
    
    
    228,286
    
    
    
    
    
    
    
    13,890
    
    
    
    
    
    
    
    6,849
    
    
    
    
    
    
    
    
    
    
    
    249,025
    
    
    
    D.M. Pashen
Development Manager
appointed Sept 2008
    
    
    47,885
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,215
    
    
    
    1,560
    i
    
    
    
    
    
    
    53,660
    
    
    
    J. Cronin
Managing Engineer
 resigned Feb 2008
    
    
    38,163
    
    
    
    23,500
    
    
    
    
    
    
    
    
    
    
    
    4,815
    
    
    
    
    
    
    
    
    
    
    
    66,478
    
    
    
    35.4A.D. Schatz
Vice President
 Business Development
    
    
    184,787
    
    
    
    
    
    
    
    1,750
    
    
    
    2,875
    
    
    
    5,544
    
    
    
    
    
    
    
    
    
    
    
    194,956
    
    
    
    Total Other Key Management
    
    
    733,663
    
    
    
    23,500
    
    
    
    15,640
    
    
    
    2,875
    
    
    
    34,061
    
    
    
    3,120
    
    
    
    
    
    
    
    812,859Total Remuneration of Key
Management Personnel
    
    
    1,285,026
    
    
    
    108,500
    
    
    
    17,956
    
    
    
    2,875
    
    
    
    68,494
    
    
    
    10,595
    
    
    
    
    
    
    
    1,493,446
  27




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##### Table of Contents



Value of shares granted
    
    Number of shares grantedduring the year
    
    during the yearA$
    
    NumberB I Farmer
    
    
    3,900
    
    
    
    100,000D M Pashen
    
    
    3,900
    
    
    
    100,000
  C. Board Practices
    
    
    retains independent auditors and reviews and discusses the independence of the auditors;
    
    sets the engagement policies for the independent auditors;
    
    reviews and discusses the audit plan, the conduct of the audit and the audit results;
    
    reviews and discusses financial statements and disclosures;
    
    determines and administers internal audit procedures;
    
    reviews and discusses the systems of internal accounting controls;
    
    reviews and discusses the recommendations of independent auditors;
    
    approves related party transactions; and
    
    establishes procedures for complaints regarding financial statements or accounting policies.
      
    
    salary/fees;
    
    benefits  including the provision of retirement and health benefits; and
    
    incentive schemes  including performance-related bonuses and share options under the
discretionary share option plan.
 28




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##### Table of Contents



D. Employees
  Queensland
    
    VirginiaAustralia
    
    USAAdministration
    
    
    5
    
    
    
    5Engineering
    
    
    16
    
    
    
    6
 E. Share Ownership
   Number of Shares Held
    
    Number of Options ExercisableT.J ODwyer
    
    
    180,855
    (1)
    
    
    33,819
    (2)J.R. Nicholls(3)
    
    
    
    
    
    
    L.J. Finniear
    
    
    10,000
    
    
    
    1,000,000T.W. Tappenden
    
    
    
    
    
    
    B.I. Farmer
    
    
    100,000
    
    
    
    P.D. Faulkner
    
    
    
    
    
    
    200,000D.M. Pashen
    
    
    100,000
    
    
    
    A.D. Schatz
    
    
    
    
    
    
    P. R. Wetzig
    
    
    400
    
    
    
    
 
 (1)
    
    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.(2)
    
    Options were issued in connection with the Rights Offer and are quoted and may be traded
on Australian Securities Exchange.(3)
    
    John Nicholls is a director of Metal Storm and a director and investment manager of
Harmony Capital Partners Pte Limited (Harmony). Harmony Investment Fund Limited is an entity that
is managed by Harmony Capital Partners and which owns securities in Metal Storm. As of July 6,
2009, Harmony Investment Fund Limited held 29,453,097 ordinary shares, 97,902,659 quoted
convertible notes and 118,726,332 listed options. Mr. Nicholls disclaims beneficial ownership of
securities owned by Harmony. 29




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 A. Major Shareholders
    Name of Shareholder
    
    Number of Ordinary Shares
    
    Percentage of ClassJames Michael ODwyer(1)
    
    
    160,375,776
    
    
    
    25.5
    %
 
 (1)
    
    116,849,489 shares are owned by Mr. J.M. ODwyer, 43,526,182 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
  30




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##### Table of Contents



Item 8. Financial Information
 A. Consolidated Financial Statements and Other Financial Information
  Legal Proceedings
   Dividends
  B. Significant Changes
  31




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##### Table of Contents



Item 9. The Offer and Listing
 A. Listing Details  Price History
 Australian Securities Exchange
  Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    A$
    
    A$December 31, 2008First Quarter
    
    $
    0.09
    
    
    $
    0.06Second Quarter
    
    $
    0.08
    
    
    $
    0.04Third Quarter
    
    $
    0.05
    
    
    $
    0.04Fourth Quarter
    
    $
    0.07
    
    
    $
    0.03December 31, 2007First Quarter
    
    $
    0.21
    
    
    $
    0.16Second Quarter
    
    $
    0.17
    
    
    $
    0.12Third Quarter
    
    $
    0.15
    
    
    $
    0.09Fourth Quarter
    
    $
    0.12
    
    
    $
    0.08December 31, 2006Annual
    
    $
    0.28
    
    
    $
    0.10December 31, 2005Annual
    
    $
    0.31
    
    
    $
    0.10December 31, 2004Annual
    
    $
    0.66
    
    
    $
    0.20
 Price PerOrdinary ShareHigh
    
    LowMonth Ended
    
    A$
    
    A$June 2009
    
    $
    0.04
    
    
    $
    0.03May 2009
    
    $
    0.04
    
    
    $
    0.02April 2009
    
    $
    0.04
    
    
    $
    0.03March 2009
    
    $
    0.05
    
    
    $
    0.03February 2009
    
    $
    0.06
    
    
    $
    0.04January 2009
    
    $
    0.09
    
    
    $
    0.06
 American Depositary Receipts
  Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    US$
    
    US$December 31, 2008First Quarter
    
    $
    1.57
    
    
    $
    0.91Second Quarter
    
    $
    1.25
    
    
    $
    0.70Third Quarter
    
    $
    1.10
    
    
    $
    0.35Fourth Quarter
    
    $
    0.91
    
    
    $
    0.31December 31, 2007First Quarter
    
    $
    3.38
    
    
    $
    2.15Second Quarter
    
    $
    2.87
    
    
    $
    2.00Third Quarter
    
    $
    2.53
    
    
    $
    1.81Fourth Quarter
    
    $
    2.25
    
    
    $
    1.15December 31, 2006Annual
    
    $
    4.04
    
    
    $
    1.75December 31, 2005Annual
    
    $
    4.84
    
    
    $
    1.75December 31, 2004Annual
    
    $
    14.47
    
    
    $
    2.95
 32




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##### Table of Contents



Price PerOrdinary ShareHigh
    
    LowMonth Ended
    
    US$
    
    US$June 2009
    
    $
    0.63
    
    
    $
    0.44May 2009
    
    $
    0.62
    
    
    $
    0.39April 2009
    
    $
    0.50
    
    
    $
    0.37March 2009
    
    $
    0.55
    
    
    $
    0.37February 2009
    
    $
    0.62
    
    
    $
    0.49January 2009
    
    $
    0.73
    
    
    $
    0.49
 B. Plan of Distribution
  C. Markets
  Exemptions from certain NASDAQ Corporate Governance Rules
  
    
    Metal Storm was exempt from Nasdaqs independence requirements for a majority of the board
of directors. The Australian Securities Exchange Listing Rules did not require Metal Storm to have
a majority of independent directors on the board during 2008. During most of the fiscal year ended
December 31, 2008, Metal Storm did, however, have a majority of directors who were independent as
defined in the Australian Securities 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 2008.
    
    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
2008.
    
    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 Securities Exchange Listing Rules required
peer review of independent public accountants during 2008. Accordingly, Metal Storm claimed this
exemption in 2008.
    
    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 Securities 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 Metal Storm 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 Securities 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
 33




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##### Table of Contents



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 2008.
 D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 Item 10. Additional Information
 A. Share Capital
  B. Our Constitution
   Directors
 Interested Directors
   Directors Compensation
  34




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##### Table of Contents



Borrowing Powers Exercisable by Directors
  Retirement of directors
  Share Qualifications
  Rights and Restrictions on Classes of Shares
  Dividend Rights
  Voting Rights
  Right to Share in our Profits
  35




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##### Table of Contents



Rights to Share in the Surplus in the Event of Liquidation
  Redemption Provisions
  Sinking Fund Provisions
  Liability for Further Capital Calls
  Provisions Discriminating Against Holders of a Substantial Number of Shares
  Variation of Share Rights
  General Meetings of Shareholders
   Foreign Ownership Regulation
  36




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##### Table of Contents



Merger, Acquisition or Restructure
  Ownership Threshold
  Conditions for Change of Capital
  Stock Issues and Takeover Attempts
  
    
    that the acquisition of control over voting shares takes place in a efficient, competitive
and informed market;
    
    that shareholders have enough information to assess the merits of a proposal; and
    
    that shareholders all have a reasonable and equal opportunity to participate in any
benefits accruing to the shareholders through any proposal under which a person would
acquire a substantial interest.
   
    
    an issuance or agreement to issue which we have notified the Australian Securities
Exchange of before we are told a person is making or proposes to make a takeover offer for
our shares;
    
    an issuance to our ordinary shareholders on a pro-rata basis;
    
    an issuance made due to an exercise of rights of conversion
already in existence;
    
    an issuance by us as consideration for an off-market takeover bid made by us where we are
required to comply with the provisions of the Corporations Act;
    
    an issuance under a dividend stock distribution plan that is in operation before we are
told a person is making or proposes to make a takeover for our shares; and
    
    if there is an agreement to issue shares and such agreement is conditional on ordinary
shareholders approving the issuance before the issuance is made.
 37




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##### Table of Contents



Access to and Inspection of Documents
  CHESS
  C. Material Contracts
 Terms of convertible notes
    Trust Deed in connection with the Rights Offer
   38




---



##### Table of Contents




    
    fails to pay principal or interest in respect of any convertible note within 5 business
days after it becomes due and payable;
    
    if, without the prior approval of Noteholders by way of ordinary resolution, the total
amount of cash held in Metal Storms bank accounts and in marketable securities falls below
the following minimum cash levels;
 Period
    
    Minimum Cash BalanceSeptember 1, 2006 to December 31, 2006
    
    A$22.5 millionJanuary 1, 2007 to June 30, 2007
    
    A$19.5 millionJuly 1, 2007 to December 31, 2007
    
    A$15.0 millionJanuary 1, 2008 to June 30, 2008
    
    A$12.5 millionJuly 1, 2008 to December 31, 2008
    
    A$  7.5 million
 
    
    if the process of commercialization of the key technology of Metal Storm fails to achieve
the following milestones to the satisfaction of Noteholders (resolved by way of ordinary
resolution) or an independent expert appointed by the Trustee:
    D. Exchange Controls
  E. Taxation
  U.S. Federal Income Tax Considerations
 To ensure compliance with U.S. Treasury Department Circular 230, investors are hereby notified
that: (a) any discussion of U.S. Federal tax issues in this document is not intended or written by
Metal Storm to be relied upon, and cannot be relied upon by investors in the ADSs or ordinary
shares, for the purpose of avoiding penalties that may be imposed on investors in the ADSs or
ordinary shares under the U.S. Internal Revenue Code of 1986, as amended (the Code), (b) such
discussion is written in connection with the promotion or marketing of the transactions or matters
addressed herein by Metal Storm, and (c) investors in the ADSs or ordinary shares should seek
advice based on their particular circumstances from their own independent tax advisors. U.S.
counsel does not intend to be, and is not, engaged in the promotion or marketing of the
transactions or matters described in this offering memorandum, and no inference to the contrary
shall be implied by reason of the U.S. tax discussion set forth herein.
 39




---



##### Table of Contents




    
    an individual who is a citizen or resident of the United States for U.S. federal income
tax purposes;
    
    a corporation, or other entity treated as a corporation for U.S. federal income tax
purposes, created or organized in or under the laws of the United States or any state
thereof or the District of Columbia;
    
    an estate the income of which is subject to U.S. federal income taxation regardless of
its source; or
    
    a trust the administration of which is subject to the primary supervision of a court in
the United States and for which one or more U.S. persons have the authority to control all
substantial decisions.
  You should consult your tax advisor with respect to the U.S. federal, as well as state, local
and non-U.S., tax consequences to you of an investment in ADSs or ordinary shares.
 Ownership of ADSs in General
  Dividends
 pro rata
  40




---



##### Table of Contents



Sale or Exchange of ADSs or Ordinary Shares
   Passive Foreign Investment Company Status
  41




---



##### Table of Contents



pro rata
   42




---



##### 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
  Nature of ADRs for Australian Taxation Purposes
  43




---



##### Table of Contents



Taxation of Dividends
   Tax on Sales or other Dispositions of SharesCapital gains tax
   Tax on Sales or other Dispositions of SharesShareholders Holding Shares on Revenue Account
    Dual Residency
  Stamp Duty
  44




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##### Table of Contents



Australian Death Duty
  Goods and Services Tax
  F. Dividends and Paying Agents
  G. Statements by Experts
  H. Documents on Display
 www.sec.gov
 I. Subsidiary Information
  
 Item 11. Quantitative and Qualitative Disclosure about Market Risk
      
 Item 12. Description of Securities Other than Equity Securities
  45




---



##### Table of Contents



PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and the Use of Proceeds
  
 Item 15T. Controls and Procedures
      
    
    pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of its assets and its consolidated entities;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Metal Storm are being made only in
accordance with authorizations of management and directors of Metal Storm and its
consolidated entities; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the assets of Metal Storm and its consolidated
entities that could have a material effect on the financial statements.
      46




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##### 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 31,2008
    
    2007A$
    
    A$Audit fees
    
    
    445,330
    
    
    
    332,000Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    70,750
    
    
    
    Total
    
    
    516,080
    
    
    
    332,000
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 Item 16F. Changes in Registrants Certifying Accountant
  
 Item 16G. Corporate Governance
  47




---



##### 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
    
    [not used]4.2
    
    [not used]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
    
    Employment Agreement of Dr. Lee Finniear***4.5
    
    Letter of Offer to Peter D. Faulkner***4.6
    
    Employment Agreement of Brett Farmer4.7
    
    Employment Agreement of David Pashen4.8
    
    Employment Agreement of Dr. Joe Cronin***4.9
    
    [not used]4.10
    
    Discretionary Share Option Scheme*4.11
    
    Convertible Note Trust Deed dated July 11, 2006***8.0
    
    List of Subsidiaries of Metal Storm Limited12.1
    
    Certification by the Chief Executive Officer of Metal Storm Limited in accordance with Section 302
of the Sarbanes-Oxley Act12.2
    
    Certification by the Chief Financial Officer of Metal Storm Limited in accordance with Section 302
of the Sarbanes-Oxley Act13.1
    
    Certification by the Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act13.2
    
    Certification by the Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act
 
 *
    
    Incorporated by reference from our Registration Statement on Form 20-F filed on December 12,
2001, File No. 000-31212.**
    
    Incorporated by reference from our annual report on Form 20-F filed on July 17, 2006.***
    
    Incorporated by reference from our annual report on Form 20-F filed on May 18, 2007. 48




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##### Table of Contents



SIGNATURES
  METAL STORM LIMITEDBy:
    /s/ LEE FINNIEARName:
    Lee FinniearTitle:
    Chief Executive Officer




---



##### 



Index to the Financial Statements
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Income Statements for the years ended 31 December 2008, 2007 and 2006
    
    
    F-3Balance Sheets as at 31 December 2008, 2007 and 2006
    
    
    F-4Cash Flow Statements for the years ended 31 December 2008, 2007 and 2006
    
    
    F-5Statement of Changes in Equity for the years ended 31 December 2008, 2007 and 2006
    
    
    F-6Notes to the Financial Statements
    
    
    F-7
  F-1




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##### Table of Contents



PricewaterhouseCoopers
ABN 52 780 433 757
Riverside Centre
123 Eagle Street
BRISBANE QLD 4000
GPO Box 150
BRISBANE QLD 4001
DX 77 Brisbane
Australia
Telephone +61 7 3257 5000
Facsimile +61 7 3257 5999
www.pwc.com/au
 
 Report of Independent Registered Public Accounting Firm
      
 F-2




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##### Table of Contents



Income Statements
 2008
    
    2007
    
    2006Note
    
    $
    
    $
    
    $Continuing OperationsRevenue
    
    
    6
    
    
    
    2,201,331
    
    
    
    3,205,381
    
    
    
    2,339,310Fair value movement in derivative
    
    
    16
    
    
    
    3,620,682
    
    
    
    2,421,388
    
    
    
    (4,469,042
    )Foreign exchange differences
    
    
    
    
    
    
    444,598
    
    
    
    (68,197
    )
    
    
    15,864Consumables used
    
    
    
    
    
    
    (131,896
    )
    
    
    (469,579
    )
    
    
    (152,471
    )Employee expenses
    
    
    7
    
    
    
    (4,229,674
    )
    
    
    (4,348,588
    )
    
    
    (5,342,348
    )Finance costs
    
    
    7
    
    
    
    (6,369,138
    )
    
    
    (4,934,415
    )
    
    
    (2,183,013
    )Professional fees
    
    
    
    
    
    
    (1,449,621
    )
    
    
    (1,321,686
    )
    
    
    (1,731,913
    )Research and development
    
    
    
    
    
    
    (1,569,582
    )
    
    
    (1,671,057
    )
    
    
    (990,022
    )Office overheads
    
    
    
    
    
    
    (623,687
    )
    
    
    (576,387
    )
    
    
    (831,647
    )Facility expenses
    
    
    
    
    
    
    (713,699
    )
    
    
    (790,874
    )
    
    
    (741,643
    )Travel and entertainment
    
    
    
    
    
    
    (346,412
    )
    
    
    (468,868
    )
    
    
    (523,432
    )Communication and technology
    
    
    
    
    
    
    (296,482
    )
    
    
    (360,501
    )
    
    
    (348,191
    )Public relations and compliance
    
    
    
    
    
    
    (423,223
    )
    
    
    (393,967
    )
    
    
    (339,206
    )Impairment expense
    
    
    7
    
    
    
    (769,200
    )
    
    
    (220,800
    )
    
    
    Loss from continuing operations before
Income tax
    
    
    
    
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,297,754
    )Income tax expenses
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    Loss after tax from continuing operations
    
    
    
    
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,297,754
    )Discontinued operationLoss after tax from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,256
    )Loss for the year
    
    
    
    
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )Earnings per share (cents per share)- Basic and diluted loss for the year
attributable to ordinary equity holders of
the parent
    
    
    30
    
    
    
    (1.75
    )
    
    
    (1.69
    )
    
    
    (2.85
    )Earnings per share (cents per share)- Basic and diluted loss for the year
from continuing operations attributable to
ordinary equity holders of the parent
    
    
    
    
    
    
    (1.75
    )
    
    
    (1.69
    )
    
    
    (2.84
    )
  F-3




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##### Table of Contents



Balance Sheets
  2008
    
    2007
    
    2006Note
    
    $
    
    $
    
    $AssetsCurrent assetsCash and cash equivalents
    
    
    9
    
    
    
    7,571,292
    
    
    
    14,727,548
    
    
    
    23,830,267Available-for-sale financial investments
    
    
    10
    
    
    
    10,000
    
    
    
    779,200
    
    
    
    2,002,080Trade and other receivables
    
    
    11
    
    
    
    1,120,592
    
    
    
    1,563,218
    
    
    
    773,130Total current assets
    
    
    
    
    
    
    8,701,884
    
    
    
    17,069,966
    
    
    
    26,605,477Non-current assetsTrade and other receivables
    
    
    12
    
    
    
    34,202
    
    
    
    987,902
    
    
    
    510,795Other financial assets
    
    
    
    
    
    
    
    
    
    
    Property, plant and equipment
    
    
    13
    
    
    
    508,354
    
    
    
    656,260
    
    
    
    627,985Intangible assets and goodwill
    
    
    14
    
    
    
    23,084
    
    
    
    74,149
    
    
    
    111,824Total non-current assets
    
    
    
    
    
    
    565,640
    
    
    
    1,718,311
    
    
    
    1,250,604Total assets
    
    
    
    
    
    
    9,267,524
    
    
    
    18,788,277
    
    
    
    27,856,081LiabilitiesCurrent liabilitiesTrade and other payables
    
    
    15
    
    
    
    1,129,438
    
    
    
    2,605,145
    
    
    
    1,942,525Conversion derivative
    
    
    16
    
    
    
    2,187,934
    
    
    
    5,963,793
    
    
    
    10,811,057Interest-bearing loans and borrowings
    
    
    17
    
    
    
    18,703,697
    
    
    
    12,941,447
    
    
    
    13,229,376Provisions
    
    
    18
    
    
    
    376,582
    
    
    
    302,161
    
    
    
    441,997Total current liabilities
    
    
    
    
    
    
    22,397,651
    
    
    
    21,812,546
    
    
    
    26,424,955Non-current liabilitiesInterest-bearing loans and borrowings
    
    
    19
    
    
    
    16,783
    
    
    
    215,036
    
    
    
    255,845Other
    
    
    
    
    
    
    46,355
    
    
    
    68,265
    
    
    
    77,949Total non-current liabilities
    
    
    
    
    
    
    63,138
    
    
    
    283,301
    
    
    
    333,794Total liabilities
    
    
    
    
    
    
    22,460,789
    
    
    
    22,095,847
    
    
    
    26,758,749Net assets (liabilities)
    
    
    
    
    
    
    (13,193,265
    )
    
    
    (3,307,570
    )
    
    
    1,097,332EquityContributed equity
    
    
    20
    
    
    
    66,209,718
    
    
    
    65,428,400
    
    
    
    59,985,634Reserves
    
    
    21
    
    
    
    9,035,414
    
    
    
    9,046,424
    
    
    
    8,895,942Accumulated losses
    
    
    22
    
    
    
    (88,438,397
    )
    
    
    (77,782,394
    )
    
    
    (67,784,244
    )Total equity (deficiency)
    
    
    
    
    
    
    (13,193,265
    )
    
    
    (3,307,570
    )
    
    
    1,097,332
  F-4




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##### Table of Contents



Cash Flow Statements
  2008
    
    2007
    
    2006Note
    
    $
    
    $
    
    $Cash Flows From Operating ActivitiesReceipts from customers (inclusive of GST)
    
    
    
    
    
    
    926,582
    
    
    
    1,052,095
    
    
    
    2,015,018Payments to suppliers and employees (inclusive of
GST)
    
    
    
    
    
    
    (9,573,667
    )
    
    
    (9,516,201
    )
    
    
    (9,864,003
    )Interest and other costs of finance paid
    
    
    
    
    
    
    (2,265,444
    )
    
    
    (2,791,790
    )
    
    
    (287,027
    )Research & development tax concession
    
    
    
    
    
    
    732,015
    
    
    
    
    
    
    
    679,673Net cash outflow from operating activities
    
    
    29
    
    
    
    (10,180,514
    )
    
    
    (11,255,896
    )
    
    
    (7,456,339
    )Cash Flows From Investing ActivitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (23,774
    )
    
    
    (200,039
    )
    
    
    (824,299
    )Proceeds from the disposal of property, plant and
equipment
    
    
    
    
    
    
    681
    
    
    
    2,127
    
    
    
    318,695Purchase of intangible assets
    
    
    
    
    
    
    
    
    
    
    (42,847
    )
    
    
    (137,197
    )Interest received
    
    
    
    
    
    
    988,900
    
    
    
    1,455,190
    
    
    
    673,435Proceeds from sale of available-for-sale financial
assets
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    3,054,060Purchase of other financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (480,798
    )Net cash inflow from investing activities
    
    
    
    
    
    
    965,807
    
    
    
    2,214,431
    
    
    
    2,603,896Cash Flows From Financing ActivitiesProceeds from issues of shares
    
    
    
    
    
    
    
    
    
    
    6,639
    
    
    
    3,017,685Share issue costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (268,696
    )Proceeds from issuance of convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,500,000Transaction costs of rights issues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,909,878
    )Proceeds from borrowings
    
    
    
    
    
    
    4,464,459
    
    
    
    419,703
    
    
    
    306,180Repayment of borrowings
    
    
    
    
    
    
    (2,499,916
    )
    
    
    (486,114
    )
    
    
    (598,442
    )Net cash inflow (outflow) from financing activities
    
    
    
    
    
    
    1,964,543
    
    
    
    (59,772
    )
    
    
    28,046,849Net movement in cash and cash equivalents
    
    
    
    
    
    
    (7,250,164
    )
    
    
    (9,101,237
    )
    
    
    23,194,406Net foreign exchange differences
    
    
    
    
    
    
    93,908
    
    
    
    (1,482
    )
    
    
    Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    14,727,548
    
    
    
    23,830,267
    
    
    
    635,861Cash and cash equivalents at year end
    
    
    9
    
    
    
    7,571,292
    
    
    
    14,727,548
    
    
    
    23,830,267
  F-5




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##### Table of Contents



Statements of Changes in Equity
  Contributed
    
    
    
    
    
    Accumulated
    
    TotalEquity
    
    Reserves
    
    Losses
    
    Equity$
    
    $
    
    $
    
    $At 31 December 2005
    
    
    56,559,039
    
    
    
    1,668,057
    
    
    
    (52,447,234
    )
    
    
    5,779,862Net gains on available-for-sale
financial assets
    
    
    
    
    
    
    (34,580
    )
    
    
    
    
    
    
    (34,580
    )Currency translation differences
    
    
    
    
    
    
    10,213
    
    
    
    
    
    
    
    10,213Total income and expense for the
year recognised directly in equity
    
    
    
    
    
    
    (24,367
    )
    
    
    
    
    
    
    (24,367
    )Loss for the year
    
    
    
    
    
    
    
    
    
    
    (15,337,010
    )
    
    
    (15,337,010
    )Total income/(expense) for the year
    
    
    
    
    
    
    (24,367
    )
    
    
    (15,337,010
    )
    
    
    (15,361,377
    )Net increase in option reserves
    
    
    
    
    
    
    358,686
    
    
    
    
    
    
    
    358,686Attaching options issued on
allotment of renounceable rights
issue
    
    
    
    
    
    
    4,379,638
    
    
    
    
    
    
    
    4,379,638Options paid as cost to Harmony
    
    
    
    
    
    
    3,262,000
    
    
    
    
    
    
    
    3,262,000Options expense
    
    
    
    
    
    
    (748,072
    )
    
    
    
    
    
    
    (748,072
    )Share options exercised
    
    
    7,685
    
    
    
    
    
    
    
    
    
    
    
    7,685Issue of share capital
    
    
    3,035,031
    
    
    
    
    
    
    
    
    
    
    
    3,035,031Conversion of convertible notes to
shares
    
    
    652,575
    
    
    
    
    
    
    
    
    
    
    
    652,575Share issue costs
    
    
    (268,696
    )
    
    
    
    
    
    
    
    
    
    
    (268,696
    )At 31 December 2006
    
    
    59,985,634
    
    
    
    8,895,942
    
    
    
    (67,784,244
    )
    
    
    1,097,332Realised gains on
available-for-sale financial
assets
    
    
    
    
    
    
    (1,040
    )
    
    
    
    
    
    
    (1,040
    )Fair value movement on
available-for-sale financial
assets
    
    
    
    
    
    
    (1,040
    )
    
    
    
    
    
    
    (1,040
    )Currency translation differences
    
    
    
    
    
    
    16,013
    
    
    
    
    
    
    
    16,013Total income and expense for the
year recognised directly in equity
    
    
    
    
    
    
    13,933
    
    
    
    
    
    
    
    13,933Loss for the year
    
    
    
    
    
    
    
    
    
    
    (9,998,150
    )
    
    
    (9,998,150
    )Total income/(expense) for the year
    
    
    
    
    
    
    13,933
    
    
    
    (9,998,150
    )
    
    
    (9,984,217
    )Share-based payment expense
    
    
    
    
    
    
    136,549
    
    
    
    
    
    
    
    136,549Share options exercised
    
    
    6,638
    
    
    
    
    
    
    
    
    
    
    
    6,638Conversion of convertible notes to
shares
    
    
    5,436,128
    
    
    
    
    
    
    
    
    
    
    
    5,436,128At 31 December 2007
    
    
    65,428,400
    
    
    
    9,046,424
    
    
    
    (77,782,394
    )
    
    
    (3,307,570
    )Currency translation differences
    
    
    
    
    
    
    (38,242
    )
    
    
    
    
    
    
    (38,242
    )Total income and expense for the
year recognised directly in equity
    
    
    
    
    
    
    (38,242
    )
    
    
    
    
    
    
    (38,242
    )Loss for the year
    
    
    
    
    
    
    
    
    
    
    (10,656,003
    )
    
    
    (10,656,003
    )Total income/(expense) for the year
    
    
    
    
    
    
    (38,242
    )
    
    
    (10,656,003
    )
    
    
    (10,694,245
    )Share-based payment expense
    
    
    
    
    
    
    27,232
    
    
    
    
    
    
    
    27,232Issue of share capital
    
    
    124,114
    
    
    
    
    
    
    
    
    
    
    
    124,114Conversion of convertible notes to
shares
    
    
    657,204
    
    
    
    
    
    
    
    
    
    
    
    657,204At 31 December 2008
    
    
    66,209,718
    
    
    
    9,035,414
    
    
    
    (88,438,397
    )
    
    
    (13,193,265
    )
  F-6




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##### Table of Contents



Notes to the financial statements
 Contents
 1.
    
    GOING CONCERN
    
    
    F-82.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
    
    F-93.
    
    FINANCIAL RISK MANAGEMENT
    
    
    F-194.
    
    CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
    
    
    F-225.
    
    SEGMENT INFORMATION
    
    
    F-236.
    
    REVENUE
    
    
    F-267.
    
    EXPENSES
    
    
    F-268.
    
    INCOME TAX
    
    
    F-279.
    
    CURRENT ASSETS  CASH AND CASH EQUIVALENTS
    
    
    F-2810.
    
    CURRENT ASSETS  AVAILABLE-FOR-SALE FINANCIAL INVESTMENTS
    
    
    F-2911.
    
    CURRENT ASSETS  TRADE AND OTHER RECEIVABLES
    
    
    F-2912.
    
    NON-CURRENT ASSETS  TRADE AND OTHER RECEIVABLES
    
    
    F-3013.
    
    NON-CURRENT ASSETS  PROPERTY, PLANT AND EQUIPMENT
    
    
    F-3114.
    
    NON-CURRENT ASSETS  INTANGIBLE ASSETS
    
    
    F-3215.
    
    CURRENT LIABILITIES  TRADE AND OTHER PAYABLES
    
    
    F-3316.
    
    CURRENT LIABILITIES  CONVERSION DERIVATIVE
    
    
    F-3317.
    
    CURRENT LIABILITIES  INTEREST BEARING LOANS AND BORROWINGS
    
    
    F-3318.
    
    CURRENT LIABILITIES  PROVISIONS
    
    
    F-3419.
    
    NON-CURRENT LIABILITIES  INTEREST BEARING LOANS AND BORROWINGS
    
    
    F-3520.
    
    CONTRIBUTED EQUITY
    
    
    F-3621.
    
    RESERVES
    
    
    F-3722.
    
    ACCUMULATED LOSSES
    
    
    F-3823.
    
    KEY MANAGEMENT PERSONNEL DISCLOSURES
    
    
    F-3824.
    
    REMUNERATION OF AUDITORS
    
    
    F-4225.
    
    COMMITMENTS
    
    
    F-4226.
    
    RELATED PARTY TRANSACTIONS
    
    
    F-4327.
    
    SUBSIDIARIES
    
    
    F-4328.
    
    EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
    
    
    F-4429.
    
    RECONCILIATION OF LOSS AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES
    
    
    F-4430.
    
    EARNINGS PER SHARE
    
    
    F-4531.
    
    SHARE-BASED PAYMENTS
    
    
    F-45
 F-7




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##### Table of Contents



Metal Storm Limited  Notes to the financial statements (continued)
 
 1. Going concern
   2008
    
    2007$
    
    $Cash at Bank
    
    
    7,571,292
    
    
    
    14,727,548Loss for the Year
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )Net cash outflow from operating activities
    
    
    (10,180,514
    )
    
    
    (11,255,896
    )Net liabilities
    
    
    (13,193,265
    )
    
    
    (3,307,570
    )Net equity (deficiency)
    
    
    (13,193,265
    )
    
    
    (3,307,570
    )
           F-8




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 2. Summary of significant accounting policies
  a. Basis of preparation
  i.
    
    Compliance with IFRS
   ii.
    
    Historical cost convention
  iii.
    
    Critical accounting estimates
  b. Principles of consolidation
        c. Segment reporting
  F-9




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 d. Foreign currency translation
 i.
    
    Functional and presentation currency
  ii.
    
    Transactions and balances
   iii.
    
    Group companies
  
    
    assets and liabilities for each balance sheet presented are translated at the closing rate
at the date of that balance sheet;
    
    income and expenses for each income statement are translated at average exchange rates
(unless this is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are translated at the
dates of the transactions); and
    
    all resulting exchange differences are recognised as a separate component of equity.
 e. Revenue recognition
    i.
    
    Contract Revenue
     ii.
    
    Interest income
  F-10




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 f. Government grants
    g. Income tax
       h. Leases
   i. Business combinations
  F-11




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 i. Business combinations (cont.)
   j. Impairment of assets
  k. Cash and cash equivalents
  l. Trade receivables
    m. Investments and other financial assets
 i.
    
    Classification
  
    
    Financial assets at fair value through profit or loss
  F-12




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 m. Investments and other financial assets (cont.)
 
    
    Loans and receivables
  
    
    Held-to-maturity investments
  
    
    Available-for-sale financial assets
  ii.
    
    Recognition and derecognition
   iii.
    
    Subsequent measurement
    iv.
    
    Fair value
  F-13




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 v.
    
    Impairment
  n. Derivatives
  o. Fair value estimation
     p. Property, plant and equipment
   
    
    Machinery
    5 - 10 years
    
    Furniture, fittings and equipment
    2 - 5 years
    
    Leasehold improvements
    3 years
    
    Leased plant and equipment
    1 - 5 years
    F-14




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 q. Intangible assets
 i.
    
    Goodwill
   ii.
    
    Research and development
  iii.
    
    Software
   r. Trade and other payables
  s. Borrowings
     t. Borrowing costs
  F-15




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 u. Provisions
    v. Employee benefits
 i.
    
    Wages and salaries, annual leave and sick leave
  ii.
    
    Long service leave
  iii.
    
    Share-based payments
    iv.
    
    Post employment benefits
  w. Share-based payments
   x. Contributed equity
   F-16




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 y. Goods and services tax (GST)
    z. Earnings per share
 i.
    
    Basic earnings per share
  ii.
    
    Diluted earnings per shares
  aa. New accounting standards and interpretations
  i.
    
    AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards
arising from AASB 8
  ii.
    
    Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to Australian Accounting
Standards arising from AASB 123 [AASB 1, AASB 101, AASB 107, AASB 111, AASB 116 & AASB 138
and Interpretations 1 & 12]
  iii.
    
    Revised AASB 101 Presentation of Financial Statements and AASB 2007-8 Amendments to
Australian Accounting Standards arising from AASB 101.
  F-17




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (cont.)
 aa. New accounting standards and interpretations (cont.)
 iv.
    
    AASB 2008-1 Amendments to Australian Accounting Standard  Share-based Payments: Vesting
Conditions and Cancellations
  v.
    
    Revised AASB 3 Business Combinations, AASB 127 Consolidated and Separate Financial Statements
and AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127
  vi.
    
    AASB 2008-7 Amendments to Australian Accounting Standards  Cost of an Investment in a
Subsidiary, Jointly Controlled Entity or Associate
  F-18




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 3. Financial risk management
   a. Market risk
 i.
    
    Foreign exchange risk
      ii.
    
    Fair value interest rate risk
      iii.
    
    Price risk of available-for-sale financial assets
   F-19




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 3. Financial Risk Management (cont.)
 a. Market risk (cont.)
  Risk Factor
 Increase in
    
    Decrease in
    
    Increase in
    
    Decrease inGroup Loss
    
    Group Loss
    
    Company Loss
    
    Company Loss$
    
    $
    
    $
    
    $2008 actual loss
    
    
    (10,656,003
    )
    
    
    (10,656,003
    )
    
    
    (10,762,246
    )
    
    
    (10,762,246
    )(i)    Australian Dollar (weaker)/stronger by
10% against the US Dollar
    
    
    (20,905
    )
    
    
    20,905
    
    
    
    
    
    
    
    (ii)   Interest rate increase/(decrease) by
10%
    
    
    (54,257
    )
    
    
    54,257
    
    
    
    (51,002
    )
    
    
    51,002(iii)  Change in fair value of
available-for-sale financial assets
(increased)/decreased by 10%
    
    
    (1,000
    )
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    1,0002008 loss after adjusting for market risk
sensitivity factors
    
    
    (10,732,165
    )
    
    
    (10,579,841
    )
    
    
    (10,814,248
    )
    
    
    (10,710,244
    )
  Risk Factor
 Increase in
    
    Decrease in
    
    Increase in
    
    Decrease inGroup
    
    Group
    
    Company
    
    CompanyDeficiency
    
    Deficiency
    
    Deficiency
    
    Deficiency$
    
    $
    
    $
    
    $2008 actual shareholders deficiency
    
    
    (13,193,265
    )
    
    
    (13,193,265
    )
    
    
    (13,287,399
    )
    
    
    (13,287,399
    )(i)    Australian Dollar (weaker)/stronger by
10% against the US Dollar
    
    
    (20,905
    )
    
    
    20,905
    
    
    
    
    
    
    
    (ii)   Interest rate increase/(decrease) by
10%
    
    
    (54,257
    )
    
    
    54,257
    
    
    
    (51,002
    )
    
    
    51,002(iii)  Change in fair value of
available-for-sale financial assets
(increased)/decreased by 10%
    
    
    (1,000
    )
    
    
    1,000
    
    
    
    (1,000
    )
    
    
    1,0002008 total shareholder deficiency after
adjusting for market risk sensitivity
factors
    
    
    (13,269,427
    )
    
    
    (13,117,103
    )
    
    
    (13,339,401
    )
    
    
    (13,235,397
    )
  Risk Factor
 Increase in
    
    Decrease in
    
    Increase in
    
    Decrease inGroup Loss
    
    Group Loss
    
    Company Loss
    
    Company Loss$
    
    $
    
    $
    
    $2007 actual loss
    
    
    (9,998,150
    )
    
    
    (9,998,150
    )
    
    
    (10,806,695
    )
    
    
    (10,806,695
    )(i)    Australian Dollar (weaker)/stronger by
10% against the US Dollar
    
    
    (130,998
    )
    
    
    130,998
    
    
    
    
    
    
    
    (ii)   Interest rate increase/(decrease) by
10%
    
    
    (148,946
    )
    
    
    148,946
    
    
    
    (148,946
    )
    
    
    148,946(iii)  Change in fair value of
available-for-sale financial assets
(increased)/decreased by 10%
    
    
    (22,288
    )
    
    
    22,288
    
    
    
    (22,288
    )
    
    
    22,2882007 loss after adjusting for market risk
sensitivity factors
    
    
    (10,300,382
    )
    
    
    (9,695,918
    )
    
    
    (10,977,929
    )
    
    
    (10,635,461
    )
  Risk Factor
 Increase in
    
    Decrease in
    
    Increase in
    
    Decrease inGroup
    
    Group
    
    Company
    
    CompanyDeficiency
    
    Deficiency
    
    Deficiency
    
    Deficiency$
    
    $
    
    $
    
    $2007 actual shareholders deficiency
    
    
    (3,307,570
    )
    
    
    (3,307,570
    )
    
    
    (3,333,703
    )
    
    
    (3,333,703
    )(i)    Australian Dollar (weaker)/stronger by
10% against the US Dollar
    
    
    (130,998
    )
    
    
    130,998
    
    
    
    
    
    
    
    (ii)   Interest rate increase/(decrease) by
10%
    
    
    (148,946
    )
    
    
    148,946
    
    
    
    (148,946
    )
    
    
    148,946(iii)  Change in fair value of
available-for-sale financial assets
(increased)/decreased by 10%
    
    
    (22,288
    )
    
    
    22,288
    
    
    
    (22,288
    )
    
    
    22,2882007 total shareholder deficiency after
adjusting for market risk sensitivity
factors
    
    
    (3,609,802
    )
    
    
    (3,005,338
    )
    
    
    (3,504,937
    )
    
    
    (3,162,469
    )
 F-20




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 3. Financial Risk Management (cont.)
 b. Credit risk
       c. Liquidity risk
    Financial liability
 Later thanone month
    
    Later than
    
    Later thanNot later
    
    and not later
    
    three months
    
    one year andthan one
    
    than three
    
    and not later
    
    not later thanmonth
    
    months
    
    than one year
    
    five years$
    
    $
    
    $
    
    $Group  2008Payables
    
    
    90,537
    
    
    
    
    
    
    
    
    
    
    
    Finance Leases
    
    
    7,208
    
    
    
    14,418
    
    
    
    64,880
    
    
    
    19,592Convertible Notes
    
    
    
    
    
    
    
    
    
    
    21,250,295
    
    
    
    Loan
    
    
    2,067,615
    
    
    
    80,983
    
    
    
    121,474
    
    
    
    Total
    
    
    2,165,360
    
    
    
    95,401
    
    
    
    21,436,649
    
    
    
    19,592Group  2007Payables
    
    
    390,737
    
    
    
    887,426
    
    
    
    
    
    
    
    Finance Leases
    
    
    7,052
    
    
    
    14,104
    
    
    
    63,470
    
    
    
    232,487Convertible Notes
    
    
    
    
    
    
    512,402
    
    
    
    1,548,466
    
    
    
    21,908,709Loan
    
    
    36,465
    
    
    
    72,931
    
    
    
    109,396
    
    
    
    Total
    
    
    434,254
    
    
    
    1,486,863
    
    
    
    1,721,332
    
    
    
    22,141,196
   F-21




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 3. Financial Risk Management (cont.)
 d. Fair value estimation
  e. Capital risk management
     
 4. Critical accounting estimates and judgements
 a. Embedded derivatives and attached options
  Share price:
    
    $0.05 (at 31 December 2008)
    
    Exercise Price:
    
    $0.15Share price Volatility:
    
    87.25%
    
    Risk free rate:
    

    3.70%
 b. Available-for-sale financial investments
  c. Revenue recognition
  F-22




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 5. Segment information
 a. Description of segments
  Australia
    
    The home country of the Company where the majority of research and development work is carried out.United States
    
    The home country of the Groups subsidiaries.
 b. Geographical segments
 2008
 Australia
    
    United States
    
    Consolidated$
    
    $
    
    $Segment revenueTotal segment revenue
    
    
    1,050,486
    
    
    
    2,415,655
    
    
    
    2,201,331Consolidated revenue
    
    
    
    
    
    
    
    
    
    
    2,201,331Segment resultSegment result
    
    
    (10,762,246
    )
    
    
    (1,358,067
    )
    
    
    (12,120,313
    )Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    1,464,310Loss before income tax
    
    
    
    
    
    
    
    
    
    
    (10,656,003
    )Segment assets and liabilitiesSegment assets
    
    
    8,806,828
    
    
    
    463,616
    
    
    
    9,270,444Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (2,920
    )Total assets
    
    
    
    
    
    
    
    
    
    
    9,267,524Segment liabilities
    
    
    22,094,227
    
    
    
    21,367,716
    
    
    
    43,461,943Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (21,001,154
    )Total liabilities
    
    
    
    
    
    
    
    
    
    
    22,460,789Other segment informationAcquisitions of property, plant and equipment, intangibles and other
non-current segment assets
    
    
    21,899
    
    
    
    1,875
    
    
    
    23,774Total Acquisitions
    
    
    
    
    
    
    
    
    
    
    23,774Depreciation and amortisation expense
    
    
    175,130
    
    
    
    45,776
    
    
    
    220,906Total depreciation and amortisation
    
    
    
    
    
    
    
    
    
    
    220,906Impairment expense
    
    
    2,930,384
    
    
    
    
    
    
    
    2,930,384Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (2,161,184
    )Total impairment expense
    
    
    
    
    
    
    
    
    
    
    769,200Segment cash flow informationNet cash flows from operating activities
    
    
    (7,740,745
    )
    
    
    (2,439,769
    )
    
    
    (10,180,514
    )Net cash flows from investing activities
    
    
    927,793
    
    
    
    38,014
    
    
    
    965,807Net cash flows from financing activities
    
    
    (196,390
    )
    
    
    2,160,933
    
    
    
    1,964,543
 F-23




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 5. Segment information (cont.)
 2007
 Australia
    
    United States
    
    Consolidated$
    
    $
    
    $Segment revenueTotal segment revenue
    
    
    1,330,579
    
    
    
    1,874,802
    
    
    
    3,205,381Consolidated revenue
    
    
    
    
    
    
    
    
    
    
    3,205,381Segment resultSegment result
    
    
    (10,806,695
    )
    
    
    (1,383,714
    )
    
    
    (12,190,410
    )Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    2,192,259Loss before income tax
    
    
    
    
    
    
    
    
    
    
    (9,998,150
    )Segment assets and liabilitiesSegment assets
    
    
    17,070,834
    
    
    
    1,720,363
    
    
    
    18,791,197Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (2,920
    )Total assets
    
    
    
    
    
    
    
    
    
    
    18,788,277Segment liabilities
    
    
    20,404,537
    
    
    
    20,454,240
    
    
    
    40,858,777Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (18,762,930
    )Total liabilities
    
    
    
    
    
    
    
    
    
    
    22,095,847Other segment informationAcquisitions of property, plant and equipment, intangibles and other
non-current segment assets
    
    
    192,604
    
    
    
    50,282
    
    
    
    242,886Total Acquisitions
    
    
    
    
    
    
    
    
    
    
    242,886Depreciation and amortisation expense
    
    
    169,389
    
    
    
    80,107
    
    
    
    249,496Total depreciation and amortisation
    
    
    
    
    
    
    
    
    
    
    249,496Impairment expense
    
    
    2,018,773
    
    
    
    
    
    
    
    2,018,773Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (1,797,973
    )Total impairment expense
    
    
    
    
    
    
    
    
    
    
    220,800Segment cash flow informationNet cash flows from operating activities
    
    
    (11,592,912
    )
    
    
    337,016
    
    
    
    (11,255,896
    )Net cash flows from investing activities
    
    
    2,240,048
    
    
    
    (25,617
    )
    
    
    2,214,431Net cash flows from financing activities
    
    
    (84,528
    )
    
    
    24,756
    
    
    
    (59,772
    )
 F-24




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 5. Segment information (cont.)
 2006
 Continuing
    
    DiscontinuedAustralia
    
    United States
    
    operations
    
    operation
    
    Consolidated$
    
    $
    
    $
    
    $
    
    $Segment revenueTotal segment revenue
    
    
    758,280
    
    
    
    1,581,030
    
    
    
    2,339,310
    
    
    
    
    
    
    
    2,339,310Consolidated revenue
    
    
    
    
    
    
    
    
    
    
    2,339,310
    
    
    
    
    
    
    
    2,339,310Segment resultSegment result
    
    
    (14,943,789
    )
    
    
    (2,904,561
    )
    
    
    (17,848,350
    )
    
    
    (39,256
    )
    
    
    (17,887,606
    )Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    2,550,596
    
    
    
    
    
    
    
    2,550,596Loss before income tax
    
    
    
    
    
    
    
    
    
    
    (15,297,754
    )
    
    
    (39,256
    )
    
    
    (15,337,010
    )Segment assets and liabilitiesSegment assets
    
    
    27,550,373
    
    
    
    563,354
    
    
    
    28,113,727
    
    
    
    22,500
    
    
    
    28,136,227Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (280,146
    )
    
    
    
    
    
    
    (280,146
    )Total assets
    
    
    
    
    
    
    
    
    
    
    27,833,581
    
    
    
    22,500
    
    
    
    27,856,081Segment liabilities
    
    
    25,654,616
    
    
    
    14,889,584
    
    
    
    40,544,200
    
    
    
    3,381,799
    
    
    
    43,925,999Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (13,967,411
    )
    
    
    (3,199,839
    )
    
    
    (17,167,250
    )Total liabilities
    
    
    
    
    
    
    
    
    
    
    26,576,789
    
    
    
    181,960
    
    
    
    26,758,749Other segment informationAcquisitions of property,
plant and equipment,
intangibles and other
non-current segment assets
    
    
    881,351
    
    
    
    80,145
    
    
    
    961,496
    
    
    
    
    
    
    
    961,496Total Acquisitions
    
    
    
    
    
    
    
    
    
    
    961,496
    
    
    
    
    
    
    
    961,496Depreciation and amortisation
expense
    
    
    78,059
    
    
    
    105,309
    
    
    
    183,368
    
    
    
    1,469
    
    
    
    184,837Total depreciation and
amortisation
    
    
    
    
    
    
    
    
    
    
    183,368
    
    
    
    1,469
    
    
    
    184,837Segment cash flow informationNet cash flows from operating
activities
    
    
    (6,510,489
    )
    
    
    (945,850
    )
    
    
    (7,456,339
    )
    
    
    
    
    
    
    (7,456,339
    )Net cash flows from investing
activities
    
    
    2,670,027
    
    
    
    (66,131
    )
    
    
    2,603,896
    
    
    
    
    
    
    
    2,603,896Net cash flows from financing
activities
    
    
    28,046,849
    
    
    
    
    
    
    
    28,046,849
    
    
    
    
    
    
    
    28,046,849
 c. Notes to and forming part of the segment information
 i.
    
    Accounting policies
   ii.
    
    Inter-segment transfers
  F-25




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 6. Revenue
 2008
    
    2007
    
    2006$
    
    $
    
    $Contract Revenue
    
    
    1,109,411
    
    
    
    1,847,399
    
    
    
    1,581,030Interest Revenue
    
    
    1,040,699
    
    
    
    1,354,048
    
    
    
    758,280Other
    
    
    51,221
    
    
    
    3,934
    
    
    
    2,201,331
    
    
    
    3,205,381
    
    
    
    2,339,310
 
 7. Expenses
  2008
    
    2007
    
    2006Note
    
    $
    
    $
    
    $Employee expensesWages and salaries
    
    
    
    
    
    
    (3,566,615
    )
    
    
    (3,531,444
    )
    
    
    (4,077,717
    )Termination benefits
    
    
    
    
    
    
    
    
    
    
    (47,581
    )
    
    
    (319,950
    )Superannuation
    
    
    
    
    
    
    (192,698
    )
    
    
    (161,904
    )
    
    
    (134,766
    )Share-based payments
    
    
    31
    (d)
    
    
    (36,832
    )
    
    
    (136,549
    )
    
    
    (358,686
    )Directors fees
    
    
    
    
    
    
    (250,215
    )
    
    
    (297,608
    )
    
    
    (412,572
    )Other
    
    
    
    
    
    
    (183,314
    )
    
    
    (173,502
    )
    
    
    (38,657
    )Total employee expenses
    
    
    
    
    
    
    (4,229,674
    )
    
    
    (4,348,588
    )
    
    
    (5,342,348
    )Finance costsInterest expense
    
    
    
    
    
    
    (2,265,445
    )
    
    
    (2,184,507
    )
    
    
    (962,751
    )Transaction cost amortisation
    
    
    
    
    
    
    (865,465
    )
    
    
    (865,465
    )
    
    
    (288,488
    )Accretion expense
    
    
    
    
    
    
    (3,238,228
    )
    
    
    (1,884,443
    )
    
    
    (464,774
    )Amortisation of options for short term loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (467,000
    )Total finance costs
    
    
    
    
    
    
    (6,369,138
    )
    
    
    (4,934,415
    )
    
    
    (2,183,013
    )Depreciation and AmortisationDepreciation
    
    
    
    
    
    
    (169,841
    )
    
    
    (168,974
    )
    
    
    (109,248
    )Amortisation
    
    
    
    
    
    
    (51,065
    )
    
    
    (80,522
    )
    
    
    (75,589
    )Total depreciation and amortisation
    
    
    
    
    
    
    (220,906
    )
    
    
    (249,496
    )
    
    
    (184,837
    )Rental expense relating to operating leasesMinimum lease payments
    
    
    
    
    
    
    (464,163
    )
    
    
    (449,439
    )
    
    
    (590,197
    )Total lease payments
    
    
    
    
    
    
    (464,163
    )
    
    
    (449,439
    )
    
    
    (590,197
    )Impairment expenseImpairment of floating rate notes
    
    
    10
    
    
    
    (769,200
    )
    
    
    (220,800
    )
    
    
    (769,200
    )
    
    
    (220,800
    )
    
    
    
 F-26




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 8. Income tax
 a. Income tax expense
 2008
    
    2007
    
    2006$
    
    $
    
    $Current tax benefit
    
    
    (2,640,250
    )
    
    
    (2,976,306
    )
    
    
    (2,300,203
    )Deferred tax benefit
    
    
    (334,330
    )
    
    
    81,032
    
    
    
    (64,275
    )Adjustment for prior years
    
    
    (235,758
    )
    
    
    
    
    
    
    2,364,478Deferred tax assets not recognised
    
    
    3,210,338
    
    
    
    2,895,274
    
    
    
    
    
    
    
    
    
    
    
    
 b. Numerical reconciliation of income tax expense to prima facie tax payable
 Loss before income tax
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )Tax at the Australia tax rate of 30% (2006:30%)
    
    
    (3,196,801
    )
    
    
    (2,999,445
    )
    
    
    (4,601,103
    )Tax effect of amounts which are not deductible
(taxable) in calculating taxable income:Research and development accounting costs
    
    
    273,383
    
    
    
    297,809
    
    
    
    269,897Research and development tax concession received
    
    
    (102,519
    )
    
    
    (117,086
    )
    
    
    (102,632
    )Entertainment
    
    
    1,007
    
    
    
    873
    
    
    
    2,131Fair value movement in embedded derivative
    
    
    (1,086,205
    )
    
    
    (726,416
    )
    
    
    636,416Non-deductible interest expense
    
    
    148,571
    
    
    
    51,664
    
    
    
    Option costs expensed  employees
    
    
    11,050
    
    
    
    40,965
    
    
    
    133,922Options cost
 Harmony
    
    
    970,805
    
    
    
    564,738
    
    
    
    111,900Borrowing costs accretion
    
    
    6,129
    
    
    
    (8,376
    )
    
    
    367,240Other
    
    
    
    
    
    
    
    
    
    
    817,751(2,974,580
    )
    
    
    2,895,274
    
    
    
    (2,364,478
    )Adjustment for prior years
    
    
    (235,758
    )
    
    
    (2,895,274
    )
    
    
    Deferred tax assets not recognised
    
    
    3,210,338
    
    
    
    
    
    
    
    2,364,478Income tax expense
    
    
    
    
    
    
    
    
    
    
    
 c. Unrecognised temporary differences
 i.
    
    Temporary differences for which deferred tax assets or deferred tax liabilities have not been
recognised.
 2008
    
    2007
    
    2006$
    
    $
    
    $Sundry creditors and accruals
    
    
    45,642
    
    
    
    46,300
    
    
    
    46,197General accruals
    
    
    687,885
    
    
    
    
    
    
    
    Provision for doubtful debts
    
    
    1,223,838
    
    
    
    
    
    
    
    Employee entitlements
    
    
    147,499
    
    
    
    118,800
    
    
    
    133,297Asset retirement obligation
    
    
    33,508
    
    
    
    29,207
    
    
    
    27,790Lease make good
    
    
    13,470
    
    
    
    8,802Deferred rent
    
    
    46,355
    
    
    
    68,267
    
    
    
    77,950S40-880 costs
    
    
    460,845
    
    
    
    866,140
    
    
    
    1,193,090Patent costs
    
    
    3,986,834
    
    
    
    3,870,873
    
    
    
    3,562,600Borrowing costs
    
    
    311,111
    
    
    
    777,778
    
    
    
    Losses available for offset against future income
    
    
    67,436,505
    
    
    
    58,635,673
    
    
    
    48,714,653Gross deferred income tax assets
    
    
    74,393,492
    
    
    
    64,421,120
    
    
    
    53,755,577Deferred tax liabilities
    
    
    
    
    
    
    
    
    
    
    Foreign exchange differences
    
    
    (744,610
    )
    
    
    29,903
    
    
    
    236,093Interest receivable on available-for-sale financial assets
    
    
    (53,200
    )
    
    
    (1,400
    )
    
    
    (102,540
    )73,595,682
    
    
    
    64,449,623
    
    
    
    53,889,130Potential tax benefit @ 30%
    
    
    22,078,705
    
    
    
    19,334,887
    
    
    
    16,166,739
 F-27




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 8. Income tax (cont.)
 c. Unrecognised temporary differences (cont.)
 ii.
    
    Temporary differences for which deferred tax assets or deferred tax liabilities have not been
recognised in relation to potential capital loss items.
 2008
    
    2007
    
    2006$
    
    $
    
    $Provision  investment in ProCam Machine LLC
    
    
    1,917,387
    
    
    
    1,917,387
    
    
    
    1,917,387Intercompany receivables
    
    
    
    
    
    
    
    
    
    
    Fair value movement in Available-for-Sale financial assets
    
    
    
    
    
    
    
    
    
    
    2,080Impairment  Available-for-sale financial assets
    
    
    990,000
    
    
    
    220,800
    
    
    
    2,907,387
    
    
    
    2,138,187
    
    
    
    1,919,467Potential tax benefit @ 30%
    
    
    872,216
    
    
    
    641,456
    
    
    
    575,840
 d.
    
    Tax losses
  2008
    
    2007
    
    2006$
    
    $
    
    $Australian tax losses
    
    
    49,244,958
    
    
    
    40,579,789
    
    
    
    32,377,936United States federal net operating loss carry-forwards
    
    
    19,284,262
    
    
    
    14,651,197
    
    
    
    15,538,802United States state net operating loss carry-forwards
    
    
    14,693,549
    
    
    
    11,031,293
    
    
    
    11,548,201
   
 9. Current assets  Cash and cash equivalents
 2008
    
    2007
    
    2006$
    
    $
    
    $Cash at bank and on hand
    
    
    1,571,292
    
    
    
    1,727,548
    
    
    
    1,097,448Short term deposits
    
    
    6,000,000
    
    
    
    13,000,000
    
    
    
    22,732,8197,571,292
    
    
    
    14,727,548
    
    
    
    23,830,267
 i.
    
    Cash at bank and on hand
  ii.
    
    Short term deposits
  iii.
    
    Trust Deed minimum cash levels
  Period to:
    
    31 Dec 2006
    
    30 Jun 2007
    
    31 Dec 2007
    
    30 Jun 2008
    
    31 Dec 2008Minimum balance
    
    $
    22.5m
    
    
    $
    19.5m
    
    
    $
    15.0m
    
    
    $
    12.5m
    
    
    $
    7.5m
   F-28




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 10. Current assets  Available-for-sale financial investments
 2008
    
    2007
    
    2006$
    
    $
    
    $Floating rate notes:Opening fair value
    
    
    779,200
    
    
    
    2,002,080
    
    
    
    5,056,140Disposal of investments
    
    
    
    
    
    
    (1,001,040
    )
    
    
    (3,019,480
    )Net movement in equity on revaluation
    
    
    
    
    
    
    (1,040
    )
    
    
    (34,580
    )Impairment loss
    
    
    (769,200
    )
    
    
    (220,800
    )
    
    
    Closing Fair Value
    
    
    10,000
    
    
    
    779,200
    
    
    
    2,002,080
    
 11. Current assets  Trade and other receivables
 2008
    
    2007
    
    2006Note
    
    $
    
    $
    
    $Trade receivables
    
    
    
    
    
    
    1,402,883
    
    
    
    762,625
    
    
    
    154,321Other receivables
    
    
    
    
    
    
    18,988
    
    
    
    4,144
    
    
    
    120,013Security deposits
    
    
    (i)
    
    
    
    480,798
    
    
    
    
    
    
    
    Goods and services tax recoverable
    
    
    
    
    
    
    51,898
    
    
    
    65,576
    
    
    
    46,061Interest receivable
    
    
    
    
    
    
    53,200
    
    
    
    1,400
    
    
    
    102,540Research and development tax concession receivable
    
    
    
    
    
    
    
    
    
    
    390,286
    
    
    
    Prepayments
    
    
    
    
    
    
    336,663
    
    
    
    339,187
    
    
    
    350,195Provision for doubtful debts
    
    
    
    
    
    
    (1,223,838
    )
    
    
    
    
    
    
    1,120,592
    
    
    
    1,563,218
    
    
    
    773,130
 
 (i)
    
    Represents restricted cash deposits held as security for operating and finance lease
commitments.   2008
    
    2007
    
    2006$
    
    $
    
    $Opening balance
    
    
    
    
    
    
    
    
    
    
    Provision created
    
    
    (1,223,838
    )
    
    
    
    
    
    
    Closing balance
    
    
    (1,223,838
    )
    
    
    
    
    
    
    
   F-29




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 12. Non-current assets  Trade and other receivables
 2008
    
    2007
    
    2006Note
    
    $
    
    $
    
    $Trade receivables
    
    (i)
    
    
    
    
    
    
    480,145
    
    
    
    Security deposits
    
    (ii)
    
    
    34,202
    
    
    
    507,757
    
    
    
    510,795Related party receivables:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due from controlled entities
    
    (iii)
    
    
    
    
    
    
    
    
    
    
    Provision for impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due from wholly owned entities
    
    (iii)
    
    
    
    
    
    
    
    
    
    
    Provision for impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,202
    
    
    
    987,902
    
    
    
    510,795
 
 (i)
    
    Due at various intervals from January 2009 to June 2009.(ii)
    
    Represents restricted cash deposits held as security for operating and finance lease
commitments.(iii)
    
    No fixed receivables terms, amounts are due on demand but not expected to be settled within
12 months. F-30




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 13. Non-current assets  Property, plant and equipment
 Leasehold
    
    Plant and
    
    Leased plantimprovements
    
    equipment
    
    and equipment
    
    Total$
    
    $
    
    $
    
    $At 1 January 2006Cost
    
    
    63,384
    
    
    
    492,216
    
    
    
    
    
    
    
    555,600Accumulated depreciation
    
    
    (43,314
    )
    
    
    (280,657
    )
    
    
    
    
    
    
    (323,971
    )Net book amount
    
    
    20,070
    
    
    
    211,559
    
    
    
    
    
    
    
    231,629Year ended 31 December 2006Opening net book amount
    
    
    20,070
    
    
    
    211,559
    
    
    
    
    
    
    
    231,629Additions
    
    
    183,629
    
    
    
    334,490
    
    
    
    306,180
    
    
    
    824,299Disposals
    
    
    (73,173
    )
    
    
    (245,522
    )
    
    
    
    
    
    
    (318,695
    )Depreciation charge
    
    
    (30,459
    )
    
    
    (78,789
    )
    
    
    
    
    
    
    (109,248
    )Closing net book amount
    
    
    100,067
    
    
    
    221,738
    
    
    
    306,180
    
    
    
    627,985At 1 January 2007Cost
    
    
    113,903
    
    
    
    467,786
    
    
    
    306,180
    
    
    
    887,869Accumulated depreciation
    
    
    (13,836
    )
    
    
    (246,048
    )
    
    
    
    
    
    
    (259,884
    )Net book amount
    
    
    100,067
    
    
    
    221,738
    
    
    
    306,180
    
    
    
    627,985Year ended 31 December 2007Opening net book amount
    
    
    100,067
    
    
    
    221,738
    
    
    
    306,180
    
    
    
    627,985Additions
    
    
    81,588
    
    
    
    91,058
    
    
    
    27,393
    
    
    
    200,039Disposals
    
    
    (117
    )
    
    
    (2,673
    )
    
    
    
    
    
    
    (2,790
    )Depreciation charge
    
    
    (49,830
    )
    
    
    (85,932
    )
    
    
    (33,212
    )
    
    
    (168,974
    )Closing net book amount
    
    
    131,708
    
    
    
    224,191
    
    
    
    300,361
    
    
    
    656,260At 1 January 2008Cost
    
    
    188,536
    
    
    
    517,510
    
    
    
    333,573
    
    
    
    1,078,279Accumulated depreciation
    
    
    (56,828
    )
    
    
    (293,319
    )
    
    
    (33,212
    )
    
    
    (422,019
    )Net book amount
    
    
    131,708
    
    
    
    224,191
    
    
    
    300,361
    
    
    
    656,260Year ended 31 December 2008Opening net book amount
    
    
    131,708
    
    
    
    224,191
    
    
    
    300,361
    
    
    
    656,260Additions
    
    
    
    
    
    
    23,774
    
    
    
    
    
    
    
    23,774Disposals
    
    
    
    
    
    
    (1,839
    )
    
    
    
    
    
    
    (1,839
    )Depreciation charge
    
    
    (57,955
    )
    
    
    (72,796
    )
    
    
    (39,090
    )
    
    
    (169,841
    )Closing net book amount
    
    
    73,753
    
    
    
    173,330
    
    
    
    261,271
    
    
    
    508,354At 31 December 2008Cost
    
    
    188,536
    
    
    
    534,595
    
    
    
    333,573
    
    
    
    1,056,704Accumulated depreciation
    
    
    (114,783
    )
    
    
    (361,265
    )
    
    
    (72,302
    )
    
    
    (548,350
    )Net book amount
    
    
    73,753
    
    
    
    173,330
    
    
    
    261,271
    
    
    
    508,354
 F-31




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##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 14. Non-current assets  Intangible assets
 Software
    
    Goodwill
    
    Total$
    
    $
    
    $At 1 January 2006Cost
    
    
    122,889
    
    
    
    1,861,726
    
    
    
    1,984,615Accumulated depreciation
    
    
    (70,951
    )
    
    
    (27,574
    )
    
    
    (98,525
    )Accumulated impairment loss
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    51,938
    
    
    
    
    
    
    
    51,938Year ended 31 December 2006Opening net book amount
    
    
    51,938
    
    
    
    
    
    
    
    51,938Additions
    
    
    137,197
    
    
    
    
    
    
    
    137,197Disposals
    
    
    (1,722
    )
    
    
    
    
    
    
    (1,722
    )Depreciation charge
    
    
    (75,589
    )
    
    
    
    
    
    
    (75,589
    )Closing net book amount
    
    
    111,824
    
    
    
    
    
    
    
    111,824At 1 January 2007Cost
    
    
    211,204
    
    
    
    1,861,726
    
    
    
    2,072,930Accumulated amortisation
    
    
    (99,380
    )
    
    
    (27,574
    )
    
    
    (126,954
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    111,824
    
    
    
    
    
    
    
    111,824Year ended 31 December 2007Opening net book amount
    
    
    111,824
    
    
    
    
    
    
    
    111,824Additions
    
    
    42,847
    
    
    
    
    
    
    
    42,847Amortisation charge
    
    
    (80,522
    )
    
    
    
    
    
    
    (80,522
    )Closing net book amount
    
    
    74,149
    
    
    
    
    
    
    
    74,149At 1 January 2008Cost
    
    
    254,051
    
    
    
    1,861,726
    
    
    
    2,115,777Accumulated amortisation
    
    
    (179,902
    )
    
    
    (27,574
    )
    
    
    (207,476
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    74,149
    
    
    
    
    
    
    
    74,149Year ended 31 December 2008Opening net book amount
    
    
    74,149
    
    
    
    
    
    
    
    74,149Additions
    
    
    
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    
    
    
    
    Amortisation charge
    
    
    (51,065
    )
    
    
    
    
    
    
    (51,065
    )Closing net book amount
    
    
    23,084
    
    
    
    
    
    
    
    23,084At 31 December 2008Cost
    
    
    131,982
    
    
    
    1,861,726
    
    
    
    1,993,708Accumulated amortisation
    
    
    (108,898
    )
    
    
    (27,574
    )
    
    
    (136,472
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    23,084
    
    
    
    
    
    
    
    23,084
   F-32




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 15. Current liabilities  Trade and other payables
 2008
    
    2007
    
    2006$
    
    $
    
    $Trade payables
    
    
    105,618
    
    
    
    228,679
    
    
    
    272,627Deferred revenue
    
    
    
    
    
    
    1,326,985
    
    
    
    620,483Accrued payables
    
    
    1,011,320
    
    
    
    1,013,648
    
    
    
    1,011,2031,116,938
    
    
    
    2,569,312
    
    
    
    1,904,313Related party payables:Directors fees payable *
    
    
    12,500
    
    
    
    35,833
    
    
    
    38,2121,129,438
    
    
    
    2,605,145
    
    
    
    1,942,525
 
 *
    
    Refer Note 23(d) for further details. 
 16. Current liabilities  Conversion derivative
 2008
    
    2007
    
    2006$
    
    $
    
    $Balance at beginning of year
    
    
    5,963,793
    
    
    
    10,811,057
    
    
    
    Initial Valuation
    
    
    
    
    
    
    
    
    
    
    6,584,036Conversion of convertible notes to shares
    
    
    (155,177
    )
    
    
    (2,425,876
    )
    
    
    (242,021
    )Fair value movement
    
    
    (3,620,682
    )
    
    
    (2,421,388
    )
    
    
    4,469,042Balance at end of year
    
    
    2,187,934
    
    
    
    5,963,793
    
    
    
    10,811,057
  
 17. Current liabilities  Interest bearing loans and borrowings
 2008
    
    
    2007
    
    
    2006Note
    
    
    $
    
    
    $
    
    
    $Obligations under finance leases
    
    (i)
    
    
    203,699
    
    
    
    63,907
    
    
    
    50,335Convertible notes
    
    (ii)
    
    
    16,263,964
    
    
    
    12,664,510
    
    
    
    12,926,837Other loan
    
    (ii)
    
    
    2,236,034
    
    
    
    213,030
    
    
    
    252,20418,703,697
    
    
    
    12,941,447
    
    
    
    13,229,376
 
 (i)
    
    Secured (see Note 11), matures 2009. See Note 19 for non-current details.(ii)
    
    Unsecured, matures 2009. i.
    
    Convertible Notes
   F-33




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 17. Current liabilities  Interest bearing loans and borrowings (cont.)
 2008
    
    2007
    
    2006$
    
    $
    
    $Balance at beginning of year
    
    
    12,664,510
    
    
    
    12,926,837
    
    
    
    Fair value of new issues
    
    
    
    
    
    
    
    
    
    
    12,579,524Accretion expense
    
    
    3,236,015
    
    
    
    1,882,440
    
    
    
    460,955Transaction cost amortisation
    
    
    865,465
    
    
    
    865,465
    
    
    
    288,488Conversion of convertible notes to shares
    
    
    (502,026
    )
    
    
    (3,010,232
    )
    
    
    (402,130
    )Balance at end of year
    
    
    16,263,964
    
    
    
    12,664,510
    
    
    
    12,926,837
 2008
    
    2007
    
    2006Number
    
    Number
    
    NumberBalance at beginning of year
    
    
    152,656,884
    
    
    
    197,282,070
    
    
    
    New issues
    
    
    
    
    
    
    
    
    
    
    203,703,704Conversion of convertible notes to shares
    
    
    (5,072,755
    )
    
    
    (44,625,186
    )
    
    
    (6,421,634
    )Balance at end of year
    
    
    147,584,129
    
    
    
    152,656,884
    
    
    
    197,282,070
 
 18. Current liabilities  Provisions
 Onerous LeaseMake Good
    
    Contracts
    
    Payroll
    
    Total$
    
    $
    
    $
    
    $Carrying amount at 1 January 2008
    
    
    29,205
    
    
    
    154,157
    
    
    
    118,799
    
    
    
    302,161Additional provisions recognised
    
    
    
    
    
    
    
    
    
    
    220,216
    
    
    
    220,216Amounts used during the year
    
    
    
    
    
    
    
    
    
    
    (191,516
    )
    
    
    (191,516
    )Foreign Exchange movements
    
    
    2,090
    
    
    
    41,418
    
    
    
    
    
    
    
    43,508Unwinding and discount rate adjustment
    
    
    2,213
    
    
    
    
    
    
    
    
    
    
    
    2,213Carrying amount at 31 December 2008
    
    
    33,508
    
    
    
    195,575
    
    
    
    147,499
    
    
    
    376,582
 i.
    
    Make good provision
  ii.
    
    Onerous Lease Contract
  iii.
    
    Payroll
  iv.
    
    Amounts not expected to be settled within 12 months
  Amounts expected
    
    Amounts expectedto be settled
    
    to be settledwithin 12 Months
    
    after 12 Months$
    
    $Onerous lease contracts
    
    
    
    
    
    
    195,575
 F-34




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 19. Non-current liabilities  Interest bearing loans and borrowings
 2008
    
    2007
    
    2006$
    
    $
    
    $Obligations under finance leases
    
    
    16,783
    
    
    
    215,036
    
    
    
    255,84516,783
    
    
    
    215,036
    
    
    
    255,845
  F-35




---



##### Table of Contents



Metal Storm Limited  Notes to the financial statements (continued)
 
 20. Contributed equity
 2008
    
    
    2007
    
    
    2006$
    
    
    $
    
    
    $Ordinary shares  issued and fully paid
    
    
    66,209,718
    
    
    
    65,428,400
    
    
    
    59,985,634
  Issue
    
    ValueNote
    
    Date
    
    Number of shares
    
    price
    
    $Closing Balance
    
    
    
    
    
    
    31/12/2005
    
    
    
    521,970,978
    
    
    
    
    
    
    
    56,559,039Settle employee bonus
    
    
    
    
    
    
    21/02/2006
    
    
    
    89,396
    
    
    $
    0.280
    
    
    
    25,031Shares issued through plan
    
    (i)
    
    
    22/05/2006
    
    
    
    22,648,691
    
    
    $
    0.133
    
    
    
    3,010,000Transaction costs on share issue
    
    (i)
    
    
    22/05/2006
    
    
    
    
    
    
    
    
    
    
    
    (268,696
    )Exercise listed options
    
    (ii)
    
    
    19/09/2006
    
    
    
    23,249
    
    
    $
    0.150
    
    
    
    3,487Exercise listed options
    
    (ii)
    
    
    20/09/2006
    
    
    
    561
    
    
    $
    0.150
    
    
    
    84Exercise listed options
    
    (ii)
    
    
    21/09/2006
    
    
    
    431
    
    
    $
    0.150
    
    
    
    65Exercise listed options
    
    (ii)
    
    
    26/09/2006
    
    
    
    1,870
    
    
    $
    0.150
    
    
    
    281Exercise listed options
    
    (ii)
    
    
    28/09/2006
    
    
    
    6,315
    
    
    $
    0.150
    
    
    
    947Exercise listed options
    
    (ii)
    
    
    29/09/2006
    
    
    
    3,220
    
    
    $
    0.150
    
    
    
    483Conversion of notes
    
    (iii)
    
    
    02/10/2006
    
    
    
    7,881,096
    
    
    $
    0.110
    
    
    
    652,575Exercise listed options
    
    (ii)
    
    
    05/10/2006
    
    
    
    982
    
    
    $
    0.150
    
    
    
    147Exercise listed options
    
    (ii)
    
    
    09/10/2006
    
    
    
    328
    
    
    $
    0.150
    
    
    
    49Exercise listed options
    
    (ii)
    
    
    16/10/2006
    
    
    
    115
    
    
    $
    0.150
    
    
    
    17Exercise listed options
    
    (ii)
    
    
    25/10/2006
    
    
    
    1,870
    
    
    $
    0.150
    
    
    
    281Exercise listed options
    
    (ii)
    
    
    03/11/2006
    
    
    
    12,292
    
    
    $
    0.150
    
    
    
    1,844Closing Balance
    
    
    
    
    
    
    31/12/2006
    
    
    
    552,641,394
    
    
    
    
    
    
    
    59,985,634Exercise listed options
    
    (ii)
    
    
    04/01/2007
    
    
    
    758
    
    
    $
    0.150
    
    
    
    119Conversion of notes
    
    (iii)
    
    
    04/01/2007
    
    
    
    1,706,709
    
    
    $
    0.135
    
    
    
    205,359Exercise listed options
    
    (ii)
    
    
    16/01/2007
    
    
    
    12,173
    
    
    $
    0.150
    
    
    
    1,826Conversion of notes
    
    (iii)
    
    
    16/01/2007
    
    
    
    14,518,842
    
    
    $
    0.135
    
    
    
    1,746,974Conversion of notes
    
    (iii)
    
    
    17/01/2007
    
    
    
    14,000,000
    
    
    $
    0.135
    
    
    
    1,684,545Exercise listed options
    
    (ii)
    
    
    19/01/2007
    
    
    
    10,983
    
    
    $
    0.150
    
    
    
    1,647Exercise listed options
    
    (ii)
    
    
    24/01/2007
    
    
    
    3,127
    
    
    $
    0.150
    
    
    
    469Exercise listed options
    
    (ii)
    
    
    08/03/2007
    
    
    
    4,684
    
    
    $
    0.150
    
    
    
    703Exercise listed options
    
    (ii)
    
    
    14/03/2007
    
    
    
    7,760
    
    
    $
    0.150
    
    
    
    1,164Conversion of notes
    
    (iii)
    
    
    01/04/2007
    
    
    
    4,807,843
    
    
    $
    0.135
    
    
    
    595,354Exercise listed options
    
    (ii)
    
    
    19/04/2007
    
    
    
    850
    
    
    $
    0.150
    
    
    
    128Exercise listed options
    
    (ii)
    
    
    29/05/2007
    
    
    
    603
    
    
    $
    0.150
    
    
    
    90Conversion of notes
    
    (iii)
    
    
    14/06/2007
    
    
    
    8,775,000
    
    
    $
    0.120
    
    
    
    986,406Exercise listed options
    
    (ii)
    
    
    26/06/2007
    
    
    
    3,188
    
    
    $
    0.150
    
    
    
    478Conversion of notes
    
    (iii)
    
    
    01/07/2007
    
    
    
    136,913
    
    
    $
    0.120
    
    
    
    14,246Exercise listed options
    
    (ii)
    
    
    25/07/2007
    
    
    
    94
    
    
    $
    0.150
    
    
    
    14Conversion of notes
    
    (iii)
    
    
    01/10/2007
    
    
    
    2,049,658
    
    
    $
    0.110
    
    
    
    203,244Closing Balance
    
    
    
    
    
    
    31/12/2007
    
    
    
    598,680,579
    
    
    
    
    
    
    
    65,428,400Conversion of notes
    
    (iii)
    
    
    01/04/2008
    
    
    
    7,683,897
    
    
    $
    0.060
    
    
    
    470,479Shares issued to employees
    
    (i)
    
    
    04/04/2008
    
    
    
    160,000
    
    
    $
    0.060
    
    
    
    9,600Shares issued to consultant
    
    (i)
    
    
    04/04/2008
    
    
    
    1,908,573
    
    
    $
    0.060
    
    
    
    114,514Conversion of notes
    
    (iii)
    
    
    01/07/2008
    
    
    
    1,890,000
    
    
    $
    0.050
    
    
    
    76,028Conversion of notes
    
    (iii)
    
    
    01/10/2008
    
    
    
    3,232,203
    
    
    $
    0.040
    
    
    
    110,697Closing Balance at 31/12/2008
    
    
    
    
    
    
    31/12/2008
    
    
    
    613,555,252
    
    
    
    
    
    
    
    66,209,718
 
 (i)
    
    Shares issued to employees.(ii)
    
    Issued under the 2006 Renounceable Rights Issue Prospectus.(iii)
    
    Convertible notes issued under the 2006 Renounceable Rights Issue Prospectus converted at
the lesser of $0.135 or 90% of the volume weighted average price of shares during the 30
business days immediate preceding the conversion date. F-36




---



##### Table of Contents



Metal Storm Limited  Notes to the financial statements (continued)
 20. Contributed equity (cont.)
  Note
    
    Number of optionsAt 1 January 2006
    
    
    
    
    
    
    Issued under Renounceable Rights Issue
    
    
    (i
    )
    
    
    101,852,055Issued as payment for transactions costs
    
    
    (i
    )
    
    
    65,000,000Issued as payment for Facilitation Agreement
    
    
    
    
    
    
    10,000,000Exercise of options
    
    
    
    
    
    
    (51,231
    )At 31 December 2006
    
    
    
    
    
    
    176,800,824Exercise of options
    
    
    
    
    
    
    (44,220
    )At 31 December 2007
    
    
    
    
    
    
    176,756,604Exercise of options
    
    
    
    
    
    
    At 31 December 2008
    
    
    
    
    
    
    176,756,604
 
 (i)
    
    Issued under the terms of the 28 July 2006 Renounceable Rights Issue Prospectus. 
 21. Reserves
 2008
    
    2007
    
    2006$
    
    $
    
    $Unlisted option reserve
    
    
    2,233,829
    
    
    
    2,221,417
    
    
    
    2,084,868Share based payment reserve
    
    
    14,820
    
    
    
    
    
    
    
    Listed option reserve
    
    
    6,893,566
    
    
    
    6,893,566
    
    
    
    6,893,566Revaluation Reserve
    
    
    
    
    
    
    
    
    
    
    2,080Accumulated translation reserve
    
    
    (106,801
    )
    
    
    (68,559
    )
    
    
    (84,572
    )9,035,414
    
    
    
    9,046,424
    
    
    
    8,895,942Movements:Unlisted option reserveBalance at 1 January
    
    
    2,221,417
    
    
    
    2,084,868
    
    
    
    1,726,182Expenses recognised
    
    
    12,412
    
    
    
    136,549
    
    
    
    358,686Balance at 31 December
    
    
    2,233,829
    
    
    
    2,221,417
    
    
    
    2,084,868Share based payment reserveBalance at 1 January
    
    
    
    
    
    
    
    
    
    
    Expenses recognised
    
    
    14,820
    
    
    
    
    
    
    
    Balance at 31 December
    
    
    14,820
    
    
    
    
    
    
    
    Listed option reserve
    
    
    
    
    
    
    
    
    
    
    Balance at 1 January
    
    
    6,893,566
    
    
    
    6,893,566
    
    
    
    6,893,566Balance at 31 December
    
    
    6,893,566
    
    
    
    6,893,566
    
    
    
    6,893,566Revaluation reserveBalance at 1 January
    
    
    
    
    
    
    2,080
    
    
    
    36,660Net gains
    
    
    
    
    
    
    
    
    
    
    (34,580
    )Realised gains
    
    
    
    
    
    
    (1,040
    )
    
    
    Net movement on revaluation
    
    
    
    
    
    
    (1,040
    )
    
    
    Balance at 31 December
    
    
    
    
    
    
    
    
    
    
    2,080Accumulated translation reserveBalance at 1 January
    
    
    (68,559
    )
    
    
    (84,572
    )
    
    
    (94,785
    )Currency translation differences
    
    
    (38,242
    )
    
    
    16,013
    
    
    
    10,213Balance at 31 December
    
    
    (106,801
    )
    
    
    (68,559
    )
    
    
    (84,572
    )
 F-37




---



##### Table of Contents



Metal Storm Limited  Notes to the financial statements (continued)
 21. Reserves (cont.)
  i.
    
    Unlisted options reserve
  ii.
    
    Share based payments reserve
  iii.
    
    Listed options reserve
  v.
    
    Revaluation reserve
  vi.
    
    Accumulated translation reserve
  
 22. Accumulated losses
 2008
    
    2007
    
    2006$
    
    $
    
    $Balance at 1 January
    
    
    (77,782,394
    )
    
    
    (67,784,244
    )
    
    
    (52,447,234
    )Net loss
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )Balance at 31 December
    
    
    (88,438,397
    )
    
    
    (77,782,394
    )
    
    
    (67,784,244
    )
 
 23. Key management personnel disclosures
 a.
    
    Key management personnel compensation
 2008
    
    2007
    
    2006$
    
    $
    
    $Short-term employee benefits
    
    
    1,414,357
    
    
    
    1,649,029
    
    
    
    2,111,346Post-employment benefits
    
    
    68,494
    
    
    
    56,206
    
    
    
    75,907Termination benefits
    
    
    
    
    
    
    
    
    
    
    304,140Share-based payments
    
    
    10,595
    
    
    
    92,448
    
    
    
    263,0851,493,446
    
    
    
    1,461,173
    
    
    
    2,754,478
 b.
    
    Equity instrument disclosures relating to key management personnel
 i.
    
    Options provided as remuneration and shares issued on exercise of such options
  F-38




---



##### Table of Contents



Metal Storm Limited  Notes to the financial statements (continued)
 23. Key management personnel disclosures (cont.)
 b.
    
    Equity instrument disclosures relating to key management personnel (cont.)
 ii.
    
    Option holdings
  2008
 Balance at start of
    
    Granted as
    
    
    
    
    
    Balance at end of
    
    Vested andName
    
    the year
    
    compensation
    
    Exercised
    
    the year
    
    exercisable
    
    UnvestedDirectorsTJ ODwyer
    
    
    33,819
    
    
    
    
    
    
    
    
    
    
    
    33,819
    
    
    
    33,819
    
    
    
    L J Finniear
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    T W Tappenden
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupP R Wetzig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B I Farmer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    D M Pashen
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J Cronin
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    1,433,819
    
    
    
    
    
    
    
    
    
    
    
    1,433,819
    
    
    
    1,433,819
    
    
    
    
  2007
 Balance at start of
    
    Granted as
    
    
    
    
    
    Balance at end of
    
    Vested andName
    
    the year
    
    compensation
    
    Exercised
    
    the year
    
    exercisable
    
    UnvestedDirectorsTJ ODwyer
    
    
    33,819
    
    
    
    
    
    
    
    
    
    
    
    33,819
    
    
    
    33,819
    
    
    
    L J Finniear
    
    
    
    
    
    
    1,000,000
    
    
    
    
    
    
    
    1,000,000
    
    
    
    500,000
    
    
    
    500,000J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupP R Wetzig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B I Farmer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    J Cronin
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    J D MacDonald
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    500,000
    
    
    
    G L Bergeron III
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    250,000
    
    
    
    1,183,819
    
    
    
    1,000,000
    
    
    
    
    
    
    
    2,183,819
    
    
    
    1,683,819
    
    
    
    500,000
  F-39




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 23. Key management personnel disclosures (cont.)
 b. Equity instrument disclosures relating to key management personnel (cont.)
 ii.
    
    Option holdings (cont.)
 2006
 Balance at
    
    
    
    
    
    
    
    Balancestart of the
    
    Granted as
    
    
    
    
    
    at end of the
    
    Vested andName
    
    year
    
    compensation
    
    Exercised
    
    year
    
    exercisable
    
    UnvestedDirectorsT J ODwyer
    
    
    
    
    
    
    
    
    
    
    33,819
    
    
    
    33,819
    
    
    
    33,819
    
    
    
    W A Downing
    
    
    3,400,000
    
    
    
    490,000
    
    
    
    
    
    
    
    3,890,000
    
    
    
    1,390,000
    
    
    
    2,500,000D A Smith
    
    
    
    
    
    
    625,000
    
    
    
    
    
    
    
    625,000
    
    
    
    625,000
    
    
    
    D L Alspach
    
    
    1,350,000
    
    
    
    450,000
    
    
    
    
    
    
    
    1,800,000
    
    
    
    1,800,000
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupI A Gillespie
    
    
    1,100,000
    
    
    
    
    
    
    
    
    
    
    
    1,100,000
    
    
    
    1,100,000
    
    
    
    J D MacDonald
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    500,000
    
    
    
    G L Bergeron III
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    250,000
    
    
    
    P D Faulkner
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    200,000
    
    
    
    125,000
    
    
    
    75,000J Cronin
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    J C Chahansky
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    6,800,000
    
    
    
    1,840,000
    
    
    
    33,819
    
    
    
    8,673,819
    
    
    
    6,098,819
    
    
    
    2,575,000
 iii.
    
    All vested options are exercisable at the end of the year.iv.
    
    Share holdings
  2008
 Balance at
    
    Changes
    
    Balance atstart of the
    
    during the
    
    end of theyear
    
    year
    
    yearDirectorsT J ODwyer
    
    
    180,855
    
    
    
    
    
    
    
    180,855L J Finniear
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    340,000
    
    
    
    340,000
    
    
    
    680,000J R Nicholls
    
    
    
    
    
    
    
    
    
    
    T W Tappenden
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupP R Wetzig
    
    
    400
    
    
    
    
    
    
    
    400B I Farmer
    
    
    
    
    
    
    100,000
    
    
    
    100,000P D Faulkner
    
    
    
    
    
    
    
    
    
    
    D M Pashen
    
    
    
    
    
    
    100,000
    
    
    
    100,000J Cronin
    
    
    
    
    
    
    
    
    
    
    521,255
    
    
    
    540,000
    
    
    
    1,061,255
 F-40




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 23. Key management personnel disclosures (cont.)
 b. Equity instrument disclosures relating to key management personnel (cont.)
 iv.
    
    Share holdings (cont.)
 2007
 Balance at
    
    
    Changes
    
    
    Balance atstart of the
    
    
    during the
    
    
    end of theyear
    
    
    year
    
    
    yearDirectorsT J ODwyer
    
    
    180,855
    
    
    
    
    
    
    
    180,855L Finniear
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    340,000
    
    
    
    
    
    
    
    340,000J R Nicholls
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupP R Wetzig
    
    
    400
    
    
    
    
    
    
    
    400B I Farmer
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    
    
    
    
    
    
    
    
    J Cronin
    
    
    
    
    
    
    
    
    
    
    J D MacDonald
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    
    
    
    
    521,255
    
    
    
    
    
    
    
    521,255
 2006
 Balance at
    
    Changes
    
    Balance atstart of the
    
    during the
    
    end of theyear
    
    year
    
    yearDirectorsT J ODwyer
    
    
    63,611
    
    
    
    117,244
    
    
    
    180,855W A Downing
    
    
    500,000
    
    
    
    
    
    
    
    500,000D A Smith
    
    
    
    
    
    
    
    
    
    
    D L Alspach
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    340,000
    
    
    
    340,000J R Nicholls
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupI A Gillespie
    
    
    
    
    
    
    89,396
    
    
    
    89,396J D MacDonald
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    
    
    
    
    
    
    
    
    J Cronin
    
    
    
    
    
    
    
    
    
    
    J C Chahansky
    
    
    
    
    
    
    
    
    
    
    563,611
    
    
    
    546,640
    
    
    
    1,110,251
 c. Loans to key management personnel
  F-41




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 23. Key management personnel disclosures (cont.)
 d. Other transactions and balances with key management personnel
 i.
    
    Directors fees
  2008
    
    2007
    
    2006$
    
    $
    
    $T J ODwyer
    
    
    
    
    
    
    6,666
    
    
    
    6,666J M Crunk
    
    
    
    
    
    
    10,000
    
    
    
    14,879P D Jonson
    
    
    
    
    
    
    15,000
    
    
    
    J R Nicholls
    
    
    12,500
    
    
    
    4,167
    
    
    
    T W Tappenden
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    1,667D L Aslpach
    
    
    
    
    
    
    
    
    
    
    15,00012,500
    
    
    
    35,833
    
    
    
    38,212
 
 24. Remuneration of auditors
  a. Audit Services
 2008
    
    2007
    
    2006$
    
    $
    
    $PricewaterhouseCoopersAudit and review of financial reports
    
    
    445,330
    
    
    
    332,000
    
    
    
    Non-PricewaterhouseCoopersAudit and review of financial reports
    
    
    
    
    
    
    353,458
    i
    
    
    387,550
    ii445,330
    
    
    
    685,458
    
    
    
    387,500
 
 i.
    
    Relates to audit services performed during 2007 for the 2006 financial year.ii.
    
    Includes audit services performed during 2006 for the 2005 financial year plus some 2006
audit services. b. Non-audit Services
 2008
    
    2007
    
    2006$
    
    $
    
    $PricewaterhouseCoopersNon-audit services
    
    
    70,750
    
    
    
    
    
    
    
    132,72670,750
    
    
    
    
    
    
    
    132,726
 
 25. Commitments
 a. Operating leases
  2008
    
    2007
    
    2006$
    
    $
    
    $Within one year
    
    
    442,874
    
    
    
    443,858
    
    
    
    459,785After one year but not more than 5 years
    
    
    161,771
    
    
    
    476,093
    
    
    
    966,503More than 5 years
    
    
    
    
    
    
    
    
    
    
    Total minimum lease payments
    
    
    604,645
    
    
    
    919,951
    
    
    
    1,426,288
 F-42




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 25. Commitments (cont.)
 b. Finance leases
   2008
    
    
    2007
    
    
    2006Present
    
    
    
    
    
    
    Present
    
    
    
    
    
    
    PresentMinimum
    
    
    value of
    
    
    Minimum
    
    
    value of
    
    
    Minimum
    
    
    value oflease
    
    
    lease
    
    
    lease
    
    
    lease
    
    
    lease
    
    
    leasepayments
    
    
    payments
    
    
    payments
    
    
    payments
    
    
    payments
    
    
    payments$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Within one year
    
    
    219,517
    
    
    
    203,699
    
    
    
    84,626
    
    
    
    63,907
    
    
    
    76,533
    
    
    
    50,335After one year but
not more than 5
years
    
    
    19,594
    
    
    
    16,783
    
    
    
    232,487
    
    
    
    215,036
    
    
    
    286,075
    
    
    
    255,845Total minimum lease
payments
    
    
    239,111
    
    
    
    220,482
    
    
    
    317,113
    
    
    
    278,943
    
    
    
    362,608
    
    
    
    306,180Less amounts
representing
finance charges
    
    
    (18,629
    )
    
    
    
    
    
    
    (38,170
    )
    
    
    
    
    
    
    (56,428
    )
    
    
    220,432
    
    
    
    220,432
    
    
    
    278,943
    
    
    
    278,943
    
    
    
    306,180
    
    
    
    306,180
 
 26. Related party transactions
 a. Inter-company loans
     
 27. Subsidiaries
 Country
    
    Percentage of equity held by theof
    
    Group
    
    InvestmentIncorporation
    
    2008
    
    2007
    
    2006
    
    2008
    
    2007
    
    2006Metal Storm Inc.
    
    USA
    
    
    49
    %
    
    
    49
    %
    
    
    49
    %
    
    
    2,920
    
    
    
    2,920
    
    
    
    2,920ProCam Machine LLC
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    Metal Storm USA Limited
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    Digigun LLC
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    
  F-43




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 28. Events occurring after the balance sheet date
         
 29. Reconciliation of loss after income tax to net cash inflow from operating activities
 2008
    
    2007
    
    2006$
    
    $
    
    $Net Loss
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )Adjustments for:Depreciation and amortisation
    
    
    220,906
    
    
    
    249,496
    
    
    
    184,837Amortisation of options issued for short term loan
    
    
    
    
    
    
    
    
    
    
    467,000Accretion expense
    
    
    3,236,015
    
    
    
    1,884,443
    
    
    
    757,866Amortisation of transaction costs
    
    
    865,465
    
    
    
    865,465
    
    
    
    Net loss on disposal of plant and equipment
    
    
    1,159
    
    
    
    Net loss on disposal of intangible assets
    
    
    
    
    
    
    
    
    
    
    1,722Foreign exchange differences
    
    
    (132,150
    )
    
    
    17,495
    
    
    
    10,213Fair value of services paid for via issue of options
    
    
    12,412
    
    
    
    136,549
    
    
    
    358,686Fair value of services paid for via issue of shares
    
    
    138,935
    
    
    
    
    
    
    
    25,031Fair value adjustment to conversion derivative
    
    
    (3,620,682
    )
    
    
    (2,421,388
    )
    
    
    4,469,042Fair value adjustment to available-for-sale assets
    
    
    
    
    
    
    (2,080
    )
    
    
    (34,580
    )Impairment loss on available-for-sale assets
    
    
    769,200
    
    
    
    220,800
    
    
    
    Interest received
    
    
    (1,040,700
    )
    
    
    (1,354,047
    )
    
    
    (758,280
    )Other
    
    
    
    
    
    
    758
    
    
    
    607Changes in assets and liabilities:(Increase) / decrease in trade and other receivables
    
    
    1,445,602
    
    
    
    (1,379,346
    )
    
    
    275,352(Increase) / decrease in prepayments
    
    
    2,524
    
    
    
    11,009
    
    
    
    956,889(Decrease) / increase in trade and other payables
    
    
    (1,475,708
    )
    
    
    662,620
    
    
    
    431,492(Decrease) / increase in provisions
    
    
    74,421
    
    
    
    (139,836
    )
    
    
    164,549(Decrease) / increase in other liabilities
    
    
    (21,910
    )
    
    
    (9,684
    )
    
    
    570,245Net cash used in operating activities
    
    
    (10,180,514
    )
    
    
    (11,255,896
    )
    
    
    (7,456,339
    )
 F-44




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 30. Earnings per share
 a. Basic and diluted earnings per share
 2008
    
    2007
    
    2006$
    
    $
    
    $Loss for the year from continuing operations
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,297,754
    )Loss for the year attributable to members of the parent
    
    
    (10,656,003
    )
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )Basic and diluted earnings per share from continuing operations (cents per
share)
    
    
    (1.75
    )
    
    
    (1.69
    )
    
    
    (2.84
    )Basic and diluted earnings per share (cents per share)
    
    
    (1.75
    )
    
    
    (1.69
    )
    
    
    (2.85
    )
 b. Weighted average number of shares used as the denominator
 2008
    
    2007
    
    2006Number
    
    Number
    
    NumberWeighted average number of ordinary shares for basic and diluted earnings per share
    
    
    607,713,288
    
    
    
    590,721,934
    
    
    
    537,796,067
 c. Information concerning the classification of securities
  2008
    
    2007
    
    2006Number
    
    Number
    
    NumberConvertible notes
    
    
    147,584,129
    
    
    
    152,656,884
    
    
    
    173,478,153Listed options
    
    
    176,756,604
    
    
    
    176,756,604
    
    
    
    176,800,824Unlisted options
    
    
    18,989,688
    
    
    
    18,569,688
    
    
    
    18,100,938
 
 31. Share-based payments
 a. Employee share option plan
       b. Options issued under the constitution
  F-45




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 31. Share-based payments (cont.)
 b. Options issued under the constitution (cont.)
          2008
    
    2007
    
    2006Number
    
    WAEP
    
    Number
    
    WAEP
    
    Number
    
    WAEPOutstanding at the beginning of the
year
    
    
    19,044,688
    
    
    
    0.30
    
    
    
    18,100,938
    
    
    
    0.31
    
    
    
    15,463,938
    
    
    
    0.30Granted during the year
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    0.19
    
    
    
    3,547,500
    
    
    
    0.40Expired during the year
    
    
    (55,000
    )
    
    
    0.54
    
    
    
    (56,250
    )
    
    
    0.54
    
    
    
    (910,500
    )
    
    
    0.57Outstanding at the end of the year
    
    
    18,989,688
    
    
    
    0.30
    
    
    
    19,044,688
    
    
    
    0.30
    
    
    
    18,100,938
    
    
    
    0.31Exercisable at the end of the year
    
    
    18,989,688
    
    
    
    0.30
    
    
    
    13,207,188
    
    
    
    0.41
    
    
    
    11,313,438
    
    
    
    0.42
  F-46




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 31. Share-based payments (cont.)
 b. Options issued under the constitution (cont.)
  Exercise Price
    
    2008
    
    2007
    
    2006Expiry Date

    
    $
    
    Number
    
    Number
    
    Number06 February 2007
    
    
    0.556
    
    
    
    
    
    
    
    
    
    
    
    12,50014 April 2007
    
    
    0.556
    
    
    
    
    
    
    
    
    
    
    
    12,50014 September 2007
    
    
    0.556
    
    
    
    
    
    
    
    
    
    
    
    12,50014 December 2007
    
    
    0.556
    
    
    
    
    
    
    
    
    
    
    
    12,50031 December 2007
    
    
    0.040
    
    
    
    
    
    
    
    
    
    
    
    6,25031 March 2008
    
    
    0.556
    
    
    
    
    
    
    
    12,500
    
    
    
    12,50004 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
    
    
    
    125,000
    
    
    
    125,00002 February 2009
    
    
    0.400
    
    
    
    100,000
    
    
    
    100,000
    
    
    
    100,00016 February 2009
    
    
    0.400
    
    
    
    14,438
    
    
    
    14,438
    
    
    
    14,43824 February 2009
    
    
    0.400
    
    
    
    81,250
    
    
    
    81,250
    
    
    
    81,25010 March 2009
    
    
    0.400
    
    
    
    8,250
    
    
    
    8,250
    
    
    
    8,25031 March 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,500
    
    
    
    62,50005 April 2009
    
    
    0.400
    
    
    
    29,500
    
    
    
    29,500
    
    
    
    29,50014 April 2009
    
    
    0.400
    
    
    
    1,100,000
    
    
    
    1,100,000
    
    
    
    1,100,00010 May 2009
    
    
    0.400
    
    
    
    25,000
    
    
    
    25,000
    
    
    
    25,00008 June 2009
    
    
    0.400
    
    
    
    25,000
    
    
    
    25,000
    
    
    
    25,00021 June 2009
    
    
    0.400
    
    
    
    3,225,000
    
    
    
    3,225,000
    
    
    
    3,225,00021 June 2009
    
    
    1.100
    
    
    
    40,000
    
    
    
    40,000
    
    
    
    40,00021 June 2009
    
    
    1.150
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,00030 June 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,500
    
    
    
    62,50005 July 2009
    
    
    0.400
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    75,00014 July 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    125,00004 September 2009
    
    
    0.400
    
    
    
    31,250
    
    
    
    31,250
    
    
    
    31,25030 September 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,500
    
    
    
    62,50014 October 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    125,00024 November 2009
    
    
    0.400
    
    
    
    6,250
    
    
    
    6,250
    
    
    
    6,25004 December 2009
    
    
    0.400
    
    
    
    31,250
    
    
    
    31,250
    
    
    
    31,25007 December 2009
    
    
    0.400
    
    
    
    12,500
    
    
    
    12,500
    
    
    
    12,50031 December 2009
    
    
    0.400
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,00018 March 2010
    
    
    0.400
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,00031 March 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,00021 June 2010
    
    
    0.400
    
    
    
    578,750
    
    
    
    578,750
    
    
    
    578,75024 June 2010
    
    
    0.400
    
    
    
    1,990,000
    
    
    
    1,990,000
    
    
    
    1,990,00030 June 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,00030 September 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,00031 December 2010
    
    
    0.400
    
    
    
    218,750
    
    
    
    218,750
    
    
    
    218,75031 March 2011
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75028 April 2011
    
    
    0.400
    
    
    
    940,000
    
    
    
    940,000
    
    
    
    940,00030 June 2011
    
    
    0.400
    
    
    
    818,750
    
    
    
    818,750
    
    
    
    818,75002 July 2011
    
    
    0.010
    
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,000,00030 September 2011
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    125,00027 October 2011
    
    
    0.400
    
    
    
    506,250
    
    
    
    506,250
    
    
    
    506,250
 F-47




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 31. Share-based payments (cont.)
 b. Options issued under the constitution (cont.)
 Exercise Price
    
    2008
    
    2007
    
    2006Expiry Date

    
    $
    
    Number
    
    Number
    
    Number31 December 2011
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75008 March 2012
    
    
    0.180
    
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    31 March 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75030 June 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75030 September 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    193,75031 December 2012
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    168,75031 March 2013
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    168,75030 June 2013
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    168,75018,989,688
    
    
    
    19,044,688
    
    
    
    18,100,938
  c. Shares issued at the discretion of the Board
   d. Expenses arising from share based payment transactions
 2008
    
    
    2007
    
    
    2006$
    
    
    $
    
    
    $Options expense
    
    
    12,412
    
    
    
    136,549
    
    
    
    358,686Shares granted but not yet issued to employees
    
    
    14,820
    
    
    
    
    
    
    
    Shares granted and issued to employees
    
    
    9,600
    
    
    
    
    
    
    
    36,832
    
    
    
    136,549
    
    
    
    358,686
 F-48




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Constitution of Metal Storm*4.1
    
    [not used]4.2
    
    [not used]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
    
    Employment Agreement of Dr. Lee Finniear***4.5
    
    Letter of Offer to Peter D. Faulkner***4.6
    
    Employment Agreement of Brett Farmer4.7
    
    Employment Agreement of David Pashen4.8
    
    Employment Agreement of Dr. Joe Cronin***4.9
    
    [not used]4.10
    
    Discretionary Share Option Scheme*4.11
    
    Convertible Note Trust Deed dated July 11, 2006***8.0
    
    List of Subsidiaries of Metal Storm Limited12.1
    
    Certification by the Chief Executive Officer of Metal Storm
Limited in accordance with Section 302 of the Sarbanes-Oxley Act12.2
    
    Certification by the Chief Financial Officer of Metal Storm
Limited in accordance with Section 302 of the Sarbanes-Oxley Act13.1
    
    Certification by the Chief Executive Officer in accordance with
Section 906 of the Sarbanes-Oxley Act13.2
    
    Certification by the Chief Financial Officer in accordance with
Section 906 of the Sarbanes-Oxley Act
 
 *
    
    Incorporated by reference from our Registration Statement on Form 20-F filed on December 12,
2001, File No. 000-31212.**
    
    Incorporated by reference from our annual report on Form 20-F filed on July 17, 2006.***
    
    Incorporated by reference from our annual report on Form 20-F filed on May 18, 2007.