ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED — Annual Report 2011

Feb 28, 2012

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Electro Optic Systems Holdings Limited A.C.N. 092 708 364 Suite 2, Level 12, 75 Elizabeth Street, Sydney NSW 2000 Tel +61 2 9233 3915 Fax +61 2 9232 3411 http://www.eos-aus.com

29 February 2012

The Manager Company Announcements Office ASX Limited Exchange Centre 20 Bridge Street Sydney NSW 2000

Dear Sir,

Preliminary Final Report – Listing Rule 4.3A

The Preliminary Final Report/ Appendix 4E for the year ended 31 December 2011 is attached.

Yours faithfully,

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Ian Dennis Director

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Preliminary Final Report of Electro Optic Systems Holdings Limited for the Financial Year Ended 31 December 2011

ACN 092 708 364

This Preliminary Final Report is provided to the Australian Stock Exchange (ASX) under ASX Listing Rule 4.3A.

Current Reporting Period: Financial Year ended 31 December 2011 Previous Corresponding Period: Financial Year ended 31 December 2010

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Results for Announcement to the Market

Revenue and Net Profit Revenue from ordinary activities down Profit from ordinary activities after tax attributable to members down Net profit attributable to members down Dividends (Distributions)	Percentage Change % Amount
	3.11 To $32,775,391 94.33 To $180,188 94.33 To $180,188

Final dividend Interim dividend Record date for determining entitlements to the dividend: • final dividend • interim dividend Net tangible assets at 31 December 2011 Number of ordinary shares outstanding at 31 December 2009 NTA per ordinary share at 31 December 2011 NTA per ordinary share at 31 December 2010	Amount per security Franked amount per security
	Nil¢ Nil¢ Nil¢ Nil¢ N/A N/A $11,945,417 56,845,926 21.01 cents 20.68 cents

Brief Explanation of Revenue, Net Profit and Dividends (Distributions)

Refer to Review of Operations on pages 19 to 22.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Consolidated statement of comprehensive income for the Financial Year ended 31 December 2011

Revenue Changes in inventories of finished goods and work in progress Raw materials and consumables used Employee benefits expense Administrative costs Amortisation of intangibles Finance costs Depreciation expense Impairment Loss on disposal of fixed assets Foreign exchange losses Occupancy costs Other expenses Profit before income tax expense Income tax expense Profit for the period Other comprehensive income Exchange differences arising on translation of Foreign operations Income tax relating to components of other Comprehensive income Total comprehensive (loss)/income for the period Earnings per share: Basic (cents per share) Diluted (cents per share)	Note 2(a) 2 2 2 2 2 4 5 5	2011 2010 $ $
		32,775,391 33,828,658
		(164,152) 2,655,051 (14,214,487) (13,091,811) (13,338,261) (13,118,633) (3,210,571) (4,240,571) (131,533) (148,474) (302,881) (107,496) (426,512) (498,816) 333,561 (459,953) 2,287 (15,167) 573,317 (121,751) (1,356,956) (1,477,375) (359,015) (28,520)
		180,188 3,175,142 - -
		180,188 3,175,142
		(527,622) (553,048) - -
		(347,434) 2,622,094
		0.3 5.6 0.3 5.6

Notes to the financial statements are included on pages 8 to 18

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Consolidated statement of financial position as at 31 December 2011

Current Assets Cash and cash equivalents Trade and other receivables Inventories Other Total Current Assets Non-Current Assets Intangibles Property, plant and equipment Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Borrowings Provisions Total Current Liabilities Non-Current Liabilities Borrowings Provisions Total Non-Current Liabilities Total Liabilities Net Assets Equity Issued capital Reserves Accumulated losses Total Equity	Note 3 4	2011 $ 2010 $
		4,885,761 8,088,355 9,835,027 15,509,461 10,704,724 11,603,252 101,316 253,520
		25,526,828 35,454,588
		714,830 849,852 2,431,083 2,361,836
		3,145,913 3,211,688
		28,672,741 38,666,276
		8,890,029 14,745,292 1,991,867 5,321,708 4,763,852 5,531,382
		15,645,748 25,598,382
		117,223 231,034 249,523 229,643
		366,746 460,677
		16,012,494 26,059,059
		12,660,247 12,607,217
		75,383,567 75,383,567 7,569,374 7,696,532 (70,292,694) (70,472,882)
		12,660,247 12,607,217

Notes to the financial statements are included on pages 8 to 18

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Consolidated statement of changes in equity for the Financial Year ended 31 December 2011

Balance at 1 January 2011 Profit for the period Exchange differences arising on translation of foreign operations Total comprehensive (loss)/income for the year Recognition of share based payments Balance as 31 December 2011 Balance at 1 January 2010 Profit for the period Exchange differences arising on translation of foreign operations Total comprehensive income for the year Recognition of share based payments Balance as 31 December 2010

Total Accumulated losses Issued capital Foreign currency translation reserve Employee equity settled benefits reserve $ $ $ $ $ 12,607,217 (70,472,882) 75,383,567 573,402 7,123,130 180,188 180,188 - - - (527,622) - - (527,622) - (347,434) 180,188 - (527,622) - 400,464 - - - 400,464 12,660,247 (70,292,694) 75,383,567 45,780 7,523,594 9,244,831 (73,648,024) 75,383,567 1,126,450 7,523,594 3,175,142 3,175,142 - - - (553,048) - - (553,048) - 2,622,094 3,175,142 - (553,048) - 740,292 - - - 740,292 12,607,217 (70,472,882) 75,383,567 573,402 7,123,130

Notes to the financial statements are included on pages 8 to 18

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Consolidated statement of cash flows for the Financial Year ended 31 December 2011

Cash Flows From Operating Activities Receipts from customers Payments to suppliers and employees Interest and bill discounts received Interest and other costs of finance paid Net cash provided (used in)/ by operating activities Cash Flows From Investing Activities Proceeds from sale of property, plant and equipment Payment for property, plant and equipment Net cash (used in) investing activities Cash Flows From Financing Activities Proceeds of borrowings Repayment of borrowings Net cash (used in) financing activities Net (Decrease)/ Increase In Cash Held Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on the balance of cash held in foreign currencies Cash and cash equivalents at the end of the year	Note	2011 $ 2010 $
		36,594,370 33,094,566 (36,235,983) (28,024,741) 348,855 278,705 (302,081) (107,496)
		404,361 5,241,034
		14,418 - (175,690) (552,550)
		(161,272) (552,550)
		739,020 323,638 (4,182,672) (2,127,421)
		(3,443,652) (1,803,783)
		(3,200,563) 2,884,701 8,088,355 5,572,052 (2,031) (368,398)
		4,885,761 8,088,355

Notes to the financial statements are included on pages 8 to 18

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

1. Basis of Preparation

The preliminary final report has been prepared in accordance with ASX Listing Rule 4.3A and disclosure requirements of ASX Appendix 4E.

The accounting policies adopted in the preparation of the preliminary financial report are consistent with those adopted and disclosed in the 2010 annual report.

Adoption of new and revised Accounting Standards

In the current period, the group has adopted all the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board that are relevant to its operations and effective for the current reporting period. The adoption of these new and revised Standards and Interpretations has resulted in no changes to the Group’s accounting policies.

Going Concern

The financial report has been prepared on the basis that the consolidated entity is a going concern, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business.

The consolidated entity earned a net profit during the year of $180,188 (2010 - $3,175,142). Net cash provided by operating activities was $404,361 (2010 - $5,241,034). As at 31 December 2011, the consolidated entity had cash of $4,885,761 (2010 - $8,088,355). Cash of $496,296 (2010 - $496,692) is restricted as it secures bank guarantees on existing contracts with local and overseas customers. This cash will become unrestricted when the contracts are concluded or renegotiated.

In the opinion of the directors, the ability of the consolidated entity to continue as a going concern and pay its debts as and when they fall due is dependent upon:

• The ability to achieve target production levels and the required technical/ quality levels

• for the military business in the year period to 31 December 2012. The Directors believe that this is achievable based on current production plans.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

1. Summary of accounting policies

Basis of preparation Going Concern (cont)

• The ability to obtain further new profitable contracts

The directors are in the process of bidding for new military and space contracts. The results of these bids are not known as at the date of the directors’ report. The Directors are confident that new contracts will be received during the next 12 months from the current bids outstanding and from new contracts which have not been bid at the date of the directors’ report.

• The successful completion of the telescope and enclosure contracts on hand

The space systems division has progressed the completion of the contracts on hand and the consolidated entity has already provided for expected losses on contracts in accordance with Australian Accounting Standard AASB111 “Construction Contracts”.

• The successful close down of Tucson, Arizona operations and relocation to Huntsville,

• Alabama by June 2012

• The willingness and ability of key military customers to make timely payments for goods

• supplied in accordance with agreed terms.

• The continued support of the Company’s shareholders

Should the company need to raise additional capital to fund new orders it may seek capital from existing or new shareholders. The Company has no current plans to raise capital.

At the date of the report and having considered the above factors, in the opinion of the directors, the company and the consolidated entity can continue as going concerns and pay their debts as and when they become due and payable.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

Profit From Ordinary Activities Profit from ordinary activities before income tax includes the following items of revenue and expense: (a) Revenue Contract receipts Interest received Other revenue Other Total revenue (c) Expenses Foreign exchange losses/(gains) Amortisation Depreciation of property, plant and equipment Impairment expense/(write back)	2011 $ 2010 $
	32,378,042 33,226,525 348,855 278,705 48,494 323,428
	32,775,391 33,828,658
	(573,317) 121,751 131,533 148,474 426,512 498,816 (333,561) 459,953

2. Profit From Ordinary Activities

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

3. Reserves Foreign currency translation reserve Employee equity settled benefits reserve Balance at end of financial period 4. Accumulated Losses Balance at beginning of financial period Net profit for the year Balance at end of financial period	2011 $ 2010 $
	45,780 573,402 7,253,594 7,123,130
	7,569,594 7,696,532
	(70,472,882) (73,648,024) 180,188 3,175,142 (70,292,694) (70,472,882)

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

5. Earnings Per Share

Earnings Per Share
Basic EPS Diluted EPS	2011 ¢ per share 2010 ¢ per share
	0.3 cents 5.6 cents 0.3 cents 5.6 cents

Basic Earnings per Share

The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:

Earnings (a) Weighted average number of ordinary shares used in the calculation of basic earnings per share (a) Earnings used in the calculation of basic earnings per	2011 $ 2010 $
	180,188 3,175,142
	2011 No. 2010 **No. **
	56,845,926 56,845,926

share is the same as net profit in the profit and loss.

Diluted Earnings per Share

The earnings and weighted average number of ordinary and potential ordinary shares used in the calculation of diluted earnings per share are as follows:

Earnings (a) Weighted average number of ordinary shares and potential ordinary shares (b) & (c)	2011 $ 2010 $
	180,188 3,175,142
	2011 No. 2010 **No. **
	56,845,926 56,845,926

(a) Earnings used in the calculation of diluted earnings per

share is the same as net profit in the profit and loss.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

5. Earnings Per Share (cont’d)

(b) The following are considered to be potential ordinary shares but are not dilutive and are therefore excluded from the weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share.

Staff options at $1.95 Directors options at $1.95 Staff options at $1.30 Total unlisted options (c) Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Weighted average number of ordinary shares used in the calculation of basic earning per share Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share	2011 Number 2010 Number - 120,000 - 1,564,800 1,538,000 1,709,000
	1,538,000 3,393,800
	56,845,926 56,845,926
	56,845,926 56,845,926

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

6. Contingent Liabilities

a) Entities within the consolidated entity are involved in contractual disputes which are in the normal course of contracting operations. The directors believe that the entities within the consolidated entity can settle any contractual disputes with customers and should any customers commence legal proceedings against the company, the directors believe that any actions can be successfully defended. As at the date of this report no legal proceedings have been commenced against any entity within the group.

b) On 10 June 2010 the parent company provided a guarantee in respect of an advance payment received of US$3,531,255 and A$2,136,443 by a subsidiary company in relation to the supply of 91 remote weapon systems to a customer. The guarantee can be satisfied by the delivery of the remote weapon systems or if the subsidiary company is in breach of its obligations it will be required to deliver shares in the parent company for the outstanding amount of the guarantee less the total value of any deliverable items actually delivered and accepted by the customer. The value of shares to be issued to satisfy the guarantee will be based on the average weighted share price over the period of 60 days prior to the guarantee being called. As at 31 December 2011, the amount still outstanding subject to the guarantee were US$2,106,901 and A$1,948,616.

c) In December 2010, a subsidiary company EOS Defense Systems, Inc acquired 32 completed inventory units for a purchase price of US$5,300,000, payable in certain instalments in accordance with and under the terms of a promissory note executed by EOS Defense Systems, Inc. The promissory note provides for interest to be paid at 5% per annum, with all principal and interest due in full by 31 January 2012. The company is required to repay US$165,625 for each unit sold on receipt of the payment from the end customer. The parent company, Electro Optic Systems Holdings Limited has guaranteed the repayment of the debt. As at 31 December 2011, there was US$1,159,375 owing in respect of 7 units. Since the end of the financial year, the note has been repaid in full.

d) In September 2011, a subsidiary company EOS Defense Systems, Inc acquired 21 completed inventory units for a purchase price of US$752,027, payable in certain instalments in accordance with and under the terms of a promissory note executed by EOS Defense Systems, Inc. The promissory note provides for interest to be paid at 5% per annum, with all principal and interest due in full by 31 January 2012. The company is required to repay US$35,811 for each unit sold on receipt of the payment from the end customer. The parent company, Electro Optic Systems Holdings Limited has guaranteed the repayment of the debt. As at 31 December 2011, there was US$752,027 owing in respect of 21 units. Since the end of the financial year, the note has been repaid in full.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

7. Segment Information

AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess performance. The identification of the Group’s reportable segments has not changed from those disclosed in the previous Annual Report.

	Revenue	Revenue	Segment profit	Segment profit
	2011 $	2010 $	2011 $	2010 $
Space systems Space surveillance Defence Total of all segments Eliminations Unallocated	824,200 3,214,813 28,387,523	1,431,169 2,165,902 29,952,882	(577,615) (395,895) 1,978,160	(1,519,583) (589,698) 6,445,592
	32,426,536 - 348,855	33,549,953 - 278,705	1,004,650 - (824,462)	4,336,311 - (1,169,169)
Consolidated Profit before tax Income tax benefit	32,775,391 - -	33,828,658 - -	180,188 -	3,175,142 -
Consolidated segment revenue and profit for theyear	32,775,391	33,828,658	180,188	3,175,142

The revenue reported above represents revenue from external customers. There were no intersegment sales during the period. There were no discontinued operations during the period.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

7. Segment Information (cont’d)

The following is an analysis of the Group’s assets by reportable operating segment:

	2011 $	2010 $
Space systems Space surveillance Defence	434,378 1,090,208 22,262,394	1,144,226 826,728 28,606,967
Total segment assets Unallocated assets	23,786,980 4,885,761	30,577,921 8,088,355
Total assets	28,672,741	38,666,276

Assets used jointly by reportable segments are allocated on the basis of the revenue earned by the individual reportable segments.

The consolidated entity operates in Australia, USA, Singapore and Germany in the development, manufacture and sale of telescopes and dome enclosures, laser satellite tracking systems and the manufacture of electro-optic fire control systems for defence.

Product and Services within each Business Segment

Space Systems

EOS is a global supplier of large optical systems. During the period the consolidated entity continued the process of completing existing contracts.

Space Surveillance

EOS’s laser-based space surveillance systems have been demonstrated in customer trials and EOS is now well-placed to be a major contributor to the next generation of space tracking capability. Future business is dependent on large government contracts being awarded in the space sector.

In addition, EOS has substantial space resources in its own right, and may enter the market for space data provision in the future.

Defence

EOS develops, manufactures and markets advanced fire control, surveillance, and weapon systems to approved military customers. These products either replace or reduce the role of a human operator for a wide range of existing and future weapon systems in the USA, Australia and other markets.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

8. Subsequent Events

Since the end of the financial year, the company has repaid the outstanding promissory notes of A$1,878,343 in full.

9. Issuance of Securities

2011

No shares or options were issued during the financial year.

No options were exercised during the year.

171,000 options issued to staff on 10 December 2009 with an exercise price of $1.30 lapsed during the year on resignation of the staff.

120,000 options issued to staff in 2007 with an exercise price of $1.95 lapsed during the year on expiry of the options.

1,564,800 options issued to directors on 31 May 2007 with an exercise price of $1.95 lapsed during the year on expiry of the options.

2010

No shares were issued during the year.

No options were exercised during the year.

91,000 options issued to staff on 10 December 2009 with an exercise price of $1.30 lapsed during the year on resignation of the staff.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Notes to the Financial Statements for the Financial Year ended 31 December 2011

10. Other Significant Information

None

11. Information on Audit or Review

This Preliminary Final report is based on accounts to which one of the following applies.

• The accounts have been audited.

• The accounts are in the process of being audited or subject to review.

• The accounts have been subject to review.

• The accounts have not yet been audited or reviewed.

Description of likely dispute or qualification if the accounts have not yet been audited or subject to review or are in the process of being audited or subjected to review.

The audit is currently in progress and the directors continue to discuss a number of matters with the auditors. At this stage the directors anticipate a clean audit report. Any further potential modifications to the audit report are unknown at this time.

Description of dispute or qualification if the accounts have been audited or subjected to review.

Not applicable

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Review of Operations

1. RESULTS FOR FULL-YEAR ENDING 31 DECEMBER 2010

The consolidated entity earned a net profit during the year of $180,188 (2010: $3,175,142) on revenues of $32,775,391 (2010: $33,828,658).

Net cash provided by operating activities was $404,361 (2010 - $5,241,034). As at 31 December 2011, the consolidated entity had cash of $4,885,761 (2010 - $8,088,355) of which $496,296 (2010 - $496,692) is restricted as it secures bank guarantees on existing contracts with local and overseas customers. The cash will become unrestricted when the contract is concluded or renegotiated.

2. REMOTE WEAPON SYSTEMS BUSINESS

Orders

Existing EOS customers for remote weapon systems continue to place new orders at levels consistent with recent years. At the issue date of this review the company is holding firm, funded and unfulfilled weapon system orders for over $36 million.

Most of the current order backlog is for our most advanced R-600 model of remote weapon system which has now sold over 300 units. This product has been in production for more than 12 months and recent orders will see its production continue with regular monthly shipments to late in 2014.

In June 2011 EOS executed and announced agreements to supply remote weapon systems to a military customer which had not previously purchased remote weapon systems from any source. The program requirement is for 400 weapon systems over approximately 5 years from 2013, subject to annual budget appropriations and performance reviews.

Initial deliveries of four units under this contract have been made and accepted, and these delivered units are being used for training and full testing for compliance with technical and performance specifications. Those reviews will be completed in mid-2012 and subject to satisfactory product performance the program funding will be released in annual blocks from late 2012.

Business Model Adjustments

During 2011 EOS adjusted its business model in this sector to allocate more production to offshore partners. This adjustment allows EOS to allocate more production into the customer countries, as increasingly required by statutes in these countries. It will also provide an improved hedge against the expected long-term rise in the exchange value of the Australian dollar.

EOS’ arrangements for closer production relationship with Northrop Grumman in the USA have already been announced, and licensed production of significant parts of EOS remote weapon systems is being negotiated in other customer countries.

The announced relocation of US production facilities to Huntsville (AL) is under way and will be completed in mid-2012. The company expects to achieve cost savings on all remote weapon system programs through this initiative.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Review of Operations

New Technology and Products

Since 2008 EOS has been developing a significant new weapon system at its own expense, towards a 2013 production target for new customer requirements. In 2011 the likelihood of success of the technical developments was increased significantly through full prototype testing and initial firing trials. At the same time customer responses confirmed funding and contract awards were still highly probable.

EOS also increased investment in sensor development for several customer-requested upgrades for current products, and for potential CROWS requirements. The new products include thermal imagers and laser rangefinders. These will reach production from late in 2013 and are expected to increase sales.

EOS thermal imagers were purchased for trial use in television broadcast of cricket, where the camera can discern which surface has been touched by the ball. Industrial security applications for EOS’ ruggedized thermal cameras at sea are increasing.

CROWS Developments

EOS is teamed with Northrop Grumman Corporation (“NGC”) to meet the US Army’s requirements for common remotely operated weapon stations (“CROWS”) with NGC to act as prime contractor and EOS as first-tier subcontractor to NGC.

In January 2012 the Army released its “invitation to tender” documents for the CROWS program, with responses due by 23 March 2012. EOS is supporting the preparation of a response to this invitation to tender.

The contract award for CROWS is expected by September 2012. This is approximately 12 months later than expected and this delay has caused additional cost to all potential bidders, including EOS.

Financial Performance

The remote weapon systems business caused a drag on the company’s financial performance in 2011, arising from the following factors:

• Inventory impairment of $1.6m during the year relating to a provision for obsolescence for EOS parts inventory.

• Increased marketing and tender costs of approximately $450,000 relating to delays in the US Army releasing the CROWS tender documents, from mid-2011 to early in 2012. CROWS-related outlays will return to normal levels through 2012.

• Increased product engineering and development expenses of approximately $650,000 for sensor and remote weapon products approaching production in 2013. Provided customer interest in these new products remains strong, this activity will not decline in 2012.

• In the second half of 2011, delays of approximately 5 weeks in completion and shipping of a $24 million order, deliverable over 15 months from mid-2011. This resulted in a reduction in revenue of over $2 million from expected levels. Production has resumed at normal output in 2012.

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Review of Operations

3. SPACE BUSINESS

Space Technology

The EOS collaboration with the Australian National University (ANU) for the development of adaptive optics (AO) technology is meeting or exceeding technical objectives. Next-generation telescopes will require AO technology at up to $70 million per telescope, and there are several such projects already under way. ANU and EOS expect to compete for commercial contracts to provide AO for new telescope programs as they are required from around 2013.

EOS continues to work in collaboration with international partners to optimise for Australian conditions and requirements synthetic aperture radar (“SAR”) satellite systems and other space surveillance capabilities. EOS expects Australia to outlay substantial sums on these capabilities over the next 3-5 years, and is positioning to meet these requirements in its domestic market.

Space Information

Space operations contracts for provision of space data to the Australian Government from two separate optical tracking sites in Australia continue to operate to expectation. During this period EOS received high ratings for performance and bonus payments under these long-term contracts.

EOS continues to refine its space sensors under $7.5m of customer-funded awards. These developments will be completed in 2013. The company is unaware of any sensor development from any other source that can better complement existing space surveillance infrastructure to improve the safety and cost-effectiveness of space exploitation.

In 2011 the company provided sensor performance data to key international partners, and is presently negotiating several memoranda or agreements towards establishing business ventures with those partners for commercial exploitation of EOS space sensors.

Financial Performance

All key metrics for space business improved in 2011 such that the net loss of this sector fell 54% to $0.974 million at the same time as strategically important space data activities increased 48% to $3.2 million of activity.

4. SUMMARY AND OUTLOOK

During 2012 the company’s remote weapons systems business financial performance is expected to recover with additional orders. The current order book is strong and all orders are for mature products with low production risk.

EOS will continue to invest in CROWS activities and new product development where customers are already committed to the intended product.

EOS space business is expected to be stable in 2012 after changes in 2011 completing the transfer of emphasis from telescope systems to space information and telescope subsystems (adaptive optics). The improved (reduced) drain on company finances for funding the space business towards commercial maturity is expected to be sustained in

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ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED

Review of Operations

1. This improvement in the sector’s financial performance is underwritten by stronger customer contracts for space data and sensors.

In both space and remote weapon systems, activity in Europe subsided significantly over 2011 and this is not expected to recover in 2012. EOS operations in Germany have been reduced to core technology support for specific products.

EOS continues to pursue its key strategic objectives in space and remote weapon systems while performing commercial contracts that better position EOS resources to execute those objective programs when captured.

Ben Greene Chief Executive Officer 29 February 2012

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