##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION



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FORM 20-F/A



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(Mark one)

| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------



OR



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



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METAL STORM LIMITED

(Exact Name of Registrant as Specified in its Charter)



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Australia

(Jurisdiction of Incorporation or Organization)



Level 34, Central Plaza One

345 Queen Street

Brisbane, QLD, 4000

Australia

(Address of principal executive offices)



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Securities registered or to be registered pursuant to Section 12(b) of the Act:



None



Securities registered or to be registered pursuant to Section 12(g) of the Act:



Ordinary Shares

(Title of Class)



Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:



None



---



Indicate the number of outstanding shares of each of the issuers
classes of capital or common stock as of the date of the close of the period covered by the annual report.



460,245,890 Ordinary Shares



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) for the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark which financial statement item the registrant has elected to
follow. ̈Item 17    x  Item 18



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##### Table of Contents

Explanatory Note



This Form 20-F/A has been filed to (1) amend and restate Charter Pacific Corporation Limiteds holdings in Item 7.A. Major Stockholders and Related Party
Transactions  Major Stockholdersfor Metal Storms Form 20-F for the fiscal year ended December 31, 2003, filed July 15, 2004, based on information provided by Charter Pacific subsequent to July 15, 2004, and (2) to amend Note
11 Related Parties to the Financial Statements by deleting the statement This relationship deed expired 25 May 2001.



This 20-F/A consists of a cover page, this explanatory note, Item 7.A, the Financial Statement Pages, the signature page and Exhibits 12.1, 12.2, 13.1 and 13.2.



Other than as expressly set forth above, this Form 20-F/A does not, and does
not purport to, update, or restate the information in any other Item of the Form 20-F or reflect any events that have occurred after the Form 20-F was filed.



1



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##### Table of Contents

Item 7. Major Stockholders and Related Party Transactions



A. Major Stockholders



The following table sets out details, as of May 21, 2004, of entities beneficially holding more than five percent of the
ordinary shares of Metal Storm.



|                                        |  |                                                       |     |  |                 |  
|--------------------------------------- |  | ----------------------------------------------------- | --- |  | --------------- | -
|                                        |  | Ordinary Shares Beneficially Owned as at May 21, 2004 |    
|Name                                    |  | Number ofShares owned                                 |     |  | Percentof Class |  
|James Michael ODwyer                   |  | 199,729,664                                           | (1) |  | 38.37           | %
|Charter Pacific Corporation Limited (2) |  | 50,390,275                                            |     |  | 9.65            | %

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|(1) | 131,517,059 shares are owned by Mr. J.M. ODwyer, 68,212,500 shares are owned by ODwyer Investments Pty Ltd as trustee for the ODwyer Family Discretionary Trust and
105 shares owned by his wife Rhonda Clare ODwyer, which 105 shares he disclaims beneficial ownership.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | According to Charter Pacific Corporation Limited, it beneficially owned 40,390,275 ordinary shares of record and 10,000,000 ordinary shares through its ownership of 500,000 American
Depositary Shares of Metal Storm. Charter Pacific Corporation Limited is a public company listed on the Australian Stock Exchange. As of May 21, 2004, Charter Pacific Corporation Limited had approximately 3,800 shareholders.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



There has been a significant change in ownership
for both James Michael ODwyer and Charter Pacific Corporation Limited, who as at May 30, 2003 owned 45.5% and 26%, respectively, of our ordinary shares.



As at May 21, 2004, there were 9,532 record holders of ordinary shares, of which 9,371 represented Australian record holders holding approximately
98.3% of our outstanding ordinary shares.



To the best of our
knowledge, we are not owned or controlled by any other corporation, by any foreign government or by any other natural or legal person(s). We are not aware of any arrangement, the operation of which may at a subsequent date result in a change in
control of Metal Storm.



2



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|                                                                                                                                 |  |     
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                 |  | Page
|Metal Storm Limited                                                                                                              |  |     
|                                                                                                                                 | 
|Independent Auditors Report                                                                                                     |  | F-2 
|                                                                                                                                 | 
|Balance Sheets as at December 31, 2003 and 2002                                                                                  |  | F-3 
|                                                                                                                                 | 
|Statements of Operations for the years ended December 31, 2003, 2002 and 2001 and the period from inception to December 31, 2003 |  | F-4 
|                                                                                                                                 | 
|Changes in Stockholders Equity from inception to December 31, 2003                                                              |  | F-5 
|                                                                                                                                 | 
|Cash Flows for the years ended December 31, 2003, 2002 and 2001 and the period from inception to December 31, 2003               |  | F-9 
|                                                                                                                                 | 
|Notes to Financial Statements                                                                                                    |  | F-10



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of Metal Storm Limited



We have audited the accompanying consolidated balance sheets of Metal Storm Limited (a development stage enterprise) (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of
operations, changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Metal Storm Limited at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with U.S. generally
accepted accounting principles.



/s/
ERNST & YOUNG



Brisbane, Queensland, Australia

July 12, 2004



F-2



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

BALANCE SHEETS

(U.S. DOLLARS)



|                                                                                                                              |  |                   |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                              |  | As of December 31 |            
|                                                                                                                              |  | 2003              |             |   | 2002 |  
|ASSETS:                                                                                                                       |  |                   |             |   |      |   |             |  
|Current assets:                                                                                                               |  |                   |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                     |  | $                 | 6,049,249   |   |      | $ | 4,541,630   |  
|Receivables                                                                                                                   |  |                   | 451,146     |   |      |   |            |  
|Inventory                                                                                                                     |  |                   | 149,925     |   |      |   |            |  
|Prepaid expenses                                                                                                              |  |                   | 440,318     |   |      |   | 277,223     |  
|Other                                                                                                                         |  |                   | 17,161      |   |      |   | 53,130      |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Total current assets                                                                                                          |  |                   | 7,107,799   |   |      |   | 4,871,983   |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Property, plant and equipment, net                                                                                            |  |                   | 824,556     |   |      |   | 85,798      |  
|Property, plant and equipment under capital leases, net                                                                       |  |                   | 1,717,866   |   |      |   |            |  
|Other non-current receivables                                                                                                 |  |                   | 8,730       |   |      |   | 6,594       |  
|Intangibles, net                                                                                                              |  |                   | 1,697,497   |   |      |   |            |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Total assets                                                                                                                  |  | $                 | 11,356,448  |   |      | $ | 4,964,375   |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                         |  |                   |             |   |      |   |             |  
|Current liabilities:                                                                                                          |  |                   |             |   |      |   |             |  
|Accounts payable                                                                                                              |  | $                 | 1,306,244   |   |      | $ | 509,135     |  
|Accounts payableR&D contracts                                                                                                |  |                   | 411,400     |   |      |   | 395,500     |  
|Accounts payablerelated party                                                                                                |  |                   | 160,820     |   |      |   | 85,709      |  
|Bank loan                                                                                                                     |  |                   | 432,637     |   |      |   |            |  
|Obligations under capital leases                                                                                              |  |                   | 453,522     |   |      |   |            |  
|Accruals for employee entitlements                                                                                            |  |                   | 318,641     |   |      |   | 238,357     |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Total current liabilities                                                                                                     |  |                   | 3,083,264   |   |      |   | 1,228,701   |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Accounts payable                                                                                                              |  |                   | 6,359       |   |      |   | 7,557       |  
|Accruals for employee entitlements, non-current                                                                               |  |                   | 51,790      |   |      |   | 27,864      |  
|Obligations under capital leases                                                                                              |  |                   | 1,156,664   |   |      |   |            |  
|Other provisions                                                                                                              |  |                   | 24,620      |   |      |   |            |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Total liabilities                                                                                                             |  |                   | 4,322,697   |   |      |   | 1,264,122   |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Commitments and contingencies                                                                                                 |  |                   |            |   |      |   |            |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Stockholders equity:                                                                                                         |  |                   |             |   |      |   |             |  
|Ordinary shares issuedno par value; 460,245,890 and 438,878,548 shares issued and outstanding in 2003 and 2002,
respectively |  |                   | 23,692,899  |   |      |   | 16,658,496  |  
|Deficit accumulated during development stage                                                                                  |  |                   | (16,634,383 | ) |      |   | (11,903,628 | )
|Unearned compensation                                                                                                         |  |                   | (105,118    | ) |      |   | (156,440    | )
|Accumulated other comprehensive loss                                                                                          |  |                   | 80,353      |   |      |   | (898,175    | )
|                                                                                                                              |  |                   |             |   |      |   |             |  
|Total stockholders equity                                                                                                    |  |                   | 7,033,751   |   |      |   | 3,700,253   |  
|                                                                                                                              |  |                   |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                         |  | $                 | 11,356,448  |   |      | $ | 4,964,375   |  
|                                                                                                                              |  |                   |             |   |      |   |             |  



See accompanying notes
to financial statements



F-3



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

STATEMENTS OF OPERATIONS

(U.S.
DOLLARS)



|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|----------------------------------------------- |  | --------------------------------- | ----------- | - | ------------------------------------------------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                |  | For the years ending December 31, |             |   | For the Period from April 13, 1994 (inception) to December 31, 2003 |  
|                                                |  | 2003                              |             |   | 2002                                                                |   |             | 2001 |  |  
|Operating income:                               |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Sales income                                    |  | $                                 | 235,293     |   |                                                                     | $ |            |      |  | $ |            |   |  | $ | 235,293     |  
|Grant income                                    |  |                                   | 227,439     |   |                                                                     | $ | 12,373      |      |  | $ | 353,180     |   |  |   | 910,971     |  
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Total operating income                          |  |                                   | 462,732     |   |                                                                     |   | 12,373      |      |  |   | 353,180     |   |  |   | 1,146,264   |  
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Operating expenses:                             |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Cost of goods sold                              |  |                                   | 316,590     |   |                                                                     |   |            |      |  |   |            |   |  |   | 316,590     |  
|Research and development                        |  |                                   | 3,224,112   |   |                                                                     |   | 3,446,407   |      |  |   | 1,673,978   |   |  |   | 11,137,081  |  
|Depreciation and amortization                   |  |                                   | 56,000      |   |                                                                     |   | 53,982      |      |  |   | 29,578      |   |  |   | 182,224     |  
|Rentals on operating leases                     |  |                                   | 117,960     |   |                                                                     |   | 124,291     |      |  |   | 90,156      |   |  |   | 448,936     |  
|General and administrative                      |  |                                   | 1,843,805   |   |                                                                     |   | 1,498,944   |      |  |   | 1,135,043   |   |  |   | 5,659,957   |  
|Legal feesrelated party                        |  |                                   |            |   |                                                                     |   | 120,996     |      |  |   | 130,080     |   |  |   | 444,618     |  
|Consulting feesrelated party                   |  |                                   | 21,907      |   |                                                                     |   | 175,824     |      |  |   | 234,254     |   |  |   | 828,083     |  
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Total operating expenses                        |  |                                   | 5,580,374   |   |                                                                     |   | 5,420,444   |      |  |   | 3,293,089   |   |  |   | 19,017,489  |  
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Loss from operations                            |  |                                   | (5,117,642  | ) |                                                                     |   | (5,408,071  | )    |  |   | (2,939,909  | ) |  |   | (17,871,225 | )
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Other income (expense):                         |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Interest income                                 |  |                                   | 221,736     |   |                                                                     |   | 101,893     |      |  |   | 196,068     |   |  |   | 1,026,490   |  
|Research and development rebate received        |  |                                   | 274,937     |   |                                                                     |   |            |      |  |   |            |   |  |   | 274,937     |  
|Interest expense                                |  |                                   | (12,639     | ) |                                                                     |   | (901        | )    |  |   | (48         | ) |  |   | (18,281     | )
|Other income                                    |  |                                   |            |   |                                                                     |   | 384         |      |  |   |            |   |  |   | 384         |  
|Foreign exchange                                |  |                                   | (97,147     | ) |                                                                     |   | (72,898     | )    |  |   | 93,535      |   |  |   | (46,688     | )
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Total other income                              |  |                                   | 386,887     |   |                                                                     |   | 28,478      |      |  |   | 289,555     |   |  |   | 1,236,842   |  
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Net loss                                        |  | $                                 | (4,730,755  | ) |                                                                     | $ | (5,379,593  | )    |  | $ | (2,650,354  | ) |  | $ | (16,634,383 | )
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Net loss per ordinary share (basic and diluted) |  | $                                 | (0.011      | ) |                                                                     | $ | (0.013      | )    |  | $ | (0.006      | ) |  |   |             |  
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  
|Weighted average ordinary shares outstanding    |  |                                   | 442,525,034 |   |                                                                     |   | 428,974,260 |      |  |   | 422,326,884 |   |  |   |             |  
|                                                |  |                                   |             |   |                                                                     |   |             |      |  |   |             |   |  |   |             |  



See accompanying notes
to financial statements



F-4



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(U.S. DOLLARS)



|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------ | --------- | ------------------- | - | ---------- | --------------------------------- |  | --------------------------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                                                                                                      |  | Number of Ordinary Shares |  | Amount |           | Accumulated Deficit |   |            | Accumulated Unearned Compensation |  | Accumulated Other Comprehensive Income (Loss) |   |  | Total |        
|Balance at inception                                                                                  |  |                          |  | $      |          |                     | $ |           |                                   |  | $                                             |  |  | $     |        |   |  | $ |         |  
|Other comprehensive income:                                                                           |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Translation adjustment                                                                                |  |                          |  |        |          |                     |   |           |                                   |  |                                               |  |  |       | 12,679  |   |  |   | 12,679   |  
|Net loss                                                                                              |  |                          |  |        |          |                     |   | (740,991   | )                                 |  |                                               |  |  |       |        |   |  |   | (740,991 | )
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Comprehensive loss                                                                                    |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   | (728,312 | )
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Issuance of ordinary shares in exchange for patents and intellectual property (May 4, 1994)           |  | 1,125,000                 |  |        |          |                     |   |           |                                   |  |                                               |  |  |       |        |   |  |   |         |  
|Issuance of ordinary shares (May 4, 1994)                                                             |  | 500,002                   |  |        | 365,951   |                     |   |           |                                   |  |                                               |  |  |       |        |   |  |   | 365,951  |  
|Compensation expense                                                                                  |  |                          |  |        | 465,588   |                     |   |           |                                   |  |                                               |  |  |       |        |   |  |   | 465,588  |  
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|BalanceJune 30, 1995                                                                                 |  | 1,625,002                 |  |        | 831,539   |                     |   | (740,991   | )                                 |  |                                               |  |  |       | 12,679  |   |  |   | 103,227  |  
|Other comprehensive income:                                                                           |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Translation adjustment                                                                                |  |                          |  |        |          |                     |   |           |                                   |  |                                               |  |  |       | 21,618  |   |  |   | 21,618   |  
|Net loss                                                                                              |  |                          |  |        |          |                     |   | (178,748   | )                                 |  |                                               |  |  |       |        |   |  |   | (178,748 | )
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Comprehensive loss                                                                                    |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   | (157,130 | )
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Issuance of ordinary shares (100,000 November 3, 1995; 562,500 December 15, 1995; 5,000 May 20, 1996) |  | 667,500                   |  |        | 506,766   |                     |   |           |                                   |  |                                               |  |  |       |        |   |  |   | 506,766  |  
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|BalanceJune 30, 1996                                                                                 |  | 2,292,502                 |  |        | 1,338,305 |                     |   | (919,739   | )                                 |  |                                               |  |  |       | 34,297  |   |  |   | 452,863  |  
|Other comprehensive income:                                                                           |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Translation adjustment                                                                                |  |                          |  |        |          |                     |   |           |                                   |  |                                               |  |  |       | (14,622 | ) |  |   | (14,622  | )
|Net loss                                                                                              |  |                          |  |        |          |                     |   | (208,962   | )                                 |  |                                               |  |  |       |        |   |  |   | (208,962 | )
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Comprehensive loss                                                                                    |  |                          |  |        |          |                     |   |           |                                   |  |                                               |  |  |       |        |   |  |   | (223,584 | )
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|BalanceJune 30, 1997                                                                                 |  | 2,292,502                 |  |        | 1,338,305 |                     |   | (1,128,701 | )                                 |  |                                               |  |  |       | 19,675  |   |  |   | 229,279  |  
|Other comprehensive income:                                                                           |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Translation adjustment                                                                                |  |                          |  |        |          |                     |   |           |                                   |  |                                               |  |  |       | (62,120 | ) |  |   | (62,120  | )
|Net loss                                                                                              |  |                          |  |        |          |                     |   | (272,032   | )                                 |  |                                               |  |  |       |        |   |  |   | (272,032 | )
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Comprehensive loss                                                                                    |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   | (334,152 | )
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|Issuance of ordinary shares (March 30, 1998)                                                          |  | 820,000                   |  |        | 554,977   |                     |   |           |                                   |  |                                               |  |  |       |        |   |  |   | 554,977  |  
|Share options exercised (March 30, 1998)                                                              |  | 637,500                   |  |        | 4,314     |                     |   |           |                                   |  |                                               |  |  |       |        |   |  |   | 4,314    |  
|                                                                                                      |  |                           |  |        |           |                     |   |            |                                   |  |                                               |   |  |       |         |   |  |   |          |  
|BalanceJune 30, 1998                                                                                 |  | 3,750,002                 |  |        | 1,897,596 |                     |   | (1,400,733 | )                                 |  |                                               |  |  |       | (42,445 | ) |  |   | 454,418  |  



F-5



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(U.S. DOLLARS)



|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|---------------------------------------------------------------------------- |  | ------------------------- |  | ---------- | - |  | ------------------- | - |  | --------------------------------- | - |  | --------------------------------------------- | - |  | ---------- | -
|                                                                             |  | Number of Ordinary Shares |  | Amount     |   |  | Accumulated Deficit |   |  | Accumulated Unearned Compensation |   |  | Accumulated Other Comprehensive Income (Loss) |   |  | Total      |  
|BalanceJune 30, 1998                                                        |  | 3,750,002                 |  | 1,897,596  |   |  | (1,400,733          | ) |  |                                  |   |  | (42,445                                       | ) |  | 454,418    |  
|Other comprehensive income:                                                  |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Translation adjustment                                                       |  |                          |  |           |   |  |                    |   |  |                                  |   |  | (6,615                                        | ) |  | (6,615     | )
|Net loss                                                                     |  |                          |  |           |   |  | (184,463            | ) |  |                                  |   |  |                                              |   |  | (184,463   | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Comprehensive loss                                                           |  |                          |  |           |   |  |                    |   |  |                                  |   |  |                                              |   |  | (191,078   | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|BalanceDecember 31, 1998                                                    |  | 3,750,002                 |  | 1,897,596  |   |  | (1,585,196          | ) |  |                                  |   |  | (49,060                                       | ) |  | 263,340    |  
|Other comprehensive income:                                                  |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Translation adjustment                                                       |  |                          |  |           |   |  |                    |   |  |                                  |   |  | 131,537                                       |   |  | 131,537    |  
|Net loss                                                                     |  |                          |  |           |   |  | (1,130,571          | ) |  |                                  |   |  |                                              |   |  | (1,130,571 | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Comprehensive loss                                                           |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  | (999,034   | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Share split                                                                  |  | 76,500,040                |  |           |   |  |                    |   |  |                                  |   |  |                                              |   |  |           |  
|Issuance of ordinary shares (June 9, 1999)                                   |  | 4,000,000                 |  | 7,745,070  |   |  |                    |   |  |                                  |   |  |                                              |   |  | 7,745,070  |  
|Share issue costs                                                            |  |                          |  | (773,850   | ) |  |                    |   |  |                                  |   |  |                                              |   |  | (773,850   | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|BalanceDecember 31, 1999                                                    |  | 84,250,042                |  | 8,868,816  |   |  | (2,715,767          | ) |  |                                  |   |  | 82,477                                        |   |  | 6,235,526  |  
|Other comprehensive income:                                                  |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Translation adjustment                                                       |  |                          |  |           |   |  |                    |   |  |                                  |   |  | (945,371                                      | ) |  | (945,371   | )
|Net loss                                                                     |  |                          |  |           |   |  | (1,157,914          | ) |  |                                  |   |  |                                              |   |  | (1,157,914 | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Comprehensive loss                                                           |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  | (2,103,285 | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Share split                                                                  |  | 337,000,168               |  |           |   |  |                    |   |  |                                  |   |  |                                              |   |  |           |  
|Unearned compensation                                                        |  |                          |  | 69,098     |   |  |                    |   |  | (69,098                           | ) |  |                                              |   |  |           |  
|Amortization of unearned compensation                                        |  |                          |  |           |   |  |                    |   |  | 17,557                            |   |  |                                              |   |  | 17,557     |  
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|BalanceDecember 31, 2000                                                    |  | 421,250,210               |  | 8,937,914  |   |  | (3,873,681          | ) |  | (51,541                           | ) |  | (862,894                                      | ) |  | 4,149,798  |  
|Other comprehensive income:                                                  |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Translation adjustment                                                       |  |                          |  |           |   |  |                    |   |  |                                  |   |  | (370,601                                      | ) |  | (370,601   | )
|Net loss                                                                     |  |                          |  |           |   |  | (2,650,354          | ) |  |                                  |   |  |                                              |   |  | (2,650,354 | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Comprehensive loss                                                           |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  | (3,020,955 | )
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|Options issued to employee fully vested                                      |  |                          |  | 56,616     |   |  |                    |   |  |                                  |   |  |                                              |   |  | 56,616     |  
|Unearned compensation                                                        |  |                          |  | 746,237    |   |  |                    |   |  | (746,237                          | ) |  |                                              |   |  |           |  
|Amortization of unearned compensation                                        |  |                          |  |           |   |  |                    |   |  | 151,188                           |   |  |                                              |   |  | 151,188    |  
|Options issued to non-employee fully vested                                  |  |                          |  | 303,159    |   |  |                    |   |  |                                  |   |  |                                              |   |  | 303,159    |  
|Issuance of ordinary shares (1,390,154 March 19, 2001; 658,194 May 29, 2001) |  | 2,048,348                 |  | 1,553,770  |   |  |                    |   |  |                                  |   |  |                                              |   |  | 1,553,770  |  
|Issuance of ordinary shares (June 1, 2001)                                   |  | 100,000                   |  | 68,677     |   |  |                    |   |  |                                  |   |  |                                              |   |  | 68,677     |  
|Share options exercised (June 28, 2001)                                      |  | 5,000                     |  | 1,400      |   |  |                    |   |  |                                  |   |  |                                              |   |  | 1,400      |  
|                                                                             |  |                           |  |            |   |  |                     |   |  |                                   |   |  |                                               |   |  |            |  
|BalanceDecember 31, 2001                                                    |  | 423,403,558               |  | 11,667,773 |   |  | (6,524,035          | ) |  | (646,590                          | ) |  | (1,233,495                                    | ) |  | 3,263,653  |  



F-6



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(U.S. DOLLARS)



|                                                                                                                        |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------ | ---------- | - | ------------------- | - | ----------- | --------------------------------- |  | - | --------------------------------------------- | - |  | ----- | ---------- | - |  | - | ---------- | -
|                                                                                                                        |  | Number of Ordinary Shares |  | Amount |            |   | Accumulated Deficit |   |             | Accumulated Unearned Compensation |  |   | Accumulated Other Comprehensive Income (Loss) |   |  | Total |           
|BalanceDecember 31, 2001                                                                                               |  | 423,403,558               |  | $      | 11,667,773 |   |                     | $ | (6,524,035  | )                                 |  | $ | (646,590                                      | ) |  | $     | (1,233,495 | ) |  | $ | 3,263,653  |  
|Other comprehensive income:                                                                                             |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |            |   |  |   |            |  
|Translation adjustment                                                                                                  |  |                          |  |        |           |   |                     |   |            |                                   |  |   |                                              |   |  |       | 335,320    |   |  |   | 335,320    |  
|Net loss                                                                                                                |  |                          |  |        |           |   |                     |   | (5,379,593  | )                                 |  |   |                                              |   |  |       |           |   |  |   | (5,379,593 | )
|                                                                                                                        |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |            |   |  |   |            |  
|Comprehensive loss                                                                                                      |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |            |   |  |   | (5,044,273 | )
|                                                                                                                        |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |            |   |  |   |            |  
|Unearned compensation                                                                                                   |  |                          |  |        | (495,933   | ) |                     |   |            |                                   |  |   | 495,933                                       |   |  |       |           |   |  |   |           |  
|Amortization of unearned compensation                                                                                   |  |                          |  |        |           |   |                     |   |            |                                   |  |   | (5,783                                        | ) |  |       |           |   |  |   | (5,783     | )
|Share options exercised (500,000 May 31, 2002)                                                                          |  | 500,000                   |  |        | 132,319    |   |                     |   |            |                                   |  |   |                                              |   |  |       |           |   |  |   | 132,319    |  
|Issuance of ordinary shares (August 27, 2002)                                                                           |  | 14,142,700                |  |        | 5,009,132  |   |                     |   |            |                                   |  |   |                                              |   |  |       |           |   |  |   | 5,009,132  |  
|Share issue costs                                                                                                       |  |                          |  |        | (15,777    | ) |                     |   |            |                                   |  |   |                                              |   |  |       |           |   |  |   | (15,777    | )
|Share options exercised (6,958 September 24, 2002; 8,844 October 17, 2002)                                              |  | 15,802                    |  |        | 5,617      |   |                     |   |            |                                   |  |   |                                              |   |  |       |           |   |  |   | 5,617      |  
|Issuance of ordinary shares for services (September 24, 2002)                                                           |  | 766,488                   |  |        | 216,824    |   |                     |   |            |                                   |  |   |                                              |   |  |       |           |   |  |   | 216,824    |  
|Issuance of ordinary shares to employees (September 24, 2002)                                                           |  | 50,000                    |  |        | 14,416     |   |                     |   |            |                                   |  |   |                                              |   |  |       |           |   |  |   | 14,416     |  
|Options issued to non-employee fully vested (50,000 June 26, 2002; 766,488 September 24, 2002; 16,665 October 17, 2002) |  |                          |  |        | 124,125    |   |                     |   |            |                                   |  |   |                                              |   |  |       |           |   |  |   | 124,125    |  
|                                                                                                                        |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |            |   |  |   |            |  
|BalanceDecember 31, 2002                                                                                               |  | 438,878,548               |  |        | 16,658,496 |   |                     |   | (11,903,628 | )                                 |  |   | (156,440                                      | ) |  |       | (898,175   | ) |  |   | 3,700,253  |  



F-7



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(U.S. DOLLARS)



|                                                                                                                            |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |          |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------ | ---------- | - | ------------------- | - | ----------- | --------------------------------- |  | - | --------------------------------------------- | - |  | ----- | -------- | - |  | - | ---------- | -
|                                                                                                                            |  | Number of Ordinary Shares |  | Amount |            |   | Accumulated Deficit |   |             | Accumulated Unearned Compensation |  |   | Accumulated Other Comprehensive Income (Loss) |   |  | Total |         
|BalanceDecember 31, 2002                                                                                                   |  | 438,878,548               |  |        | 16,658,496 |   |                     |   | (11,903,628 | )                                 |  |   | (156,440                                      | ) |  |       | (898,175 | ) |  |   | 3,700,253  |  
|Other comprehensive income:                                                                                                 |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |          |   |  |   |            |  
|Translation adjustment                                                                                                      |  |                          |  |        |           |   |                     |   |            |                                   |  |   |                                              |   |  |       | 978,528  |   |  |   | 978,528    |  
|Net loss                                                                                                                    |  |                          |  |        |           |   |                     |   | (4,730,755  | )                                 |  |   |                                              |   |  |       |         |   |  |   | (4,730,755 | )
|                                                                                                                            |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |          |   |  |   |            |  
|Comprehensive loss                                                                                                          |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |          |   |  |   | (3,752,227 | )
|                                                                                                                            |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |          |   |  |   |            |  
|Unearned compensation                                                                                                       |  |                          |  |        | 30,267     |   |                     |   |            |                                   |  |   | (30,267                                       | ) |  |       |         |   |  |   |           |  
|Amortization of unearned compensation                                                                                       |  |                          |  |        |           |   |                     |   |            |                                   |  |   | 81,589                                        |   |  |       |         |   |  |   | 81,589     |  
|Issuance of ordinary shares to third parties (February 24, 2003)                                                            |  | 59,472                    |  |        | 15,635     |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 15,635     |  
|Share options exercised (January 28, 2003)                                                                                  |  | 1,008                     |  |        | 387        |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 387        |  
|Share options exercised (February 24, 2003)                                                                                 |  | 475                       |  |        | 185        |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 185        |  
|Share options exercised (June 4, 2003)                                                                                      |  | 125                       |  |        | 54         |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 54         |  
|Share options exercised (October 16, 2003)                                                                                  |  | 455                       |  |        | 204        |   |                     |   |             |                                   |  |   |                                               |   |  |       |          |   |  |   | 204        |  
|Share options exercised (December 4, 2003)                                                                                  |  | 250                       |  |        | 120        |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 120        |  
|Issuance of ordinary shares to employees (September 3, 2003)                                                                |  | 50,000                    |  |        | 16,440     |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 16,440     |  
|Issuance of ordinary shares under the Share Purchase Plan (October 2003)                                                    |  | 15,730,631                |  |        | 4,872,327  |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 4,872,327  |  
|Share issue costs                                                                                                           |  |                           |  |        | (23,964    | ) |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | (23,964    | )
|Issuance of shares for purchase of ProCam Machine LLC (December 11, 2003)                                                   |  | 3,913,033                 |  |        | 1,416,374  |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 1,416,374  |  
|Issuance of shares for settlement of promissory note as part of the purchase of ProCam Machine LLC (December 11, 2003)      |  | 1,184,713                 |  |        | 407,999    |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 407,999    |  
|Issuance of shares for services rendered as part of the purchase of ProCam Machine LLC (December 11, 2003)                  |  | 427,180                   |  |        | 153,000    |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 153,000    |  
|Issuance of options in settlement of cash bonus payable (500,000 September 3, 2003; 118,000 November 19, 2003)              |  |                          |  |        | 140,138    |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 140,138    |  
|Issuance of options under employee share option plan  fully vested (5,000 on June 4, 2003 and 80,000 on September 3,
2003) |  |                           |  |        | 5,237      |   |                     |   |            |                                   |  |   |                                              |   |  |       |         |   |  |   | 5,237      |  
|                                                                                                                            |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |          |   |  |   |            |  
|BalanceDecember 31, 2003                                                                                                   |  | 460,245,890               |  | $      | 23,692,899 |   |                     | $ | (16,634,383 | )                                 |  | $ | (105,118                                      | ) |  | $     | 80,353   |   |  | $ | 7,033,751  |  
|                                                                                                                            |  |                           |  |        |            |   |                     |   |             |                                   |  |   |                                               |   |  |       |          |   |  |   |            |  



The functional
currency for the Companys operations is Australian dollars (A$). The translation from Australian dollars into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at balance sheet date and for revenue and
expense accounts using the average exchange rate during the period. The gains or losses resulting from such translation are included in other comprehensive income (loss).



See accompanying notes to financial statements



F-8



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

STATEMENTS OF CASH FLOWS

(U.S.
DOLLARS)



|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|------------------------------------------------------------ |  | --------------------------------- | ---------- | - | ------------------------------------------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ----------- | -
|                                                             |  | For the years ending December 31, |            |   | For the Period from April 13, 1994 (inception) to December 31, 2003 |  
|                                                             |  | 2003                              |            |   | 2002                                                                |   |            | 2001 |  |  
|Operating Activities                                         |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Net loss                                                     |  | $                                 | (4,730,755 | ) |                                                                     | $ | (5,379,593 | )    |  | $ | (2,650,354 | ) |  | $ | (16,634,383 | )
|Depreciation and amortization                                |  |                                   | 56,000     |   |                                                                     |   | 53,982     |      |  |   | 29,578     |   |  |   | 182,224     |  
|Stock based compensationemployee                            |  |                                   | 86,826     |   |                                                                     |   | 8,633      |      |  |   | 207,804    |   |  |   | 320,900     |  
|Shares issued to employee under terms of employment contract |  |                                   | 16,440     |   |                                                                     |   |           |      |  |   |           |   |  |   | 16,440      |  
|Stock based compensationnon-employees                       |  |                                   | 15,635     |   |                                                                     |   | 340,949    |      |  |   | 371,836    |   |  |   | 728,420     |  
|Foreign exchange loss                                        |  |                                   | (22,750    | ) |                                                                     |   | 72,898     |      |  |   | 29,048     |   |  |   | 79,196      |  
|Net change in operating assets and liabilities:              |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|(Increase) decrease in assets:                               |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Grant receivable and other current assets                    |  |                                   | 40,252     |   |                                                                     |   | 171,810    |      |  |   | (112,630   | ) |  |   | 12,807      |  
|Prepaid expenses                                             |  |                                   | 26,931     |   |                                                                     |   | (185,402   | )    |  |   | (33,801    | ) |  |   | (233,145    | )
|Inventory                                                    |  |                                   | 85,813     |   |                                                                     |   |           |      |  |   |           |   |  |   | 85,813      |  
|Increase (decrease) in liabilities:                          |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Accounts payables                                            |  |                                   | (42,583    | ) |                                                                     |   | 734,545    |      |  |   | 32,073     |   |  |   | 953,113     |  
|Options issued to employees as settlement of bonus           |  |                                   | 140,138    |   |                                                                     |   |           |      |  |   |           |   |  |   | 140,138     |  
|Accruals for employee entitlements                           |  |                                   | 29,159     |   |                                                                     |   | 179,374    |      |  |   | 11,273     |   |  |   | 172,378     |  
|Accruals for employee entitlements, non-current              |  |                                   | (12,998    | ) |                                                                     |   | 13,594     |      |  |   | 21,519     |   |  |   | 31,699      |  
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Net cash used in operating activities                        |  |                                   | (4,311,892 | ) |                                                                     |   | (3,989,210 | )    |  |   | (2,093,654 | ) |  |   | (14,144,400 | )
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Investing activities                                         |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Purchase of controlled entity                                |  |                                   | (144,110   | ) |                                                                     |   |           |      |  |   |           |   |  |   | (144,110    | )
|Payment for property and equipment                           |  |                                   | (66,174    | ) |                                                                     |   | (15,111    | )    |  |   | (115,472   | ) |  |   | (283,160    | )
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Net cash used in investing activities                        |  |                                   | (210,284   | ) |                                                                     |   | (15,111    | )    |  |   | (115,472   | ) |  |   | (427,270    | )
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Financing Activities                                         |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Proceeds from share options exercised                        |  |                                   | 950        |   |                                                                     |   | 137,936    |      |  |   | 1,400      |   |  |   | 144,600     |  
|Proceeds from share issue                                    |  |                                   | 4,872,327  |   |                                                                     |   | 5,009,132  |      |  |   | 1,553,770  |   |  |   | 20,607,994  |  
|Share issue costs                                            |  |                                   | (23,964    | ) |                                                                     |   | (15,777    | )    |  |   |           |   |  |   | (813,591    | )
|Repayment of borrowings                                      |  |                                   | (37,161    | ) |                                                                     |   |           |      |  |   |           |   |  |   | (37,161     | )
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Net cash provided by financing activities                    |  |                                   | 4,812,152  |   |                                                                     |   | 5,131,291  |      |  |   | 1,555,170  |   |  |   | 19,901,842  |  
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Effect of exchange rate changes on cash                      |  |                                   | 1,217,643  |   |                                                                     |   | 284,883    |      |  |   | (400,522   | ) |  |   | 719,077     |  
|Net increase (decrease) in cash and cash equivalents         |  |                                   | 1,507,619  |   |                                                                     |   | 1,411,853  |      |  |   | (1,054,478 | ) |  |   | 6,049,249   |  
|Cash and cash equivalents, beginning of year                 |  |                                   | 4,541,630  |   |                                                                     |   | 3,129,777  |      |  |   | 4,184,255  |   |  |   |            |  
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Cash and cash equivalents, end of year                       |  | $                                 | 6,049,249  |   |                                                                     | $ | 4,541,630  |      |  | $ | 3,129,777  |   |  | $ | 6,049,249   |  
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Supplemental disclosure of cash flow information:            |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  
|Cash paid during the period for interest                     |  | $                                 | 12,639     |   |                                                                     | $ | 901        |      |  | $ | 48         |   |  | $ | 18,013      |  
|                                                             |  |                                   |            |   |                                                                     |   |            |      |  |   |            |   |  |   |             |  



See accompanying notes
to financial statements



F-9



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS

(U.S.
DOLLARS)



1. Summary of Significant Accounting Policies



Organization and Nature of Operations



Metal Storm Limited was incorporated in Queensland,
Australia on April 13, 1994 and listed on the Australian Stock Exchange on July 8, 1999. On March 14, 2001, Metal Storm Limited formed a wholly-owned U.S. subsidiary, Metal Storm, Inc., incorporated in the state of Virginia and on December 11, 2003,
Metal Storm acquired 100% of ProCam Machine LLC, a US company based in Seattle, Washington, (collectively referred to as Metal Storm or the Company).



Metal Storm is a development stage enterprise engaged in the research and development of electronic ballistics technology.
The Company continues to establish the viability of this technology with government agencies in the U.S. and Australia. The technology has no known equivalent and incorporates a 100% electronic firing system. The technology has many potential
applications, including applications in the military and law enforcement industries, firearms and the commercial environment.



ProCam Machine LLC Metal Storms newly acquired US subsidiary specializes in the manufacture and sale of precision engineered parts to the defense,
electronics, aircraft and space propulsion industries.



Principles of Consolidation



The financial
statements include the accounts of Metal Storm Limited and its wholly-owned subsidiaries, Metal Storm Inc, and ProCam Machine LLC. All inter-company balances and transactions have been eliminated on consolidation.



Basis of Presentation



The Companys principal activities to date have included technology
development, obtaining research and funding grants, securing of patents and intellectual property rights and securing finance for working capital and capital expenditure. Accordingly, these financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial Accounting Standards (SFAS) No. 7 Accounting and Reporting by Development Stage Enterprises. The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP) and are presented in U.S. dollars.



Development StageRisks



As a development stage enterprise, the Companys prospects are subject to the risks, expenses and uncertainties frequently encountered by companies
which have not yet commercialized any applications of their technology, particularly in new and evolving markets. The Companys operating results may fluctuate significantly in the future as a result of a variety of factors, including capital
expenditure and other costs relating to establishing, maintaining and expanding the operations, the number and mix of potential customers, potential pricing of future products by the Company and its competitors, new technology introduced by the
Company and its competitors, delays or expense in obtaining necessary equipment, economic and social conditions in the defence and ballistics industries and general economic conditions.



The Company will continue to review the need to seek additional funding through public and private financing and/or through
collaboration or other arrangements with corporate partners. The Company cannot be certain that they will be able to raise any required funding or capital, on favorable terms or at all, or that they will be able to establish corporate collaborations
on acceptable terms, if at all. If the Company is unable to obtain such additional funding or capital, they may be required to reduce the scope of their development plans.



The Companys experience in exploiting their technology is limited. The Company cannot be certain that their operations
will be profitable in the short-term, or at all. If the Company fails in any of their efforts to establish or expand their business, the results of operations and financial condition could be materially adversely affected. The Company cannot be
certain that they will be able to obtain or retain any permits required by the Company to market, sell and deliver its technology. Any of these factors could result in cessation of the Companys operations.



F-10



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Revenue Recognition



A sale is recorded when goods have been delivered to and accepted by the customer pursuant to a fixed price sales order, collectibility of the selling
price is reasonably assured and the associated risks have passed to the customer.



The Company receives non-refundable government grants which fund the Companys efforts in specific research and development projects. These grants generally provide for reimbursement of approved costs incurred as
defined in the various agreements and are expected to fully cover the Companys costs for the specific research and development projects. Government grants are recorded as revenue when key milestones set within each agreement are achieved and
accepted by all parties to the grant, no performance obligation remains and collectibility is reasonably assured.



Interest income is recognized as earned and when collectibility is assured.



Research and Development



All research and development costs are charged to expense as incurred and are reflected gross of the related government grants. The Company has not
entered into any research and development agreements which would require the government grants to be recorded as an offset to research and development costs in accordance with the AICPA Audit and Accounting Guide: Audits of Federal Government
Contractors.



Although the Company believes that their
patents and underlying technology have continuing value, the future benefits to be derived there from are uncertain. Patent costs are therefore included under research and development expenses rather than capitalized.



Foreign Currency Transactions



The Australian dollar is the functional currency for the parent entity,
Metal Storm Limited. The functional currency of the Companys subsidiaries is the U.S. dollar. Balance sheet amounts denominated in Australian dollars have been translated into U.S. dollars using the year end rate of exchange. Operating results
denominated in Australian dollars have been translated into U.S. dollars using the average rate of exchange. Capital accounts are translated at historical exchange rates. Gains or losses resulting from such translation are included as a component of
stockholders equity. Commitments, contingencies and option exercise prices detailed in the notes have been translated into U.S. currency at the rate of exchange at December 31, 2003 of A$1.00 = $0.748.



Cash and Cash Equivalents



Cash equivalents are comprised of short-term, highly liquid investments that
are both: (i) readily convertible to known amounts of cash, and (ii) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.



Property and Equipment



Property and equipment are stated at cost, net of accumulated depreciation. Property and equipment are depreciated on a straight line basis over the
estimated useful lives of the assets.



Classes of property and
equipment and related useful lives are as follows:



|                                             |  |                           
|-------------------------------------------- |  | --------------------------
|Asset                                        |  | EstimatedUseful Life Years
|Machinery and equipment                      |  | 2-6                       
|Machinery and equipment under capital leases |  | 2-6                       



Inventory



Inventory is stated at the lower of cost or market. Costs
are assigned to individual items of inventory mainly on the basis of average costs, which approximates the first-in, first-out (FIFO) costing method.



F-11



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Allowance For Doubtful Accounts



The Company determines the allowance for doubtful accounts based on the evaluation of the aging of their trade receivable portfolio and an in-depth
analysis of high-risk customers. Recorded reserves contemplate historical loss rate on receivables, specific customer situations, and the economic environments in which the Company operates.



Goodwill



In accordance with SFAS No. 142, Accounting for Goodwill and Intangible
Assets, no amortization was recorded for goodwill. SFAS No. 142 requires that goodwill be assessed annually for impairment. The Company completed the annual impairment test for 2003 and no impairment was determined. Future impairment tests will
be performed annually.



Stock-Based Compensation



The Company has elected to account for its stock option
plan in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employeesand related interpretations (APB 25) and adopt the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation(SFAS 123). Under APB 25, the Company recognizes compensation expense for stock option grants to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date.
Unearned compensation expense is charged against operations ratably over the vesting period of the options. For disclosure purposes under SFAS 123, stock options are valued at the measurement date using the Black-Scholes option valuation model and
compensation costs are recognized ratably over the vesting period.



Options granted to consultants and other non-employees are accounted for in accordance with Emerging Issues Task Force Consensus No. 96-18, Accounting for Equity Investments That Are Issued to Other Than Employees for Acquiring, or In
Conjunction with Selling, Goods or Services, and valued using the Black-Scholes option valuation model.



The Companys pro forma information is as follows:



|                                                                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                             |  | 2003 |            |   | 2002 |   |            | 2001 | 
|Net loss as reported                                                                                         |  | $    | (4,730,755 | ) |      | $ | (5,379,593 | )    |  | $ | (2,650,354 | )
|                                                                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Basic and diluted net loss per ordinary share as reported                                                    |  | $    | (0.011     | ) |      | $ | (0.013     | )    |  | $ | (0.006     | )
|                                                                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Employee stock based compensation, net of taxes, as calculated under APB 25 included in net loss as reported |  | $    | 103,266    |   |      | $ | 8,633      |      |  | $ | 207,804    |  
|                                                                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Employee stock based compensation, net of taxes, as calculated under FAS 123                                 |  | $    | (229,170   | ) |      | $ | (145,691   | )    |  | $ | (596,737   | )
|                                                                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Pro forma net loss                                                                                           |  | $    | (4,856,659 | ) |      | $ | (5,516,651 | )    |  | $ | (3,039,287 | )
|                                                                                                             |  |      |            |   |      |   |            |      |  |   |            |  
|Pro forma basic and diluted net loss per ordinary share                                                      |  | $    | (0.011     | ) |      | $ | (0.013     | )    |  | $ | (0.007     | )
|                                                                                                             |  |      |            |   |      |   |            |      |  |   |            |  



Refer to Note 14 for
further details regarding the Companys stock option plans.



Net Loss Per Share



Basic and diluted net loss
per share has been calculated by dividing net loss by the weighted average ordinary shares outstanding during the periods.



Stock options have not been included in the computation of net loss per share in the periods presented, as their effect is anti-dilutive. For additional
disclosures regarding stock options see Note 14.



F-12



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Accounting Estimates



The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates. Accounting estimates have been applied
to calculate accruals for employee entitlements.



Income
Taxes



Income taxes have been provided using the liability
method of accounting in accordance with Statement of Financial Accounting Standards No 109 (SFAS 109) Accounting for Income Taxes.



Accruals for Employee Entitlements



The Company accrues compensated absences and related benefits as current charges to earnings when the following criteria are met: (i) the employees
right to receive compensation for the future absences is attributable to services already performed by the employee; (ii) the employees right to receive the compensation for the future absences is vested, or accumulates; (iii) it is probable
that the compensation will be paid; and (iv) the amount of compensation is reasonably estimable.



Impairment



Pursuant to guidance established in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets the Company evaluates the
recoverability of its long lived assets when events and circumstances warrant such a review or at least annually. An impairment review is based on an undiscounted cash flow analysis. Impairment occurs if the carrying value exceeds the future
undiscounted cash flows from related operations. If impairment is deemed to exist, the asset will be written down to fair value, generally determined based on projected discounted cash flows. Management also re-evaluates the periods of amortization
to determine whether subsequent events and circumstances warrant revised estimates of useful lives.



Financial Instruments



The fair values of financial instruments, including cash and cash equivalents, accounts receivable, investments, and accounts payable, approximate their
carrying value due to their short term nature. Refer to Note 16 for further details.



Reclassifications



Certain reclassifications have been made to prior periods to conform to the current period presentation.



Rabbi Trust



On September 1, 2003, in order for the Company to meet the requirements of the Small Business Innovation Research Program (SBIR), a U.S. Government
program that funds research and development activities aimed at the defence industry, the Company divested 51% of its interest in Metal Storm Inc. to a trust established to hold shares of common stock for the benefit of U.S. citizens identified by
the Board and pursuant to a compensation plan to be adopted within one year. The trust qualifies as a rabbi trust for U.S. legal and tax purposes and per guidance in EITF 97-14 Accounting for Deferred Compensation Agreements Where
Amounts Are Held in a Rabbi Trust and Invested should be consolidated with the financial statements of the employer, being Metal Storm Inc. At December 31, 2003 no shares or options were issued by the trust.



New Accounting Standards



FIN 46



In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities an Interpretation of ARB No. 51, which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities
without additional subordinated financial support, or (2) the equity investors lack an essential characteristic of a controlling financial interest. The provisions of FIN 46 must be immediately applied for variable interest entities created after
January 31, 2003. For variable interests in entities commonly referred to



F-13



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



as special purpose entities, implementation of this statement is required by January 1, 2004. And for all other variable interest entities, implementation is
required by December 31, 2004. Currently, the Company does not have any variable interest entities and the Company does not expect the adoption of FIN 46 will have a material impact on the Companys results of operations or financial condition.



2. Concentrations of Credit Risk



Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents and accounts receivable. The Company invests cash and cash equivalents, which are not required for immediate operating needs with various high credit quality financial
institutions located in Australia. Concentrations of credit risk with respect to accounts receivable are limited due to the number and quality of entities comprising the Groups customer base. The Company performs credit evaluations of its
customers financial conditions and does not require collateral for accounts receivable. The provision for doubtful accounts the Company maintains is based upon the expected collectibility of all accounts receivable based on a review of the
Companys history of collection.



Included in accounts
receivable is $211,880, receivable from three customers representing 47% of the receivable balance. Sales to each of these customers exceed 10% of the Companies total sales. Refer to Note 15 for further details.



3. Acquisition of Controlled Entity



On 11 December 2003, effective from 1 December 2003, Metal Storm Limited
acquired 100% of the outstanding common stock of ProCam Machine LLC (ProCam), a company based in Seattle, Washington, US. The results of ProCams operations have been included in the consolidated financial statements since that date. ProCam
specialize in the manufacturing of defense products, which will provide the Company with an established business in the U.S. defense and aerospace sector as well as the ability to produce Metal Storm prototype weapon systems for demonstration in the
U.S.



The aggregate purchase price for the acquisition of
ProCam was 5,524,926 shares of Metal Storm Limited and $189,739 cash comprising of: 3,913,033 shares for the acquisition, 1,184,713 shares for settlement of a promissory note, and 427,180 shares and $189,739 cash as payment for direct costs related
to the acquisition. The fair value of the shares was calculated based on the average market price of the securities two days before and two days after the terms of the acquisition were agreed and announced, giving a total purchase price of
$2,167,112.



The following table summarizes the estimated fair
values of the assets acquired and the liabilities assumed at the date of acquisition.



|                                         |  |   |            |  
|---------------------------------------- |  | - | ---------- | -
|Cash                                     |  | $ | 45,629     |  
|Receivables                              |  |   | 442,707    |  
|Inventories                              |  |   | 242,004    |  
|Prepayments & deposits                   |  |   | 50,998     |  
|Property, plant and equipment (net)      |  |   | 2,413,352  |  
|Intangibles                              |  |   | 147,000    |  
|Goodwill                                 |  |   | 1,553,830  |  
|                                         |  |   |            |  
|Total assets acquired                    |  |   | 4,895,520  |  
|                                         |  |   |            |  
|Payables                                 |  |   | (249,424   | )
|Interest bearing liabilities (current)   |  |   | (955,460   | )
|Interest bearing liabilities (long term) |  |   | (1,237,890 | )
|Provisions                               |  |   | (77,248    | )
|Other accruals                           |  |   | (208,386   | )
|                                         |  |   |            |  
|Total liabilities assumed                |  |   | (2,728,408 | )
|                                         |  |   |            |  
|Net assets acquired                      |  | $ | 2,167,112  |  
|                                         |  |   |            |  



F-14



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Identifiable intangibles consist of non-compete agreements having a fair value of $147,000 with a remaining life of three years. This intangible was
assigned to the manufacturing segment. The goodwill balance was assigned to the manufacturing segment.



The following unaudited pro forma financial information summarizes our consolidated results of operations as if the ProCam acquisition had occurred on the
first day of the fiscal year 2003 and 2002.



|                                            |  |              |   |  |            |  
|------------------------------------------- |  | ------------ | - |  | ---------- | -
|                                            |  | December 31, |  
|Pro-forma financial information (unaudited) |  | 2003         |   |  | 2002       |  
|                                            |  | $            |   |  | $          |  
|Net revenues                                |  | 4,294,853    |   |  | 1,252,195  |  
|Loss before income taxes                    |  | (5,096,327   | ) |  | (5,411,249 | )
|Net loss                                    |  | (5,096,327   | ) |  | (5,411,249 | )
|Earnings per share                          |  |              |   |  |            |  
|Basic and Diluted                           |  | (0.012       | ) |  | (0.013     | )



4. Cash



|                                 |  |              |           |      |   |          
|-------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                 |  | December 31,
|                                 |  | 2003         |           | 2002
|Cash at bank                     |  | $            | 484,412   |      | $ | 1,187,267
|Cash on deposit at floating rate |  |              | 5,564,837 |      |   | 3,354,363
|                                 |  |              |           |      |   |          
|                                 |  | $            | 6,049,249 |      | $ | 4,541,630
|                                 |  |              |           |      |   |          



Deposits or
withdrawals from cash on deposit may be made at any time without prior notice or penalty.



5. Inventory



|                                     |  |              |         |      |   |  
|------------------------------------ |  | ------------ | ------- | ---- | - | -
|                                     |  | December 31,
|                                     |  | 2003         |         | 2002
|Inventory consists of the following: |  |              |         |      |   |  
|Raw materials and supplies at cost   |  | $            | 38,202  |      | $ | 
|Work in progress at cost             |  |              | 111,723 |      |   | 
|                                     |  |              |         |      |   |  
|                                     |  | $            | 149,925 |      | $ | 
|                                     |  |              |         |      |   |  



6. Property, Plant and Equipment



Property, plant and equipment consist of the
following:



|                                              |  |              |           |   |      |   |          |  
|--------------------------------------------- |  | ------------ | --------- | - | ---- | - | -------- | -
|                                              |  | December 31, |          
|                                              |  | 2003         |           |   | 2002 |  
|Property, plant and equipment                 |  | $            | 1,032,827 |   |      | $ | 209,523  |  
|Accumulated depreciation and amortization     |  |              | (208,271  | ) |      |   | (123,725 | )
|                                              |  |              |           |   |      |   |          |  
|Property, plant and equipment, net            |  | $            | 824,556   |   |      | $ | 85,798   |  
|                                              |  |              |           |   |      |   |          |  
|Plant and equipment under capital leases      |  | $            | 1,733,769 |   |      | $ |         |  
|Accumulated depreciation and amortization     |  |              | (15,903   | ) |      |   |         |  
|                                              |  |              |           |   |      |   |          |  
|Plant and equipment under capital leases, net |  | $            | 1,717,866 |   |      | $ |         |  
|                                              |  |              |           |   |      |   |          |  
|Total property, plant and equipment, net      |  | $            | 2,542,422 |   |      | $ | 85,798   |  
|                                              |  |              |           |   |      |   |          |  



F-15



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Depreciation expense relating to property, plant and equipment amounted to $52,667, $53,982 and $29,578 for the years ended 2003, 2002 and 2001
respectively.



7. Intangibles



Intangibles consists of the following:



|                               |  |              |           |   |      |   |  
|------------------------------ |  | ------------ | --------- | - | ---- | - | -
|                               |  | December 31,
|                               |  | 2003         |           |   | 2002
|Non-compete agreements - gross |  | $            | 147,000   |   |      |   | 
|Less accumulated amortization  |  |              | (3,333    | ) |      |   | 
|                               |  |              |           |   |      |   |  
|Non-compete agreements - net   |  | $            | 143,667   |   |      |   | 
|                               |  |              |           |   |      |   |  
|Goodwill - gross               |  | $            | 1,553,830 |   |      |   | 
|                               |  |              |           |   |      |   |  
|Total intangible assets - net  |  | $            | 1,697,497 |   |      | $ | 
|                               |  |              |           |   |      |   |  



For further
information with regard to the acquisition of the non-compete agreements and goodwill refer to Note 3. The amortization period for the non-compete intangible is three years. The amortization expense of amortizable intangible assets for the fiscal
year ended 31 December 2003 was $3,333.



8. Income Taxes



At December 31, 2003 the Company has net operating
loss carryforward of approximately $14,146,755 which are indefinite as to use under Australian tax law, and $2,290,102 which are available to use in the United States from 2002 through to 2023.



The Company has not yet assessed the impact of the reorganization of
ownership in its US subsidiary, Metal Storm, Inc. on the ability of the Company to utilize net operating losses.



The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2003, 2002 and
December 2001 are presented below:



|                        |  |                         |   |  |            |   |  |            |  
|----------------------- |  | ----------------------- | - |  | ---------- | - |  | ---------- | -
|                        |  | Year Ended December 31, |  
|Deferred tax assets     |  | 2003                    |   |  | 2002       |   |  | 2001       |  
|Amortization            |  | 1,000                   |   |  |           |   |  |           |  
|Employee entitlements   |  | 111,129                 |   |  | 79,866     |   |  | 25,068     |  
|Other                   |  | 7,386                   |   |  |           |   |  |           |  
|Loss carryforward       |  | 4,931,057               |   |  | 3,153,900  |   |  | 1,650,848  |  
|                        |  |                         |   |  |            |   |  |            |  
|Net deferred tax assets |  | 5,050,572               |   |  | 3,233,766  |   |  | 1,675,916  |  
|Valuation allowance     |  | (5,050,572              | ) |  | (3,233,766 | ) |  | (1,675,916 | )
|                        |  |                         |   |  |            |   |  |            |  
|                        |  |                        |   |  |           |   |  |           |  
|                        |  |                         |   |  |            |   |  |            |  



The Companys
deferred income tax balance and the difference between income tax computed at the Australian statutory rate and income tax expense is primarily the result of tax losses carried forward. The change in the valuation allowance and the corresponding
change in the deferred tax asset amounted to $1,816,806, $1,557,850 and $574,247 for the years ended December 31, 2003, December 31, 2002 and 2001 respectively.



In assessing the realizability of deferred tax assets, management considers whether it is more likely that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generating of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled



F-16



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



reversal of deferred tax liabilities, projected future taxable income and projections for future taxable income over the periods in which the deferred tax assets are
deductible. At this time, management has concluded that it is not likely that the Company will realize the benefits of these deductible differences, as there can be no assurance that the Company will generate the necessary taxable income in any
future periods.



The reconciliation of income tax computed at
the Australian statutory rate to income tax expense is as follows:



|                                                                           |  |                         |    |  |        |    |  |        |   
|-------------------------------------------------------------------------- |  | ----------------------- | -- |  | ------ | -- |  | ------ | --
|                                                                           |  | Year Ended December 31, |   
|                                                                           |  | 2003                    |    |  | 2002   |    |  | 2001   |   
|Tax at Australian statutory tax rate                                       |  | (30.00                  | )% |  | (30.00 | )% |  | (30.00 | )%
|Effect of difference between the Australian tax rate and the U.S. tax rate |  | (0.98                   | %) |  | (0.78  | )% |  | (0.20  | )%
|Non deductible items                                                       |  | 2.35                    | %  |  | 2.06   | %  |  | (0.53  | )%
|Change in valuation allowance                                              |  | 28.63                   | %  |  | 28.72  | %  |  | 30.73  | % 
|                                                                           |  |                         |    |  |        |    |  |        |   
|                                                                           |  |                        | %  |  |       | %  |  |       | % 
|                                                                           |  |                         |    |  |        |    |  |        |   



For financial
reporting purposes, loss before income taxes includes the following components:



|                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|---------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                   |  | Year Ended December 31, |           
|                                   |  | 2003                    |            |   | 2002 |   |            | 2001 | 
|Pre tax (loss):                    |  |                         |            |   |      |   |            |      |  |   |            |  
|Domestic operations (Australia)    |  | $                       | (3,377,749 | ) |      | $ | (4,325,460 | )    |  | $ | (2,519,749 | )
|Foreign operations (United States) |  | $                       | (1,353,006 | ) |      | $ | (1,054,133 | )    |  | $ | (130,605   | )



9. Capital leases



The Company leases plant and equipment under capital
leases expiring in various dates through to 2021. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are amortized over the lesser
of their related lease terms or their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense.



Following is a summary of plant and equipment held under capital leases as of December 31, 2003. No comparative data has been shown as there were no
capital leases prior to 2003.



|                               |  |      |           |  
|------------------------------ |  | ---- | --------- | -
|                               |  | 2003 |          
|Plant and equipment            |  | $    | 1,733,769 |  
|Less: accumulated depreciation |  |      | (15,903   | )
|                               |  |      |           |  
|Total                          |  | $    | 1,717,866 |  
|                               |  |      |           |  



F-17



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



At December 31, 2003 minimum future lease payments under capital leases for each year through 2008 and thereafter is as follows:



|                                            |  |   |           |  
|------------------------------------------- |  | - | --------- | -
|2004                                        |  | $ | 570,869   |  
|2005                                        |  |   | 561,874   |  
|2006                                        |  |   | 324,346   |  
|2007                                        |  |   | 114,297   |  
|2008                                        |  |   | 67,798    |  
|Thereafter                                  |  |   | 264,065   |  
|                                            |  |   |           |  
|Total minimum lease payments                |  |   | 1,903,249 |  
|Less: amount representing interest          |  |   | (293,063  | )
|                                            |  |   |           |  
|Present value of net minimum lease payments |  | $ | 1,610,186 |  
|                                            |  |   |           |  
|Obligations under capital leases            |  |   |           |  
|Current liability                           |  | $ | 453,522   |  
|Non-current liability                       |  |   | 1,156,664 |  
|                                            |  |   |           |  
|Total obligations under capital leases      |  | $ | 1,610,186 |  
|                                            |  |   |           |  



10. Borrowings



Borrowings consists of the following:



|          |  |              |         |      |   |  
|--------- |  | ------------ | ------- | ---- | - | -
|          |  | December 31,
|          |  | 2003         |         | 2002
|Current   |  |              |         |      |   |  
|Bank loan |  | $            | 432,637 |      | $ | 
|          |  |              |         |      |   |  



Terms and conditions of borrowings



Current



Bank loan: The bank loan was assumed on the acquisition of ProCam and
represents a line of credit with an interest rate of PRIME of 4.0% plus 1.5% that expired in February 2004, the weighted average interest rate was 5.5%. At December 31, 2003 there was an available balance of $17,365. On January 27, 2004 a new line
of credit was established which will mature on January 27, 2006, with an interest rate of 4.6% and interest earned on deposits at 2.5%.



11. Related Parties



On May 25, 1999 Mr. J.M. ODwyer entered into a voting rights agreement with Charter Pacific Corporation Limited pursuant to which Charter Pacific
Corporation agreed to appoint Mr. J.M. ODwyer as the Charter Pacific Corporations proxy with respect to 4,287,503 of the Companys shares to vote in respect of all matters put before the stockholders, with certain limited
exceptions. The voting rights agreement expired on July 7, 2001. In consideration for the voting rights agreement, Mr. J.M. ODwyer entered into a relationship deed with Charter Pacific Corporation dated May 25, 1999 where he agreed, (a) that
he will use or procure the voting rights attached to the shares registered in his name or that he controls, to vote in favor of the election or re-election, as the case may be, of the person nominated by Charter Pacific Corporation to be a director
of Metal Storm; (b) that he will not use the voting rights attached to the shares registered in his name that he controls, to vote to remove the person nominated by Charter Pacific Corporation to be a director of Metal Storm as a director; and (c)
that while he is a director of Metal Storm, and if requested so to do by Charter Pacific Corporation, he will seek to procure the appointment of a person nominated by Charter Pacific Corporation to be appointed as a director of Metal Storm to fill
any casual vacancy caused by the death, retirement, resignation or removal of the then existing Charter Pacific Corporation representative.



F-18



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



The relationship deed expires on the later of two years after the date of the issuance of the Companys securities in Australia under its May 1999
prospectus or Charter Pacific Corporations shareholding in the Company is reduced to 5% of the Companys issued capital.



During 2003, legal services totaling $nil (2002: $120,996; 2001: $130,080) were performed by McCullough Robertson Lawyers of which Mr. J.B.L. Heading, a
former director (resigned March 26, 2003), is a partner. At December 31, 2003, $nil was outstanding and payable (2002: $9,921; 2001: $16,111). The amounts owing were repaid in full under the Companys normal trading terms of credit.



During 2003, accounting and consulting services totaling $3,993 (2002:
$29,449; 2001: $66,719) were performed by BDO Kendalls, of which Mr. T.J. ODwyer, a director, is a partner. At December 31, 2003 $nil was outstanding and payable (2002: $1,533; 2001: $nil). The amounts owing were repaid in full under the
Companys normal trading terms of credit.



During 2003,
consultancy fees were paid to General W.A. Downing (US Army retired), a director, totaling $nil (2002: $nil; 2001: $63,340) pursuant to a consultancy agreement with the Company. At December 31, 2003, $nil was outstanding and payable (2002: $nil;
2001: $2,166). The amounts owing were non-interest bearing and were repaid in full generally under 30 day terms.



During 2003, consultancy fees were paid to Admiral W.A. Owens (US Navy retired), a director, totaling $24,147 (2002: $82,903; 2001: $81,105) pursuant to a
consultancy agreement with the Company. At December 31, 2003, $nil was outstanding and payable (2002: $20,032; 2001: $19,931). The amounts owing were non-interest bearing and were repaid in full generally under 30 day terms.



During 2003, consultancy services totaling $24,586 (2002: $63,472; 2001:
$23,090) were performed by Clarity Business Consulting, of which Mr. P.L.G. Pursey, a former director of the Company (resigned March 26, 2003), is a director and shareholder. At December 31, 2003, $nil was outstanding and payable (2002: $7,806;
2001: $3,093). The amounts owing were non-interest bearing and were repaid in full generally under 30 day terms.



In addition, directors fees were payable to the following directors at December 31, 2003 and 2002:



|                                  |  |              |         |      |   |       
|--------------------------------- |  | ------------ | ------- | ---- | - | ------
|                                  |  | December 31,
|                                  |  | 2003         |         | 2002
|Admiral W.A. Owens                |  | $            | 48,620  |      | $ | 10,411
|Mr. J.M. ODwyer                  |  |              | 33,660  |      |   | 7,341 
|General W.A. Downing              |  |              | 33,660  |      |   |      
|Lieutenant General D.W. Christman |  |              | 33,660  |      |   | 6,006 
|Dr. D.L. Alspach                  |  |              | 11,220  |      |   |      
|Mr. P.L.G. Pursey                 |  |              |        |      |   | 7,341 
|Mr. K.J. Dart                     |  |              |        |      |   | 7,341 
|Mr. T.J. ODwyer                  |  |              |        |      |   | 7,977 
|                                  |  |              |         |      |   |       
|                                  |  | $            | 160,820 |      | $ | 46,417
|                                  |  |              |         |      |   |       



12. Commitments and
Contingencies



Operating Leases



The operating lease commitments primarily consist of the rental of office
premises.



The Company is obligated under various operating
leases for office premises and other equipment for periods expiring through 2007.



F-19



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Future payments under non-cancelable operating lease arrangements at December 31, 2003 are as follows:



|                                 |  |   |          
|-------------------------------- |  | - | ---------
|Years ending December 31        
|2004                             |  | $ | 303,154  
|2005                             |  |   | 305,450  
|2006                             |  |   | 307,747  
|2007                             |  |   | 115,598  
|                                 |  |   |          
|Total minimum rental commitments |  | $ | 1,031,949
|                                 |  |   |          



13. Stockholders Equity



On March 19, 2001 the Company issued 1,390,154 fully
paid ordinary shares in the Company at an issue price of $0.728 per share.



On May 29, 2001, the Company issued 658,194 fully paid ordinary shares in the Company at an issue price of $0.728 per share.



On June 1, 2001 the Company issued 100,000 ordinary shares in the Company at market value as partial payment for consultancy services provided by an
unrelated party. This partial payment of these services, which were completed, and the ordinary shares issued have been recorded in the financial statements at the fair value of the ordinary shares as of June 1, 2001, the date at which the
consultancy services were completed. The fair value of $68,677 was calculated by using the market value of the shares on the date of issue.



On June 28, 2001 5,000 employee options were exercised at an exercise price of $0.28 per option.



On May 31, 2002 500,000 executive options were exercised at an exercise price
of A$0.48 (approximately $0.26) per option.



On June 26, 2002
the Company issued 50,000 options as payment for consultancy services provided by an unrelated party. The payment of these services and of the options issued have been recorded in the financial statements at the fair value of the options as of June
26, 2002, the date at which the options were issued and the services were completed. The fair value of $13,508 was calculated by using the Black Scholes valuation model.



On August 27, 2002 the Company issued 14,142,700 ordinary shares in the Company and received proceeds of $5,009,132. Costs
incurred relating to the issue totaled $15,777.



On September
24, 2002 the Company issued 766,488 ordinary shares in the Company at market value as partial payment for consultancy services provided by an unrelated party. The partial payment of these services and the ordinary shares issued have been recorded in
the financial statements at the fair value of the ordinary shares as of September 24, 2002 the date the services were completed. The fair value of $216,824 was calculated by using the market value of the shares on the date of issue.



On September 24, 2002 the Company issued 766,488 listed options as partial
payment for consultancy services provided by an unrelated party. The partial payment of these services and the options issued have been recorded in the financial statements at the fair value of the options as of September 24,2002, the date at which
the options were issued and the services were completed. The fair value of $109,153 was calculated by using the Black Scholes valuation model.



On September 24, 2002 the Company issued 50,000 ordinary shares in the Company at market value to an employee under the terms of the employment contract.
The employee related expense and the ordinary shares issued have been recorded in the financial statements at the fair value of the ordinary shares as of September 24, 2002. The fair value of $14,416 was calculated by using the market value of the
shares on the date of issue.



On September 24, 2002, 6,958
listed options were exercised at an exercise price of A$0.65 (approximately $0.35) per option.



On October 17, 2002, 8,844 listed options were exercised at an exercise price of A$0.65 (approximately $0.36) per option. (Listed options have a fixed exercise price of A$0.65. Exercised options were translated at the
rate of exchange on the date of conversion being $0.5385 and $0.5538 respectively for the above transactions.)



F-20



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##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



On October 17, 2002 the Company issued 16,655 unlisted options as payment for consultancy services provided by an unrelated party. The payment of these
services and the options issued have been recorded in the financial statements at the fair value of the options as of October 17, 2002, the date at which the options were issued and the services were completed. The fair value of $1,464 was
calculated by using the Black Scholes valuation model.



On
January 28, 2003, 1,008 listed options were exercised at an exercise price of A$0.65 (approximately $0.38) per option. The Company also issued 59,472 ordinary shares in the Company at market value as payment for consultancy services provided by an
unrelated party. The payment of these services and the ordinary shares have been recorded in the financial statements at the fair value of the ordinary shares as of January 28, 2003. The fair value of $15,635 was calculated by using the market value
of the shares on the date of issue.



On February 24, 2003, 475
listed options were exercised at an exercise price of A$0.65 (approximately $0.40) per option. On June 4, 2003, 125 listed options were exercised at an exercise price of A$0.65 (approximately $0.43) per option. On October 16, 2003, 455 listed
options were exercised at an exercise price of A$0.65 (approximately $0.45) per option.



On December 4, 2003, 250 listed options were exercised at an exercise price of A$0.65 (approximately $0.48) per option.



On September 3, 2003 the Company issued 50,000 ordinary shares in the Company at market value to an employee under the terms of the employment contract.
The employee related expense and the ordinary shares issued have been recorded in the financial statements at the fair value of the ordinary shares as of September 3, 2003. The fair value of $16,440 was calculated by using the market value of the
shares on the date of issue.



In October 2003 the Company
raised an additional A$7,078,784 (approximately $5 million) in working capital through a Share Purchase Plan to those shareholders of record on October 3, 2003. This offer was only available to those shareholders resident of Australia and New
Zealand. The placement comprised the issue of 15,730,631 ordinary shares at A$0.45 ($0.31) per share. The total capital raising costs attributable to this placement was A$34,816 ($23,964).



On December 11, 2003 the Company issued 5,524,926 shares of Metal Storm
Limited for the purchase of ProCam Machine LLC comprising of 3,913,033 shares for the acquisition, 1,184,713 shares for settlement of a promissory note, and 427,180 shares as payment for direct costs related to the acquisition. The fair value of the
shares was calculated based on the average market price of the securities two days before and two days after the terms of the acquisition were agreed and announced. The fair value of shares issued was $1,977,373. For further details refer to Note 3.



F-21



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



14. Stock Options



Unlisted Options



a) Options pursuant to the Executive and Employee Share Option Plan:



Information with respect to the number of options granted under the executive and employee share option plan are as follows:



|                                                            |  |                               |  |                                     |      |                               |         |                                     |    |     
|----------------------------------------------------------- |  | ----------------------------- |  | ----------------------------------- | ---- | ----------------------------- | ------- | ----------------------------------- | -- | ----
|                                                            |  | Number of options outstanding |  | Weighted average exercise price (i) |      | Number of options exercisable |         | Weighted average exercise price (i)
|Options outstanding, December 31, 2000                      |  |                              |  |                                     |     |                               |        |                                     |    |    
|- granted                                                   |  | 575,000                       |  | A$                                  | 1.16 |                               |         |                                     |    |     
|- forfeited                                                 |  |                              |  |                                     |     |                               |         |                                     |    |     
|- expired                                                   |  |                              |  |                                     |     |                               |         |                                     |    |     
|- exercised                                                 |  |                              |  |                                     |     |                               |         |                                     |    |     
|                                                            |  |                               |  |                                     |      |                               |         |                                     |    |     
|Options outstanding, December 31, 2001                      |  | 575,000                       |  | A$                                  | 1.16 |                               | 575,000 |                                     | A$ | 1.16
|- granted                                                   |  |                              |  |                                     |     |                               |         |                                     |    |     
|- forfeited                                                 |  |                              |  |                                     |     |                               |         |                                     |    |     
|- expired                                                   |  |                              |  |                                     |     |                               |         |                                     |    |     
|- exercised                                                 |  |                              |  |                                     |     |                               |         |                                     |    |     
|                                                            |  |                               |  |                                     |      |                               |         |                                     |    |     
|Options outstanding, December 31, 2002                      |  | 575,000                       |  | A$                                  | 1.16 |                               | 575,000 |                                     | A$ | 1.16
|- granted                                                   |  | 85,000                        |  | A$                                  | 0.40 |                               |         |                                     |    |     
|- forfeited                                                 |  |                              |  |                                     |     |                               |         |                                     |    |     
|- expired                                                   |  |                              |  |                                     |     |                               |         |                                     |    |     
|- exercised                                                 |  |                              |  |                                     |     |                               |         |                                     |    |     
|                                                            |  |                               |  |                                     |      |                               |         |                                     |    |     
|Options outstanding, December 31, 2003                      |  | 660,000                       |  | A$                                  | 1.06 |                               | 635,000 |                                     | A$ | 0.94
|                                                            |  |                               |  |                                     |      |                               |         |                                     |    |     
|Shares reserved for future issuance as at December 31, 2003 |  | 660,000                       |  |                                     |      |                               |         |                                     |    |     

---

|(i) | Options were issued in Australian dollars (the functional currency for the Company).
|--- | ------------------------------------------------------------------------------------



There were a total of 85,000 options granted during 2003 (2002: nil, 2001:575,000). The equivalent market price per share at
grant date for options granted during 2003 was A$0.43-A$0.49 (2001: A$1.35).



On June 4, 2003 the Company issued 5,000 options in accordance with the employee share options plan. On issuance of these options, the Company expensed $139.



On September 3, 2003 the Company issued 80,000 options in accordance with the
employee share options plan. On issuance of these options, the Company expensed $5,098.



F-22



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



The following table summarises information about options issued under the Employee and Executive Option Plan outstanding at December 31, 2003:



|                   |  |         |  |                                             |  |                                 |      |                   |         |                                 |    |     
|------------------ |  | ------- |  | ------------------------------------------- |  | ------------------------------- | ---- | ----------------- | ------- | ------------------------------- | -- | ----
|                   |  |         |  | Outstanding                                 |  | Exercisable                    
|Exercise price (i) |  | Options |  | Weighted average remaining contractual life |  | Weighted average exercise price |      | Number of options |         | Weighted average exercise price
|A$1.16             |  | 575,000 |  | 0.5 year                                    |  | A$                              | 1.16 |                   | 575,000 |                                 | A$ | 1.16
|A$0.39             |  | 5,000   |  | 0.4 years                                   |  | A$                              | 0.39 |                   | 5,000   |                                 | A$ | 0.39
|A$0.40             |  | 25,000  |  | 1.6 years                                   |  | A$                              | 0.40 |                   |        |                                 | A$ | 0.40
|A$0.40             |  | 55,000  |  | 1.6 years                                   |  | A$                              | 0.40 |                   | 55,000  |                                 | A$ | 0.40
|                   |  |         |  |                                             |  |                                 |      |                   |         |                                 |    |     
|Total              |  | 660,000 |  |                                             |  |                                 |      |                   | 635,000 |                                 |    |     
|                   |  |         |  |                                             |  |                                 |      |                   |         |                                 |    |     

---

|(i) | Options were issued in Australian dollars (the functional currency for the Company).
|--- | ------------------------------------------------------------------------------------



(b) Options not pursuant to the Employee and Executive Option Plan



Information with respect to Options issued not pursuant the Executive and
Employee Option Plan detailed above, however in line with the powers contained in the Companys constitution, is as follows:



|                                                            |  |                               |   |  |                                     |      |                               |           |                                     |    |     
|----------------------------------------------------------- |  | ----------------------------- | - |  | ----------------------------------- | ---- | ----------------------------- | --------- | ----------------------------------- | -- | ----
|                                                            |  | Number of options outstanding |   |  | Weighted average exercise price (i) |      | Number of options exercisable |           | Weighted average exercise price (i)
|Options outstanding, December 31, 2000                      |  | 1,375,000                     |   |  | A$                                  | 0.50 |                               | 1,375,000 |                                     | A$ | 0.50
|- granted                                                   |  | 5,600,000                     |   |  | A$                                  | 0.16 |                               |           |                                     |    |     
|- forfeited                                                 |  |                              |   |  |                                     |     |                               |           |                                     |    |     
|- expired                                                   |  |                              |   |  |                                     |     |                               |           |                                     |    |     
|- exercised                                                 |  | (5,000                        | ) |  |                                     |     |                               |           |                                     |    |     
|                                                            |  |                               |   |  |                                     |      |                               |           |                                     |    |     
|Options outstanding, December 31, 2001                      |  | 6,970,000                     |   |  | A$                                  | 0.23 |                               | 1,970,000 |                                     | A$ | 0.77
|- granted                                                   |  | 129,165                       |   |  | A$                                  | 1.09 |                               |           |                                     |    |     
|- forfeited                                                 |  |                              |   |  |                                     |     |                               |           |                                     |    |     
|- expired                                                   |  |                              |   |  |                                     |     |                               |           |                                     |    |     
|- exercised                                                 |  | (500,000                      | ) |  | A$                                  | 0.48 |                               |           |                                     |    |     
|                                                            |  |                               |   |  |                                     |      |                               |           |                                     |    |     
|Options outstanding, December 31, 2002                      |  | 6,599,165                     |   |  | A$                                  | 0.22 |                               | 1,599,165 |                                     | A$ | 0.89
|- granted                                                   |  | 793,000                       |   |  | A$                                  | 0.53 |                               |           |                                     |    |     
|- forfeited                                                 |  | (870,000                      | ) |  | A$                                  | 0.51 |                               |           |                                     |    |     
|- expired                                                   |  |                              |   |  |                                     |     |                               |           |                                     |    |     
|- exercised                                                 |  |                              |   |  |                                     |     |                               |           |                                     |    |     
|                                                            |  |                               |   |  |                                     |      |                               |           |                                     |    |     
|Options outstanding, December 31, 2003                      |  | 6,522,165                     |   |  | A$                                  | 0.21 |                               | 1,522,165 |                                     | A$ | 0.98
|                                                            |  |                               |   |  |                                     |      |                               |           |                                     |    |     
|Shares reserved for future issuance as at December 31, 2003 |  | 6,522,165                     |   |  |                                     |      |                               |           |                                     |    |     
|                                                            |  |                               |   |  |                                     |      |                               |           |                                     |    |     

---

|(i) | Options were issued in Australian dollars (the functional currency for the Company).
|--- | ------------------------------------------------------------------------------------



There were 793,000 options granted during 2003 (2002: 129,165, 2001:5,600,000). The equivalent market price per share at
grant date for options granted during 2003 was A$0.43-A$0.49 (2002: A$0.55-A$0.99; 2001: A$1.34-A$1.54).



On September 3, 2003 the Company issued 500,000 options to an employee in lieu of cash bonuses payable under an employment contract. The employee related
expense and options issued have been recorded in the financial statements at the intrinsic value being the value of the cash bonus payable. The value of $101,775 was offset against the accrued bonus liability recorded at December 31, 2002.



F-23



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



On November 19, 2003 the Company issued 118,000 options to an employee in lieu of cash bonuses payable under an employment contract. The employee related
expense and options issued have been recorded in the financial statements at the intrinsic value being the value of the cash bonus payable. The value of $38,363 was offset against the accrued bonus liability recorded at December 31, 2002.



The remaining 175,000 options were granted during the year to
employees in accordance with their employment contracts. No amount was expensed to record the issuance of these options as these options were out of the money.



The following table summarises information about options not granted under the Executive and Employee Option Plan outstanding at December 31, 2003:



|                   |  |           |  |                                           |  |                               |  |                  |      |                                |           |  |    |                                                                            |  |     
|------------------ |  | --------- |  | ----------------------------------------- |  | ----------------------------- |  | ---------------- | ---- | ------------------------------ | --------- |  | -- | -------------------------------------------------------------------------- |  | ----
|                   |  |           |  | Outstanding                               |  | Exercisable                  
|Exercise price (i) |  | Options   |  | Weighted averageremainingcontractual life |  | Weightedaverageexercise price |  | Number ofoptions |      | Weighted averageexercise price
|16,665             |  | 16,665    |  | 0.8 years                                 |  | A$                            |  |                  | 0.57 |                                | 16,665    |  | A$ |                                                                            |  | 0.57
|300,000            |  | 300,000   |  | 0.96 years                                |  | A$                            |  |                  | 1.15 |                                | 300,000   |  | A$ |                                                                            |  | 1.15
|300,000            |  | 300,000   |  | 0.96 years                                |  | A$                            |  |                  | 1.64 |                                | 300,000   |  | A$ |                                                                            |  | 1.64
|31,250             |  | 31,250    |  | 1.25 years                                |  | A$                            |  |                  | 1.16 |                                | 31,250    |  | A$ |                                                                            |  | 1.16
|50,000             |  | 50,000    |  | 1.5 years                                 |  | A$                            |  |                  | 1.16 |                                | 50,000    |  | A$ |                                                                            |  | 1.16
|31,250             |  | 31,250    |  | 1.75 years                                |  | A$                            |  |                  | 1.16 |                                | 31,250    |  | A$ |                                                                            |  | 1.16
|62,500             |  | 62,500    |  | 1.42 years                                |  | A$                            |  |                  | 1.16 |                                | 62,500    |  | A$ |                                                                            |  | 1.16
|31,250             |  | 31,250    |  | 2.75 years                                |  | A$                            |  |                  | 1.16 |                                | 31,250    |  | A$ |                                                                            |  | 1.16
|500,000            |  | 500,000   |  | 2.75 years                                |  | A$                            |  |                  | 0.40 |                                | 500,000   |  | A$ |                                                                            |  | 0.40
|31,250             |  | 31,250    |  | 2.83 years                                |  | A$                            |  |                  | 1.16 |                                | 31,250    |  | A$ |                                                                            |  | 1.16
|12,500             |  | 12,500    |  | 2.83 years                                |  | A$                            |  |                  | 0.56 |                                | 12,500    |  | A$ |                                                                            |  | 0.56
|118,000            |  | 118,000   |  | 2.92 years                                |  | A$                            |  |                  | 0.40 |                                | 118,000   |  | A$ |                                                                            |  | 0.40
|25,000             |  | 25,000    |  | 2.92 years                                |  | A$                            |  |                  | 0.56 |                                | 25,000    |  | A$ |                                                                            |  | 0.56
|12,500             |  | 12,500    |  | 2.92 years                                |  | A$                            |  |                  | 0.56 |                                | 12,500    |  | A$ |                                                                            |  | 0.56
|                   |  | 5,000,000 |  |                                           |  | A$                            |  |                  | 0.01 |                                |           |  |    | Exercisable from thedate of grant basedon share price levelsbeing achieved
|                   |  |           |  |                                           |  |                               |  |                  |      |                                |           |  |    |                                                                            |  |     
|Total              |  | 6,522,165 |  |                                           |  |                               |  |                  |      |                                | 1,522,165 |  |    |                                                                            |  |     
|                   |  |           |  |                                           |  |                               |  |                  |      |                                |           |  |    |                                                                            |  |     

---

|(i) | Options were issued in Australian dollars (the functional currency for the Company).
|--- | ------------------------------------------------------------------------------------

|(ii) | The options are exercisable for a period of 10 years from the date of grant based on share price levels of the Companys shares being achieved and maintained for a period of 30
days, as follows:
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                      |  |                    
|--------------------- |  | -------------------
|Share Price Level USD |  | Options Exercisable
|$1.00                 |  | 1,000,000          
|$2.00                 |  | 2,000,000          
|$4.00                 |  | 1,000,000          
|$5.00                 |  | 1,000,000          



In 2002, the directors
extended the period in which the $1.00 share price level is probable to be reached, from two years (2001) to four years from date of grant (July 2001). The value of these options at December 31, 2003 was $280,571 (2002: $250,304; 2001: $746,237).
Compensation expense of $81,589 was recorded in 2003 bringing the cumulative compensation expense to $175,453 (2002: 93,864). Compensation expense of $99,647 was recorded in 2001 in connection with the grant of these options based on the fair value
of the per share price of the Companys common stock at December 31, 2001 and an amortization period of two years. Due to the probable life being extended to 4 years, previously recognized expense in the amount of $5,783 was reversed in 2002.



F-24



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



The weighted average grant date fair value of options granted during the year, by range of exercise prices is as follows:



|                                                 |  |                   |  |                                 |      |                             |    |     
|------------------------------------------------ |  | ----------------- |  | ------------------------------- | ---- | --------------------------- | -- | ----
|Range of Exercise prices                         |  | Number of Options |  | Weighted average exercise price |      | Weighted average fair value
|Year ended December 31, 2003:                    |  |                   |  |                                 |      |                             |    |     
|Exercise price equal to market on grant date     |  |                  |  |                                 |     |                             |    |    
|Exercise price less than market on grant date    |  | 703,000           |  | A$                              | 0.30 |                             | A$ | 0.37
|Exercise price greater than market on grant date |  | 175,000           |  | A$                              | 0.74 |                             | A$ | 0.34
|                                                 |  |                   | 
|Year ended December 31, 2002:                    |  |                   |  |                                 |      |                             |    |     
|Exercise price equal to market on grant date     |  |                  |  |                                 |     |                             |    |    
|Exercise price less than market on grant date    |  |                  |  |                                 |     |                             |    |    
|Exercise price greater than market on grant date |  | 129,165           |  | A$                              | 1.08 |                             | A$ | 0.75
|                                                 |  |                   | 
|Year ended December 31, 2001:                    |  |                   |  |                                 |      |                             |    |     
|Exercise price equal to market on grant date     |  |                  |  |                                 |     |                             |    |    
|Exercise price less than market on grant date    |  | 5,875,000         |  | A$                              | 0.18 |                             | A$ | 1.36
|Exercise price greater than market on grant date |  | 300,000           |  | A$                              | 1.64 |                             | A$ | 1.54



Given the wide range
of exercise prices, the following table provides additional information on all options outstanding at December 31, 2003 by ranges of exercise prices.



|                         |  |                   |  |                                    |      |                                                          |    
|------------------------ |  | ----------------- |  | ---------------------------------- | ---- | -------------------------------------------------------- | ---
|Range of Exercise Prices |  | Number of Options |  | Weighted average exercise price(i) |      | Weighted average remainingcontractual life value (years)
|A$0.01A$0.10            |  | 5,000,000         |  | A$                                 | 0.01 |                                                          | 7.5
|A$0.40A$0.57            |  | 769,665           |  | A$                                 | 0.41 |                                                          | 2.7
|A$1.15A$1.64            |  | 1,412,500         |  | A$                                 | 1.26 |                                                          | 1.0

---

|(i) | Options were issued in Australian dollars (the functional currency for the Company).
|--- | ------------------------------------------------------------------------------------



Compensation cost for stock options granted to non-employees is measured as the fair market value of stock options as
calculated using an option pricing model, and is expensed over the period in which the options vest. Nil options issued in 2003 (2002: 66,665; 2001: 600,000) to non-employees as payment for consulting services rendered were valued at nil (2002:
$14,972; 2001: $303,159) using the Black-Scholes option valuation model. These options were fully expensed in the year they were granted.



The fair value of options granted in 2003, 2002 and 2001 were estimated at the date of grant using the Black Scholes method, assuming no dividends, an
expected life in 2003 of 1.75 and 4 years (2002: 2 years; 2001: between 2 and 8 years), volatility in 2003 of between 42.7%% and 79.2% (2002: between 84.5% and 124%; 2001: 103.4%) and a risk free rate of between 4.39% and 5.39% in 2003 (2002:
between 4.46% and 5.53%; 2001: between 4.17% and 6.35%). The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys employee stock options have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock
options.



F-25



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Listed Options



During the year ended December 31, 2003 the Company issued nil options (2002: 36,811,761) that were listed on the Australian Stock Exchange as follows:



|                                                            |  |                  |   |  |                  |    
|----------------------------------------------------------- |  | ---------------- | - |  | ---------------- | ---
|                                                            |  | December 31,2003 |   |  | December 31,2002 |    
|Balance at beginning of year                                |  | 36,795,959       |   |  |                 |    
|- placement under a private equity raising                  |  |                 |   |  | 14,142,700       |    
|- rights issue (1 bonus option per 20 ordinary shares held) |  |                 |   |  | 21,902,573       |    
|- issued as partial payment for consultancy services        |  |                 |   |  | 766,488          | (i)
|- exercised                                                 |  | (2,313           | ) |  | (15,802          | )  
|                                                            |  |                  |   |  |                  |    
|Balance at end of year                                      |  | 36,793,646       |   |  | 36,795,959       |    
|                                                            |  |                  |   |  |                  |    
|Shares reserved for future issuance as at December 31, 2003 |  | 36,793,646       |   |  |                  |    
|                                                            |  |                  |   |  |                  |    

---

|(i) | The 766,488 listed options issued as partial payment for consultancy services were valued at the market value of the listed options on date of grant and were fully expensed in the
year ended December 31, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All listed options
are fully vested and are exercisable at any time. All listed options have a fixed exercise price of A$0.65 (approximately $0.49). Each listed option is exercisable to one ordinary share at any time on or before September 6, 2004. The weighted
average contractual life is 8.2 months, and the weighted average exercise price is A$0.65 (approximately $0.49).



During the year ended December 31, 2003, 2,313 (2002: 15,802) listed options were exercised. As a result at December 31, 2003 there remains 36,793,646
(2002: 36,795,959) unexercised listed options.



Summary of
total shares reserved for future issuance as at December 31, 2003:



|                                                                           |  |           
|-------------------------------------------------------------------------- |  | ----------
|Unlisted options  issued under the Executive and Employee Option Plan     |  | 660,000   
|Unlisted options  not issued under the Executive and Employee Option Plan |  | 6,522,165 
|Listed options                                                             |  | 36,793,646
|                                                                           |  |           
|                                                                           |  | 43,975,811
|                                                                           |  |           



2000 Discretionary Share Option
Scheme



During the year ended December 31, 2000 the
stockholders in Annual General Meeting approved the establishment of a Discretionary Share Option Scheme (Scheme) to enable the board to provide an incentive to and to reward full time executives and employees for the key role that they
will play in the future success of the Company. A summary of the terms of the Scheme is as follows:



Invitations to participate in the Scheme are at the absolute discretion of the board. Any invitation shall specify the precise details of the invitation,
such as maximum number of shares, date by which application must be made by the invitee, the exercise price and any conditions attached to the exercise of the option. The exercise price shall not be less than the market price of the Companys
shares on the date determined by the board. The aggregate number of shares subject to options shall not exceed 5% of the Companys shares then on issue. There are also individual limits on the number of options which may be granted to
employees.



The exercise period is the earlier of: (a) the
third anniversary of the date of grant of the option; (b) the date on which any special circumstances including death, disability, redundancy, retirement or cessation of employment arise; (c) a takeover, compulsory acquisition, reconstruction,
amalgamation or liquidation; and ending on the earliest of (d) the date which is 2 days before the tenth anniversary of the date of grant; (e) the last day before the first anniversary of the date on which any special circumstance arises; (f) the
expiry of specific time frames set out in the Scheme in relation to the circumstances in (c) above.



An option shall lapse upon expiry of the exercise period, termination of the option holders employment otherwise than in a special circumstance,
upon the option holders being adjudicated bankrupt or any purported alienation of the options by the option holder.



F-26



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Upon the variation of the share capital of the Company, the number of shares subject to the option and the exercise price shall be adjusted in such manner
to be fair and reasonable and consistent with any relevant requirements of the Corporations Act in Australia and the Listing Rules of the Australian Stock Exchange.



The board may, at any time, cease making further offers or invitations but the subsisting rights of option holders shall not
be affected.



15. Segment Disclosures



Following the acquisition of ProCam, the Company is organized based on the
products and services that it offers. Under this organizational structure, there are two reportable segments: (i) research and development and (ii) manufacturing. The research and development segment derives its revenues from funding received to
assist with the development of its ballistics technology for markets in Australia and the United States. The manufacturing segment derives revenue from the sale of precision-machined parts for the defense, electronics, aircraft and space propulsion
industries based in the United States. As stated, Metal Storm Limited sees itself as predominately a research and development company with its primary focus on the development of its ballistics technology for markets in Australia and the United
States



The Company views certain expenses, particularly some
general and administration costs, as not belonging to any one reportable segment. As a result, the Company has aggregated these items into an Unallocated expenses non-segment line, as permitted by Statement of Financial Accounting
Standards No. 131 Disclosures about Segments of an Enterprise and Related Information. All transactions between segments were incurred at market value.



|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|------------------------------------------------------------------------------------------------ |  | ---------- | - |  | ------------------ | - |  | ------------ | - |  | ----------------- | -
|                                                                                                 |  | R&D 2003   |   |  | Manufacturing 2003 |   |  | Eliminations |   |  | Consolidated 2003 |  
|                                                                                                 |  | $          |   |  | $                  |   |  |              |   |  | $                 |  
|Sales to customers outside the economic entity                                                   |  |           |   |  | 235,293            |   |  |              |   |  | 235,293           |  
|Interest revenue                                                                                 |  | 221,736    |   |  |                   |   |  |              |   |  | 221,736           |  
|Grant revenue                                                                                    |  | 227,439    |   |  |                   |   |  |              |   |  | 227,439           |  
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Total revenue                                                                                    |  | 449,175    |   |  | 235,293            |   |  |              |   |  | 684,468           |  
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Interest expense                                                                                 |  | 1,073      |   |  | 11,566             |   |  |              |   |  | 12,639            |  
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Segment result                                                                                   |  | (4,350,042 | ) |  | (186,560           | ) |  |              |   |  | (4,536,602        | )
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Unallocated expenses                                                                             |  |            |   |  |                    |   |  |              |   |  | (194,153          | )
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Consolidated operating loss from ordinary activities before income tax expense                   |  |            |   |  |                    |   |  |              |   |  | (4,730,755        | )
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Assets                                                                                           |  |            |   |  |                    |   |  |              |   |  |                   |  
|Segment assets                                                                                   |  | 8,520,609  |   |  | 4,722,228          |   |  | (1,886,389   | ) |  |                   |  
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Total assets                                                                                     |  |            |   |  |                    |   |  |              |   |  | 11,356,448        |  
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Liabilities                                                                                      |  |            |   |  |                    |   |  |              |   |  |                   |  
|Segment liabilities                                                                              |  | 1,619,353  |   |  | 3,153,344          |   |  | (450,000     | ) |  |                   |  
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Total liabilities                                                                                |  |            |   |  |                    |   |  |              |   |  | 4,322,697         |  
|                                                                                                 |  |            |   |  |                    |   |  |              |   |  |                   |  
|Acquisition of property, plant and equipment, intangibles, goodwill and other non-current assets |  | 62,720     |   |  | 4,195,183          |   |  |              |   |  | 4,257,903         |  
|Depreciation                                                                                     |  | 33,575     |   |  | 19,092             |   |  |              |   |  | 52,667            |  
|Amortization                                                                                     |  |           |   |  | 3,333              |   |  |              |   |  | 3,333             |  
|Non-cash expenses other than depreciation, issue of options, shares in lieu of cash payments     |  | 118,901    |   |  |                   |   |  |              |   |  | 118,901           |  



F-27



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



In the manufacturing business segment, sales to individual customers exceed 10% of total sales for three different customers. The amount of sales to these
customers equals $89,399, $44,429 and $40,642 respectively. The three customers are: Aerojet  General Corporation, General Dynamics AES and General Dynamics OTS. The loss of these three customers would not have had a material effect on the 31
December 2003 operations. In 2004 the Company is focused expanding its customer base and as such is not expecting to be as reliant on these customers.



Geographic information



|              |  |                  |  |                       
|------------- |  | ---------------- |  | ----------------------
|              |  | Revenues (1)2003 |  | Long-lived assets 2003
|              |  | $                |  | $                     
|Australia     |  |                 |  | 1,667,702             
|United States |  | 235,293          |  | 2,572,217             
|              |  |                  |  |                       
|Total         |  | 235,293          |  | 4,239,919             
|              |  |                  |  |                       

---

|(1) | Revenues to external customers are attributed to countries based on the location of the customer.
|--- | -------------------------------------------------------------------------------------------------



In 2002 and 2001, prior to the acquisition of ProCam, the Company was organized based on the geographical areas in which it
operated, being Australia and North America. For this reason, no business segment information has been disclosed for these years.



|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|-------------------------------------------------------------------------------------------- |  | ------------- | - |  | ----------------- | - |  | ------------ | - |  | ---------------- | -
|                                                                                             |  | Australia2002 |   |  | North America2002 |   |  | Eliminations |   |  | Consolidated2002 |  
|                                                                                             |  | $             |   |  | $                 |   |  |              |   |  | $                |  
|Sales to customers outside the economic entity                                               |  |              |   |  |                  |   |  |              |   |  |                 |  
|Interest revenue                                                                             |  | 99,555        |   |  | 2,338             |   |  |              |   |  | 101,893          |  
|Grant revenue                                                                                |  | 5,172         |   |  | 7,201             |   |  |              |   |  | 12,373           |  
|Other revenue                                                                                |  | 384           |   |  |                  |   |  |              |   |  | 384              |  
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Total revenue                                                                                |  | 105,111       |   |  | 9,539             |   |  |              |   |  | 114,650          |  
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Interest expense                                                                             |  | 396           |   |  | 505               |   |  |              |   |  | 901              |  
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Segment result                                                                               |  | (4,154,377    | ) |  | (1,053,630        | ) |  |              |   |  | (5,208,007       | )
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Unallocated expenses                                                                         |  |               |   |  |                   |   |  |              |   |  | (171,586         | )
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Consolidated operating loss from ordinary activities before income tax expense               |  |               |   |  |                   |   |  |              |   |  | (5,379,593       | )
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Assets                                                                                       |  |               |   |  |                   |   |  |              |   |  |                  |  
|Segment assets                                                                               |  | 5,985,701     |   |  | 367,803           |   |  | (1,389,129   | ) |  |                  |  
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Total assets                                                                                 |  |               |   |  |                   |   |  |              |   |  | 4,964,375        |  
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Liabilities                                                                                  |  |               |   |  |                   |   |  |              |   |  |                  |  
|Segment liabilities                                                                          |  | 1,050,681     |   |  | 1,602,570         |   |  | (1,389,129   | ) |  |                  |  
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Total liabilities                                                                            |  |               |   |  |                   |   |  |              |   |  | 1,264,122        |  
|                                                                                             |  |               |   |  |                   |   |  |              |   |  |                  |  
|Acquisition of property, plant and equipment, intangible assets and other non-current assets |  | 9,758         |   |  | 5,353             |   |  |              |   |  | 15,111           |  
|Depreciation and amortization                                                                |  | 43,454        |   |  | 10,528            |   |  |              |   |  | 53,982           |  
|Non-cash expenses other than depreciation                                                    |  | 411,319       |   |  | 11,161            |   |  |              |   |  | 422,480          |  



F-28



---

##### Table of Contents

METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|-------------------------------------------------------------------------------------------- |  | ------------- | - |  | ------------------ | - |  | ------------ | - |  | ---------------- | -
|                                                                                             |  | Australia2001 |   |  | North America 2001 |   |  | Eliminations |   |  | Consolidated2001 |  
|                                                                                             |  | $             |   |  | $                  |   |  |              |   |  | $                |  
|Sales to customers outside the economic entity                                               |  |              |   |  |                   |   |  |              |   |  |                 |  
|Interest revenue                                                                             |  | 195,025       |   |  | 1,043              |   |  |              |   |  | 196,068          |  
|Grant revenue                                                                                |  | 353,180       |   |  |                   |   |  |              |   |  | 353,180          |  
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Total revenue                                                                                |  | 548,205       |   |  | 1,043              |   |  |              |   |  | 549,248          |  
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Interest expense                                                                             |  | 48            |   |  |                   |   |  |              |   |  | 48               |  
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Segment result                                                                               |  | (2,375,028    | ) |  | (130,604           | ) |  |              |   |  | (2,505,632       | )
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Unallocated expenses                                                                         |  |               |   |  |                    |   |  |              |   |  | (144,722         | )
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Consolidated operating loss from ordinary activities before income tax expense               |  |               |   |  |                    |   |  |              |   |  | (2,650,354       | )
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Assets                                                                                       |  |               |   |  |                    |   |  |              |   |  |                  |  
|Segment assets                                                                               |  | 3,619,642     |   |  | 106,035            |   |  | (198,682     | ) |  |                  |  
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Total assets                                                                                 |  |               |   |  |                    |   |  |              |   |  | 3,526,995        |  
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Liabilities                                                                                  |  |               |   |  |                    |   |  |              |   |  |                  |  
|Segment liabilities                                                                          |  | 229,992       |   |  | 232,032            |   |  | (198,682     | ) |  |                  |  
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Total liabilities                                                                            |  |               |   |  |                    |   |  |              |   |  | 263,342          |  
|                                                                                             |  |               |   |  |                    |   |  |              |   |  |                  |  
|Acquisition of property, plant and equipment, intangible assets and other non-current assets |  | 87,928        |   |  | 27,544             |   |  |              |   |  | 115,472          |  
|Depreciation and amortization                                                                |  | 28,547        |   |  | 1,031              |   |  |              |   |  | 29,578           |  
|Non-cash expenses other than depreciation                                                    |  | 608,688       |   |  |                   |   |  |              |   |  | 608,688          |  



16. Fair Value
of Financial Instruments



|                               |  |                      |           |                           |   |                      |  |                           |           |  |   |          
|------------------------------ |  | -------------------- | --------- | ------------------------- | - | -------------------- |  | ------------------------- | --------- |  | - | ---------
|                               |  |                      |           | December 31,              |   |                     
|                               |  | 2003 Carrying Amount |           | 2003 Estimated fair value |   | 2002 Carrying Amount |  | 2002 Estimated fair value
|ASSETS                         |  |                      |           |                           |   |                      |  |                           |           |  |   |          
|Cash and cash equivalents      |  | $                    | 6,049,249 |                           | $ | 6,049,249            |  | $                         | 4,541,630 |  | $ | 4,541,630
|Receivables                    |  |                      | 451,146   |                           |   | 451,146              |  |                           |          |  |   |         
|Inventory                      |  |                      | 149,925   |                           |   | 149,925              |  |                           |          |  |   |         
|LIABILITIES                    |  |                      |           |                           |   |                      |  |                           |           |  |   |          
|Accounts payable               |  |                      | 1,717,644 |                           |   | 1,717,644            |  |                           | 904,635   |  |   | 904,635  
|Accounts payablerelated party |  |                      | 160,820   |                           |   | 160,820              |  |                           | 85,709    |  |   | 85,709   
|Interest bearing liabilities   |  |                      | 886,159   |                           |   | 886,159              |  |                           |          |  |   |         
|Accounts payable  non-current |  |                      | 6,359     |                           |   | 6,359                |  |                           | 7,557     |  |   | 7,557    
|Interest bearing liabilities   |  |                      | 1,156,664 |                           |   | 1,156,664            |  |                           |          |  |   |         



The Company has
reviewed the fair value of all financial instruments and based on their analysis of current market conditions and the nature of the financial instrument, the Company has concluded that the carrying amounts approximate fair value.



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METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Limitations: Fair value estimates are made at a specific point in time, and are based on relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.



17. Significant Research and Development Agreements



Area Denial Weapon System



In June 2000, the Commonwealth of Australia approved a three-year program to
develop a prototype mortar box system for an area denial weapons system for use in minefield replacement. The objective of this program is to develop a multi-barrel mortar box capable of launching 40mm ammunition at electronically variable and
ultra-rapid rates of fire.



The Company is undertaking this
program in collaboration with the Australian Defense Science & Technology Organization (DSTO), the U.S. Defense Advanced Research Projects Agency (DARPA), and an international consortium. The agreement to formalize the
consortium members rights and obligations was finalized in May 2002 and has a five-year term. Under the program, each of the participants will retain ownership of the intellectual property related to its own technology and any developments and
improvements to that technology.



The Company is using the
technology to develop an area denial weapons system that will be a field deployable system based on the integration of multiple barrels known as a pod, a sensor system and a man in the loop capability for command and control. The Company
believes that the area denial weapons system that we are developing will provide a safer and more accurate alternative to conventional minefields. Finding an alternative to conventional landmines is a high defense priority for governments around the
world. The system will be compliant with the Ottawa Convention, which binds signatories to discontinue using, stockpiling, producing and transferring anti-personnel landmines.



The area denial weapons system that the Company is developing differs from conventional minefields in that it places no
active explosives in or on the ground. Rather, the system works by strategically positioning boxes of massed barrels or pods. Each pod consists of multiple barrels containing various projectiles, which may be ammunition, cameras, sensors or
non-lethal ammunition. The pods are placed directly on the ground and can be adjusted to cover part of a target area. A series of pods can be used to cover a larger target area. The pods are then linked via radio transmitters to a single control
unit, which in turn can be controlled by a soldier (man in the loop) from a remote location. Once the controller is alerted to trespassers in the target area by sensors, each pod may be electronically programmed to fire at the intruder,
with confirmation by a soldier that the intrusion is a threat.



This DSTO-led program is in the final stages of concept demonstrator development. Plans are being prepared to demonstrate the system to the Australian Defence Force and other potential customers in late 2004.



At December 31, 2003 the Company had accounts payable of $149,600 in respect
of contractual commitments for this program.



Advanced
Individual Combat Weapon



In May 2001, the Australian
Department of Defense approved a three-year program to develop, in conjunction with an international consortium consisting of international defense companies, a concept technology demonstrator for a hybrid electronic/mechanical assault rifle, which
they have named the Advanced Individual Combat Weapon. The Company believes the Advanced Individual Combat Weapon has the potential to replace the Australian Armys current assault rifle. The proposal plans to integrate our
technology with an individual combat weapon and a range of other technologies to fire 40 millimeter bursting munitions in addition to the North Atlantic Treaty Organizations standard 5.56 millimeter kinetic rounds. In November 2001, the
Weapons System Division of DSTO announced that it had successfully developed an early-stage prototype Advanced Individual Combat Weapon.



This weapon is being developed under a program undertaken by DSTO in collaboration with us and Tenix Defense Systems to produce three fully operational
Advanced Individual Combat Weapon prototypes for further military testing. The agreement to formalize the consortium members rights and obligations was finalized in September 2002 and has a five-year term. Under the program, each of the
participants will retain ownership of the intellectual property related to its own technology and any developments and improvements to that technology.



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METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



This weapon will be a hybrid assault rifle with an additional barrel incorporating our technology and providing the combat soldier with a range of
enhanced weapon capabilities. It will integrate commercial-off-the-shelf products for enhancing surveillance, communication, target detection and target engagement with our ballistics technology. We anticipate that the fire power component of this
weapon will include NATO standard 5.56 millimeter rounds, initiated mechanically or electrically, and also integrate our stacked rounds technology to fire 40 millimeter bursting munitions.



This DSTO-led concept technology demonstrator program will continue to be
developed through 2005.



At December 31, 2003 the Company had
accounts payable of $261,800 in respect of contractual commitments for this program.



Small Business Innovation Research Programs



The Companys technology has led to the successful awards of Small Business Innovation Research (SBIR) programs over the past few years. The U.S. Department of Defense SBIR program funds early stage
research and development projects that serve defense needs and have the potential for commercialization in private sector or military markets. SBIR proposals pass through three phases. Phase I is a six-month commercial feasibility concept stage.
Success at this level can lead to an invitation to participate in a Phase II award of up to US$750,000 over two years to develop the proposal to prototype stage. Phase III requires private sector funding to take the technology to commercialization.
In addition, the SBIR program provides for private funding into Phase II that can fast-track approvals and attracts up to US$4 from the U.S. Department of Defense for every US$1 of private contribution, thereby leveraging private sector investment.



SBIR program awards for the technology include:



US Missile Defense Agency.In November 2002, the U.S.
Department of Defense Missile Defense Agency made two SBIR Phase I awards to the Companys teaming partner, StratCom International LLC. Both awards include the application of our technology. The first SBIR award is for a stratospheric
missile-intercept launch system that combines the StratCom strategic airships wide area early detection and tracking capability with our electronic ballistic technology. The second SBIR award combines StratComs stratospheric airship
platforms with our technology to improve kill vehicle reliability by enlarging its destructive volume. The Company is awaiting advice from their teaming partner regarding the status of these two SBIR awards.



| |  | U.S. Army Research Office.In December 2002, the U.S. Army Research Office made a SBIR Phase I award to the Companys teaming partner Schappell Automation
Corporation Inc. The program provides for a lethal and less-than-lethal Metal Storm weapon pod system. The objective of this SBIR program is to develop the use of our electronic ballistic technology to deliver special projectiles from a multi-barrel
pod that can be either hand-held or mounted on a robot. The Company was advised there were no funds available for Phase II submissions in 2003 and a Phase III proposal for sole source production is being considered or a Phase II proposal may be
considered when funding is available.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | U.S. Office of Naval Research.In January 2003, the U.S. Navys Office of Naval Research made a SBIR Phase I award to he Companys teaming partner Schappell
Automation Corporation Inc. This SBIR program utilizes the Companys electronic ballistic technology in an innovative weapon system that can deliver a variety of projectiles against a number of different threats. The system is designed for use
on naval vessels for close-in threats and can also be used to protect port facilities and berthed ships. A Phase II proposal has been submitted and the Company expects advice on this by the end of 2004.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | U.S. Navy.In May 2004, the U.S. Navy made a SBIR Phase I award for the development of a new program designed to defend U.S. naval ships from multiple airborne and
surface threats. The Company will work with engineering and technology company Foster-Miller Inc. on this program. Termed Thunder and Lightning Shield, the program proposes to employ both Metal Storm and Foster-Miller technology to
protect U.S. vessels from close range threats such as skimming cruise missiles and small, fast boats containing explosives.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Munitions Development



The Company is developing ammunition and single use, replaceable multi-shot cartridges in which the ammunition will be supplied. The Company is
specifically designing ammunition for use in weapons utilizing our technology, particularly to support activities in the key caliber areas of 40mm and 9mm. The Company has developed and fired kinetic and pyrotechnic munitions and is now extending
plans to produce a range of lethal and less-than-lethal munitions calibers to support their weapon programs.



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METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



Research Agreements with Government Agencies



DSTO Research Agreement



In April 2001, the Company entered into a five-year research agreement, which was amended in September 2002, with the Commonwealth of Australia as
represented by DSTO. Pursuant to this agreement, the Company has granted DSTO a non-exclusive, worldwide, perpetual license to use their scientific and technical know-how and information in relation to their gun hardware and gun system technology
for defense use and international collaboration.



This
agreement also specifies the Companys intellectual property ownership rights, and sets out the terms and conditions under which the Company may commercialize the technology developed under it. In particular, this agreement provides that any
improvements of the Companys gun hardware or gun system technology, including the intellectual property, developed or acquired by or for DSTO from DSTOs further research, will be owned by the Company. However, the Company must pay
royalties to DSTO at agreed rates if they commercialize such improvements.



DSTO Technology License Agreement



In April 2001, the Company entered into an agreement with the Commonwealth of Australia to license from DSTO certain technology that DSTO has used as a design, evaluation or modeling tool in appraising our gun system
technology. The Company also has the right to improvements in the DSTO technology developed during the term of the license agreement.



This agreement is for five years or such further period as the Company agrees with DSTO, but will in any event terminate at the same time as the DSTO
Research Agreement. This agreement provides that if the Company commercializes any of the DSTO technology described above, they must pay DSTO a royalty calculated on their gross revenues on manufacture, sales or licensing, after taking into account
the proportion of the value of DSTOs intellectual property incorporated into the products based on their technology.



National Institute of Justice Smartgun Project



In October 2002, the Company signed a cooperative agreement with the U.S. National Institute of Justice for a project to plan the development of their
100% electronic handgun system into a smart gun, building on their successful law enforcement prototype, the ODwyer VLe handgun. The NIJ is the research and development arm of the U.S. Department of Justice. Since 1994, the NIJ has
been working to develop, test and incorporate smart gun technologies that will reduce deaths and injuries resulting from the use of weapons taken from law enforcement officers. Smart guns provide for a handgun that operates only for the
authorized user.



The project, which was completed in March
2003, provided in-depth analysis into the design, use, manufacturing processes and cost elements of delivering a production safe firearm to the law enforcement community of the United States and potentially other police and military forces
internationally. The Company is currently awaiting advice from NIJ regarding the possibility of developing the VLe Smartgun for the law enforcement community.



Business Development Agreement



In October 2002, the Company entered into a non-exclusive business development agreement with Science Applications International Corporation that has a
three-year term. The agreement grants SAIC a non-exclusive license to make, use, offer, sell, reproduce and publicly display, certain of our core technology, but only in connection with bids and potential bids for research and development programs
and the conduct of research and development programs that have received the Companys prior approval. The non-exclusive license is limited geographically to the United States and Europe. The Company has not received any funds from SAIC under
this agreement.



Under the agreement, SAIC may bid for funding
from government or commercial entities, or conduct certain research and development programs in relation to our technology, subject to us approving the program and the financial arrangements. In any successful bid, the Company must license the
technology to the appropriate government or commercial entity and, if necessary, grant further rights to SAIC to enable SAIC to conduct the successful research and development program. The SAIC agreement allocates ownership of and licensing rights
to certain improvements made to the Companys core technology, to the Company and to SAIC depending on a variety of factors. Improvements to the core technology must be licensed to the other party at no additional cost.



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METAL STORM LIMITED

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS  continued

(U.S. DOLLARS)



18. Employee Superannuation



As required by Australian superannuation legislation, the Company contributes a defined contribution of 9% (until 1 July 2002 8%, 2001: 8%) of all
Australian employees salary to an approved superannuation fund nominated by the employee for their retirement benefit. The Company contributed $68,888 to superannuation funds for the year ended December 31, 2003 (2002: $30,442; 2001: $30,345).



19. Subsequent Events



In May 2004, the Company raised A$21.5 million (approximately $15.7 million)
from the sale of shares in a private placement transaction.



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SIGNATURES



Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F/A and has duly caused this amendment to the annual report to be signed on its behalf by the undersigned, thereunto duly authorized.



METAL STORM LIMITEDBy:

/s/ SYLVIE MOSER-SAVAGEName:

Sylvie Moser-SavageTitle:

Chief Financial Officer and Company Secretary




Date: September 8, 2004