##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 (Mark one)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 METAL STORM LIMITED
 (Exact Name of Registrant as Specified in its Charter)
 Australia
(Jurisdiction of Incorporation or Organization)
 Building 4
848 Boundary Road
Richlands, Queensland 4077
Australia
(Address of principal executive offices)
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
 Ordinary Shares in the form of American Depositary Shares, evidenced by American Depositary Receipts
(Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
    o þ
  o þ
  þ o
  o o þ
  U.S. GAAP o
    
    International Financial Reporting Standards as issued
    
    Other oby the International Accounting Standards Board þ
  o o
  o þ




---



##### 



Table of Contents
 Item 1.
    
    Identity of Directors, Senior Management and Advisors
    
    
    4Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    4Item 3.
    
    Key Information
    
    
    4Item 4.
    
    Information on Metal Storm
    
    
    14Item 4A.
    
    Unresolved Staff Comments
    
    
    23Item 5.
    
    Operating and Financial Review and Prospects
    
    
    23Item 6.
    
    Directors, Senior Management and Employees
    
    
    29Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    34Item 8.
    
    Financial Information
    
    
    35Item 9.
    
    The Offer and Listing
    
    
    35Item 10.
    
    Additional Information
    
    
    38Item 11.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    50Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    50Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    50Item 14.
    
    Material Modifications to the Rights of Security Holders and the Use of Proceeds
    
    
    50Item 15T.
    
    Controls and Procedures
    
    
    50Item 16A.
    
    Audit Committee Financial Expert
    
    
    52Item 16B.
    
    Code of Ethics
    
    
    52Item 16C.
    
    Principal Accountant Fees and Services
    
    
    52Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    53Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    53Item 17.
    
    Financial Statements
    
    
    53Item 18.
    
    Financial Statements
    
    
    53Item 19.
    
    Exhibits
    
    
    53EX-4.6: EMPLOYMENT AGREEMENTEX-8.0: SUBSIDIARIESEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONEX-13.2: CERTIFICATION
  2




---



##### Table of Contents



CURRENCY OF PRESENTATION AND EXCHANGE RATES
    AtPeriod
    
    AverageEnd
    
    Rate (1)
    
    High
    
    LowYear ended December 31,2003
    
    
    0.7520
    
    
    
    0.6589
    
    
    
    0.7520
    
    
    
    0.56292004
    
    
    0.7805
    
    
    
    0.7384
    
    
    
    0.7979
    
    
    
    0.68402005
    
    
    0.7342
    
    
    
    0.7620
    
    
    
    0.7974
    
    
    
    0.72612006
    
    
    0.7884
    
    
    
    0.7535
    
    
    
    0.7914
    
    
    
    0.70562007
    
    
    0.8776
    
    
    
    0.8389
    
    
    
    0.9369
    
    
    
    0.7724MonthJanuary 2008
    
    
    0.8968
    
    
    
    0.8823
    
    
    
    0.8981
    
    
    
    0.8654February 2008
    
    
    0.9370
    
    
    
    0.9133
    
    
    
    0.9463
    
    
    
    0.8934March 2008
    
    
    0.9132
    
    
    
    0.9221
    
    
    
    0.9411
    
    
    
    0.8958April 2008
    
    
    0.9419
    
    
    
    0.9309
    
    
    
    0.9488
    
    
    
    0.9067May 2008
    
    
    0.9551
    
    
    
    0.9492
    
    
    
    0.9644
    
    
    
    0.9338
 
 (1)
    
    Determined by averaging noon buying rates on the last day of each full month during the
period. FORWARD-LOOKING STATEMENTS
  3




---



##### Table of Contents



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




---



##### Table of Contents



As of and for the year ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004A$
    
    
    A$
    
    
    A$
    
    
    A$Total equity
    
    
    (3,307,570
    )
    
    
    1,097,332
    
    
    
    5,779,862
    
    
    
    16,199,993Other Financial Data:Dividends per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Net loss per ordinary share  basic and diluted is calculated as net loss for the period
divided by adjusted weighted average number of ordinary shares outstanding for the same
period.  As of and for the year endedDecember 31, 2003(A$)Amounts in accordance with U.S. GAAPIncome Statement data:Total operating income
    
    
    348,570Total operating expenses
    
    
    (8,153,088
    )Loss from operations
    
    
    (7,804,518
    )Total other income
    
    
    997,985Loss after tax from discontinued operations
    
    
    (373,244
    )Net loss
    
    
    (7,179,777
    )Net loss per ordinary share  basic and diluted (1)
    
    
    (0.016
    )Weighted average ordinary number of shares outstanding
    
    
    442,525,034Balance Sheet data:Total current assets
    
    
    9,451,860Total current liabilities
    
    
    4,100,085Total assets
    
    
    15,101,660Ordinary share capital
    
    
    31,506,515Total shareholders equity
    
    
    9,353,392Other financial data:Dividends per share
    
    
    
 
 (1)
    
    Net loss per ordinary share  basic and diluted is calculated as net loss for the period
divided by adjusted weighted average number of ordinary shares outstanding for the same
period. B. Capitalization and Indebtedness
  C. Reasons for Offer and Use of Proceeds
  D. Risk Factors
 There is uncertainty regarding Metal Storm continuing as a going concern
  5




---



##### Table of Contents



We may be required to redeem convertible notes before maturity, which redemption could cause us to
become insolvent.
   We may need additional capital and may not be able to raise additional capital on favorable terms,
if at all.
    6




---



##### Table of Contents



We are in the product engineering phase and do not yet have any product for sale based on our core
technology.
  We cannot be certain of market acceptance of our technology or the rate of any market acceptance.
  We are dependent on retaining key personnel.
  Any catastrophic event involving our technology could adversely affect Metal Storms reputation.
  We work on research and development programs.
  There are some limitations relating to our technology.
  7




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents




    
    Loss of Appropriations
  
    
    Procurement and Other Related Laws and Regulations
  
    
    Protection of Proprietary Technology
  
    
    Changes and Adjustments
  
    
    Competitive Bidding and Domestic Preferences
   11




---



##### Table of Contents



We may have product liability exposure in the future.
  We may be dependent on third party manufacturers, suppliers and teaming partners.
    Our share price has been and will likely continue to be volatile.
  
    
    variations in our anticipated or actual operating results;
    
    sales of substantial amounts of our shares;
    
    announcements about us or about our competitors, including new products;
    
    litigation and other developments relating to our patents or other proprietary rights or
those of our competitors;
    
    governmental regulation and legislation;
    
    our available cash resources or the need to seek additional funding through public or
private equity or debt financings; and
    
    changes in securities analysts estimates of our performance, or our failure to meet
analysts expectations.
   12




---



##### Table of Contents



We are not currently paying dividends and we may not pay dividends in the future.
  We have been, and likely will be again, classified as a passive foreign investment company for U.S.
federal income tax purposes.
    Our ADR holders are not shareholders and do not have shareholder rights.
    13




---



##### Table of Contents



Item 4. Information on Metal Storm
 A. History and Development of Metal Storm
       B. Business Overview
  Strategy
   14




---



##### Table of Contents




    
    completing the engineering of current Metal Storm 40mm weapon system components to a
standard suitable for certification by relevant government agencies;
    
    building and demonstrating new and selected existing weapon prototypes designed to
attract demand for early adoption by end-users;
    
    producing weapon prototypes to customer specifications in funded programs;
    
    obtaining certification of components and product prototypes by relevant government
agencies, particularly the U.S. Department of Defense;
    
    merging our technology into fully integrated weapons systems that are adaptable to a
variety of applications in current demand by military customers;
    
    securing customer production orders for certified products; and
    
    using the successful commercialization of 40mm weapons systems as a platform from which
we can then branch out into other weapons categories and other applications of our core
technology.
    15




---



##### Table of Contents



Recent achievements
  
    
    the successful test firing of the Redback weapon system and munitions in collaboration
with Electro Optic Systems and ST Kinetics in February 2006, March 2007, April 2007 and June
2007;
    
    the successful live fire demonstration of the FireStorm weapons system with non-lethal
munitions for the U.S. Army in December 2007;
    
    the initial test firing and trials of a prototype high explosive 40mm grenade assembly
developed in collaboration with ARDEC in March 2006;
    
    the successful live fire demonstrations of the MAUL 18mm grenade launcher to the U.S.
Marine Corp in February 2008;
    
    successful live fire demonstration from an unmanned aerial vehicle in collaboration with
Dragonfly Pictures Inc. in September 2006;
    
    ongoing development and firings of the 3GL weapons; and
    
    ongoing refinement and development of munitions for use in all Metal Storm 40mm weapons
systems.
 Engineering
    Business Development
    16




---



##### Table of Contents



Technology
      
    
    electronically programmable rates of fire from single shots to ultra-rapid rates;
    
    no moving parts, resulting in increased reliability and availability because there is
less maintenance required and decreased possibility of malfunction;
    
    increased firepower to weight ratio resulting in a lighter weapon with greater firepower
compared to conventional weapons;
    
    modular pods that could operate as a complete weapon system in one container;
    
    100% electronic operation;
    
    the potential of grouping multiple calibers and multiple lethalities in one gun allowing
the user to vary the use to a specific situation;
    
    numerous hybrid configurations and capability for special applications; and
    
    fast second round strike capability before recoil effect.
 Joint Collaboration Agreement with ST Kinetics
   17




---



##### Table of Contents



Internal Product Development
  3GL
  Redback
    FireStorm
  
    
    military operations on urban terrain;
    
    reconnaissance patrol;
    
    border patrol;
    
    critical infrastructure protection; and
    
    crowd control.
  18




---



##### Table of Contents



Fireworks
  Systems for Unmanned Vehicles
      MAUL
     Handgun
   Electronically Initiated Munitions Development  ST Kinetics
 19




---



##### Table of Contents



External Development Programs
  U.S. Navy SBIR Contract  Metal Storm Active Protection System
  U.S. Army SBIR Contract  Metal Storm Crowd Control System
  StarChase Contract  Pursuit Management System Phase II Lead System Integrator
  U.S. Marine Corps  18mm Stacked Round Firing System
  U.S. Navy  12-gauge Multi-shot Grenade Launcher
  U.S. Army  Explosive Ordinance Disposal
  20




---



##### Table of Contents



U.S. Navy  Weapons Pod Assembly and Spares
  Commercial Contract  Design Support Services
  Research Agreements with Government Agencies
  Competition
    Regulation
  Australia
    United States
 21




---



##### Table of Contents



Intellectual Property
   
    
    stacked projectile delivery systems and stacked projectile weapon systems, in particular
the sealing, reload and ignition thereof;
    
    technology related to encoding weapons to permit authorized access only;
    
    ammunition and projectiles;
    
    electronic firing technology;
    
    area denial;
    
    fire fighting;
    
    seismic testing;
    
    increased first shot kill probability;
    
    multi-barrel systems;
    
    fireworks;
    
    missile defense and target interception;
    
    directional control of missiles;
    
    unmanned aerial vehicle weaponization;
    
    adapting conventional munitions to Metal Storm configuration; and
    
    selectable kinetic energy systems.
  
    
    25 granted U.S. patents and 15 pending U.S. patents;
    
    24 granted Australian patents and 13 pending Australian patent applications including one
allowed application; and
    
    158 other patents granted outside the United States and Australia and 152 pending
applications outside the United States and Australia, including 10 allowed applications
(including 16 pending European Patent Convention and 3 PCT applications).
 Raw Materials
  Seasonality
 22




---



##### Table of Contents



C. Organizational Structure
  D. Property, Plant and Equipment
   
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  A. Operating Results
 Overview
    23




---



##### Table of Contents



Where We Derive Our Revenue
  Critical Accounting Policies
   Revenue Recognition
  Sale of goods
  Rendering of services
  Construction contracts
  24




---



##### Table of Contents



Share-based payment transactions
    Comparison of Annual Results of Operations
 2007 compared with 2006
 Revenue.
  Expenses.
 
    
    Employee expenses decreased A$1,133,346 (20.7%) from A$5,481,934 in 2006 to A$4,348,588
in 2007 due to a reduction in share based payments, termination payments and staff
restructuring.
    
    Research and development expenses increased A$681,035 (68.8%) due to the increased costs
of test firings associated with the performance milestones of the Trust Deed.
    
    Professional fees decreased A$410,227 (23.7%) primarily due to a non recurring expense in
2006 of A$399,141 associated with a proposed capital raising that was terminated in 2006.
    
    In 2007, we had a fair value movement gain of A$2,421,388 on the embedded derivative that
reflects the movement in the fair value of the conversion option embedded in the convertible
notes issued in 2006. In 2006, we had a fair value loss of A$4,469,042.
 25




---



##### Table of Contents




    
    Finance expenses increased A$2,751,402 in 2007. Finance expenses primarily relate to the
convertible notes that we issued in September 2006. Accordingly, interest and accretion
expenses for 2006 reflect the period from September to December whereas finance expenses in
2007 reflect the full year.
 Net Loss.
 2006 compared with 2005
 Revenue.
 Expenses.
 
    
    Employee expenses increased A$873,708 (19.6%) from A$4,468,640 in 2005 to A$5,342,348 in
2006, primarily due to the costs of additional staff employed throughout the year and
executive bonuses.
    
    Professional fees decreased A$42,456 (2.4%) from A$1,774,369 in 2005 to A$1,731,913 in
2006 due to cost savings achieved through performing more work in-house rather than using
external consultants. These savings were off-set by professional fees of A$399,141
associated with a proposed capital raising that commenced in 2005 and was terminated in
2006.
    
    Research and development expenses decreased A$156,342 (13.6%) from A$1,146,364 in 2005 to
A$990,022 in 2006 reflecting the change in focus of the U.S. office from research and
development on our internal programs to contract performance.
    
    Administrative expenses decreased A$97,284 (10.5%) from A$928,931 in 2005 to A$831,647 in
2006 primarily due to a aggressive cost saving activities.
    
    Facilities and equipment expenses increased A$218,950 (41.9%) from A$522,693 in 2005 to
A$741,643 in 2006 primarily due to higher costs required to maintain two facilities in
Brisbane for six months while a new engineering facility was being established plus higher
depreciation costs resulting from the purchase of new plant and equipment.
    
    Travel and entertainment expenses increased A$89,573 (20.6%) from A$433,859 in 2005 to
A$523,432 in 2006 primarily due to an increase in travel costs associated with research and
development activities and A$65,200 of travel costs relating to a proposed capital raising
that commenced in 2005 and was terminated in 2006.
    
    Public relations and compliance expenses decreased A$155,580 (31.4%) from A$494,786 in
2005 to A$339,206 primarily due to savings achieved through more work performed in-house
rather than using external consultants.
    
    In 2006, we had an A$4,469,042 embedded derivative expense that reflects the movement in
the fair value of the conversion option embedded in the convertible notes issued in 2006.
The fair value of the liability component of convertible notes is carried as a current
liability on an amortized cost basis until extinguished on conversion or redemption.
 Finance Cost.
 Net Loss.
 Effects of Currency Fluctuations
 26




---



##### Table of Contents



B. Liquidity and Capital Resources
 Overview
   Year ended December 312007
    
    2006A$
    
    A$Net cash used in operating activities
    
    
    (11,255,896
    )
    
    
    (7,456,339
    )Net cash provided by investing activities
    
    
    2,214,431
    
    
    
    2,603,896Net cash provided by (used in) financing activities
    
    
    (59,772
    )
    
    
    28,046,849Effect of exchange rate changes on cash
    
    
    (1.482
    )
    
    
    Net movement in cash and cash equivalents
    
    
    (9,102,719
    )
    
    
    23,194,406
    Borrowings
  27




---



##### Table of Contents



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




---



##### Table of Contents



E. Off-Balance sheet arrangements
  F. Tabular disclosure of contractual obligations
  Payments due by periodTotal
    
    Less Than
    
    
    
    
    
    
    
    
    
    More thanA$
    
    1 Year
    
    1  3 Years
    
    4  5 Years
    
    5 YearsCapital (finance) lease obligations
    
    
    278,943
    
    
    
    63,907
    
    
    
    215,036
    
    
    
    

    
    
    Operating lease obligations
    
    
    919,951
    
    
    
    443,858
    
    
    
    476,093
    
    
    
    

    
    
    Convertible Notes
    
    
    24,041,577
    
    
    
    2,060,868
    
    
    
    21,980,709
    
    
    
    

    
    
    Total
    
    
    25,240,471
    
    
    
    2,568,633
    
    
    
    22,671,838
    
    
    
    

    
    
    
 
 Item 6. Directors, Senior Management and Employees
 A. Directors and Senior Management
  Name
    
    PositionTerence J. ODwyer
    
    ChairmanDr. Peter D. Jonson
    
    DirectorJohn R. Nicholls
    
    DirectorDr. Lee J. Finniear
    
    Chief Executive OfficerBrett I. Farmer
    
    Chief Financial OfficerPeter D. Faulkner
    
    General Manager  MS IncPeter R. Wetzig
    
    Company Secretary
 Terence J. ODwyer.
 Dr. Peter D. Jonson.
 John R. Nicholls.
 Dr. Lee
J. Finniear.
 29




---



##### Table of Contents



Brett I. Farmer.
 Peter D. Faulkner.
 Peter R. Wetzig.
 B. Compensation
   Non
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    Perfor-Salary &
    
    
    Cash
    
    
    Monetary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Remuner
    
    
    manceName
    
    Position
    
    Fees
    
    
    Bonus
    
    
    Benefit
    
    
    Other
    
    
    Super
    
    
    Options
    
    
    -ation
    
    
    RelatedA$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    A$
    
    
    %T. J O'Dwyer
    
    Chairman (Non-Executive)
    
    
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    B. S. McComish
    
    Director
(Non-Executive) - resigned March 2007
    
    
    12,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,333
    
    
    
    J. M. Crunk
    
    Director
(Non-Executive) - resigned May 2008
    
    
    85,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,248
    
    
    
    P. D. Jonson
    
    Director (Non-Executive)
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    J. R. Nicholls
    
    Director (Non-Executive)
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    L. J. Finniear
    
    Managing Director &
Chief Executive Officer - appointed February 2007
    
    
    214,361
    
    
    
    40,000
    
    
    
    
    
    
    
    
    
    
    
    21,597
    
    
    
    89,700
    
    
    
    365,658
    
    
    
    10.9
    %P. R. Wetzig
    
    Company Secretary - appointed April 2007
    
    
    50,720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,720
    
    
    
    B. I. Farmer
    
    Chief Financial Officer
- appointed August 2007
    
    
    50,365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,533
    
    
    
    
    
    
    
    54,898
    
    
    
    P. D. Faulkner
    
    General Manager-MS Inc
    
    
    227,929
    
    
    
    19,709
    
    
    
    10,279
    
    
    
    2,937
    
    
    
    
    
    
    
    10,223
    
    
    
    271,077
    
    
    
    7.3
    %J. Cronin
    
    Managing Engineer -
resigned effective Feb. 2008
    
    
    177,368
    
    
    
    19,500
    
    
    
    17,632
    
    
    
    
    
    
    
    19,364
    
    
    
    
    
    
    
    233,864
    
    
    
    8.3
    %J. D. MacDonald
    
    Chief Financial
Officer-resigned April 2007
    
    
    142,905
    
    
    
    22,750
    
    
    
    
    
    
    
    
    
    
    
    10,712
    
    
    
    
    
    
    
    176,366
    
    
    
    12.9
    %S. T. Rolander
    
    Vice President -
Corporate Services-MS Inc
    
    
    144,339
    
    
    
    13,076
    
    
    
    7,730
    
    
    
    2,021
    
    
    
    
    
    
    
    
    
    
    
    167,166
    
    
    
    7.8
    %A. D. Schatz
    
    Vice President -
Business Development - MS Inc
    
    
    174,484
    
    
    
    
    
    
    
    
    
    
    
    2,334
    
    
    
    
    
    
    
    
    
    
    
    176,818
    
    
    
    G. L. Bergeron
    
    Chief Technical Officer - resigned January 2007
    
    
    19,475
    
    
    
    
    
    
    
    1,318
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    21,009
    
    
    
    Total Remuneration
    
    
    1,489,527
    
    
    
    115,035
    
    
    
    36,959
    
    
    
    7,508
    
    
    
    56,205
    
    
    
    99,923
    
    
    
    1,805,158
    
    
    
    6.4
    %
 30




---



##### Table of Contents



Granted
    
    Terms and Conditions for each Grant
    
    VestedFairValueper
    
    
    
    
    
    
    
    
    
    First
    
    LastGrant
    
    Option
    
    Exercise
    
    Expiry
    
    Exercise
    
    ExerciseNo.
    
    Date
    
    (1)
    
    Price
    
    Date
    
    Date
    
    Date
    
    No.
    
    %DirectorsT. J ODwyer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    L. J. Finniear
    
    
    500,000
    
    
    
    2/26/07
    
    
    $
    0.09
    
    
    $
    0.19
    
    
    
    3/08/12
    
    
    
    8/18/07
    
    
    
    3/08/12
    
    
    
    500,000
    
    
    
    100.0L. J. Finniear (2)
    
    
    500,000
    
    
    
    2/26/07
    
    
    $
    0.09
    
    
    $
    0.19
    
    
    
    3/08/12
    
    
    
    2/18/08
    
    
    
    3/08/12
    
    
    
    500,000
    
    
    
    100.0J. M. Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P. D. Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J. R. Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B. S. McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Key Management PersonnelP. R. Wetzig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B. I. Farmer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P. D. Faulkner
    
    
    25,000
    
    
    
    2/06/06
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    
    3/31/12
    
    
    
    3/31/07
    
    
    
    3/31/12
    
    
    
    25,000
    
    
    
    100.0P. D. Faulkner
    
    
    25,000
    
    
    
    2/06/06
    
    
    $
    0.10
    
    
    $
    0.40
    
    
    
    6/30/12
    
    
    
    6/30/07
    
    
    
    6/30/12
    
    
    
    25,000
    
    
    
    100.0P. D. Faulkner
    
    
    25,000
    
    
    
    2/06/06
    
    
    $
    0.11
    
    
    $
    0.40
    
    
    
    9/30/12
    
    
    
    9/30/07
    
    
    
    9/30/12
    
    
    
    25,000
    
    
    
    100.0J. Cronin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J. D. MacDonald
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    S. T. Rolander
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    A. D. Schatz
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G. L. Bergeron
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,075,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,075,000
 
 (1)
    
    See Note 14 to the accompanying consolidated financial statements for a discussion of our
share-based payment plan.(2)
    
    500,000 share options vested after December 31, 2007 but before the date of this report. C. Board Practices
    
    
    retains independent auditors and reviews and discusses the independence of the auditors;
    
    sets the engagement policies for the independent auditors;
 31




---



##### Table of Contents




    
    reviews and discusses the audit plan, the conduct of the audit and the audit results;
    
    reviews and discusses financial statements and disclosures;
    
    determines and administers internal audit procedures;
    
    reviews and discusses the systems of internal accounting controls;
    
    reviews and discusses the recommendations of independent auditors;
    
    approves related party transactions; and
    
    establishes procedures for complaints regarding financial statements or accounting
policies.
      
    
    salary/fees;
    
    benefits  including the provision of retirement and health benefits; and
    
    incentive schemes  including performance-related bonuses and share options under the
discretionary share option plan.
  32




---



##### Table of Contents



D. Employees
  E. Share Ownership
  Number of OptionsNumber of Shares Held
    
    ExercisableT. J ODwyer
    
    
    180,855
    (2)
    
    
    33,819
    (3)P. D. Jonson
    
    
    680,000
    
    
    
    J. R. Nicholls(4)
    
    
    
    
    
    
    L. J. Finniear
    
    
    
    
    
    
    1,000,000P. D. Faulkner
    
    
    
    
    
    
    200,000J. Cronin
    
    
    
    
    
    
    200,000P. R. Wetzig
    
    
    400
    
    
    
    
 
 (1)
    
    At June 2, 2008, the number of outstanding shares was 608,443,049. There are 18,863,438
unlisted share options and 176,756,604 options quoted on Australian Securities Exchange.(2)
    
    101,233 shares are owned by Mr. Terence J. ODwyer and Mrs. P.M. ODwyer, 79,622 shares are
owned by Louclaben Pty Ltd in trust for the ODwyer Family Account.(3)
    
    Options were issued in connection with the Rights Offer and are quoted and may be traded on
Australian Securities Exchange.(4)
    
    John Nicholls is a director of Metal Storm and a director of Harmony Capital Partners Pte
Limited (Harmony Capital Partners). Harmony Investment Fund Limited is an entity that is
managed by Harmony Capital Partners and which owns securities in
Metal Storm. At June 2, 2008,
Citicorp Nominees Pty Ltd held 29,476,097 ordinary shares, 121,509,108 quoted convertible
notes and 123,226,332 quoted options on behalf of Harmony Investment Fund Limited. Mr.
Nicholls disclaims beneficial ownership of securities owned by Harmony Investment Fund
Limited.  
 Item 7. Major Shareholders and Related Party Transactions
 A. Major Shareholders
  33




---



##### Table of Contents



Number of OrdinaryName of Shareholder
    

Shares (2)
    
    Percentage of ClassJames Michael ODwyer(1)
    
    
    187,423,610
    
    
    
    30.8
    %
 
 (1)
    
    Includes 62,026,783 shares owned by Mr. J.M. ODwyer, 125,396,722 shares owned by ODwyer
Investments Pty Ltd as trustee for the ODwyer Family Discretionary Trust and 105 shares owned
by Rhonda Clare ODwyer in trust for Mr. J.M. ODwyer. The percentage of Mr. J.M. ODwyers
shareholding to total outstanding shares has decreased from 36.68% in June 2006 and 34.0% in
April 2007.    B. Related Party Transactions
  C. Interest of Experts and Counsel
  
 Item 8. Financial Information
 A. Consolidated Financial Statements and Other Financial Information
  Legal Proceedings
  Dividends
 34




---



##### Table of Contents



B. Significant Changes
  
 Item 9. The Offer and Listing
 A. Listing Details  Price History
 Australian Securities Exchange
  Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    A$
    
    A$December 31, 2007First Quarter
    
    $
    0.21
    
    
    $
    0.16Second Quarter
    
    $
    0.17
    
    
    $
    0.12Third Quarter
    
    $
    0.15
    
    
    $
    0.09Fourth Quarter
    
    $
    0.12
    
    
    $
    0.08December 31, 2006First Quarter
    
    $
    0.28
    
    
    $
    0.18Second Quarter
    
    $
    0.21
    
    
    $
    0.12Third Quarter
    
    $
    0.16
    
    
    $
    0.10Fourth Quarter
    
    $
    0.17
    
    
    $
    0.13December 31, 2005Annual
    
    $
    0.31
    
    
    $
    0.10December 31, 2004Annual
    
    $
    0.66
    
    
    $
    0.20December 31, 2003Annual
    
    $
    0.68
    
    
    $
    0.32
 Price PerOrdinary ShareHigh
    
    LowMonth Ended
    
    A$
    
    A$May 2008
    
    $
    0.07
    
    
    $
    0.06April 2008
    
    $
    0.08
    
    
    $
    0.05March 2008
    
    $
    0.08
    
    
    $
    0.06February 2008
    
    $
    0.08
    
    
    $
    0.07January 2008
    
    $
    0.09
    
    
    $
    0.06December 2007
    
    $
    0.11
    
    
    $
    0.08
 NASDAQ Capital Market  American Depositary Receipts
  35




---



##### Table of Contents



Price PerOrdinary ShareHigh
    
    LowYear Ended
    
    US$
    
    US$December 31, 2007First Quarter
    
    $
    3.38
    
    
    $
    2.15Second Quarter
    
    $
    2.87
    
    
    $
    2.00Third Quarter
    
    $
    2.53
    
    
    $
    1.81Fourth Quarter
    
    $
    2.25
    
    
    $
    1.15December 31, 2006First Quarter
    
    $
    4.04
    
    
    $
    2.32Second Quarter
    
    $
    3.05
    
    
    $
    1.75Third Quarter
    
    $
    2.40
    
    
    $
    1.80Fourth Quarter
    
    $
    3.20
    
    
    $
    2.00December 31, 2005Annual
    
    $
    4.84
    
    
    $
    1.75December 31, 2004Annual
    
    $
    14.47
    
    
    $
    2.95December 31, 2003Annual
    
    $
    8.53
    
    
    $
    3.97
 Price PerOrdinary ShareHigh
    
    LowMonth Ended
    
    US$
    
    US$May 2008
    
    $
    1.25
    
    
    $
    1.00April 2008
    
    $
    1.25
    
    
    $
    0.81March 2008
    
    $
    2.90
    
    
    $
    0.91February 2008
    
    $
    1.50
    
    
    $
    1.30January 2008
    
    $
    1.57
    
    
    $
    1.00December 2007
    
    $
    1.78
    
    
    $
    1.15
 B. Plan of Distribution
  C. Markets
  Exemptions from certain Nasdaq Corporate Governance Rules
  
    
    Metal Storm was exempt from Nasdaqs independence requirements for a majority of the board of
directors. The Australian Securities Exchange Listing Rules did not require Metal Storm to
have a majority of independent directors on the board during 2007. During most of the fiscal
year ended December 31, 2007, Metal Storm did, however, have a majority of directors who were
independent as defined in the Australian Securities Exchange Corporate Governance
Principles, which definition differs from Nasdaqs definition. Accordingly, because Australian
law and generally accepted business practices in Australia regarding director independence
differ to Nasdaqs independence requirements, Metal Storm claimed this exemption in 2007.
 36




---



##### Table of Contents




    
    Metal Storm was exempt from Nasdaqs quorum requirements applicable to meetings of
shareholders. Consistent with Australian law, Metal Storms constitution provides that five
shareholders present shall constitute a quorum for a general meeting. Nasdaq requires that an
issuer provide for a quorum as specified in its by-laws for any meeting of the holders of
common stock, which quorum may not be less than 33 1/3% of the outstanding shares of an
issuers voting common stock. Accordingly, because applicable Australian law and rules
governing quorums at shareholder meetings differ to Nasdaqs quorum requirements, Metal Storm
claimed this exemption in 2007.
    
    Metal Storm was exempt from the Nasdaq requirement that an issuers auditors be subject to a
peer review. Neither Australian law nor the Australian Securities Exchange Listing Rules
required peer review of independent public accountants during 2007. Accordingly, Metal Storm
claimed this exemption in 2007.
    
    Metal Storm was exempt from the Nasdaq requirement that issuers obtain shareholder approval
prior to the issuance of securities in connection with the establishment or amendment of
certain stock option, purchase or other compensation plans. Applicable Australian law and
rules differ to the Nasdaq requirements, with the Australian Securities Exchange Listing Rules
providing generally for prior shareholder approval in numerous circumstances, including (i)
issuance of equity securities exceeding 15% of the issued share capital of Metal Storm in any
12 month period (but in determining the 15% limit, securities issued under an exception to the
rule or with shareholder approval are not counted), (ii) issuance of equity securities to
related parties (as defined in the Australian Securities Exchange Listing Rules), and (iii)
directors or their associates acquiring securities under an employee incentive plan. Generally
accepted business practices in Australia also provide for plans involving the issue of shares
to directors and employees being capped at no more than 5% of the total number of shares on
issue. Metal Storms Discretionary Share Option Scheme applies this 5% cap. Due to differences
between Australian law and rules and the Nasdaq shareholder approval requirements, Metal Storm
claimed this exemption in 2007.
 D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 Item 10. Additional Information
 A. Share Capital
  B. Our Constitution
   Directors
 37




---



##### Table of Contents



Interested Directors
   Directors Compensation
     Borrowing Powers Exercisable by Directors
  Retirement of directors
  Share Qualifications
  Rights and Restrictions on Classes of Shares
  38




---



##### Table of Contents



Dividend Rights
  Voting Rights
  Right to Share in our Profits
  Rights to Share in the Surplus in the Event of Liquidation
  Redemption Provisions
  Sinking Fund Provisions
  Liability for Further Capital Calls
  Provisions Discriminating Against Holders of a Substantial Number of Shares
  Variation of Share Rights
  39




---



##### Table of Contents



General Meetings of Shareholders
   Foreign Ownership Regulation
  (a)
    
    by a foreign person, as defined in the Foreign Acquisitions and Takeovers Act, or
associated foreign persons which would result in such persons having an interest in 15%
or more of the issued shares of, or control of 15% or more of the voting power in, an
Australian company, and(b)
    
    by a non-associated foreign person which would result in such foreign person having
an interest in 40% or more of the issued shares of, or control of 40% or more of the
voting power in, an Australian company.
  Merger, Acquisition or Restructure
  Ownership Threshold
  40




---



##### Table of Contents



Conditions for Change of Capital
  Stock Issues and Takeover Attempts
  
    
    that the acquisition of control over voting shares takes place in an efficient,
competitive and informed market;
    
    that shareholders have enough information to assess the merits of a proposal; and
    
    that shareholders all have a reasonable and equal opportunity to participate in any
benefits accruing to the shareholders through any proposal under which a person would
acquire a substantial interest.
   
    
    an issuance or agreement to issue which we have notified the Australian Securities
Exchange of before we are told a person is making or proposes to make a takeover offer for
our shares;
    
    an issuance to our ordinary shareholders on a pro-rata basis;
    
    an issuance made due to an exercise of rights of conversion already in existence;
    
    an issuance by us as consideration for an off-market takeover bid made by us where we are
required to comply with the provisions of the Corporations Act;
    
    an issuance under a dividend stock distribution plan that is in operation before we are
told a person is making or proposes to make a takeover for our shares; and
    
    if there is an agreement to issue shares and such agreement is conditional on ordinary
shareholders approving the issuance before the issuance is made.
 Access to and Inspection of Documents
  CHESS
  41




---



##### Table of Contents



C. Material Contracts
 Terms of convertible notes
    Trust Deed in connection with the Rights Offer
    
    
    fails to pay principal or interest in respect of any convertible note within 5 business
days after it becomes due and payable;
    
    if, without the prior approval of Noteholders by way of ordinary resolution, the total
amount of cash held in Metal Storms bank accounts and in marketable securities falls below
the following minimum cash levels:
 Period
    
    Minimum Cash BalanceSeptember 1, 2006 to December 31, 2006
    
    A$22.5 millionJanuary 1, 2007 to June 30, 2007
    
    A$19.5 millionJuly 1, 2007 to December 31, 2007
    
    A$15.0 millionJanuary 1, 2008 to June 30, 2008
    
    A$12.5 millionJuly 1, 2008 to December 31, 2008
    
    A$  7.5 million
 
    
    if the process of commercialization of the key technology of Metal Storm fails to achieve
the following milestones to the satisfaction of Noteholders (resolved by way of ordinary
resolution) or an independent expert appointed by the Trustee:
 42




---



##### Table of Contents



Cash Advance Facility Agreement
  D. Exchange Controls
  E. Taxation
  U.S. Federal Income Tax Considerations
 To ensure compliance with U.S. Treasury Department Circular 230, investors are hereby notified
that: (a) any discussion of U.S. Federal tax issues in this document is not intended or written by
Metal Storm to be relied upon, and cannot be relied upon by investors in the ADSs or ordinary
shares, for the purpose of avoiding penalties that may be imposed on investors in the ADSs or
ordinary shares under the U.S. Internal Revenue Code of 1986, as amended (the Code), (b) such
discussion is written in connection with the promotion or marketing of the transactions or matters
addressed herein by Metal Storm, and (c) investors in the ADSs or ordinary shares should seek
advice based on their particular circumstances from their own independent tax advisors. U.S.
counsel does not intend to be, and is not, engaged in the promotion or marketing of the
transactions or matters described in this offering memorandum, and no inference to the contrary
shall be implied by reason of the U.S. tax discussion set forth herein
  43




---



##### Table of Contents




    
    an individual who is a citizen or resident of the United States for U.S. federal income
tax purposes;
    
    a corporation, or other entity treated as a corporation for U.S. federal income tax
purposes, created or organized in or under the laws of the United States or any state
thereof or the District of Columbia;
    
    an estate the income of which is subject to U.S. federal income taxation regardless of
its source; or
    
    a trust the administration of which is subject to the primary supervision of a court in
the United States and for which one or more U.S. persons have the authority to control all
substantial decisions.
  You should consult your tax advisor with respect to the U.S. federal, as well as state, local
and non-U.S., tax consequences to you of an investment in ADSs or ordinary shares.
 Ownership of ADSs in General
  Dividends
 pro rata
  44




---



##### Table of Contents



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




---



##### Table of Contents



pro rata
   46




---



##### Table of Contents



U.S. holders are urged to consult their tax advisors as to the effect on them of the PFIC
rules and the desirability of making, and the availability of, either a QEF election or a
mark-to-market election with respect to our ADSs or ordinary shares. Metal Storm provides no advice
on your taxation matters. The above should not be taken as advice by the reader of this document.
 Backup Withholding Tax and Information Reporting Requirements
   The discussion above is not intended to constitute a complete analysis of all tax
considerations applicable to an investment in ADSs or ordinary shares. You should consult with your
tax advisor concerning the tax consequences to you in your particular situation.
 Australian Tax Considerations
  47




---



##### Table of Contents



Nature of ADRs for Australian Taxation Purposes
  Taxation of Dividends
   Tax on Sales or other Dispositions of SharesCapital gains tax
   Tax on Sales or other Dispositions of SharesShareholders Holding Shares on Revenue Account
    Dual Residency
 48




---



##### Table of Contents



Stamp Duty
  Australian Death Duty
  Goods and Services Tax
  F. Dividends and Paying Agents
  G. Statements by Experts
  H. Documents on Display
 www.sec.gov
 
 Item 11. Quantitative and Qualitative Disclosure about Market Risk
   49




---



##### Table of Contents



Item 12. Description of Securities Other than Equity Securities
  PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and the Use of Proceeds
  
 Item 15T. Controls and Procedures
 (a) Disclosure Controls and Procedures
   (b) Managements Annual Report on Internal Control over Financial Reporting
     50




---



##### Table of Contents



(c) Changes in Internal Control over Financial Reporting
      
 Item 16A. Audit Committee Financial Expert
   
 Item 16B. Code of Ethics
  
    
    responsibilities to shareholders;
 51




---



##### Table of Contents




    
    compliance with laws and regulations;
    
    relations with customers and suppliers;
    
    ethical responsibilities;
    
    employment practices; and
    
    responsibilities to the environment and the community.
   
 Item 16C. Principal Accountant Fees and Services
 PricewaterhouseCoopers
 December 31,2007
    
    2006A$
    
    A$Audit fees
    
    
    45,000
    
    
    
    Audit-related fees
    
    
    287,000
    
    
    
        Tax fees
    
    
    
    
    
    
        All other fees
    
    
    
    
    
    
        Total
    
    
    332,000
 Ernst & Young
 December 31,2007
    
    2006A$
    
    A$Audit fees
    
    
    353,458
    
    
    
    387,550Audit-related fees
    
    
    
    
    
    
    41,926Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    Total
    
    
    353,458
    
    
    
    429,476
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees.
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  PART III
 
 Item 17. Financial Statements
  52




---



##### Table of Contents



Item 18. Financial Statements
  
 Item 19. Exhibits
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Constitution of Metal Storm*4.1
    
    [not used]4.2
    
    [not used]4.3
    
    DSTO Technology License Agreement dated April 20, 2001, as amended (portions omitted pursuant to a
request for confidential treatment; non-public information has been filed with the SEC)*4.4
    
    Employment Agreement of Dr. Lee Finniear***4.5
    
    Letter of Offer to P. D. Faulkner***4.6
    
    Employment Agreement of Brett Farmer4.7
    
    [not used]4.8
    
    Employment Agreement of Dr. Joe Cronin***4.9
    
    Cash Advance Facility Agreement, dated June 16, 2006, between Metal Storm and Harmony Investment
Fund Limited**4.10
    
    Discretionary Share Option Scheme*4.11
    
    Convertible Note Trust Deed dated July 11, 2006***8.0
    
    List of Subsidiaries of Metal Storm Limited12.1
    
    Certification by the Chief Executive Officer of Metal Storm Limited in accordance with Section 302
of the Sarbanes-Oxley Act12.2
    
    Certification by the Chief Financial Officer of Metal Storm Limited in accordance with Section 302
of the Sarbanes-Oxley Act13.1
    
    Certification by the Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act13.2
    
    Certification by the Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act
 
 *
    
    Incorporated by reference from our Registration Statement on Form 20-F filed on December 12,
2001, File No. 000-31212.**
    
    Incorporated by reference from our annual report on Form 20-F filed on July 17, 2006.***
    
    Incorporated by reference from our annual report on Form 20-F filed on May 18, 2007. 53




---



##### Table of Contents



Index to the Financial Statements
 Report of Independent Registered Public Accounting Firm
    
    F-2Income Statements for the years ended 31 December 2007, 2006 and 2005
    
    F-3Balance Sheets as at 31 December 2007, 2006 and 2005
    
    F-4Cash Flow Statements for the years ended 31 December 2007, 2006 and 2005
    
    F-5Statement of Changes in Equity for the years ended 31 December 2007, 2006 and 2005
    
    F-6Notes to the Financial Statements
    
    F-7
 F-1




---



##### Table of Contents



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




---



##### Table of Contents



Metal Storm Limited
 
 Income Statements
 2007
    
    2006
    
    2005Note
    
    A$
    
    A$
    
    A$Continuing operationsRevenue
    
    
    6
    
    
    
    3,205,381
    
    
    
    2,339,310
    
    
    
    830,645ExpensesFair value movement in embedded derivative
    
    
    17
    
    
    
    2,421,388
    
    
    
    (4,469,042
    )
    
    
    Consumables used
    
    
    
    
    
    
    (469,579
    )
    
    
    (152,471
    )
    
    
    (4,360
    )Employee expenses
    
    
    7
    
    
    
    (4,348,588
    )
    
    
    (5,342,348
    )
    
    
    (4,468,640
    )Finance costs
    
    
    7
    
    
    
    (4,934,415
    )
    
    
    (2,183,013
    )
    
    
    (35,496
    )Professional fees
    
    
    
    
    
    
    (1,321,686
    )
    
    
    (1,731,913
    )
    
    
    (1,774,369
    )Research and development
    
    
    
    
    
    
    (1,671,057
    )
    
    
    (990,022
    )
    
    
    (1,146,364
    )Administrative expenditure
    
    
    
    
    
    
    (576,387
    )
    
    
    (831,647
    )
    
    
    (928,931
    )Facility expenses
    
    
    
    
    
    
    (790,874
    )
    
    
    (741,643
    )
    
    
    (522,693
    )Travel and entertainment
    
    
    
    
    
    
    (468,868
    )
    
    
    (523,432
    )
    
    
    (433,859
    )Communication and technology
    
    
    
    
    
    
    (360,501
    )
    
    
    (348,191
    )
    
    
    (306,335
    )Public relations and compliance
    
    
    
    
    
    
    (393,967
    )
    
    
    (339,206
    )
    
    
    (494,786
    )Foreign exchange differences
    
    
    
    
    
    
    (68,197
    )
    
    
    15,864
    
    
    
    (27,022
    )Impairment expense
    
    
    7
    
    
    
    (220,800
    )
    
    
    
    
    
    
    Loss from continuing operations before Income tax
    
    
    
    
    
    
    (9,998,150
    )
    
    
    (15,297,754
    )
    
    
    (9,312,210
    )Income tax benefit
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    Loss after tax from continuing operations
    
    
    
    
    
    
    (9,998,150
    )
    
    
    (15,297,754
    )
    
    
    (9,312,210
    )Discontinued OperationLoss after tax from discontinued operation
    
    
    9
    
    
    
    
    
    
    
    (39,256
    )
    
    
    (1,602,390
    )Loss for the year
    
    
    
    
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )
    
    
    (10,914,600
    )Earnings per share (cents per share)- Basic and diluted loss for the year
attributable to ordinary equity holders of the
parent
    
    
    31
    
    
    
    (1.69
    )
    
    
    (2.85
    )
    
    
    (2.09
    )Earnings per share (cents per share)- Basic and diluted loss for the year from
continuing operations attributable to ordinary
equity holders of the parent
    
    
    31
    
    
    
    (1.69
    )
    
    
    (2.84
    )
    
    
    (1.78
    )
  F-3




---



##### Table of Contents



Metal Storm Limited
 
 Balance Sheets
 2007
    
    2006
    
    2005Note
    
    A$
    
    A$
    
    A$AssetsCurrent assetsCash and cash equivalents
    
    
    10
    
    
    
    14,727,548
    
    
    
    23,830,267
    
    
    
    635,861Available-for-sale financial investments
    
    
    11
    
    
    
    779,200
    
    
    
    2,002,080
    
    
    
    5,056,140Trade and other receivables
    
    
    12
    
    
    
    1,563,218
    
    
    
    773,130
    
    
    
    1,423,553Total current assets
    
    
    
    
    
    
    17,069,966
    
    
    
    26,605,477
    
    
    
    7,115,554Non-current assetsTrade and other receivables
    
    
    13
    
    
    
    987,902
    
    
    
    510,795
    
    
    
    30,600Property, plant and equipment
    
    
    14
    
    
    
    656,260
    
    
    
    627,985
    
    
    
    231,629Intangible assets and goodwill
    
    
    15
    
    
    
    74,149
    
    
    
    111,824
    
    
    
    51,938Total non-current assets
    
    
    
    
    
    
    1,718,311
    
    
    
    1,250,604
    
    
    
    314,167Total assets
    
    
    
    
    
    
    18,788,277
    
    
    
    27,856,081
    
    
    
    7,429,721LiabilitiesCurrent liabilitiesTrade and other payables
    
    
    16
    
    
    
    2,605,145
    
    
    
    1,942,525
    
    
    
    933,574Conversion derivative
    
    
    17
    
    
    
    5,963,793
    
    
    
    10,811,057
    
    
    
    Interest-bearing loans and borrowings
    
    
    18
    
    
    
    12,941,447
    
    
    
    13,229,376
    
    
    
    353,674Provisions
    
    
    19
    
    
    
    302,161
    
    
    
    441,997
    
    
    
    277,448Total current liabilities
    
    
    
    
    
    
    21,812,546
    
    
    
    26,424,955
    
    
    
    1,564,696Non-current liabilitiesInterest-bearing loans and borrowings
    
    
    20
    
    
    
    215,036
    
    
    
    255,845
    
    
    
    Other
    
    
    
    
    
    
    68,265
    
    
    
    77,949
    
    
    
    85,163Total non-current liabilities
    
    
    
    
    
    
    283,301
    
    
    
    333,794
    
    
    
    85,163Total liabilities
    
    
    
    
    
    
    22,095,847
    
    
    
    26,758,749
    
    
    
    1,649,859Net assets (liabilities)
    
    
    
    
    
    
    (3,307,570
    )
    
    
    1,097,332
    
    
    
    5,779,862EquityContributed equity
    
    
    21
    
    
    
    65,428,400
    
    
    
    59,985,634
    
    
    
    56,559,039Reserves
    
    
    22
    
    
    
    9,046,424
    
    
    
    8,895,942
    
    
    
    1,668,057Accumulated losses
    
    
    23
    
    
    
    (77,782,394
    )
    
    
    (67,784,244
    )
    
    
    (52,447,234
    )Total equity (deficiency)
    
    
    
    
    
    
    (3,307,570
    )
    
    
    1,097,332
    
    
    
    5,779,862
  F-4




---



##### Table of Contents



Metal Storm Limited
 
 Cash Flow Statement
 2007
    
    2006
    
    2005Note
    
    A$
    
    A$
    
    A$Cash Flows From Operating ActivitiesReceipts from customers
    
    
    
    
    
    
    1,052,095
    
    
    
    2,015,018
    
    
    
    1,488,361Payments to suppliers and employees
    
    
    
    
    
    
    (9,516,201
    )
    
    
    (9,864,003
    )
    
    
    (12,237,520
    )Interest and other costs of finance paid
    
    
    
    
    
    
    (2,791,790
    )
    
    
    (287,027
    )
    
    
    (96,157
    )Government grant  research & development
    
    
    
    
    
    
    
    
    
    
    679,673
    
    
    
    310,755Net cash outflow from operating activities
    
    
    30
    
    
    
    (11,255,896
    )
    
    
    (7,456,339
    )
    
    
    (10,534,561
    )Cash Flows From Investing ActivitiesPurchase of property, plant and equipment
    
    
    
    
    
    
    (200,039
    )
    
    
    (824,299
    )
    
    
    (104,292
    )Proceeds from the disposal of property, plant and equipment
    
    
    
    
    
    
    2,127
    
    
    
    318,695
    
    
    
    Purchase of intangible assets
    
    
    
    
    
    
    (42,847
    )
    
    
    (137,197
    )
    
    
    (74,007
    )Interest received
    
    
    
    
    
    
    1,455,190
    
    
    
    673,435
    
    
    
    613,030Proceeds from disposal of discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,256,721Purchase of available-for-sale financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,633,480
    )Proceeds from sale of available-for-sale financial assets
    
    
    
    
    
    
    1,000,000
    
    
    
    3,054,060
    
    
    
    3,614,000Purchase of other financial asset
    
    
    
    
    
    
    
    
    
    
    (480,798
    )
    
    
    Proceeds from sale of other financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    857,536Net cash inflow (outflow) from investing activities
    
    
    
    
    
    
    2,214,431
    
    
    
    2,603,896
    
    
    
    (1,470,492
    )Cash Flows From Financing ActivitiesProceeds from issues of shares
    
    
    
    
    
    
    6,639
    
    
    
    3,017,685
    
    
    
    Share issue costs
    
    
    
    
    
    
    
    
    
    
    (268,696
    )
    
    
    Proceeds from issuance of convertible notes
    
    
    
    
    
    
    
    
    
    
    27,500,000
    
    
    
    Transaction costs of rights issue
    
    
    
    
    
    
    
    
    
    
    (1,909,878
    )
    
    
    Proceeds from borrowings
    
    
    
    
    
    
    419,703
    
    
    
    306,180
    
    
    
    Repayment of borrowings
    
    
    
    
    
    
    (486,114
    )
    
    
    (598,442
    )
    
    
    (2,466,723
    )Net cash inflow (outflow) from financing activities
    
    
    
    
    
    
    (59,772
    )
    
    
    28,046,849
    
    
    
    (2,466,723
    )Net cash movement in cash and cash equivalents
    
    
    
    
    
    
    (9,101,237
    )
    
    
    23,194,406
    
    
    
    (14,471,776
    )Net foreign exchange differences
    
    
    
    
    
    
    (1,482
    )
    
    
    
    
    
    
    (1,959
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    23,830,267
    
    
    
    635,861
    
    
    
    15,109,596Cash and cash equivalents at year end
    
    
    10
    
    
    
    14,727,548
    
    
    
    23,830,267
    
    
    
    635,861
  F-5




---



##### Table of Contents



Metal Storm Limited
 
 Statements of Changes in Equity
 Contributed
    
    
    
    
    
    Accumulatedequity
    
    Reserves
    
    losses
    
    Total equityA$
    
    A$
    
    A$
    
    A$At 1 January 2005
    
    
    56,559,039
    
    
    
    1,173,588
    
    
    
    (41,532,634
    )
    
    
    16,199,993Net gains on available-for-sale financial assets
    
    
    
    
    
    
    36,660
    
    
    
    
    
    
    
    36,660Currency translation differences
    
    
    
    
    
    
    48,081
    
    
    
    
    
    
    
    48,081Total income and expense for the year recognised
directly in equity
    
    
    
    
    
    
    84,741
    
    
    
    
    
    
    
    84,741Loss for the year
    
    
    
    
    
    
    
    
    
    
    (10,914,600
    )
    
    
    (10,914,600
    )Total income/(expense) for the year
    
    
    
    
    
    
    84,741
    
    
    
    (10,914,600
    )
    
    
    (10,829,859
    )Net increase in option reserves
    
    
    
    
    
    
    409,728
    
    
    
    
    
    
    
    409,728At 31 December 2005
    
    
    56,559,039
    
    
    
    1,668,057
    
    
    
    (52,447,234
    )
    
    
    5,779,862Net gains on available-for-sale financial assets
    
    
    
    
    
    
    (34,580
    )
    
    
    
    
    
    
    (34,580
    )Currency translation differences
    
    
    
    
    
    
    10,213
    
    
    
    
    
    
    
    10,213Total income and expense for the year recognised
directly in equity
    
    
    
    
    
    
    (24,367
    )
    
    
    
    
    
    
    (24,367
    )Loss for the year
    
    
    
    
    
    
    
    
    
    
    (15,337,010
    )
    
    
    (15,337,010
    )Total income/(expense) for the year
    
    
    
    
    
    
    (24,367
    )
    
    
    (15,337,010
    )
    
    
    (15,361,377
    )Net increase in option reserves
    
    
    
    
    
    
    358,686
    
    
    
    
    
    
    
    358,686Attaching options issued on allotment of
renounceable rights issue
    
    
    
    
    
    
    4,379,638
    
    
    
    
    
    
    
    4,379,638Options paid as cost to Harmony
    
    
    
    
    
    
    3,262,000
    
    
    
    
    
    
    
    3,262,000Options expense
    
    
    
    
    
    
    (748,072
    )
    
    
    
    
    
    
    (748,072
    )Share options exercised
    
    
    7,685
    
    
    
    
    
    
    
    
    
    
    
    7,685Issue of share capital
    
    
    3,035,031
    
    
    
    
    
    
    
    
    
    
    
    3,035,031Conversion of convertible notes to shares
    
    
    652,575
    
    
    
    
    
    
    
    
    
    
    
    652,575Share issue costs
    
    
    (268,696
    )
    
    
    
    
    
    
    
    
    
    
    (268,696
    )At 31 December 2006
    
    
    59,985,634
    
    
    
    8,895,942
    
    
    
    (67,784,244
    )
    
    
    1,097,332Realised gains on available-for-sale financial assets
    
    
    
    
    
    
    (1,040
    )
    
    
    
    
    
    
    (1,040
    )Fair value movement on available-for-sale financial
assets
    
    
    
    
    
    
    (1,040
    )
    
    
    
    
    
    
    (1,040
    )Currency translation differences
    
    
    
    
    
    
    16,013
    
    
    
    
    
    
    
    16,013Total income and expense for the year recognised
directly in equity
    
    
    
    
    
    
    13,933
    
    
    
    
    
    
    
    13,933Loss for the year
    
    
    
    
    
    
    
    
    
    
    (9,998,150
    )
    
    
    (9,998,150
    )Total income/(expense) for the year
    
    
    
    
    
    
    13,933
    
    
    
    (9,998,150
    )
    
    
    (9,984,217
    )Net increase in option reserves
    
    
    
    
    
    
    136,549
    
    
    
    
    
    
    
    136,549Share options exercised
    
    
    6,638
    
    
    
    
    
    
    
    
    
    
    
    6,638Conversion of convertible notes to shares
    
    
    5,436,128
    
    
    
    
    
    
    
    
    
    
    
    5,436,128At 31 December 2007
    
    
    65,428,400
    
    
    
    9,046,424
    
    
    
    (77,782,394
    )
    
    
    (3,307,570
    )
  F-6




---



##### Table of Contents



Metal Storm Limited
 
 Notes to the financial statements
 Contents to the notes of the financial statements
 1. Going concern
    
    
    F-82. Summary of significant accounting policies
    
    
    F-93. Financial risk management
    
    
    F-204. Critical accounting estimates and judgements
    
    
    F-225. Segment information
    
    
    F-236. Revenue
    
    
    F-267. Expenses
    
    
    F-268. Income tax
    
    
    F-279. Discontinued operation
    
    
    F-2910. Current assets  Cash and cash equivalents
    
    
    F-3011. Current assets  Available-for-sale financial investments
    
    
    F-3012. Current assets  Trade and other receivables
    
    
    F-3013. Non-current assets  Trade and other receivables
    
    
    F-3114. Non-current assets  Property, plant and equipment
    
    
    F-3115. Non-current assets  Intangible assets
    
    
    F-3216. Current liabilities  Trade and other payables
    
    
    F-3317. Current liabilities  Conversion derivative
    
    
    F-3318. Current liabilities  Interest bearing loans and borrowings
    
    
    F-3419. Current liabilities  Provisions
    
    
    F-3520. Non-current liabilities  Interest bearing loans and borrowings
    
    
    F-3521. Contributed equity
    
    
    F-3622. Reserves
    
    
    F-3723. Accumulated losses
    
    
    F-3824. Key management personnel disclosures
    
    
    F-3825. Remuneration of auditors
    
    
    F-4326. Commitments
    
    
    F-4327. Related party transactions
    
    
    F-4428. Subsidiaries
    
    
    F-4429. Events occurring after the balance sheet date
    
    
    F-4530. Reconciliation of profit after income tax to net cash inflow from operating activities
    
    
    F-4531. Earnings per share
    
    
    F-4632. Share-based payments
    
    
    F-46
 F-7




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 1. Going concern
   2007
    
    2006Loss for the year
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )Net cash outflow from operating activities
    
    
    (11,255,896
    )
    
    
    (7,456,339
    )Net assets (liabilities)
    
    
    (3,307,570
    )
    
    
    1,097,332
     
    
    Monitoring cash flows to match the critical engineering resource demands and the timeliness
of engineering delivery with cash availability.
 
    
    Taking action, where corrective action is needed on cash flows, to ensure the cash covenant
is met in terms of the Note holders trust deed.
 
    
    Utilizing the conditions within the Trust Deed which allow the company to borrow, to enable
timely delivery of resources where those expenditures will be allowable within future cash
covenant limits. To that end the company has borrowed $2 M by short term unsecured facility to
maintain its limits within the cash covenant now, where the post 30 June 2008 limit allows for
the full repayment of the short term borrowing.
 
    
    Increasing contract revenue significantly. The company has traditionally obtained quality
contract work in the USA which has increased its own intellectual property. That needs to be
expanded and prospects for further contracts are good. Currently and additionally the company
has contracting opportunities in embryonic negotiations in Australia.
 
    
    Developing the relationship with STK commenced with the recently contracted Agreement with
them for 40mm ammunition and international marketing of the 3GL product.
      F-8




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 2. Summary of significant accounting policies
  (a) Compliance with IFRS and basis of preparation
  Compliance with IFRS
   Historical cost convention
  Critical accounting estimates
  Change in accounting policy  financial instruments
      F-9




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (a) Compliance with IFRS and basis of preparation (continued)
   2006
    
    2006
    
    2007
    
    2007Original
    
    Revised
    
    Original
    
    RevisedIncome StatementFair Value movement in Embedded
Derivative
    
    
    (3,244,330
    )
    
    
    (4,469,042
    )
    
    
    2,241,388
    
    
    
    2,241,388Net loss for the year
    
    
    (14,225,132
    )
    
    
    (15,337,010
    )
    
    
    (10,096,815
    )
    
    
    (9,998,150
    )Basic and diluted earning per share
    
    
    (2.65
    )
    
    
    (2.85
    )
    
    
    (1.71
    )
    
    
    (1.69
    )Balance SheetInterest bearing loans and borrowings
    
    
    11,903,152
    
    
    
    13,229,376
    
    
    
    12,030,408
    
    
    
    12,941,447Contributed equity
    
    
    60,199,980
    
    
    
    59,985,634
    
    
    
    65,135,606
    
    
    
    65,428,400
   (b) Principles of consolidation
       (c) Segment reporting
  F-10




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (d) Foreign currency translation
 (i) Functional and presentation currency
  (ii) Transactions and balances
   (iii) Group companies
  
    
    assets and liabilities for each balance sheet presented are translated at the closing
rate at the date of that balance sheet;
    
    income and expenses for each income statement are translated at average exchange rates
(unless this is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are translated at
the dates of the transactions); and
    
    all resulting exchange differences are recognised as a separate component of equity.
 (e) Revenue recognition
    Construction contracts
   F-11




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (e) Revenue recognition (continued)
   Interest income
  (f) Government grants
    (g) Income tax
       F-12




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (h) Leases
   (i) Business combinations
    (j) Impairment of assets
  (k) Cash and cash equivalents
  F-13




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (l) Trade receivables
    (m) Investments and other financial assets
 Classification
  (i) Financial assets at fair value through profit or loss
  (ii) Loans and receivables
  (iii) Held-to-maturity investments
  (iv) Available-for-sale financial assets
  F-14




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (m) Investments and other financial assets (continued)
 Recognition and derecognition
   Subsequent measurement
    Fair value
  Impairment
  (n) Derivatives
  F-15




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (o) Fair value estimation
     (p) Property, plant and equipment
   - Machinery
    
    5 - 10 years- Furniture, fittings and equipment
    
    2 - 5 years- Leasehold improvements
    

3 years- Leased plant and equipment
    
    1 - 5 years
    (q) Intangible assets
 (i) Goodwill
   F-16




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (q) Intangible assets (continued)
 (ii) Research and development
  (iii) Software
   (r) Trade and other payables
  (s) Borrowings
     (t) Borrowing costs
  F-17




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (u) Provisions
    (v) Employee benefits
 (i) Wages and salaries, annual leave and sick leave
  (ii) Long service leave
  (iii) Share-based payments
    (iv) Post employment benefits
  (w) Contributed equity
   F-18




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 2. Summary of significant accounting policies (continued)
 (x) Goods and services tax (GST)
    (y) New accounting standards and interpretations
  (i) AASB 8 Operating Segments and 2007-3 Amendments to Australian Accounting Standards arising
from AASB 8 and 2007-3.
  (ii) Revised AASB 123 Borrowing Costs and 2007-6 Amendments to Australian Accounting Standards
arising from AASB 123 [AASB 1, AASB 101, AASB 107, AASB 111, AASB 116 & AASB 138 and
Interpretations 1 & 12].
  (iii) AASB-I 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their
Interaction
  (iv) Revised 101 Presentation of Financial Statements and 2007-8 Amendments to Australian
Accounting Standards arising from AASB 101.
  F-19




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 3. Financial risk management
   (a) Market risk
 (i) Foreign exchange risk
      (ii) Fair value interest rate risk
      (iii) Price risk of available-for-sale financial assets
   F-20




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 3. Financial risk management (continued)
 (a) Market risk (continued)
  Increase in
    
    Decrease inRisk Factor
    
    Group Loss
    
    Group Loss2007 actual loss
    
    
    (9,998,150
    )
    
    
    (9,998,150
    )(i) Australian Dollar (weaker)/stronger by 10% against the US Dollar
    
    
    (130,998
    )
    
    
    130,998(ii) Interest rate increase/(decrease) by 10%
    
    
    (148,946
    )
    
    
    148,946(iii) Change in fair value of available-for-sale financial assets
(increased)/decreased by 10%
    
    
    (22,288
    )
    
    
    22,2882007 loss after adjusting for market risk sensitivity factors
    
    
    (10,300,382
    )
    
    
    (9,695,918
    )
  Increase in
    
    Decrease inGroup
    
    GroupRisk Factor
    
    Deficiency
    
    Deficiency2007 actual shareholders deficiency
    
    
    (3,307,570
    )
    
    
    (3,307,570
    )(i) Australian Dollar (weaker)/stronger by 10% against the US Dollar
    
    
    (115,234
    )
    
    
    115,234(ii) Interest rate increase/(decrease) by 10%
    
    
    (148,946
    )
    
    
    148,946(iii) Change in fair value of available-for-sale financial assets
(increased)/decreased by 10%
    
    
    (22,288
    )
    
    
    22,2882007 total shareholder deficiency after adjusting for market risk sensitivity factors
    
    
    (3,594,038
    )
    
    
    (3,021,102
    )
  Increase in
    
    Decrease inRisk Factor
    
    Group Loss
    
    Group Loss2006 actual loss
    
    
    (15,337,010
    )
    
    
    (15,337,010
    )(i) Australian Dollar (weaker)/stronger by 10% against the US Dollar
    
    
    (294,140
    )
    
    
    294,140(ii) Interest rate increase/(decrease) by 10%
    
    
    (83,411
    )
    
    
    83,411(iii) Change in fair value of available-for-sale financial assets
(increased)/decreased by 10%
    
    
    
    
    
    
    2006 loss after adjusting for market risk sensitivity factors
    
    
    (15,714,561
    )
    
    
    (14,959,459
    )
  Decrease
    
    Increase inGroup
    
    GroupRisk Factor
    
    Equity
    
    Equity2006 actual shareholders equity
    
    
    1,097,332
    
    
    
    1,097,332(i) Australian Dollar (weaker)/stronger by 10% against the US Dollar
    
    
    (274,809
    )
    
    
    307,651(ii) Interest rate increase/(decrease) by 10%
    
    
    (83,411
    )
    
    
    83,411(iii) Change in fair value of available-for-sale financial assets
(increased)/decreased by 10%
    
    
    (3,458
    )
    
    
    3,4582006 total shareholders equity after adjusting for market risk sensitivity factors
    
    
    735,654
    
    
    
    1,491,852
 (b) Credit risk
      F-21




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 3. Financial risk management (continued)
 (c) Liquidity risk
    Later than onemonth and not
    
    Later than three
    
    Later than oneNot later than one
    
    later than three
    
    months and not
    
    year and not laterFinancial liability
    
    month
    
    months
    
    later than one year
    
    than five years2007Payables
    
    
    390,737
    
    
    
    887,426
    
    
    
    
    
    
    
    Finance Leases
    
    
    7,052
    
    
    
    14,104
    
    
    
    63,470
    
    
    
    232,487Convertible Notes
    
    
    
    
    
    
    512,402
    
    
    
    1,548,466
    
    
    
    21,908,709Loan
    
    
    36,465
    
    
    
    72,931
    
    
    
    109,396
    
    
    
    Total
    
    
    434,254
    
    
    
    1,486,863
    
    
    
    1,721,332
    
    
    
    22,141,1962006Payables
    
    
    394,933
    
    
    
    927,109
    
    
    
    
    
    
    
    Finance Leases
    
    
    6,378
    
    
    
    12,755
    
    
    
    57,400
    
    
    
    286,075Convertible Notes
    
    
    
    
    
    
    656,706
    
    
    
    2,006,602
    
    
    
    31,076,791Loan
    
    
    43,156
    
    
    
    86,312
    
    
    
    129,469
    
    
    
    Total
    
    
    444,467
    
    
    
    1,682,882
    
    
    
    2,193,471
    
    
    
    31,362,866
   (d) Fair value estimation
  4. Critical accounting estimates and judgements
 (a) Share-based payment transactions
  (b) Embedded derivatives and attached options
  (c) Available-for-sale financial assets
  F-22




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 4. Critical accounting estimates and judgements (continued)
 (d) Revenue recognition
  
 5. Segment information
 (a) Description of segments
  Australia
  United States
  (b) Geographical segments
 Continuing
    
    DiscontinuedAustralia
    
    United States
    
    operations
    
    operation
    
    Consolidated2007
    
    A$
    
    A$
    
    A$
    
    A$
    
    A$Segment revenueTotal segment revenue
    
    
    1,192
    
    
    
    1,874,802
    
    
    
    1,875,994
    
    
    
    
    
    
    
    1,875,994Unallocated revenue / interest income
    
    
    
    
    
    
    
    
    
    
    1,329,387
    
    
    
    
    
    
    
    1,329,387Consolidated revenue
    
    
    
    
    
    
    
    
    
    
    3,205,381
    
    
    
    
    
    
    
    3,205,381Segment resultSegment result
    
    
    (11,848,335
    )
    
    
    (1,383,714
    )
    
    
    (13,232,049
    )
    
    
    
    
    
    
    (13,232,049
    )Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    2,192,259
    
    
    
    
    
    
    
    2,192,259Unallocated revenue less unallocated
expenses
    
    
    
    
    
    
    
    
    
    
    1,041,640
    
    
    
    
    
    
    
    1,041,640Loss before income tax
    
    
    
    
    
    
    
    
    
    
    (9,998,150
    )
    
    
    
    
    
    
    (9,998,150
    )Segment assets and liabilitiesSegment assets
    
    
    17,070,834
    
    
    
    1,720,363
    
    
    
    18,791,197
    
    
    
    
    
    
    
    18,791,197Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (2,920
    )
    
    
    
    
    
    
    (2,920
    )Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    
    
    
    
    
    
    
    
    18,788,277
    
    
    
    
    
    
    
    18,788,277Segment liabilities
    
    
    20,404,537
    
    
    
    20,454,240
    
    
    
    40,858,777
    
    
    
    
    
    
    
    40,858,777Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (18,762,930
    )
    
    
    
    
    
    
    (18,762,930
    )Unallocated liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    
    
    
    
    
    
    
    
    22,095,847
    
    
    
    
    
    
    
    22,095,847Other segment informationAcquisitions of property, plant and
equipment, intangibles and other
non-current segment assets
    
    
    192,604
    
    
    
    50,282
    
    
    
    242,886
    
    
    
    
    
    
    
    242,886Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Acquisitions
    
    
    
    
    
    
    
    
    
    
    242,886
    
    
    
    
    
    
    
    242,886Depreciation and amortisation expense
    
    
    169,389
    
    
    
    80,107
    
    
    
    249,496
    
    
    
    
    
    
    
    249,496Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total depreciation and amortisation
    
    
    
    
    
    
    
    
    
    
    249,496
    
    
    
    
    
    
    
    249,496
 F-23




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 5. Segment information (continued)
 (b) Geographical segments (continued)
 Continuing
    
    DiscontinuedAustralia
    
    United States
    
    operations
    
    operation
    
    ConsolidatedA$
    
    A$
    
    A$
    
    A$
    
    A$Segment cash flow informationNet cash flows from operating activities
    
    
    (11,592,912
    )
    
    
    337,016
    
    
    
    (11,255,896
    )
    
    
    
    
    
    
    (11,255,896
    )Net cash flows from investing activities
    
    
    2,240,048
    
    
    
    (25,617
    )
    
    
    2,214,431
    
    
    
    
    
    
    
    2,214,431Net cash flows from financing activities
    
    
    (84,528
    )
    
    
    24,756
    
    
    
    (59,772
    )
    
    
    
    
    
    
    (59,772
    )2006Segment revenueTotal segment revenue
    
    
    
    
    
    
    1,581,030
    
    
    
    1,581,030
    
    
    
    
    
    
    
    1,581,030Unallocated revenue / interest income
    
    
    
    
    
    
    
    
    
    
    758,280
    
    
    
    
    
    
    
    758,280Consolidated revenue
    
    
    
    
    
    
    
    
    
    
    2,339,310
    
    
    
    
    
    
    
    2,339,310Segment resultSegment result
    
    
    (14,531,217
    )
    
    
    (2,904,561
    )
    
    
    (17,435,778
    )
    
    
    (39,256
    )
    
    
    (17,475,034
    )Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    2,550,596
    
    
    
    
    
    
    
    2,550,596Unallocated revenue less unallocated
expenses
    
    
    
    
    
    
    
    
    
    
    (412,572
    )
    
    
    
    
    
    
    (412,572
    )Loss before income tax
    
    
    
    
    
    
    
    
    
    
    (15,297,754
    )
    
    
    (39,256
    )
    
    
    (15,337,010
    )Segment assets and liabilitiesSegment assets
    
    
    27,550,373
    
    
    
    563,354
    
    
    
    28,113,727
    
    
    
    22,500
    
    
    
    28,136,227Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (280,146
    )
    
    
    
    
    
    
    (280,146
    )Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    
    
    
    
    
    
    
    
    27,833,581
    
    
    
    22,500
    
    
    
    27,856,081Segment liabilities
    
    
    25,654,616
    
    
    
    14,889,584
    
    
    
    40,544,200
    
    
    
    3,381,799
    
    
    
    43,925,999Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (13,967,411
    )
    
    
    (3,199,839
    )
    
    
    (17,167,250
    )Unallocated liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    
    
    
    
    
    
    
    
    26,576,789
    
    
    
    181,960
    
    
    
    26,758,749Other segment informationAcquisitions of property, plant and
equipment, intangibles and other
non-current segment assets
    
    
    881,351
    
    
    
    80,145
    
    
    
    961,496
    
    
    
    
    
    
    
    961,496Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Acquisitions
    
    
    
    
    
    
    
    
    
    
    961,496
    
    
    
    
    
    
    
    961,496Depreciation and amortisation expense
    
    
    78,059
    
    
    
    105,309
    
    
    
    183,368
    
    
    
    1,469
    
    
    
    184,837Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total depreciation and amortisation
    
    
    
    
    
    
    
    
    
    
    183,368
    
    
    
    1,469
    
    
    
    184,837Segment cash flow informationNet cash flows from operating activities
    
    
    (6,510,489
    )
    
    
    (945,850
    )
    
    
    (7,456,339
    )
    
    
    
    
    
    
    (7,456,339
    )Net cash flows from investing activities
    
    
    2,670,027
    
    
    
    (66,131
    )
    
    
    2,603,896
    
    
    
    
    
    
    
    2,603,896Net cash flows from financing activities
    
    
    28,046,849
    
    
    
    
    
    
    
    28,046,849
    
    
    
    
    
    
    
    28,046,8492005Segment revenueTotal segment revenue
    
    
    
    
    
    
    230,743
    
    
    
    230,743
    
    
    
    1,287,223
    
    
    
    1,517,966Unallocated revenue / interest income
    
    
    
    
    
    
    
    
    
    
    599,902
    
    
    
    3,047
    
    
    
    602,949Consolidated revenue
    
    
    
    
    
    
    
    
    
    
    830,645
    
    
    
    1,290,270
    
    
    
    2,120,915
 F-24




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 5. Segment information (continued)
 (b) Geographical segments (continued)
 Continuing
    
    DiscontinuedAustralia
    
    United States
    
    operations
    
    operation
    
    ConsolidatedA$
    
    A$
    
    A$
    
    A$
    
    A$Segment resultSegment result
    
    
    (11,592,924
    )
    
    
    (3,570,5,22
    )
    
    
    (15,163,446
    )
    
    
    (1,609,830
    )
    
    
    (16,773,276
    )Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    6,197,640
    
    
    
    68,101
    
    
    
    6,265,741Unallocated revenue less unallocated
expenses
    
    
    
    
    
    
    
    
    
    
    (346,404
    )
    
    
    (60,661
    )
    
    
    (407,065
    )Loss before income tax
    
    
    
    
    
    
    
    
    
    
    (9,312,210
    )
    
    
    (1,602,390
    )
    
    
    (10,914,600
    )Segment assets and liabilitiesSegment assets
    
    
    7,388,241
    
    
    
    512,550
    
    
    
    7,900,791
    
    
    
    25,731
    
    
    
    7,926,522Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (496,801
    )
    
    
    
    
    
    
    (496,801
    )Unallocated assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    
    
    
    
    
    
    
    
    7,403,990
    
    
    
    25,731
    
    
    
    7,429,721Segment liabilities
    
    
    1,192,960
    
    
    
    11,934,247
    
    
    
    13,127,207
    
    
    
    3,592,053
    
    
    
    16,719,260Intersegment elimination
    
    
    
    
    
    
    
    
    
    
    (11,641,089
    )
    
    
    (3,428,312
    )
    
    
    (15,069,401
    )Unallocated liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    
    
    
    
    
    
    
    
    1,486,118
    
    
    
    163,741
    
    
    
    1,649,859Other segment informationAcquisitions of property, plant and
equipment, intangibles and other
non-current segment assets
    
    
    28,777
    
    
    
    75,515
    
    
    
    104,292
    
    
    
    
    
    
    
    104,292Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Acquisitions
    
    
    
    
    
    
    
    
    
    
    104,292
    
    
    
    
    
    
    
    104,292Depreciation and amortisation expense
    
    
    59,192
    
    
    
    58,708
    
    
    
    117,900
    
    
    
    141,859
    
    
    
    259,759Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total depreciation and amortisation
    
    
    
    
    
    
    
    
    
    
    117,900
    
    
    
    141,859
    
    
    
    259,759Segment cash flow informationNet cash flows from operating activities
    
    
    (5,451,792
    )
    
    
    (4,194,162
    )
    
    
    (9,645,954
    )
    
    
    (888,607
    )
    
    
    (10,534,561
    )Net cash flows from investing activities
    
    
    (4,437,392
    )
    
    
    710,179
    
    
    
    (3,727,213
    )
    
    
    2,256,721
    
    
    
    (1,470,492
    )Net cash flows from financing activities
    
    
    (3,840,867
    )
    
    
    3,058,304
    
    
    
    (782,563
    )
    
    
    (1,684,160
    )
    
    
    (2,466,723
    )
 (C) Notes to and forming part of the segment information
 (i) Accounting policies
 AASB 114 Segment Reporting
  (ii) Inter-segment transfers
  F-25




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 6. Revenue
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Contract Revenue
    
    
    1,847,399
    
    
    
    1,581,030
    
    
    
    230,743Interest Revenue
    
    
    1,354,048
    
    
    
    758,280
    
    
    
    599,902Other
    
    
    3,934
    
    
    
    
    
    
    
    3,205,381
    
    
    
    2,339,310
    
    
    
    830,645
 
 7. Expenses
  2007
    
    2006
    
    2005A$
    
    A$
    
    A$Employee expensesWages and salaries
    
    
    (3,531,444
    )
    
    
    (4,077,717
    )
    
    
    (3,089,934
    )Termination benefits
    
    
    (47,581
    )
    
    
    (319,950
    )
    
    
    (500,000
    )Superannuation
    
    
    (161.904
    )
    
    
    (134,766
    )
    
    
    (126,187
    )Share-based payments
    
    
    (136,549
    )
    
    
    (358,686
    )
    
    
    (409,728
    )Directors fees
    
    
    (297,608
    )
    
    
    (412,572
    )
    
    
    (310,908
    )Other
    
    
    (173,502
    )
    
    
    (38,657
    )
    
    
    (31,883
    )Total employee expenses
    
    
    (4,348,588
    )
    
    
    (5,342,348
    )
    
    
    (4,468,640
    )Finance costsInterest expense
    
    
    (2,184,507
    )
    
    
    (962,751
    )
    
    
    (35,496
    )Transaction cost amortisation
    
    
    (865,465
    )
    
    
    (288,488
    )
    
    
    Accretion expense
    
    
    (1,884,443
    )
    
    
    (464,774
    )
    
    
    Amortisation of options for short term loan
    
    
    
    
    
    
    (467,000
    )
    
    
    Total finance costs
    
    
    (4,934,415
    )
    
    
    (2,183,013
    )
    
    
    (35,496
    )Depreciation and AmortisationDepreciation
    
    
    (168,974
    )
    
    
    (109,248
    )
    
    
    (211,545
    )Amortisation
    
    
    (80,522
    )
    
    
    (75,589
    )
    
    
    (48,214
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (1,834,152
    )Lease paymentsOperating lease payments
    
    
    (449,439
    )
    
    
    (590,197
    )
    
    
    441,817Total lease payments
    
    
    (449,439
    )
    
    
    (590,197
    )
    
    
    441,817Impairment expenseImpairment of floating rate notes
    
    
    (220,800
    )
    
    
    
    
    
    
    (220,800
    )
    
    
    
    
    
    
    
 F-26




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 8. Income tax
 (a) Income tax expense
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Current tax
    
    
    (2,976,306
    )
    
    
    (2,300,203
    )
    
    
    (1,728,142
    )Deferred tax
    
    
    81,032
    
    
    
    (64,275
    )
    
    
    (1,307,778
    )Deferred tax assets not recognised
    
    
    2,895,274
    
    
    
    2,364,478
    
    
    
    3,035,920
    
    
    
    
    
    
    
    (b) Numerical reconciliation
of income tax expense to prima facie tax payableLoss before income tax
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )
    
    
    (10,914,600
    )Tax at the Australia tax rate of 30% (2006:30%)
    
    
    (2,999,445
    )
    
    
    (4,601,103
    )
    
    
    (3,274,380
    )Tax effect of amounts which are not deductible
(taxable) in calculating taxable income:Research and development accounting costs
    
    
    297,809
    
    
    
    269,897
    
    
    
    266,774Research and development grant received
    
    
    (117,086
    )
    
    
    (102,632
    )
    
    
    (194,496
    )Entertainment
    
    
    873
    
    
    
    2,131
    
    
    
    625Fair value movement in embedded derivative
    
    
    (726,416
    )
    
    
    636,416
    
    
    
    Non-deductible interest expense
    
    
    51,664
    
    
    
    
    
    
    
    Option costs expensed  employees
    
    
    40,965
    
    
    
    133,922
    
    
    
    58,066Option costs expensed  Harmony Capital
    
    
    
    
    
    
    111,900
    
    
    
    Borrowing costs accretion
    
    
    564,738
    
    
    
    367,240
    
    
    
    Other
    
    
    (8,376
    )
    
    
    817,751
    
    
    
    107,492(2,895,274
    )
    
    
    (2,364,478
    )
    
    
    (3,035,920
    )Deferred tax assets not recognised
    
    
    2,895,274
    
    
    
    2,364,478
    
    
    
    3,035,920Income tax expense
    
    
    
    
    
    
    
    
    
    
    
 F-27




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 8. Income tax (continued)
 (c) Unrecognised temporary differences
  2007
    
    2006
    
    2005A$
    
    A$
    
    A$Sundry creditors and accruals
    
    
    46,300
    
    
    
    46,197
    
    
    
    55,230Employee entitlements
    
    
    118,800
    
    
    
    133,297
    
    
    
    42,040Asset retirement obligation
    
    
    29,207
    
    
    
    27,790
    
    
    
    13,508Deferred rent
    
    
    68,267
    
    
    
    77,950
    
    
    
    25,549S40-880 costs
    
    
    866,140
    
    
    
    1,193,090
    
    
    
    388,848Patent costs
    
    
    3,870,873
    
    
    
    3,562,600
    
    
    
    964,568Unrealised foreign exchange differences
    
    
    29,903
    
    
    
    236,093
    
    
    
    Losses available for offset against future income
    
    
    58,635,673
    
    
    
    48,714,653
    
    
    
    12,915,808Gross deferred income tax assets
    
    
    63,665,163
    
    
    
    53,991,670
    
    
    
    14,405,551Deferred tax liabilitiesInterest receivable on available-for-sale financial assets
    
    
    (1,400
    )
    
    
    (102,540
    )
    
    
    Deferred tax assets not recognisable
    
    
    63,663,763
    
    
    
    53,889,130
    
    
    
    14,405,551Potential tax benefit @ 30%
    
    
    19,099,129
    
    
    
    16,166,739
    
    
    
    4,321,665(ii) Temporary differences for which deferred tax assets or deferred liabilities have not been
recognised in relation to potential capital loss items.Provision  investment in ProCam Machine LLC
    
    
    1,917,387
    
    
    
    1,917,387
    
    
    
    575,216Intercompany receivables
    
    
    
    
    
    
    
    
    
    
    Fair value movement in Available-for-sale financial assets
    
    
    
    
    
    
    2,080
    
    
    
    Impairment  Available-for-sale financial assets
    
    
    220,800
    
    
    
    
    
    
    
    Deferred tax assets not recognisable
    
    
    2,138,187
    
    
    
    1,919,467
    
    
    
    575,216
 (d) Tax losses
  2007
    
    2006
    
    2005A$
    
    A$
    
    A$Australian tax losses
    
    
    40,579,789
    
    
    
    32,377,936
    
    
    
    26,992,892United States federal net operating loss carryforwards
    
    
    14,651,197
    
    
    
    15,538,802
    
    
    
    13,124,360United States state net operating loss carryforwards
    
    
    11,031,293
    
    
    
    11,548,201
    
    
    
    9,160,116
   F-28




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 9. Discontinued operation
    2007
    
    
    2006
    
    
    2005A$
    
    
    A$
    
    
    A$Revenue
    
    
    
    
    
    
    
    
    
    
    1,290,270Expenses
    
    
    
    
    
    
    (39,256
    )
    
    
    (2,831,999
    )Gross loss
    
    
    
    
    
    
    (39,256
    )
    
    
    (1,541,729
    )Finance costs
    
    
    
    
    
    
    
    
    
    
    (60,661
    )Net loss attributable to discontinued operation
    
    
    
    
    
    
    (39,256
    )
    
    
    (1,602,390
    )Earnings per share (cents per share):Basic and diluted from discontinued operation
    
    
    
    
    
    
    
    
    
    
    (0.31
    )The major classes of assets and liabilities of Procam measured at the lower of carrying amount and
fair value less costs to sell at 31 December are as follows:AssetsTrade and other receivables
    
    
    
    
    
    
    21,768
    
    
    
    23,373Other
    
    
    
    
    
    
    732
    
    
    
    2,358Total Assets
    
    
    
    
    
    
    22,500
    
    
    
    25,731LiabilitiesTrade and other payables
    
    
    
    
    
    
    3,199,839
    
    
    
    3,445,485Provisions* (note 18)
    
    
    
    
    
    
    181,960
    
    
    
    146,594Total Liabilities
    
    
    
    
    
    
    3,381,799
    
    
    
    3,592,079Net Liabilities
    
    
    
    
    
    
    (3,359,029
    )
    
    
    (3,566,348
    )*Make Good Provision and Onerous Lease ContractThe net cash flows incurred by ProCam are as follows:Operating
    
    
    
    
    
    
    
    
    
    
    (888,607
    )Investing
    
    
    
    
    
    
    
    
    
    
    2,256,722Financing
    
    
    
    
    
    
    
    
    
    
    (1,684,160
    )Net cash outflow
    
    
    
    
    
    
    
    
    
    
    (316,045
    )Details of disposal of ProCam are as follows:Book value of the assets sold at 1 June 2005:Trade and other receivables
    
    
    
    
    
    
    
    
    
    
    360,182Inventory
    
    
    
    
    
    
    
    
    
    
    456,510Property plant and equipment
    
    
    
    
    
    
    
    
    
    
    2,212,631Trade and other payables
    
    
    
    
    
    
    
    
    
    
    (77,946
    )Accrued property tax
    
    
    
    
    
    
    
    
    
    
    (36,681
    )Net assets attributable to discontinued operation
    
    
    
    
    
    
    
    
    
    
    2,915,326Consideration received as cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    2,256,721Loss on sale of the assets and liabilities
    
    
    
    
    
    
    
    
    
    
    (658,605
    )
 F-29




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 10. Current assets  Cash and cash equivalents
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Cash at bank and on hand
    
    
    1,727,548
    
    
    
    1,097,448
    
    
    
    635,861Short term deposits
    
    
    13,000,000
    
    
    
    22,732,819
    
    
    
    14,727,548
    
    
    
    23,830,267
    
    
    
    635,861
 (a) Cash at bank and on hand
  (b) Short term deposits
  (c) Trust Deed minimum cash levels
  Period to:
    
    31 Dec 2006
    
    30 Jun 2007
    
    31 Dec 2007
    
    30 Jun 2008
    
    31 Dec 2008Minimum balance
    
    
    $22.5m
    
    
    
    $19.5m
    
    
    
    $15.0m
    
    
    
    $12.5m
    
    
    
    $7.5m
  
 11. Current assets  Available-for-sale financial investments
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Floating rate notes:Opening fair value
    
    
    2,002,080
    
    
    
    5,056,140
    
    
    
    Purchase of investments
    
    
    
    
    
    
    
    
    
    
    8,633,480Disposal of investments
    
    
    (1,000,000
    )
    
    
    (3,019,480
    )
    
    
    (3,614,000
    )Fair value adjustments
    
    
    
    
    
    
    (34,580
    )
    
    
    36,660Impairment loss
    
    
    (222,880
    )
    
    
    Closing Fair Value
    
    
    779,200
    
    
    
    2,002,080
    
    
    
    5,056,140
  
 12. Current assets  Trade and other receivables
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Trade receivables
    
    
    762,625
    
    
    
    154,321
    
    
    
    98,532Other receivables
    
    
    4,144
    
    
    
    120,013
    
    
    
    66,399Allowance for doubtful debts
    
    
    
    
    
    
    
    
    
    
    (27,750
    )Goods and services tax recoverable
    
    
    65,576
    
    
    
    46,061
    
    
    
    107,564Interest receivable
    
    
    1,400
    
    
    
    102,540
    
    
    
    17,695Research and development tax concession receivable
    
    
    390,286
    
    
    
    
    
    
    
    337,565Prepayments
    
    
    339,187
    
    
    
    350,195
    
    
    
    810,112Related party receivable  key management personnel
    
    
    
    
    
    
    
    
    
    
    13,4361,563,218
    
    
    
    773,130
    
    
    
    1,423,553
 F-30




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 12. Current assets  Trade and other receivables (continued)
    
 13. Non-current assets  Trade and other receivables
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Trade receivables
    
    
    (i
    )
    
    
    480,145
    
    
    
    
    
    
    
    Security deposits
    
    
    (ii
    )
    
    
    507,757
    
    
    
    510,795
    
    
    
    30,600Related party receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    987,902
    
    
    
    510,795
    
    
    
    30,600
 
 (i)
    
    Due at various intervals from January 2009 to June 2009.(ii)
    
    Represents restricted cash deposits held as security for operating and finance lease commitments. 
 14. Non-current assets  Property, plant and equipment
 Leasehold
    
    
    
    
    
    Leasedimprove-
    
    Plant and
    
    plant andments
    
    equipment
    
    equipment
    
    TotalA$
    
    A$
    
    A$
    
    A$At 1 January 2005Cost
    
    
    62,658
    
    
    
    4,021,626
    
    
    
    
    
    
    
    4,084,284Accumulated depreciation
    
    
    (27,599
    )
    
    
    (1,108,881
    )
    
    
    
    
    
    
    (1,136,480
    )Net book amount
    
    
    35,059
    
    
    
    2,912,745
    
    
    
    
    
    
    
    2,947,804Year ended 31 December 2005Opening net book amount
    
    
    35,059
    
    
    
    2,912,745
    
    
    
    
    
    
    
    2,947,804Additions
    
    
    726
    
    
    
    103,566
    
    
    
    
    
    
    
    104,292Attributable to discontinued operation
    
    
    
    
    
    
    (2,608,922
    )
    
    
    
    
    
    
    (2,608,922
    )Depreciation charge
    
    
    (15,715
    )
    
    
    (195,830
    )
    
    
    
    
    
    
    (211,545
    )Closing net book amount
    
    
    20,070
    
    
    
    211,559
    
    
    
    
    
    
    
    231,629At 1 January 2006Cost
    
    
    63,384
    
    
    
    492,216
    
    
    
    
    
    
    
    555,600Accumulated depreciation
    
    
    (43,314
    )
    
    
    (280,657
    )
    
    
    
    
    
    
    (323,971
    )Net book amount
    
    
    20,070
    
    
    
    211,559
    
    
    
    
    
    
    
    231,629Year ended 31 December 2006Opening net book amount
    
    
    20,070
    
    
    
    211,559
    
    
    
    
    
    
    
    231,629Additions
    
    
    183,629
    
    
    
    334,490
    
    
    
    306,180
    
    
    
    824,299Disposals
    
    
    (73,173
    )
    
    
    (245,522
    )
    
    
    
    
    
    
    (318,695
    )Depreciation charge
    
    
    (30,459
    )
    
    
    (78,789
    )
    
    
    
    
    
    
    (109,248
    )Closing net book amount
    
    
    100,067
    
    
    
    221,738
    
    
    
    306,180
    
    
    
    627,985
 F-31




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 14. Non-current assets  Property, plant and equipment (continued)
 Leasehold
    
    
    
    
    
    Leasedimprove-
    
    Plant and
    
    plant andments
    
    equipment
    
    equipment
    
    TotalA$
    
    A$
    
    A$
    
    A$At 1 January 2007Cost
    
    
    113,903
    
    
    
    467,786
    
    
    
    306,180
    
    
    
    887,869Accumulated depreciation
    
    
    (13,836
    )
    
    
    (246,048
    )
    
    
    
    
    
    
    (259,884
    )Net book amount
    
    
    100,067
    
    
    
    221,738
    
    
    
    306,180
    
    
    
    627,985Year ended 31 December 2007Opening net book amount
    
    
    100,067
    
    
    
    221,738
    
    
    
    306,180
    
    
    
    627,985Additions
    
    
    81,588
    
    
    
    91,058
    
    
    
    27,393
    
    
    
    200,039Disposals
    
    
    (117
    )
    
    
    (2,673
    )
    
    
    
    
    
    
    (2,790
    )Depreciation charge
    
    
    (49,830
    )
    
    
    (85,932
    )
    
    
    (33,212
    )
    
    
    (168,974
    )Closing net book amount
    
    
    131,708
    
    
    
    224,191
    
    
    
    300,361
    
    
    
    656,260At 31 December 2007Cost
    
    
    188,536
    
    
    
    556,170
    
    
    
    333,573
    
    
    
    1,078,279Accumulated depreciation
    
    
    (56,828
    )
    
    
    (331,979
    )
    
    
    (33,212
    )
    
    
    (422,019
    )Net book amount
    
    
    131,708
    
    
    
    224,191
    
    
    
    300,361
    
    
    
    656,260
 
 15. Non-current assets  Intangible assets
 Software
    
    Goodwill
    
    TotalA$
    
    A$
    
    A$At 1 January 2005Cost
    
    
    48,882
    
    
    
    1,861,726
    
    
    
    1,910,608Accumulated amortisation
    
    
    (22,737
    )
    
    
    (27,574
    )
    
    
    (50,311
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    26,145
    
    
    
    
    
    
    
    26,145Year ended 31 December 2005Opening net book amount
    
    
    26,145
    
    
    
    
    
    
    
    26,145Additions
    
    
    74,007
    
    
    
    
    
    
    
    74,007Disposals
    
    
    
    
    
    
    
    
    
    
    Amortisation charge
    
    
    (48,214
    )
    
    
    
    
    
    
    (48,214
    )Closing net book amount
    
    
    51,938
    
    
    
    
    
    
    
    51,938At 1 January 2006Cost
    
    
    122,889
    
    
    
    1,861,726
    
    
    
    1,984,615Accumulated amortisation
    
    
    (70,951
    )
    
    
    (27,574
    )
    
    
    (98,525
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    51,938
    
    
    
    
    
    
    
    51,938Year ended 31 December 2006Opening net book amount
    
    
    51,938
    
    
    
    
    
    
    
    51,938Additions
    
    
    137,197
    
    
    
    
    
    
    
    137,197Disposals
    
    
    (1,722
    )
    
    
    
    
    
    
    (1,722
    )Amortisation charge
    
    
    (75,589
    )
    
    
    
    
    
    
    (75,589
    )Closing net book amount
    
    
    111,824
    
    
    
    
    
    
    
    111,824
 F-32




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 15. Non-current assets  Intangible assets (continued)
 Software
    
    Goodwill
    
    TotalA$
    
    A$
    
    A$At 1 January 2007Cost
    
    
    211,204
    
    
    
    1,861,726
    
    
    
    2,072,930Accumulated amortisation
    
    
    (99,380
    )
    
    
    (27,574
    )
    
    
    (126,954
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    111,824
    
    
    
    
    
    
    
    111,824Year ended 31 December 2007Opening net book amount
    
    
    111,824
    
    
    
    
    
    
    
    111,824Additions
    
    
    42,847
    
    
    
    
    
    
    
    42,847Amortisation charge
    
    
    (80,522
    )
    
    
    
    
    
    
    (80,522
    )Closing net book amount
    
    
    74,149
    
    
    
    
    
    
    
    74,149At 31 December 2007Cost
    
    
    254,051
    
    
    
    1,861,726
    
    
    
    2,115,777Accumulated amortisation
    
    
    (179,902
    )
    
    
    (27,574
    )
    
    
    (207,476
    )Accumulated impairment losses
    
    
    
    
    
    
    (1,834,152
    )
    
    
    (1,834,152
    )Net book amount
    
    
    74,149
    
    
    
    
    
    
    
    74,149
   
 16. Current liabilities  Trade and other payables
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Trade payables
    
    
    228,679
    
    
    
    272,627
    
    
    
    259,508Deferred revenue
    
    
    1,326,985
    
    
    
    620,483
    
    
    
    43,024Other payables
    
    
    1,013,648
    
    
    
    1,011,203
    
    
    
    511,4822,569,312
    
    
    
    1,904,313
    
    
    
    814,014Related party payables:Directors fees payable*
    
    
    35,833
    
    
    
    38,212
    
    
    
    119,5602,605,145
    
    
    
    1,942,525
    
    
    
    933,574
 
 *
    
    Refer note 24(f) for further details. 
 17. Current liabilities  Conversion derivative
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Balance at beginning of year
    
    
    10,811,057
    
    
    
    
    
    
    
    Initial Notional Value of Derivative on 1 September 2006
    
    
    
    
    
    
    6,584,036
    
    
    
    Conversion of convertible notes to shares
    
    
    (2,425,876
    )
    
    
    (242,021
    )
    
    
    Fair value movement
    
    
    (2,421,388
    )
    
    
    4,469,042
    
    
    
    Balance at end of year
    
    
    5,963,793
    
    
    
    10,811,057
    
    
    
    -
 F-33




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 18.
    
    Current liabilities  Interest bearing loans and borrowings
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Obligations under finance leases
    
    
    (i
    )
    
    
    63,907
    
    
    
    50,335
    
    
    
    Convertible notes
    
    
    (ii
    )
    
    
    12,664,510
    
    
    
    12,926,837
    
    
    
    Other loan
    
    
    (iii
    )

    
    
    213,030
    
    
    
    252,204
    
    
    
    353,67412,941,447
    
    
    
    13,229,376
    
    
    
    353,674
 
 (i)
    
    Secured, matures 2008. See note 20 for non-current details.(ii)
    
    Unsecured, matures 2009.(iii)
    
    Unsecured, matures 2008. Convertible Notes
   2007
    
    2006
    
    2005A$
    
    A$
    
    A$Balance at beginning of year
    
    
    12,926,837
    
    
    
    
    
    
    
    Fair value of new issues
    
    
    
    
    
    
    12,579,524
    
    
    
    Accretion expense
    
    
    1,882,440
    
    
    
    460,955
    
    
    
    Transaction cost amortisation
    
    
    865,465
    
    
    
    288,488
    *
    
    
    Conversion of convertible notes to shares
    
    
    (3,010,232
    )
    
    
    (402,130
    )
    
    
    Balance at end of year
    
    
    12,664,510
    
    
    
    12,926,837
    
    
    
    
 2007
    
    2006
    
    2005Number
    
    Number
    
    NumberBalance at beginning of year
    
    
    197,282,070
    
    
    
    
    
    
    
    New issues
    
    
    
    
    
    
    203,703,704
    
    
    
    Conversion of convertible notes to shares
    
    
    (44,625,186
    )
    
    
    (6,421,634
    )
    
    
    Balance at end of year
    
    
    152,656,884
    
    
    
    197,282,070
    
    
    
    
 
 *
    
    As revised per change in policy refer note 2(a) F-34




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 19. Current liabilities  Provisions
 OnerousLeaseMake Good
    
    Contracts
    
    Payroll
    
    TotalA$
    
    A$
    
    A$
    
    A$Carrying amount at 1 January 2006
    
    
    45,026
    
    
    
    136,203
    
    
    
    96,219
    
    
    
    277,448Additional provisions recognised
    
    
    17,078
    
    
    
    35,045
    
    
    
    398,715
    
    
    
    450,838Amounts used during the year
    
    
    (37,541
    )
    
    
    
    
    
    
    (257,022
    )
    
    
    (294,563
    )Reclassified as other receivables
    
    
    
    
    
    
    
    
    
    
    5,047
    
    
    
    5,047Foreign Exchange movements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unwinding and discount rate adjustment
    
    
    3,227
    
    
    
    
    
    
    
    
    
    
    
    3,227Carrying amount at 1 January 2007
    
    
    27,790
    
    
    
    171,248
    
    
    
    242,959
    
    
    
    441,997Additional provisions recognised
    
    
    
    
    
    
    
    
    
    
    161,328
    
    
    
    161,328Amounts used during the year
    
    
    
    
    
    
    
    
    
    
    (264,579
    )
    
    
    (264,579
    )Bonus not paid
    
    
    
    
    
    
    
    
    
    
    (20,909
    )
    
    
    (20,909
    )Foreign Exchange movements
    
    
    (568
    )
    
    
    (17,091
    )
    
    
    
    
    
    
    (17,659
    )Unwinding and discount rate adjustment
    
    
    1,983
    
    
    
    
    
    
    
    
    
    
    
    1,983Carrying amount at 31 December 2007
    
    
    29,205
    
    
    
    154,157
    
    
    
    118,799
    
    
    
    302,161
 Make good provision
  Onerous Lease Contract
  Payroll
  
 20. Non-current liabilities  Interest bearing loans and borrowings
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Obligations under finance leases
    
    
    215,036
    
    
    
    255,845
    
    
    
    
  F-35




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 21. Contributed equity
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Ordinary shares  issued and fully paid
    
    
    65,428,400
    
    
    
    59,985,634
    
    
    
    56,559,039
  Number of
    
    Issue
    
    ValueDate
    
    Details
    
    Note
    
    shares
    
    price
    
    A$01/01/2005
    
    Opening Balance
    
    
    
    
    
    
    521,970,978
    
    
    
    
    
    
    
    56,559,03931/12/2005
    
    Closing Balance
    
    
    
    
    
    
    521,970,978
    
    
    
    
    
    
    
    56,559,03921/02/2006
    
    Settle employee bonus
    
    
    
    
    
    
    89,396
    
    
    $
    0.280
    
    
    
    25,03122/05/2006
    
    Shares issued through plan
    
    
    (i
    )
    
    
    22,648,691
    
    
    $
    0.133
    
    
    
    3,010,00022/05/2006
    
    Transaction costs on share issue
    
    
    (i
    )
    
    
    
    
    
    
    
    
    
    
    (268,696
    )19/09/2006
    
    Exercise listed options
    
    (ii)
    
    
    23,249
    
    
    $
    0.150
    
    
    
    3,48720/09/2006
    
    Exercise listed options
    
    (ii)
    
    
    561
    
    
    $
    0.150
    
    
    
    8421/09/2006
    
    Exercise listed options
    
    (ii)
    
    
    431
    
    
    $
    0.150
    
    
    
    6526/09/2006
    
    Exercise listed options
    
    (ii)
    
    
    1,870
    
    
    $
    0.150
    
    
    
    28128/09/2006
    
    Exercise listed options
    
    (ii)
    
    
    6,315
    
    
    $
    0.150
    
    
    
    94729/09/2006
    
    Exercise listed options
    
    (ii)
    
    
    3,220
    
    
    $
    0.150
    
    
    
    48302/10/2006
    
    Conversion of notes
    
    (iii)
    
    
    7,881,096
    
    
    $
    0.110
    
    
    
    652,57505/10/2006
    
    Exercise listed options
    
    (ii)
    
    
    982
    
    
    $
    0.150
    
    
    
    14709/10/2006
    
    Exercise listed options
    
    (ii)
    
    
    328
    
    
    $
    0.150
    
    
    
    4916/10/2006
    
    Exercise listed options
    
    (ii)
    
    
    115
    
    
    $
    0.150
    
    
    
    1725/10/2006
    
    Exercise listed options
    
    (ii)
    
    
    1,870
    
    
    $
    0.150
    
    
    
    28103/11/2006
    
    Exercise listed options
    
    (ii)
    
    
    12,292
    
    
    $
    0.150
    
    
    
    1,84431/12/2006
    
    Closing Balance
    
    
    
    
    
    
    552,641,394
    
    
    
    
    
    
    
    59,985,63404/01/2007
    
    Exercise listed options
    
    (ii)
    
    
    758
    
    
    $
    0.150
    
    
    
    11904/01/2007
    
    Conversion of notes
    
    (iii)
    
    
    1,706,709
    
    
    $
    0.135
    
    
    
    205,35916/01/2007
    
    Exercise listed options
    
    (ii)
    
    
    12,173
    
    
    $
    0.150
    
    
    
    1,82616/01/2007
    
    Conversion of notes
    
    (iii)
    
    
    14,518,842
    
    
    $
    0.135
    
    
    
    1,746,97417/01/2007
    
    Conversion of notes
    
    (iii)
    
    
    14,000,000
    
    
    $
    0.135
    
    
    
    1,684,54519/01/2007
    
    Exercise listed options
    
    (ii)
    
    
    10,983
    
    
    $
    0.150
    
    
    
    1,64724/01/2007
    
    Exercise listed options
    
    (ii)
    
    
    3,127
    
    
    $
    0.150
    
    
    
    46908/03/2007
    
    Exercise listed options
    
    (ii)
    
    
    4,684
    
    
    $
    0.150
    
    
    
    70314/03/2007
    
    Exercise listed options
    
    (ii)
    
    
    7,760
    
    
    $
    0.150
    
    
    
    1,16401/04/2007
    
    Conversion of notes
    
    (iii)
    
    
    4,807,843
    
    
    $
    0.135
    
    
    
    595,35419/04/2007
    
    Exercise listed options
    
    (ii)
    
    
    850
    
    
    $
    0.150
    
    
    
    12829/05/2007
    
    Exercise listed options
    
    (ii)
    
    
    603
    
    
    $
    0.150
    
    
    
    9014/06/2007
    
    Conversion of notes
    
    (iii)
    
    
    8,775,000
    
    
    $
    0.120
    
    
    
    986,40626/06/2007
    
    Exercise listed options
    
    (ii)
    
    
    3,188
    
    
    $
    0.150
    
    
    
    47801/07/2007
    
    Conversion of notes
    
    (iii)
    
    
    136,913
    
    
    $
    0.120
    
    
    
    14,24625/07/2007
    
    Exercise listed options
    
    (ii)
    
    
    94
    
    
    $
    0.150
    
    
    
    1401/10/2007
    
    Conversion of notes
    
    (iii)
    
    
    2,049,658
    
    
    $
    0.110
    
    
    
    203,24431/12/2007
    
    Closing Balance
    
    
    
    
    
    
    598,680,579
    
    
    
    
    
    
    
    65,428,400
 
 (i)
    
    New share issue for cash under a Share Purchase Plan as part of a capital raising plan.(ii)
    
    Issued under the 2006 Renounceable Rights Issue Prospectus.(iii)
    
    Convertible notes issued under the 2006 Renounceable Rights Issue Prospectus converted at
the lesser of $0.135 or 90% of the volume weighted average price of shares during the 30
business days immediate preceding the conversion date. F-36




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 21. Contributed equity (continued)
  Details
    
    Note

    Number of optionsAt 1 January 2006
    
    
    
    
    
    
    Issued under Renounceable Rights Issue
    
    
    (i
    )
    
    
    101,852,055Issued as payment for transactions costs
    
    
    (i
    )
    
    
    65,000,000Issued as payment for Facilitation Agreement
    
    
    
    
    
    
    10,000,000Exercise of options
    
    
    
    
    
    
    (51,231
    )At 31 December 2006
    
    
    
    
    
    
    176,800,824Exercise of options
    
    
    
    
    
    
    (44,220
    )At 31 December 2007
    
    
    
    
    
    
    176,756,604
 
 (i)
    
    Issued under the terms of the 28 July 2006 Renounceable Rights Issue Prospectus. 
 22. Reserves
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Unlisted option reserve
    
    
    2,221,417
    
    
    
    2,084,868
    
    
    
    1,726,182Listed option reserve
    
    
    6,893,566
    
    
    
    6,893,566
    
    
    
    Revaluation reserve
    
    
    
    
    
    
    2,080
    
    
    
    36,660Accumulated translation reserve
    
    
    (68,559
    )
    
    
    (84,572
    )
    
    
    (94,785
    )9,046,424
    
    
    
    8,895,942
    
    
    
    1,668,057Movements:Unlisted option reserveBalance at 1 January
    
    
    2,084,868
    
    
    
    1,726,182
    
    
    
    1,316,454New Issues
    
    
    
    
    
    
    
    
    
    
    Expenses recognised
    
    
    136,549
    
    
    
    358,686
    
    
    
    409,728Balance at 31 December
    
    
    2,221,417
    
    
    
    2,084,868
    
    
    
    1,726,182Listed option reserveBalance at 1 January
    
    
    6,893,566
    
    
    
    
    
    
    
    Attached options issued on
allotment of
renounceable rights issue
    
    
    
    
    
    
    4,379,638
    
    
    
    Option issue costs
    
    
    
    
    
    
    (748,072
    )
    
    
    Options paid as fees to Harmony
    
    
    
    
    
    
    3,262,000
    
    
    
    Balance at 31 December
    
    
    6,893,566
    
    
    
    6,893,566
    
    
    
    Revaluation reserveBalance at 1 January
    
    
    2,080
    
    
    
    36,660
    
    
    
    Net gains on available-for-sale
financial assets
    
    
    
    
    
    
    (34,580
    )
    
    
    36,660Realised gains
    
    
    (1,040
    )
    
    
    
    
    
    
    Net movement on revaluation
    
    
    (1,040
    )
    
    
    
    
    
    
    Balance at 31 December
    
    
    
    
    
    
    2,080
    
    
    
    36,660Accumulated translation reserveBalance at 1 January
    
    
    (84,572
    )
    
    
    (94,785
    )
    
    
    (142,886
    )Currency translation differences
    
    
    16,013
    
    
    
    10,213
    
    
    
    48,101Balance at 31 December
    
    
    (68,559
    )
    
    
    (84,572
    )
    
    
    (94,785
    )
 F-37




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 22. Reserves (continued)
  Unlisted options reserve
  Listed options reserve
  Revaluation reserve
  Accumulated translation reserve
  
 23. Accumulated losses
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Balance at 1 January
    
    
    (67,784,244
    )
    
    
    (52,447,234
    )
    
    
    (41,532,634
    )Net loss
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )
    
    
    (10,914,600
    )Balance at 31 December
    
    
    (77,782,394
    )
    
    
    (67,784,244
    )
    
    
    (52,447,234
    )
 
 24. Key management personnel disclosures
 (a) Directors
  T J ODwyer
    
    ChairmanL J Finniear
    
    Managing Director (appointed 24 May 2007),Chief Executive Officer (appointed 19 February 2007)B S McComish
    
    Non-executive Director (resigned 8 March 2007)J M Crunk
    
    Non-executive DirectorP D Jonson
    
    Non-executive DirectorJ R Nicholls
    
    Non-executive Director
   F-38




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 24. Key management personnel disclosures (continued)
 (b) Other key management personnel
  Name
    
    Position
    
    EmployerP R Wetzig
    
    Company Secretary
    
    Metal Storm LimitedB I Farmer
    
    Chief Financial Officer (from 17 August 2007)
    
    Metal Storm LimitedP D Faulkner
    
    Senior VP  Director US Operations
    
    Metal Storm IncJ Cronin
    
    Managing Engineer
    
    Metal Storm LimitedJ D MacDonald
    
    Chief Financial Officer (resigned 13 April 2007)
    
    Metal Storm LimitedG L Bergeron III
    
    Chief Technical Officer (resigned 31 January 2007)
    
    Metal Storm Inc
   (c) Key management personnel compensation
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Short-term employee benefits
    
    
    1,305,045
    
    
    
    2,111,346
    
    
    
    1,326,496Post-employment benefits
    
    
    56,205
    
    
    
    75,907
    
    
    
    61,182Termination benefits
    
    
    
    
    
    
    304,140
    
    
    
    500,000Share-based payments
    
    
    99,923
    
    
    
    263,085
    
    
    
    422,6261,461,173
    
    
    
    2,754,478
    
    
    
    2,310,304
 (d) Equity instrument disclosures relating to key management personnel
 Option holdings
  F-39




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 24. Key management personnel disclosures (continued)
 (d) Equity instrument disclosures relating to key management personnel (continued)
 2007
 Balance at
    
    Granted as
    
    
    
    
    
    Balance atstart of the
    
    compen-
    
    
    
    
    
    end of the
    
    Vested andName
    
    year
    
    sation
    
    Exercised
    
    year
    
    exercisable
    
    UnvestedDirectorsTJ ODwyer
    
    
    33,819
    
    
    
    
    
    
    
    
    
    
    
    33,819
    
    
    
    33,819
    
    
    
    L J Finniear
    
    
    
    
    
    
    1,000,000
    
    
    
    
    
    
    
    1,000,000
    
    
    
    500,000
    
    
    
    500,000J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupP R Wetzig
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    B I Farmer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    J Cronin
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    J D MacDonald
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    500,000
    
    
    
    G L Bergeron III
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    250,000
    
    
    
    1,183,819
    
    
    
    1,000,000
    
    
    
    
    
    
    
    2,183,819
    
    
    
    1,683,819
    
    
    
    500,000
  2006
 Balance at
    
    Granted as
    
    
    
    
    
    Balance atstart of the
    
    compen-
    
    
    
    
    
    end of the
    
    Vested andName
    
    year
    
    sation
    
    Exercised
    
    year
    
    exercisable
    
    UnvestedDirectorsT J ODwyer
    
    
    
    
    
    
    
    
    
    
    33,819
    
    
    
    33,819
    
    
    
    33,819
    
    
    
    W A Downing
    
    
    3,400,000
    
    
    
    490,000
    
    
    
    
    
    
    
    3,890,000
    
    
    
    1,390,000
    
    
    
    2,500,000D A Smith
    
    
    
    
    
    
    625,000
    
    
    
    
    
    
    
    625,000
    
    
    
    625,000
    
    
    
    D L Alspach
    
    
    1,350,000
    
    
    
    450,000
    
    
    
    
    
    
    
    1,800,000
    
    
    
    1,800,000
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J R Nicholls
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupI A Gillespie
    
    
    1,100,000
    
    
    
    
    
    
    
    
    
    
    
    1,100,000
    
    
    
    1,100,000
    
    
    
    J D MacDonald
    
    
    500,000
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    500,000
    
    
    
    G L Bergeron III
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    250,000
    
    
    
    P D Faulkner
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    200,000
    
    
    
    125,000
    
    
    
    75,000J Cronin
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    J C Chahansky
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    6,800,000
    
    
    
    1,840,000
    
    
    
    33,819
    
    
    
    8,673,819
    
    
    
    6,098,819
    
    
    
    2,575,000
 F-40




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 24. Key management personnel disclosures (continued)
 (d) Equity instrument disclosures relating to key management personnel (continued)
 2005
 Balance at
    
    Granted as
    
    
    
    
    
    Balance atstart of the
    
    compen-
    
    
    
    
    
    end of the
    
    Vested andName
    
    year
    
    sation
    
    Exercised
    
    year
    
    exercisable
    
    UnvestedDirectorsT J ODwyer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Downing
    
    
    2,950,000
    
    
    
    450,000
    
    
    
    
    
    
    
    3,400,000
    
    
    
    900,000
    
    
    
    2,500,000D A Smith
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    D L Alspach
    
    
    675,000
    
    
    
    675,000
    
    
    
    
    
    
    
    1,350,000
    
    
    
    1,350,000
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    J M ODwyer
    
    
    450,000
    
    
    
    450,000
    
    
    
    
    
    
    
    900,000
    
    
    
    900,000
    
    
    
    J D Heipt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    W A Ownes
    
    
    2,950,000
    
    
    
    150,000
    
    
    
    
    
    
    
    3,100,000
    
    
    
    600,000
    
    
    
    2,500,000D W Christman
    
    
    915,000
    
    
    
    618,750
    
    
    
    
    
    
    
    1,533,750
    
    
    
    1,533,750
    
    
    
    Other key management personnel of the groupI A Gillespie
    
    
    1,100,000
    
    
    
    
    
    
    
    
    
    
    
    1,100,000
    
    
    
    1,100,000J D MacDonald
    
    
    
    
    
    
    500,000
    
    
    
    
    
    
    
    500,000
    
    
    
    312,500
    
    
    
    187,500G L Bergeron III
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    187,500
    
    
    
    62,500J C Chahansky
C A Vehlow
    
    
    1,850,000
    
    
    
    225,000
    
    
    
    
    
    
    
    2,075,000
    
    
    
    2,075,00011,140,000
    
    
    
    3,068,750
    
    
    
    
    
    
    
    14,208,750
    
    
    
    8,958,750
    
    
    
    5,250,000
 (iii) Share holdings
  Balance at
    
    Changes
    
    Balance atstart of the
    
    during the
    
    end of theName
    
    year
    
    year
    
    year2007DirectorsT J ODwyer
    
    
    180,855
    
    
    
    
    
    
    
    180,855L Finniear
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    340,000
    
    
    
    
    
    
    
    340,000J R Nicholls
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupP R Wetzig
    
    
    400
    
    
    
    
    
    
    
    400B I Farmer
    
    
    
    
    
    
    P D Faulkner
    
    
    
    
    
    
    
    
    
    
    J Cronin
    
    
    
    
    
    
    
    
    
    
    J D MacDonald
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    
    
    
    
    521,255
    
    
    
    
    
    
    
    521,255
 F-41




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 24. Key management personnel disclosures (continued)
 (d) Equity instrument disclosures relating to key management personnel (continued)
 Balance at
    
    Changes
    
    Balance atstart of the
    
    during the
    
    end of theName
    
    year
    
    year
    
    year2006DirectorsT J ODwyer
    
    
    63,611
    
    
    
    117,244
    
    
    
    180,855W A Downing
    
    
    500,000
    
    
    
    
    
    
    
    500,000D A Smith
    
    
    
    
    
    
    
    
    
    
    D L Alspach
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    P D Jonson
    
    
    
    
    
    
    340,000
    
    
    
    340,000J R Nicholls
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupI A Gillespie
    
    
    
    
    
    
    89,396
    
    
    
    89,396J D MacDonald
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    
    
    
    
    P D Faulkner
    
    
    
    
    
    
    
    
    
    
    J Cronin
    
    
    
    
    
    
    
    
    
    
    J C Chahansky
    
    
    
    
    
    
    
    
    
    
    563,611
    
    
    
    546,640
    
    
    
    1,110,2512005DirectorsT J ODwyer
    
    
    63,611
    
    
    
    
    
    
    
    63,611W A Downing
    
    
    500,000
    
    
    
    
    
    
    
    500,000D A Smith
    
    
    
    
    
    
    
    
    
    
    D L Alspach
    
    
    
    
    
    
    
    
    
    
    B S McComish
    
    
    
    
    
    
    
    
    
    
    J M Crunk
    
    
    
    
    
    
    
    
    
    
    J M ODwyer
    
    
    199,729,559
    
    
    
    
    
    
    
    199,729,559J D Heipt
    
    
    
    
    
    
    
    
    
    
    W A Owens
    
    
    
    
    
    
    
    
    
    
    D W Christman
    
    
    
    
    
    
    
    
    
    
    Other key management personnel of the groupI A Gillespie
    
    
    
    
    
    
    
    
    
    
    J D MacDonald
    
    
    
    
    
    
    
    
    
    
    G L Bergeron III
    
    
    
    
    
    
    
    
    
    
    J C Chahansky
    
    
    
    
    
    
    
    
    
    
    C A Vehlow
    
    
    
    
    
    
    
    
    
    
    200,293,170
    
    
    
    
    
    
    
    200,293,170
 (e) Loans to key management personnel
  F-42




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 24. Key management personnel disclosures (continued)
 (f) Other transactions and balances with key management personnel
   2007
    
    2006
    
    2005A$
    
    A$
    
    A$T J ODwyer
    
    
    6,666
    
    
    
    6,666
    
    
    
    W A Downing
    
    
    
    
    
    
    
    
    
    
    44,560D L Alspach
    
    
    
    
    
    
    15,000
    
    
    
    75,000B S McComish
    
    
    
    
    
    
    1,667
    
    
    
    J M Crunk
    
    
    10,000
    
    
    
    14,879
    
    
    
    P D Jonson
    
    
    15,000
    
    
    
    
    
    
    
    J R Nicholls
    
    
    4,167
    
    
    
    
    
    
    
    35,833
    
    
    
    38,212
    
    
    
    119,560
 
 25. Remuneration of auditors
  (a) Audit Services
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$PricewaterhouseCoopersAudit and review of financial reports
    
    
    332,000
    
    
    
    
    
    
    
    Non-PricewaterhouseCoopersAudit and review of financial reports
    
    
    353,458
    (1)
    
    
    387,550
    (2)
    
    
    385,410
    (3)685,458
    
    
    
    387,500
    
    
    
    384,410
 
 (1)
    
    Relates to audit services performed during 2007 for the 2006 financial year.(2)
    
    Includes audit services performed during 2006 for the 2005 financial year plus some 2006 audit
services.(3)
    
    Includes audit services performed during 2005 for the 2004 financial year plus some 2005 audit
services. (b) Non-audit Services
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$PricewaterhouseCoopersNon-audit services
    
    
    
    
    
    
    
    
    
    
    Non-PricewaterhouseCoopersNon-audit services
    
    
    
    
    
    
    132,726
    
    
    
    31,500
    
    
    
    132,726
    
    
    
    31,500
 
 26. Commitments
 (a) Operating leases
  2007
    
    2006
    
    2005A$
    
    A$
    
    A$Within one year
    
    
    443,858
    
    
    
    459,785
    
    
    
    468,068After one year but not more than 5 years
    
    
    476,093
    
    
    
    966,503
    
    
    
    1,085,904More than 5 years
    
    
    
    
    
    
    
    
    
    
    Total minimum lease payments
    
    
    919,951
    
    
    
    1,426,288
    
    
    
    1,553,972
 F-43




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 26. Commitments (continued)
 (b) Finance leases
   2007
    
    2006Present
    
    
    
    
    
    PresentMinimum
    
    value of
    
    Minimum
    
    value oflease
    
    lease
    
    lease
    
    leasepayments
    
    payments
    
    payments
    
    paymentsA$
    
    A$
    
    A$
    
    A$Within one year
    
    
    84,626
    
    
    
    63,907
    
    
    
    76,533
    
    
    
    50,335After one year but not more than 5 years
    
    
    232,487
    
    
    
    215,036
    
    
    
    286,075
    
    
    
    255,845Total minimum lease payments
    
    
    317,113
    
    
    
    278,943
    
    
    
    362,608
    
    
    
    306,180Less amounts representing finance charges
    
    
    (38,170
    )
    
    
    
    
    
    
    (56,428
    )
    
    
    278,943
    
    
    
    278,943
    
    
    
    306,180
    
    
    
    306,180
  
 27. Related party transactions
 Inter-company loans
     
 28. Subsidiaries
 Country of
    
    Percentage of equity held byIncorporation
    
    the Group
    
    Investment2007
    
    2006
    
    2005
    
    2007
    
    2006
    
    2005Metal Storm Inc.
    
    USA
    
    
    49
    %
    
    
    49
    %
    
    
    49
    %
    
    
    2,920
    
    
    
    2,920
    
    
    
    2,920ProCam Machine LLC
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    Metal Storm USA Limited
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    Digigun LLC
    
    USA
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    
  F-44




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 29. Events occurring after the balance sheet date
     
 30. Reconciliation of profit after income tax to net cash inflow from operating activities
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Net Loss
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )
    
    
    (10,914,600
    )Adjustments for:Depreciation and amortisation
    
    
    249,496
    
    
    
    184,837
    
    
    
    259,759Amortisation of options issued for short term loan
    
    
    
    
    
    
    467,000
    
    
    
    Accretion expense
    
    
    1,884,443
    
    
    
    757,866
    
    
    
    Amortisation of transaction costs
    
    
    865,465
    
    
    
    
    
    
    
    Net loss on disposal of discontinued operation
    
    
    
    
    
    
    
    
    
    
    658,605Net loss on disposal of intangible assets
    
    
    
    
    
    
    1,722
    
    
    
    Foreign exchange differences
    
    
    17,495
    
    
    
    10,213
    
    
    
    27,022Impairment loss on receivables
    
    
    
    
    
    
    
    
    
    
    Fair value of services paid for via issue of options
    
    
    136,549
    
    
    
    358,686
    
    
    
    409,728Fair value of services paid for via issue of shares
    
    
    
    
    
    
    25,031
    
    
    
    Fair value adjustment to conversion derivative
    
    
    (2,421,388
    )
    
    
    4,469,042
    
    
    
    Fair value adjustment to available-for-sale assets
    
    
    (2,080
    )
    
    
    (34,580
    )
    
    
    Impairment loss on available-for-sale assets
    
    
    220,800
    
    
    
    
    
    
    
    Interest received
    
    
    (1,354,047
    )
    
    
    (758,280
    )
    
    
    (602,949
    )Other
    
    
    758
    
    
    
    607
    
    
    
    Changes in assets and liabilities:(Increase) / decrease in trade and other receivables
    
    
    (1,379,346
    )
    
    
    275,352
    
    
    
    (412,492
    )(Increase) / decrease in inventories
    
    
    
    
    
    
    
    
    
    
    250,982(Increase) / decrease in prepayments
    
    
    11,009
    
    
    
    956,889
    
    
    
    451,569(Decrease) / increase in trade and other payables
    
    
    662,620
    
    
    
    431,492
    
    
    
    (700,396
    )(Decrease) / increase in provisions
    
    
    (139,836
    )
    
    
    164,549
    
    
    
    (55,049
    )(Decrease) / increase in other current liabilities
    
    
    (9,684
    )
    
    
    570,245
    
    
    
    93,260Net cash used in operating activities
    
    
    (11,255,896
    )
    
    
    (7,456,339
    )
    
    
    (10,534,561
    )
 F-45




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 
 31. Earnings per share
 (a) Basic and diluted earnings per share
 2007
    
    2006
    
    2005A$
    
    A$
    
    A$Loss for the year from continuing operations
    
    
    (9,998,150
    )
    
    
    (15,297,754
    )
    
    
    (9,312,210
    )Loss for the year attributable to members of the parent
    
    
    (9,998,150
    )
    
    
    (15,337,010
    )
    
    
    (10,914,600
    )Basic and diluted earnings per share from continuing
operations (cents per share)
    
    
    (1.69
    )
    
    
    (2.84
    )
    
    
    (1.78
    )Basic and diluted earnings per share (cents per share)
    
    
    (1.69
    )
    
    
    (2.85
    )
    
    
    (2.09
    )
 (b) Weighted average number of shares used as the denominator
 2007 Number
    
    2006 Number
    
    2005 NumberWeighted average number of
ordinary shares for basic
and diluted earning per
share
    
    
    590,721,934
    
    
    
    537,796,067
    
    
    
    521,970,978
 (c) Information concerning the classification of securities
  2007 Number
    
    2006 Number
    
    2005 NumberConvertible notes
    
    
    152,656,884
    
    
    
    173,478,153
    
    
    
    Listed options
    
    
    176,756,604
    
    
    
    176,800,824
    
    
    
    Unlisted options
    
    
    18,569,688
    
    
    
    18,100,938
    
    
    
    15,463,938
 
 32. Share-based payments
 (a) Employee share option plan
       F-46




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 32. Share-based payments (continued)
 (b) Options issued under the constitution
           2007
    
    2006
    
    2005Number
    
    WAEP
    
    Number
    
    WAEP
    
    Number
    
    WAEPOutstanding at the beginning of the year
    
    
    18,100,938
    
    
    
    0.31
    
    
    
    15,463,938
    
    
    
    0.30
    
    
    
    12,399,353
    
    
    
    0.28Granted during the year
    
    
    1,000,000
    
    
    
    0.19
    
    
    
    3,547,500
    
    
    
    0.40
    
    
    
    3,268,750
    
    
    
    0.40Expired during the year
    
    
    (56,250
    )
    
    
    0.54
    
    
    
    (910,500
    )
    
    
    0.57
    
    
    
    (204,165
    )
    
    
    0.87Outstanding at the end of the year
    
    
    19,044,688
    
    
    
    0.30
    
    
    
    18,100,938
    
    
    
    0.31
    
    
    
    15,463,938
    
    
    
    0.30Exercisable at the end of the year
    
    
    13,207,188
    
    
    
    0.41
    
    
    
    11,313,438
    
    
    
    0.42
    
    
    
    10,113,438
    
    
    
    0.32
  F-47




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 32. Share-based payments (continued)
 (b) Options issued under the constitution (continued)
  Exercise Price
    
    2007
    
    2006
    
    2005Expiry Date
    
    A$
    
    Number
    
    Number
    
    Number8 January 2006
    
    
    1.162
    
    
    
    
    
    
    
    
    
    
    
    62,5003 March 2006
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    55,0004 June 2006
    
    
    1.162
    
    
    
    
    
    
    
    
    
    
    
    62,5003 September 2006
    
    
    0.556
    
    
    
    
    
    
    
    
    
    
    
    12,5003 September 2006
    
    
    1.162
    
    
    
    
    
    
    
    
    
    
    
    62,50019 October 2006
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    118,00031 October 2006
    
    
    0.400
    
    
    
    
    
    
    
    
    
    
    
    500,00031 October 2006
    
    
    0.556
    
    
    
    
    
    
    
    
    
    
    
    12,50031 December 2006
    
    
    0.556
    
    
    
    
    
    
    
    
    
    
    
    25,00006 February 2007
    
    
    0.556
    
    
    
    
    
    
    
    12,500
    
    
    
    12,50014 April 2007
    
    
    0.556
    
    
    
    
    
    
    
    12,500
    
    
    
    12,50014 September 2007
    
    
    0.556
    
    
    
    
    
    
    
    12,500
    
    
    
    12,50014 December 2007
    
    
    0.556
    
    
    
    
    
    
    
    12,500
    
    
    
    12,50031 December 2007
    
    
    0.400
    
    
    
    
    
    
    
    6,250
    
    
    
    6,25031 March 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,500
    
    
    
    12,50004 June 2008
    
    
    0.388
    
    
    
    5,000
    
    
    
    5,000
    
    
    
    5,00030 June 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,500
    
    
    
    12,50030 September 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,500
    
    
    
    12,50031 December 2008
    
    
    0.556
    
    
    
    12,500
    
    
    
    12,500
    
    
    
    12,50014 January 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    125,00002 February 2009
    
    
    0.400
    
    
    
    100,000
    
    
    
    100,000
    
    
    
    100,00016 February 2009
    
    
    0.400
    
    
    
    14,438
    
    
    
    14,438
    
    
    
    14,43824 February 2009
    
    
    0.400
    
    
    
    81,250
    
    
    
    81,250
    
    
    
    81,25010 March 2009
    
    
    0.400
    
    
    
    8,250
    
    
    
    8,250
    
    
    
    8,25031 March 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,500
    
    
    
    62,50005 April 2009
    
    
    0.400
    
    
    
    29,500
    
    
    
    29,500
    
    
    
    29,50014 April 2009
    
    
    0.400
    
    
    
    1,100,000
    
    
    
    1,100,000
    
    
    
    1,100,00010 May 2009
    
    
    0.400
    
    
    
    25,000
    
    
    
    25,000
    
    
    
    25,00008 June 2009
    
    
    0.400
    
    
    
    25,000
    
    
    
    25,000
    
    
    
    25,00021 June 2009
    
    
    0.400
    
    
    
    3,225,000
    
    
    
    3,225,000
    
    
    
    3,225,00021 June 2009
    
    
    1.100
    
    
    
    40,000
    
    
    
    40,000
    
    
    
    40,00021 June 2009
    
    
    1.150
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,00030 June 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,500
    
    
    
    62,50005 July 2009
    
    
    0.400
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    75,00014 July 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    125,00004 September 2009
    
    
    0.400
    
    
    
    31,250
    
    
    
    31,250
    
    
    
    31,25030 September 2009
    
    
    0.400
    
    
    
    62,500
    
    
    
    62,500
    
    
    
    62,50014 October 2009
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    125,00024 November 2009
    
    
    0.400
    
    
    
    6,250
    
    
    
    6,250
    
    
    
    6,25004 December 2009
    
    
    0.400
    
    
    
    31,250
    
    
    
    31,250
    
    
    
    31,25007 December 2009
    
    
    0.400
    
    
    
    12,500
    
    
    
    12,500
    
    
    
    12,50031 December 2009
    
    
    0.400
    
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,00018 March 2010
    
    
    0.400
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    31 March 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,00021 June 2010
    
    
    0.400
    
    
    
    578,750
    
    
    
    578,750
    
    
    
    578,750
 F-48




---



##### Table of Contents



Metal Storm Limited
Notes to the financial statements (continued)
 32. Share-based payments (continued)
 (b) Options issued under the constitution (continued)
 Exercise Price
    
    2007
    
    2006
    
    2005Expiry Date
    
    A$
    
    Number
    
    Number
    
    Number24 June 2010
    
    
    0.400
    
    
    
    1,990,000
    
    
    
    1,990,000
    
    
    
    1,990,00030 June 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,00030 September 2010
    
    
    0.400
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,00031 December 2010
    
    
    0.400
    
    
    
    218,750
    
    
    
    218,750
    
    
    
    193,75031 March 2011
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    131,25028 April 2011
    
    
    0.400
    
    
    
    940,000
    
    
    
    940,000
    
    
    
    30 June 2011
    
    
    0.400
    
    
    
    818,750
    
    
    
    818,750
    
    
    
    131,25002 July 2011
    
    
    0.010
    
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,000,00030 September 2011
    
    
    0.400
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    100,00027 October 2011
    
    
    0.400
    
    
    
    506,250
    
    
    
    506,250
    
    
    
    31 December 2011
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    08 March 2012
    
    
    0.180
    
    
    
    1,000,000
    
    
    
    
    
    
    
    31 March 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    30 June 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    30 September 2012
    
    
    0.400
    
    
    
    193,750
    
    
    
    193,750
    
    
    
    31 December 2012
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    31 March 2013
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    30 June 2013
    
    
    0.400
    
    
    
    168,750
    
    
    
    168,750
    
    
    
    19,044,688
    
    
    
    18,100,938
    
    
    
    15,463,938
 F-49




---



##### Table of Contents



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




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit1.1
    
    Constitution of Metal Storm*4.1
    
    [not used]4.2
    
    [not used]4.3
    
    DSTO Technology License Agreement dated April 20, 2001, as amended (portions
omitted pursuant to a request for confidential treatment; non-public information
has been filed with the SEC)*4.4
    
    Employment Agreement of Dr. Lee Finniear***4.5
    
    Letter of Offer to Mr. Peter D. Faulkner***4.6
    
    Employment Agreement of Brett Farmer4.7
    
    [not used]4.8
    
    Employment Agreement of Dr. Joe Cronin***4.9
    
    Cash Advance Facility Agreement, dated June 16, 2006, between Metal Storm and
Harmony Investment Fund Limited**4.10
    
    Discretionary Share Option Scheme*4.11
    
    Convertible Note Trust Deed dated July 11, 2006***8.0
    
    List of Subsidiaries of Metal Storm Limited12.1
    
    Certification by the Chief Executive Officer of Metal Storm Limited in accordance
with Section 302 of the Sarbanes-Oxley Act12.2
    
    Certification by the Chief Financial Officer of Metal Storm Limited in accordance
with Section 302 of the Sarbanes-Oxley Act13.1
    
    Certification by the Chief
Executive Officer of Metal Storm Limited in accordance with Section 906 of the
Sarbanes-Oxley Act13.2
    
    Certification by the Chief Financial Officer of Metal Storm Limited in accordance with Section 906 of the
Sarbanes-Oxley Act
 
 *
    
    Incorporated by reference from our Registration Statement on Form 20-F filed on December 12,
2001, File No. 000-31212.**
    
    Incorporated by reference from our Annual Report on Form 20-F filed on July 17, 2006.***
    
    Incorporated by reference from our Annual Report on Form 20-F filed on May 18, 2007.