HYTERRA LTD — Annual Report 2007

Jul 30, 2007

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ANNUAL REPORT:2007
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Contents

• 1 HIGHLIGHTS

• 10 aUdITOr’S rEPOrT

• 2 cHaIrman’S rEPOrT

• 11 FInancIaL STaTEmEnTS

• 4 cEO’S rEPOrT

12 STaTEmEnT OF FInancIaL PErFOrmancE

• 5 dIrEcTOrS’ rEPOrT

• 12 STaTEmEnT OF mOvEmEnTS In EqUITy

• 8 cOrPOraTE GOvErnancE STaTEmEnT 13 STaTEmEnT OF FInancIaL POSITIOn

14 STaTEmEnT OF caSH FLOwS

• 15 STaTEmEnT OF accOUnTInG POLIcIES

17 nOTES TO FInancIaL STaTEmEnTS

• 26 addITIOnaL InFOrmaTIOn

• 28 dIrEcTOry

BrainZ 2007 Highlights

• Sold 71 BRM2 monitors compared to the 27 monitors sold in the corresponding seven months to 31 March 2006. An increase of 163% globally (267% increase in Europe). 74 BRM2 monitors were sold in the previous twelve month financial year.

• Total installed base of BrainZ monitors around the world increased by 42% over the course of the 2007 financial period and are now installed in 20 countries.

• Existing distribution agreement between BrainZ and GE Healthcare extended through to October 2008. GE Healthcare also granted new territories in Europe, North America, Middle East and Asia bringing GE Healthcare’s currently held distribution rights to 49 countries.

• • Received CE mark and CMDCAS certifications of RecogniZe[®] which allows the Company to sell this major new product into all European Union countries and Canada. RecogniZe[®] is a BrainZ proprietary software product designed to assist clinicians by automatically detecting events at the bedside that may be seizures and clinically significant.

• Became the exclusive monitoring partner to a major EU-funded research project into brain injury associated with pre-term birth (NEOBRAIN) which includes the participation of leading medical and research centres from France, Germany, Italy, the Netherlands, Sweden and Switzerland.

• Awarded a NZ$500,000 growth services trade grant. The grant, which is expected to be fully received in the 2008 financial year, is to assist with market development activities associated with the BrainZ commercialisation in US and EU markets.

BRAINZ ANNUAL REPORT 2007 1

Chairman’s Report

BrainZ Strategy

It gives me great pleasure to present our second annual report for BrainZ Strategy BrainZ Instruments Limited (“BrainZ” or the “Company”) since listing on the Australian Stock Exchange in December 2005. This annual The Company’s core strategy is to develop innovative bedside brain report is for the seven months to 31 March 2007, due to re-aligning monitoring technologies. The initial market focus for the BrainZ our financial year with our parent company (as communicated in an This is the first annual report released for BrainZ Instruments Limited (“BrainZ” or the ASX release in October 2006 and in the 2006 annual report). technology is neonatal intensive care units and paediatric settings. The Directors are convinced there is also a significant potential for “Company”) since listing on the Australian Stock Exchange (“ASX”) in December 2005. 2007 was a year of significant growth for BrainZ – and as with most the technology platform to translate into clinically useful tools in other healthcare environments (such as adult clinical settings). As growth, it came with its share of opportunities and challenges. The 2006 financial year has been a very exciting and positive year for BrainZ and we have growth in awareness and acceptance of the Company’s technology Several key objectives were achieved during the year and the continues, research activities and new product development will be Company is now in an excellent position to capitalise on its rapid successfully accomplished several important milestones.expanded and prioritised accordingly. growth and translate this into improved financial performance.

This report highlights some of the significant achievements of the 2007 year. The Company’s new Chief Executive Officer, Richard Smith will follow this with a commentary assessing the outlook for BrainZ in the 2008 year and beyond.

market commentary

The clinical value of bedside brain monitoring in the newborn arena is growing in acceptance throughout the world. This is not only evidenced by the increased number of BRM2 monitor sales (and sales of competitor products) but through increased focus at international scientific meetings and the increasing volume of published literature appearing in peer-reviewed journals.

I would like to thank the talented and dedicated team at BrainZ, my fellow Directors and other associated parties for their hard work and contribution over this seven month period. I would also like to thank all BrainZ shareholders for their support and patience over the past year and we look forward to creating significant shareholder value over the coming years.

Countries around the world are embracing this new technology at different rates, with Australasia and Europe appearing to be the most rapid adopters. The US market, the world’s largest, has been slow to adopt newborn brain monitoring. This has occurred for a number of reasons, including medico-legal risk, but it also means that once the technology has reached its “tipping point” and becomes “standard of care”, then widespread uptake is likely to occur rapidly. In the mean time, we have identified a number of product enhancements that we expect to increase the uptake.

Financial Performance

For the seven months to 31 March 2007 BrainZ achieved total operating revenue of NZ$2.0 million. Of this, NZ$1.4 million resulted directly from product sales of BRM2 monitors, disposable sensors and associated products with the remainder made up of interest revenue and government funding.

Signs of increased awareness in the US are strengthening. As an example, at the 2nd annual Neonatal Brain Monitoring Conference held in the US in January 2007, BrainZ conducted a market survey of a portion of attending American clinicians who were not currently using brain monitoring technology. 78% of the surveyed group indicated that they were planning to purchase a bedside brain monitor in the following 12 months, whereas only 4% suggested they had no plans to buy (with the remainder undecided).

The dollar value of product sales for this seven months was 90% of the sales achieved for the twelve months to 31 August 2006. Compared to the corresponding seven months to 31 March 2006, the dollar value of BRM2 monitor sales increased by 141%. As a proportion of total product sales, BRM2 monitor sales represented 86% of product revenue (2006: 89%). As the installed base of monitors continues to grow around the world, revenue from consumables and service agreements will comprise larger percentages of product revenue.

Sales review

During the seven months, BrainZ cash reserves reduced from NZ$10.1 million to NZ$7.0 million with NZ$0.8 million of this reduction being due to foreign exchange losses. Importantly, when Government funding is excluded, the net cash consumption from operating activities improved by NZ$0.2m over the previous period. As indicated previously, the Company is nearing the completion of its most expensive phase of development, in terms of critical research to support product release. As the Company emerges from this phase, and delivers on other identified cost saving initiatives, the expenditure profile of the business is expected to improve. Specifically, it is expected that the Company’s total cash outlay will be reduced by approximately NZ$1.5 million per annum. The first full year impact of these cost savings will be achieved in the 2009 financial year.

The total installed base of BRM2 monitors around the world increased by 42% over the course of the 2007 financial period and BRM2 monitors are now installed in 20 countries. During this seven month period, BrainZ sold 71 BRM2 monitors, compared to the 74 sold in the previous twelve month financial year and 27 sold in the corresponding seven months to 31 March 2006.

2 BRAINZ ANNUAL REPORT 2007

Of the total BRM2 monitor sales made during the period, the majority were sold into European markets (56%), with the UK (17%) and US (14%) markets also contributing. The remainder of monitor sales were made through BrainZ direct sales channels, in Australia, New Zealand and South Africa.

Developing the appropriate structures and resources for the launch and support of a new medical technology in global markets is a costly exercise. This fact, coupled with the outstanding commercial potential of BrainZ, was recognized by New Zealand Trade & Enterprise during this financial period when the Company was awarded a NZ$500,000 trade grant. The grant, which is expected to be fully received in the 2008 financial year, is designed to assist with market development activities associated with the BrainZ commercialisation in US and EU markets.

GE Healthcare

During the period BrainZ extended its master distribution agreement with GE Healthcare by mutual consent through to October 2008. Around the same time the agreement was also expanded to include new territories in Europe, North America, Middle East and Asia. GE Healthcare now holds distribution rights to 49 countries. The major focus for the GE Healthcare distributed territories over the next year will be to make significant progress in the US market. Other key objectives will be to cement growth in the UK, encourage new business in continental European countries and support launches into new countries, with particular emphasis on the launch into India, which appears to hold considerable potential.

Making the relationship with GE Healthcare work for the best advantage of BrainZ is perhaps the single largest success factor for the business. Every effort will be made to support and grow this relationship with GE Healthcare.

Product development

The RecogniZe[®] seizure detection software product is the culmination of several years of research, product development and clinical validation and offers tremendous long-term value to the Company by means of its groundbreaking method, strong patent protection and additional revenue stream.

In neonatal intensive care conditions it is difficult for clinical staff to assess if a baby is experiencing seizure activity. RecogniZe[®] is designed as a software tool that can provide this information via the BRM2 monitor and thereby result in improved clinical care.

During the period, BrainZ received CE mark and CMDCAS certifications for its RecogniZe[®] software, which allows the Company to sell this major new product into all European Union countries and Canada. The FDA approval process is still progressing for the US market.

research

BrainZ became the exclusive monitoring partner to a major EU-funded research project into brain injury associated with pre-term birth. The NEOBRAIN project (Neonatal Estimation Of Brain Damage Risk And Identification of Neuroprotectants) includes the participation of leading medical and research centres from France, Germany, Italy, the Netherlands, Sweden and Switzerland. The project allows BrainZ to work closely with major European opinion leaders and boost the technology profile throughout the EU as well as providing additional data and expertise for the further development of the pre-term application of the BRM2 monitor.

The Company has committed to optimising the investment made into clinical trials in the neonatal area and will continue to focus predominantly on utilising the data acquired from these trials for product development activities that lead to an optimal return on investment in the near term. Longer-term research projects such as the development of adult products will proceed in line with future growth of the business.

appointment of new chief Executive Officer (cEO)

On 10 April 2007 the Company announced the appointment of Richard Smith as the new CEO of BrainZ, effective from June 2007. Richard Smith has a deep knowledge and experience of the US market as well as past success in growing medical device companies. Richard has the skills and attributes required to lead BrainZ through the next stage in its growth cycle and we are fortunate to have someone of his calibre within the Company to assume the mantle of CEO.

The appointment of Richard Smith came about after the resignation of Dr Justin Vaughan. Justin contributed greatly to the initial growth and IPO of BrainZ and my fellow Directors and I would like to pay tribute to the input Justin has made to the Company over the past four years. We are fortunate that Justin has agreed to remain involved as a Director on the Board of BrainZ and I am certain he will continue to contribute to the future success of the Company in this capacity.

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P M smith Chairman 24 July 2007

BRAINZ ANNUAL REPORT 2007 3

CEO’s Report

We are at an exciting point in the evolution of our company. Over the past few years BrainZ has focused on laying the ground work needed to create the market for bedside brain monitoring. This work began with proving the clinical validity of the technology on which our company was founded. Driven by a dedicated team, we were successful in building relationships with leading researchers who have published and continue to publish data demonstrating the clinical utility of our technology.

Our work then focused on developing a commercial brain monitoring product which became known as the BRM2 monitor and obtaining the regulatory approvals and distribution channels that supported a global market launch. We now have access to over 49 markets across the globe through GE Healthcare.

These combined efforts have created a “global footprint” for BrainZ much larger than comparable companies in size or age, thus positioning the Company in an enviable position relative to our competitors while attracting a following of key opinion leaders.

We now face the challenge of moving from an early stage development company to a commercially driven company capable of creating and servicing a global market for bedside brain monitoring. This transition will require us to translate the “voice of our customers” into viable features of both our existing and future technologies.

Our short term goal is to add customer focused processes that will complement our existing skills in research and development. The desired result will be a quicker delivery of enhancements to our products and services as well as better alignment of our technology to the clinical practice of the “average” user across diverse healthcare markets. We have begun the process of achieving this goal in the first quarter of the 2008 financial year and are driving for new features to be introduced during the second half of the year.

The 2008 year should prove to be a critical one for brain monitoring of high risk neonates now that hypothermia has become a reality in the clinical environment for treating moderate to severe hypoxicischemic encephalopathy (HIE) of the newborn (see inset First Approved Therapy). This therapeutic is critical for two reasons. Firstly, it is the beginning of what we believe will be a series of therapeutics for brain injury in the neonate. Secondly, we believe

~~First Approved Therapy~~

The Food and Drug Administration (FDA) today approved a first-of-a-kind medical device for the treatment of babies born with moderate to severe hypoxic-ischemic encephalopathy (HIE), a potentially fatal injury to the brain caused by low levels of oxygen.

Up until now, there has been no effective treatment for these infants other than supportive care.

http://www.fda.gov/bbs/topics/news/2006/new01537.html

as hypothermia becomes a widely adopted treatment, the role of brain monitoring will grow from that of a screening device to a standard of care for monitoring any baby at risk of brain injury allowing for the earliest intervention once brain injury is detected (see inset The Ultimate Goal). The emergence of other therapeutics in this context will further underpin this trend (see inset Other Therapeutics on the Horizon).

~~The Ultimate Goal~~

The ultimate goal would be to be able to step in when a scan shows an injury occurring and stop the damage. Dr Barkovich is still working with Dr Ferriero to find neuroprotective agents that could be administered in such cases. The holy grail would be to block cell death after the initial injury and prevent permanent damage.

University of California San Francisco http://pub.ucsf.edu/magazine/200404/small.html

~~Other Therapeutics on the Horizon~~

Over the past decade, researchers at Children’s Hospital Boston have documented a complex web of insults sustained by premature babies’ brain cells – but have also showed that many of these insults can be blocked. Now, preclinical data suggests that certain existing drugs, given at the right time, can ameliorate brain injury in vulnerable newborns.

http://www.newswise.com/articles/view/529671

Our longer term goals are to improve the integration of our technologies into the evolving world of clinical data management. This will require us to further automate our data and to improve the connectivity of our products. It is not too difficult to imagine that the brain monitoring technology of BrainZ could one day be a “parameter” that is integrated into the existing physiological monitors used at the bedside for neonates, paediatrics and adults.

I look forward to leading BrainZ into this new phase of its evolution and am extremely optimistic about the future of brain monitoring and our company.

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R A smith Chief Executive Officer 24 July 2007

4 BRAINZ ANNUAL REPORT 2007

Directors’ Report

The Board of Directors is pleased to present the annual report of BrainZ Instruments Limited for the seven months ended 31 March 2007.

Principal activities

BrainZ Instruments Limited is a New Zealand based medical technology company specialising in the research, development, manufacture and sale of bedside brain monitoring technology.

Performance review

The company was established in 2001 to commercialise pioneering neonatal brain research from the Auckland University’s Liggins Institute. Originally a subsidiary of NeuronZ Limited, the company was acquired by Tru-Test Limited in September 2002. Tru-Test Limited is a multinational company specialising in electronic technology solutions. BrainZ publicly listed on the ASX on 14 December 2005, raising AU$13 million.

The company’s operations for the seven months are described in the Chairman and CEO’s Reports on pages 2 to 4.

All amounts are shown in New Zealand dollars unless otherwise stated. Comparative figures are from the previous annual report for the twelve months ended 31 August 2006.

The net deficit for the seven months ended 31 March 2007 was $3,525,000 (2006: $4,962,000). The detailed financial statements are presented on pages 11 to 25.

The Group net deficit per share of $0.06 (2006: $0.10) is based on a weighted average of 60,000,000 shares outstanding (2006: 50,351,902).

No ordinary share dividends were paid in the seven months and the Directors recommend none for this year.

Statement under aSX Listing rule 4.10.19

From the date of admission of the company’s shares on the ASX to the date of this annual report, the company has used the cash and assets in a form readily convertible to cash that it had at the time of admission in a way consistent with its business objectives. Expenditures have been in line with prospectus estimates.

directors

Mr Michael smith, M Com (Chairman)

Michael Smith is a director of several public and private companies including Fisher & Paykel Healthcare Corporation Limited (Deputy Chairman), Auckland International Airport Limited, ING New Zealand Holdings Limited (Chairman), ING Property Trust (Chairman), The Lion Foundation (Chairman), Hauraki Number 1 Private Equity Fund and Hauraki Number 2 Private Equity Fund (both sponsored by Goldman Sachs JB Were) and Tru-Test Corporation Limited (Chairman). Michael is a graduate of the Harvard Business School. His past directorships include Lion Nathan Limited and Fonterra Co-operative Group.

Mr Keith Aitchison, CA

(non-executive Director)

Keith Aitchison joined the Tru-Test Group (the majority shareholder in the company) as an executive in 1978, and was appointed director of finance in 1985. Tru-Test is based in Auckland, New Zealand. Prior to joining Tru-Test, Keith spent 4 years in South Africa and England working for chartered accounting firms and in a finance role for a large shipping company.

Dr James Brown, PhD, C Biol, MI Biol, FIMLs (non-executive Director)

Dr Jim Brown has over 25 years experience in the biotechnology market and was recently Vice President for Global Alliances for GE Healthcare (formerly Amersham Plc). Jim was previously the President of the International Division from 1995-2003 for Amersham Plc and prior to that was Executive Vice President for BioReliance based in Maryland USA. Jim is also the Chairman of Life Therapeutics Limited, an ASX listed company, and Chairman of Lux Biotechnology Limited in Scotland.

Dr Robin Congreve, LLM, PhD (non-executive Director)

Dr Robin Congreve was for many years a partner in Russell McVeagh Mckenzie Bartleet & Co specialising in taxation and business law.

Robin was on the boards of or chaired a number of public and private companies in New Zealand. He is a principal of Oceania and Eastern Group, a New Zealand private equity group. Robin is currently a director of Tru-Test Corporation Limited and Chairman of Neuren Pharmaceuticals Limited.

BRAINZ ANNUAL REPORT 2007 5

Mr Roger sharp

Interests register

(non-executive Director)

Roger Sharp is Managing Director of Co-Investor Capital Partners Pty Limited, a Sydney-based active investor in smaller listed companies. Roger has more than 20 years experience in technology, finance and international markets. He has run a successful technology start-up and significant investment banking businesses in major international markets.

Roger was Head of Corporate Finance for Ord Minnett in New Zealand from 1990-96, and from 1997 was CEO of ABN AMRO Asia based in Hong Kong and subsequently Global Head of Technology for ABN AMRO Bank, based in London, until 2001. Roger is currently a director of Software of Excellence International Limited, Tru-Test Corporation Limited, Chairman of travel.com.au Limited and a director of SCV Group Limited.

Dr Justin Vaughan BHB, MBChB, MBA, AFPM (non-executive Director)

Dr Justin Vaughan was appointed CEO of BrainZ in July 2003. On 25 May 2007 Justin left BrainZ to take up the position of CEO of New Zealand Cricket. He continues as a non-executive Director of the company. Justin has a medical qualification from the University of Auckland and has significant previous experience in the global pharmaceutical industry, healthcare management, mergers and acquisitions, and management consultancy. Justin also had considerable achievement in the sporting arena having represented New Zealand in international cricket.

The company is required to maintain an interests register in which particulars of certain transactions and matters involving Directors must be recorded. During the period there were no directors who declared an interest in transactions with the company.

The details of each Director’s relevant interests in shares of the company are disclosed in the “Other Information” section of this annual report.

Use of company Information

During the period the Board received no notices from the Directors of the company requesting to use company information received in their capacity as Directors which would not otherwise have been available to them.

Indemnification and Insurance of directors and Officers

The company has arranged Directors and Officers Liability Insurance that provides that generally Directors and Officers will incur no monetary loss as a result of actions undertaken by them as Directors and Officers. The insurance does not cover liabilities arising from criminal activities or deliberate or reckless acts of omissions.

director attendance at meetings during the period

					Nomination and Remuneration	Nomination and Remuneration
		Board Meetings	Audit	Committee		Committee
	Held	Attended	Held	Attended	Held	Attended
P M Smith	8	7	1	1	1	1
Dr J Vaughan	8	8
K J Aitchison	8	5	1	1	1	1
Dr J Brown	8	5	1	–	1	–
Dr R L Congreve	8	4
R K Sharp	8	7

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6 BRAINZ ANNUAL REPORT 2007

remuneration of directors

Remuneration paid to Directors of BrainZ Instruments Limited during the period by the company and Group were as follows:

	DIRECTORS	DIRECTORS	OTHER	OTHER
	FEES	FEES	REMUNERATION	REMUNERATION
	7 MONTHS	12 MONTHS	7 MONTHS	12 MONTHS
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
P M Smith (appointed 16/9/2002)	50	83	–	–
Dr J Vaughan (appointed 7/10/2005) Chief Executive Offcer*	–	–	146	275
K J Aitchison (appointed 7/10/2005)**	27	41	–	–
Dr J Brown (appointed 7/10/2005)	27	41	–	–
Dr R L Congreve (resigned 7/10/2005 – reappointed 23/6/2006)	27	12	–	–
R K Sharp (appointed 23/6/2006)***	27	9	–	–
D W Scott (resigned 7/10/2005)**	–	3	–	–
G A Lawrie (resigned 7/10/2005)	–	3	–	–

• resigned as CEO effective 25 May 2007 but continues as a non-executive Director

• ** fees paid to Tru-Test Limited

*** fees paid to Co-Investor Capital Partners Pty Limited

remuneration of Employees

The number of employees, other than Directors, whose income during the period was in the specified bands are as follows:

			GROUP	GROUP	PARENT	PARENT
			7 MONTHS	12 MONTHS	7 MONTHS	12 MONTHS
$NZ			MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
58,001	–	70,000	5	n/a	5	n/a
70,001	–	80,000	2	n/a	1	n/a
80,001	–	90,000	–	n/a	–	n/a
90,001	–	100,000	–	5	–	5
100,001	–	110,000	–	1	–	1
110,001	–	120,000	–	1	–	1
150,001	–	160,000	1	1	–	–

The Group numbers include two off-shore employees, one who is paid in US dollars and one who is paid in GB pounds.

Donations

The company made no donations during the period (2006: nil).

Auditors

Deloitte has been appointed auditor of the company for the seven months ended 31 March 2007 and was the auditor for the previous year ended 31 August 2006. Audit fees were $20,000 (2006: $20,000).

Corporations Act, Australia – Directors’ declaration

The Directors of BrainZ Instruments Limited (“BrainZ”) declare that:

1. The accompanying audited financial statements on pages 11 to 25 of BrainZ and its subsidiaries for the seven months ended 31 March 2007 and the notes to those financial statements:

2. (a) comply with the accounting standards issued by the New Zealand Institute of Chartered Accountants; and

3. (b) give a true and fair view of the financial position as at 31 March 2007 and of the performance for the seven months ended on that date of BrainZ and its subsidiaries.

4. In the Directors’ opinion there are reasonable grounds to believe that BrainZ will be able to pay its debts as and when they become due and payable.

This report is signed and declaration made in accordance with a resolution of the Board of Directors dated 24 July 2007.

On behalf of the Board

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P M smith Chairman 24 July 2007

BRAINZ ANNUAL REPORT 2007 7

Corporate Governance Statement

As at 31 August 2006

The Directors have adopted practices and procedures for the good corporate governance of the company. These practices and procedures establish the framework of how the Directors carry out their duties and discharge their obligations on behalf of shareholders.

The company was admitted to the official list of the Australian Stock Exchange (“ASX”) on 14 December 2005 and has adopted appropriate policies and practices as provided by the ASX Listing Rules and the “Principles of Good Corporate Governance and Best Practice Recommendations” issued by the ASX Corporate Governance Council (“Council”) which are as follows:

Principle 1. Lay solid foundations for management and oversight Principle 2. Structure the Board to add value Principle 3. Promote ethical and responsible decision-making Principle 4. Safeguard integrity in financial reporting Principle 5. Make timely and balanced disclosure Principle 6. Respect the rights of shareholders Principle 7. Recognise and manage risk Principle 8. Encourage enhanced performance Principle 9. Remunerate fairly and responsibly Principle 10. Recognise the legitimate interests of stakeholders

The Council has recognised that the range in size and diversity of companies is significant and that smaller companies (such as BrainZ) may face particular issues in implementing all Recommendations from the outset. As at the date of this annual report, BrainZ complies with a number of, but not all, Recommendations. BrainZ does not currently comply with:

Recommendation 2.1 – that a majority of the board should be independent directors;

Recommendation 2.2 – that the chairperson should be an independent director; and

Recommendation 2.4 – the nomination committee should consist of a majority of independent directors.

BrainZ’s current board of six Directors, comprise one independent director, Dr J Brown (non-executive Director). With the exception of Dr J Vaughan, the other non-executive Directors are all associated with Tru-Test Limited, BrainZ’s majority shareholder. BrainZ has established a Nomination and Remuneration Committee. However it does not consist of a majority of independent directors.

continuous disclosure Policy

The company has adopted a continuous disclosure policy. This policy sets out the standards, protocols and the detailed requirements expected of all Directors, officers, senior management and employees of the company for complying with the Listing Rules relating to continuous disclosure.

This policy is designed to ensure that the company complies with the Listing Rules and provides equal access to information and to promote quality communication between the company and third parties such as shareholders, the investment community, the media and the ASX.

The company has a corporate governance process designed to ensure that its ASX company announcements:

• are made in a timely manner;

• are factual and are accurate;

• do not omit material and relevant information; and

• are expressed clearly and objectively to enable investors to assess the impact of the information when making investment decisions.

The Board is responsible for approving and monitoring compliance with this policy. The effectiveness of this policy will also be evaluated on an annual basis.

All relevant information provided to the ASX is also posted on the company’s corporate website www.brainz.com, in compliance with the continuous disclosure requirements of the Listing Rules.

role of the Board

The Board is accountable to shareholders for the overall direction, management and corporate governance of the company.

The Board’s responsibilities include:

• overseeing the company, including its control and accountability systems;

• ratifying senior executive appointments, organisational changes and senior management remuneration policies and practices;

• approving management’s corporate strategy and performance objectives;

• approving and monitoring the progress of major capital expenditure, capital management, acquisitions and divestitures;

• reviewing and ratifying systems of risk management, internal compliance and control and legal compliance to ensure appropriate compliance frameworks and controls are in place; and

• monitoring and ensuring compliance with best practice corporate governance requirements.

The Board considers corporate governance to be an important element of its responsibilities. It meets regularly throughout the year. The Board appoints the Chief Executive Officer and the responsibility for the operation and administration of the company has been delegated to the Chief Executive Officer and senior management. The Board ensures this team is appropriately qualified to discharge their responsibilities and reviews the performance of the Chief Executive Officer annually. The Chief Executive Officer is responsible for reviewing annually the performance of senior management.

Board composition

The Board currently consists of a non-executive Chairman and five non-executive Directors. The composition of the Board, its performance, and the independence of Directors are regularly reviewed to ensure the Board has the appropriate mix of independence, expertise and experience. Every year one third of the Directors must retire and are eligible for re-election. The usual term of appointment for non-executive Directors is 3 years.

It is the Board’s policy to determine the terms and conditions relating to the appointment and retirement of non-executive Directors on a case by case basis and in conformity with the requirements of the Listing Rules. The Board may also engage an external consultant where appropriate to identify and assess suitable candidates who meet the Board’s specifications.

The relevant skills, experience and expertise of each Board member are set out in the Director’s Report.

For the purposes of the proper performance of their duties, Directors are entitled to seek independent professional advice at the company’s expense on prior approval of the Chairman.

Board committees

The Board has established the following committees to assist it in carrying out its responsibilities, to share detailed work and to consider certain issues and functions in detail:

• Nomination and Remuneration Committee

• Audit Committee

8 BRAINZ ANNUAL REPORT 2007

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nomination and remuneration committee

The Nomination and Remuneration Committee must comprise at least three Directors, a majority of which are non-executive Directors. Currently the Committee members are Mr Smith (Chairman), Mr Aitchison and Dr Brown. The Committee operates under terms of reference approved by the Board.

The objective of the Nomination and Remuneration Committee is to help the Board achieve its objective to ensure the company:

• has a Board of an effective composition, size and commitment to adequately discharge its responsibilities and duties;

• has coherent remuneration policies and practices to attract and retain executives and Directors who will create value for the shareholders;

• observes those remuneration policies and practices; and

• fairly and responsibly rewards executives having regard to the performance of the company, the performance of the executives and general pay environment.

The Nomination and Remuneration Committee is responsible for matters including identifying and recommending to the Board nominees for membership of the Board including the Chief Executive Officer and ensuring succession plans are in place to maintain an appropriate balance of skills on the Board and reviewing those plans.

In relation to remuneration, the Nomination and Remuneration Committee is responsible for matters including reviewing, approving and recommending to the Board for adoption executive remuneration and incentive policies and practices and annually considering, approving and recommending to the Board, both executive and non-executive Directors’ remuneration.

Under the company constitution, the Board may not exercise the power conferred by section 161 of the New Zealand Companies Act 1993 to authorise payment of remuneration to non-executive Directors in their capacity as such, without prior approval of the company shareholders by ordinary resolution. The approved monetary sum may be divided among the non-executive Directors as determined by the Board.

remuneration

Non-executive Director fees are determined by the Board within the aggregate limit for Directors’ fees approved by shareholders. The current remuneration levels for Chairman is AU$75,000 and for non-executive Directors is AU$40,000 per year. Executive Directors do not receive Directors’ fees. Directors and executives receive no retirement allowances. New Zealand Companies Act disclosures with regard to Directors’ fees and executives’ remuneration are set out in the Directors’ Report.

Remuneration of executives comprises base salary and an “at-risk” (bonus) component, the payment of which is dependent on individual, team and company performance relative to targets. Executive performance and remuneration is reviewed formally each year.

Long-term incentive arrangements have been provided by participation in a share option plan to ensure key employees maintain a long-term interest in the growth and value of the company.

audit committee

The Audit Committee must comprise at least three directors, a majority of which are non-executive Directors. Currently the members are Mr Aitchison (Chairman), Mr Smith and Dr Brown. The Committee operates under terms of reference approved by the Board.

The principal functions of the Audit Committee include:

• Helping the Board to achieve its objectives in relation to:

• financial reporting;

• the application of accounting policies;

• business policies and practices;

• legal and regulatory compliance; and

• internal control and risk management systems;

• promoting a culture of compliance; and

• ensuring effective external audit functions and communication between the Board and the external auditor.

The Audit Committee meets twice during the year in undertaking these tasks and meets separately with management and the external auditor where required. The Committee also seeks assurances from the Chief Executive Officer and Chief Financial Officer in respect of the accuracy and compliance of the company’s annual and half-yearly financial statements.

code of conduct

The company has adopted a code of conduct for Directors and senior executives. As well as the legal and equitable duties owed by the Directors and senior executives, the purpose of this code is to:

• articulate the high standards of integrity, ethical and law-abiding behaviour expected of Directors and senior executives;

• encourage the observance of those standards to protect and promote the interests of shareholders and other stakeholders (including employees, customers, suppliers and creditors); and

• set out the responsibility and accountability of Directors and senior executives to report and investigate any reported violations of this code or unethical or unlawful behaviour.

Securities Trading Policy

The company recognises the need for Directors and employees to observe the highest standards of behaviour and business ethics when engaging in corporate activity or share trading.

The company’s share trading policy prohibits Directors, executives and employees from acquiring or disposing of securities unless this occurs during the one month period beginning at the close of trading on the day after the date on which the company announces its half year or full year results to the ASX or the company holds its annual general meeting and provided that person is not in possession of price sensitive information. Any trading in securities must be cleared and approved in writing by the relevant company officer.

rights of Shareholders

The Board strives to communicate regularly and clearly with shareholders, the principal methods being through the company’s annual and half-year reports and company announcements posted on the company’s website. Shareholders are encouraged to attend and participate at general meetings, which the Auditor is also invited to attend.

Identification and management of Significant Business risk

The Board has identified the significant areas of potential business and legal risk for the company.

The identification, monitoring and where appropriate, the reduction of significant risk to the company are monitored by the Board. The Board reviews and monitors the parameters under which such risks will be managed.

The Nomination and Remuneration and the Audit Committees also assist the Board in its monitoring of financial and operational risk.

BRAINZ ANNUAL REPORT 2007 9

Auditor’s Report

XXX

TO THE SHAREHOLDERS OF

BRAINZ INSTRUMENTS LIMITED

We have audited the financial statements on pages 11 to 25. The financial statements provide information about the past financial performance and financial position of BrainZ Instruments Limited and Group as at 31 March 2007. This information is stated in accordance with the accounting policies set out on pages 15 and 16.

Board of Directors’ Responsibilities

The Board of Directors is responsible for the preparation, in accordance with New Zealand law and generally accepted accounting practice, of financial statements which give a true and fair view of the financial position of BrainZ Instruments Limited and Group as at 31 March 2007 and of the results of operations and cash flows for the seven months ended on that date.

Auditor’s Responsibilities

It is our responsibility to express to you an independent opinion on the financial statements presented by the Board of Directors.

Basis of opinion

An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing:

• the significant estimates and judgements made by the Board of Directors in the preparation of the financial statements, and

• whether the accounting policies are appropriate to the company and group circumstances, consistently applied and adequately disclosed.

We conducted our audit in accordance with New Zealand Auditing Standards. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to obtain reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Other than in our capacity as auditor, we have no relationship with or interests in BrainZ Instruments Limited or any of its subsidiaries.

Unqualified opinion

We have obtained all the information and explanations we have required.

In our opinion:

• proper accounting records have been kept by BrainZ Instruments Limited as far as appears from our examination of those records; and

• the financial statements on pages 11 to 25:

• comply with generally accepted accounting practice in New Zealand;

• give a true and fair view of the financial position of BrainZ Instruments Limited and Group as at 31 March 2007 and the results of their operations and cash flows for the seven months ended on that date.

Our audit was completed on 24 July 2007 and our unqualified opinion is expressed as at that date.

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Chartered Accountants AUCKLAND, NEW ZEALAND

10 BRAINZ ANNUAL REPORT 2007

Financial Statements

The Directors have pleasure in presenting the Financial Statements, set out on pages 11 to 25, of BrainZ Instruments Limited and Group for the seven months ended 31 March 2007.

The Board of Directors of BrainZ Instruments Limited authorise these Financial Statements.

For and on behalf of the Board:

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P M sMItH CHAIRMAn 24 JULY 2007

==> picture [85 x 64] intentionally omitted <==

K J AItCHIson DIReCtoR 24 JULY 2007

BRAINZ ANNUAL REPORT 2007 11

Statement of Financial Performance

For the seven months ended 31 March 2007

GRoUP PARent 7 MONTHS 12 MONTHS 7 MONTHS 12 MONTHS MARCH 2007 AUGUST 2006 MARCH 2007 AUGUST 2006 NOTE NZ$000 NZ$000 NZ$000 NZ$000 Sales revenue 1,406 1,565 1,406 1,565 Other revenue 553 3,091 553 3,091 Total operating revenue 1 1,959 4,656 1,959 4,656 Defcit before taxation and non-recurring items 2 (3,504) (831) (3,574) (906) Non-recurring items 3 – (5,249) – (5,249) Defcit before taxation (3,504) (6,080) (3,574) (6,155) Income tax expense 4 21 (1,118) – (1,141) net defcit for the period (3,525) (4,962) (3,574) (5,014) Basic and diluted net defcit per share 5 ($0.06) ($0.10) ($0.06) ($0.10) Weighted average number of shares 5 60,000,000 50,351,902 60,000,000 50,351,902

Statement of Movements in Equity

For the seven months ended 31 March 2007

GRoUP PARent 7 MONTHS 12 MONTHS 7 MONTHS 12 MONTHS MARCH 2007 AUGUST 2006 MARCH 2007 AUGUST 2006 NOTE NZ$000 NZ$000 NZ$000 NZ$000 Equity at beginning of period 16,372 3,741 16,320 3,741 Net defcit for the period (3,525) (4,962) (3,574) (5,014) Total recognised revenues and expenses (3,525) (4,962) (3,574) (5,014) Contributions from owners Increase in share capital 7 – 18,918 – 18,918 Cost of shares issued 8 – (1,325) – (1,325) equity at end of period 12,847 16,372 12,746 16,320

These financial statements should be read in conjunction with the accompanying notes and statement of accounting policies.

12 BRAINZ ANNUAL REPORT 2007

Statement of Financial Position

As at 31 March 2007

GRoUP PARent MARCH 2007 AUGUST 2006 MARCH 2007 AUGUST 2006 NOTE NZ$000 NZ$000 NZ$000 NZ$000 CURRent Assets Cash and bank balances 6,970 10,140 6,895 10,075 Accounts receivable 9 985 838 964 825 Inventories 10 252 460 252 460 Taxation receivable 145 110 145 110 8,352 11,548 8,256 11,470 non-CURRent Assets Plant and equipment 13 340 316 297 270 Intangibles 15 4,739 5,124 4,739 5,124 Investments 11 – – 4 4 5,079 5,440 5,040 5,398 total Assets 13,431 16,988 13,296 16,868 CURRent LIABILItIes Accounts payable 18 550 594 550 548 Taxation payable 34 22 – – 584 616 550 548 non-CURRent LIABILItIes Deferred taxation 14 – – – – – – – – eQUItY Share capital 7 25,623 25,623 25,623 25,623 Reserves 8 (12,776) (9,251) (12,877) (9,303) 12,847 16,372 12,746 16,320 total equity and Liabilities 13,431 16,988 13,296 16,868 Net tangible assets 8,108 11,248 8,007 11,196 Net tangible assets per share $0.14 $0.19 $0.13 $0.19 Shares on issue at end of period 60,000,000 60,000,000 60,000,000 60,000,000

These financial statements should be read in conjunction with the accompanying notes and statement of accounting policies.

BRAINZ ANNUAL REPORT 2007 13

Statement of Cash Flows

For the seven months ended 31 March 2007

GRoUP PARent 7 MONTHS 12 MONTHS 7 MONTHS 12 MONTHS MARCH 2007 AUGUST 2006 MARCH 2007 AUGUST 2006 NOTE NZ$000 NZ$000 NZ$000 NZ$000 CAsH FLoWs FRoM oPeRAtInG ACtIVItIes Cash was provided from: Receipts from customers 1,148 1,377 1,148 1,377 Government funding 373 910 373 910 Interest income 214 339 214 339 1,735 2,626 1,735 2,626 Cash was applied to: Payments to suppliers and employees (3,968) (4,411) (3,992) (4,525) Income tax paid (9) – – – Interest expense paid – (78) – (78) (3,977) (4,489) (3,992) (4,603) Net cash outfow from operating activities 21 (2,242) (1,863) (2,257) (1,977) CAsH FLoWs FRoM InVestInG ACtIVItIes Cash was applied to: Purchase of shares in subsidiaries – – – (4) Purchase of plant and equipment (136) (238) (131) (185) Investment in development assets – (1,859) – (1,859) (136) (2,097) (131) (2,048) Net cash outfow from investing activities (136) (2,097) (131) (2,048) CAsH FLoWs FRoM FInAnCInG ACtIVItIes Cash was provided from: Proceeds from issue of shares 7 – 18,918 – 18,918 Advance from parent company – 400 – 400 – 19,318 – 19,318 Cash was applied to: Repayment of parent company loan – (5,630) – (5,630) Costs of share issue 8 – (1,325) – (1,325) – (6,955) – (6,955) Net cash infow from fnancing activities – 12,363 – 12,363 net increase (decrease) in cash held (2,378) 8,403 (2,388) 8,338 Cash at beginning of period 10,140 178 10,075 178 Effect of exchange rate on foreign currency balance (792) 1,559 (792) 1,559 Cash at end of period 6,970 10,140 6,895 10,075

These financial statements should be read in conjunction with the accompanying notes and statement of accounting policies.

14 BRAINZ ANNUAL REPORT 2007

Statement of Accounting Policies

For the seven months ended 31 March 2007

a. Basis of Preparation

BrainZ Instruments Limited is a company domiciled in New Zealand, registered under the Companies Act 1993. The reporting currency used in the preparation of these financial statements for the seven months to 31 March 2007 is New Zealand dollars.

The Group consists of BrainZ Instruments Limited and its subsidiaries.

The financial statements and Group financial statements have been prepared in accordance with the Financial Reporting Act 1993 and generally accepted accounting principles in New Zealand.

The financial statements are prepared on the basis of historical cost.

B. revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.

sale of Goods

Sales revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be reliably measured.

Government Grants

Government grants compensating the Group for development costs incurred are recognised as revenue in the statement of financial performance on a systematic basis in the same periods in which the costs are incurred.

Interest

Interest revenue is recognised as the interest accrues.

d. Plant and Equipment

owned Assets

All owned items of plant and equipment are initially recorded at cost and depreciated. Initial cost includes the purchase consideration, or fair value, and those costs directly attributable to bringing the asset to the location and condition necessary for its intended use. Subsequent expenditure relating to an item of plant and equipment is added to its gross carrying value when such expenditure increases the future economic benefits beyond its existing service potential and that expenditure would have been included in the initial cost of the item had the expenditure been incurred at that time.

Depreciation

Depreciation is calculated on a straight line basis to allocate the cost of the asset, less any residual value, over its useful life.

The estimated economic lives of the major classes of fixed assets are:

Plant and equipment 3 –10 years

E. receivables

Receivables are carried at estimated net realisable value.

F. Inventories

Inventories are valued at the lower of cost and net realisable value.

Cost is calculated on a weighted average basis and includes expenditure incurred in acquiring inventories and bringing them to their existing condition and location. In the case of work in progress and finished goods, cost includes a portion of direct labour and production overheads appropriate to the stage of completion attained.

c. Basis of consolidation

G. Taxation

subsidiaries

The consolidated financial statements include the parent company and its subsidiary companies, accounted for using the purchase method of consolidation. The effects of intra-Group transactions are eliminated in the financial statements. In the parent company financial statements investments in subsidiaries are stated at cost.

Acquisition

Where an entity becomes part of the Group during the year, the results of that entity are included in the consolidated results from the date that control or significant influence commenced. When an entity is acquired all identifiable assets and liabilities are recognised at their fair value at acquisition date.

Income tax expense is recognised on the surplus before taxation adjusted for permanent differences between taxable and accounting income.

Deferred tax is calculated using the comprehensive basis under the liability method. This method involves recognising the tax effect of all timing differences between accounting and taxable income as a deferred tax asset or liability in the statement of financial position. A debit balance in the deferred tax account arising from timing differences is only recognised if there is virtual certainty of realisation.

BRAINZ ANNUAL REPORT 2007 15

continued Statement of Accounting Policies

As at 31 August 2006

H. Foreign currencies

exchange Differences

Transactions in foreign currency are translated to New Zealand dollars using the exchange rate at the date of the transaction.

At balance date foreign monetary assets and liabilities are translated at the closing rate, and exchange variations arising from these translations are recognised in the statement of financial performance. Revenue and expense items of foreign subsidiaries are translated at the average monthly rate or a rate approximating that rate.

translation of Foreign operations

The assets and liabilities of the Group’s overseas operations, being integrated foreign operations, are translated to New Zealand dollars in the same way as if the underlying transactions had been entered into by the parent company.

K. Financial Instruments

The Group uses financial instruments with off balance sheet risk to meet financing needs and to reduce exposure to fluctuations in foreign currency exchange rates and interest rates. These financial instruments include foreign exchange forward contracts.

L. Leases

Group entities lease certain land and buildings.

Payments made under operating leases are recognised in the statement of financial performance on a basis representative of the pattern of benefits expected to be derived from the leased asset.

m. Provisions

All provisions are recorded at the best estimate of the expenditure required to settle the obligation at balance date.

I. research and development costs

All research expenditure is recognised in the statement of financial performance as incurred. Development expenditure is recognised as an asset when the asset can be clearly defined, reliably measured and it can be demonstrated that the commercial production of the material or product will commence.

When a project reaches the stage where it is reasonably certain that further expenditure can be recovered through the processes or products produced, development expenditure is recognised as a development asset. If an asset subsequently ceases to meet the recognition criteria it is written down to the statement of financial performance. Development assets are amortised from the commencement of the commercial production of the product to which it relates, on a straight line basis, over the period of expected benefits. All other development expenditure is recognised in the statement of financial performance as incurred.

During the 2006 financial year the application of the accounting policy for research and development costs was reviewed and development assets were written down.

J. Intellectual Property

Intellectual property is recorded at cost less any accumulated impairment losses and amortised from the commencement of commercial production of the product to which it relates. Amortisation is calculated on a straight line basis over the period of expected benefits, being the life of the intellectual property, but not greater than 10 years.

n. Impairment

If the estimated recoverable amount of an asset is less than its carrying amount, the asset is written down to its estimated recoverable amount and an impairment loss is recognised in the statement of financial performance.

O. Share Issue costs

The costs associated with the shares issued on the Australian Stock Exchange are accounted for in Capital Reserves in the statement of financial position.

P. comparatives

Certain comparatives have been restated to ensure consistency with current year disclosure. Comparative figures are from the previous Financial Statements for the twelve months ended 31 August 2006.

q. changes In accounting Policies

There have been no changes in accounting policies during the period. All policies have been applied on bases consistent with those used in prior years.

16 BRAINZ ANNUAL REPORT 2007

For the seven months ended 31 March 2007

Notes to the Financial Statements

1. oPeRAtInG ReVenUe

1. oPeRAtInG ReVenUe
	GRoUP		PARent
	7 MONTHS	12 MONTHS	7 MONTHS	12 MONTHS
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Comprises:
Sales revenue	1,406	1,565	1,406	1,565
Interest revenue	214	339	214	339
Foreign exchange gains	–	1,701	–	1,701
Government funding	339	1,051	339	1,051
	1,959	4,656	1,959	4,656

2. oPeRAtInG eXPenses

The following items are included within the deficit before taxation and non-recurring items:

	GRoUP	GRoUP	PARent	PARent
	7 MONTHS	12 MONTHS	7 MONTHS	12 MONTHS
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Operating expenses include:
Interest expense:
Advance from parent company	–	77	–	77
Other	–	1	–	1
	–	78	–	78
Amortisation of intangible assets:
Intellectual property	385	662	385	662
Development assets	–	237	–	237
	385	899	385	899
Research and development costs (excluding depreciation and amortisation)	1,294	278	1,294	278
Depreciation on plant and equipment	108	152	100	145
Loss on disposal of plant and equipment	4	11	4	11
Operating lease costs	70	61	30	40
Directors’ fees	156	181	156	181
Foreign exchange losses	834	98	829	95
Auditor’s remuneration for auditing fnancial statements:
Deloitte	20	20	20	20
Other auditors	12	11	–	11
	32	31	20	31
Auditor’s remuneration for other services
Deloitte	–	–	–	–
Other auditors	–	–	–	–

BRAINZ ANNUAL REPORT 2007 17

For the seven months ended 31 March 2007

Notes to the Financial Statements continued

3. non-ReCURRInG IteMs

3. non-ReCURRInG IteMs
		GRoUP		PARent
		7 MONTHS	12 MONTHS	7 MONTHS	12 MONTHS
		MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NOTE	NZ$000	NZ$000	NZ$000	NZ$000
Write down of development assets	16	–	5,249	–	5,249

4. tAXAtIon

A. Income tax expense

A. Income tax expense	GRoUP		PARent
	7 MONTHS	12 MONTHS	7 MONTHS	12 MONTHS
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Defcit before taxation	(3,504)	(6,080)	(3,574)	(6,155)
Prima facie income tax (33%)	(1,156)	(2,008)	(1,179)	(2,031)
Permanent differences:
Tax effect of non-deductible expenditure	1	16	1	16
Effect of tax losses not recognised	1,145	497	1,145	497
Effect of timing differences not recognised	33	377	33	377
Difference in overseas tax rates	(2)	–	–	–
Income tax expense	21	(1,118)	–	(1,141)
The income tax expense is represented by:
Current taxation	21	(17)	–	(40)
Deferred taxation	–	(1,101)	–	(1,101)
	21	(1,118)	–	(1,141)

The Group now has unrecognised tax losses of $4,371,000 (2006: $1,506,000) that are available to offset against future taxable income. The future availability of these losses is dependent on the satisfaction of an income tax continuity of ownership test. Tax losses of $640,000 for the 2006 year were unable to be carried forward as they did not meet the continuity of ownership test.

B. Imputation credits

B. Imputation credits	GRoUP AnD PARent
	MARCH 2007	AUGUST	2006
	NZ$000	NZ$000
Balance at beginning of period	110		–
Resident withholding tax paid	35		110
Balance at end of period	145		110

Imputation credits are available to shareholders through the parent company.

18 BRAINZ ANNUAL REPORT 2007

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5. net DeFICIt PeR sHARe

Net deficit per share is based upon the weighted average number of outstanding ordinary shares. The effect of the ordinary share split of 3.23 for 1 in October 2005 has been applied to the calculation of the weighted average number of outstanding ordinary shares for all periods presented. The company’s potentially dilutive ordinary share options have not been included in determining the weighted average number of ordinary shares.

ordinary shares.
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Net defcit for the period	(3,525)	(4,962)	(3,574)	(5,014)
Basic and diluted net defcit per share	($0.06)	($0.10)	($0.06)	($0.10)
Weighted average number of shares	60,000,000	50,351,902	60,000,000	50,351,902

6. DIVIDenDs

There were no dividends paid by the company in 2007 (2006: nil).

7. sHARe CAPItAL

Fully paid ordinary shares	GRoUP AnD PARent	GRoUP AnD PARent
	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000
Share capital at beginning of period	25,623	6,705
Shares issued to parent company	–	5,270
Shares issued to new shareholders	–	13,648
Share capital at end of period	25,623	25,623

The number of issued and paid-up shares as at 31 March 2007 was 60,000,000 (2006: 60,000,000). All ordinary shares have equal voting rights and share equally in dividends and surplus on winding up.

After August 2005, a 3.23 for 1 share split occurred. This resulted in the paid up shares of 5,250,000 becoming 16,967,586 paid up shares. In addition on 18 October 2005 the company issued 17,032,414 fully paid ordinary shares to Tru-Test Limited for $5,270,059.

On 14 December 2005 the company was listed on the Australian Stock Exchange with the issue of 26,000,000 shares to new shareholders.

8. ReseRVes

8. ReseRVes
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Capital reserve	(1,325)	(1,325)	(1,325)	(1,325)
Retained earnings
Balance at beginning of period	(7,926)	(2,964)	(7,978)	(2,964)
Net defcit for the period	(3,525)	(4,962)	(3,574)	(5,014)
Balance at end of period	(11,451)	(7,926)	(11,552)	(7,978)
total reserves	(12,776)	(9,251)	(12,877)	(9,303)

The capital reserve represents the cost of the shares issued on the Australian Stock Exchange on 14 December 2005.

BRAINZ ANNUAL REPORT 2007 19

For the seven months ended 31 March 2007

Notes to the Financial Statements continued

9. ACCoUnts ReCeIVABLe

9. ACCoUnts ReCeIVABLe
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Accounts receivable – trade	634	376	634	376
Accounts receivable – other	351	422	319	393
Accounts receivable – related party	–	40	–	40
Accounts receivable – intercompany	–	–	11	16
	985	838	964	825

10. InVentoRIes

10. InVentoRIes
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Raw material and components	104	191	104	191
Work in progress	37	150	37	150
Finished goods	111	119	111	119
	252	460	252	460

11. InVestMents

11. InVestMents
		GRoUP		PARent
		MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NOTE	NZ$000	NZ$000	NZ$000	NZ$000
Shares in subsidiaries	12	–	–	4	4

12. InVestMents In sUBsIDIARIes

12. InVestMents In sUBsIDIARIes
	PRINCIPAL	PERCENTAGE HELD By		BALANCE	COUNTRy OF
	ACTIVITy	BRAINZ INSTRUMENTS LTD		DATE	INCORPORATION
		MARCH 2007	AUGUST 2006
Shares in subsidiaries comprise:
BrainZ Instruments USA Inc.	Product support	100%	100%	31 March	USA
BrainZ Instruments UK Limited	Product support	100%	100%	31 March	UK

13. PLAnt AnD eQUIPMent

13. PLAnt AnD eQUIPMent
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Plant and equipment
At cost	822	701	764	648
Accumulated depreciation	(482)	(385)	(467)	(378)
	340	316	297	270
Total net carrying amount	340	316	297	270

20 BRAINZ ANNUAL REPORT 2007

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14. DeFeRReD tAXAtIon

14. DeFeRReD tAXAtIon
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Deferred taxation at beginning of period	–	1,124	–	1,124
Transfer to taxation payable	–	(23)	–	(23)
Recognised in the statement of fnancial performance	–	(1,101)	–	(1,101)
Deferred taxation at end of period	–	–	–	–

A future income tax benefit has not been provided on $1,281,000 of timing differences (2006: $1,142,000) where virtual certainty criteria have not been met.

On 17 May 2007 the New Zealand Government announced in its annual budget that the New Zealand corporate tax rate will be reduced from 33% to 30% with effect from the 2008/2009 tax year. This will impact the Group for the financial year commencing 1 April 2008 and the net effect of any losses subsequently utilised.

15. IntAnGIBLe Assets

15. IntAnGIBLe Assets
		GRoUP		PARent
		MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NOTE	NZ$000	NZ$000	NZ$000	NZ$000
Development assets	16	–	–	–	–
Intellectual property	17	4,739	5,124	4,739	5,124
		4,739	5,124	4,739	5,124
16. DeVeLoPMent Assets
		GRoUP		PARent
		MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
		NZ$000	NZ$000	NZ$000	NZ$000
Balance at beginning of period		–	3,627	–	3,627
Costs capitalised		–	1,859	–	1,859
Asset written down		–	(5,249)	–	(5,249)
Amortisation		–	(237)	–	(237)
Balance at end of period		–	–	–	–

Development assets arise from the Group’s activities in developing medical equipment. Assets were written down during the 2006 year in accordance with accounting policy I and N.

17. InteLLeCtUAL PRoPeRtY

17. InteLLeCtUAL PRoPeRtY
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Balance at beginning of period	5,124	5,786	5,124	5,786
Amortisation	(385)	(662)	(385)	(662)
Balance at end of period	4,739	5,124	4,739	5,124
Original cost	6,612	6,612	6,612	6,612
Accumulated amortisation to date	(1,873)	(1,488)	(1,873)	(1,488)
Balance at end of period	4,739	5,124	4,739	5,124

BRAINZ ANNUAL REPORT 2007 21

Notes to the Financial Statements continued

For the seven months ended 31 March 2007

18. ACCoUnts PAYABLe

18. ACCoUnts PAYABLe
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Current
Accounts payable – trade	118	111	116	94
Accounts payable – other	412	440	348	362
Accounts payable – related party	20	43	20	43
Accounts payable – intercompany	–	–	66	49
	550	594	550	548
Annual leave entitlements included in Accounts payable – other	106	98	106	98

19. ContInGent LIABILItIes AnD oPeRAtInG LeAse CoMMItMents

	GRoUP	GRoUP	PARent	PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Lease commitments under non-cancellable operating leases:
Not later than 1 year	105	102	51	51
Later than 1 year and not later than 2 years	61	88	25	51
Later than 2 years and not later than 5 years	–	23	–	4
	166	213	76	106

During the period the company provided a letter of credit to the ASB Bank Limited for £16,000 as security for credit cards for subsidiary BrainZ Instruments UK Limited (2006: nil).

There are no other contingent liabilities that have not already been disclosed in the accounts (2006: nil).

20. CAPItAL CoMMItMents

20. CAPItAL CoMMItMents
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Capital commitments contracted for at balance date
for computer equipment.	–	19	–	19

22 BRAINZ ANNUAL REPORT 2007

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21. net CAsH FLoWs FRoM oPeRAtInG ACtIVItIes

The following is a reconciliation between the net deficit after income tax shown in the statement of financial performance and the net cash flow from operating activities.

from operating activities.
	GRoUP		PARent
	7 MONTHS	12 MONTHS	7 MONTHS	12 MONTHS
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
net defcit for the period	(3,525)	(4,962)	(3,574)	(5,014)
Add non-cash items:
Amortisation of intangible assets	385	899	385	899
Depreciation	108	152	100	145
Movement in deferred taxation	–	(1,124)	–	(1,124)
Unrealised foreign exchange losses/(gains)	792	(1,559)	792	(1,559)
	1,285	(1,632)	1,277	(1,639)
Less items classifed as fnancing activities:
Transfer of tax credit to related party	–	(40)	–	(40)
Plus items classifed as investing activities:
Loss on sale of plant and equipment	4	11	4	11
Write down of development assets	–	5,249	–	5,249
	4	5,260	4	5,260
Movement in working capital:
Increase/(decrease) in accounts payable – trade	7	16	22	(1)
Increase/(decrease) in accounts payable – other	(28)	209	(14)	131
Increase/(decrease) in accounts payable – related party	(23)	43	(23)	43
Increase in accounts payable – intercompany	–	–	17	49
Increase in taxation payable	12	22	–	–
Increase in taxation receivable	(35)	(110)	(35)	(110)
Increase in accounts receivable – trade	(258)	(188)	(258)	(188)
Decrease/(increase) in accounts receivable – other	71	(259)	74	(230)
Decrease in accounts receivable – related party	40	–	40	–
Decrease/(increase) accounts receivable – intercompany	–	–	5	(16)
Decrease/(increase) in inventories	208	(222)	208	(222)
	(6)	(489)	36	(544)
net cash outfow from operating activities	(2,242)	(1,863)	(2,257)	(1,977)

22. eVents AFteR BALAnCe DAte

No significant events have occurred after balance date which require disclosure.

23. seGMent InFoRMAtIon

The Group operates solely in the medical industry, its primary business being the manufacture of brain monitoring equipment, and from one geographical location, being New Zealand, for the manufacture and distribution of it’s products.

BRAINZ ANNUAL REPORT 2007 23

For the seven months ended 31 March 2007

Notes to the Financial Statements continued

24. ReLAteD PARtY tRAnsACtIons

The company is 56.67% owned by Tru-Test Limited and as such the transactions with Tru-Test group companies are related party transactions.

A. transactions during the period

A. transactions during the period	GRoUP AnD PARent
	7 MONTHS	12 MONTHS
	MARCH 2007	AUGUST	2006
	NZ$000	NZ$000
expenses paid
Rent	30		40
Computer technology and support	105		191
Management fee	28		109
Interest expense	–		77
Drawing and design offce costs	25		38
Manufacturing services	21		12
Director’s fees	27		44
Income received
Credit received for use of tax losses	–		40

The company is currently a tenant under an unregistered sublease of premises situated at 25 Carbine Road, Mt Wellington, New Zealand. The company pays arm’s length market rent.

Under an annual management services agreement, Tru-Test Ltd provides company secretarial, accounting, administration, information, operations and distribution services. The services are provided to the company at specified monthly rates.

Tru-Test Limited has charged interest on advances to fund the company until the advances were repaid in October 2005.

Director’s fees have been paid to Tru-Test Limited for its representative on the company Board during the year.

Prior to listing on the ASX , the company received credit for the tax losses utilised by other Tru-Test group companies.

B. Balances at end of period

B. Balances at end of period	GRoUP AnD PARent
	MARCH 2007	AUGUST	2006
	NZ$000	NZ$000
Accounts payable – related party	20		43
Accounts receivable – related party	–		40
25. ULtIMAte PARent CoMPAnY

The ultimate parent company of BrainZ Instruments Limited is Tru-Test Corporation Limited.

24 BRAINZ ANNUAL REPORT 2007

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26. FInAnCIAL InstRUMents

Credit Risk

Credit risk is the risk that the counter party to a transaction with the Group will fail to discharge its obligations, causing the Group to incur a financial loss. The Group is primarily exposed to credit risk through its bank balances, accounts receivable and foreign currency forward exchange contracts.

The Group performs credit evaluations on all customers requiring credit and does not require collateral.

Maximum exposures to credit risk as at balance date are:

Maximum exposures to credit risk as at balance date are:
	GRoUP		PARent
	MARCH 2007	AUGUST 2006	MARCH 2007	AUGUST 2006
	NZ$000	NZ$000	NZ$000	NZ$000
Bank balances	6,970	10,140	6,895	10,075
Accounts Receivable	801	617	812	633

Foreign Currency Risk

Foreign currency risk is the risk that the value of the Group’s assets and liabilities will fluctuate due to changes in foreign exchange rates. The Group is exposed to currency risk as a result of transactions that are denominated in a currency other than New Zealand dollars. Such transactions which would typically expose the Group to foreign currency risk include exported sales and imported purchases. The main currencies giving rise to credit risk in which the Group primarily deals are Euros, US dollars, Australian dollars and UK pounds.

At 31 March 2007, the company had monetary assets totalling AU$0.1 million, US$4.7 million, £1.6 million and €1.2 million that are not hedged (2006: AU$0.5 million, US$3.4 million, £0.6 million and €1.2 million). There are no material monetary liabilities in foreign currency (2006: nil).

Interest Rate Risk

Interest rate risk is the risk that the value of the Group’s assets and liabilities will fluctuate due to changes in market interest rates. The Group is exposed to interest rate risk through its cash balances.

Credit Facilities

The Group has cash balances of $7.0 million (2006: $10.1 million). There are no external borrowings (2006: nil).

Fair Values

Bank balances and Accounts Receivable

The carrying value of these financial instruments is equal to their fair value.

Accounts Payable

The carrying value of these financial instruments is equal to their fair value.

27. sHARe oPtIons

employee share option plan

In December 2002 the directors of BrainZ Instruments Limited established the BrainZ Option Plan. The option plan was administered by a committee appointed by the Board who may offer options, to purchase shares in BrainZ Instruments Limited, to selected employees, contractors, directors and members of the scientific advisory board of the company, up to a maximum of 2,500,000 options in total. As part of the ASX listing this option plan has been cancelled.

A new option plan has been approved. This plan is called the BrainZ Instruments Limited Option Plan.

At 31 March 2007 there are 5,963,556 options outstanding (2006: 6,344,339) with exercise periods from 14 December 2006 to 31 December 2009. Each of these options have an exercise price of A$0.63 (2006: A$0.63). No options have been exercised to date.

The plan is administered by the Employee Option Plan Committee (a subcommittee of the Board of Directors). The committee may from time to time make an offer to selected employees, contractors, directors, founders and members of the scientific advisory board of the company to join the plan. Any options issued to Directors are subject to shareholder approval.

The ordinary shares issued following the exercise of the options will rank equally with the other ordinary shares in the company.

28. IMPACt oF ADoPtInG InteRnAtIonAL FInAnCIAL RePoRtInG stAnDARDs

Adoption of New Zealand equivalents to international financial reporting standards (NZ IFRS) is planned for the preparation of the financial statements of the Group for the year ended 31 March 2008. The Directors have initiated the transition to NZ IFRS by appointing a project team which includes internal management staff and IFRS consultants from KPMG. Although the company has commenced the transition to NZ IFRS, it is not known what the key differences in accounting policies or financial impacts are expected to be as a result of conversion to NZ IFRS.

BRAINZ ANNUAL REPORT 2007 25

Additional Information

For the year ended 31 August 2006

eQUItY seCURItIes HeLD BY DIReCtoRs As At 26 JUne 2007

eQUItY seCURItIes HeLD BY DIReCtoRs As At 26 JUne 2007
	INTERESTS IN		INTERESTS IN
	ORDINARy SHARES		OPTIONS
DIRECTOR	DIRECT	INDIRECT*	DIRECT	INDIRECT
P M Smith	–	–	165,000	–
Dr J Vaughan (formerly Chief Executive Offcer)	–	–	720,892	–
K J Aitchison	–	3,548,672	125,000	–
Dr J Brown	–	–	125,000	–
Dr R L Congreve	–	1,118,320	125,000	–
R K Sharp	–	4,200,000	125,000	–

• The shares are held either directly or indirectly through an interest in Tru-Test Corporation Limited shares.

The options allocated to non-executive Directors will vest by 14 December 2007. All of the 720,892 options allocated to Dr J Vaughan have vested. Of these, 595,892 options will lapse if not exercised by 25 July 2007. All options have an exercise price of A$0.63.

sHAReHoLDInG

Each ordinary share is entitled to one vote when a poll is called: otherwise on a show of hands at a general meeting every member present in person or by proxy has one vote.

The number of ordinary shareholdings held in less than marketable parcels at 26 June 2007 was 16, holding 14,510 ordinary shares. The following information is presented based on share registry information processed up to 26 June 2007.

Distribution of shareholders

Distribution of shareholders		NUMBER OF
	NUMBER OF	ORDINARy
ANALySIS OF NUMBERS OF FULLy PAID ORDINARy SHARES By SIZE OF HOLDING:	SHAREHOLDERS	SHARES
1 – 1,000	16	14,510
1,001 – 5,000	89	325,888
5,001 – 10,000	109	1,002,024
10,001 – 100,000	183	6,441,465
100,001 and over	42	52,216,113
	439	60,000,000

Distribution of optionholders

Distribution of optionholders
	NUMBER OF	NUMBER OF
ANALySIS OF NUMBERS OF OPTIONS By SIZE OF HOLDING:	OPTIONHOLDERS	OPTIONS
1 – 1,000	–	–
1,001 – 5,000	–	–
5,001 – 10,000	–	–
10,001 – 100,000	10	756,940
100,001 and over	15	5,206,616
	25	5,963,556

substantial security Holderswho have notifed the company
as at 26 June 2007	NUMBER OF
	ORDINARy SHARES
Tru-Test Limited	34,000,000

26 BRAINZ ANNUAL REPORT 2007

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securities subject to escrow as at 26 June 2007	NUMBER OF	NUMBER OF
	ORDINARy SHARES	OPTIONS
Compulsory escrow period ends 14 December 2007	24,418,020	–
twenty Largest Holdersof fully paid ordinary shares as at 26 June 2007
	NUMBER OF	%
	ORDINARy SHARES	HOLDING
Tru-Test Limited	34,000,000	56.67
First Charnook Pty Limited	2,050,000	3.42
JT Campbell & Co Private Equity Pty Limited	1,451,643	2.42
Bell Potter Nominees Limited	1,250,488	2.08
SHR Pty Limited	1,211,938	2.02
Snowdon Peak Investments Limited	900,000	1.50
De Simone Nominees Pty Limited	800,000	1.33
ANZ Nominees Limited	755,250	1.26
Mr Andrew Kroger	718,366	1.20
Titan Capital Pty Limited	683,500	1.14
Mr James Vincent Chester Guest	580,000	0.97
Citicorp Nominees Pty Limited	550,000	0.92
National Nominees Limited	535,000	0.89
Mr David Kevin Colvin	514,688	0.86
Mr David Peter Neil Symons	451,095	0.75
Peter Franzis Menzies, Peter James Mahoney & Mary Anne Mahoney	400,000	0.67
UBS Wealth Management Australia Nominees Pty Limited	372,000	0.62
Oaktel Investments Pty Limited	360,000	0.60
Orshan Pty Ltd	350,000	0.58
TBT Nominees Pty Limited	286,000	0.48
	48,219,968	80.37

Australian stock exchange Disclosures

BrainZ Instruments Limited is incorporated in New Zealand under the Companies Act 1993.

The company is not subject to chapters 6, 6A, 6B and 6C of the Corporations Act 2001, Australia, dealing with the acquisition of shares (such as substantial holdings and takeovers).

Limitations on the acquisition of shares are imposed by the following New Zealand legislation: Companies Act 1993, Securities Act 1978, Securities Amendment Act 1988, Takeovers Act 1993, Overseas Investment Act 1973, Commerce Act 1986 and various regulations and codes promulgated under such Acts.

BRAINZ ANNUAL REPORT 2007 27

Directory

As at 31 August 2006

dIrEcTOrS

P M Smith (Chairman) K J Aitchison Dr J Brown Dr R L Congreve R K Sharp Dr J Vaughan

cHIEF EXEcUTIvE OFFIcEr

R A Smith

cOmPany SEcrETary

cOmPany

BrainZ Instruments Limited ARBN 116 829 675

rEGISTErEd OFFIcE

25 Carbine Road Mt Wellington Auckland 1060 New Zealand

PO Box 51078 Pakuranga Manukau 2140 New Zealand

I R Hadwin

aUdITOr

Telephone: +64 9 978 8896 Facsimile: +64 9 978 8889 Internet: www.brainz.com

Deloitte

8 Nelson Street Auckland New Zealand

SOLIcITOrS

Russell McVeagh

48 Shortland Street Auckland New Zealand

Minter ellison Rudd Watts

125 Queen Street Auckland New Zealand

SHarE rEGISTry

Computershare Investor services Pty Limited yarra Falls 452 Johnston Street Abbotsford, Victoria 3067 Australia

PrIncIPaL OFFIcE In aUSTraLIa

2/2b Birmingham Avenue Villawood, New South Wales 2163 Australia

LOcaL aGEnT OF THE cOmPany In aUSTraLIa

Minter ellison

525 Collins Street Melbourne Australia

oakhill Hamilton Pty Limited 35 Hamilton Street Riverview, New South Wales 2066 Australia

TaXaTIOn & FInancIaL cOnSULTanTS

STOcK EXcHanGE LISTInG

PricewaterhouseCoopers

188 Quay Street Auckland New Zealand

Australian stock exchange Limited ASX Code: BZI

BanKErS

AsB Bank Limited

135 Albert Street Auckland New Zealand

28 BRAINZ ANNUAL REPORT 2007

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