##### 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, 2006
 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
 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)
 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 þ
  þ o
  o þ




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##### 



Table of Contents
 Item 1.
    
    Identity of Directors, Senior Management and Advisors
    
    
    4Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    4Item 3.
    
    Key Information
    
    
    4Item 4.
    
    Information on Metal Storm
    
    
    14Item 4A.
    
    Unresolved Staff Comments
    
    
    22Item 5.
    
    Operating and Financial Review and Prospects
    
    
    23Item 6.
    
    Directors, Senior Management and Employees
    
    
    30Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    35Item 8.
    
    Financial Information
    
    
    36Item 9.
    
    The Offer and Listing
    
    
    37Item 10.
    
    Additional Information
    
    
    40Item 11.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    51Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    51Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    52Item 14.
    
    Material Modifications to the Rights of Security Holders and the Use of Proceeds
    
    
    52Item 15.
    
    Controls and Procedures
    
    
    52Item 16A.
    
    Audit Committee Financial Expert
    
    
    53Item 16B.
    
    Code of Ethics
    
    
    53Item 16C.
    
    Principal Accountant Fees and Services
    
    
    53Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    53Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    53Item 17.
    
    Financial Statements
    
    
    54Item 18.
    
    Financial Statements
    
    
    54Item 19.
    
    Exhibits
    
    
    54EX-4.4: EMPLOYMENT AGREEMENT OF DR. LEE FINNIEAREX-4.5: LETTER OF OFFEREX-4.8: EMPLOYMENT AGREEMENT OF DR. JOE CRONINEX-4.11: CONVERTIBLE NOTE TRUST DEEDEX-8.0: LIST OF SUBSIDIARIESEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONEX-13.2: CERTIFICATION
  2




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CURRENCY OF PRESENTATION AND EXCHANGE RATES
    AtPeriod
    
    AverageEnd
    
    Rate(1)
    
    High
    
    LowYear ended December 31,2002
    
    
    0.5625
    
    
    
    0.5448
    
    
    
    0.5748
    
    
    
    0.50602003
    
    
    0.7520
    
    
    
    0.6589
    
    
    
    0.7520
    
    
    
    0.56292004
    
    
    0.7805
    
    
    
    0.7384
    
    
    
    0.7979
    
    
    
    0.68402005
    
    
    0.7342
    
    
    
    0.7620
    
    
    
    0.7974
    
    
    
    0.72612006
    
    
    0.7884
    
    
    
    0.7535
    
    
    
    0.7914
    
    
    
    0.7056MonthJanuary 2007
    
    
    0.7740
    
    
    
    0.7826
    
    
    
    0.7960
    
    
    
    0.7724February 2007
    
    
    0.7892
    
    
    
    0.7830
    
    
    
    0.7933
    
    
    
    0.7726March 2007
    
    
    0.8104
    
    
    
    0.7932
    
    
    
    0.8104
    
    
    
    0.7728April 2007
    
    
    0.8326
    
    
    
    0.8273
    
    
    
    0.8367
    
    
    
    0.8131
 
 (1)
    
    Determined by averaging noon buying rates on the last day of each full month during the
period. FORWARD-LOOKING STATEMENTS
  3




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 A. Selected Financial Data
      As of and for the year ended December 31,2006
    
    2005
    
    2004A$
    
    A$
    
    A$Income Statement data in accordance with A-IFRS:Revenue
    
    
    2,339,310
    
    
    
    830,645
    
    
    
    837,201Expenses
    
    
    (14,229,339
    )
    
    
    (10,107,359
    )
    
    
    (12,382,001
    )Loss from continuing operations
    
    
    (11,890,029
    )
    
    
    (9,276,714
    )
    
    
    (11,544,800
    )Finance costs
    
    
    (2,295,847
    )
    
    
    (35,496
    )
    
    
    (43,568
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    Loss after tax from continuing operations
    
    
    (14,185,876
    )
    
    
    (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
    
    
    (14,225,132
    )
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Basic and diluted loss per share(1)
    
    
    (0.0265
    )
    
    
    (0.0209
    )
    
    
    (0.0262
    )Weighted average ordinary number of shares outstanding
    
    
    537,796,067
    
    
    
    521,970,978
    
    
    
    500,886,725Income Statement data in accordance with U.S. GAAP:Revenue
    
    
    1,190,923
    
    
    
    230,743
    
    
    
    42,636Loss attributable to members of the parent
    
    
    (11,090,358
    )
    
    
    (12,016,844
    )
    
    
    (13,121,233
    )Basic and diluted loss per share
    
    
    (0.0206
    )
    
    
    (0.0230
    )
    
    
    (0.0262
    )Balance Sheet data in accordance with A-IFRS:Total current assets
    
    
    26,605,477
    
    
    
    7,115,554
    
    
    
    17,349,971Total assets
    
    
    27,856,081
    
    
    
    7,429,721
    
    
    
    20,327,317Total current liabilities
    
    
    25,098,731
    
    
    
    1,564,696
    
    
    
    3,507,365Long term obligations (including finance leases)
    
    
    333,794
    
    
    
    85,163
    
    
    
    619,959Total liabilities
    
    
    25,432,525
    
    
    
    1,649,859
    
    
    
    4,127,324Contributed equity
    
    
    60,199,980
    
    
    
    56,559,039
    
    
    
    56,559,039
 4




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As of and for the year ended December 31,2006
    
    2005
    
    2004A$
    
    A$
    
    A$Total equity
    
    
    2,423,556
    
    
    
    5,779,862
    
    
    
    16,199,993Total equity
in accordance with U.S. GAAP:
    
    
    8,291,313
    
    
    
    5,151,734
    
    
    
    16,674,109Other Financial Data:Dividends per share
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Net loss per ordinary share  basic and diluted is calculated as net loss for the period
divided by adjusted weighted average number of ordinary shares outstanding for the same
period.  As of and for the year endedDecember 31,2003
    
    2002A$
    
    A$Amounts in accordance with U.S. GAAPIncome Statement data:Total operating income
    
    
    348,570
    
    
    
    22,711Total operating expenses
    
    
    (8,153,088
    )
    
    
    (9,949,420
    )Loss from operations
    
    
    (7,804,518
    )
    
    
    (9,926,709
    )Total other income
    
    
    997,985
    
    
    
    52,272Loss after tax from discontinued operations
    
    
    (373,244
    )
    
    
    Net loss
    
    
    (7,179,777
    )
    
    
    (9,874,437
    )Net loss per ordinary share  basic and diluted (1)
    
    
    (0.016
    )
    
    
    (0.023
    )Weighted average ordinary number of shares
outstanding
    
    
    442,525,034
    
    
    
    428,974,260Balance Sheet data:Total current assets
    
    
    9,451,860
    
    
    
    8,661,303Total current liabilities
    
    
    4,100,085
    
    
    
    2,184,357Total assets
    
    
    15,101,660
    
    
    
    8,825,556Ordinary share capital
    
    
    31,506,515
    
    
    
    29,615,104Total shareholders equity
    
    
    9,353,392
    
    
    
    6,578,228Other financial data:Dividends per share
    
    
    
    
    
    
    
 
 (1)
    
    Net loss per ordinary share  basic and diluted is calculated as net loss for the period
divided by adjusted weighted average number of ordinary shares outstanding for the same
period. B. Capitalization and Indebtedness
  C. Reasons for Offer and Use of Proceeds
  D. Risk Factors
 We may be required to redeem convertible notes before maturity, which redemption could cause us
to become insolvent.
  5




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TM
    TM
      We may need additional capital and may not be able to raise additional capital on favorable terms,
if at all.
    6




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We are in the product engineering phase and do not yet have any product for sale based on our
core technology.
  We cannot be certain of market acceptance of our technology or the rate of any market acceptance.
  We are dependent on retaining key personnel.
  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.
  7




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We may not have adequate protection for our intellectual property.
     
    
    any of the pending or future patent applications filed by us or on our behalf will be approved;
    
    we will develop any additional proprietary products or processes that are patentable; or
    
    third parties will not independently develop similar products or processes, duplicate any
of the products or processes we have or are developing relating to our technology, or design
around the patents we own with competitive advantages.
  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.
   8




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The Australian and U.S. governments may take action on patent applications and patents.
       We have contracted to perform some systems integration work at a fixed price, which could turn out
to be less than our costs.
  There are potential adverse effects from competition and technological changes.
   9




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There may be reductions or changes in military expenditures.
  We are subject to government regulation.
     There are risks inherent in U.S. government contracts.
  
    
    Contract Termination
  
    
    Loss of Appropriations
  10




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##### Table of Contents




    
    Procurement and Other Related Laws and Regulations
  
    
    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.
  11




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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;
    
    our inability to meet the key commercialization objectives set forth in the Trust Deed in
connection with our 2006 Rights Offer; 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.
   12




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Our ADR holders are not shareholders and do not have shareholder rights.
    13




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Item 4. Information on Metal Storm
 A. History and Development of Metal Storm
       B. Business Overview
  Strategy
   
    
    completing the engineering of current Metal Storm 40mm weapon system components to a
standard suitable for certification by relevant government agencies;
    
    building and demonstrating new and selected existing weapon prototypes designed to
attract demand for early adoption by end-users;
 14




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
    
    producing weapon prototypes to customer specifications in funded programs;
    
    obtaining certification of components and product prototypes by relevant government
agencies, particularly the U.S. Department of Defense;
    
    merging our technology into fully integrated weapons systems that are adaptable to a
variety of applications in current demand by military customers;
    
    securing customer production orders for certified products; and
    
    using the successful commercialization of 40mm weapons systems as a platform from which
we can then branch out into other weapons categories and other applications of our core
technology.
    Recent achievements
  
    
    the successful test firing of high explosive, enhanced blast explosive and high
explosive air burst munitions in conjunction with ST Kinetics in February 2006;
    
    the successful test firing of the Redback TM Weapon System and munitions in
collaboration with Electro Optic Systems and ST Kinetics in February 2006, March 2007 and
April 2007;
    
    the initial test firing and trials of a prototype high explosive 40mm grenade assembly
developed in collaboration with ARDEC in March 2006;
    
    successful live fire demonstration from an unmanned aerial vehicle in collaboration with
Dragonfly Pictures Inc. in September 2006;
    
    ongoing development and firings of the three Shot Grenade Launcher; and
    
    ongoing refinement and development of munitions for use in all Metal Storm 40mm weapons systems.
 Engineering
  15




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##### Table of Contents



TM
 Business Development
    Technology
      
    
    electronically programmable rates of fire from single shots to ultra-rapid rates;
    
    no moving parts, resulting in increased reliability and availability because there is
less maintenance required and decreased possibility of malfunction;
    
    increased firepower to weight ratio resulting in a lighter weapon with greater firepower
compared to conventional weapons;
    
    modular pods that could operate as a complete weapon system in one container;
    
    100% electronic operation;
    
    the potential of grouping multiple calibers and multiple lethalities in one gun allowing
the user to vary the use to a specific situation;
    
    numerous hybrid configurations and capability for special applications; and
    
    fast second round strike capability before recoil effect.
 16




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Internal Product Development
 TM
 Redback TM
 TM TM
 TM TM
  3GL
   Fireworks
  Systems for Unmanned Vehicles
    17




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Handgun
   Low Velocity and Less Than Lethal munitions development  U.S. Army ARDEC
    Low Velocity 40mm launcher  Systems Upgrade
   18




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Electronically Initiated Munitions Development  ST Kinetics
   External Development Programs
  U.S. Navy SBIR Contract  Metal Storm Active Protection System
  U.S. Army SBIR Contract  Metal Storm Crowd Control System
  StarChase Contract  Pursuit Management System Phase II Lead System Integrator
  U.S. Marine Corps  18mm Stacked Round Firing System
  U.S. Army  Explosive Ordinance Disposal
  19




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Research Agreements with Government Agencies
  Competition
    Regulation
  Australia
    United States
   20




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##### Table of Contents



Intellectual Property
   
    
    stacked projectile delivery systems and stacked projectile weapon systems, in particular
the sealing, reload and ignition thereof;
    
    technology related to encoding weapons to permit authorized access only;
    
    ammunition and projectiles;
    
    electronic firing technology;
    
    area denial;
    
    fire fighting;
    
    increased first shot kill probability;
    
    fireworks;
    
    missile defense and target interception;
    
    directional control of missiles;
    
    unmanned aerial vehicle weaponization;
    
    adapting conventional munitions to Metal Storm configuration; and
    
    selectable kinetic energy weapons.
  
    
    22 granted U.S. patents and 16 pending U.S. patent applications including two allowed applications;
    
    23 granted Australian patents and 14 pending Australian patent applications including one allowed application; and
    
    127 other patents granted outside the United States and Australia and 215 pending
applications outside the United States and Australia including 11 allowed applications
(including 19 pending and one allowed European application).
 Raw Materials
  Seasonality
  C. Organizational Structure
  21




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D. Property, Plant and Equipment
   
 Item 4A. Unresolved Staff Comments
  22




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Item 5. Operating and Financial Review and Prospects
  A. Operating Results
 Overview
     Where We Derive Our Revenue
  Critical Accounting Policies
   23




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Revenue Recognition
  (i) Sale of goods
  (ii) Rendering of services
  (iii) Construction contracts
    Share-based payment transactions
         24




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Comparison of Annual Results of Operations
 2006 compared with 2005
 Revenue.
  Expenses.
 25




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
    
    Employee expenses increased A$873,708 (19.6%) from
A$4,468,640 in 2005 to A$5,342,348 in 2006, primarily due
to the costs of additional staff employed throughout the
year and executive bonuses.
    
    Professional fees decreased A$42,456 (2.4%) from
A$1,774,369 in 2005 to A$1,731,913 in 2006 due to cost
savings achieved through performing more work in-house
rather than using external consultants. These savings were
off-set by professional fees of A$399,141 associated with a
proposed capital raising that commenced in 2005 and was
terminated in 2006.
    
    Research and development expenses decreased A$156,342
(13.6%) from A$1,146,364 in 2005 to A$990,022 in 2006
reflecting the change in focus of the U.S. office from
research and development on our internal programs to
contract performance.
    
    Administrative expenses decreased A$97,284 (10.5%) from
A$928,931 in 2005 to A$831,647 in 2006 primarily due to a
aggressive cost saving activities.
    
    Facilities and equipment expenses increased A$218,950
(41.9%) from A$522,693 in 2005 to A$741,643 in 2006
primarily due to higher costs required to maintain two
facilities in Brisbane for six months while a new
engineering facility was being established plus higher
depreciation costs resulting from the purchase of new plant
and equipment.
    
    Travel and entertainment expenses increased A$89,573
(20.6%) from A$433,859 in 2005 to A$523,432 in 2006
primarily due to an increase in travel costs associated
with research and development activities and A$65,200 of
travel costs relating to a proposed capital raising that
commenced in 2005 and was terminated in 2006.
    
    Public relations and compliance expenses decreased
A$155,580 (31.4%) from A$494,786 in 2005 to A$339,206
primarily due to savings achieved through more work
performed in-house rather than using external consultants.
    
    In 2006 we had an A$3,244,330 embedded derivative expense
that reflects the movement in the fair value of the
conversion option embedded in the convertible notes issued
in 2006. The fair value of the liability component of
convertible notes is carried as a current liability on an
amortized cost basis until extinguished on conversion or
redemption.
 Finance Cost.
 Net Loss.
 2005 compared with 2004
 Revenue.
 Expenses.
 
    
    Employee expenses increased A$717,181 (19.1%) from
A$3,751,459 in 2004 to A$4,468,640 in 2005, primarily due
to a termination payment of A$500,000 made to Mr. J M
ODwyer upon his resignation in 2005 plus the costs of
additional engineering staff in Australia.
    
    Professional fees decreased A$247,204 (12.2%) from
A$2,021,573 in 2004 to A$1,774,369 in 2005 due to cost
savings achieved through performing more work in-house
rather than using external consultants.
    
    Research and development expenses increased A$134,257
(10.5%) from A$1,280,621 in 2004 to A$1,146,364 in 2005
principally due to higher research and development activity
in both the United States and Australia related to our core
40mm technology.
    
    Administrative expenses decreased A$397,966 (30.0%) from
A$1,326,897 in 2004 to A$928,931 in 2005 primarily due to
 26




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aggressive cost saving activities.
 
    
    Facilities and equipment expenses increased A$103,579
(24.7%) from A$419,114 in 2004 to A$522,693 in 2005
primarily due to higher rental costs at our Arlington,
Virginia office, which was expanded in late 2004 to support
our greater research and development and business
development focus.
    
    Travel and entertainment expenses decreased A$362,752
(45.5%) from A$796,611 in 2004 to A$433,859 in 2005
primarily due to an increased focus on cost savings during
the year, particularly in lower travel expenses.
    
    Public relations and compliance expenses decreased
A$122,924 (19.9%) from A$617,710 in 2004 to A$494,786 in
2005 primarily due to savings achieved through more work
performed in-house rather than using external consultants.
    
    In 2004 we had an A$1,834,152 impairment loss on the
goodwill arising from the acquisition of ProCam. We had no
goodwill impairment in 2005.
 Net Loss.
 Effects of Currency Fluctuations
    B. Liquidity and Capital Resources
 Overview
   Year ended December 312006
    
    2005A$
    
    A$Net cash used in operating activities
    
    
    (7,456,339
    )
    
    
    (10,534,561
    )Net cash provided by (used in) investing activities
    
    
    2,603,896
    
    
    
    (1,470,492
    )Net cash provided by (used in) financing activities
    
    
    28,046,849
    
    
    
    (2,466,723
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    (1,959
    )Net movement in cash and cash equivalents
    
    
    23,194,406
    
    
    
    (14,471,776
    )
   27




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Borrowings
      Other Material Commitments
  Future Cash Needs
  C. Research and Development: Patents and Licenses
  D. Trend Information
  28




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E. Off-Balance sheet arrangements
  F. Tabular disclosure of contractual obligations
  Payments due by periodTotal
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    A$
    
    
    1 Year
    
    
    1  3 Years
    
    
    4  5 Years
    
    
    5 YearsCapital (Finance) Lease Obligations
    
    
    306,180
    
    
    
    50,335
    
    
    
    255,845
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    1,200,146
    
    
    
    380,269
    
    
    
    819,877
    
    
    
    
    
    
    
    Convertible Note Obligation
    
    
    26,633,079
    
    
    
    
    
    
    
    26,633,079
    
    
    
    
    
    
    
    Total
    
    
    28,139,405
    
    
    
    430,604
    
    
    
    27,708,801
    
    
    
    
    
    
    
    
 29




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Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  Name
    
    PositionTerence J. ODwyer
    
    ChairmanJames M. Crunk
    
    DirectorDr. Peter D. Jonson
    
    DirectorJohn R. Nicholls
    
    DirectorDr. Lee J. Finniear
    
    Chief Executive OfficerPeter D. Faulkner
    
    Senior Vice-President  Director of U.S. OperationsDr. Joe Cronin
    
    Managing EngineerPeter R. Wetzig
    
    Company Secretary
 Terence J. ODwyer.
 James M. Crunk.
 Dr. Peter D. Jonson.
 John R. Nicholls.
 Dr. Lee J. Finniear.
 Peter D. Faulkner.
 Dr. Joe Cronin.
 30




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Peter R. Wetzig.
 B. Compensation
   Primary BenefitsNon
    
    
    
    
    
    
    Post
    
    
    Share Based
    
    
    TerminationMonetary
    
    
    
    
    
    
    Employment
    
    
    Payment
    
    
    Benefits
    
    
    Total
    
    
    TotalDecember 31, 2006
    
    Salary & Fees
    
    
    Cash Bonus
    
    
    Benefits
    
    
    Other
    
    
    Superannuation
    
    

Options
(2)
    
    
    Termination
    
    
    Remuneration
    
    
    Performance RelatedA$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    %T J ODwyer
    
    
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    W A
Downing(1)
    
    
    105,108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174,617
    
    
    
    
    
    
    
    279,725
    
    
    
    D L Alspach
    
    
    32,515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,515
    
    
    
    J M Crunk
    
    
    93,210
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,210
    
    
    
    P D Jonson
    
    
    53,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,750
    
    
    
    J R Nicholls
    
    
    16,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,322
    
    
    
    B S McComish
    
    
    31,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,667
    
    
    
    D A
Smith(4)
    
    
    114,219
    
    
    
    
    
    
    
    3,774
    
    
    
    2,847
    
    
    
    
    
    
    
    36,625
    
    
    
    241,258
    
    
    
    398,723
    
    
    
    J D
MacDonald(3)
    
    
    214,438
    
    
    
    69,188
    
    
    
    
    
    
    
    
    
    
    
    25,207
    
    
    
    28,214
    
    
    
    
    
    
    
    337,047
    
    
    
    20.5
    %G L Bergeron III
    
    
    256,833
    
    
    
    77,453
    
    
    
    6,671
    
    
    
    14,088
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355,045
    
    
    
    21.8
    %(3)(7)(8)P D Faulkner
    
    
    235,803
    
    
    
    12,409
    
    
    
    5,112
    
    
    
    10,451
    
    
    
    
    
    
    
    8,998
    
    
    
    
    
    
    
    272,773
    
    
    
    4.5
    %(3)(7)(8)J
Cronin(3)(6)
    
    
    153,044
    
    
    
    23,063
    
    
    
    15,939
    
    
    
    
    
    
    
    16,543
    
    
    
    11,286
    
    
    
    
    
    
    
    219,875
    
    
    
    10.5
    %I A
Gillespie(3)
    
    
    224,802
    
    
    
    165,500
    
    
    
    
    
    
    
    
    
    
    
    34,157
    
    
    
    
    
    
    
    
    
    
    
    424,459
    
    
    
    39.0
    %J C
Chehansky(5)(7)(8)
    
    
    88,611
    
    
    
    
    
    
    
    3,474
    
    
    
    1,055
    
    
    
    
    
    
    
    3,345
    
    
    
    62,882
    
    
    
    159,367
    
    
    
    Totals
    
    
    1,700,322
    
    
    
    347,613
    
    
    
    34,970
    
    
    
    28,441
    
    
    
    75,907
    
    
    
    263,085
    
    
    
    304,140
    
    
    
    2,754,478
    
    
    
    12.6
    %
 
 Footnotes:
 1.
    
    In 2003, General W. Downing entered into a call option agreement with J. M. ODwyer, Metal
Storms major shareholder. Under this agreement, General Downing has the option to acquire
2,000,000 ordinary shares owned and held by J. M. ODwyer if he holds office as a Director for a
continuous period of three years. The value of this right has been amortized over the three year
vesting period. Although General Downing resigned in November 2006, he has fulfilled the
requirements of this agreement.2.
    
    Options are valued using the Black-Scholes option pricing model. See Note 14 of the financial
report.3.
    
    Bonuses were achieved for year ended December 31, 2005 however, were paid in 2006 when funds
were available.4.
    
    Under a Deed of Termination, Mr. Smith (who resigned as Chief Executive Officer in May 2006)
was paid three months salary in lieu of notice, and six months salary as a separation payment.5.
    
    Under a Deed of Termination, Mr. Chehansky (who resigned in 2006) was paid three months salary
in lieu of notice.6.
    
    Non-monetary benefit consists of a novated motor vehicle lease.7.
    
    Non-monetary benefit consists of medical insurance cover.8.
    
    Other short-term benefit consists of life insurance cover.  31




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##### Table of Contents



Granted
    
    
    Terms and Conditions for each Grant
    
    
    VestedFair Value perDecember 31,
    
    
    
    
    
    
    
    
    
    Option
    
    

    Exercise Price2006
    
    Number
    
    
    Grant Date
    
    
    (A$)(1)
    
    
    (A$)
    
    
    Expiry Date
    
    
    First Exercise Date
    
    
    Last Exercise Date
    
    
    Number
    
    
    %DirectorsT J ODwyer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Downing
    
    
    490,000
    
    
    
    28/04/06
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    
    28/04/11
    
    
    
    28/04/06
    
    
    
    28/04/11
    
    
    
    490,000
    
    
    
    100.0D L Alspach
    
    
    450,000
    
    
    
    28/04/06
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    
    28/04/11
    
    
    
    28/04/06
    
    
    
    28/04/11
    
    
    
    450,000
    
    
    
    100.0DA Smith
    
    
    125,000
    
    
    
    28/04/06
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    
    30/06/11
    
    
    
    30/06/06
    
    
    
    30/06/11
    
    
    
    125,000
    
    
    
    100.0D A Smith
    
    
    125,000
    
    
    
    28/04/06
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    
    30/06/11
    
    
    
    30/06/06
    
    
    
    30/06/11
    
    
    
    125,000
    
    
    
    100.0D A Smith
    
    
    125,000
    
    
    
    28/04/06
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    
    30/06/11
    
    
    
    30/06/06
    
    
    
    30/06/11
    
    
    
    125,000
    
    
    
    100.0D A Smith
    
    
    125,000
    
    
    
    28/04/06
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    
    30/06/11
    
    
    
    30/06/06
    
    
    
    30/06/11
    
    
    
    125,000
    
    
    
    100.0D A Smith
    
    
    125,000
    
    
    
    28/04/06
    
    
    $
    0.06
    
    
    $
    0.40
    
    
    
    30/06/11
    
    
    
    30/06/06
    
    
    
    30/06/11
    
    
    
    125,000
    
    
    
    100.0P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExecutivesJ D MacDonald
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    I A Gillespie
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J Cronin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    25,000
    
    
    
    06/02/06
    
    
    $
    0.09
    
    
    $
    0.40
    
    
    
    31/12/10
    
    
    
    06/02/06
    
    
    
    31/12/10
    
    
    
    25,000
    
    
    
    100.025,000
    
    
    
    06/02/06
    
    
    $
    0.09
    
    
    $
    0.40
    
    
    
    31/03/11
    
    
    
    31/03/06
    
    
    
    31/03/11
    
    
    
    25,000
    
    
    
    100.025,000
    
    
    
    06/02/06
    
    
    $
    0.09
    
    
    $
    0.40
    
    
    
    30/06/11
    
    
    
    30/06/06
    
    
    
    30/06/11
    
    
    
    25,000
    
    
    
    100.025,000
    
    
    
    06/02/06
    
    
    $
    0.09
    
    
    $
    0.40
    
    
    
    30/09/11
    
    
    
    30/09/06
    
    
    
    30/09/11
    
    
    
    25,000
    
    
    
    100.025,000
    
    
    
    06/02/06
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    
    31/12/11
    
    
    
    31/12/06
    
    
    
    31/12/11
    
    
    
    25,000
    
    
    
    100.025,000
    
    
    
    06/02/06
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    
    31/03/12
    
    
    
    31/03/07
    
    
    
    31/03/12
    
    
    
    
    
    
    
    25,000
    
    
    
    06/02/06
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    
    30/06/12
    
    
    
    30/06/07
    
    
    
    30/06/12
    
    
    
    
    
    
    
    25,000
    
    
    
    06/02/06
    
    
    $
    0.11
    
    
    $
    0.40
    
    
    
    30/09/12
    
    
    
    30/09/07
    
    
    
    30/09/12
    
    
    
    
    
    
    
    J C Chehansky
    
    
    37,500
    
    
    
    26/05/06
    
    
    $
    0.04
    
    
    $
    0.40
    
    
    
    31/03/11
    
    
    
    26/05/06
    
    
    
    31/03/11
    
    
    
    37,500
    
    
    
    100.037,500
    
    
    
    26/05/06
    
    
    $
    0.05
    
    
    $
    0.40
    
    
    
    30/06/11
    
    
    
    30/06/06
    
    
    
    30/06/11
    
    
    
    37,500
    
    
    
    100.0Total
    
    
    1,840,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,765,000
 
 (1)
    
    See Note 14 to the accompanying consolidated financial statements for a discussion of our
share-based payment plan. 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;
 32




---



##### Table of Contents




    
    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.
  D. Employees
  33




---



##### Table of Contents



E. Share Ownership
  Number of OptionsNumber of Shares Held
    
    ExercisableT. J ODwyer
    
    
    180,855
    (2)
    
    
    33,819
    (4)J. M Crunk
    
    
    32,714
    (3)
    
    
    P. D. Jonson
    
    
    340,000
    
    
    
    J. R. Nicholls(5)
    
    
    
    
    
    
    L. J. Finniear
    
    
    
    
    
    
    P. D. Faulkner
    
    
    
    
    
    
    150,000J. Cronin
    
    
    
    
    
    
    200,000P. R. Wetzig
    
    
    400
    
    
    
    
 
 (1)
    
    At April 30, 2007, the number of outstanding shares was 587,715,123. There are 18,000,938
unlisted share options and 176,760,489 options quoted on Australian Securities Exchange.(2)
    
    101,233 shares are owned by Mr. Terence J. ODwyer and Mrs. P.M. ODwyer, 79,622 shares
are owned by Louclaben Pty Ltd in trust for the ODwyer Family Account.(3)
    
    Shares are held in the name of Morgan Stanley Dean Witter, Profit Share Plan, for the
benefit of James M. Crunk.(4)
    
    Options were issued in connection with the Rights Offer and are quoted and may be traded
on Australian Securities Exchange.(5)
    
    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. At April 30, 2007,
Citicorp Nominees Pty Ltd held 20,678,097 ordinary shares, 132,282,922 quoted convertible notes and
122,150,515 quoted options on behalf of Harmony Investment Fund Limited.  34




---



##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 A. Major Shareholders
    Number of OrdinaryName of Shareholder
    
    Shares
    
    Percentage of ClassJames Michael ODwyer(1)
    
    
    199,804,908
    
    
    
    34.0
    %
 
 (1)
    
    131,554,681 shares are owned by Mr. J.M. ODwyer, 68,250,122 shares are owned by ODwyer
Investments Pty Ltd as trustee for the ODwyer Family Discretionary Trust and 105 shares owned by
Rhonda Clare ODwyer in trust for Mr. J.M. ODwyer.    B. Related Party Transactions
  C. Interest of Experts and Counsel
  35




---



##### Table of Contents



Item 8. Financial Information
 A. Consolidated Financial Statements and Other Financial Information
  Legal Proceedings
  Dividends
  B. Significant Changes
  36




---



##### 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, 2006First Quarter
    
    $
    0.28
    
    
    $
    0.18Second Quarter
    
    $
    0.21
    
    
    $
    0.12Third Quarter
    
    $
    0.16
    
    
    $
    0.10Fourth Quarter
    
    $
    0.17
    
    
    $
    0.13December 31, 2005First Quarter
    
    $
    0.27
    
    
    $
    0.17Second Quarter
    
    $
    0.18
    
    
    $
    0.10Third Quarter
    
    $
    0.31
    
    
    $
    0.12Fourth Quarter
    
    $
    0.29
    
    
    $
    0.19December 31, 2004Annual
    
    $
    0.66
    
    
    $
    0.20December 31, 2003Annual
    
    $
    0.68
    
    
    $
    0.32December 31, 2002Annual
    
    $
    1.58
    
    
    $
    0.42
 Price PerOrdinary ShareHigh
    
    LowMonth Ended
    
    A$
    
    A$April 2007
    
    $
    0.17
    
    
    $
    0.14March 2007
    
    $
    0.17
    
    
    $
    0.16February 2007
    
    $
    0.20
    
    
    $
    0.17January 2007
    
    $
    0.21
    
    
    $
    0.16December 2006
    
    $
    0.17
    
    
    $
    0.14November 2006
    
    $
    0.16
    
    
    $
    0.14
 Nasdaq SmallCap Market  American Depositary Receipts
  Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    US$
    
    US$December 31, 2006First Quarter
    
    $
    4.04
    
    
    $
    2.32Second Quarter
    
    $
    3.05
    
    
    $
    1.75Third Quarter
    
    $
    2.40
    
    
    $
    1.80Fourth Quarter
    
    $
    3.20
    
    
    $
    2.00December 31, 2005First Quarter
    
    $
    4.26
    
    
    $
    2.55Second Quarter
    
    $
    3.00
    
    
    $
    1.75
 37




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##### Table of Contents



Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    US$
    
    US$Third Quarter
    
    $
    4.84
    
    
    $
    1.81Fourth Quarter
    
    $
    4.70
    
    
    $
    2.76December 31, 2004Annual
    
    $
    14.47
    
    
    $
    2.95December 31, 2003Annual
    
    $
    8.53
    
    
    $
    3.97December 31, 2002Annual
    
    $
    15.77
    
    
    $
    4.90
 Price PerOrdinary ShareHigh
    
    LowMonth Ended
    
    US$
    
    US$April 2007
    
    $
    2.55
    
    
    $
    2.05March 2007
    
    $
    2.90
    
    
    $
    2.15February 2007
    
    $
    3.01
    
    
    $
    2.52January 2007
    
    $
    3.38
    
    
    $
    2.50
 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 2006. During most of the
fiscal year ended December 31, 2006, 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 2006.
    
    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 331/3% 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 2006.
    
    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 2005. Accordingly, Metal Storm
claimed this exemption in 2006.
    
    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 at no more than 5% of the total
number of shares on issue. Metal Storms Discretionary Share Option
 38




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##### Table of Contents



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 2006.
 D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  39




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##### Table of Contents



Item 10. Additional Information
 A. Share Capital
  B. Our Constitution
   Directors
 Interested Directors
   Directors Compensation
     Borrowing Powers Exercisable by Directors
  40




---



##### Table of Contents



Retirement of directors
  Share Qualifications
  Rights and Restrictions on Classes of Shares
  Dividend Rights
  Voting Rights
  Right to Share in our Profits
  Rights to Share in the Surplus in the Event of Liquidation
  Redemption Provisions
  Sinking Fund Provisions
  41




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##### Table of Contents



Liability for Further Capital Calls
  Provisions Discriminating Against Holders of a Substantial Number of Shares
  Variation of Share Rights
  General Meetings of Shareholders
   Foreign Ownership Regulation
  (a)
    
    by a foreign person, as defined in the Foreign Acquisitions and Takeovers Act, or
associated foreign persons which would result in such persons having an interest in 15%
or more of the issued shares of, or control of 15% or more of the voting power in, an
Australian company, and(b)
    
    by a non-associated foreign person which would result in such foreign person having
an interest in 40% or more of the issued shares of, or control of 40% or more of the
voting power in, an Australian company.
  42




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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.
 Access to and Inspection of Documents
  CHESS
  43




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##### Table of Contents



C. Material Contracts
 Terms of convertible notes
    Trust Deed in connection with the Rights Offer
    
    
    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 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:
 TM
  44




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##### Table of Contents



Asset Purchase Agreement for the Sale of ProCam
  Cash Advance Facility Agreement
  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
  45




---



##### 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
    46




---



##### Table of Contents



Sale or Exchange of ADSs or Ordinary Shares
   Passive Foreign Investment Company Status
     47




---



##### Table of Contents



pro rata
     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
  48




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##### Table of Contents



The discussion above is not intended to constitute a complete analysis of all tax
considerations applicable to an investment in ADSs or ordinary shares. You should consult with your
tax advisor concerning the tax consequences to you in your particular situation.
 Australian Tax Considerations
  Nature of ADRs for Australian Taxation Purposes
  Taxation of Dividends
   Tax on Sales or other Dispositions of SharesCapital gains tax
   Tax on Sales or other Dispositions of SharesShareholders Holding Shares on Revenue Account
  49




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##### Table of Contents



Dual Residency
  Stamp Duty
  Australian Death Duty
  Goods and Services Tax
  F. Dividends and Paying Agents
  G. Statements by Experts
  H. Documents on Display
 www.sec.gov
 50




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##### Table of Contents



Item 11. Quantitative and Qualitative Disclosure about Market Risk
    
 Item 12. Description of Securities Other than Equity Securities
  51




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##### Table of Contents



PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and the Use of Proceeds
  
 Item 15. Controls and Procedures
   Internal control environment
    U.S. GAAP Knowledge
   Segregation of Duties
  Financial Statement Close Process
   52




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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 31,2006
    
    2005A$
    
    A$Audit fees
    
    
    387,550
    
    
    
    385,410Audit-related fees
    
    
    41,926
    
    
    
    31,500Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    Total
    
    
    429,476
    
    
    
    416,910
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  53




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##### Table of Contents



PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Constitution of Metal Storm*4.1
    
    DSTO Research Agreement dated April 20, 2001*4.2
    
    Deed of Amendment to the DSTO Research Agreement dated September 13, 2002 (portions omitted pursuant
to a request for confidential treatment; non-public information has been filed with the SEC)**4.3
    
    DSTO Technology License Agreement dated April 20, 2001, as amended (portions omitted pursuant to a
request for confidential treatment; non-public information has been filed with the SEC)*4.4
    
    Employment Agreement of Dr. Lee Finniear4.5
    
    Letter of Offer to Mr. P. D Faulkner4.6
    
    Separation Agreement, dated February 8, 2005, of J.M. ODwyer***4.7
    
    Deed of Termination Agreement, dated May 20, 2006, of David A. Smith****4.8
    
    Employment Agreement of Dr. Joe Cronin4.9
    
    Cash Advance Facility Agreement, dated June 16, 2006, between Metal Storm and Harmony Investment
Fund Limited****4.10
    
    Discretionary Share Option Scheme*4.11
    
    Convertible Note Trust Deed dated July 11, 20068.0
    
    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 Financial Controller 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 Financial Controller in accordance with Section 906 of the Sarbanes-Oxley Act
 
 *
    
    Incorporated by reference from our Registration Statement on Form 20-F filed on
December 12, 2001, File No. 000-31212.**
    
    Incorporated by reference from our annual report on Form 20-F filed on July 14, 2003.***
    
    Incorporated by reference from our annual report on Form 20-F filed on June 15, 2005.****
    
    Incorporated by reference from our annual report on Form 20-F
filed on July 17, 2006. 54




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##### Table of Contents



Index to Financial Statements
 Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Income Statements for the years ended December 31, 2006, 2005 and 2004
    
    F-3Consolidated Balance Sheets as at December 31, 2006 and 2005
    
    F-4Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    F-5Consolidated Statements of Changes in Equity for the years ended December 31, 2006, 2005 and 2004
    
    F-6Notes to the Consolidated Financial Statements
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Board of Directors and Shareholders of Metal Storm Limited
     /s/ Ernst & Young

Brisbane, Australia
May 9, 2007
 F-2




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##### Table of Contents



Metal Storm Limited
Consolidated Income Statements (Australian Dollars)
For the Years Ended 31 December 2006, 2005 and 2004
 2006
    
    2005
    
    2004Note
    
    A$
    
    A$
    
    A$Continuing operationsRevenue
    
    
    4
    (a)
    
    
    2,339,310
    
    
    
    830,645
    
    
    
    837,201ExpensesConsumables used
    
    
    
    
    
    
    (152,471
    )
    
    
    (4,360
    )
    
    
    Employee expenses
    
    
    4
    (b)
    
    
    (5,342,348
    )
    
    
    (4,468,640
    )
    
    
    (3,751,459
    )Professional fees
    
    
    
    
    
    
    (1,731,913
    )
    
    
    (1,774,369
    )
    
    
    (2,021,573
    )Research and development
    
    
    
    
    
    
    (990,022
    )
    
    
    (1,146,364
    )
    
    
    (1,280,621
    )Administrative expenditure
    
    
    
    
    
    
    (831,647
    )
    
    
    (928,931
    )
    
    
    (1,326,897
    )Facilities and equipment
    
    
    
    
    
    
    (741,643
    )
    
    
    (522,693
    )
    
    
    (419,114
    )Travel and entertainment
    
    
    
    
    
    
    (523,432
    )
    
    
    (433,859
    )
    
    
    (796,611
    )Communication and technology
    
    
    
    
    
    
    (348,191
    )
    
    
    (306,335
    )
    
    
    (342,549
    )Public relations and compliance
    
    
    
    
    
    
    (339,206
    )
    
    
    (494,786
    )
    
    
    (617,710
    )Unrealised net foreign exchange differences
    
    
    
    
    
    
    (254
    )
    
    
    (785
    )
    
    
    1,378Realised net foreign exchange differences
    
    
    
    
    
    
    16,118
    
    
    
    (26,237
    )
    
    
    7,307Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,834,152
    )Fair value movement in embedded derivative
    
    
    16
    
    
    
    (3,244,330
    )
    
    
    
    
    
    
    Loss from continuing operations before
finance costs and Income tax
    
    
    
    
    
    
    (11,890,029
    )
    
    
    (9,276,714
    )
    
    
    (11,544,800
    )Finance costs
    
    
    4
    (d)
    
    
    (2,295,847
    )
    
    
    (35,496
    )
    
    
    (43,568
    )Loss before Income tax
    
    
    
    
    
    
    (14,185,876
    )
    
    
    (9,312,210
    )
    
    
    (11,588,368
    )Income tax benefit
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Loss after tax from continuing operations
    
    
    
    
    
    
    (14,185,876
    )
    
    
    (9,312,210
    )
    
    
    (11,588,368
    )Discontinued operationLoss after tax from discontinued operation
    
    
    6
    (b)
    
    
    (39,256
    )
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Loss attributable to members of the parent
    
    
    
    
    
    
    (14,225,132
    )
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Earnings per share (cents per share)
-   Basic and diluted loss for the year
attributable to ordinary equity holders of the
parent
    
    
    7
    
    
    
    (2.65
    )
    
    
    (2.09
    )
    
    
    (2.62
    )-   Basic and diluted loss for the year from
continuing operations attributable to ordinary
equity holders of the parent
    
    
    7
    
    
    
    (2.64
    )
    
    
    (1.78
    )
    
    
    (2.31
    )
 F-3




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##### Table of Contents



Metal Storm Limited
Consolidated Balance Sheets (Australian Dollars)
As at 31 December 2006 and 2005
 2006
    
    2005Note
    
    A$
    
    A$AssetsCurrent assetsCash and cash equivalents
    
    
    8
    
    
    
    23,830,267
    
    
    
    635,861Available-for-sale financial investments
    
    
    9
    
    
    
    2,002,080
    
    
    
    5,056,140Trade and other receivables
    
    
    10
    
    
    
    422,935
    
    
    
    613,441Prepayments
    
    
    
    
    
    
    350,195
    
    
    
    810,112Total current assets
    
    
    
    
    
    
    26,605,477
    
    
    
    7,115,554Non-current assetsOther receivables
    
    
    10
    
    
    
    510,795
    
    
    
    30,600Property, plant and equipment
    
    
    12
    
    
    
    627,985
    
    
    
    231,629Intangible assets and goodwill
    
    
    13
    
    
    
    111,824
    
    
    
    51,938Total non-current assets
    
    
    
    
    
    
    1,250,604
    
    
    
    314,167Total assets
    
    
    
    
    
    
    27,856,081
    
    
    
    7,429,721LiabilitiesCurrent liabilitiesTrade and other payables
    
    
    15
    
    
    
    1,322,042
    
    
    
    890,550Embedded derivative
    
    
    16
    
    
    
    10,811,057
    
    
    
    Interest-bearing loans and borrowings
    
    
    16
    
    
    
    11,903,152
    
    
    
    353,674Provisions
    
    
    17
    
    
    
    441,997
    
    
    
    277,448Unearned revenue
    
    
    
    
    
    
    620,483
    
    
    
    43,024Total current liabilities
    
    
    
    
    
    
    25,098,731
    
    
    
    1,564,696Non-current liabilitiesInterest-bearing loans and borrowings
    
    
    16
    
    
    
    255,845
    
    
    
    Other
    
    
    
    
    
    
    77,949
    
    
    
    85,163Total non-current liabilities
    
    
    
    
    
    
    333,794
    
    
    
    85,163Total liabilities
    
    
    
    
    
    
    25,432,525
    
    
    
    1,649,859Net assets
    
    
    
    
    
    
    2,423,556
    
    
    
    5,779,862EquityContributed equity
    
    
    18
    
    
    
    60,199,980
    
    
    
    56,559,039Options reserves
    
    
    18
    
    
    
    8,978,434
    
    
    
    1,726,182Other reserves
    
    
    18
    
    
    
    (82,492
    )
    
    
    (58,125
    )Accumulated losses
    
    
    18
    
    
    
    (66,672,366
    )
    
    
    (52,447,234
    )Total equity
    
    
    
    
    
    
    2,423,556
    
    
    
    5,779,862
 F-4




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##### Table of Contents



Metal Storm Limited
Consolidated Statements of Cash Flows (Australian Dollars)
For the Years Ended 31 December 2006, 2005 and 2004
 2006
    
    2005
    
    2004Note
    
    A$
    
    A$
    
    A$Cash Flows From Operating ActivitiesReceipts from customers
    
    
    
    
    
    
    2,015,018
    
    
    
    1,488,361
    
    
    
    5,438,689Payments to suppliers and employees
    
    
    
    
    
    
    (10,269,673
    )
    
    
    (12,498,971
    )
    
    
    (16,182,794
    )Interest and other costs of finance paid
    
    
    
    
    
    
    (287,027
    )
    
    
    (96,157
    )
    
    
    (295,435
    )Government grant  research & development
    
    
    
    
    
    
    679,673
    
    
    
    310,755
    
    
    
    332,744Other  GST received
    
    
    
    
    
    
    405,670
    
    
    
    261,451
    
    
    
    293,832Net cash flows (used in) operating activities
    
    
    8
    
    
    
    (7,456,339
    )
    
    
    (10,534,561
    )
    
    
    (10,412,964
    )Cash Flows From Investing ActivitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (824,299
    )
    
    
    (104,292
    )
    
    
    (257,325
    )Proceeds from the disposal of discontinued operation
    
    
    6
    
    
    
    
    
    
    
    2,256,721
    
    
    
    Purchase of intangible assets
    
    
    
    
    
    
    (137,197
    )
    
    
    (74,007
    )
    
    
    (19,030
    )Interest received
    
    
    
    
    
    
    673,435
    
    
    
    613,030
    
    
    
    810,302Purchase of available-for-sale financial investments
    
    
    
    
    
    
    
    
    
    
    (8,633,480
    )
    
    
    Purchase of other financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (845,446
    )Proceeds from the disposal of available-for-sale financial assets
    
    
    
    
    
    
    3,054,060
    
    
    
    3,614,000
    
    
    
    Proceeds from the disposal of property, plant and equipment
    
    
    
    
    
    
    318,695
    
    
    
    
    
    
    
    Purchase of security deposits
    
    
    
    
    
    
    (480,798
    )
    
    
    
    
    
    
    Proceeds from disposal of other financial asset
    
    
    
    
    
    
    
    
    
    
    857,536
    
    
    
    Net cash flows (used in)/from investing activities
    
    
    
    
    
    
    2,603,896
    
    
    
    (1,470,492
    )
    
    
    (311,499
    )Cash Flows From Financing ActivitiesProceeds from issuance of ordinary shares
    
    
    
    
    
    
    3,017,685
    
    
    
    
    
    
    
    21,511,418Share issue costs
    
    
    
    
    
    
    (268,696
    )
    
    
    
    
    
    
    (1,705,107
    )Proceeds from issuance of convertible notes
    
    
    
    
    
    
    27,500,000
    
    
    
    
    
    
    
    Transaction costs related to issuance of convertible notes
    
    
    
    
    
    
    (1,909,878
    )
    
    
    
    
    
    
    Proceeds from exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,007Proceeds from borrowings
    
    
    
    
    
    
    306,180
    
    
    
    
    
    
    
    289,455Repayments of borrowings
    
    
    
    
    
    
    (598,442
    )
    
    
    (2,466,723
    )
    
    
    (2,319,393
    )Net cash flows (used in)/from financing activities
    
    
    
    
    
    
    28,046,849
    
    
    
    (2,466,723
    )
    
    
    17,779,380Net movement in cash and cash equivalents
    
    
    
    
    
    
    23,194,406
    
    
    
    (14,471,776
    )
    
    
    7,054,917Net foreign exchange differences
    
    
    
    
    
    
    
    
    
    
    (1,959
    )
    
    
    Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    635,861
    
    
    
    15,109,596
    
    
    
    8,054,679Cash and cash equivalents at end of period
    
    
    8
    
    
    
    23,830,267
    
    
    
    635,861
    
    
    
    15,109,596
 F-5




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 
 Metal Storm Limited
Consolidated Statements of Changes in Equity (Australian Dollars)  For the Years Ended 31 December 2006, 2005 and 2004
 Issued
    
    Option
    
    Other
    
    Accumulated
    
    Totalcapital
    
    reserves
    
    reserves
    
    losses
    
    equityA$
    
    A$
    
    A$
    
    A$
    
    A$At 1 January 2004
    
    
    36,638,128
    
    
    
    515,009
    
    
    
    (22,883
    )
    
    
    (28,428,507
    )
    
    
    8,701,747Currency translation differences
    
    
    
    
    
    
    
    
    
    
    (119,983
    )
    
    
    
    
    
    
    (119,983
    )Share issue costs
    
    
    (1,705,107
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,705,107
    )Total income and expense for the year recognised directly
in equity
    
    
    (1,705,107
    )
    
    
    
    
    
    
    (119,983
    )
    
    
    
    
    
    
    (1,825,090
    )Loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,104,127
    )
    
    
    (13,104,127
    )Total income/expense for the year
    
    
    (1,705,107
    )
    
    
    
    
    
    
    (119,983
    )
    
    
    (13,104,127
    )
    
    
    (14,929,217
    )Exercise of options
    
    
    3,007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,007Net increase in option reserves
    
    
    
    
    
    
    801,445
    
    
    
    
    
    
    
    
    
    
    
    801,445Issue of ordinary shares
    
    
    21,511,418
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,511,418Fair value of services paid for via issue of shares
    
    
    111,593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,593At 31 December 2004
    
    
    56,559,039
    
    
    
    1,316,454
    
    
    
    (142,866
    )
    
    
    (41,532,634
    )
    
    
    16,199,993Net gains on available-for-sale financial investments
    
    
    
    
    
    
    
    
    
    
    36,660
    
    
    
    
    
    
    
    36,660Currency translation differences
    
    
    
    
    
    
    
    
    
    
    48,081
    
    
    
    
    
    
    
    48,081Total income and expense for the year recognised directly
in equity
    
    
    
    
    
    
    
    
    
    
    84,741
    
    
    
    
    
    
    
    84,741Loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,914,600
    )
    
    
    (10,914,600
    )Total income/(expense) for the year
    
    
    
    
    
    
    
    
    
    
    84,741
    
    
    
    (10,914,600
    )
    
    
    (10,829,859
    )Net increase in option reserves
    
    
    
    
    
    
    409,728
    
    
    
    
    
    
    
    
    
    
    
    409,728At 31 December 2005
    
    
    56,559,039
    
    
    
    1,726,182
    
    
    
    (58,125
    )
    
    
    (52,447,234
    )
    
    
    5,779,862Net losses on available-for-sale financial investments
    
    
    
    
    
    
    
    
    
    
    (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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,225,132
    )
    
    
    (14,225,132
    )Total income/(expense) for the year
    
    
    
    
    
    
    
    
    
    
    (24,367
    )
    
    
    (14,225,132
    )
    
    
    (14,249,499
    )Net increase in option reserves (Note 18)
    
    
    
    
    
    
    358,686
    
    
    
    
    
    
    
    
    
    
    
    358,686Options issued related to issuance of convertible notes
(Note 18)
    
    
    
    
    
    
    4,379,638
    
    
    
    
    
    
    
    
    
    
    
    4,379,638Options issued to Harmony Investment Fund Limited
    
    
    
    
    
    
    3,262,000
    
    
    
    
    
    
    
    
    
    
    
    3,262,000Options issue costs (Note 18)
    
    
    
    
    
    
    (748,072
    )
    
    
    
    
    
    
    
    
    
    
    (748,072
    )Share options exercised (Note 18)
    
    
    7,685
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,685Issue of ordinary shares (Note 18)
    
    
    3,035,031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,035,031Conversion of convertible notes to ordinary shares
    
    
    866,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    866,921Share issue costs (Note 18)
    
    
    (268,696
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (268,696
    )At 31 December 2006
    
    
    60,199,980
    
    
    
    8,978,434
    
    
    
    (82,492
    )
    
    
    (66,672,366
    )
    
    
    2,423,556
 F-6




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 1. Corporate Information
    2. Summary of Significant Accounting Policies
 Table of Contents
 (a)
    
    Basis of Preparation(b)
    
    Statement of Compliance(c)
    
    Basis of Consolidation(d)
    
    Significant Accounting Judgments, Estimates and Assumptions(e)
    
    Foreign Currency Translation(f)
    
    Property, Plant and Equipment(g)
    
    Finance Costs(h)
    
    Goodwill(i)
    
    Intangible Assets(j)
    
    Impairment of non-financial assets other than goodwill(k)
    
    Investments and Other Financial Assets(l)
    
    Trade and Other Receivables(m)
    
    Cash and Cash Equivalents(n)
    
    Trade and Other Payables(o)
    
    Interest-bearing Loans and Borrowings(p)
    
    Provisions(q)
    
    Employee Leave Benefits(r)
    
    Employee Benefit Plan(s)
    
    Share-based Payment Transactions(t)
    
    Leases(u)
    
    Revenue Recognition(v)
    
    Government Grants(w)
    
    Income Tax(x)
    
    Other Taxes(y)
    
    Financial Instruments Issued by the Company(z)
    
    Technology Development(aa)
    
    Contributed Equity
 F-7




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 
 (a) Basis of Preparation
   Change in Accounting Policy
  Income Taxes Accounting for Government Grants and Disclosure of Government Assistance
   2006
    
    2005
    
    2004A$
    
    A$
    
    A$Research and development before the change in policy
    
    
    1,332,130
    
    
    
    1,794,684
    
    
    
    1,613,365Research and development after the change in policy
    
    
    990,022
    
    
    
    1,146,364
    
    
    
    1,280,621Net change
    
    
    342,108
    
    
    
    648,320
    
    
    
    332,744Loss before Income tax before the change in policy
    
    
    14,527,984
    
    
    
    9,960,530
    
    
    
    11,921,112Loss before Income tax after the change in policy
    
    
    14,185,876
    
    
    
    9,312,210
    
    
    
    11,588,368Net change
    
    
    342,108
    
    
    
    648,320
    
    
    
    332,744Income tax benefit before the change in policy
    
    
    342,108
    
    
    
    648,320
    
    
    
    332,744Income tax benefit after the change in policy
    
    
    
    
    
    
    
    
    
    
    Net change
    
    
    342,108
    
    
    
    648,320
    
    
    
    332,744
 F-8




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 
 (b) Statement of Compliance
   Presentation of Financial Statements
 ApplicationNature of change to
    
    Impact on Company
    
    date of
    
    Application dateReference
    
    Title
    
    accounting policy
    
    financial report
    
    Standard*
    
    for Company*AASB 2005-10
    
    Amendments to
Australian
Accounting
Standards [AASB
132, AASB 101, AASB
114, AASB 117, AASB
133, AASB 139:,
AASB 1, AASB 4,
AASB 1023 & AASB
1038]
    
    Amendments arise from the release
in August 2005 of AASB 7 Financial
Instruments: Disclosures
    
    AASB 7 is a disclosure standard
so will have no direct impact on
the amounts included in the
Companys financial statements.
However the amendments will
result in changes to the
financial instrument disclosures
included in the Companys
financial report.
    
    1 January 2007
    
    1 January 2007AASB 7
    
    AASB 7: Financial
Instruments:
Disclosures
    
    New standard replacing disclosure
requirements of AASB 132
    
    As above
    
    1 January 2007
    
    1 January 2007UIG 7
    
    Applying the
Restatement
Approach under AASB
129 Financial
Reporting in
Hyperinflationary
Economies
    
    Addresses the requirements of AASB
129 for financial statements to be
stated in terms of the measuring
unit current at the reporting date
when reporting in the currency of a
hyperinflationary economy
    
    As the Company has no investments
in foreign operations operating
in hyperinflationary economies,
these amendments are not expected
to have any impact on the
Companys financial report.
    
    1 March 2006
    
    1 January 2007UIG 8
    
    Scope of AASB 2
Share-based Payment
    
    Clarifies that the scope of AASB 2
includes transactions in which the
entity cannot identify specifically
some or all of the goods or services
received as consideration for the
equity instruments of the entity or
other share-based payment
    
    This is consistent with the
Companys current policy on
accounting for share-based
payments. Therefore these
amendments are not expected to
have any impact on the Companys
financial report.
    
    1 May 2006
    
    1 January 2007UIG 9
    
    Reassessment of
Embedded
Derivatives
    
    Clarifies that an entity reassesses
whether an embedded derivative
contained in a host contract must be
separated from the host and
accounted for as a derivative under
AASB 139 only when there is a change
in the terms of the contract that
significantly modifies the cash
flow that would otherwise be
required
    
    The Companys embedded
derivatives were assessed for
separation from the convertible
notes on initial recognition this
year. Going forward, consistent
with UIG 9 they will not be
reassessed unless there is a
change in the terms of the
convertible notes that
significantly modifies the cash
flows that would otherwise be
required.
    
    1 June 2006
    
    1 January 2007
 
 *
    
    designates the beginning of the applicable annual reporting period F-9




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 
 (c) Basis of Consolidation
       
 (d) Significant Accounting Judgments, Estimates and Assumptions
  Significant accounting estimates and assumptions
 Share-based payment transactions
  Embedded derivatives and detachable options
  
 (e) Foreign Currency Translation
 (i) Functional and presentation currency
  (ii) Transactions and balances
   F-10




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 (e) Foreign Currency Translation (continued)
    
 (f) Property, Plant and Equipment
       Disposal
   
 (g) Finance Costs
  
 (h) Goodwill
    
    
    represents the lowest level within the Company at which goodwill is monitored for
internal management purposes; and
    
    is not larger than a segment based either on the Companys primary or secondary
reporting format determined in accordance with AASB 114 Segment Reporting.
 F-11




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 (h) Goodwill (continued)
    
 (i) Intangible Assets
 Acquired both separately and from a business combination
    Research and development costs
    Policy
    
    SoftwareUseful life
    
    FiniteAmortisation method used
    
    Straight lineInternally generated or acquired
    
    AcquiredImpairment testing
    
    Annually where an indicator of impairment exists
   F-12




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 
 (j) Impairment of non-financial assets other than goodwill
  
 (k) Investments and Other Financial Assets
 Recognition and Measurement
  (i) Financial assets at fair value through profit or loss
  (ii) Held-to-maturity investments
  (iii) Available-for-sale investments
   F-13




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 
 (l) Trade and Other Receivables
   
 (m) Cash and Cash Equivalents
   
 (n) Trade and Other Payables
   
 (o) Interest-bearing Loans and Borrowings
    
 (p) Provisions
    
 (q) Employee Leave Benefits
  F-14




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 
 (r) Employee Benefit Plan
  
 (s) Share-based Payment Transactions
 Employees
             Non-employees
     F-15




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 (s) Share-based Payment Transactions (continued)
         
 (t) Leases
     
 (u) Revenue Recognition
  (i) Sale of goods
  F-16




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 (u) Revenue Recognition (continued)
 (ii) Rendering of services
  (iii) Construction contracts
     (iv) Interest income
  
 (v) Government Grants
     F-17




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 
 (w) Income Tax
   
    
    where the deferred income tax liability arises from the initial
recognition of goodwill or an asset or liability in a transaction that
is not a business combination and, at the time of the transaction,
affects neither the accounting profit nor taxable profit or loss; or
    
    when the taxable temporary difference is associated with investments
in subsidiaries, associates or interests in joint ventures, and the
timing of the reversal of the temporary difference can be controlled
and it is probable that the temporary differences will not reverse in
the foreseeable future.
  
    
    when the deferred income tax asset relating to the deductible
temporary difference arises from the initial recognition of an asset
or liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting profit
nor taxable profit or loss; or
    
    when the deductible temporary difference is associated with
investments in subsidiaries, associates or interests in joint
ventures, in which case a deferred tax asset is only recognised to the
extent that it is probable that the temporary difference will reverse
in the foreseeable future and taxable profit will be available against
which the temporary differences can be utilised.
      
 (x) Other Taxes
  
    
    where the GST incurred on a purchase of goods and services is not recoverable from the taxation
authority, in which case the GST is recognised as part of the cost of acquisition of the asset or
as part of the expense item as applicable; and
    
    receivables and payables which are stated with the amount of GST included.
  F-18




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 (x) Other Taxes (continued)
   
 (y) Financial Instruments Issued by the Company
 Transaction Costs on the Issue of Equity Instruments
  Transaction Costs on the Issue of Convertible Notes
  Interest and Dividends
  Convertible Notes and Embedded Derivatives
   
 (z) Technology Development
  
 (aa) Contributed Equity
  3. Segment Information
    F-19




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 3. Segment Information (continued)
 (a) Geographic Segment
 TotalNorth
    
    Continuing
    
    Discontinued
    
    TotalAustralia
    
    America
    
    Operations
    
    Operations
    
    OperationsA$
    
    A$
    
    A$
    
    A$
    
    A$2006RevenueSales to external customers
    
    
    
    
    
    
    1,540,410
    
    
    
    1,540,410
    
    
    
    
    
    
    
    1,540,410Sundry income
    
    
    
    
    
    
    40,620
    
    
    
    40,620
    
    
    
    
    
    
    
    40,620Total segment revenue
    
    
    
    
    
    
    1,581,030
    
    
    
    1,581,030
    
    
    
    
    
    
    
    1,581,030Unallocated Revenue
    
    
    
    
    
    
    
    
    
    
    758,280
    
    
    
    
    
    
    
    758,280Total consolidated revenue
    
    
    
    
    
    
    
    
    
    
    2,339,310
    
    
    
    
    
    
    
    2,339,310ResultSegment Results
    
    
    (11,123,492
    )
    
    
    (2,904,561
    )
    
    
    (14,028,053
    )
    
    
    (39,256
    )
    
    
    (14,067,309
    )Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    2,550,596
    
    
    
    
    
    
    
    2,550,596Unallocated
    
    
    
    
    
    
    
    
    
    
    (412,572
    )
    
    
    
    
    
    
    (412,572
    )Result before tax and finance
    
    
    
    
    
    
    
    
    
    
    (11,890,029
    )
    
    
    (39,256
    )
    
    
    (11,929,285
    )Finance costs
    
    
    
    
    
    
    
    
    
    
    (2,295,847
    )
    
    
    
    
    
    
    (2,295,847
    )Net profit/(loss) for the year
    
    
    
    
    
    
    
    
    
    
    (14,185,876
    )
    
    
    (39,256
    )
    
    
    (14,225,132
    )Assets and liabilitiesSegment assets
    
    
    27,550,373
    
    
    
    563,354
    
    
    
    28,113,727
    
    
    
    22,500
    
    
    
    28,136,227Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    (280,146
    )
    
    
    
    
    
    
    (280,146
    )Total assets
    
    
    
    
    
    
    
    
    
    
    27,833,581
    
    
    
    22,500
    
    
    
    27,856,081Segment liabilities
    
    
    24,328,392
    
    
    
    14,889,584
    
    
    
    39,217,976
    
    
    
    3,381,799
    
    
    
    42,599,775Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    (13,967,411
    )
    
    
    (3,199,839
    )
    
    
    (17,167,250
    )Total liabilities
    
    
    
    
    
    
    
    
    
    
    25,250,565
    
    
    
    181,960
    
    
    
    25,432,525Other Segment InformationCapital expenditure
    
    
    881,351
    
    
    
    80,146
    
    
    
    961,497
    
    
    
    
    
    
    
    961,497Depreciation
    
    
    65,301
    
    
    
    42,478
    
    
    
    107,779
    
    
    
    1,469
    
    
    
    109,248Amortisation
    
    
    12,758
    
    
    
    62,831
    
    
    
    75,589
    
    
    
    
    
    
    
    75,589Cash Flow InformationNet cash flow from operating activities
    
    
    (6,013,517
    )
    
    
    (1,442,822
    )
    
    
    (7,456,339
    )
    
    
    
    
    
    
    (7,456,339
    )Net cash flow from investing activities
    
    
    2,670,627
    
    
    
    (66,731
    )
    
    
    2,603,896
    
    
    
    
    
    
    
    2,603,896Net cash flow from financing activities
    
    
    28,046,849
    
    
    
    
    
    
    
    28,046,849
    
    
    
    
    
    
    
    28,046,849
 F-20




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 3. Segment Information (continued)
 (a) Geographic Segment (continued)
 TotalNorth
    
    Continuing
    
    Discontinued
    
    TotalAustralia
    
    America
    
    Operations
    
    Operations
    
    OperationsA$
    
    A$
    
    A$
    
    A$
    
    A$2005RevenueSales to external customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,287,223
    
    
    
    1,287,223Contract revenue
    
    
    
    
    
    
    230,743
    
    
    
    230,743
    
    
    
    
    
    
    
    230,743Other revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total segment revenue
    
    
    
    
    
    
    230,743
    
    
    
    230,743
    
    
    
    1,287,223
    
    
    
    1,517,966Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unallocated Revenue
    
    
    
    
    
    
    
    
    
    
    599,902
    
    
    
    3,047
    
    
    
    602,949Total consolidated revenue
    
    
    
    
    
    
    
    
    
    
    830,645
    
    
    
    1,290,270
    
    
    
    2,120,915ResultSegment Results
    
    
    (11,592,924
    )
    
    
    (3,570,522
    )
    
    
    (15,163,446
    )
    
    
    (1,609,830
    )
    
    
    (16,773,276
    )Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    6,197,640
    
    
    
    68,101
    
    
    
    6,265,741Unallocated
    
    
    
    
    
    
    
    
    
    
    (310,908
    )
    
    
    
    
    
    
    (310,908
    )Result before tax and finance
    
    
    
    
    
    
    
    
    
    
    (9,276,714
    )
    
    
    (1,541,729
    )
    
    
    (10,818,443
    )Finance costs
    
    
    
    
    
    
    
    
    
    
    (35,496
    )
    
    
    (60,661
    )
    
    
    (96,157
    )Net profit/(loss) for the year
    
    
    
    
    
    
    
    
    
    
    (9,312,210
    )
    
    
    (1,602,390
    )
    
    
    (10,914,600
    )Assets and liabilitiesSegment assets
    
    
    7,388,241
    
    
    
    512,550
    
    
    
    7,900,791
    
    
    
    25,731
    
    
    
    7,926,522Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    (496,801
    )
    
    
    
    
    
    
    (496,801
    )Total assets
    
    
    
    
    
    
    
    
    
    
    7,403,990
    
    
    
    25,731
    
    
    
    7,429,721Segment liabilities
    
    
    1,192,960
    
    
    
    11,934,247
    
    
    
    13,127,207
    
    
    
    3,592,053
    
    
    
    16,719,260Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    (11,641,089
    )
    
    
    (3,428,312
    )
    
    
    (15,069,401
    )Total liabilities
    
    
    
    
    
    
    
    
    
    
    1,486,118
    
    
    
    163,741
    
    
    
    1,649,859Other Segment InformationCapital expenditure
    
    
    28,777
    
    
    
    75,515
    
    
    
    104,292
    
    
    
    
    
    
    
    104,292Depreciation
    
    
    42,113
    
    
    
    27,573
    
    
    
    69,686
    
    
    
    141,859
    
    
    
    211,545Amortisation
    
    
    17,079
    
    
    
    31,135
    
    
    
    48,214
    
    
    
    
    
    
    
    48,214Cash Flow InformationNet cash flow from operating activities
    
    
    (5,451,792
    )
    
    
    (4,194,162
    )
    
    
    (9,645,954
    )
    
    
    (888,607
    )
    
    
    (10,534,561
    )Net cash flow from investing activities
    
    
    (4,437,392
    )
    
    
    710,179
    
    
    
    (3,727,213
    )
    
    
    2,256,721
    
    
    
    (1,470,492
    )Net cash flow from financing activities
    
    
    (3,840,867
    )
    
    
    3,058,304
    
    
    
    (782,563
    )
    
    
    (1,684,160
    )
    
    
    (2,466,723
    )
 F-21




---



##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 3. Segment Information (continued)
 (b) Geographic Segment (continued)
 Total Continuing
    
    DiscontinuedAustralia
    
    North America
    
    Operations
    
    Operations
    
    Total OperationsA$
    
    A$
    
    A$
    
    A$
    
    A$2004RevenueSales to external customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,309,298
    
    
    
    5,309,298Contract revenue
    
    
    
    
    
    
    42,636
    
    
    
    42,636
    
    
    
    
    
    
    
    42,636Other revenue
    
    
    793,065
    
    
    
    1,500
    
    
    
    794,565
    
    
    
    14,099
    
    
    
    808,664Total segment revenue
    
    
    793,065
    
    
    
    44,136
    
    
    
    837,201
    
    
    
    5,323,397
    
    
    
    6,160,598Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,294
    )
    
    
    (77,294
    )Unallocated Revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,737
    
    
    
    15,737Total consolidated revenue
    
    
    
    
    
    
    
    
    
    
    837,201
    
    
    
    5,261,840
    
    
    
    6,099,041ResultSegment Results
    
    
    (13,807,807
    )
    
    
    (3,490,587
    )
    
    
    (17,298,394
    )
    
    
    (1,252,663
    )
    
    
    (18,551,057
    )Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    6,228,131
    
    
    
    (11,229
    )
    
    
    6,216,902Unallocated
    
    
    
    
    
    
    
    
    
    
    (474,537
    )
    
    
    
    
    
    
    (474,537
    )Result before tax and finance
    
    
    
    
    
    
    
    
    
    
    (11,544,800
    )
    
    
    (1,263,892
    )
    
    
    (12,808,692
    )Finance costs
    
    
    
    
    
    
    
    
    
    
    (43,568
    )
    
    
    (251,867
    )
    
    
    (295,435
    )Net profit/(loss) for the year
    
    
    
    
    
    
    
    
    
    
    (11,588,368
    )
    
    
    (1,515,759
    )
    
    
    (13,104,127
    )Assets and liabilitiesSegment assets
    
    
    18,379,324
    
    
    
    487,009
    
    
    
    18,866,333
    
    
    
    4,649,742
    
    
    
    23,516,075Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    (3,119,718
    )
    
    
    (69,040
    )
    
    
    (3,188,758
    )Total assets
    
    
    
    
    
    
    
    
    
    
    15,746,615
    
    
    
    4,580,702
    
    
    
    20,327,317Segment liabilities
    
    
    1,312,921
    
    
    
    8,114,004
    
    
    
    9,426,925
    
    
    
    6,354,788
    
    
    
    15,781,713Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    (7,514,357
    )
    
    
    (4,140,032
    )
    
    
    (11,654,389
    )Total liabilities
    
    
    
    
    
    
    
    
    
    
    1,912,568
    
    
    
    2,214,756
    
    
    
    4,127,324Other Segment InformationCapital expenditure
    
    
    54,348
    
    
    
    53,052
    
    
    
    107,400
    
    
    
    149,925
    
    
    
    257,325Depreciation
    
    
    (74,618
    )
    
    
    (23,723
    )
    
    
    (98,341
    )
    
    
    (349,479
    )
    
    
    (447,820
    )Amortisation
    
    
    (16,953
    )
    
    
    
    
    
    
    (16,953
    )
    
    
    
    
    
    
    (16,953
    )Cash Flow InformationNet cash flow from operating activities
    
    
    (5,883,566
    )
    
    
    (3,275,505
    )
    
    
    9,159,071
    
    
    
    (1,253,893
    )
    
    
    10,412,964Net cash flow from investing activities
    
    
    722,192
    
    
    
    (38,320
    )
    
    
    683,872
    
    
    
    (995,371
    )
    
    
    (311,499
    )Net cash flow from financing activities
    
    
    11,968,599
    
    
    
    3,348,198
    
    
    
    15,316,797
    
    
    
    2,462,583
    
    
    
    17,779,380
 F-22




---



##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 4. Revenue and Expenses from Continuing Operations
 2006
    
    
    2005
    
    
    2004A$
    
    
    A$
    
    
    A$(a)
    
    RevenueContract revenue
    
    
    1,581,030
    
    
    
    230,743
    
    
    
    42,636Interest revenue
    
    
    758,280
    
    
    
    599,902
    
    
    
    794,5652,339,310
    
    
    
    830,645
    
    
    
    837,201(b)
    
    Employee benefits expenseWages & salaries
    
    
    (4,077,717
    )
    
    
    (3,089,934
    )
    
    
    (2,502,161
    )Termination payments
    
    
    (319,950
    )
    
    
    (500,000
    )
    
    
    (375,458
    )Superannuation
    
    
    (134,766
    )
    
    
    (126,187
    )
    
    
    (79,109
    )Share-based payments expense
    
    
    (358,686
    )
    
    
    (409,728
    )
    
    
    (277,779
    )Directors' fees
    
    
    (412,572
    )
    
    
    (310,908
    )
    
    
    (474,537
    )Fringe benefits tax
    
    
    (38,657
    )
    
    
    (31,883
    )
    
    
    (42,415
    )(5,342,348
    )
    
    
    (4,468,640
    )
    
    
    (3,751,459
    )(c)
    
    Lease payments included in the income statement:Minimum lease payments - operating lease
    
    
    (585,793
    )
    
    
    (441,817
    )
    
    
    (248,028
    )(d)
    
    Finance CostsInterest expense
    
    
    (57,001
    )
    
    
    (35,496
    )
    
    
    (43,568
    )Interest expense on convertible notes
    
    
    (897,327
    )
    
    
    
    
    
    
    Options issued in consideration for working capital facility
    
    
    (467,000
    )
    
    
    
    
    
    
    Accretion      of convertible notes
    
    
    (870,700
    )
    
    
    
    
    
    
    Accretion of asset retirement obligations
    
    
    (3,819
    )
    
    
    
    
    
    
    (2,295,847
    )
    
    
    (35,496
    )
    
    
    (43,568
    )(e)
    
    Depreciation, amortisation and impairmentDepreciation
    
    
    (109,248
    )
    
    
    (69,686
    )
    
    
    (68,341
    )Amortisation
    
    
    (75,589
    )
    
    
    (48,214
    )
    
    
    (16,953
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (1,834,152
    )
 5. Income Tax
 (a)
    
    Numerical reconciliation between aggregate tax benefit recognised in the income statement and
tax benefit calculated per the statutory income tax rate
  2006
    
    2005
    
    2004A$
    
    A$
    
    A$Accounting loss before income tax from continuing operations
    
    
    (14,185,876
    )
    
    
    (9,312,210
    )
    
    
    (11,588,368
    )Loss before tax from discontinued operation
    
    
    (39,256
    )
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Total accounting loss before income tax
    
    
    (14,225,132
    )
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )At the Companys statutory income tax rate of 30%
    
    
    (4,267,540
    )
    
    
    (3,274,380
    )
    
    
    (3,931,238
    )Research & development  accounting expense add back
    
    
    269,870
    
    
    
    266,774
    
    
    
    66,549Research & development  current year tax offset
    
    
    (342,108
    )
    
    
    (337,565
    )
    
    
    Research & development  prior year tax offset
    
    
    
    
    
    
    (310,755
    )
    
    
    (332,744
    )Other tax adjustments
    
    
    1,802,616
    
    
    
    620,006
    
    
    
    1,211,160Unrecognised tax losses
    
    
    2,537,162
    
    
    
    3,035,920
    
    
    
    2,986,273Aggregate income tax benefit attributable to continuing operations
    
    
    
    
    
    
    
    
    
    
    
 F-23




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##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 5. Income Tax (continued)
 Balance sheet2006
    
    
    2005A$
    
    
    A$(b)
    
    Deferred income taxDeferred income tax at 31 December relates to the following:ConsolidatedDeferred tax liabilities  currentInterest on available for sale financial investments
    
    
    (30,762
    )
    
    
    Deferred tax liabilities
    
    
    (30,762
    )
    
    
    Deferred tax assetsProvision  investment in ProCam
    
    
    575,216
    
    
    
    575,216Sundry creditors and accruals
    
    
    13,859
    
    
    
    55,230Employee entitlements
    
    
    39,989
    
    
    
    42,040Asset retirement obligations
    
    
    8,337
    
    
    
    13,508Deferred rent
    
    
    23,385
    
    
    
    25,549S40880 costs
    
    
    357,927
    
    
    
    388,848Patent costs
    
    
    1,068,780
    
    
    
    964,568Unrealised foreign exchange difference
    
    
    70,828
    
    
    
    Available for sale financial assets
    
    
    624
    
    
    
    Losses available for offset against future taxable income
    
    
    15,452,970
    
    
    
    12,915,809Gross deferred tax asset
    
    
    17,611,915
    
    
    
    14,980,768Deferred tax assets not recognisable
    
    
    (17,581,153
    )
    
    
    (14,980,768
    )Deferred tax asset
    
    
    30,762
    
    
    
    Net deferred tax asset
    
    
    
    
    
    
    Net deferred tax income/(expense)
    
    
    
    
    
    
    
 2006
    
    2005A$
    
    A$Deferred tax assets not recognisable at 1 January
    
    
    (14,980,768
    )
    
    
    (12,019,485
    )Increase in unrecognised tax losses
    
    
    (2,537,162
    )
    
    
    (3,035,920
    )Increase/Decrease in deferred tax assets
    
    
    (93,985
    )
    
    
    74,637Deferred tax assets utilised
    
    
    30,762
    
    
    
    Deferred tax assets not recognisable at 31 December
    
    
    (17,581,153
    )
    
    
    (14,980,768
    )
  F-24




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##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 5. Income Tax (continued)
 (c) Tax losses
 Tax Loss Carryforwards
 2006
    
    2005A$
    
    A$Australian
    
    
    32,377,936
    
    
    
    26,992,992United States  federal
    
    
    15,538,802
    
    
    
    13,124,360United States  state
    
    
    11,548,201
    
    
    
    9,160,116Total tax loss carryforwards
    
    
    59,464,939
    
    
    
    49,277,468
  6. Discontinued Operation
 a) Details of Operations disposed of:
   b) Financial performance of operations disposed of:
 2006
    
    2005
    
    2004A$
    
    A$
    
    A$Revenue from the sale of goods
    
    
    
    
    
    
    1,290,270
    
    
    
    5,261,840Expenses
    
    
    (39,256
    )
    
    
    (2,173,394
    )
    
    
    (6,525,732
    )Gross loss
    
    
    (39,256
    )
    
    
    (883,124
    )
    
    
    (1,263,892
    )Finance costs
    
    
    
    
    
    
    (60,661
    )
    
    
    (251,867
    )Loss on disposal of assets and liabilities
    
    
    
    
    
    
    (658,605
    )
    
    
    Loss for the year from discontinued operation
    
    
    (39,256
    )
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )
 c) Assets and liabilities  discontinued operations:
  2006
    
    2005A$
    
    A$AssetsTrade and other receivables
    
    
    21,768
    
    
    
    23,373Other
    
    
    732
    
    
    
    2,358Total Assets
    
    
    22,500
    
    
    
    25,731LiabilitiesTrade and other payables (i)
    
    
    3,199,839
    
    
    
    3,445,459Provisions (note 17) (ii)
    
    
    181,960
    
    
    
    146,594Total Liabilities
    
    
    3,381,799
    
    
    
    3,592,053Net Liabilities
    
    
    (3,359,299
    )
    
    
    (3,566,322
    )
 
 (i)
    
    Intercompany payables(ii)
    
    Make Good Provision and Onerous Lease Contract F-25




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 6. Discontinued Operation (continued)
 d) Assets and liabilities and cash flow information on discontinued operations:
 The net cash flows incurred by ProCam are as follows:
 2006
    
    2005
    
    2004A$
    
    A$
    
    A$Operating
    
    
    
    
    
    
    (888,607
    )
    
    
    (1,253,893
    )Investing
    
    
    
    
    
    
    2,256,721
    
    
    
    (995,371
    )Financing
    
    
    
    
    
    
    (1,684,160
    )
    
    
    2,462,583Net cash outflow
    
    
    
    
    
    
    (316,046
    )
    
    
    213,319Details of disposal of Procam are as follows:Book value of the assets sold at 1 June 2005:Trade and other receivables
    
    
    
    
    
    
    360,812Inventory
    
    
    
    
    
    
    456,510Property plant and equipment
    
    
    
    
    
    
    2,212,631Trade and other payables
    
    
    
    
    
    
    (77,946
    )Accrued property tax
    
    
    
    
    
    
    (36,681
    )Net assets attributable to discontinued operation
    
    
    
    
    
    
    2,915,326Consideration received:Consideration received as cash and cash equivalents
    
    
    
    
    
    
    2,256,721Less: net assets disposed of
    
    
    
    
    
    
    (2,915,326
    )Loss on sale of the assets and liabilities
    
    
    
    
    
    
    (658,605
    )Earnings per share (cents per share):Basic and diluted from discontinued operation
    
    
    
    
    
    
    (0.31
    )
    
    
    (0.31
    )
  2006
    
    2005
    
    2004A$
    
    A$
    
    A$Net loss attributable
to ordinary equity
holders of the parent
from discontinued
operation
    
    
    (39,256
    )
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )
 Number
    
    Number
    
    NumberWeighted average
number of ordinary
shares for basic and
diluted earnings per
share
    
    
    537,796,067
    
    
    
    521,970,978
    
    
    
    500,886,725
 F-26




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 7. Earnings per Share
   
    
    costs of servicing equity (other than dividends);
    
    the after tax effect of dividends and interest associated with dilutive potential
ordinary shares that have been recognised as expenses; and
    
    other non-discretionary changes in revenue or expenses during the period that would
result from the dilution of potential ordinary shares;divided by the weighted average number of ordinary shares and dilutive potential
ordinary shares, adjusted for any bonus element.
  2006
    
    2005
    
    2004A$
    
    A$
    
    A$Net loss attributable
to ordinary equity
holders of the parent
from continuing
operations
    
    
    (14,185,876
    )
    
    
    (9,312,210
    )
    
    
    (11,588,368
    )Net loss
attributable to
ordinary equity
holders of the parent
from discontinued
operation
    
    
    (39,256
    )
    
    
    (1,602,390
    )
    
    
    (1,515,759
    )Net loss
attributable to
ordinary equity
holders of the parent
(used in calculating
basic and diluted
earnings per share)
    
    
    (14,225,132
    )
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )
 Number
    
    Number
    
    NumberWeighted average
number of ordinary
shares for basic and
diluted earnings per
share
    
    
    537,796,067
    
    
    
    521,970,978
    
    
    
    500,886,725
   F-27




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 8. Cash and Cash Equivalents
 2006
    
    2005A$
    
    A$CurrentCash at bank and in hand
    
    
    1,097,448
    
    
    
    635,861Short-term deposits
    
    
    22,732,819
    
    
    
    23,830,267
    
    
    
    635,861
   Reconciliation from the net loss after tax to the net cash flows from operations
 2006
    
    2005
    
    2004A$
    
    A$
    
    A$Net Loss
    
    
    (14,225,132
    )
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )Adjustments for:Depreciation and amortisation
    
    
    184,837
    
    
    
    259,759
    
    
    
    464,773Options issued in consideration of working capital facility
    
    
    467,000
    
    
    
    
    
    
    
    Accretion of convertible note liability
    
    
    870,700
    
    
    
    
    
    
    
    Net loss on disposal of discontinued operation
    
    
    
    
    
    
    658,605
    
    
    
    Net loss on disposal of intangible assets
    
    
    1,722
    
    
    
    
    
    
    
    Foreign exchange (gains)/losses
    
    
    10,213
    
    
    
    27,022
    
    
    
    (19,694
    )Impairment loss on investments
    
    
    
    
    
    
    
    
    
    
    1,834,152Fair value of services paid for via issue of options
    
    
    358,686
    
    
    
    409,728
    
    
    
    801,445Fair value of services paid for via issue of shares
    
    
    25,031
    
    
    
    
    
    
    
    111,595Fair value adjustment to embedded derivatives
    
    
    3,244,330
    
    
    
    
    
    
    
    Fair value adjustment to available-for-sale investments
    
    
    (34,580
    )
    
    
    
    
    
    
    Interest received
    
    
    (758,280
    )
    
    
    (602,949
    )
    
    
    (810,302
    )Inventory provision movements
    
    
    
    
    
    
    
    
    
    
    (90,415
    )Other
    
    
    607
    
    
    
    
    
    
    
    Changes in assets and liabilities:(Increase)/decrease in trade and other receivables
    
    
    275,352
    
    
    
    (412,492
    )
    
    
    106,607(Increase)/decrease in inventories
    
    
    
    
    
    
    250,982
    
    
    
    97,355(Increase)/decrease in prepayments
    
    
    956,889
    
    
    
    451,569
    
    
    
    835,269(Decrease)/increase in trade and other payables
    
    
    431,492
    
    
    
    (700,396
    )
    
    
    (484,279
    )(Decrease)/increase in provisions
    
    
    164,549
    
    
    
    (55,049
    )
    
    
    (155,343
    )Net
cash
used in operating activities
    
    
    (7,456,339
    )
    
    
    (10,534,561
    )
    
    
    (10,412,964
    )
 9. Available-for-sale Financial Investments
 2006
    
    2005A$
    
    A$Securities  Fair value
    
    
    2,002,080
    
    
    
    5,056,140
   F-28




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 10. Trade and Other Receivables
 2006
    
    2005A$
    
    A$CurrentTrade receivables
    
    
    (i
    )
    
    
    154,321
    
    
    
    98,532Other receivables
    
    
    
    
    
    
    120,013
    
    
    
    66,399Allowance for doubtful debts
    
    
    
    
    
    
    
    
    
    
    (27,750
    )Goods and services tax  recoverable
    
    
    
    
    
    
    46,061
    
    
    
    107,564Interest receivable
    
    
    
    
    
    
    102,540
    
    
    
    17,695Income tax receivable
    
    
    
    
    
    
    
    
    
    
    337,565422,935
    
    
    
    600,005Related party receivables:Key management personnel
    
    (iii)
    
    
    
    
    
    
    13,436422,935
    
    
    
    613,441Non currentSecurity deposits
    
    (ii)
    
    
    510,795
    
    
    
    30,600510,795
    
    
    
    30,600
 
 (i)
    
    Trade receivables are non-interest bearing and are generally on 30 day terms.(ii)
    
    Includes a guarantee deposit of A$480,798 as security over assets subject to a finance lease (Note 16).(iii)
    
    For terms and conditions relating to related party receivables refer to Note 25 (f) 11. Interests in Controlled Entities
 Country of
    
    Percentage of equity held by theIncorporation
    
    consolidated entity2006
    
    2005
    
    2004Metal Storm Inc.
    
    USA
    
    
    49
    %
    
    
    49
    %
    
    
    49
    %ProCam Machine LLC
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Metal Storm USA Limited
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Digigun LLC
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  F-29




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 12. Property, Plant and Equipment
 2006
    
    
    2005A$
    
    
    A$Leasehold improvementsAt 1 January, net of accumulated depreciation
    
    
    20,070
    
    
    
    35,059Additions
    
    
    183,629
    
    
    
    726Disposals
    
    
    (73,173
    )
    
    
    Depreciation charge for the year
    
    
    (30,459
    )
    
    
    (15,715
    )At 31 December, net of accumulated depreciation
    
    
    100,067
    
    
    
    20,070At 1 January
Cost
    
    
    63,384
    
    
    
    62,658Accumulated depreciation
    
    
    (43,314
    )
    
    
    (27,599
    )Net carrying amount
    
    
    20,070
    
    
    
    35,059At 31 December
Cost
    
    
    113,903
    
    
    
    63,384Accumulated depreciation
    
    
    (13,836
    )
    
    
    (43,314
    )Net carrying amount
    
    
    100,067
    
    
    
    20,070Plant and equipmentAt 1 January, net of accumulated depreciation
    
    
    211,559
    
    
    
    2,912,745Additions
    
    
    334,490
    
    
    
    103,566Attributable to discontinued operation
    
    
    
    
    
    
    (2,608,922
    )Disposals
    
    
    (245,522
    )
    
    
    Depreciation charge for the year
    
    
    (78,789
    )
    
    
    (195,830
    )At 31 December, net of accumulated depreciation
    
    
    221,738
    
    
    
    211,559At 1 January
Cost
    
    
    492,216
    
    
    
    4,021,626Accumulated depreciation
    
    
    (280,657
    )
    
    
    (1,108,881
    )Net carrying amount
    
    
    211,559
    
    
    
    2,912,745At 31 December
Cost
    
    
    467,786
    
    
    
    492,216Accumulated depreciation
    
    
    (246,048
    )
    
    
    (280,657
    )Net carrying amount
    
    
    221,738
    
    
    
    211,559Leased plant and equipmentAt 1 January, net of accumulated depreciation
    
    
    
    
    
    
    Additions
    
    
    306,180Disposals
    
    
    
    
    
    
    Depreciation charge for the year
    
    
    
    
    
    
    At 31 December, net of accumulated depreciation
    
    
    306,180
    
    
    
    At 1 January
    
    
    
    
    
    
    Cost
    
    
    
    
    
    
    Accumulated depreciation
    
    
    
    
    
    
    Net carrying amount
    
    
    
    
    
    
    At 31 December
Cost
    
    
    306,180
    
    
    
    Accumulated depreciation
    
    
    
    
    
    
    Net carrying amount
    
    
    306,180
    
    
    
    
 F-30




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 12.
Property, Plant and Equipment (continued)
 2006
    
    
    2005A$
    
    
    A$Total property, plant and equipmentAt 1 January, net of accumulated depreciation
    
    
    231,629
    
    
    
    2,947,804Additions
    
    
    824,299
    
    
    
    104,292Attributable to discontinued operation
    
    
    
    
    
    
    (2,608,922
    )Disposals
    
    
    (318,695
    )
    
    
    Depreciation charge for the year
    
    
    (109,248
    )
    
    
    (211,545
    )At 31 December, net of accumulated depreciation
    
    
    627,985
    
    
    
    231,629At 1 January
Cost
    
    
    555,600
    
    
    
    4,084,284Accumulated depreciation
    
    
    (323,971
    )
    
    
    (1,136,480
    )Net carrying amount
    
    
    231,629
    
    
    
    2,947,804At 31 December
Cost
    
    
    887,869
    
    
    
    555,600Accumulated depreciation
    
    
    (259,884
    )
    
    
    (323,971
    )Net carrying amount
    
    
    627,985
    
    
    
    231,629
    13. Intangible Assets and Goodwill
 2006
    
    
    2005A$
    
    
    A$SoftwareAt 1 January, net of accumulated amortisation
    
    
    51,938
    
    
    
    26,145Additions
    
    
    137,197
    
    
    
    74,007Disposals
    
    
    (1,722
    )
    
    
    Amortisation charge for the year
    
    
    (75,589
    )
    
    
    (48,214
    )At 31 December, net of accumulated
amortisation
    
    
    111,824
    
    
    
    51,938At 1 January
Cost
    
    
    122,889
    
    
    
    48,882Accumulated amortisation
    
    
    (70,951
    )
    
    
    (22,737
    )Net carrying amount
    
    
    51,938
    
    
    
    26,145At 31 December
Cost
    
    
    211,204
    
    
    
    122,889Accumulated amortisation
    
    
    (99,380
    )
    
    
    (70,951
    )Net carrying amount
    
    
    111,824
    
    
    
    51,938
 F-31




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 13. Intangible Assets and Goodwill (continued)
 2006
    
    
    2005A$
    
    
    A$GoodwillAt 1 January, net of accumulated impairment
    
    
    
    
    
    
    Additions
    
    
    
    
    
    
    Impairment loss
    
    
    
    
    
    
    At 31 December, net of accumulated impairment
    
    
    
    
    
    
    At 1 January
Cost
    
    
    1,861,726
    
    
    
    1,861,726Accumulated amortisation
    
    
    (27,574
    )
    
    
    (27,574
    )Accumulated impairment losses
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net carrying amount
    
    
    
    
    
    
    At 31 December
Cost
    
    
    1,861,726
    
    
    
    1,861,726Accumulated amortisation
    
    
    (27,574
    )
    
    
    (27,574
    )Accumulated impairment losses
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net carrying amount
    
    
    
    
    
    
    Total intangiblesAt 1 January, net of accumulated
amortisation and impairment
    
    
    51,938
    
    
    
    26,145Additions
    
    
    137,197
    
    
    
    74,007Impairment loss
    
    
    (1,722
    )
    
    
    Amortisation charge for the year
    
    
    (75,589
    )
    
    
    (48,214
    )At 31 December, net of accumulated
amortisation
    
    
    111,824
    
    
    
    51,938At 1 January
Cost
    
    
    1,984,615
    
    
    
    1,910,608Accumulated amortisation
    
    
    (98,525
    )
    
    
    (50,311
    )Accumulated impairment losses
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net carrying amount
    
    
    51,938
    
    
    
    26,145At 31 December
Cost
    
    
    2,072,930
    
    
    
    1,984,615Accumulated amortisation
    
    
    (126,954
    )
    
    
    (98,525
    )Accumulated impairment losses
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net carrying amount
    
    
    111,824
    
    
    
    51,938
      F-32




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 13. Intangible Assets and Goodwill (continued)
     14. Share-based Payment Plans
 Options Issued under the Constitution
     
    
    Expected volatility  calculated using historical information for a period equivalent to
the expected life of the option dated back from the grant date of the options. This has a
range between 57% and 65% depending on grant date and expected life of the options.
    
    Risk-free interest rate  based on the implied yield on zero coupon Australian
Government bonds with a maturity equal to the expected life of the option.
    
    Expected life of the option  Range from four to eight years determined by the terms of
the option agreement and managements assessment of when the option will be exercised.
    
    Option exercise price  as per option terms.
    
    Share price  share price at grant date of the option.
 
 F-33




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 14. Share-based Payment Plans (continued)
  2006
    
    
    2005No.
    
    
    WAEP
    
    
    No.
    
    
    WAEPOutstanding at the beginning of the year
    
    
    15,463,938
    
    
    
    0.30
    
    
    
    12,399,353
    
    
    
    0.28Granted during the year
    
    
    3,547,500
    
    
    
    0.40
    
    
    
    3,268,750
    
    
    
    0.40Expired during the year
    
    
    (910,500
    )
    
    
    0.57
    
    
    
    (204,165
    )
    
    
    0.87Outstanding at the end of the year
    
    
    18,100,938
    
    
    
    0.30
    
    
    
    15,463,938
    
    
    
    0.30Exercisable at the end of the year
    
    
    11,313,438
    
    
    
    0.42
    
    
    
    10,113,438
    
    
    
    0.32
 F-34




---



##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 14. Share-based Payment Plans (continued)
  Exercise PriceExpiry Date
    
    A$
    
    2006 No.
    
    2005 No.8 January 2006
    
    
    1.162
    
    
    
    
    
    
    
    62,5003 March 2006
    
    
    0.400
    
    
    
    
    
    
    
    55,0004 June 2006
    
    
    1.162
    
    
    
    
    
    
    
    62,5003 September 2006
    
    
    0.556
    
    
    
    
    
    
    
    12,5003 September 2006
    
    
    1.162
    
    
    
    
    
    
    
    62,50019 October 2006
    
    
    0.400
    
    
    
    
    
    
    
    118,00031 October 2006
    
    
    0.400
    
    
    
    
    
    
    
    500,00031 October 2006
    
    
    0.556
    
    
    
    
    
    
    
    12,50031 December 2006
    
    
    0.556
    
    
    
    
    
    
    
    25,0006 February 2007
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50014 April 2007
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50014 September 2007
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50014 December 2007
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50031 December 2007
    
    
    0.400
    
    
    
    6,250
    
    
    
    6,25031 March 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,5004 June 2008
    
    
    0.388
    
    
    
    5,000
    
    
    
    5,00030 June 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50030 September 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50031 December 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,50014 January 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,0002 February 2009
    
    
    0.400
    
    
    
    100,000
    
    
    
    100,00016 February 2009
    
    
    0.400
    
    
    
    14,438
    
    
    
    14,43824 February 2009
    
    
    0.400
    
    
    
    81,250
    
    
    
    81,25010 March 2009
    
    
    0.400
    
    
    
    8,250
    
    
    
    8,25031 March 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,5005 April 2009
    
    
    0.400
    
    
    
    29,500
    
    
    
    29,50014 April 2009
    
    
    0.400
    
    
    
    1,100,000
    
    
    
    1,100,00010 May 2009
    
    
    0.400
    
    
    
    25,000
    
    
    
    25,0008 June 2009
    
    
    0.400
    
    
    
    25,000
    
    
    
    25,00021 June 2009
    
    
    0.400
    
    
    
    3,225,000
    
    
    
    3,225,00021 June 2009
    
    
    1.100
    
    
    
    40,000
    
    
    
    40,00021 June 2009
    
    
    1.150
    
    
    
    200,000
    
    
    
    200,00030 June 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,5005 July 2009
    
    
    0.400
    
    
    
    75,000
    
    
    
    75,00014 July 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,0004 September 2009
    
    
    0.400
    
    
    
    31,250
    
    
    
    31,25030 September 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,50014 October 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,00024 November 2009
    
    
    0.400
    
    
    
    6,250
    
    
    
    6,2504 December 2009
    
    
    0.400
    
    
    
    31,250
    
    
    
    31,2507 December 2009
    
    
    0.400
    
    
    
    12,500
    
    
    
    12,50031 December 2009
    
    
    0.400
    
    
    
    150,000
    
    
    
    150,00018 March 2010
    
    
    0.400
    
    
    
    20,000
    
    
    
    31 March 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,00021 June 2010
    
    
    0.400
    
    
    
    578,750
    
    
    
    578,75024 June 2010
    
    
    0.400
    
    
    
    1,990,000
    
    
    
    1,990,00030 June 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,00030 September 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,00031 December 2010
    
    
    0.400
    
    
    
    218,750
    
    
    
    193,75031 March 2011
    
    
    0.400
    
    
    
    193,750
    
    
    
    131,25028 April 2011
    
    
    0.400
    
    
    
    940,000
    
    
    
    30 June 2011
    
    
    0.400
    
    
    
    818,750
    
    
    
    131,2502 July 2011
    
    
    0.010
    
    
    
    5,000,000
    
    
    
    5,000,00030 September 2011
    
    
    0.400
    
    
    
    125,000
    
    
    
    100,00027 October 2011
    
    
    0.400
    
    
    
    506,250
    
    
    
    31 December 2011
    
    
    0.400
    
    
    
    193,750
    
    
    
    31 March 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    30 June 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    30 September 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    31 December 2012
    
    
    0.400
    
    
    
    168,750
    
    
    
    31 March 2013
    
    
    0.400
    
    
    
    168,750
    
    
    
    30 June 2013
    
    
    0.400
    
    
    
    168,750
    
    
    
    18,100,938
    
    
    
    15,463,938
 F-35




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##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 14. Share-based Payment Plans (continued)
 Weighted average remaining contractual life of options
  Weighted averageExercise Price
    
    Number of options outstanding at
    
    remaining contractualA$
    
    31 December 2006
    
    life (months)$0.56
    
    
    100,000
    
    
    
    13$0.39
    
    
    5,000
    
    
    
    17$1.10-$1.15
    
    
    240,000
    
    
    
    30$0.40
    
    
    12,755,938
    
    
    
    42$0.01
    
    
    5,000,000
    
    
    
    54$0.30
    
    
    18,100,938
    (i)
    
    
    45
   Range of exercise prices
  Weighted average fair value
  Employee Share Option Plan
       F-36




---



##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 15. Trade and Other Payables
 2006
    
    2005A$
    
    A$Trade payables
    
    
    (i
    )
    
    
    310,036
    
    
    
    259,508Interest payable
    
    
    
    
    
    
    671,300
    
    
    
    Other payables
    
    (ii)
    
    
    302,494
    
    
    
    511,4821,283,830
    
    
    
    770,990Related party payables:Key management personnel
    
    (iii)
    
    
    38,212
    
    
    
    119,560Carrying amount of trade and other payables
    
    
    
    
    
    
    1,322,042
    
    
    
    890,550
 
 (i)
    
    Trade payables are non interest-bearing and are normally settled on 30 day terms.(ii)
    
    Other payables are non-interest bearing and have an average term of 30 days.(iii)
    
    For terms and conditions relating to related party payables refer to Note 25 (f). 16. Interest-bearing Loans and Borrowings
 2006
    
    2005Current
    
    Maturity
    
    A$
    
    A$SecuredObligations under finance leases (b)
    
    
    2007
    
    
    
    50,335
    
    
    
    UnsecuredConvertible notes (d)
    
    
    2009
    
    
    
    11,600,613
    
    
    
    Other loan  insurance premium (c)
    
    
    2007
    
    
    
    252,204
    
    
    
    353,67411,903,152
    
    
    
    353,674Embedded derivatives (e)
    
    
    
    
    
    
    10,811,057
    
    
    
    Non currentSecuredObligations under finance leases (b)
    
    
    2008-2009
    
    
    
    255,845
    
    
    
    255,845
    
    
    
    
 (a) Fair value disclosure
  (b) Finance leases
  (c) Other loan  insurance premium
  F-37




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##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 16. Interest-bearing Loans and Borrowings (continued)
 (d) Convertible notes
   2006
    
    2005A$
    
    A$Convertible notes:Balance at 1 January 2006
    
    
    
    
    
    
    Face value of convertible notes issued on 1 September 2006
    
    
    27,500,000
    
    
    
    Value of embedded derivatives (e)
    
    
    (7,944,444
    )
    
    
    Fair value of detachable options (note 18)
    
    
    (4,379,638
    )
    
    
    Fair value of convertible notes issued on 1 September 2006
    
    
    15,175,918
    
    
    
    Transaction costs of convertible notes issue
    
    
    (3,956,802
    )
    
    
    Accretion of convertible note liability
    
    
    870,700
    
    
    
    Conversion of convertible notes to ordinary shares
    
    
    (489,203
    )
    
    
    Balance at year end
    
    
    11,600,613
    
    
    
    
   Period
    
    Minimum Cash BalanceIssue date to 31 December 2006
    
    $22.5 million1 January 2007 to 30 June 2007
    
    $19.5 million1 July 2007 to 31 December 2007
    
    $   15 million1 January 2008 to 30 June 2008
    
    $12.5 million1 July 2008 to 31 December 2008
    
    $  7.5 million
  (i)
    
    two fully functional prototypes of stabilised remotely operable weapons systems
including an Electro Optic Systems electronic fire control system and a Metal Storm
Ballistic Weapon, as defined in the Teaming Agreement between Electro Optic Systems Pty
Limited and the Company dated 2 August 2005 (subsequently named the Redback system) are
assembled and ready for inspection before 30 June 2007;
 F-38




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##### Table of Contents



Metal Storm Limited 
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 16. Interest-bearing Loans and Borrowings (continued)
 (d) Convertible notes (continued)
 (ii)
    
    two fully functional prototype units of the Three Shot Grenade Launcher (known as
3GL) are assembled and ready for inspection before 30 June 2007;(iii)
    
    a successful live test firing of low velocity air burst rounds and low velocity high
explosive rounds suitable for Metal Storm Ballistic Weapons in conjunction with Singapore
Technologies Kinectics Ltd (as defined in the Teaming Agreement between the Company and
Singapore Technologies Kinetics Ltd dated 28 September 2005) before 30 June 2007.
 (e) Embedded derivative
 2006
    
    2005A$
    
    A$Balance at 1 January 2006
    
    
    
    
    
    
    Value of embedded derivatives on 1 September 2006
    
    
    7,944,444
    
    
    
    Conversion of convertible notes to ordinary shares
    
    
    (377,717
    )
    
    
    Fair value movement
    
    
    3,244,330
    
    
    
    Balance at year end
    
    
    10,811,057
    
    
    
    
 (f) Listed Options
 Detachable options
  Harmony options
   
    
    Expected volatility  calculated using historical information for a period equivalent to
the expected life of the option dated back from the grant date of the options. This had a
volatility of 65% based on the grant date and expected life of the options.
    
    Risk-free interest rate  based on the implied yield on zero coupon Australian
Government bonds with a maturity equal to the expected life of the option.
    
    Expected life of the option  Two years was determined by the terms of the option
agreement and managements assessment of when the option will be exercised.
    
    Option exercise price  as per option terms.
    
    Share price  share price at grant date of the option.
  F-39




---



##### Table of Contents



Metal Storm Limited  Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 17. Provisions
 Onerous LeaseMake Good Provision
    
    Contract
    
    Payroll
    
    TotalA$
    
    A$
    
    A$
    
    A$At 1 January 2006
    
    
    45,026
    
    
    
    136,203
    
    
    
    96,219
    
    
    
    277,448Arising during year
    
    
    17,078
    
    
    
    35,045
    
    
    
    398,715
    
    
    
    450,838Utilised during year
    
    
    (37,541
    )
    
    
    
    
    
    
    (257,022
    )
    
    
    (294,563
    )Reclassified as Other Receivables
    
    
    
    
    
    
    
    
    
    
    5,047
    
    
    
    5,047Unwinding and amortisation
    
    
    3,227
    
    
    
    
    
    
    
    
    
    
    
    3,227At 31 December 2006
    
    
    27,790
    
    
    
    171,248
    
    
    
    242,959
    
    
    
    441,997Current 2006
    
    
    27,790
    
    
    
    171,248
    
    
    
    242,959
    
    
    
    441,997Non-Current 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,790
    
    
    
    171,248
    
    
    
    242,959
    
    
    
    441,997Current 2005
    
    
    45,026
    
    
    
    136,203
    
    
    
    96,219
    
    
    
    277,448Non-Current 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,026
    
    
    
    136,203
    
    
    
    96,219
    
    
    
    277,448
 Make good provision
 A provision is recognised to restore the leased premises to their original condition as required by
the lease agreements. The amount recognised represents the present value of the estimated cost to
restore the premises. Because of the long-term nature of the liability, the greatest uncertainty in
estimating the provision is the costs that will ultimately be incurred. The provision has been
calculated using a pre-tax discount rate of 11.035%.
 Onerous Lease Contract
  Payroll
  18. Contributed Equity and Reserves
 2006
    
    2005A$
    
    A$Ordinary Shares
Issued and fully paid
    
    
    60,199,980
    
    
    
    56,559,039
   F-40




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 18. Contributed Equity and Reserves (continued)
 Number of
    
    Issue
    
    AmountMovement in ordinary shares on issue
    
    
    
    shares
    
    price
    
    A$At 1 January 2005 and at 1 January 2006
    
    
    
    
    521,970,978
    
    
    
    
    
    
    
    56,559,039New share issue
    
    (i)
    
    
    89,396
    
    
    $
    0.28
    
    
    
    25,031New share issue
    
    (ii)
    
    
    22,648,691
    
    
    $
    0.13
    
    
    
    3,010,000Conversion of convertible notes to shares
    
    (iii)
    
    
    7,881,096
    
    
    $
    0.11
    
    
    
    866,921Exercise of detachable options
    
    (iv)
    
    
    51,231
    
    
    $
    0.15
    
    
    
    7,685Transaction costs of share issues
    
    (v)
    
    
    
    
    
    
    
    
    
    
    (268,696
    )At 31 December 2006
    
    
    
    
    552,641,392
    
    
    
    
    
    
    
    60,199,980
 
 (i)
    
    New share issue in part settlement of 2004 employee bonus, issued at market price less calculated Fringe Benefits Tax liability.(ii)
    
    New share issue for cash under a Share Purchase Plan on 19 May 2006, as part of a capital raising plan.(iii)
    
    6,421,634 convertible notes, issued for cash under the terms of the 28 July 2006 Renounceable Rights IssueProspectus, converted at 90% of the volume
weighted average price of shares during the 30 business days immediately preceding the conversion date.(iv)
    
    Issued under the terms of the 28 July 2006 Renounceable Rights IssueProspectus.(v)
    
    The transaction costs represent the cost of issuing shares. Number of
    
    Issue
    
    AmountMovement in options
    
    
    
    
    
    options
    
    price
    
    A$Listed optionsAt 1 January 2006Detachable options issued related to issuance of convertible notes
    
    
    (i
    )
    
    
    101,852,055
    
    
    $
    0.043
    
    
    
    4,379,638Options in payment to Harmony for commitment to underwrite the
transaction
    
    
    (i
    )
    
    
    65,000,000
    
    
    $
    0.043
    
    
    
    2,795,000Options issued in consideration for a working capital facility
    
    
    
    
    
    
    10,000,000
    
    
    $
    0.047
    
    
    
    467,000Exercise of 2006 options
    
    
    
    
    
    
    (51,231
    )
    
    $
    0.150
    
    
    
    (7,685
    )Listed options at 31 December 2006
    
    
    
    
    
    
    176,800,824Unlisted options (note 14)
    
    
    
    
    
    
    18,100,938Total options at 31 December 2006
    
    
    
    
    
    
    194,901,762
 
 (i)
    
    Issued under the terms of the 28 July 2006 Renounceable Rights IssueProspectus. Options Reserves
 Unlisted
    
    Listed optionsoptions reserve
    
    reserve
    
    TotalA$
    
    A$
    
    A$At 1 January 2005
    
    
    1,316,454
    
    
    
    
    
    
    
    1,316,454Expenses recognised
    
    
    409,728
    
    
    
    
    
    
    
    409,728At 31 December 2005
    
    
    1,726,182
    
    
    
    
    
    
    
    1,726,182Detachable options issued
related to issuance of convertible
notes
    
    
    
    
    
    
    4,379,638
    
    
    
    4,379,638Options issue costs
    
    
    
    
    
    
    (748,072
    )
    
    
    (748,072
    )Options paid as costs to Harmony
    
    
    
    
    
    
    3,262,000
    
    
    
    3,262,000Expenses recognised
    
    
    358,686
    
    
    
    
    
    
    
    358,686At 31 December 2006
    
    
    2,084,868
    
    
    
    6,893,566
    
    
    
    8,978,434
 F-41




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 18. Contributed Equity and Reserves (continued)
 Other Reserves
 AccumulatedBond reserve
    
    translation reserve
    
    TotalA$
    
    A$
    
    A$At 1 January 2005
    
    
    
    
    
    
    (142,886
    )
    
    
    (142,886
    )Currency translation differences
    
    
    
    
    
    
    48,101
    
    
    
    48,101Net gains on available-for-sale financial investments
    
    
    36,660
    
    
    
    
    
    
    
    36,660At 31 December 2005
    
    
    36,660
    
    
    
    (94,785
    )
    
    
    (58,125
    )Currency translation differences
    
    
    
    
    
    
    10,213
    
    
    
    10,213Net losses on available-for-sale financial investments
    
    
    (34,580
    )
    
    
    
    
    
    
    (34,580
    )At 31 December 2006
    
    
    2,080
    
    
    
    (84,572
    )
    
    
    (82,492
    )
 Accumulated Losses
 2006
    
    2005A$
    
    A$At 1 January
    
    
    (52,447,234
    )
    
    
    (41,532,634
    )Net loss
    
    
    (14,225,132
    )
    
    
    (10,914,600
    )At 31 December
    
    
    (66,672,366
    )
    
    
    (52,447,234
    )
 Nature and purpose of reserves
 Unlisted options reserve
 Bond reserve
 Accumulated translation reserve
 Listed options reserve
 F-42




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 19. Financial Risk Management Objectives and Policies
      Interest rate risk
   Fair Value Interest rate risk
  Foreign currency risk
    Credit risk
    Liquidity risk
   F-43




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 20. Financial Instruments
 Fair Values
  Carrying amount
    
    
    Fair value2006
    
    
    2005
    
    
    2006
    
    
    2005A$
    
    
    A$
    
    
    A$
    
    
    A$Financial Assets- currentCash and cash equivalents
    
    
    23,830,267
    
    
    
    635,861
    
    
    
    23,830,267
    
    
    
    635,861Available-for-sale financial assets
    
    
    2,002,080
    
    
    
    5,056,140
    
    
    
    2,002,080
    
    
    
    5,056,140Trade and other receivables
    
    
    422,935
    
    
    
    613,441
    
    
    
    422,935
    
    
    
    613,441Trade and other receivables (non-current)
    
    
    510,795
    
    
    
    30,600
    
    
    
    510,795
    
    
    
    30,600Financial LiabilitiesTrade payables
    
    
    1,942,525
    
    
    
    933,574
    
    
    
    1,942,525
    
    
    
    933,574Embedded derivative
    
    
    10,811,057
    
    
    
    
    
    
    
    10,811,057
    
    
    
    Interest bearing loans and borrowings
    
    
    11,903,152
    
    
    
    353,674
    
    
    
    11,903,152
    
    
    
    353,674Interest bearing loans and borrowings
(non-current)
    
    
    255,845
    
    
    
    
    
    
    
    255,845
    
    
    
    
 Interest rate risk
  Year ended 31 December 2006
 Weightedaverageeffective<1 Year
    
    >1-<2 Years
    
    >2-<3 Years
    
    Total
    
    interestA$
    
    A$
    
    A$
    
    A$
    
    rate %Financial AssetsFloating rateCash and cash equivalents
    
    
    23,830,267
    
    
    
    
    
    
    
    
    
    
    
    23,830,267
    
    
    
    5.70Fixed interest securities
    
    
    2,002,080
    
    
    
    
    
    
    
    
    
    
    
    2,002,080
    
    
    BBSW + 1.3Financial LiabilitiesFixed rateObligations under finance leases
    
    
    50,335
    
    
    
    57,724
    
    
    
    198,121
    
    
    
    306,180
    
    
    
    9.6Short term loans
    
    
    252,204
    
    
    
    
    
    
    
    
    
    
    
    252,204
    
    
    
    4.1Embedded derivatives (i)
    
    
    
    
    
    
    
    
    
    
    10,811,057
    
    
    
    10,811,057
    
    
    
    Convertible notes (i)
    
    
    
    
    
    
    
    
    
    
    11,600,613
    
    
    
    11,600,613
    
    
    
    46.9
 
 (i)
    
    At maturity 1 September 2009 the Company must repay the face value of the convertible
notes to the note holders unless prior to this time they elect to convert the notes to equity. F-44




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 20. Financial Instruments (continued)
 Year ended 31 December 2005
 Weightedaverageeffective<1 Year
    
    >1-<2 Years
    
    >2-<3 Years
    
    Total
    
    interestA$
    
    A$
    
    A$
    
    A$
    
    rate %Financial LiabilitiesFixed rateShort term loans
    
    
    353,674
    
    
    
    
    
    
    
    
    
    
    
    353,674
    
    
    
    4.1Floating rateCash and cash equivalents
    
    
    635,861
    
    
    
    
    
    
    
    
    
    
    
    635,861
    
    
    
    4.6Fixed interest securities
    
    
    5,056,140
    
    
    
    
    
    
    
    
    
    
    
    5,056,140
    
    
    BBSW + 1.3
  http://www.rba.gov.au
 21. Commitments and contingencies
 Operating lease commitments  Company as lessee
    2006
    
    2005A$
    
    A$Within one year
    
    
    380,269
    
    
    
    468,068After one year but not more than five years
    
    
    819,877
    
    
    
    1,085,904More than 5 years
    
    
    
    
    
    
    Total minimum lease payments
    
    
    1,200,146
    
    
    
    1,553,972
 Finance lease commitments  Company as lessee
  F-45




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 21. Commitments and contingencies (continued)
  2006Minimum lease
    
    Present value ofpayments
    
    lease paymentsA$
    
    A$Within one year
    
    
    76,533
    
    
    
    50,335After one year but not more than five years
    
    
    286,075
    
    
    
    255,845Total minimum lease payments
    
    
    362,608
    
    
    
    306,180Less amounts representing finance charges
    
    
    (56,428
    )
    
    
    306,180
    
    
    
    306,180
  2006
    
    2005A$
    
    A$Current interest-bearing loans and borrowings (note 16)
    
    
    50,335
    
    
    
    Non-current interest-bearing loans and borrowings (note 16)
    
    
    255,845
    
    
    
    Total included in interest-bearing loans and borrowings
    
    
    306,180
    
    
    
    
  US Army ARDEC
   Contingent Liabilities
 Potential claim concerning lease of two photocopiers  ProCam Machine LLC
  Motor Vehicle Accident Claim
  F-46




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 22. Related Party Disclosure
 Call option agreement
  23. Events after the Balance Sheet Date
  24. Auditors Remuneration
  2006
    
    
    2005
    
    
    2004A$
    
    
    A$
    
    
    A$An audit or review of
the financial report of the
entity and any other entity
in the consolidated entity
    
    
    387,550
    
    
    
    385,410
    
    
    
    437,661Other services in
relation to the entity and
any other entity in the
consolidated entity
    
    
    41,926
    
    
    
    31,500
    
    
    
    6,279429,476
    
    
    
    416,910
    
    
    
    443,940
  Non-audit
services
    

    90,800
    
    
    
    
    
    
    
    
 25. Key Management Personnel Disclosures
 (a) Details of Key Management Personnel
 DirectorsT J ODwyer
    
    Executive Chairman  appointed 28 April 2006B S McComish
    
    Non-executive DirectorJ M Crunk
    
    Non-executive DirectorP D Jonson
    
    Non-executive Director  appointed 6 February 2006J R Nicholls
    
    Non-executive Director  appointed 1 September 2006W A Downing
    
    Non-executive Deputy Chairman  resigned 1 November 2006D A Smith
    
    Managing Director & Chief Executive Officer  resigned 28 April 2006D L Alspach
    
    Non-executive Director  resigned 1 July 2006ExecutivesJ D MacDonald
    
    Chief Financial Officer & Company Secretary  resigned 22 March 2007P D Faulkner
    
    Senior VP  Director of US Operations  appointed to this role 1 September 2006J Cronin
    
    Managing EngineerG L Bergeron III
    
    Chief Technology Officer  resigned 31 January 2007I A Gillespie
    
    Chief Operating Officer  resigned 20 October 2006J C Chehansky
    
    Senior VP Business Development  resigned 1 May 2006
 F-47




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##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 25. Key Management Personnel Disclosures (continued)
 (b) Compensation of Key Management Personnel
 2006
    
    2005A$
    
    A$Short-Term
    
    
    2,111,346
    
    
    
    1,326,496Post Employment
    
    
    75,907
    
    
    
    61,182Share Based Payments
    
    
    263,085
    
    
    
    422,626Termination Benefits
    
    
    304,140
    
    
    
    500,000Totals
    
    
    2,754,478
    
    
    
    2,310,304
 Corporations Amendments Regulation 2006 Related Party Disclosures
 (c) Option holdings of Key Management Personnel
 Vested at 31 December 2006Balance at beginning of
    
    Granted as
    
    On purchase of
    
    Options
    
    Balance at end of
    
    
    
    
    
    Not31 December 2006
    
    period
    
    remuner-ation
    
    listed options
    
    expired
    
    period
    
    Exercisable
    
    ExerciseableDirectorsT J ODwyer
    
    
    
    
    
    
    
    
    
    
    33,819
    
    
    
    
    
    
    
    33,819
    
    
    
    33,819
    
    
    
    W A Downing
 resigned 1
November 2006
    
    
    3,400,000
    
    
    
    490,000
    
    
    
    
    
    
    
    
    
    
    
    3,890,000
    
    
    
    1,390,000
    
    
    
    2,500,000D A Smith 
resigned 28 April
2006
    
    
    
    
    
    
    625,000
    
    
    
    
    
    
    
    
    
    
    
    625,000
    
    
    
    625,000
    
    
    
    D L Alspach
 resigned 28 April
2006
    
    
    1,350,000
    
    
    
    450,000
    
    
    
    
    
    
    
    
    
    
    
    1,800,000
    
    
    
    1,800,000
    
    
    
    B S McComish 
resigned 8 March
2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Owens
    
    
    3,100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,100,000
    
    
    
    600,000
    
    
    
    2,500,000D W Christman
    
    
    1,533,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,533,750
    
    
    
    1,533,750
    
    
    
    J M ODwyer
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900,000
    
    
    
    900,000
    
    
    
    ExecutivesI A
Gillespie 
resigned 20 October
2006
    
    
    1,100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,100,000
    
    
    
    1,100,000
    
    
    
    J D MacDonald 
resigned 22 March
2007
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    500,000
    
    
    
    G L Bergeron III
resigned 31 January 2007
    
    
    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 Chehansky
 resigned 1 May
2006
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    C A Vehlowresigned
17 December 2004
    
    
    2,075,000
    
    
    
    
    
    
    
    
    
    
    
    (750,000
    )
    
    
    1,325,000
    
    
    
    1,325,000
    
    
    
    Total
    
    
    14,408,750
    
    
    
    1,840,000
    
    
    
    33,819
    
    
    
    (750,000
    )
    
    
    15,532,569
    
    
    
    10,457,569
    
    
    
    5,075,000
 
 *
    
    J Cronin did not meet the definition of a key management person under AASB 124 for the 2005
financial year when the options were granted, but is a key management person for 2006. F-48




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 25. Key Management Personnel Disclosures (continued)
 (c) Option holdings of Key Management Personnel (continued)
 Vested at 31 December 2005Balance at
    
    
    Granted as
    
    
    On exercise of
    
    
    Balance at end of
    
    
    
    
    
    
    Not31 December 2005
    
    beginning of period
    
    
    remuneration
    
    
    options
    
    
    period
    
    
    Exercisable
    
    
    exercisableDirectorsT J ODwyer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Downing (i)
    
    
    2,950,000
    
    
    
    450,000
    
    
    
    
    
    
    
    3,400,000
    
    
    
    900,000
    
    
    
    2,500,000D A Smith (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D L Alspach (i)
    
    
    675,000
    
    
    
    675,000
    
    
    
    
    
    
    
    1,350,000
    
    
    
    1,350,000
    
    
    
    B S McComish (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M ODwyer
    
    
    450,000
    
    
    
    450,000
    
    
    
    
    
    
    
    900,000
    
    
    
    900,000
    
    
    
    J D Heipt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Owens
    
    
    2,950,000
    
    
    
    150,000
    
    
    
    
    
    
    
    3,100,000
    
    
    
    600,000
    
    
    
    2,500,000D W Christman
    
    
    915,000
    
    
    
    618,750
    
    
    
    
    
    
    
    1,533,750
    
    
    
    1,533,750
    
    
    
    ExecutivesI A Gillespie (i)
    
    
    1,100,000
    
    
    
    
    
    
    
    
    
    
    
    1,100,000
    
    
    
    1,100,000
    
    
    
    J D MacDonald (ii)
    
    
    
    
    
    
    500,000
    
    
    
    
    
    
    
    500,000
    
    
    
    312,500
    
    
    
    187,500G L Bergeron III (ii)
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    187,500
    
    
    
    62,500J C Chehansky (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    C A Vehlow
    
    
    1,850,000
    
    
    
    225,000
    
    
    
    
    
    
    
    2,075,000
    
    
    
    2,075,000
    
    
    
    Total
    
    
    11,140,000
    
    
    
    3,068,750
    
    
    
    
    
    
    
    14,208,750
    
    
    
    8,958,750
    
    
    
    5,250,000
 
 (i)
    
    resigned during 2006(ii)
    
    resigned subsequent to 31 December 2006 F-49




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 25. Key Management Personnel Disclosures (continued)
 (d) Shareholdings of Key Management Personnel
 Balance at
    
    Granted as
    
    On exercise of
    
    Net Change
    
    Balance at end of31 December 2006
    
    beginning of period
    
    remuneration
    
    options
    
    Other
    
    periodDirectorsT J ODwyer
    
    
    63,611
    
    
    
    
    
    
    
    
    
    
    
    117,244
    
    
    
    180,855W A Downing (i)
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000D A Smith (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D L Alspach (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B S McComish (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    340,000
    
    
    
    340,000J Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExecutivesI A Gillespie *(i)
    
    
    
    
    
    
    89,396
    
    
    
    
    
    
    
    
    
    
    
    89,396J D MacDonald (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J Cronin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J C Chehansky (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    563,611
    
    
    
    89,396
    
    
    
    
    
    
    
    457,244
    
    
    
    1,110,251
 
 (i)
    
    resigned during 2006(ii)
    
    resigned subsequent to 31 December 2006*
    
    Mr Gillespie was issued 89,396 shares in 2006 in part settlement of a bonus due for the 2004
financial year. This was expensed in the 2005 financial statements. 31 December 2005DirectorsT J ODwyer
    
    
    63,611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,611W A Downing (i)
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000D A Smith (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D L Alspach (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B S McComish (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M ODwyer
    
    
    199,729,559
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199,729,559J D Heipt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Owens
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D W Christman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ExecutivesI A Gillespie (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J D MacDonald (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III (ii)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J C Chehansky (i)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    C A Vehlow
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    200,293,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,293,170
 
 (i)
    
    resigned during 2006(ii)
    
    resigned subsequent to 31 December 2006 F-50




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 25. Key Management Personnel Disclosures (continued)
 (d) Shareholdings of Key Management Personnel (continued)
  (e) Loans to Key Management Personnel
  (f) Other transactions and balances with Key Management Personnel
 Directors fees
  2006
    
    
    2005A$
    
    
    A$T J ODwyer
    
    
    6,666
    
    
    
    W A Downing
    
    
    
    
    
    
    44,560D L Alspach
    
    
    15,000
    
    
    
    75,000J M Crunk
    
    
    14,879
    
    
    
    B S McComish
    
    
    1,667
    
    
    
    38,212
    
    
    
    119,560
  Receivables due from key management personnel
 I A Gillespie
    
    
    
    
    
    
    13,436
    
    
    
    13,436
 This receivable was an interest-free advance with a six month repayment term.
 26. Reconciliation of AIFRS to USGAAP
  F-51




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 26. Reconciliation of AIFRS to USGAAP (continued)
 (a) Reconciliation of Net Loss
 2006
    
    2005
    
    2004Note
    
    A$
    
    A$
    
    A$Net loss reported using AIFRS
    
    
    
    
    
    
    (14,225,132
    )
    
    
    (10,914,600
    )
    
    
    (13,104,127
    )USGAAP adjustments -- Amortisation of non-compete agreements
    
    
    27
    (a)
    
    
    
    
    
    
    (33,153
    )
    
    
    (66,306
    )- Write back of non-compete agreements included
in goodwill under AIFRS
    
    
    27
    (a)
    
    
    
    
    
    
    
    
    
    
    193,809- Write-off of non-compete agreements
    
    
    27
    (a)
    
    
    
    
    
    
    (94,350
    )
    
    
    - Goodwill purchase price adjustment made for
USGAAP
    
    
    27
    (h)
    
    
    
    
    
    
    
    
    
    
    (638,688
    )- Share based payments
    
    
    27
    (g)
    
    
    
    
    
    
    
    
    
    
    335,624- Write-off of costs pertaining to capital raising
    
    
    27
    (b)
    
    
    327,248
    
    
    
    (327,248
    )
    
    
    - Onerous lease contract
    
    
    27
    (c)
    
    
    17,230
    
    
    
    (485,829
    )
    
    
    - Accretion expense on convertible notes
    
    
    27
    (d)
    
    
    (269,085
    )
    
    
    
    
    
    
    - Write back of embedded derivative fair value
adjustments
    
    
    27
    (d)
    
    
    3,244,330
    
    
    
    
    
    
    
    - Others
    
    
    27
    (i)
    
    
    (184,949
    )
    
    
    (161,664
    )
    
    
    158,455Net adjustments
    
    
    
    
    
    
    3,134,774
    
    
    
    (1,102,244
    )
    
    
    (17,106
    )Net loss in accordance with USGAAP
    
    
    
    
    
    
    (11,090,358
    )
    
    
    (12,016,844
    )
    
    
    (13,121,233
    )
 (b) Earnings per Share
 Weighted average number of shares
    
    
    27
    (e)
    
    
    537,796,067
    
    
    
    521,970,987
    
    
    
    500,886,725Basic and diluted loss per
share from continuing operations
    
    
    27
    (e)
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.02Basic and diluted loss per
share from discontinued
operations
    
    
    27
    (e)
    
    
    
    
    
    
    0.01
    
    
    
    0.01
 (c) Reconciliation of Shareholders Equity
 2006
    
    
    2005
    
    
    2004Note
    
    
    A$
    
    
    A$
    
    
    A$Total Equity reported using AIFRS
    
    
    
    
    
    
    2,423,556
    
    
    
    5,779,862
    
    
    
    16,199,993USGAAP adjustments -- Amortisation of non-compete agreements
    
    
    27
    (a)
    
    
    
    
    
    
    
    
    
    
    (66,306
    )- Write back of non-compete agreements
included in goodwill under AIFRS
    
    
    27
    (a)
    
    
    
    
    
    
    
    
    
    
    193,809- Write-off of capitalised costs
pertaining to capital raising
    
    
    27
    (b)
    
    
    
    
    
    
    (327,248
    )
    
    
    - Onerous lease contract
    
    
    27
    (c)
    
    
    (468,599
    )
    
    
    (485,829
    )
    
    
    - Accretion expense on convertible notes
    
    
    27
    (d)
    
    
(269,085
    )
    
    
    
    
    
    
    - Write back of embedded derivative fair
value adjustments
    
    
    27
    (d)
    
    
    3,244,330
    
    
    
    
    
    
    
    - Recognition of beneficial conversion
feature in convertible notes
    
    
    27
    (d)
    
    
    3,361,111
    
    
    
    
    
    
    
    - Others
    
    
    27
    (i)
    
    
    
    
    
    
    184,949
    
    
    
    346,613Net adjustments
    
    
    
    
    
    
    5,867,757
    
    
    
    (628,128
    )
    
    
    474,116Shareholders Equity according to US GAAP
    
    
    
    
    
    
    8,291,313
    
    
    
    5,151,734
    
    
    
    16,674,109
 F-52




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 26. Reconciliation of AIFRS to USGAAP (continued)
 (d) Reconciliation of Income
 2006
    
    
    2005
    
    
    2004Note
    
    
    A$
    
    
    A$
    
    
    A$Revenue under AIFRS
    
    
    
    
    
    
    2,339,310
    
    
    
    830,645
    
    
    
    837,201- Reversal of revenue to unearned revenue
    
    
    27
    (f)
    
    
 (390,107
    )
    
    
    
    
    
    
    - Interest revenue
    
    
    27
    (k)
    
    
    (758,280
    )
    
    
    (599,902
    )
    
    
    (794,565
    )Revenue under USGAAP
    
    
    
    
    
    
    1,190,923
    
    
    
    230,743
    
    
    
    42,636Other income/(expense) under AIFRS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - Interest income
    
    
    27
    (k)
    
    
    758,280
    
    
    
    599,902
    
    
    
    794,565- Research & development rebate received
    
    
    27
    (k)
    
    
    342,108
    
    
    
    648,320
    
    
    
    332,744- Interest expense
    
    
    27
    (k)
    
    
    (2,097,932
    )
    
    
    (35,496
    )
    
    
    (43,568
    )- Options issued in consideration for
working capital facility
    
    
    27
    (k)
    
    
(467,000
    )
    
    
    
    
    
    
    - Foreign exchange
    
    
    
    
    
    
    15,864
    
    
    
    (27,022
    )
    
    
    8,685Other income/(expense) under USGAAP
    
    
    
    
    
    
    (1,448,680
    )
    
    
    1,185,704
    
    
    
    1,092,426
 (e) Condensed Income Statement under USGAAP
 2006
    
    
    2005
    
    
    2004A$
    
    
    A$
    
    
    A$Revenue
    
    
    
    
    
    
    1,190,923
    
    
    
    230,743
    
    
    
    42,636Operating Expenses
    
    
    
    
    
    
    (10,810,575
    )
    
    
    (11,217,569
    )
    
    
    (10,395,199
    )Loss from operations
    
    
    
    
    
    
    (9,619,652
    )
    
    
    (10,986,826
    )
    
    
    (10,352,563
    )Other income / (expense)
    
    
    
    
    
    
    (1,448,680
    )
    
    
    1,185,704
    
    
    
    1,092,426Loss from continuing operations
    
    
    
    
    
    
    (11,068,332
    )
    
    
    (9,801,122
    )
    
    
    (9,260,137
    )Loss from discontinued operations net of tax
    
    
    27
    (j)
    
    
    (22,026
    )
    
    
    (2,215,722
    )
    
    
    (3,861,096
    )Net loss
    
    
    
    
    
    
    (11,090,358
    )
    
    
    (12,016,844
    )
    
    
    (13,121,233
    )
 27. Significant Differences between AIFRS and USGAAP
 (a) Non-compete Agreements
    F-53




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
  27. Significant Differences between AIFRS and USGAAP (continued)
  (b) Capital Raise Costs
   (c) Onerous Lease Contract
   (d) Convertible Notes
     F-54




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
  27. Significant Differences between AIFRS and USGAAP (continued)
 (d) Convertible Notes (continued)
    Under US GAAP, the rollforward analysis of convertible notes follows:
 2006A$Balance at 1 January
    
    
    Face value of convertible notes issued on 1 September
    
    
    27,500,000Value of beneficial conversion feature recognised in equity
    
    
    (3,361,111
    )Fair value of detachable options
    
    
    (4,379,638
    )Fair value of convertible notes issued on 1 September
    
    
    19,759,251Accretion of convertible note liability
    
    
    520,783Conversion of convertible notes to ordinary shares
    
    
    (626,727
    )Balance at year end
    
    
    19,653,307
 (e) Earnings per Share
  (f) Revenue recognition
  (g) Share-based payments
   F-55




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 27. Significant Differences between AIFRS and USGAAP (continued)
 (g) Share-based payments (continued)
      (h) Goodwill
 a. Recognition
  b. Impairment loss
  (i) Others
  (j) Discontinued Operations
  2006
    
    2005
    
    2004A$
    
    A$
    
    A$Loss from discontinued operations AIFRS:
    
    
    39,256
    
    
    
    1,602,390
    
    
    
    1,515,759Impairment loss reclassification to discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,834,152Amortisation of non-compete agreement (see Note 27(a))
    
    
    
    
    
    
    33,153
    
    
    
    66,306Write-back of non-compete agreements included in goodwill for AIFRS
(see Note 27(a))
    
    
    
    
    
    
    
    
    
    
    (193,809
    )Write-off of non-compete agreements (see Note 27(a))
    
    
    
    
    
    
    94,350
    
    
    
    Goodwill purchase price adjustment made for USGAAP (see Note 27 (h))
    
    
    
    
    
    
    
    
    
    
    638,688Onerous lease contracts (see Note 27(c))
    
    
    (17,230
    )
    
    
    485,829
    
    
    
    Loss from discontinued operations US GAAP:
    
    
    22,026
    
    
    
    2,215,722
    
    
    
    3,861,096
 F-56




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 27. Significant Differences between AIFRS and USGAAP (continued)
 (k) Consolidated Income Statement Classification Differences
     (l) Recent Accounting Pronouncements
 Uncertainty in Income Taxes
  F-57




---



##### Table of Contents



Metal Storm Limited
Notes to the Consolidated Financial Statements (Australian Dollars) (continued)
 27. Significant Differences between AIFRS and USGAAP (continued)
 (l) Recent Accounting Pronouncements (continued)
 Fair Value Measurements
  28. Additional Information
 Non-compete Agreements
 2006
    
    2005
    
    2004A$
    
    A$
    
    A$At cost
    
    
    198,917
    
    
    
    198,917
    
    
    
    198,917Less accumulated amortisation
    
    
    (104,567
    )
    
    
    (104,567
    )
    
    
    (71,414
    )Less write-off
    
    
    (94,350
    )
    
    
    (94,350
    )
    
    
    Net value
    
    
    
    
    
    
    
    
    
    
    127,503
 F-58




---



##### Table of Contents



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




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Constitution of Metal Storm*4.1
    
    DSTO Research Agreement dated April 20, 2001*4.2
    
    Deed of Amendment to the DSTO Research Agreement dated September 13, 2002 (portions omitted pursuant
to a request for confidential treatment; non-public information has been filed with the SEC)**4.3
    
    DSTO Technology License Agreement dated April 20, 2001, as amended (portions omitted pursuant to a
request for confidential treatment; non-public information has been filed with the SEC)*4.4
    
    Employment Agreement of Dr. Lee Finniear4.5
    
    Letter of Offer to Mr. Peter D. Faulkner4.6
    
    Separation Agreement, dated February 8, 2005, of J.M. ODwyer***4.7
    
    Deed of Termination Agreement, dated May 20, 2006, of David A. Smith****4.8
    
    Employment Agreement of Dr. Joe Cronin4.9
    
    Cash Advance Facility Agreement, dated June 16, 2006, between Metal Storm and Harmony Investment
Fund Limited****4.10
    
    Discretionary Share Option Scheme*4.11
    
    Convertible Note Trust Deed dated July 11, 20068.0
    
    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 Financial Controller 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 Financial Controller in accordance with Section 906 of the Sarbanes-Oxley Act
 
 *
    
    Incorporated by reference from our Registration Statement on Form 20-F filed on
December 12, 2001, File No. 000-31212.**
    
    Incorporated by reference from our Annual Report on Form 20-F filed on July 14, 2003.***
    
    Incorporated by reference from our Annual Report on Form 20-F filed on June 15, 2005.****
    
    Incorporated by reference from our Annual Report on Form 20-F filed on July 17, 2006.