ARIKA RESOURCES LIMITED - Annual Report 2007

The Freedom of an Active Lifestyle. PORTLAND ORTHOPAEDICS LIMITED ANNUAL REPORT 2007

Notes Contents

	Our Vision	1
	Our Mission	2
	Chairman’s Review	4
	Our Products	6
	Chief Executive’s Review	8
	Corporate Governance Statement	14
	Remuneration Report	18
	Directors’ Report	22
	Income Statement	26
	Balance Sheet	27
	Cash Flow Statement	28
	Statement of Changes in Equity	29
	Notes to the Financial Statements
1	Statement of Signifcant Accounting Policies	30
2	Segment Information	34
3	Revenue	35
4	Loss from Ordinary Activities	36
5	Income Tax	37
6	Key Management Personnel Compensation	39
7	Employee Option Plans	42
8	Auditor’s Remuneration	43
9	Current Assets – Cash assets	44
10	Current Assets – Trade and other receivables	44
11	Current Assets – Inventories	44
12	Current Assets – Other current assets	44
13	Non-current Assets – Financial assets	44
14	Non-current Assets – Property, plant and equipment	45
15	Non-current Assets – Intangible assets	46
16	Current Liabilities – Trade and other payables	47
17	Current Liabilities – Short term borrowings	47
18	Liabilities – Provisions	47
19	Non-current Liabilities – Long term borrowings	48
20	Non-current Liabilities – Other	48
21	Issued Capital	48
22	Reserves	49
23	Financial Instruments	49
24	Cash Flow Information	51
25	Contingencies	51
26	Commitments for Expenditure	52
27	Related Party Transactions	53
28	Investments in Controlled Entities	53
29	Events Occurring after Reporting Date	53
30	Loss per Share	54
	Directors’ Declaration	55
	Auditor’s Declaration of Independence	56
	Independent Audit Report	57
	Shareholder Information	59
	Corporate Directory

Important Information

This financial report covers both Portland Orthopaedics Limited as an individual entity and the consolidated entity consisting of Portland Orthopaedics Limited and its controlled entities. Portland Orthopaedics Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is:

Portland Orthopaedics Limited

Unit 3, 44 McCauley Street Matraville NSW 2036

A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ Report on page 22.

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Our Vision.

Through all of our products, services and relationships, to allow orthopaedic patients to return to the freedom of an active lifestyle.

To inspire the development of creative technical solutions to meet the ongoing challenge of a changing health care environment.

To enable the surgeon to have confi dence in an improved outcome.

Simple things, like being able to do up your shoelaces, taking the dog for a walk, or riding a bike, have a huge effect on the quality of life for someone who has 31 year-old M-COR bi-lateral hip replacement candidate. suffered hip or knee pain.

Our Mission.

To design and develop a range of differentiated and innovative joint replacement products that are globally recognised as being of the highest quality and precision.

The integrity of our products, services and relationships will deliver to patients an unsurpassed ability to return to the freedom of an active lifestyle.

We will, through the practice of our core values, lead from the front to ensure that we are both inspirational to our customers and aspirational in our goal of enhancing shareholder value.

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Current Locations
Proposed Expansion
Surgeon – Michigan Surgeon – Wisconsin Surgeon – Florida Surgeon – Connecticut
“The M-COR modular “The M-COR has “The ability to have insert will minimize “Adjustable (modular)
hip system allows exceeded all my full anteversion and particle wear and hip stems, such as the
me (the surgeon) to expectations. The retroversion modularity therefore osteolysis. M-COR, provides the
customize the implant procedure is simple with the M-COR neck, The press-fi t combination surgeon with a level
for each patient in order to learn and execute. and establish offset has of the M-COR stem of control previously
to provide distal fi xation The instrumentation modernized femoral with its multiple neck unavailable and will
and proximal fi t while is well thought out. stem implants. The combinations together become the standard
accurately reproducing The modularity allows combination of the neck with the Equator Plus of care for total hip
hip offset and leg length.” me to recreate the offset and stem enables the shell should, due to its replacement. The
and leg length without surgeon to match the design have minimal M-COR is at the leading
having to compromise patient’s preoperative particle wear, minimal edge of this evolution.”
the placement of the anatomy every time. osteolysis, minimal
femoral component.” The Equator Plus metal polyethylene debris
backed polyethylene resulting in much
insert, or ceramic improved outcomes.”
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Chairman’s Review.

“ The successful change to our own distribution process and the benefi cial negotiation of the termination of the Plus agreement was implemented after the end of the fi nancial year. In the months since the transition, the Company has maintained and increased its penetration of the US market, expanding surgeon numbers and procedures undertaken.”

Dear shareholder,

The past year has been one of major change for your company. In our second year since listing we have achieved a number of key milestones, in the face of a number of challenges:

Capital Raising

Following the successful raising on the initial public offering (IPO) of just over $4 million and the raising of $3.23 million last year, your Company raised $6 million this year from a placement to nominated parties. These funds have provided the base from which the Company has been able to pursue penetration of the US market, to continue to develop new products for our product line, and to implement progress towards expansion into other key markets.

Market Overview

The successful market penetration followed the 16 March 2006 announcement that the Company had entered into an agreement with Plus Orthopaedics Inc for the exclusive distribution of the Company’s products in the United States.

With increasing surgeon acquisition, an increasing number of procedures, and an enhanced product range using the Portland brand, the announcement that Plus was to be acquired by multinational Smith and Nephew required a signifi cant revision of our US marketing strategy. The decision to distribute our products directly was made after careful consideration of the options available and with regard to the medium to long term objectives of the Company.

The successful change to our own distribution process and the benefi cial negotiation of the termination of the Plus agreement was implemented after the end of the fi nancial year. In the months since the transition, the Company has maintained and increased its penetration of the US market, expanding surgeon numbers and procedures undertaken.

Discussion with potential distributors in Japan and China continues, whilst in China the Company has continued to progress the previously announced lengthy product registration process. The Asian markets remain a key focus for expansion in the medium to long term and are a major target for the Company.

Product Range

The Company continues to progress in its goal of becoming a multiproduct Company. The Company has successfully launched two US Food and Drug Administration (FDA) approved products, the Equator Plus cup and the M-COR hip. Currently, testing and submission are underway for approval by the FDA and the Therapeutic Goods Administration (TGA) in Australia of a modular cemented hip product.

Financial Results

The Company’s sales revenue for the past year signifi cantly increased by 135% to $5.7 million, and fi nished the year with cash reserves of $3.9 million. The trading performance is expected to continue to improve during the next 12 months.

Company

In May 2007, the former Chairman, Ronald Rowland, retired, and I want to place on record the signifi cant contribution Ronald made to the Company, joining as a Director and Chairman immediately prior to the listing of the Company. I would like to thank Ronald for his counsel and advice, and strong leadership which made a major contribution to the Company’s progress.

We continue to receive support from our growing number of shareholders, and we thank them for that support.

Yours faithfully

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John R Lee Chairman 26 September 2007

“ Discussion with potential distributors in Japan and China continue, whilst in China the Company has continued to progress the previously announced lengthy product registration process. The Asian Markets remain a key focus for expansion in the medium to long term, and are a major target for the Company.”

David Sekel and his team have shown continued dedication and professionalism in their pursuit of the Company’s objectives, coping with a largely unexpected degree of change, yet continuing to progress the Company’s overall performance. On behalf of the Board and shareholders I thank them for their efforts, often in diffi cult times. I would also like to recognise the contribution of my fellow Directors, and thank them for their assistance, participation and involvement in the governance and operation of the Company.

Our Products.

1 2 3 M-COR Equator + DTC

Complete modularity with Portland’s unique neck component designed for better fi t and adjustability.

Patented liner assembly has solid metal backing potentially preventing wear particles escaping through screw holes.

Used for diffi cult and second time around hip replacement where patient suffers poor bone quality.

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“The M-COR modular hip system allows me (the surgeon) to customize the implant for each patient in order to provide distal fi xation and proximal fi t while accurately reproducing hip offset and leg length.”

Surgeon Michigan USA

Advanced Product Development M-COR Family Extension

Portland now offers a family approach to address both the primary and revision segments of the total hip replacement market.

The M-COR range is being extended to include modular cement, modular tapered style and a modular revision system.

M-COR M-COR TL Primary Press-Fit (Tapered Stem)

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M-COR M-COR Revision Press-Fit Cemented

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Chief Executive’s Review.

“ The Company has continued to lay fi rm foundations over the past year with the release of and growth in sales of the M-COR and Equator Plus ranges of product. We continue to research and develop new products and technologies which will all be characteristic of our goal to offer long lasting, high quality joint replacement products. Through our vision we will seek to maximise revenues from our existing product ranges and to partner strategically with others both in the US and in other countries to gain global credibility and acceptance in the next phase of our evolution.”

Dear shareholder,

It gives me great pleasure to present the 2007 Annual Report of Portland Orthopaedics.

The past 12 months have been exciting for the Portland team. In line with the milestones previously set two new products were released into the US market, the M-COR primary hip system on 18 September 2006 and the Equator Plus Acetabular Cup on 13 January 2007. Both products have experienced excellent up-take by surgeon users in the US and clinically they are performing extremely well, and precisely as was intended by the development team.

Orthopaedic Market

In 2006, revenues generated by sales of Orthopaedic products worldwide neared US$29 billion, an increase of 11% over 2005 global revenues. Reconstructive devices (joint replacement) formed the largest segment of the total orthopaedic revenue, being US$10.5 billion or 36%.

More than 2.3 million joint replacement procedures took place worldwide in 2006 – 1.2 million hips, 956,000 knees and 72,000 shoulders. US volumes of joint replacement procedures totalled 47% followed by Western Europe with 31% and Japan with an additional 7%.

Although most hip and knee replacement procedures today are performed on people over the age of 65, over the past few years a trend has emerged with younger patients undergoing joint replacement procedures. Younger patients are undergoing joint replacement more frequently. This has become practical with new technology and designs, such as Portland has developed, that are more amenable and applicable to high activity levels and long life expectancies.

In the past, orthopaedic surgeons would delay joint replacement in their younger patients due to concerns with the longevity of certain implant components and it is this segment that has driven the strategy of Portland Orthopaedics. Approximately 25% of total hip and knee joint replacements are actually repeat surgeries due to premature failure of the prosthetic joints by aseptic loosening. The product of bearing wear, microscopic particulate debris in the joint space, leads to bone irritation and secondary implant loosening. Repeat surgery to replacements is a major undertaking associated with signifi cant morbidity and risks.

Portland Orthopaedics’ core technology in the primary M-COR hip range gives full adjustability independently of version, height and offset, allowing the surgeon the option to ideally match the implant to the patient’s individual anatomy. The very proprietary technology of the Equator Plus cup also allows the surgeon to have minimal back wear, reducing the problem of secondary bone damage behind the cup.

It is the combination of a fully aligned hip stem with minimised cup wear that leads to a longer lasting implant.

Product Range

Previously we have outlined the transition process from initially a single product to a multi-product orthopaedics company.

Portland Orthopaedics has built a strong Clinical Advisory Board consisting of surgeons from six US states as well as Victoria and New South Wales. It is through these surgeons that focused and detailed data can be interrogated for both existing product performance and new product innovation.

In 2006/07 we have achieved the multi-product aim with the release of both the M-COR and the Equator Plus systems. Further products are under development, including a revision hip system and an uncemented hip stem based on the proprietary primary M-COR stem and neck technology. There is the knee system under development as both a primary and revision series product, and a new high tech ceramic cup liner.

The drive to build a full line joint replacement company remains, and has not stopped with the release of the new products. Together with the Clinical Advisory Board, the Portland Orthopaedics development teams are working on the additional ranges of both hip and knee replacements to integrate with our already established prostheses as both primary and revision systems focusing on longevity products. It is the Company’s intention to offer a family of products to the market so that we can satisfy all of a surgeon’s needs in hip and knee surgery. This is particularly important to being able to both attract and retain distributors around the globe. Portland is set to achieve this in the coming quarters through internal product development utilising our own intellectual property, as well as by partnering with orthopaedic companies to achieve this goal.

In the short term, Portland is working on carrying forward the momentum of the M-COR family by introducing the same key benefi ts of full adjustability into other subsets of the hip replacement market. Work continues on the unique modular cemented stem, the M-CS, as well as a fully modular early stage revision stem, the M-COR REV, each to be sold alongside the M-COR range.

US$29b

“In 2006, revenues generated by sales of orthopaedic products worldwide neared US$29 billion, an increase of 11% over 2005 global revenues.”

“In line with the milestones previously set two new products were released into the US market, the M-COR primary hip system on 18 September 2006 and the Equator Plus Acetabular Cup on 13 January 2007.”

Chief Executive’s Review. continued

“ In the short term, Portland is working on carrying forward the momentum of the M-COR family by introducing the same key benefi ts of full adjustability into other subsets of the hip replacement market. Work continues on the unique modular cemented stem, the M-CS as well as a fully modular early stage revision stem, the M-COR REV each to be sold alongside the M-COR range.”

By taking this family approach to product development, Portland not only will fully utilise the core patented technologies but will also offer to a surgeon user the benefi t of similar and hence familiar instrumentation and surgical technique, each designed to enable the surgeon to have confi dence in an improved outcome.

Distribution

The year has seen the establishment in the United States, of a solid and sound sales and distribution base. Initially with the exclusive US distributor Plus Orthopedics Inc, the US arm of the world’s sixth largest joint replacement company and then later on our own behalf.

Typically in the US market, small and medium companies will utilise a network of independent distributors or resellers across the US who are allowed to carry more than one orthopaedic company’s line of products as long as those lines do not compete with each other. This provides a low cost approach to building a sales network in the US market as the distributor is remunerated on a commission on sales basis.

The ideal situation for a manufacturer such as Portland is to have those independent distributors push Portland product lines to the exclusion of others. To be able to achieve this, a company needs to have suffi cient leverage through complete product line offerings so that a distributor can generate enough income to exclude all others. This is the objective of Portland for the future.

Plus, prior to the announcement by it of its acquisition in March 2007, was able to achieve this, as together with the Portland products, they were a full line company in the US.

Portland Orthopaedics, with the momentum carried over from the Plus agreement and key staff hires, has been able to retain and build its network to more than thirteen US based distributors. It is the focus and strategy of Portland Orthopaedics to continue to grow this fortuitous network across the US and to bring forward internal product development. Portland intends to further partnering arrangements to achieve full line product status and thus continue to build the leverage for exclusive distribution in the US market.

Whilst focus remains in the fore for the US market, application for registration is under way for other new and exciting global opportunities. By using the US as our fi rst point of reference Portland is strategically moving forwards to appointments of similar distribution arrangements in Australia, Europe and Asia in the coming quarters.

The Portland Team

This year (more importantly than before) the Company has operationally strengthened its management team with senior appointments in quality assurance, US sales and procurement. The Company has turned its primary focus and attention to lean production and sales and marketing, with the completion of development and release into the US market of the M-COR and Equator Plus ranges. It has not lost focus however on supporting further products coming from its now well established and proven R&D team.

With the evolution of the US based business away from a stocking distribution arrangement to that of indirect sales, the US team has expanded to meet the new demands. With the implementation of a principally outsourced production cycle, procurement and lean production have become an essential element in management’s focus to ensure that the company continues to operate to the highest quality standards, remaining fully compliant with ISO13485.

The contribution of the team overall to meet the objectives set has been exceptional, facing and meeting each demand and milestone in a professional, competent and inspirational manner.

Share Market

Portland shares traded for six months of the year in a band between $0.36 and $0.48. In December, a placement of $6 million at $0.36 per share was transacted.

The termination of the Plus Agreement coincided with a decline in the share price as low as $0.22 in May, however the share price traded back through support levels to end the fi nancial year at $0.32 as continued surgeon take up the M-COR and Equator Plus emerged in line with management expectations.

At the end of 2006, Portland had 979 shareholders. Through the placement and growing appreciation of the company, at 30 June 2007, our shareholders total 1,447.

Financial Results

Portland’s fi nancial performance in 2007 was highlighted by the signifi cant revenue growth in the US, a 398% increase on 2006. The cost of production as techniques previously deployed in R&D were transitioned to outsourced methods saw margins decline in the fi rst half of the year but recover in the second half where a gross margin of 40% for the full year was experienced. This was acceptable but improvements are expected.

A signifi cant one-off exceptional cost was incurred with the write-down of $1.1 million of stock. This treatment although extremely conservative, refl ected the emergence of the M-COR as a product with extensive application, making the DTC less applicable to a range of surgical cases.

The Board has determined not to book in excess of $4 million in tax losses that could be utilised next year to offset tax payable from operations.

398%

“ Portland’s fi nancial performance in 2007 was highlighted by the signifi cant revenue growth in the US, a 398% increase on 2006.”

“ Portland Orthopaedics has built a strong Clinical Advisory Board consisting of surgeons from six US states as well as Victoria and New South Wales.”

Our Key Financial Results are noted on page 12.

Chief Executive’s Review. continued

“ I look forward to 2008 with enthusiasm and together with the Board and management we will seek to deliver our objectives of allowing surgeons to have confi dence in improved outcomes.”

KEY FINANCIAL RESULTS	YEAR TO 30 JUNE 2007	YEAR TO 30 JUNE 2006	CHANGE
US Revenue	$3.54m	$0.71m	up 398%
Total Revenue	$5.72m	$2.45m	up 133%
Research Expenses	($1.13m)	($0.57)	up 98%
Exceptional Write-off	($1.10m)	–	–
Prof t Before Tax	($5.72m)	($2.91m)	down 96%
Basic EPS (cents)	(0.05)	(0.04)	–
Diluted EPS (cents)	(0.05)	(0.04)	–

KEY DATES

AGM 28th November

The Year Ahead

The Company has continued to lay fi rm foundations over the past year with the release of and growth in sales of the M-COR and Equator Plus ranges of product. We continue to research and develop new products and technologies which will all be characteristic of our goal to offer long lasting, high quality joint replacement products. Through our vision we will seek to maximise revenues from our existing product ranges and to partner strategically with others both in the US and in other countries to gain global credibility and acceptance in the next phase of our evolution.

I look forward to 2008 with enthusiasm and together with the Board and management we will seek to deliver our objectives of allowing surgeons to have confi dence in improved outcomes. Yours faithfully

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David Sekel

Chief Executive Offi cer 26 September 2007

Financial and Statutory Reports.

Corporate Governance Statement.

Compliance with ASX Best Practice Recommendations

The Board and Management of Portland Orthopaedics Limited (“Portland”) recognise the benefi ts of independence and support the ASX guidelines in this regard. However, it is not appropriate or effective for Portland, a small listed entity, to expand the size of the Board or its committees to the extent required to meet the following recommendations:

2.1 The majority of the Board should be independent Directors 2.4 The Board should establish a nomination committee 4.3 Structure of the audit committee

The Company’s main corporate governance practices are set out below. All these practices, unless otherwise stated, were in place for the whole of the fi nancial year.

1. Board of Directors

Board Composition and Charter

The names of the Directors of the company are:

Mr. John Lee Dr. Ronald Sekel OAM Mr. David Sekel Dr. Richard Gregson Mr. Rajeev Dhawan (as alternate to Richard Gregson)

Details of the Directors’ experience, expertise and qualifi cations are set out in the Directors’ Report.

The Board shall comprise Directors with broad skills and experience that will add value to the integrity and decision making effectiveness of the Board. The Directors elect the Chairman.

The Constitution of Portland provides that the minimum number of Directors is three and the maximum is nine unless the Company in a General Meeting determines otherwise. At the Company’s Annual General Meeting one third of all Directors (excluding the Managing Director) shall retire from offi ce and seek re-election.

The Board currently has two executive Directors and two nonexecutive Directors. Richard Gregson is not independent to the extent that more than 10% of the Company’s ordinary shares are held by an entity associated with him.

Responsibilities

The Board operates in accordance with the principles set out below. In developing and reviewing these principles, it has been recognised that the company has a tightly held shareholder base, with the top 10 of the Company’s 1,447 shareholders at the reporting date holding in excess of 78% of the equity in the Company.

The responsibilities of the Board include:
oversight of the Company, including its control and accountability systems;
development and approval of corporate strategies and performance objectives;
review and approval of the Company’s business plans, the annual budgets and fi nancial plans, including the resourcing of operating and capital requirements;
overseeing and monitoring organisational performance and the achievement of the Company’s strategic goals and objectives, including acquisitions and divestments;
identifi cation and appointment, and removal, of the Executives of the Company;
monitoring fi nancial performance including approval of the annual and half-year fi nancial reports and liaison with the Company’s auditors;
appointment and assessment of the performance of any offi ceholders of the Company;
ensuring there are effective management processes in place and approving major corporate initiatives;
enhancing and protecting the reputation of the organisation;
ensuring the signifi cant risks facing the Company have been identifi ed and appropriate and adequate control, monitoring and reporting mechanisms are in place; and
reporting to shareholders.

Responsibilities of the day-to-day management of the company are delegated to the Managing Director assisted by the management team. The Managing Director manages the Company in accordance with the strategy, plans and delegations approved by the Board. The Chairman is responsible for leading the Board, and ensuring that the Board activities are organised and effi ciently conducted.

Code of Conduct

Directors are required to comply with the Company’s Director’s code of conduct. The code of conduct requires that a Director:

must act honestly, in good faith and in the best interests of the Company as a whole;
has a duty to use due care and diligence in fulfi lling the functions of offi ce and exercising powers attached to that offi ce;
must use the powers of offi ce for a proper purpose, in the best interests of the Company as a whole;
must recognise that the primary responsibility is to the Company’s shareholders as a whole but should, where appropriate, have regard for the interests of all stakeholders of the Company;

must not make improper use of information acquired as a Director;
must not take improper advantage of the powers of a Director;
must not allow personal interest, or the interests of any associate person, to confl ict with the interests of the Company;
has an obligation to be independent in judgement and actions and to take all reasonable steps to be satisfi ed as to the soundness of all decisions taken by the Board;
acknowledges and accepts that confi dential information received in the course of his or her duties as a Director remains the property of the Company from which it was obtained and it is improper to disclose it, or allow it to be disclosed, unless that disclosure has been authorised by that company, or person from whom the information is provided, or is required by law;
should not engage in conduct likely to bring discredit upon the Company; and
has an obligation, at all times, to comply with the spirit, as well as the letter, of the law and with the principles of the Director’s code of conduct.

Directors’ Independence

In order to be considered independent, a Director must be a nonexecutive and:

not a substantial shareholder of the Company or an offi cer of, or otherwise associated directly with, a substantial shareholder of the Company;
not an offi cer of the Company or a related entity, or not been a Director after ceasing to hold such offi ce, within the last three years;
not been a principal of a professional advisor to the company or its controlled entities within the last three years;
not been a material supplier or customer of the Company or a related entity, or an offi cer of or otherwise associated with a material supplier or customer;
must have no material contractual relationship with the Company or a related entity other than as a Director of the Company; or
not been on the Board for a period that may be perceived to interfere materially with the Director’s ability to act in the best interests of the company.

Materiality for these purposes is determined on both quantitative bases, with an amount over 5% considered material in respect of the quantitative basis.

The Chairman of the Board, Mr. John Lee, is considered an independent non-executive Director.

Commitment

The number of Board and committee meetings held during the year and the number of meetings attended by each of the Directors is set out in the Directors’ Report.

Independent Professional Advice

Directors and Board committees have the right, in connection with their duties and responsibilities, to seek independent professional advice at the Company’s expense. Written approval of the Chairman is required prior to incurring an expense on behalf of the Company.

2. Corporate Reporting

The Chief Executive Offi cer and Chief Financial Offi cer of each of the business units of the Company have made the following

that the Company’s fi nancial reports are complete and present a true and fair view, in all material respects, of the fi nancial condition and operational results of the company and the Group; and
that the above statement is founded on sound systems of internal control and risk management which implement the policies adopted by the Board and that the Company’s risk management and internal controls are operating effectively in all material respects.

3. Board Committees

The Board has established an audit committee and a remuneration committee each with defi ned responsibilities.

All matters determined by the committee are submitted to the full Board as recommendations for Board decision. In addition the Board seeks to ensure that the membership at any point in time represents an appropriate balance between Directors with experience and knowledge of the Company and Directors with an external or fresh perspective.

Audit Committee

At the date of this report, the audit committee consists of Mr. John Lee (committee chairman) with each other Director participating in the functions of the committee.

The main responsibilities of the audit committee are to:

review and report to the Board on the annual and half-year fi nancial reports;
assist the Board in reviewing the effectiveness of the organisation’s internal control environment covering:
i) effectiveness and effi ciency of operations;
ii) reliability of fi nancial reporting; and
iii) compliance with applicable laws and regulations;

Corporate Governance Statement. continued

oversee the effective operation of risk management; and
recommend to the Board the appointment, removal and remuneration of the external auditor, and review the terms of his or her engagement, and the scope and quality of the audit.

In fulfi lling its responsibilities, the audit committee seeks regular reports from management and the external auditor. It will also meet with the external auditor at least twice a year and at other times as appropriate. The external auditor has a clear line of direct communication at any time to the chairman of the audit committee.

The audit committee has authority, within the scope of its responsibilities, to seek any information it requires from any employee or external party.

Remuneration Committee

The remuneration committee consists of the non-executive Directors, currently Mr. John Lee and Dr. Richard Gregson, and Mr. David Sekel, an executive Director. The Chairperson, Mr. John Lee, is the Chairman of the Board. The responsibilities of the committee include a review and recommendation to the Board on:

remuneration and incentive policies for the executive Directors;
remuneration and incentive policies for key executives;
the Company’s recruitment, retention and termination policies and procedures for senior management;
incentive schemes for employees; and
the remuneration framework for non-executive Directors.

The committee meets once annually or as otherwise required. The meeting is minuted and the minutes tabled at the next convenient Board meeting.

Nominations

Considering the size of the Company, the full Board has resolved that the functions and responsibilities of the nomination committees will, for the time being, be undertaken by the full Board. The responsibilities of the Board in respect of these functions are:

assess the necessary and desirable competencies of Board members;
review the Board’s succession plans;

4. Directors Share Trading

The purpose of this policy is to assist Directors and senior managers to avoid conduct that might be considered to be a criminal act of “insider trading”, and to establish appropriate rules for trading in the Company’s shares. For the purposes of this policy, trading in the Company’s shares would also extend to trading in other securities issued by the Company including options. This policy applies to trading in the Company’s shares by Directors, both executive and non-executive, to senior managers and to trading by their family members and associates.

The Board takes the matter of the purchase and sale of shares in the Company seriously and expects full compliance with this policy.

Directors and senior managers must not buy or sell shares in the Company when they are in possession of price sensitive information, which is not generally available to the market. Public companies are required to continuously disclose price sensitive information, so there is no particular period of time in which it can be automatically assumed that it is safe to trade in the Company’s shares. The only permissible time for a Director or senior manager to buy or sell the Company’s shares is when he or she is not in possession of price sensitive information.

Without limiting this principle, the following rules have been established to assist Directors and senior managers in fulfi lling their obligations:

Directors and senior managers must not engage in short term trading;
there is an absolute prohibition on any trading of shares in the two month period before the announcement of the full year results or if shorter, the period from the relevant fi nancial year end up to and including the time of the announcement;
there is an absolute prohibition on any trading of shares in the two month period before the announcement of the half-year results or, if shorter, the period from the relevant fi nancial period end up to and including the time of the announcement;
there is an absolute prohibition on any trading of shares in the two month period before the Annual General Meeting or other General Meeting of the Company;
there is an absolute prohibition on any trading of shares in the one month period before the announcement of any quarterly results or, if shorter, the period from the relevant fi nancial period end up to and including the time of the announcement;
evaluate the Board’s performance and remuneration; and
make recommendations for the appointment and removal of Directors.

The Board has completed an evaluation of its performance.

a Director or senior manager must not deal in any shares of the Company at any time when he or she is in possession of unpublished price sensitive information in relation to those shares, or when it has become reasonably probable that such information will be required to be disclosed to the market under the Listing Rules of ASX or otherwise where clearance to trade has not been given under this policy;
a Director or senior manager must not trade in the Company’s shares without advising the Chairman (or other person designated for this purpose) in advance and receiving written clearance before any dealing (including market dealing) in the Company’s shares. In his or her own case, the Chairman must advise the Board in advance at a Board meeting, or advise another designated Director, and receive clearance from the Board or designated Director, as appropriate;
a Director or senior manager will not be given clearance under this policy to deal in any securities during:
(i) a closed period;
(ii) any period when there exists any matter which constitutes unpublished price sensitive information in relation to the Company’s securities (whether or not the Director or senior manager has knowledge of such matter) and the proposed dealing would (if permitted) take place after the time when it has become reasonably probable that an announcement will be required in relation to that matter; or
(iii) any period when the person responsible for the clearance otherwise has reason to believe that the proposed dealing is in breach of this policy;
a Director or senior manager must seek to prohibit dealings on his or her behalf (as required by this policy) by an investment manager or other party connected with the Director or senior manager; and
a Director or senior manager must advise the Company Secretary in writing of the details of any completed transactions within 3 business days of the transaction in the format requested by ASX. The Company Secretary will be responsible for maintaining a record of disclosures.

The grant of options to a Director or senior manager under an Employee Share Option Plan may be permitted if such a grant could not be reasonably made at another time.

5. Shareholder Communication and Continuous Disclosure

This policy aims to ensure any price sensitive information is disclosed to the market prior to any other person or groups of persons. The policy aims to ensure shareholders and the market is provided with suffi cient information to make informed decisions about investments in Portland Orthopaedics Limited.

The Company promotes effective communication with shareholders and the market through:

the Annual and Half-yearly Reports;
disclosures made to ASX under the Continuous Disclosure regime;
notices and explanatory memoranda of the Annual General Meeting (“AGM”) and any Extraordinary General Meetings;
the AGM, where the auditor will be available to answer questions about the audit;
letters from the Chairman; and
the Company’s website.

6. The Environment, Health and Safety Management System (EHSMS)

Portland Orthopaedics Limited recognises the importance of environmental and occupational health and safety (OH&S) issues and is committed to the highest levels of performance. To help meet this objective the EHSMS was established to facilitate the systematic identifi cation of environmental and OH&S issues and to ensure they are managed in a structured manner.

This operates under the EHSMS to:

monitor its compliance with all relevant legislation;
continually assess and improve the impact of its operations on the environment;
encourage employees to actively participate in the management of environmental and OH&S issues;
work with trade associations representing the entity’s businesses to raise standards;
use energy and other resources effi ciently; and
encourage the adoption of similar standards by the entity’s principal suppliers, contractors and distributors.

Information on compliance with signifi cant environmental regulations is set out in the Directors’ Report.

Remuneration Report.

This report sets out information in respect of the Company’s remuneration policies in respect of Directors, and executives, including the relationship between remuneration policies and the Company’s performance; prescribed details of Directors and executives; details of securities included in the remuneration of Directors and executives; and details of the contracts under which these persons are employed.

Principles Used to Determine the Nature and Amount of Remuneration

The objective of the Company’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for shareholders, and conforms to market best practice for the delivery of reward.

The Board has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the Company and which is transparent.

The alignment of the remuneration policy to shareholders’ interests focuses on maintaining sustainable growth in shareholder wealth through growth in share value and delivering returns on assets employed.

The alignment of the remuneration policy to participants’ interests is based on providing a clear understanding for the earning of rewards, refl ects contribution to shareholder wealth and rewards experience and contribution.

The framework provides for fi xed pay with a blend of short and long term incentives.

Non-executive Directors

Fees and payment to non-executive Directors refl ect the demands, which are made on, and the responsibilities of, being a Director of a listed company. Remuneration for non-executive Directors consists of annual fees and the fees paid to nonexecutive Directors are reviewed annually. The Board as a whole has responsibility for reviewing and recommending the level of remuneration for non-executive Directors.

Directors’ fees have been determined on the basis that they are appropriate and in line with the market, and to ensure the Company’s Board is comprised of skilled and well-qualifi ed Directors.

Non-executive Directors’ fees are determined within the aggregate annual fees pool limit of $300,000. The fees paid to non-executive Directors are inclusive of committee fees. Non-executive Directors do not participate in the Company’s Employee Share Option Plan (“ESOP”).

Executive Pay

The executive pay and reward framework has four components:

base pay and benefi ts;
long term incentives through participation in the Company’s ESOP;
bonuses for the achievement of preset targets where appropriate; and
other remuneration such as superannuation.

The combination of these components forms the executive’s total remuneration package.

Base pay is structured as a total employment cost package, which may be delivered as a combination of cash and prescribed non-

Base pay for executives is reviewed annually to ensure remuneration levels are competitive with market rates. There are no guaranteed base pay increases included in senior executives’ contracts.

Bonuses are paid to individual executives upon the achievement of predetermined personal objectives. The basis of the bonus is tied to the role occupied by the executive and the corporate outcomes that he can infl uence. The appropriate targets and key performance indicators are set annually as part of the Company’s budgeting procedures.

The company provides equity-linked incentives to executives through the Company’s ESOP. Information on the Company’s ESOP is set out below.

Details of Remuneration

Details of remuneration provided to Directors and the highest paid executives are set out in the table below. The cash bonuses are dependant on the satisfaction of performance conditions and hurdles relating to fi nancial performance and corporate objectives. All other elements of remuneration are not directly related to performance.

2007	PRIMARY			RETIREMENT
	BASE			SUPER-	EQUITY
NAME	FEE/PAY	BENEFITS	BONUS	ANNUATION	OPTIONS	TOTAL
Non-executive Directors
Mr. John Lee	44,861	–	–	–	–	44,861
Dr. Richard Gregson	30,000	–	–	–	–	30,000
Mr. Ronald Rowland (to 2/5/07)	41,666	–	–	–	–	41,666
Executive Directors
Mr. David Sekel, Managing Director	287,862	9,271	75,000	16,564	54,717	443,414
Dr. Ronald Sekel OAM,CTO	169,000	–	–	11,730	181,244	361,974
Total Directors	573,389	9,271	75,000	28,294	235,961	921,915
Other executives
Mr. David Edwards,
CFO and Company Secretary*	145,569	–	–	13,101	13,362	172,032
Mr. John Green, VP Global Sales	274,011	11,247	29,940	–	33,984	349,182
Dr. Simone Machan,
Operations Manager	74,161	–	15,000	6,674	2,483	98,318
Mr.James Wynn,CFO(from 30/4/07)*	36,000	–	–	–	–	36,000
Total other executives	529,741	11,247	44,940	19,775	49,829	655,532

*Mr. David Edwards resigned on 11 May 2007 as CFO. His responsibilities were assumed by Mr. James Wynn who is employed on a six month contract at commercial market rates through JWI Advisory Group Pty Ltd. Mr. Wynn was also granted 100,000 options.

Mr. Rajeev Dhawan did not receive remuneration for his role as alternate Director.

2006	PRIMARY			RETIREMENT
	BASE			SUPER-	EQUITY
NAME	FEE/PAY	BENEFITS	BONUS	ANNUATION	OPTIONS	TOTAL
Non-executive Directors
Mr. Ronald Rowland AM, Chairman	33,333	–	–	–	–	33,333
Dr. Richard Gregson	30,000	–	–	–	–	30,000
Mr. John Lee	23,333	–	–	–	–	23,333
Dr. Geoff Brooke	6,576	–	–	–	–	6,576
Executive Directors
Mr. David Sekel, Managing Director	232,638	9,005	30,000	16,564	–	288,207
Dr. Ronald Sekel OAM,CTO	161,853	–	–	11,730	90,622	264,205
Total Directors	487,733	9,005	30,000	28,294	90,622	645,654
Other executives
Mr. David Edwards,
CFO and Company Secretary	143,658	–	20,000	13,829	7,136	184,623
Mr. John Green, VP Global Sales	233,460	24,037	26,799	–	16,992	301,288
Ms.JudyLindstrom,COO	32,467	1,459	–	–	–	33,926
Total other executives	409,585	25,496	46,799	13,829	24,128	519,837

Mr. Ronald Rowland and Mr. John Lee were appointed on 1 November 2005, Dr. Geoff Brooke resigned on 27 October 2005. Mr. Quentin Jones and Mr. Rajeev Dhawan did not receive remuneration for their roles as alternate Directors. Ms. Judy Lindstrom’s employment ceased on 31 October 2005.

Remuneration Report. continued

Service Agreement

Remuneration and other terms of employment for the Directors and executives named in the table below are formalised in service agreements. Details of current service agreements in place with Directors or executives of the Company are set out in the table below.

NAME		TERM OF AGREEMENT	TERMINATION NOTICE	TERMINATION PAYMENT
Mr. John Lee		Unspecif ed	Unspecif ed	Unspecif ed
Dr. Richard Gregson		Unspecif ed	Unspecif ed	Unspecif ed
Mr. David Sekel, Managing Director	3	years to November 2009	Unspecif ed	Unspecif ed
Dr. Ronald Sekel OAM, CTO	3	years to November 2009	Unspecif ed	Unspecif ed
Mr. James Wynn, CFO	6 months to 31 October 2007		1 month notice by either party	1 month + $10,000
Mr. John Green, VP Global Sales		Unspecif ed	3 months	Unspecif ed
Dr. Simone Machan,Operations Manager		Unspecif ed	1 month	Unspecif ed

Share Based Compensation

The ESOP is designed to encourage retention of key employees, provide an incentive for future performance and align employee interests with shareholder value in the future.

Options are exercisable:

at predetermined exercise dates; and
at variable exercise prices which were calculated having consideration to the share price of the company at the time the issue of options was approved by the Board.

Provided that an option holder is an employee of the Company, the options held by that option holder will vest and become exercisable in accordance with their terms of issue during the exercise period determined by the Board. Options granted under the Company’s ESOP carry no dividend or voting rights. When exercised, each option is convertible to one ordinary share.

The terms and conditions of each grant of options affecting remuneration in this or future reporting periods are as follows:

Options granted under the plan are for no consideration.

			VALUE PER
		GRANT	OPTION AT	EXERCISE	DATE	EXPIRY
NAME	NUMBER	DATE	GRANT DATE	PRICE	EXERCISABLE	DATE
Mr. David Sekel	500,000	10 November 2006	0.1937	0.48	From 10 November 2007	8 November 2016
Mr. David Sekel	500,000	10 November 2006	0.1730	0.60	From 10 November 2007	8 November 2016
Mr. David Sekel	500,000	10 November 2006	0.1258	1.00	From 10 November 2007	8 November 2016
Mr. John Green	375,000	1 December 2005	0.1409	0.30	From 1 December 2006	1 December 2015
Mr. John Green	375,000	1 December 2005	0.1310	0.35	From 1 December 2006	1 December 2015
Dr. Ronald Sekel OAM	2,000,000	1 December 2005	0.1409	0.30	From 1 December 2006	1 December 2015
Dr. Ronald Sekel OAM	2,000,000	1 December 2005	0.1310	0.35	From 1 December 2006	1 December 2015
Dr. Simone Machan	50,000	21 November 2006	0.2234	0.36	From 21 November 2007	19 November 2016
Mr. David Edwards	42,970	29 April 2003	0.0382	1.63	From 29 April 2004	29 April 2013
Mr. David Edwards	125,000	21 December 2005	0.1658	0.30	From 21 December 2006	20 December 2015
Mr. David Edwards	125,000	21 December 2005	0.1549	0.35	From 21 December 2006	20 December 2015
Mr.James Wynn	100,000	30 April 2007	0.2243	0.39	From 30 April 2008	28 April 2017

Equity Instrument Disclosures Relating to Directors and Executives

Options Provided as Remuneration

Details of options over ordinary shares in the Company provided as remuneration to each Director and each executive are set out below:

							TOTAL
						VALUE OF	REMUNER ATION
	OPTIONS	OPTIONS	OPTIONS	CLOSING		OPTIONS	REPRESENTED
	BALANCE	LAPSED	GRANTED	BALANCE	TOTAL	GRANTED	BY OPTIONS
NAME	NUMBER	NUMBER	NUMBER	NUMBER	VESTED	$	%
Executive Directors
Mr. David Sekel, Managing Director	–	–	1,500,000	1,500,000	–	246,231	12
Dr. Ronald Sekel OAM,CTO	4,000,000	–	–	4,000,000	2,111,111	543,735	34
Total Directors	4,000,000	–	1,500,000	5,500,000	2,111,111	789,966
Other executives
Mr James Wynn, CFO	–	–	100,000	100,000	–	24,431	5
Mr. John Green, VP Global Sales	750,000	–	–	750,000	395,833	101,950	26
Dr. Simone Machan,Operations Manager	–	–	50,000	50,000	–	11,170	2
Total other executives	750,000	–	150,000	900,000	395,833	137,551

The assessed fair value at grant date of options granted to Directors and executives are allocated equally over the period from grant date to vesting date, and the amounts are disclosed in the remuneration tables. Fair values are independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.

Shareholdings of Directors and Executives

The number of ordinary shares in the company held during the year by each Director of the Company and each of the executives, including their personally related entities, is set out below:

			RECEIVED	SHARE
			DURING THE	CONSOLIDATION	RECEIVED	OTHER
			YEAR ON	ON CONVERSION	ON CONVERSION	CHANGES	BALANCE
		BALANCE AT	EXERCISE OF	OF PREFERENCE	OF PREFERENCE	DURING	AT END
NAME	START OF YEAR		OPTIONS	SHARES	SHARES	THE YEAR	OF YEAR
Non-executive Directors
Mr. John Lee		–	–	–	–	50,000	50,000
Dr. Richard Gregson		–	–	–	–	–	–
Executive Directors
Mr. David Sekel, Managing Director		3,360	–	–	–	–	3,360
Dr. Ronald Sekel OAM,CTO		7,804,436	–	–	–	254,307	8,058,743
Total Directors		7,807,796	–	–	–	304,307	8,112,103

Directors’ Report.

Your Directors present their report on Portland Orthopaedics Limited and its controlled entities for the year ended 30 June 2007.

Directors

The following persons were Directors of Portland Orthopaedics Limited (“the Company”) at any time during or since the end of the year.

Mr. John Lee (Chairman, appointed Chairman on 2 May 2007) Mr. Ronald Rowland AM (Chairman, retired 2 May 2007) Mr. David Sekel (Director and Chief Executive Offi cer) Dr. Ronald Sekel OAM (Director and Chief Technology Offi cer) Dr. Richard Gregson (Non-executive Director) Mr. Rajeev Dhawan (Alternate Director to Dr. Richard Gregson)

Company Secretary

Mr. David Edwards BEc, CA. Mr. Edwards has worked for Portland Orthopaedics Limited since May 2003 performing the role of Chief Financial Offi cer up until 11 May 2007. Mr. Edwards was appointed Company Secretary on 17 July 2003 and continues in that role at the date of this report.

Mr. James Wynn BEc (Syd), CA, MMgt (MGSM), MIMC, GAICD was also appointed as a Company Secretary on 27 August 2007 and holds the offi ce at the date of this report.

Principal Activities

The consolidated entity’s principal continuing activities during the year consisted of the research and development, manufacture and distribution of orthopaedic implants.

Signifi cant Changes in the State of Affairs

In December 2006, a placement of 17,142,857 shares at $0.35 per share was executed raising $6,000,000 pre raising costs.

In September 2006, Portland launched the sale of the M-COR product in the USA and in January 2007, the launch of the Equator Plus Cup in the USA.

Apart from this, there were no other signifi cant changes in the state of affairs of the Company during the year.

Environmental Regulation

As the consolidated entity’s principal activity relates to the research and development, manufacture and distribution of orthopaedic implants there are no environmental regulations with which it must comply. The Company is not regulated by any signifi cant environmental regulations under a law of the Commonwealth or of a State or Territory.

Website

Review of Operations

The consolidated loss after income tax for the 12 months ended 30 June 2007 was $5,726,095 (2006: $2,911,182). For further analysis of results and operations, please refer to the Chief Executive’s Review.

Dividends

No dividends were paid during the year and no dividend is proposed.

Likely Developments and Expected Results of Operations

Further information on likely developments in the operations of the consolidated entities and the expected results of operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to the consolidated entities.

Information on Directors

John Robert Lee BCom, BEdu, MBA, FAICD, SA FIN Non-executive Chairman

Experience

Mr. John Lee, most recently Chairman of listed Panbio Limited, is a former Director and Chairman of listed companies; Online Advantage Limited and EcoAir Limited, and a Director of Crescent Gold Mining Limited, Richard Oliver International Pty Ltd. and Guild Insurance Limited. Mr. Lee is currently a Director of TMG International Pty Limited, BTF Pty Ltd and Milvella Limited.

Mr. Lee, as a Director and Chairman of listed and unlisted companies has had experience in capital raisings, corporate governance, strategic reviews, development of enhanced fi nancial reporting procedures, industrial relations strategies and senior management succession.

Mr. Lee, through his corporate consultancy Stockholder Relations, has advised clients on fi nancial structuring, capital raising, mergers, acquisitions and disposals. Mr. Lee has held various senior executive roles including Chief General Manager, Corporate Services, Woolworths Limited and General Manager, Personnel & Corporate Relations, Elders IXL Limited. These roles, and experience, together with listed company governance participation, have given him an excellent base from which to contribute to the Company.

Special Responsibilities

Mr. Lee is chairman of the audit and remuneration committee.

Former Australian Listed Company Directorships in the Last Three Years

Mr. Lee is a former Director of Panbio Limited.

Further information in relation to the Company is available on the company’s website at www.portland-orthopaedics.com

David Ford Sekel BEc, Dip Law Managing Director

Experience

Mr. David Sekel is a qualifi ed lawyer and accountant who began practice in 1989 as a management accountant and then later for eight years practised in Sydney as a corporate lawyer in a

His specifi c expertise in business and fi nance management has been used to develop the systems of administrative and fi nancial control for Portland and he is its Chief Executive Offi cer. David has been responsible for Portland attaining all registrations, including FDA, TGA and CE Mark, as well as for establishing and maintaining Portland’s distribution throughout the US, the Middle East and Australia.

Interest in Shares and Options

Dr. Sekel is the holder of 7,864,038 ordinary shares and 4,000,000 unlisted options that vest during the three year period commencing on 21 December 2006 and expire 10 years after the vesting date.

Special Responsibilities

Dr. Sekel is responsible for management of the research and development team.

Other Current Australian Listed Company Directorships None.

Dr. Richard Gregson BSc, MBA, PHD Non-executive Director

Experience

In 2003, David became Deputy Chair of the National Steering Committee for the Medical Device Network and he is a regular speaker at seminars on start up to commercialisation. He is a member of the Strategic Industry Leaders Group appointed for the Medical Device Action Agenda run by the Commonwealth Department of Industry.

Over seven years of involvement with Portland, David has developed a strong network of affi liations in the US within the orthopaedics industry in manufacturing, supply and sales. With a considerable part of his time spent in the US, he has remained focused on developing the sales and commercialisation of Portland’s existing and future product lines.

Interest in Shares and Options

The David Sekel Family Trust of which Mr. Sekel is a benefi ciary holds 3,360 ordinary shares. Mr. Sekel holds 1,500,000 unlisted options at various strike prices exercisable from 10 November 2007.

Special Responsibilities

Mr. Sekel is responsible for the day-to-day operations of the Company. He is also responsible for external aspects of the Company, including implementing Board strategy and communication with the investment community.

Other Current Australian Listed Company Directorships None.

Dr. Ronald Sekel OAM, MBBS, FRACS(orth), FRCSE Director and Chief Technology Offi cer

Experience

Dr. Sekel has been practising as a consultant orthopaedic surgeon for over 25 years. He is a former Affi liate Professor of Engineering at the University of New South Wales, a former Director of the NSW Bone Bank and has represented the Australian Orthopaedic Association on the federal government committee of prosthesis listing. Dr.Sekel has had 10 years of management experience at a Sydney based regional commuter and charter aircraft company and 30 years in the orthopaedic and academic worlds. He has a long and esteemed research and development track record in hip replacement and medical research.

Dr. Richard Gregson is Managing Partner of Equity Partners, a private equity fund management group that manages funds on behalf of institutional investors. Equity Partners invested in Portland in October 2001. He has served as a non-executive Director on the Boards of a number of private companies and prior to entering the private equity industry he was involved in the healthcare industry. He brings substantial business development, fi nance and commercial expertise to the Board.

Interest in Shares and Options

Dr. Gregson is the Managing Partner of Equity Partners Management Pty Limited (Equity Partners Management) and a Director of Equity Partners Two Pty Limited. Equity Partners Two Pty Limited, as trustee of the Equity Partners 2 Trust, is the holder of 41,985,653 shares. Equity Partners Management is entitled to be paid management fees based on the total amount of funds invested in the various trusts managed by it, and an incentive fee based upon the overall performance of the portfolios.

Special Responsibilities

Dr. Gregson is a member of the remuneration and audit committee.

Other Current Australian Listed Company Directorships Dr. Gregson is a Director of Energy Developments Limited and Traffi c Technologies Limited.

Mr. Rajeev Dhawan BCom, MBA Alternate Director

Experience

Mr. Rajeev Dhawan has an investment and corporate fi nance background with over 11 years experience with HambroGrantham/Colonial First State Private Equity.

Special Responsibilities

Mr. Dhawan has no special responsibilities.

Other Current Australian Listed Company Directorships Mr. Dhawan is a Director of the Snowball Group Limited and an alternate Director for Traffi c Technologies Limited.

Directors’ Report. continued

Meetings of Directors

During the year 12 formal meetings of the Directors were held (including committees of Directors but excluding strategy meetings). Attendances by each Director during the year were as follows:

	BOARD	MEETINGS	AUDIT	COMMITTEE	REMUNERATION	COMMITTEE
	NUMBER		NUMBER		NUMBER
ELIGIBLE TO		NUMBER	ELIGIBLE TO	NUMBER	ELIGIBLE TO	NUMBER
	ATTEND	ATTENDED	ATTEND	ATTENDED	ATTEND	ATTENDED
Mr. John Lee	12	12	2	2	–	–
Mr. Ronald Rowland	10	10	2	2	2	2
Mr. David Sekel	12	12	–	–	2	2
Dr. Ronald Sekel OAM	12	12	–	–	–	–
Dr. Richard Gregson	12	12	–	–	2	2
Mr. Rajeev Dhawan	nil	–	–	–	–	–

During the fi nancial year, the Company paid a premium of $40,831 (2006: $34,513) to insure the Directors and offi cers of the Company.

Matters Subsequent to the End of the Financial Year

There is no other matter or circumstance subsequent to the end of the fi nancial year that has signifi cantly affected or may signifi cantly affect:

(i) the consolidated entity’s operations in future fi nancial years; or
(ii) the results of those operations in future fi nancial years, or (iii) the consolidated entity’s state of affairs in future fi nancial years.

Proceedings on Behalf of the Company

No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings.

No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001 .

Non-audit Services

The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s experience with the Company and/or the consolidated entity is benefi cial and cost effective to the company. Details of the amount paid or payable to the auditor for audit and non-audit services are set out below.

The Board of Directors has considered the position, and, in accordance with the advice received from the audit committee, is satisfi ed that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 . The Directors are satisfi ed that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor’s independence requirements of the Corporations Act 2001 for the following reasons:

all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor; and
none of the services undermine the general principles relating to auditor independence as set out in Professional Statement F1, including reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as advocate for the Company or jointly sharing economic risk and rewards.

Auditor’s Independence Declaration

The auditor’s independence declaration for the year ended 30 June 2007 has been received and can be found on page 56.

	CONSOLIDATED	CONSOLIDATED	PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Grant Thornton NSW
Review of interim reports of the entity	30,000	25,277	30,000	25,277
Audit of f nancial reports of the entity – current year	58,000	52,000	58,000	52,000
Audit of f nancial reports of the entity – prior year	–	7,933	–	7,933
Independent Accountants’ Report – Initial Public Offering/Placement	5,000	56,070	5,000	56,070
Review of corporate registers	–	2,070	–	2,070
Taxation services	–	500	–	500
Other services –general advice and attendance at meetings	–	4,275	–	4,275
	93,000	148,125	93,000	148,125

Auditor

Grant Thornton NSW has been appointed as auditor in accordance with section 327 of the Corporations Act 2001 . This report is made in accordance with a resolution of the Directors.

==> picture [132 x 46] intentionally omitted <==

John Lee Chairman

Sydney 26 September 2007

==> picture [177 x 46] intentionally omitted <==

David Sekel Director

Sydney 26 September 2007

Income Statement. For the year ended 30 June 2007

		CONSOLIDATED	CONSOLIDATED		PARENT
		2007	2006	2007	2006
	NOTES	$	$	$	$
Revenue	3	5,738,980	2,446,510	5,246,790	2,762,432
Changes in inventories of f nished goods		(2,420,445)	(160,693)	(88,381)	(216,495)
Raw materials and consumables used		(948,220)	(536,582)	(3,164,698)	(271,928)
Employee benef ts expense		(3,146,715)	(1,717,591)	(1,492,873)	(1,278,415)
Depreciation and amortisation expenses	4	(445,092)	(347,356)	(243,693)	(203,505)
Finance costs	4	(46,128)	(55,261)	(8,624)	(16,464)
Share register and ASX fees		(64,596)	(73,194)	(64,596)	(73,194)
Legal and professional fees		(490,632)	(322,637)	(404,347)	(291,133)
Consulting fees		(265,435)	(90,943)	–	(72,755)
Facilities expenses		(955,499)	(366,431)	(527,087)	(331,434)
Travel and entertainment expenses		(383,143)	(329,898)	(144,291)	(191,712)
Sales, distribution and marketing expenses		(970,957)	(632,281)	(825,092)	(203,144)
Research expenses	4	(1,130,895)	(567,731)	(1,054,709)	(565,219)
Other expenses from ordinaryactivities		(197,318)	(157,094)	(106,325)	(99,297)
Loss before income tax expense		(5,726,095)	(2,911,182)	(2,877,926)	(1,052,263)
Income tax expense		–	–	–	–
Loss attributable to members of theparent entity		(5,726,095)	(2,911,182)	(2,877,926)	(1,052,263)
Loss per share for losses from continuing
operations attributable to the ordinary
equity holders of the company
Basic loss per share	30	(0.05)	(0.04)
Diluted loss per share	30	(0.05)	(0.04)

The above income statement should be read in conjunction with the accompanying notes.

Balance Sheet. As at 30 June 2007

		CONSOLIDATED	CONSOLIDATED		PARENT
		2007	2006	2007	2006
	NOTE	$	$	$	$
Current assets
Cash and cash equivalents	9	3,911,046	4,575,167	2,732,123	4,213,785
Trade and other receivables	10	315,682	202,687	1,701,659	19,468
Inventories	11	3,040,268	3,023,292	2,249,084	2,731,933
Other	12	165,885	97,745	164,885	96,293
Total current assets		7,432,881	7,898,891	6,847,751	7,061,479
Non-current assets
Financial assets	13	–	–	11,049,566	7,356,448
Property, plant and equipment	14	944,481	1,054,574	187,475	249,455
Intangible assets	15	3,982,964	3,288,375	1,784,552	1,081,557
Total non-current assets		4,927,445	4,342,949	13,021,593	8,687,460
Total assets		12,360,326	12,241,840	19,869,344	15,748,939
Current liabilities
Trade and other payables	16	1,548,063	1,856,153	2,533,196	1,386,713
Short term borrowings	17	181,698	223,881	10,950	17,315
Short termprovisions	18	263,137	198,603	146,502	100,092
Total current liabilities		1,992,898	2,278,637	2,690,648	1,504,120
Non-current liabilities
Long term borrowings	19	214,416	381,674	47,947	58,897
Long term provisions	18	56,759	44,275	34,810	29,656
Other	20	–	–	–	130,646
Total non-current liabilities		271,175	425,949	82,757	219,199
Total liabilities		2,264,073	2,704,586	2,773,405	1,723,319
Net assets		10,096,253	9,537,254	17,095,939	14,025,620
Equity
Issued capital	21	29,513,431	23,899,066	29,513,471	23,899,066
Options reserve	22	508,582	174,665	508,582	174,665
Translation reserve		332,790	(4,022)	–	–
Accumulated losses		(20,258,550)	(14,532,455)	(12,926,114)	(10,048,111)
Total equity		10,096,253	9,537,254	17,095,939	14,025,620

The above balance sheet should be read in conjunction with the accompanying notes.

Cash Flow Statement. For the year ended 30 June 2007

		CONSOLIDATED	CONSOLIDATED		PARENT
		2007	2006	2007	2006
	NOTE	$	$	$	$
Cash f ows from operating activities
Receipts from customers		5,735,114	2,406,006	(885,908)	586,897
Payments to suppliers and employees		(10,838,603)	(5,068,034)	(2,021,180)	(2,449,579)
Interest received		103,321	77,826	100,814	76,831
Finance costs		(46,128)	(55,261)	(8,624)	(16,464)
Other revenue		–	706,803	–	706,803
Net cash used in operatingactivities	24	(5,046,296)	(1,932,660)	(2,814,898)	(1,095,512)
Cash f ows from investing activities
Purchase of property, plant and equipment		(214,809)	(90,532)	(66,973)	(18,051)
Purchase of intangible assets		(808,662)	(863,030)	(375,776)	(347,776)
Net cash used in investingactivities		(1,023,471)	(953,562)	(442,749)	(365,827)
Cash f ows from f nancing activities
Loans to related parties		–	–	(3,819,815)	(2,534,174)
Loans from related parties		–	–	–	818,000
Proceeds from issue of shares		6,011,295	8,047,250	6,011,295	8,047,250
Share transaction costs		(396,930)	(987,506)	(396,930)	(987,550)
Repayment of borrowings		(208,719)	(157,392)	(18,565)	(50,697)
Net cashprovided byf nancingactivities		5,405,646	6,902,352	1,775,985	5,292,829
Net increase/(decrease) in cash held		(664,121)	(4,016,130)	(1,481,662)	3,831,490
Cash at beginningof f nancialyear		4,575,167	559,037	4,213,785	382,295
Cash at end of f nancialyear	9	3,911,046	4,575,167	2,732,123	4,213,785

The above cash fl ow statement should be read in conjunction with the accompanying notes.

Statement of Changes in Equity. For the year ended 30 June 2007

		ISSUED	RETAINED	OPTION	TRANSLATION
		CAPITAL	LOSSES	RESERVE	RESERVE	TOTAL
CONSOLIDATED ENTITY	NOTE	$	$	$	$	$
Balance at 1 July 2005		16,789,947	(11,621,273)	35,274	–	5,203,948
Foreign exchange arising on
retranslation of foreign operations		–	–	–	(4,022)	(4,022)
Net Income recognised directly in equity		–	–	–	(4,022)	(4,022)
Loss for theperiod		–	(2,911,182)	–	–	(2,911,182)
Total recognised income and expense
for the period		–	(2,911,182)	–	(4,022)	(2,915,204)
Shares issued in the period	21	8,096,625	–	–	–	8,096,625
Costs associated with the issue of shares	21	(987,506)	–	–	–	(987,506)
Movement in option reserve relating to
share basedpayment expense		–	–	139,391	–	139,391
Balance at 30 June 2006		23,899,066	(14,532,455)	174,665	(4,022)	9,537,254
Loss for theperiod		–	(5,726,095)	–	–	(5,729,095)
Total recognised income and expense
for the period		–	(5,726,095)	–	–	(5,726,095)
Shares issued in the period	21	6,011,295	–	–	–	6,011,295
Costs associated with the issue of shares	21	(396,930)	–	–	–	(396,930)
Movement in option reserve relating to
share based payment expense		–	–	333,917	–	333,917
Foreign exchange arising on retranslation
of foreign operations		–	–	–	336,812	336,812
Balance at 30 June 2007		29,513,431	(20,258,550)	508,582	332,790	10,096,253

The above statement of changes in equity should be read in conjunction with the accompanying notes.

		ISSUED	RETAINED	OPTION	TRANSLATION
		CAPITAL	LOSSES	RESERVE	RESERVE	TOTAL
PARENT ENTITY	NOTE	$	$	$	$	$
Balance at 1 July 2005		16,789,947	(8,995,848)	35,274	–	7,829,373
Loss for theperiod		–	(1,052,263)	–	–	(1,052,263)
Total recognised income and expense
for the period		–	(1,052,263)	–	–	(1,052,263)
Shares issued in the period	21	8,096,625	–	–	–	8,096,625
Costs associated with the issue of shares	21	(987,506)	–	–	–	(987,506)
Movement in option reserve relating to
share basedpayment expense		–	–	139,391	–	139,391
Balance at 30 June 2006		23,899,066	(10,048,111)	174,665	–	14,025,620
Opening adjustment		–	(37)	–	–	(37)
Loss for theperiod		–	(2,877,926)	–	–	(2,877,926)
Total recognised income and expense
for the period		–	(2,877,926)	–	–	(2,877,926)
Shares issued in the period	21	6,011,295	–	–	–	6,011,295
Costs associated with the issue of shares	21	(396,930)	–	–	–	(396,930)
Movement in option reserve relating to
share basedpayment expense		–	–	333,917	–	333,917
Balance at 30 June 2007		29,513,431	(12,926,074)	508,582	–	17,095,939

The above statement of changes in equity should be read in conjunction with the accompanying notes.

Notes to the Financial Statements. For the year ended 30 June 2007

Note 1. Statement of Signifi cant Accounting Policies

This general purpose fi nancial report has been prepared in accordance with the Australian Accounting Standards Board, including Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001 .

This report incorporates the assets and liabilities of all of the entities controlled by Portland Orthopaedics Limited (the “Company” or “parent entity”) as at 30 June 2007 and the results of all controlled entities for the year then ended. Portland Orthopaedics Limited and its controlled entities together are referred to in this fi nancial report as the “consolidated entity”, or “group”. Portland Orthopaedics is a listed public company, incorporated and domiciled in Australia.

Compliance with AIFRS

The fi nancial report of Portland Orthopaedics Limited and its controlled entities, and Portland Orthopaedics Limited, an individual parent entity, complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS), in their entirety. Compliance with AIFRS ensures that the fi nancial report also complies with International Financial Reporting Standards (IFRS) in their entirety.

The following is a summary of the material accounting policies adopted by the company in the preparation of the fi nancial report. The accounting policies have been consistently applied unless otherwise stated.

(a) Basis of Preparation

Reporting Basis and Conventions

The fi nancial report has been prepared on an accruals basis and is based on historical costs modifi ed by the revaluation of selected non-current assets and fi nancial liabilities for which the fair value basis of accounting has been applied.

Notwithstanding the net loss for the year and the accumulated losses for the company and the consolidated entity, the directors have performed a review of the cash fl ow forecasts and have considered the cash fl ow needs of the company and consolidated entity, including their ability to reduce the level of cash expenditure if required to do so. Based on this review, the Directors are satisfi ed that there are no material uncertainties that could cast doubt on the Company’s and consolidated entity’s ability to meet their debts as and when they fall due or payable for a period of at least 12 months from the date of this report and hence the going concern basis of accounting is appropriate and has been used in the preparation of this fi nancial report.

(b) Principles of Consolidation

A controlled entity is any entity Portland Orthopaedics Limited has the power to control the fi nancial and operating policies of so

A list of controlled entities is contained in Note 28 to the fi nancial statements. All controlled entities have a June fi nancial year-end.

All inter-company balances and transactions between entities in the consolidated entity, including any unrealised profi ts or losses, have been eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistencies with those policies applied by the parent entity.

Where controlled entities have entered or left the consolidated entity during the year, their operating results have been included/ excluded from the date control was obtained or until the date control ceased.

(c) Income Tax

The charge for current income tax expenses is based on the profi t for the year adjusted for any non-assessable or disallowed items. It is calculated using tax rates that have been enacted or are substantially enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the fi nancial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profi t or loss.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted against equity.

Deferred income tax assets are recognised to the extent that it is probable that future tax profi ts will be available against which deductible temporary differences can be utilised.

Deferred income tax assets relating to tax losses where there is a history of tax losses are only recognised to the extent that there is convincing evidence of future taxable profi ts with which to offset the tax losses.

The amount of benefi ts brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the economic entity will derive suffi cient future assessable income to enable the benefi t to be realised and comply with the conditions of deductibility imposed by the law.

Note 1. Statement of Signifi cant Accounting Policies continued

(d) Foreign Currency Transactions and Balances

Functional and Presentation Currency

The functional currency of each of the group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated fi nancial statements are presented in Australian dollars, which is the parent entity’s functional and presentation currency.

Transaction and Balances

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined.

Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash fl ow or net investment hedge.

Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the income statement.

Group Companies

The fi nancial results and position of foreign operations whose functional currency is different from the group’s presentation currency are translated as follows:

assets and liabilities are translated at year-end exchange rates prevailing at that reporting date;
income and expenses are translated at average exchange rates for the period; and
retained profi ts are translated at the exchange rates prevailing at the date of the transaction.

Exchange differences arising on translation of foreign operations are transferred directly to the translation reserve in the balance sheet.

(e) Revenue Recognition

Revenue is recognised as follows:

(i) Stocking Distributor

A sale is recorded when goods have been passed to the distributor pursuant to a sales order and the associated risks have passed to the carrier or distributor.

(ii) Consignment Distributor

Revenue is recognised on completion of the surgical procedure.

(iii) Grant Income

Grant income is recognised when the control of a right to receive grant funds has been attained, evidenced by confi rmation from the relevant government or other body. Grants relating to expense items are recognised as income over the periods necessary to match the grant income to the costs it is compensating. Grants relating to assets are credited to deferred income at fair value and are credited to income over the estimated useful life of the asset on a straight-line basis.

(iv) Interest Revenue

Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the fi nancial assets.

All revenue is stated net of the amount of goods and services tax (GST).

(f) Inventories

Finished goods, raw materials and work in progress are stated at the lower of cost and net realisable value. Cost comprises the cost of purchases including costs of bringing the inventories to location. In the case of manufactured goods, direct labour costs, direct material costs, variable overhead and a portion of fi xed overhead costs allocated on the basis of normal operating capacity are included.

(g) Plant and Equipment

Each class of plant and equipment is carried at cost or fair value less any accumulated depreciation and impairment losses.

The carrying amount of plant and equipment is reviewed annually by Directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash fl ows that will be received from the assets employment and subsequent disposal. The expected net cash fl ows have been discounted to their present values in determining recoverable amounts. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the income statement.

(h) Depreciation of Property, Plant and Equipment

Property, plant and equipment, are depreciated over their expected useful lives, using the reducing balance method.

The expected useful lives are as follows:

The expected useful lives are as follows:
Manufacturing Equipment	2–6 years
Motor Vehicles Off ce Equipment	4 years 2–5 years
Fixtures and Fittings	2–5 years

Instrument sets are depreciated on a straight-line basis. The expected useful life of instrument sets is between 2 and 5 years.

Notes to the Financial Statements. For the year ended 30 June 2007 continued

(i) Leases

Leases of fi xed assets where substantially all the risks and benefi ts incidental to the ownership of the asset, but not the legal ownership that is transferred to entities in the economic entity,

Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period.

Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term.

Lease payments for operating leases, where substantially all the risks and benefi ts remain with the lessor, are charged as expenses on a straight-line basis, in the periods in which they were incurred, unless another method is more representative of the time pattern if the users benefi t.

Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term.

(j) Intangibles

(i) Goodwill

Goodwill and goodwill on consolidation are initially recorded at the amount by which the purchase price for a business or for an ownership interest in a controlled entity exceeds the fair value attributed to its net assets at date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

(ii) Patents and Intellectual Property

Patents are recognised at cost of acquisition. Patents have a fi nite life and are carried at cost less any accumulated amortisation and any impairment losses. Patents are amortised over their useful lives ranging from three to fi ve years.

Intellectual property is valued at cost. The Directors have considered the legal and commercial factors likely to impact on the useful life of the intellectual property and consider that it has an indefi nite useful life. Accordingly, no amortisation has been provided against the carrying amount, and the asset is subject to annual impairment testing.

(iii) Research and Development

Expenditure during the research phase of a project is recognised as an expense when incurred. Development costs are capitalised only when technical feasibility studies identify that the project will deliver future economic benefi ts and these benefi ts can be measured reliably. Development costs have a fi nite life and are amortised on a systematic basis matched to the future economic benefi ts over the useful life of the asset. Capitalised development costs are amortised over a 15 year period from the date that revenue is derived from the relevant asset.

(iv) Licences

Licences are recognised at cost of acquisition. Licences have a fi nite life and are carried at cost less any accumulated amortisation and any impairment losses. Licences are amortised over a fi ve year period from the date that revenue is derived from the relevant asset.

(k) Borrowings

Loans are carried at their principal amounts, which represent the present value of future cash fl ows associated with servicing the debt. Interest is accrued over the period it becomes due and is recorded as part of other creditors.

On issue of convertible notes, the fair value of the liability component, being the obligation to make future payments of principal and interest to note holders, is calculated using a market interest rate for an equivalent non-convertible note. The residual amount, representing the fair value of the conversion option, is included in equity as other equity securities with no recognition of any change in the value of the option in subsequent periods.

(l) Employee Benefi ts

Provision is made for the company’s liability for employee benefi ts arising from services rendered by employees to balance date. Employee benefi ts that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Employee benefi ts payable later than one year have been measured at the present value of the estimated future cash outfl ows to be made

(m) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within short term borrowings in current liabilities on the balance sheet.

Note 1. Statement of Signifi cant Accounting Policies continued

(n) Impairment of Assets

At each reporting date, the group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less cost to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the income statement.

Impairment testing is performed annually for goodwill and intangible assets with indefi nite lives.

Where it is not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the cash-generating unit to which the assets belongs.

(o) Financial Instruments

(i) Recognition

Financial instruments are initially measured at cost on trade date, which includes transaction costs, when the related contractual rights or obligations exist. Subsequent to initial recognition these instruments are measured as set out below.

(ii) Financial Assets at Fair Value through Profi t and Loss A fi nancial asset is classifi ed in this category if acquired principally for the purpose of selling in the short term or if so designated by management and within the requirements of AASB 139: Recognition and Measurement of Financial Instruments. Derivatives are also categorised as held for trading unless they are designated as hedges. Realised and unrealised gains and losses arising from changes in the fair value of these assets are included in the income statement in the period in which they arise.

(iii) Loans and Receivables

Loans and receivables are non-derivative fi nancial assets with fi xed or determined payments that are not quoted in an active market and are stated at amortised cost using the effective interest rate method.

(iv) Financial Liabilities

Non-derivative fi nancial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation.

(v) Fair Value

Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and options pricing models.

(vi) Impairment

At each reporting date the group assesses whether there is any objective evidence that a fi nancial instrument has been impaired. Impairment losses are recognised in the income statement.

(p) Comparative Figures

When required by Accounting Standards, comparative fi gures have been adjusted to conform to changes in presentation for the current fi nancial year.

(q) Goods and Services Tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Offi ce. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables are shown inclusive of GST.

Cash fl ows are presented in the cash fl ow statement on a gross basis, except for the GST component of investing and fi nancing activities, which are disclosed as operating cash fl ows.

(r) Critical Accounting Estimates and Judgements

The Directors evaluate estimates and judgements incorporated into the fi nancial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the group.

Key Estimates – Impairment

The group assesses impairment at each reporting date by evaluating conditions specifi c to the group that may lead to an impairment of assets. Where an impairment trigger exists, the recoverable amount of the asset is determined. Value-inuse calculations performed in assessing recoverable amounts incorporate a number of key estimates.

No impairment for intellectual property has been recognised for the year ended 30 June 2007. An impairment loss may be considered in 2008 if forecast sales, from certain products, were underachieved by 25% and this level of sales was expected to continue or decline further.

Notes to the Financial Statements. For the year ended 30 June 2007 continued

(s) Regulatory Disclosure

The following Australian Accounting Standards which have been issued or amended and which are applicable to the Company but which are not yet effective have not been adopted in preparation of the fi nancial statements at the reporting date:

AASB STANDARD AFFECTED	ISSUE DATE	OPERATIVE DATE
AASB 7: Financial Instrument Disclosures	August 2005	1January2007
AASB 8: OperatingSegments	February2007	1January2009
AASB 101: Presentation of Financial Statements(Amended)	October 2006	1January2007
AASB 123: BorrowingCosts(Amended)	June 2007	1January2009
AASB 2007-4: Amendments to [AASB 1, 2, 3, 4, 5, 6, 7, 102, 107, 108, 110,
112, 114, 116, 117, 118, 119, 120, 121, 127, 128, 129, 130, 131, 132, 133, 134,
136,137,138,139,141,1023 & 1038]	April 2007	1July2007
AASB 2007-5: Amendments to Australian Accounting Standard – Inventories
Held for Distribution byNot for Prof t Entities[AASB 102]	May2007	1July2007

The Company has not adopted these standards, as they do not yet apply to the Company statements. Based on management’s analysis of the standards, most will only affect disclosures and will have no fi nancial impact. Further to this, management has assessed the standards and does not believe they will have a material impact on the fi nancial statements.

Note 2. Segment Information

Business Segments

The Company operates in one business segment globally, being orthopaedic implants.

Geographical Segments

Although the consolidated entity’s divisions are managed on a global basis they operate in three main geographical areas, Australia, Europe and the United States.

Europe and the United States.
				INTER-SEGMENT
	AUSTRALIA	UNITED STATES	EUROPE	ELIMINATIONS	CONSOLIDATED
2007	$	$	$	$	$
Sales to external customers	1,488,180	3,543,760	430,500	–	5,462,440
Intersegmental sales	2,962,857	–	–	(2,962,857)	–
Revenue from operating activities	4,451,037	3,543,760	430,500	(2,962,857)	5,462,440
Revenue from non-operatingactivities	276,540	–	–	–	276,540
Total segment revenue	4,727,577	3,543,760	430,500	(2,962,857)	5,738,980
Segment result	(4,951,510)	(1,205,868)	431,283	–	(5,726,095)
Segment assets	16,998,363	529,803	798	(5,168,638)	12,360,326
Segment liabilities	502,982	7,135,185	95,971	(5,470,065)	2,264,073
Acquisitions of intangibles	814,779	–	–	–	814,779
Depreciation and amortisation expense	438,622	6,470	–	–	445,092
Share basedpayments	333,917	–	–	–	333,917

Note 2. Segment Information continued

Geographical Segments continued

Geographical Segments continued
				INTER-SEGMENT
	AUSTRALIA	UNITED STATES	EUROPE	ELIMINATIONS	CONSOLIDATED
2006	$	$	$	$	$
Sales to external customers	909,144	706,445	19,114	–	1,634,703
Intersegmental sales	465,775	–	–	(465,775)	–
Revenue from operating activities	1,374,919	706,445	19,114	(465,775)	1,634,703
Revenue from non-operatingactivities	811,807	–	–	–	811,807
Total segment revenue	2,186,726	706,445	19,114	(465,775)	2,446,510
Segment result	(2,506,195)	(424,101)	19,114	–	(2,911,182)
Segment assets	17,293,036	219,781	–	(5,270,977)	12,241,840
Segment liabilities	4,180,673	6,944,259	532,572	(8,952,918)	2,704,586
Acquisitions of non-current assets	1,301,472	2,741	–	–	1,304,213
Depreciation and amortisation expense	343,094	4,262	–	–	347,356
Share basedpayments	139,391	–	–	–	139,391

Inter-Segment Transfers

Segment revenues include transfers between segments on commercial terms and are eliminated on consolidation.

Note 3. Revenue

Note 3. Revenue
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Revenue from operating activities
Sale of goods	5,462,440	1,634,703	4,080,925	983,039
Revenue from outside the operating activities
Interest – other corporations	222,953	97,234	220,446	96,243
Interest – related parties	–	–	–	198,144
Government grants	–	412,445	–	412,445
R&D tax concession	–	294,358	–	294,358
Management fees	–	–	907,398	777,480
Other	53,587	7,770	38,020	723
	276,540	811,807	1,165,864	1,779,393
Revenue from ordinary activities	5,738,980	2,446,510	5,246,790	2,762,432

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Note 4. Loss from Ordinary Activities

Note 4. Loss from Ordinary Activities
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Expenses
Cost of sales	3,368,665	697,275	3,253,079	488,423
Depreciation
Instruments	69,956	115,166	69,956	115,166
Off ce equipment	33,686	13,936	24,784	9,833
Furniture and f ttings	18,719	10,476	8,329	7,658
Leasehold improvements	17,359	–	–	–
Motor vehicles	32,892	29,721	17,284	15,035
Manufacturingequipment	152,290	124,384	8,600	7,925
	324,902	293,683	128,953	155,617
Amortisation
Patents	61,509	42,646	61,509	42,646
Development costs	42,949	–	42,949	–
Software	15,732	11,027	10,282	5,242
	120,190	53,673	114,740	47,888
Finance costs
Interest and f nance chargespaid	46,128	55,261	8,624	16,464
	46,128	55,261	8,624	16,464
Rental expenses relating to operating leases
Minimum leasepayments	92,940	78,808	–	19,692
Total rental expenses	92,940	78,808	–	19,692
Research expenses	1,130,895	567,731	1,054,709	565,219
Foreign currencytranslationgains/(losses)	53,586	1,873	38,021	44
Write down of obsolete inventory	738,566	–	561,181	–
Share basedpayments	333,917	139,391	333,917	139,391

Note 5. Income Tax

Note 5. Income Tax
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Loss from ordinaryactivities before income tax expense	(5,726,095)	(2,911,182)	(2,877,926)	(1,052,263)
Income tax calculated at 30% (2006: 30%)	(1,717,829)	(873,355)	(863,377)	(315,679)
Tax effect of amounts not deductible:
Research and development	–	169,566	–	169,566
Placement/(IPO) costs	(65,606)	(63,097)	(65,606)	(63,097)
Non-deductible expenses	296,933	25,303	248,755	18,925
Income tax adjusted for amounts not deductible	(1,486,502)	(741,583)	(680,228)	(190,285)
Tax losses not brought to account as deferred tax assets	1,486,502	741,583	680,228	190,285
Recoupment of prior year tax losses not previously brought to account
Utilised in the current f nancialyear	–	–	–	–
Income tax expense	–	–	–	–
(a) Deferred tax assets not brought to account,
the benef ts of which will only be realised if the
conditions for deductibility in Note 1(c) occur:
Timing differences	123,090	34,761	74,922	24,258
Tax losses(at 30%)	4,334,600	2,848,098	1,583,127	902,899
	4,457,690	2,882,859	1,658,049	927,157

This benefi t for tax losses will only be obtained if:

(i) The consolidation entity derives future assessable income of a nature and of an amount suffi cient to enable the benefi t from the deduction for the losses to be realised; or

(ii) The losses are transferred to an eligible entity in the consolidated entity; and

(iii) The consolidated entity continues to comply with the conditions for deductibility imposed by tax legislation; and

(iv) No changes in tax legislation adversely affect the consolidated entity in realising the benefi t from the deductions for the losses.

Tax Consolidation Legislation

At the date of this report, the Directors have not adopted the tax consolidation legislation.

Note 6. Key Management Personnel Compensation

Principles Used to Determine the Nature and Amount of Remuneration

The Board has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the Company and which is transparent.

The alignment of the remuneration policy to shareholders’ interest focuses on maintaining sustainable growth in shareholder wealth through growth in share value and delivering returns on assets employed.

The alignment of the remuneration policy to participants’ interest is based on providing a clear understanding for the earning of rewards, refl ects contribution to shareholder wealth and rewards experience and contribution.

The framework provides for fi xed pay with a blend of short and long term incentives.

Notes to the Financial Statements. For the year ended 30 June 2007 continued

(a) Names and positions held of parent entity Directors and key management personnel in offi ce at any time during the fi nancial year are:

Parent entity Directors:

NAME	ROLE	PERIOD OF TENURE
Mr. Ronald Rowland AM	Chairman – non-executive	1 July 2006 until 2 May 2007
Mr. David Sekel	Managing Director – executive	All year
Dr. Ronald Sekel OAM	Chief Technology Off cer – executive	All year
Dr. Richard Gregson	Director – non-executive	All year
Mr. John Lee	Director – non-executive	All year
Mr. Rajeev Dhawan	Alternate Director	Allyear
Key management personnel:
NAME	ROLE	PERIOD OF TENURE
Mr. David Edwards	CFO and Company Secretary	Until 11 May 2007
Mr. James Wynn	CFO	30 April 2007 to 30 June 2007
Mr. John Green	VP Global Sales	All year
Dr. Simone Machan	Operations Manager	Allyear

Other Transactions with Directors and Key Management Personnel

On 4 April 2006, Portland Orthopaedics Limited entered a lease agreement for an item of manufacturing equipment from Dr. Ronald Sekel. The lease agreement is at arm’s length and on normal commercial terms. On inception of the lease, the equipment had a value of $306,900, with monthly lease payments of $7,745 over a term of 48 months.

Details of Remuneration

Details of remuneration provided to Directors and the highest paid executives are set out in the table below. The cash bonuses are dependant on the satisfaction of performance conditions. All other elements of remuneration are not directly related to performance.

Mr Ronald Rowland resigned as Chairman on 2 May 2007. Mr David Edwards resigned as CFO on 11 May 2007.

2007	PRIMARY			RETIREMENT
	BASE FEE/			SUPER -	EQUITY
NAME	PAY	BENEFITS	BONUS	ANNUATION	OPTIONS	TOTAL
Non-executive Directors
Mr. John Lee	44,861	–	–	–	–	44,861
Dr. Richard Gregson	30,000	–	–	–	–	30,000
Mr. Ronald Rowland (to 2/5/07)	41,666	–	–	–	–	41,666
Executive Directors
Mr. David Sekel, Managing Director	287,862	9,271	75,000	16,564	54,717	443,414
Dr. Ronald Sekel OAM,CTO	169,000	–	–	11,730	181,244	361,974
Total Directors	573,389	9,271	75,000	28,294	235,961	921,915
Other executives
Mr. David Edwards, CFO and
Company Secretary*	145,569	–	–	13,101	13,362	172,032
Mr. John Green, VP Global Sales	274,011	11,247	29,940	–	33,984	349,182
Dr. Simone Machan, Operations Manager 74,161		–	15,000	6,674	2,483	98,318
Mr.James Wynn,CFO(from 30/4/07)*	36,000	–	–	–	–	36,000
Total other executives	529,741	11,247	44,940	19,775	49,829	655,532

Mr. Rajeev Dhawan did not receive remuneration for his role as alternate Director.

Note 6. Key Management Personnel Compensation continued

Details of Remuneration continued

2006	PRIMARY			RETIREMENT
	BASE FEE/			SUPER -	EQUITY
NAME	PAY	BENEFITS	BONUS	ANNUATION	OPTIONS	TOTAL
Non-executive Directors
Mr. Ronald Rowland AM, Chairman	33,333	–	–	–	–	33,333
Dr. Richard Gregson	30,000	–	–	–	–	30,000
Mr. John Lee	23,333	–	–	–	–	23,333
Dr. Geoff Brooke	6,576	–	–	–	–	6,576
Executive Directors
Mr. David Sekel, Managing Director	232,638	9,005	30,000	16,564	–	288,207
Dr. Ronald Sekel OAM,CTO	161,853	–	–	11,730	90,622	264,205
Total Directors	487,733	9,005	30,000	28,294	90,622	645,654
Other executives
Mr. David Edwards, CFO and
Company Secretary	143,658	–	20,000	13,829	7,136	184,623
Mr. John Green, VP Global Sales	233,460	24,037	26,799	–	16,992	301,288
Ms.JudyLindstrom,COO	32,467	1,459	–	–	–	33,926
Total other executives	409,585	25,496	46,799	13,829	24,128	519,837

Mr. Ronald Rowland and Mr. John Lee were appointed on 1 November 2005. Dr. Geoff Brooke resigned on 27 October 2005. Mr. Quentin Jones and Mr. Rajeev Dhawan did not receive remuneration for their roles as alternate directors. Ms. Judy Lindstrom’s employment ceased on 31 October 2005.

Service Agreement

NAME		TERM OF AGREEMENT	TERMINATION NOTICE	TERMINATION PAYMENT
Mr. John Lee		Unspecif ed	Unspecif ed	Unspecif ed
Dr. Richard Gregson		Unspecif ed	Unspecif ed	Unspecif ed
Mr. David Sekel, Managing Director	3	years to November 2009	Unspecif ed	Unspecif ed
Dr. Ronald Sekel OAM, CTO	3	years to November 2009	Unspecif ed	Unspecif ed
Mr. James Wynn, CFO	6 months to 31 October 2007		1 month notice by either party	1 month + $10,000
Mr. John Green, VP Global Sales		Unspecif ed	3 months	Unspecif ed
Dr. Simone Machan,Operations Manager		Unspecif ed	1 month	Unspecif ed

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Share Based Compensation

The ESOP is designed to encourage retention of key employees, provide an incentive for future performance and align employee interests with shareholder value in the future.

Options are exercisable:

at predetermined exercise dates; and
at variable exercise prices which were calculated having consideration to the share price of the company at the time the issue of options was approved by the Board.

Provided that an option holder is an employee of the company, the options held by that option holder will vest and become exercisable in accordance with their terms of issue during the exercise period determined by the Board. Options granted under the Company’s ESOP carry no dividend or voting rights. When exercised, each option is convertible to one ordinary share.

The terms and conditions of each grant of options affecting remuneration in this or future reporting periods are as follows: Options granted under the plan are for no consideration.

			VALUE PER
		GRANT	OPTION AT	EXERCISE	DATE	EXPIRY
NAME	NUMBER	DATE	GRANT DATE	PRICE	EXERCISABLE	DATE
Mr. David Sekel	500,000	10 November 2006	0.1937	0.48	From 10 November 2007	8 November 2016
Mr. David Sekel	500,000	10 November 2006	0.1730	0.60	From 10 November 2007	8 November 2016
Mr. David Sekel	500,000	10 November 2006	0.1258	1.00	From 10 November 2007	8 November 2016
Mr. John Green	375,000	1 December 2005	0.1409	0.30	From 1 December 2006	1 December 2015
Mr. John Green	375,000	1 December 2005	0.1310	0.35	From 1 December 2006	1 December 2015
Dr. Ronald Sekel OAM	2,000,000	1 December 2005	0.1409	0.30	From 1 December 2006	1 December 2015
Dr. Ronald Sekel OAM	2,000,000	1 December 2005	0.1310	0.35	From 1 December 2006	1 December 2015
Dr. Simone Machan	50,000	21 November 2006	0.2234	0.36	From 21 November 2007	19 November 2016
Mr. David Edwards	42,970	29 April 2003	0.0382	1.63	From 29 April 2004	29 April 2013
Mr. David Edwards	125,000	21 December 2005	0.1658	0.30	From 21 December 2006	20 December 2015
Mr. David Edwards	125,000	21 December 2005	0.1549	0.35	From 21 December 2006	20 December 2015
Mr.James Wynn	100,000	30 April 2007	0.2243	0.39	From 30 April 2008	28 April 2017

Note 6. Key Management Personnel Compensation continued

Equity Instrument Disclosures Relating to Key Management Personnel

Options Provided as Remuneration Details of options over ordinary shares in the Company provided as remuneration to each executive are set out below:

							REMUNER-
						VALUE OF	ATION
	OPTIONS	OPTIONS	OPTIONS	CLOSING		OPTIONS	REPRESENTED
	BALANCE	LAPSED	GRANTED	BALANCE	TOTAL	GRANTED	BY OPTIONS
NAME	NUMBER	NUMBER	NUMBER	NUMBER	VESTED	$	%
Executive Directors
Mr. David Sekel, Managing Director	–	–	1,500,000	1,500,000	–	246,231	12
Dr. Ronald Sekel OAM,CTO	4,000,000	–	–	4,000,000	2,111,111	543,735	34
Total Directors	4,000,000	–	1,500,000	5,500,000	2,111,111	789,966
Other executives
Mr. James Wynn, CFO	–	–	100,000	100,000	–	24,431	5
Mr. John Green, VP Global Sales	750,000	–	–	750,000	395,833	101,950	26
Dr. Simone Machan,Operations Manager	–	–	50,000	50,000	–	11,170	2
Total other executives	750,000	–	150,000	900,000	395,833	137,551

The assessed fair value at grant date of options granted to Directors and executives is allocated equally over the period from grant date to vesting date, and the amounts are disclosed in the remuneration tables. Fair values are independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.

Shareholdings of Key Management Personnel

The number of ordinary shares in the Company held during the year by each Director of the Company and each of the executives, including their personally related entities, is set out below:

			RECEIVED	SHARE
			DURING THE	CONSOLIDATION	RECEIVED	OTHER
			YEAR ON	ON CONVERSION	ON CONVERSION	CHANGES	BALANCE
		BALANCE AT	EXERCISE OF	OF PREFERENCE	OF PREFERENCE	DURING	AT END
NAME	START OF YEAR		OPTIONS	SHARES	SHARES	YEAR	OF YEAR
Non-executive Directors
Mr. John Lee		–	–	–	–	50,000	50,000
Dr. Richard Gregson		–	–	–	–	–	–
Executive Directors
Mr. David Sekel, Managing Director		3,360	–	–	–	–	3,360
Dr. Ronald Sekel OAM,CTO		7,804,436	–	–	–	254,307	8,058,743
Total Directors		7,807,796	–	–	–	304,307	8,112,103

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Note 7. Employee Option Plans

The “Employee Share Option Plan” (ESOP) offers shares to employees at the discretion of the Board. The objectives of the plan are to assist in the recruitment, retention and motivation of employees.

The options granted under the ESOP which are not listed on the ASX do not give the right to participate in dividend or rights issues until shares are allotted pursuant to the exercise of the relevant options. Options will be issued for no consideration unless the Board determines otherwise. Each option is to subscribe for one fully paid ordinary share in the Company. The exercise price is fi xed by the Board prior to the grant of options and the options may be subject to other restrictions on exercise as may be determined by the Board prior to the grant of the options.

There were no options exercised during the year. Options issued under the ESOP have a three year vesting period whereby one third of the options vest on the fi rst anniversary of grant date and the remaining two thirds vest in equal monthly instalments over the remaining two years of the vesting period. The options have a life of 10 years from grant date.

The assessed fair value at grant date of options granted under the ESOP is allocated equally over the period from grant date to vesting date, and the amounts are disclosed in the remuneration tables. Fair values are independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.

Set out below are summaries of options granted under the plan:

		BALANCE AT	ISSUED	LAPSED	BALANCE AT
		THE START OF	DURING	DURING	THE END OF
	EXERCISE	THE YEAR	THE YEAR	THE YEAR	THE YEAR
GRANT DATE	PRICE	NUMBER	NUMBER	NUMBER	NUMBER
Consolidated and parent entity – 2007
1 January 2001	$1.63	17,189	–	–	17,189
1 January 2001	$0.20	57,472	–	–	57,472
1 February 2001	$1.63	23,635	–	–	23,635
1 October 2001	$1.63	116,019	–	–	116,019
1 October 2001	$0.20	90,667	–	–	90,667
1 January 2002	$1.63	1,264	–	–	1,264
1 July 2002	$1.63	19,337	–	(5,909)	13,428
1 February 2003	$1.63	2,149	–	–	2,149
1 March 2003	$1.63	6,446	–	–	6,446
1 May 2003	$1.63	70,662	–	–	70,662
22 September 2003	$1.63	64,474	–	–	64,474
11 October 2004	$1.63	4,297	–	–	4,297
1 January 2005	$1.63	2,149	–	–	2,149
3 March 2005	$1.63	2,149	–	–	2,149
21 December 2005	$0.30	2,500,000	–	–	2,500,000
21 December 2005	$0.35	2,500,000	–	–	2,500,000
22 February 2006	$0.36	540,000	–	(20,000)	520,000
18 April 2006	$0.36	50,000	–	(50,000)	–
8 August 2006	$0.34	–	200,000	–	200,000
23 August 2006	$0.31	–	40,000	–	40,000
31 October 2006	$0.40	–	100,000	–	100,000
10 November 2006	$0.34	–	20,000	–	20,000
10 November 2006	$0.48	–	500,000	–	500,000
10 November 2006	$0.60	–	500,000	–	500,000
10 November 2006	$1.00	–	500,000	–	500,000
21 November 2006	$0.36	–	100,000	(30,000)	70,000
13 March 2007	$0.35	–	120,000	–	120,000
30 April 2007	$0.39	–	100,000	–	100,000
Total		6,067,909	2,180,000	(105,909)	8,142,000

Note 7. Employee Option Plans continued

Note 7. Employee Option Plans continued
		BALANCE AT	ISSUED	LAPSED	BALANCE AT
		THE START OF	DURING	DURING	THE END OF
	EXERCISE	THE YEAR	THE YEAR	THE YEAR	THE YEAR
GRANT DATE	PRICE	NUMBER	NUMBER	NUMBER	NUMBER
Consolidated and parent entity – 2006
1 January 2001	$1.63	17,189	–	–	17,189
1 January 2001	$0.20	57,472	–	–	57,472
1 February 2001	$1.63	23,635	–	–	23,635
1 October 2001	$1.63	116,019	–	–	116,019
1 October 2001	$0.20	90,667	–	–	90,667
1 January 2002	$1.63	1,264	–	–	1,264
1 July 2002	$1.63	19,337	–	–	19,337
1 February 2003	$1.63	2,149	–	–	2,149
1 March 2003	$1.63	6,446	–	–	6,446
1 May 2003	$1.63	77,346	–	(6,684)	70,662
22 September 2003	$1.63	66,819	–	(2,345)	64,474
11 October 2004	$1.63	4,297	–	–	4,297
1 January 2005	$1.63	2,149	–	–	2,149
3 March 2005	$1.63	2,149	–	–	2,149
21 December 2005	$0.30	–	2,500,000	–	2,500,000
21 December 2005	$0.35	–	2,500,000	–	2,500,000
22 February 2006	$0.36	–	540,000	–	540,000
18 April 2006	$0.36	–	50,000	–	50,000
Total		486,938	5,590,000	(9,029)	6,067,909

Note 8. Auditor’s Remuneration

Note 8. Auditor’s Remuneration
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Grant Thornton NSW
Review of interim reports of the entity	30,000	25,277	30,000	25,277
Audit of f nancial reports of the entity – current year	58,000	52,000	58,000	52,000
Audit of f nancial reports of the entity – prior year	–	7,933	–	7,933
Independent Accountants’ Report – Initial Public Offering/Placement	5,000	56,070	5,000	56,070
Review of corporate registers	–	2,070	–	2,070
Taxation services	–	500	–	500
Other services –general advice and attendance at meetings	–	4,275	–	4,275
	93,000	148,125	93,000	148,125

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Note 9. Current Assets – Cash assets

Note 9. Current Assets – Cash assets
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Cash at bank and on hand	3,911,046	4,575,167	2,732,123	4,213,785
	3,911,046	4,575,167	2,732,123	4,213,785
Note 10. Current Assets – Trade and other receivables
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Trade debtors	190,494	139,950	1,576,858	–
	190,494	139,950	1,576,858	–
Other debtors	125,188	62,737	124,801	19,468
	315,682	202,687	1,701,659	19,468
Note 11. Current Assets – Inventories
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Raw materials (at cost)	200,945	258,785	–	–
Work in progress (at cost)	1,097,576	343,394	–	–
Finishedgoods(at cost)	1,741,747	2,421,113	2,249,084	2,731,933
	3,040,268	3,023,292	2,249,084	2,731,933
Note 12. Current Assets – Other current assets
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Prepayments	2,916	78,337	2,916	76,885
Accrued Income	139,040	19,408	139,040	19,408
Other	23,929	–	22,929	–
	165,885	97,745	164,885	96,293
Note 13. Non-current Assets – Financial assets
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Loans to related parties	–	–	8,747,463	5,054,345
Investment in subsidiaries	–	–	2,302,103	2,302,103
	–	–	11,049,566	7,356,448

Note 14. Non-current Assets – Property, plant and equipment
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Instruments
At cost	289,338	638,886	289,338	631,373
Less: Accumulated depreciation	(245,724)	(517,407)	(245,724)	(517,798)
	43,614	121,479	43,614	113,575
Off ce equipment
At cost	199,200	131,056	165,720	88,644
Less: Accumulated depreciation	(135,336)	(83,052)	(104,743)	(49,754)
	63,864	48,004	60,977	38,890
Furniture and f ttings
At cost	108,464	107,224	58,224	56,806
Less: Accumulated depreciation	(60,921)	(42,202)	(47,713)	(39,384)
	47,543	65,022	10,511	17,422
Leasehold improvements
At cost	91,252	–	–	–
Less: Accumulated depreciation	(19,854)	–	–	–
	71,398	–	–	–
Motor vehicles
At cost	–	55,478	–	–
Less: Accumulated depreciation	–	(36,912)	–	–
	–	18,566	–	–
Motor vehicles under f nance lease	174,274	182,338	69,135	115,499
Less: Accumulated depreciation	(111,526)	(99,209)	(24,485)	(53,563)
	62,748	83,129	44,650	61,936
Total motor vehicles	62,748	101,695	44,650	61,936
Manufacturing equipment
At cost	605,874	537,829	–	–
Less: Accumulated depreciation	(475,196)	(403,351)	–	–
	130,678	134,478	–	–
Manufacturing equipment under f nance lease	778,322	759,629	62,252	46,560
Less: Accumulated depreciation	(253,686)	(175,733)	(34,529)	(28,928)
	524,636	583,896	27,723	17,632
Total manufacturingequipment	655,314	718,374	27,723	17,632
	944,481	1,054,574	187,475	249,455

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Movements in carrying amounts

								LEASED
			LEASE-				MANU-	MANU-
			HOLD FURNITURE			LEASED	FACT-	FACT-
		OFFICE	IMPROVE-	AND	MOTOR	MOTOR	URING	URING
INSTRUMENTS EQUIPMENT			MENTS	FITTINGS	VEHICLES	VEHICLES EQUIPMENT EQUIPMENT			TOTAL
CONSOLIDATED	$	$	$	$	$	$	$	$	$
Carrying amount at 1 July 2006	121,479	48,004	–	65,022	18,566	83,129	134,478	583,896	1,054,574
Additions	–	49,546	88,757	1,240	–	12,511	73,048	21,185	246,287
Disposals	(7,909)	–	–	–	(18,566)	–	(5,003)	–	(31,478)
Depreciation expense(Note 4)	(69,956)	(33,686)	(17,359)	(18,719)	–	(32,892)	(71,845)	(80,445)	(324,902)
Carrying amount at 30 June 2007	43,614	63,864	71,398	47,543	–	62,748	130,678	524,636	944,481
								LEASED
			LEASE-				MANU-	MANU-
			HOLD FURNITURE			LEASED	FACT-	FACT-
		OFFICE	IMPROVE-	AND	MOTOR	MOTOR	URING	URING
INSTRUMENTS EQUIPMENT			MENTS	FITTINGS	VEHICLES	VEHICLES EQUIPMENT EQUIPMENT			TOTAL
PARENT	$	$	$	$	$	$	$	$	$
Carrying amount at 1 July 2006	113,575	38,890	–	17,422	–	61,936	–	17,632	249,455
Additions	–	46,871	–	1,418	–	–	–	18,691	66,980
Disposals	(5)	–	–	–	–	(2)	–	–	(7)
Depreciation expense(Note 4)	(69,956)	(24,784)	–	(8,329)	–	(17,284)	–	(8,600)	(128,953)
Carrying amount at 30 June 2007	43,614	60,977	–	10,511	–	44,650	–	27,723	187,475

Note 15. Non-current Assets – Intangible assets

			CONSOLIDATED	CONSOLIDATED	PARENT	ENTITY
			2007	2006	2007	2006
			$	$	$	$
Patents			314,848	240,699	314,848	240,699
Less: Accumulated amortisation			(147,915)	(97,193)	(147,915)	(97,193)
			166,933	143,506	166,933	143,506
Development costs			1,397,193	680,114	1,397,193	680,114
Less: Accumulated amortisation			(42,949)	–	(42,949)	–
			1,354,244	680,114	1,354,244	680,114
Software			–	67,153	–	40,481
Less: Accumulated amortisation			–	(51,421)	–	(30,199)
			–	15,732	–	10,282
Intellectual Property at cost			2,363,375	2,347,655	263,375	247,655
Goodwill			98,412	101,368	–	–
			3,982,964	3,288,375	1,784,552	1,081,557
		INTELLECTUAL			DEVELOPMENT
	PATENTS	PROPERTY	GOODWILL	SOFTWARE	COSTS	TOTAL
CONSOLIDATED ENTITY	$	$	$	$	$	$
Year ended 30 June 2006
Balance at 1 July 2005	138,696	2,209,675	101,368	26,759	–	2,476,498
Additions	47,456	137,980	–	–	680,114	865,550
Amortisation charge	(42,646)	–	–	(11,027)	–	(53,673)
Balance at 30 June 2006	143,506	2,347,655	101,368	15,732	680,114	3,288,375
Year ended 30 June 2007
Balance at 1 July 2006	143,506	2,347,655	101,368	15,732	680,114	3,288,375
Additions	84,936	15,720	(2,956)	–	717,079	814,779
Amortisation charge	(61,509)	–	–	(15,732)	(42,949)	(120,190)
Balance at 30 June 2007	166,933	2,363,375	98,412	–	1,354,244	3,982,964

Note 15. Non-current Assets – Intangible assets continued

		INTELLECTUAL			DEVELOPMENT
	PATENTS	PROPERTY	SOFTWARE	GOODWILL	COSTS	TOTAL
PARENT ENTITY	$	$	$	$	$	$
Year ended 30 June 2006
Balance at 1 July 2005	138,696	109,675	15,524	–	–	263,895
Additions	47,456	137,980	–	–	680,114	865,550
Amortisation charge	(42,646)	–	(5,242)	–	–	(47,888)
Balance at 30 June 2006	143,506	247,655	10,282	–	680,114	1,081,557
Year ended 30 June 2007
Balance at 1 July 2006	143,506	247,655	10,282	–	680,114	1,081,557
Additions/Deletions	84,936	15,720	–	–	717,079	817,735
Amortisation charge	(61,509)	–	(10,282)	–	(42,949)	(114,740)
Balance at 30 June 2007	166,933	263,375	–	–	1,354,244	1,784,552

Impairment Testing

Goodwill and intellectual property are allocated to one cash-generating unit and the recoverable amount is determined using value-in-use calculations. Value-in-use is calculated based on the present value of cash fl ows over a three year period. Management has based the value-in-use calculations on budgets and forecasts with assumed conservative terminal growth rates ranging from (-5%) to 6% and a discount rate of 13%.

Note 16. Current Liabilities – Trade and other payables

Note 16. Current Liabilities – Trade and other payables
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Trade payables	297,824	880,860	1,566,746	574,408
Other payables	664,334	389,388	380,545	226,400
Deferredgrant income	585,905	585,905	585,905	585,905
	1,548,063	1,856,153	2,533,196	1,386,713
Note 17. Current Liabilities – Short term borrowings
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Lease liabilities	181,698	223,881	10,950	17,315
	181,698	223,881	10,950	17,315

Note 18. Liabilities – Provisions

Note 18. Liabilities – Provisions
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Current
Employee benef ts	263,137	198,603	146,502	100,092
Non-current
Employee benef ts	56,759	44,275	34,810	29,656
Aggregate employee benef ts	319,896	242,878	181,312	129,748
Number of full time employees atyear end	25	23	4	7

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Note 19. Non-current Liabilities – Long term borrowings

	CONSOLIDATED	CONSOLIDATED	PARENT ENTITY	PARENT ENTITY
	2007	2006	2007	2006
	$	$	$	$
Lease liabilities	214,416	381,674	47,947	58,897
	214,416	381,674	47,947	58,897
Note 20. Non-current Liabilities – Other
	CONSOLIDATED		PARENT ENTITY
	2007	2006	2007	2006
	$	$	$	$
Loans from relatedparties	–	–	–	130,646
	–	–	–	130,646
Note 21. Issued Capital
(a) Issued and paid up capital
	2007 NUMBER	2006 NUMBER	2007	2006
	OF SECURITIES	OF SECURITIES	$	$
Ordinaryshares issued and fully paid	155,746,357	138,558,500	29,513,431	23,899,066
	155,746,357	138,558,500	29,513,431	23,899,066

(b) Movements of ordinary share capital and tradable options over ordinary shares

(i) Ordinary Shares – Fully Paid

			SHARES	SHARES	OPTIONS
		NOTE	NUMBER	$	NUMBER
At 30 June 2005	Balance		17,000,000	2,227,010	–
5 December 2005	Share consolidation		(16,988,800)	–	–
5 December 2005	Conversion of preference shares	(ii)	111,988,800	15,312,937	–
21 December 2005	Shares issued under the initial public offering		16,294,000	4,073,500	–
21 December 2005	Costs of the initial public offering		–	(747,185)	–
21 December 2005	Options issued under the initial public offering		–	–	4,073,500
17 February 2006	Conversion of options		123,500	30,875	(123,500)
28 February 2006	Conversion of options		5,000	1,250	(5,000)
9 March 2006	Conversion of options		4,500	1,125	(4,500)
21 April 2006	Conversion of options		12,000	3,000	(12,000)
5 May 2006	Conversion of options		10,000	2,500	(10,000)
11 May 2006	Conversion of options		7,500	1,875	(7,500)
25 May 2006	Shares issued under placement		10,100,000	3,232,000	–
25 May 2006	Costs of the placement		–	(240,321)	–
16June 2006	Conversion of options		2,000	500	(2,000)
At 30June 2006	Balance		138,558,500	23,899,066	3,909,000
13 December 2006	Shares issued under placement		17,142,857	6,000,000	–
13 December 2006	Costs of placement		–	(396,930)	–
13 December 2006	Conversion of options		30,500	7,625	(30,500)
30 January 2007	Conversion of options		5,000	1,250	(5,000)
8 May2007	Conversion of options		9,500	2,420	(9,500)
At 30 June 2007	Balance		155,746,357	29,513,431	3,864,000

(ii) Preference Shares – Fully Paid

On 5 December 2005, 19,048,159 preference shares were converted into 111,988,800 ordinary shares.

Note 21. Issued Capital continued

(c) Ordinary Shares

Voting Rights

Members are entitled to notice of, and to attend and vote at, General Meetings. Subject to any shares which may in the future be issued with special or preferential rights (at present there are none), every shareholder present in person or by proxy, attorney or representative has one vote on a show of hands, and on a poll, one vote for each fully paid ordinary share. In the case of an equality of votes, the Chairman of the meeting shall not have a second or casting vote.

General Meetings

Subject to the Corporations Act 2001 providing for a shorter minimum period of notice, each shareholder is entitled to receive at least 28 days, notice of and to attend General Meetings of the Company and to receive all notices, accounts and other documents required to be sent to shareholders under the Constitution, the Corporations Act 2001 and the Listing Rules.

Dividends

Subject to any shares which may in the future be issued with special or preferential rights, the Directors may determine that a dividend is payable and fi x the amount, the time for payment and the method of payment. The Directors may set aside out of the profi ts of the Company such amounts as they determine as reserves to be applied at the discretion of the Directors for any purpose for which the profi ts of the Company may be properly applied.

Rights on Winding Up

The liquidator in a winding up may, with the sanction of a special resolution of members, divide among the members the whole or any part of the property of the Company and determine how the division is to be carried out as between the members or different classes of members.

Transfer of Shares

Subject to the Constitution, the Corporations Act 2001 , the Listing Rules and the ASTC Settlement Rules, the shares are freely transferable. A member may transfer shares by a market transfer in accordance with any manner required or permitted by the Listing Rules, the Corporations Act 2001 or the ASTC Settlement Rules. Shares may also be transferred by an instrument in writing in any usual or common form or in such other form as the Directors approve or in such form as is required by the ASTC Settlement Rules.

(d) Options

(i) For information relating to the Portland Orthopaedics Limited Employee Share Option Plan, including details of options issued, exercised and lapsed during the fi nancial year and the options outstanding at year-end, refer to Note 7 Employee Option Plans.
(ii) For information relating to share options issued to key management personnel during the fi nancial year, refer to Note 6 Directors and Executives Remuneration.
(iii) On 21 December 2005 the Company was admitted to the Offi cial List on the Australian Securities Exchange. One option was issued for every four ordinary shares issued under the prospectus. The options are exercisable at any time before 30 November 2008 at an exercise price of 25 cents. Options not exercised by this date will lapse. In addition to the options issued to the subscribers to the prospectus, 1,629,400 options were issued to the Financial Adviser and Broker (or other Australian Financial Services Licensees who also lodged applications through the Financial Adviser and Broker) to the capital raising and are on the same terms and conditions as the options offered under the prospectus. Details of movements in these options are as follows:

Consolidated and Parent Entity

			2007 $	2006 $
	Balance Options Options Balance	at 1 July 2006 issued exercised at 30 June 2007	5,538,400 – (45,000) 5,493,400	– 5,702,900 (164,500) 5,538,400

Note 22. Reserves

The options reserve relates in full to equity settled share based payment transactions. For full details see Note 7.

The Foreign Currency Translation Reserve recognises exchange differences on translation of foreign controlled entities. Amounts are recognised in the profi t or loss when the net investment is disposed of.

Note 23. Financial Instruments

(a) Credit Risk Exposure

The credit risk on fi nancial assets of the consolidated entity that have been recognised on the balance sheet, is generally the carrying amount, net of any provisions for doubtful debts.

(b) Interest Rate Exposure

The consolidated entity’s exposure to interest rate risk and the effective weighted average interest rate by maturity periods is set out in the table in Note 23(d). For interest rates applicable to each class of asset or liability, refer to the individual note in the fi nancial statements. Exposures arise predominantly from assets and liabilities bearing variable interest rates as the consolidated entity intends to hold fi xed rate assets and liabilities to maturity.

(c) Liquidity Risk

The group manages liquidity risk by monitoring forecast

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Note 23. Financial Instruments continued

(d) Foreign Currency Risk

The group is exposed to fl uctuations in foreign currencies arising from the sale and purchase of goods and services in currencies other than the group’s measurement currency. From time to time, foreign exchange contracts will be entered to hedge all or part of the associated currency risk pertaining to a position or transaction.

	FLOATING		OVER 1	MORE	NON-
	INTEREST	1 YEAR	YEAR TO 5	THAN 5	INTEREST
	RATE	OR LESS	YEARS	YEARS	BEARING	TOTAL
2007	$	$	$	$	$	$
Financial assets
Cash and deposits	3,911,046	–	–	–	–	3,911,046
Receivables	–	–	–	–	315,682	315,682
	3,911,046	–	–	–	315,682	4,226,728
Weighted Average Interest Rate	6.15%	–	–	–	–	–
Financial liabilities
Trade and other creditors	–	–	–	–	962,158	962,158
Lease liabilities	–	181,698	214,416	–	–	396,114
	–	181,698	214,416	–	962,158	1,358,272
Weighted Average Interest Rate	–	7.70%	7.70%	–	–	–
	FLOATING		OVER 1	MORE	NON-
	INTEREST	1 YEAR	YEAR TO 5	THAN 5	INTEREST
	RATE	OR LESS	YEARS	YEARS	BEARING	TOTAL
2006	$	$	$	$	$	$
Financial assets
Cash and deposits	4,575,167	–	–	–	–	4,575,167
Receivables	–	–	–	–	202,687	202,687
	4,575,167	–	–	–	202,687	4,777,854
Weighted Average Interest Rate	6.00%	–	–	–	–	–
Financial liabilities
Trade and other creditors	–	–	–	–	1,260,248	1,260,248
Lease liabilities	–	223,881	381,674	–	–	605,555
	–	223,881	381,674	–	1,260,248	1,865,803
Weighted Average Interest Rate	–	7.70%	7.70%	–	–	–

(e) Net Fair Value of Financial Assets and Liabilities

The net fair value of cash and cash equivalents and non-interest bearing monetary fi nancial assets and fi nancial liabilities of the consolidated entity approximates their carrying amounts.

Note 24. Cash Flow Information

Note 24. Cash Flow Information
	CONSOLIDATED		PARENT	ENTITY
	2007	2006	2007	2006
	$	$	$	$
Operating loss after tax	(5,726,095)	(2,911,182)	(2,877,926)	(1,052,263)
Depreciation expense	324,902	293,683	128,953	155,617
Amortisation expense	120,190	53,673	114,740	47,888
Non-cash employee benef ts expense – share based payments	333,917	139,391	333,917	139,391
(Increase)/Decrease in trade and other debtors	183,361	699,896	(5,966,374)	(1,381,542)
(Increase) in inventories	(16,976)	(636,130)	482,849	(189,615)
Increase/(Decrease) in trade and other creditors	(342,613)	358,622	4,917,417	1,141,305
Increase/(Decrease)inprovision for employee entitlements	77,018	69,387	51,526	43,707
Cash outf ow from operatingactivities	(5,046,296)	(1,932,660)	(2,814,898)	(1,095,512)

Note 25. Contingencies

The consolidated entity had contingent liabilities at 30 June 2007 in respect of:

Government Grants

To date, the consolidated entity has received various grants from the Federal and State Government to assist on a dollar for dollar basis with the commercialisation of new products and to also assist with the funding of specifi c projects. There are certain circumstances in accordance with the grant deed that certain of these grants, together with interest, may be repayable. These circumstances include the project not being commercialised within its prescribed timeframe, the Company breaching the agreement, or an insolvency event occurring.

Total grants received for the year were nil (2006: $998,350).

Bank Guarantees

There is a bank guarantee in place valued at $18,000 in favour of the lessor of the group’s principal place of business.

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Note 26. Commitments for Expenditure

(a) Lease Commitments

(a) Lease Commitments
	CONSOLIDATED			PARENT
	2007	2006	2007	2006
	$	$	$	$
Lease commitments
Commitments in relation to leases contracted for at the
reporting date but not recognised as liabilities payable:
Within one year	119,073	119,073	25,643	25,643
Later than oneyear but not later than 5years	225,609	225,609	49,678	49,678
	344,682	344,682	75,321	75,321
Representing
Non-cancellable operating leases	236,124	236,124	59,076	59,076
Future f nance charges on f nance leases	108,558	108,558	16,245	16,245
	344,682	344,682	75,321	75,321
Operating leases
Commitments for minimum lease payments in relation to
non-cancellable operating leases are payable as follows:
Within one year	92,940	78,708	19,692	19,692
Later than one year but not later than 5 years	157,416	157,416	39,384	39,384
Later than 5years	–	–	–	–
Commitments not recognised in the f nancial statements	250,356	236,124	59,076	59,076
Finance leases
Commitments in relation to secured f nance leases are payable as follows:
Within one year	103,838	–	14,936	–
Later than one year but not later than 5 years	365,315	264,245	54,258	23,263
Later than 5years	–	449,868	–	69,194
Minimum lease payments	469,153	714,113	69,194	92,457
Less: future f nance charges	(73,039)	(108,558)	(10,297)	(16,245)
Total lease liability	396,114	605,555	58,897	76,212
Representing lease liabilities
Current (Note 18)	181,698	223,881	10,950	17,315
Non-current(Note 20)	214,416	381,674	47,947	58,897
	396,114	605,555	58,897	76,212

Note 27. Related Party Transactions

(a) Directors

Disclosures relating to Directors and specifi ed executives are set out in Note 6.

On 4 April 2006, Portland Orthopaedics Limited entered a lease agreement for an item of manufacturing equipment from Dr. Ronald Sekel OAM. The lease agreement is on normal commercial terms. On inception of the lease, the equipment had a value of $306,900, with monthly lease payments of $7,745 over a term of 48 months.

(b) Wholly Owned Group

The wholly owned group consists of Portland Orthopaedics Limited and its wholly owned controlled entities listed in Note 28.

Transactions between Portland Orthopaedics Limited and other entities within the wholly owned group during the year ended 30 June 2007 consisted of loans advanced by and to Portland Orthopaedics Limited together with sales and purchases in the ordinary course of business. All loans are unsecured.

course of business. All loans are unsecured.
			PARENT	ENTITY
			2007	2006
			$	$
Sales to controlled entities			3,308,194	963,925
Interest received from controlled entities			–	198,144
Management fees charged to controlled entities			907,398	777,480
Purchases from controlled entities			1,873,909	256,680
Aggregate amounts due to controlled entities			130,646	130,646
Aggregate amounts due from controlled entities			8,878,109	5,054,345
Note 28. Investments in Controlled Entities
	COUNTRY OF	CLASS OF	2007	2006
NAME OF ENTITY	INCORPORATION	SHARES	%	%
Portland Orthopaedics Inc	United States of America	Ordinary	100	100
Portland Square Pty Ltd	Australia	Ordinary	100	100
Portland Orthopaedics IP Holdings Pty Ltd	Australia	Ordinary	100	100
Portland Square Manufacturing Pty Ltd	Australia	Ordinary	100	100
Portland Orthopaedics (Aust.) Pty Ltd	Australia	Ordinary	100	100
Vimek Pty Ltd	Australia	Ordinary	46	46
Portland Orthopaedics Limited	United Kingdom	Ordinary	100	100
Entities controlled by Portland Square Manufacturing Pty Ltd
Vimek PtyLtd	Australia	Ordinary	54	54

Note 29. Events Occurring after Reporting Date

There were no events occurring after the reporting date.

Notes to the Financial Statements. For the year ended 30 June 2007 continued

Note 30. Loss per Share
	30	JUNE 2007	30 JUNE 2006
Loss per share for losses from continuing operations attributable
to the ordinary equity holders of the company
Basic loss per share		(0.05)	(0.04)
Diluted lossper share		(0.05)	(0.04)
The losses used to calculate the basic and diluted earnings per share are $5,726,095 (2006: $2,911,182)
being the losses from continuing operations attributable to the ordinary equity holders of the company
Weighted average number of ordinary shares outstanding during the year used
in the calculation of basic earningsper share	114,974,449		76,620,984
Weighted average number of ordinary shares outstanding during the year used
in the calculation of diluted earningsper share	114,974,449		76,620,984

Options

Options exercisable are considered anti-dilutive in the calculation of potential ordinary shares.

Directors’ Declaration.

The Directors of the Company declare that:

(a) the fi nancial statements and notes set out on pages 26 to 54 are in accordance with the Corporations Act 2001 , and
(i) comply with Accounting Standards, the Corporations Act 2001 ; and
(ii) give a true and fair view of the fi nancial position as at 30 June 2007 and of their performance for the year ended on that date of the Company and economic entity;
(b) The Chief Executive Offi cer and Chief Financial Offi cer have each declared that:
(i) the fi nancial records of the company for the fi nancial year have been properly maintained in accordance with section 286 of the Corporations Act 2001 ;
(ii) the fi nancial statements and notes for the fi nancial year comply with the Accounting Standards; and
(iii) the fi nancial statements and notes for the fi nancial year give a true and fair view; and
(c) In the Directors’ opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the Directors.

==> picture [176 x 46] intentionally omitted <==

David Sekel

26 September 2007

Auditor’s Declaration of Independence.

Chartered Accountants Business Advisers and Consultants

==> picture [145 x 43] intentionally omitted <==

AUDITOR’S INDEPENDENCE DECLARATION

TO THE DIRECTORS OF PORTLAND ORTHOPAEDICS LIMITED

In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Portland Orthopaedics Limited for the year ended 30 June 2007, I declare that, to the best of my knowledge and belief, there have been:

(a) No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and

(b) No contraventions of any applicable code of professional conduct in relation to the audit.

GRANT THORNTON NSW Chartered Accountants

A J ARCHER Partner

Sydney

26 September 2007

Level 17, 383 Kent Street Sydney NSW 2000 PO Locked Bag Q800 QVB Post Office Sydney NSW 1230 T +61 2 8297 2400 F +61 2 9299 4445 E [email protected] W www.grantthornton.com.au

Grant Thornton NSW ABN 25 034 787 757

Liability limited by a scheme approved under Professional Standards Legislation.

An independent New South Wales partnership entitled to trade under the international name Grant Thornton. Grant Thornton is a trademark owned by Grant Thornton International and used under licence b y independent firms and entities throughout the world.

Independent Audit Report.

Chartered Accountants Business Advisers and Consultants

==> picture [133 x 55] intentionally omitted <==

INDEPENDENT AUDITOR’S REPORT

TO THE MEMBERS OF PORTLAND ORTHOPAEDICS LIMITED ABN: 92 086 839 992

We have audited the accompanying financial report of Portland Orthopaedics Limited, which comprises the balance sheet as at 30 June 2007, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies and other explanatory notes and the directors’ declaration of the consolidated entity comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year.

Directors’ responsibility for the financial report

The directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1 the Directors also state, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements , that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards.

Auditor’s responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards, which require us to comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance as to whether the financial report is free of material misstatement.

Level 17, 383 Kent Street Sydney NSW 2000 PO Locked Bag Q800 QVB Post Office Sydney NSW 1230 T +61 2 8297 2400 F +61 2 9299 4445 E [email protected] W www.grantthornton.com.au

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating

Grant Thornton NSW ABN 25 034 787 757

Liability limited by a scheme approved under Professional Standards Legislation.

An independent New South Wales partnership entitled to trade under the international name Grant Thornton. Grant Thornton is a trademark owned by Grant Thornton International and used under licence by independent firms and entities throughout the world.

Independent Audit Report. continued

==> picture [147 x 53] intentionally omitted <==

the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit, we complied with the independence requirements of the Corporations Act 2001.

Auditor’s opinion

In our opinion:

(a) The financial report of Portland Orthopaedics Limited is in accordance with the Corporations Act 2001 , including:
i. Giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2007 and of their performance for the year ended on that date; and
ii. Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 ; and

(b) The financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

GRANT THORNTON NSW Chartered Accountants

A J ARCHER Partner

Sydney 26 September 2007

Shareholder Information.

The shareholder information set out below is applicable at 31 August 2007.

(a) Distribution of Equity Securities

Analysis of number of equity security holders by size of holding:

	EQUITY	TRADEABLE
	SECURITY	OPTION
	HOLDERS	HOLDERS
RANGE OF SECURITIES (NUMBER)	NUMBER	NUMBER
1 – 1,000	9	2
1,001 – 5,000	318	261
5,001 – 10,000	369	52
10,001 – 100,000	697	72
100,001 and over	44	8
Total number of security holders	1,437	395

No shareholders hold less than a marketable parcel of shares.

(b) Equity Security Holders

The names of the twenty largest holders of quoted equity securities are listed below:

NAME	NUMBER HELD	ISSUED SHARES %
Equity Partners Two Pty Limited	41,958,946	26.94
GBS Venture Partners Limited	21,796,541	13.99
Perpetual Trustees Nominees Limited	20,222,421	12.98
J P Morgan Nominees Limited	20,179,749	12.96
Dr. Ronald Sekel OAM	7,831,143	5.03
Citicorp Nominees Pty Ltd	2,584,877	1.66
Citicorp Nominees Pty Ltd	2,262,500	1.45
ANZ Nominees Limited	1,689,284	1.08
Dixson Trust Pty Ltd	1,125,000	0.72
Equity Trustees Limited	1,000,000	0.64
Bond Street Custodians Limited	855,000	0.55
ASIA Union Investments Pty Ltd	800,000	0.51
NA Investments (Vic) Pty Ltd	394,390	0.25
Mr Ian Morrison & Mr Peter Fusea	375,000	0.24
Drill Investments Pty Ltd	300,000	0.19
Mr E.P. Merrigan & Mrs S.M. Merrigan	300,000	0.19
BIFA Development Co Pty Ltd	250,000	0.16
Parmelia Pty Ltd	250,000	0.16
Jasfrali Pty Ltd	200,000	0.13
LPA No 2 PtyLtd	200,000	0.13
Top 20 holders of ordinary shares as at 31 August 2007	124,574,851	79.96
Details of unquoted equity securities:
	NUMBER	NUMBER
UNQUOTED EQUITY SECURITIES	ON ISSUE	OF HOLDERS
Options issued to take upordinaryshares	5,490,900	396

Shareholder Information. continued

(c) Substantial holders of equity securities

Substantial holders of equity securities in the Company are set out below:

Substantial holders of equity securities in the Company are set	out below:
NAME	NUMBER HELD	ISSUED SHARES %
Equity Partners Two Pty Limited	41,958,946	26.94
GBS Venture Partners Limited	21,796,541	13.99
Perpetual Trustees Nominees Limited	20,222,421	12.98
JP Morgan Nominees Limited	20,179,749	12.96
Dr. Ronald Sekel OAM	7,831,143	5.03

(d) Voting Rights

The voting rights attaching to each class of equity security are set out below:

Ordinary shareholders are entitled to notice of, and to attend and vote at, General Meetings. Subject to any shares which may in the future be issued with special or preferential rights (at present there are none), every shareholder present in person or by proxy, attorney or representative has one vote on a show of hands, and on a poll, one vote for each fully paid ordinary share. In the case of an equality of votes, the Chairman of the meeting shall not have a second or casting vote.

Options do not carry any voting rights

(e) Restricted Securities

Ordinary Shares

The existing shareholders of the Company, in respect of their security holdings, have entered into voluntary restriction agreements under which they may not dispose of any interest in or grant and security over those holdings for:

(i) In respect of 7,529,000 ordinary shares, 2 years after the listing date of 21 December 2005.

Options

(i) In respect of 1,629,400 options restricted for a period of 24 months from 21 December 2005 exercisable at $0.25 on or before 30 November 2008.
(ii) In respect of 4,000,000 options restricted for a period of 24 months from 21 December 2005 exercisable at various exercise prices and expiry dates.

Corporate Directory.

Chairman

John Lee ([email protected])

Directors

David Sekel Ronald Sekel Richard Gregson

Joint Company Secretaries

David Edwards James Wynn ([email protected])

Registered Offi ce

Unit 3, 44 McCauley Street Matraville Sydney NSW 2036 Australia Telephone: 61 2 9700 1533 Facsimile: 61 2 9666 8544

Portland Orthopaedics Inc 301 Orchard Suite 1C St Clair MI 48079 Telephone: 1 810 326 3840 Facsimile: 1 810 326 3842 John Green Executive VP Global Sales and Marketing ([email protected])

Website

www.pldortho.com

Share Registry

Computershare Investor Services Pty Limited 452 Johnston Street Abbotsford VIC 3000 Australia

Stock Exchange Listing

Portland Orthopaedics Limited shares and options are listed on the Australian Stock Exchange (Code PLD).

AI assistant

ARIKA RESOURCES LIMITED — Annual Report 2007

64420_rns_2007-10-23_9470c3ec-2bc9-49e9-95e0-4f760fd82fc2.pdf

Important Information

Portland Orthopaedics Limited

Our Vision.

Our Mission.

Chairman’s Review.

Dear shareholder,

Capital Raising

Market Overview

Product Range

Financial Results

Company

Our Products.

Advanced Product Development M-COR Family Extension

Chief Executive’s Review.

Dear shareholder,

Orthopaedic Market

Product Range

US$29b

Chief Executive’s Review. continued

Distribution

The Portland Team

Share Market

Financial Results

Chief Executive’s Review. continued

KEY DATES

The Year Ahead

Financial and Statutory Reports.

Compliance with ASX Best Practice Recommendations

1. Board of Directors

Board Composition and Charter

Responsibilities

Code of Conduct

Directors’ Independence

Commitment

Independent Professional Advice

2. Corporate Reporting

3. Board Committees

Audit Committee

Remuneration Committee

Nominations

4. Directors Share Trading

5. Shareholder Communication and Continuous Disclosure

6. The Environment, Health and Safety Management System (EHSMS)

Principles Used to Determine the Nature and Amount of Remuneration

Non-executive Directors

Executive Pay

Details of Remuneration

Service Agreement

Share Based Compensation

Equity Instrument Disclosures Relating to Directors and Executives

Options Provided as Remuneration

Shareholdings of Directors and Executives

Directors’ Report.

Directors

Company Secretary

Principal Activities

Signifi cant Changes in the State of Affairs

Environmental Regulation

Website

Review of Operations

Dividends

Likely Developments and Expected Results of Operations

Information on Directors

Experience

Special Responsibilities

David Ford Sekel BEc, Dip Law Managing Director

Experience

Interest in Shares and Options

Special Responsibilities

Dr. Richard Gregson BSc, MBA, PHD Non-executive Director

Experience

Interest in Shares and Options

Special Responsibilities

Dr. Ronald Sekel OAM, MBBS, FRACS(orth), FRCSE Director and Chief Technology Offi cer

Experience

Interest in Shares and Options

Special Responsibilities

ARIKA RESOURCES LIMITED Annual Report 2007