INVESTSMART GROUP LIMITED — Annual Report 2007

Aug 29, 2007

Appendix 4E

________________________________________________________________________

Preliminary Final Report to the Australian Stock Exchange

Name of Entity	Fat Prophets Australia Fund Limited
ABN	62 111 772 359
Financial Year Ended	30 June 2007
Previous Corresponding	30 June 2006
Reporting Period

Results for Announcement to the Market

			\$ '000	Percentage increase /(decrease) over previous corresponding period #
Revenue from ordinary activities			3,176	177%
Profit/(loss) from ordinary activities after tax attributable to members (excluding realised capital gains/(losses))			2,276	405%
Profit / (loss) for the period attributable			5,389	139%
to members (including realised capital gains /(losses)
Dividends (distributions)	Amount per			Franked amount per
	security			security
Final Dividend	2 cents + 1 cent special			100%
Previous corresponding period	2.1 cps			100%
Record date for determining entitlements to the dividends (if any)			10 October 2007

Dividends

Date the dividend is payable	24 October 2007
Record date to determine
entitlement to the dividend	10 October 2007
Amount per security	2 cents +1 cent special
Total dividend	3 cents
Amount per security of foreign	n/a
sourced dividend or distribution

	____________
Details of any dividend	n/a
reinvestment plans in operation
The last date for receipt of an	n/a
election notice for participation
in any dividend reinvestment
plans

NTA Backing

	Current Period To 30/06/07	Previous corresponding period
Net tangible asset backing per ordinary security – pre deferred capital gains tax	\$1.4304	\$1.1999

Other Significant Information Needed by an Investor to Make an Informed Assessment of the Entity's Financial Performance and Financial Position:

See attached Annual Report

The earnings per security and the nature of any dilution aspects: Refer Annual Report

Returns to shareholders including distributions and buy backs: Refer Annual Report

Significant features of operating performance: Refer Annual Report

The results of segments that are significant to an understanding of the business as a whole: Refer Annual Report

Discussion of trends in performance: Refer Annual Report

Any other factor which has affected the results in the period or which are likely to affect results in the future, including those where the effect could not be quantified: Refer Annual Report

Audit/Review Status

This report is based on accounts to which one of the following
applies:
(Tick one)
The accounts have been	5	The accounts have been
audited		subject to review
The accounts are in the		The accounts have not yet
process of being audited or		been audited or reviewed
subject to review
If the accounts have not yet been audited or subject to review and are likely to be subject to dispute or qualification, a description of the likely dispute or qualification: Refer Annual Report
If the accounts have been audited or subject to review and are subject to dispute or qualification, a description of the dispute or qualification:
Refer Annual Report

________________________________________________________________________

Attachments Forming Part of Appendix 4E

Attachment #	Details
1	Annual Report

Signed By Director
Print Name	Andrew Brown
Date	29 August 2007

FAT PROPHETS AUSTRALIA FUND LIMITED

ABN 62 111 772 359

ANNUAL REPORT

For the year ended 30 June 2007

1. Directory

Investment Manager Registered Office

Fat Prophets Funds Management Australia Pty Ltd Level 33 AFSL 284171 2 Park Street ACN 112 466 887 Sydney NSW 2000 ABN 42 112 466 887 Level 33 Share Registry 2 Park Street Registries Limited Sydney NSW 2000 ACN 003 209 836 Telephone: 02 9024 6725 ABN 14 003 209 836

Robert J Bolton (Chairman) Sydney NSW 2000 Bruce W Holman Andrew Brown Shareholder Enquiries Angus Geddes Telephone: (02) 9290 9600

Company Secretary Clare Porta

Accounting & Administration

White Outsourcing Pty Limited ACN 074 709 210 ABN 76 074 709 210 Level 7 20 Hunter Street Sydney NSW 2000 Telephone: (02) 8236 7700 Fax: (02) 9221 1194

Auditors

Grosvenor Schiliro ABN 12 225 759 072 Level 2 333 George Street Sydney NSW 2000 Telephone: (02) 9299 7399 Fax: (02) 9299 7311

Level 2 Directors 28 Margaret Street

Contents

1. Directory	1
2. Chairman's Report	3
3. Investment Manager's Report	6
4. Corporate Governance Statement	11
5. Directors' Report	22
6. Auditor's Independence Declaration	29
7. Income Statement	30
8. Balance Sheet	31
9. Statement of Changes in Equity	32
10. Cash Flow Statement	33
11. Notes to the Financial Statements	34
12. Directors' Declaration	45
13. Independent Audit Report to the Members	46
14. ASX Additional Information	48

2. Chairman's Report

My Fellow Shareholders,

It is my pleasure to share with you the Fat Prophets Australia Fund Limited ("Fat Fund") Annual Report for the year ended 30 June 2007.

Profit

The Fat Fund's net profit attributable to shareholders for the year ending 30 June 2007 was \$5,389,519. This compares with the net profit attributable to shareholders of \$2,252,763 for the year ending 30 June 2006. This represents an increase of 139%.

Earnings per share and dividends

The weighted average earnings per share grew from 7.0 cents to 16.8 cents. This is the basic and diluted earnings per share including net realised gains / losses on the investment portfolio.

The fund aims to provide shareholders with a reliable fully franked dividend income stream. The table below shows the fully franked dividends paid to date.

Dividend Type	Dividend per share (cents per share)	Paid on
Interim - 2006	1.2	26 April 2006
Final - 2006	2.1	24 October 2006
Interim - 2007	2.0	20 April 2007
Special - 2007	1.0	20 April 2007
Total Paid to date	6.3 cents
Final 2007 - unpaid	2.0	24 October 2007
Special 2007- unpaid	1.0	24 October 2007

The Directors have declared a final dividend of 2.0 cents per share plus a 1.0 cent per share special dividend. The record date is 10 October 2007 and the payment date is 24 October 2007.

Net Asset Backing (NTA)

The net tangible assets per share as at 30 June 2007 before the provision for the fully franked final ordinary dividend and before provision for tax on the unrealised capital gain was \$1.4304. This compares with \$1.1999 at 30 June 2006, a gain of 26.05% for the year including dividends.

The Directors are aware of the discount between the company's share price and the NTA. We have been taking a number of steps to address this discount. These are detailed below.

Board Composition and Management of the Fund

We would like to note that Angus Geddes rejoined the Board as a Director in September 2006. Angus is one of the founders of Fat Prophets Funds Management Australia Pty Ltd and is one of the founders of the Fat Prophets independent research company.

Angus is a Director and Chief Executive Officer of the Manager (Fat Prophets Fund Management Australia – FPFMA). The Manager will receive management and performance fees (where relevant) for managing the portfolio.

Angus has a dual role as a Director with the Company (Fat Fund) and the Manager (FPFMA). Relevant conflict of interest policies are in place to manage this dual role.

The day to day management of the Fat Fund has been sub-contracted by FPFMA to a wholly owned subsidiary of Tidewater Investments Limited. During the year, the period of this subcontract agreement was extended by a further two years until 20 April 2010. The Tidewater Investments Limited Managing Director, Andrew Brown, is also the responsible officer for FPFMA.

It is noted that entities associated with Angus Geddes and Andrew Brown own 4.9% and 5.4% of the undiluted shares in the Fat Fund respectively.

The fund overview, performance and portfolio positioning is detailed in the Investment Manager's Report.

Capital Management

The Directors have exercised a number of the capital management tools that are available to the Board. The overall aim of these capital management initiatives was to increase the underlying value of the NTA and to provide the maximum after tax benefits to the shareholders. These initiatives include increases in the dividends to shareholders and the use of an on-market share buyback, which commenced in September 2006. Up until 30th June 2007, 1,651,932 shares have been bought back. The issued capital of the Fat Fund as at 30 June 2007 was 32,431,218 ordinary shares at a paid up value of \$31,763,329.

The above shares have been bought back at discount to post-tax fully diluted NTA.

Exercise of Options

As at 30 June 2007, 1,898,149 Fat Fund Options ("FATO") have been exercised. There are 30,286,852 options remaining to be exercised. This will increase the capital which will reduce the impact of the fixed costs of the fund.

Outlook

The Fat Fund expects its portfolio of investments in companies and trusts to continue to generate increasing investment income, subject to market conditions.

The Fat Fund aims to pay fully franked dividends to shareholders and will continue its policy of capital preservation.

We remain cautious of the year ahead based on our assessment of the economic fundamentals and elevated asset values and multiples that are shaping the current Australian market.

The investment process remains very much value focused.

Our value style and focus on risk management positions us well to take advantage of any investment opportunities that may arise subject to market conditions.

We will continue to communicate regularly with shareholders via the website www.fatprophets.com.au/fatfund and via the NTA release.

We wish to remind you that the final exercise date of the \$1.00 options ("FATO") is 20 April 2008.

Together with my fellow Directors, I thank you for your support and look forward to meeting many of you at the Annual General Meeting. Following the meeting, there will be an Investment Manager's presentation by Andrew Brown.

Yours sincerely,

Robert Bolton Chairman

3. Investment Manager's Report

In the past year, the Australian equity market has borne a distinct resemblance to a house party, where the location happens to be adjacent to a liquor hyper-market – whose manager has accidentally left the back door unlocked. With the exception of a sharply rising Australian dollar, which tends to have generally negative connotations, virtually every other factor added to the prevailing party atmosphere – indeed, it is nigh on impossible to think of a more virtuous set of circumstances than has prevailed in Australian shares over the past twelve months:

• Massive global liquidity, both from central banks and the ongoing creation of larger numbers of debt and derivative type instruments;
• Low nominal (and real) interest rates;
• The price of risk, as measured by credit spreads for corporate bonds and emerging country debt relative to their US Government counterparts falling and remaining at extraordinary low levels;
• Volatility in the pricing of derivatives falling to long term lows;
• Continued growth in the Chinese economy, which has fuelled further price rises across base metals and bulk commodities;
• Strongly rising gold and oil price;
• Perceived and actual Corporate takeover activity amongst major Australian companies fuelled by this creation of liquidity and the large cash reserves of private equity businesses; and
• A reasonable growth and inflation environment within the Australian economy;
• Injection of significant further liquidity into the equity market from one-off changes to superannuation legislation.

To continue the analogy, the risk police have now decided the party is too noisy and way out of hand – and are shutting it down.

It's the third of the points above – the absurdly low price of risk – which has been our key worry over the past twelve months. It's a fear we have written about in many different ways in the monthly NTA releases - probably most starkly in the December 2006 release where we dissected the private equity bid for Qantas, effectively noting the availability of cheap credit was the real driver behind being able to contemplate doing the deal – and then deriving the attendant spin offs in fees to the respective parties.

We typically own about forty stocks in the portfolio at any one time. During the year we received:

• takeover offers for five of them (Burns Philp, Gloucester Coal, Sedimentary, Integrated Workforce, DCA Group);
• takeover offers for two stocks less than a month after we sold them Rinker and Gro-Pep;
• notice that two companies had received "serious" corporate approaches PCH Group and Great Southern;

• one takeover offer after the year end – IWL Limited.

We suspect this takeover mania is over for the time being, for the simple reason that high yield corporate debt has now been repriced back to more "normal" levels. In the US, this corresponds to about 4.5% to 5.5% above the yield on a comparable US Treasury bond. There is some justification for this spread to have been below "normal" over the past couple of years – with a healthy economy, corporations have been able to repay and refinance their debt as a result of stronger profitability. The problem is that these conditions have been extravagantly extrapolated into the future, with the result that risk was priced down to absurdly low levels.

As the sub-contract manager for the Fat Fund, we are charged, above all, with protecting your capital. That's why, in the type of insane environment that has prevailed over the first six months of calendar 2007, we have held high cash weightings of between 11-15% within the Fat Fund. There have been very few opportunities to buy shares at the type of desirable discounts to properly calculated valuations (not the nonsense that values Macquarie Bank at way over \$100 a share in today's money). We have tended to be very opportunistic and taken a number of positions in much smaller companies who have raised money at prices close to distressed values, and then traded them out when confidence has returned – in many cases, this is a circular and self-feeding course of action.

As a consequence, the Fat Fund has performed pretty well over the course of fiscal 2007 in an environment where (perhaps) it perhaps shouldn't, given its strong value disposition. To keep an eye on how we are travelling, we follow three measures of performance:

• gross of expenses and taxes so that we can compare ourselves to professional fund managers in the monthly surveys of the industry;
• net of expenses but before taxes, which provides a comparison to a typical retail unit trust whose performance is quoted in the financial sections of newspapers; and
• under ASX listing rule 19.12, where performance is after expenses and taxes on realised gains but before taxes on unrealised gains. This figure can, therefore, be heavily influenced by portfolio turnover, which will dilute the return in a rising stockmarket.

For the year to 30 June 2007, based on unaudited management analysis, the Fat Fund portfolio returned 29.84% gross of expenses and taxes, compared to the S&P/ASX 300 Accumulation benchmark index of 29.18%. This excess return of 0.66% is regarded as respectable on the basis that the Fat Fund 0.65% (on this measure) from engaging in the BHP off-market buyback to gain significant franking credits and was still hamstrung by certain legacy microcap positions for part of the year.

Additionally, the Fat Fund carried between 8 – 15% cash during the last four months of the fiscal year, during which time the Benchmark rose by 9.1%. In overall terms, the Fat Fund appears to have outperformed other professional managers over the period, despite its strong defensive stance, which augurs well for relative outperformance if equity markets correct. After expenses, but before tax, we estimate the return was 28.53%.

Reflecting ongoing portfolio turnover, the Fat Fund portfolio returned 26.05% in the year to 30 June 2007, after (30%) taxes on realised gains, in accordance with ASX Listing Rule 19.12.

The performance of the portfolio can be broken down into a feature professional investors call "attribution". This is the make up of the performance of the fund against our benchmark. It denotes the contribution of every position we take against the S&P/ASX 300 index; for example, if BHP is 10% of the index, and we have a 15% weighting, we are 5% overweight. If BHP returns 20% against a 15% rise in the index, it has outperformed the index by 4.35%. Because we were 5% overweight, it has contributed 22 basis points (0.22%) to performance against the index (5x4.35). We can perform this measurement for every position against the index to show what helped and hindered our performance. The following analysis has not been audited, but serves as a guide:

Addition to performance:		Detraction from performance:
shares we owned:		shares we owned:
Image Resources	+ 3.81%	Cash holdings	- 1.73%
UXC	+ 1.77%	Repcol	- 1.46%
Tassal	+ 1.22%	Perseverance Corp	- 0.97%
Metgasco	+ 1.13%	Konekt	- 0.93%
Great Southern	+ 0.63%	OM Holdings	- 0.69%
Rinker	+ 0.46%	Oil Search	- 0.69%
Espreon	+ 0.44%	Guinness Peat	- 0.41%
Mundo Minerals	+ 0.41%	Lihir Gold	- 0.36%
Addition to performance - shares we didn't		Detraction from performance - shares we
own: (large underperforming shares)		didn't own: (large strongly performing shares)
Brambles	+0.36%	QBE Insurance	-0.38%
Woodside	+0.31%	Qantas Airways	-0.32%
Sigma Pharma	+0.28%	Zinifex	-0.25%

The analysis shows that in the main, we added value in the smaller companies, our stock selection in the larger companies was reasonable, but that carrying cash was a significant drag on performance in a rising market.

Outlook

The volatility of the last few weeks has done a great deal to put in place some firmer longer term fundamentals; it's now a case of looking at which of the financial engineering emperors are left naked as the tide has receded. We haven't yet seen the full extent of "secondary" damage, when liquidity dries up in certain sectors – debt or equity – of financial markets. This latter factor will be the major one which restrains financial market returns since it will act to force more sensible valuation parameters onto shares than have prevailed in recent times. Since the year end, we have used some of our cash reserves to buy some blue chip shares at far more attractive valuations than previously prevailed, and at the time of writing have reduced our cash exposure below 6%.

Andrew Brown Steve O'Hanna

Portfolio and Sector Allocation as at 31 July 2007

We provide a breakdown of the investment portfolio by value and sector as a means of highlighting the main areas of the economy we have exposure to:

Security	Value (\$)	% Weighting
Industrials
CONNECTEAST GROUP	\$ 444,850.00	0.96%
COFFEY INTERNATIONAL LTD	\$ 851,453.50	1.84%
PCH GROUP LIMITED	\$ 805,668.60	1.75%
Materials & Mining
BHP BILLITON LIMITED	\$ 5,598,729.00	12.13%
GREAT SOUTHERN LIMITED	\$ 987,840.00	2.14%
IMAGE RESOURCES NL	\$ 897,619.32	1.95%
LIHIR GOLD LIMITED	\$ 1,370,880.00	2.97%
LION SELECTION LIMITED	\$ 986,888.02	2.14%
MUNDO MINERALS LIMITED	\$ 666,120.00	1.44%
PERSEVERANCE CORPORATION LTD	\$ 737,807.27	1.60%
RIO TINTO LIMITED	\$ 2,116,639.20	4.59%
Financials
ANZ BANKING GROUP LIMITED	\$ 2,631,900.00	5.70%
COMMONWEALTH BANK OF AUSTRALIA	\$ 2,577,350.00	5.58%
GUINNESS PEAT GROUP PLC	\$ 511,712.03	1.11%
INSURANCE AUSTRALIA GROUP LTD	\$ 826,500.00	1.79%
IWL LIMITED	\$ 588,000.00	1.27%
NATIONAL AUSTRALIA BANK LIMITED	\$ 3,743,936.00	8.11%
WESTPAC BANKING CORPORATION	\$ 2,855,800.00	6.19%
PREMIER INVESTMENTS LIMITED	\$ 313,667.20	0.68%
WASHINGTON H SOUL PATTINSON & CO LT	\$ 918,185.28	1.99%
Energy
AUST. RENEWABLE 60C OPT EXP 04 09	\$ 56,141.87	0.12%
AUSTRALIAN WORLDWIDE EXPLORATION	\$ 552,120.00	1.20%
BEACH PETROLEUM LIMITED	\$ 724,316.85	1.57%
INCREMENTAL PETROLEUM LIMITED	\$ 632,550.00	1.37%
TAP OIL NL	\$ 494,160.00	1.07%
Consumer Staples
WOOLWORTHS LIMITED	\$ 1,300,368.50	2.82%
Cons Discretionary
MAC. COMMUNICATIONS INFRASTRUCTURE	\$ 298,500.00	0.65%
Health Care
KONEKT LIMITED	\$ 207,577.35	0.45%
Telecommunications
COMMANDER COMMUNICATIONS LTD	\$ 453,650.00	0.98%
SP TELEMEDIA LIMITED	\$ 358,826.42	0.78%

Information technology
ALTIUM LIMITED	\$ 656,904.15	1.42%
INTEGRATED RESEARCH LIMITED	\$ 405,777.67	0.88%
QM TECHNOLOGIES LIMITED	\$ 658,781.28	1.43%
UXC LIMITED	\$ 1,235,000.00	2.68%
Property
RECORD REALTY TRUST	\$ 467,125.00	1.01%
WESTPAC OFFICE TRUST	\$ 456,880.20	0.99%
GALILEO JAPAN TRUST	\$ 566,020.00	1.23%
Cash	\$ 6,185,837.74	13.40%
Accrued Dividends Due	\$ 7,386.23	0.02%
Total Portfolio Value	\$ 46,149,468.67	100.0%

4. Corporate Governance Statement

Introduction

The Board of Fat Prophets Australia Fund Limited ("the Company") is committed to achieving a high standard of corporate governance appropriate for its nature and size.

The Board has the responsibility to ensure that the Company is properly managed so as to protect and enhance shareholder and optionholder interests in a manner which is consistent with the Company's responsibility to meet its obligations to all parties with which it interacts. To this end, the Board has adopted what it believes to be appropriate corporate governance policies and practices having regard to its nature of activities and size.

The Board, other than Andrew Brown in his capacity as a Director of Tidewater Asset Management Pty Limited (the sub-contracted Manager), has no direct involvement with the management of the portfolio. Although the Board will closely monitor the compliance of the Manager with the terms of the management agreement, the performance of the Company is dependent upon the performance of the Manager.

The Board has used the ASX Corporate Governance Council best practice recommendations (published March 2003) as a framework to report on compliance matters for the year ended 30 June 2007, as follows:

• Essential Principle
• Best Practice Recommendations and Status of Compliance

PRINCIPLE 1: Lay solid foundations for management and oversight

Best Practice Recommendations	Status of Compliance
Formalise and disclose the functions	Comply
reserved to the Board and those delegated	Refer section 4.1.
to management.

PRINCIPLE 2. Structure the Board to add value

Best Practice Recommendations	Status of Compliance
A Majority of the Board should be	Do not comply
independent Directors	Refer section 4.2.
	The Board has two members whom are independent. This is considered adequate given the size of the Company.
The Chairman should be an independent	Comply
Director.	Refer section 4.2.
The same individual should not exercise	Comply
the roles of Chairman and CEO.	Refer section 4.2.

Best Practice Recommendations	Status of Compliance
The Board should establish a Nomination	Do not comply
Committee.	Refer section 4.2.
	Given the size and nature of the Company and the number of Directors (4), the formation of such a committee would not serve to protect or enhance the interest of shareholders. The Board deals with this issue as a whole.
Disclose the following information in the Corporate Governance Section of the Annual Report:
The skills, experience and expertise • relevant to the position of Director held	Comply
by each Director in office as at the date of the Annual Report.	Refer section 4.2 and Directors' Report.
The names of the Directors •	Comply
considered by the Board to constitute independent Directors and the Company's materiality thresholds.	Refer section 4.2.
A statement as to whether there is a • procedure agreed by the Board for	Comply
Directors to take independent professional advice at the expense of the Company.	Refer section 4.2.
The term of office held by each •	Comply
Director in office at the time of the Annual Report.	Refer section 4.2 and Director's Report.
The names of members of the •	Do not comply
Nomination Committee and their attendance at meetings of the	Refer section 4.2.
committee.	Given the size and nature of the Company and the number of Directors (4), the formation of such a committee would not serve to protect or enhance the interest of shareholders. The Board deals with this issue as a whole.
An explanation of any departures from • best practice recommendations.	Comply Refer section 4.3

PRINCIPLE 3. Promote ethical and responsible decision making

Best Practice Recommendations	Status of Compliance
Establish a code of conduct to guide the Directors, the CEO, the CFO and other key	Comply
executives.	Refer section 4.4.
Disclose the policy concerning trading in the entity's securities by Directors, officers	Comply
and employees.	Refer section 4.5.

PRINCIPLE 4. Safeguard integrity in financial reporting

Best Practice Recommendations	Status of Compliance
Require the CEO and CFO to state in writing to the Board that the financial	Comply
reports present a true and fair view, in all	Refer section 4.6.
material respects, of the entity's financial
condition and performance, and are in
accordance with relevant accounting standards.
The Board should establish an Audit	Comply
Committee.	Refer section 4.7.
Structure the Audit Committee so that it consists of the following: only Non	Do not fully comply
Executive Directors; a majority of	Refer section 4.7.
independent Directors; an Independent Chair who is not Chair of the Board, and at least three members.	The Audit Committee has two members, both of whom are independent Non Executive Directors. This is considered adequate given the size of the Company.
The Audit Committee should have a	Comply
formal charter.	Refer section 4.7.
Disclose the information described in "Guide to Reporting on Principle 4" in the Corporate Governance section of the Annual Report:
Details of the names and qualifications •
of those appointed to the Audit Committee, or, where an Audit	Comply
Committee has not been formed, those who fulfil the function of an Audit Committee.	Refer section 4.7.
The number of meetings of the Audit •	Comply
Committee and the names of the attendees.	Refer section 4.7.
Explanation of any departures from •	Comply
best practice recommendations.	Refer section 4.3

Best Practice Recommendations	Status of Compliance
Make the following material publicly
available:	Comply
The Audit Committee Charter. •	Refer section 4.7.
Information on procedures for the • selection and appointment of the external auditor and for the rotation of external audit engagement partners.	Comply Refer section 4.8.

PRINCIPLE 5. Make timely and balanced disclosure

Best Practice Recommendations	Status of Compliance
Establish written policies and procedures	Comply
designed to ensure compliance with disclosure requirements and to ensure	Refer section 4.9.
accountability at a senior management
level for that compliance.
Disclose the information described in	Comply
"Guide to Reporting on Principle 5" in the	Refer section 4.9.
Corporate Governance section of the
Annual Report.

PRINCIPLE 6. Respect the rights of shareholders

Best Practice Recommendations	Status of Compliance
Design and disclose a communications strategy to promote effective	Comply
communication with shareholders and	Refer section 4.10.
encourage effective participation at general meetings.
Request the external auditor to attend the	Comply
Annual General Meeting, and to be available to answer shareholder questions about the conduct of the audit and	Refer section 4.10.
preparation and content of the auditor's
report.

PRINCIPLE 7. Recognise and manage risk

Best Practice Recommendations	Status of Compliance
The Board, or appropriate Board committee, should establish policies on risk oversight and management.	Comply Refer section 4.11.

Best Practice Recommendations	Status of Compliance
The CEO and CFO should state to the Board in writing that: (1) the statement given in accordance with best practice recommendation regarding the integrity of financial statements is founded on a sound system of risk management and internal compliance and control that implements the policies adopted by the Board; and (2) the risk management and internal compliance and control system is operating efficiently and effectively in all material respects.	Comply Refer section 4.6 and 4.11.
Disclose the information described in: "Guide to Reporting on Principle 7" in the Corporate Governance section of the Annual Report.	Comply Refer section 4.11.

PRINCIPLE 8. Encourage enhanced performance

Best Practice Recommendations	Status of Compliance
Disclose the process for performance	Do not comply
evaluation of the Board, its committees, individual Directors and key executives.	Refer section 4.12.
	Given the number of Directors (4) and the appointment of Angus Geddes in September 2006, the Board did not believe that it was necessary to conduct a formal board review in fiscal year 2007.

PRINCIPLE 9. Remunerate fairly and responsibly

Best Practice Recommendations	Status of Compliance
Disclose the remuneration policies to enable investors to understand the costs and benefits of those policies, and the link	Comply Refer to Remuneration Report.
between the remuneration paid to Directors and key executives and corporate performance.
The Board should establish a	Do not comply
Remuneration Committee.	Refer section 4.13
	Given the number of Directors (4), the formation of such a committee would not serve to protect or enhance the interests of shareholders. The Board deals with this issue as a whole.

Best Practice Recommendations	Status of Compliance
Ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders.	Comply No equity-based remuneration plans exist.

PRINCIPLE 10. Recognise the legitimate interest of stakeholders.

Best Practice Recommendations	Status of Compliance
Establish and disclose a code of conduct to	Comply
guide compliance with legal and other obligations to legitimate stakeholders.	Refer section 4.14

4.1 Board and Management Functions

The Company has a Board but no full time staff at present. Hence the Board's role is to set strategic direction and to delegate functions to outside parties and then monitor the services provided. These functions include, amongst others, management of the Company's:

• investment portfolio, via the Manager (and sub-contract Manager) pursuant to a management agreement;
• back office functions via White Outsourcing Pty Limited;
• audit services via Grosvenor Schiliro; and
• share registry services via Registries Limited.

The pivotal role of the Manager (and sub-contract Manager) is such that there is frequent contact between the Board and the Manager (and sub-contract Manager).

4.2 Board of Directors

The Board has two independent Directors and two non independent Directors.

The Chairman is an independent Director and is not an Executive Director. In the event of a tied vote at a Directors' Meeting, the Chairman has a casting vote.

The Board has chosen not to establish a Nomination Committee. The Board considers such action is not presently warranted given the modest size of the Company and the Board.

The skills, experience and expertise and the status as to independence of each Director can be found in section 5.

The directors considered to be independent are:

Robert Bolton - Chairman Bruce Holman

Materiality thresholds for qualifying as an Independent Director relate to many aspects of a Director's actual and perceived reason for being a Director, such as:

• Do they have an association with, or do they represent a substantial shareholder of the Company (defined as over 5%);
• Do they represent or have association with the Manager, Fat Prophets Funds Management Australia Pty Limited;
• Do they represent or have association with Mint Financial Group Pty Limited, that trades as Fat Prophets in Australia;
• Do they represent or have association with the sub-contract Manager, Tidewater Asset Management Pty Limited; and
• Other reasons as the Independent Board members may from time to time agree.

For the purposes of the proper performance of their duties, Directors are entitled to seek independent professional advice at the Company's expense, unless the Board determines otherwise.

It is the Board's policy that any committees established by the Board should:

• operate in accordance with the terms of reference established by the Board;
• be entitled to obtain independent professional or other advice at the cost of the Company, unless determined otherwise by the Board; and
• be entitled to obtain such resources and information from the Company including direct access to advisors to the Company as they might require.

Directors hold office for a maximum term of three years and are eligible to seek reelection. The Company intends to rotate re-elections each year so that shareholders have a continuing voice regarding the appointment of Directors.

4.3 Departures from Best Practice Recommendations

The Board considers each best practice recommendation and generally complies.

Where the Board does not comply, it carefully considers the reasons for non compliance with the reason generally being the size of either the Company or the Board or a combination of the two. In addition, the Board will disclose within the Annual Report the areas where it does not comply and background as to the issues relating to non compliance.

4.4 Ethical and Responsible Decision Making

The Board has established a Code of Conduct to guide the Directors.

4.5 Policy on Dealing in Shares of the Company

The Board has a policy for dealing in shares of the Company.

"Directors can only purchase or sell securities in the Company in the five days after release of the Net Tangible Asset statement to the ASX''.

4.6 Written report to Board from CFO and CEO regarding Financial Reports

While the Company has no full time staff, no CEO and no CFO, Andrew Brown, performs these "chief executive functions". Andrew Brown has given a declaration to the Board.

Accounting functions and back office functions have been outsourced to an independent party, White Outsourcing Pty Limited.

The Board considers that the independence of the external providers of accounting and back office services ensures that no collusion can occur within the ranks of senior management (if it existed) or the Board of the Company with the outcome that the financial accounts received by the Board are not likely to be significantly flawed.

4.7 Audit Committee

The board has established an Audit Committee, as follows:

• Bruce Holman Independent Director and Chairman of the Committee
• Robert Bolton Independent Director, Chairman of the Board and Member of the Committee

The Audit Committee has a majority of independent Directors.

The Chairman of the Audit Committee is an independent Director.

The Chairman of the Board is not the Chairman of the Audit Committee.

The Committee's main responsibilities include assessing and monitoring:

• 1. the adequacy of the Company's internal controls and procedures to ensure compliance with all applicable legal obligations;
• 1. compliance by the Manager with the management agreement;
• 1. the adequacy of the financial risk management processes; and
• 1. the appointment of the external auditor, any reports prepared by the external auditor and liaising with the external auditor.

The Audit Committee intends to meet with the external auditors as required.

The Audit Committee has a formal charter, adopted by the Board. This is publicly available via the Company's website at www.fatprophets.com.au/fatfund.

The number of Audit Committee meetings and number of meetings attended by each of the members of the audit committee during the 2007 financial year were:

Director	No of meetings eligible to attend	No of meetings attended
Bruce Holman - Chairman	2	2
Robert Bolton	2	2

All members of the Audit Committee are financially literate. Qualifications and experience of each member of the Audit Committee can be found in the Directors' Report.

4.8 External Auditors

The Company has appointed Grosvenor Schiliro as external auditor.

The decision was reached on the basis of audit experience particularly in relation to knowledge of Listed Investment Companies and after extensive reference checking.

As this is the third year of the Company's operation, there is no need or intention to rotate the audit partner.

4.9 Timely and Balanced Disclosure

The Company promotes the timely and balanced disclosure of all relevant matters concerning the Company.

The Company has measures in place designed to ensure compliance with ASX Listing Rule requirements such that:

• All investors have equal and timely access to material information concerning the Company including its financial situation, performance, ownership and governance.
• Company announcements are factual and presented in a clear and balanced way.

4.10 Shareholders Rights respected

The Company has designed and implemented a shareholder communications strategy that promotes effective communication and encourages participation at general meetings. The main communications vehicles are:

• the website;
• Annual Report; and
• Monthly NTA releases.

Monthly NTA releases contain additional information concerning the underlying investment portfolio of the Company in an effort to give investors a better understanding of the Company.

The external auditor, Grosvenor Schiliro, has been invited to attend, and is expected to attend, the Annual General Meeting to be held in Sydney. This will allow shareholders to ask the external auditor questions relating to;

• the conduct of the audit;
• audit preparation; and
• content of the auditor's report.

4.11 Risk Management

The Board has not established a separate Risk Committee of the Board, due to the small size of the board (four members).

Issues of risk are discussed at each Board Meeting, and each Board member is financially literate and experienced in risk management.

The Manager of the investment portfolio has been granted specific risk tolerance boundaries and compliance with these are monitored at monthly Board Meetings.

The Company has no full time employees, no CEO and no CFO. Andrew Brown performs these "chief executive functions". Accounting functions and back office functions have been outsourced to an independent party, White Outsourcing Pty Limited. The Board considers that the independence of the external providers of accounting and back office services ensures that no collusion can occur within the ranks of senior management (if it

existed) or the Board of the Company with the outcome that the financial accounts received by the Board are unlikely to be significantly flawed.

4.12 Encouraging Enhanced Performance

The Board regularly monitors the performance of the Company, the Manager, its suppliers, and itself, and takes steps to encourage continuous improvement.

4.13 Fair and Responsible Remuneration

Independent Directors are paid market rates in cash for their service to the Company.

The Board has not established a Remuneration Committee nor does it intend to at this stage. A Remuneration Committee will be established in the event the Board deems it necessary.

No executives or Board members receive equity based remuneration.

The Manager, Fat Prophets Funds Management Australia Pty Limited receives base and performance fees. However, since 15 March 2006 when Tidewater Investments Limited (previously Trent Capital Limited) or a wholly owned subsidiary of Tidewater Investments Limited have been sub-contracted to manage the Fat Prophets Australia Fund, there has effectively been a sharing of both base and performance fees (notwithstanding that no performance fees have been paid) with Fat Prophets Funds Management Australia Pty Ltd. Tidewater Investments Limited and its controlled entities receive no direct remuneration from the company, other than for the provision of Company Secretarial services. The Company is confident that such a reward structure aligns the interests of shareholders with those of the Investment Manager.

4.14 Recognise the Legitimate Interest of Stakeholders

The Company has:

• A Code of Conduct to guide compliance with legal and other obligations to legitimate stakeholders.
• A Conflicts of Interest Policy.

The Board is mindful of the need to identify issues pertaining to actual, potential and perceived conflicts of interest and has adopted a Conflicts of Interest Policy.

The Conflict of Interest Policy aims to ensure that all employees and the Board of the Company are engaged in a business that is not significantly compromised by conflicts of interest. This will be achieved in part by having adequate mechanisms in place to manage conflicts of interest.

There is an obligation for disclosure of conflicts of interest (or potential conflicts of interest) by all employees and Directors of the Board to each other and other external stakeholders.

All employees, customers and other stakeholders are entitled to be treated fairly without fear of mistreatment due to disclosed conflicts of interest.

The Company will use three mechanisms for managing conflicts of interest;

(i) Controlling

The Company aims to identify conflicts of interest relating to its business. The Company assesses and evaluates any identified conflicts of interest.

The Company decides upon and implements an appropriate response to those conflicts.

(ii) Avoiding

Where conflicts of interest are likely to have a serious impact on the Company or its clients, and the conflicts can not be adequately managed in other forms, the Company may choose to avoid altogether circumstances and situations that would allow such conflicts of interest to occur.

(iii) Disclosing

Where conflicts of interest are likely to have a material impact on the Company, or the perception of the Company by an outside party, these will be disclosed to the parties concerned in a timely fashion.

4.15 Auditor's Independence Declaration

The lead auditor's independence declaration for the year ended 30 June 2007 has been received and can be found on page 29.

Further information on the company's corporate governance practices and policies have been made publicly available on the company's website at: http://fatfund.republicast.com/auditcommitteecharter.asp

5. Directors' Report

The Directors present their report on the Company for the financial year ended 30 June 2007.

A. Directors

The names and details of the Directors of the Company in office at the date of this report are:

Robert Bolton

Independent Non-Executive Chairman

Bachelor of Engineering (civil), MBA, GAICD Age 47

Robert has over 22 years of executive management and project management experience in the construction, mining, IT, financial services and consulting sectors.

In 1996 Robert founded "Probative Solutions" to provide innovative constraint management solutions. More recently he has led a number of business development teams in start-up environments in roles encompassing innovative business and project turnaround often in an interim executive and director capacity. Robert is a leading Australian advocate of the Theory of Constraints (TOC) approach to management.

He holds a B. Engineering (Civil) from the University of Sydney, an MBA from Ashridge Management College United Kingdom and is a graduate member of the Australian Institute of Company Directors (AICD).

Robert became a Non-Executive Director and Chairman of the Company in January 2005. He is a member of the Audit Committee.

Bruce Holman

Independent Non-Executive Director

Bachelor of Engineering (mining), Grad Dip Geoscience, FFin, GAICD Age 46

Bruce has 17 years experience in Australian equities funds management as an analyst, portfolio manager and fund manager. Prior to this, he spent 4 years in the coal industry as a mining engineer. Bruce presently works with NSW Treasury in the Energy Branch.

Bruce has an Engineering Degree (mining) from the University of Sydney, a Graduate Diploma in Applied Finance and Investment (Securities Institute of Australia), a Diploma in Geoscience (mineral economics) from Macquarie University and is a graduate member of the Australian Institute of Company Directors (AICD).

Bruce became a Non-Executive Director of the Company in November 2004. He is the Chairman of the Audit Committee.

Andrew Brown

Executive Director

Bachelor of Arts (Economics) Honours Age 48

Andrew Brown has 27 years experience in the Australian equity market as a stockbroker, corporate investor and funds manager. Andrew has an honours degree majoring in economics and econometrics from the University of Manchester, England. He was previously Director, Equities at Rothschild Australia Asset Management and is currently the Managing Director of Tidewater Investments Limited.

During the past three years, Andrew has served as a Director of the following other public companies:

• Aequs Capital Limited (Non-Executive Director ongoing)
• Cheviot Bridge Limited (Non-Executive Director ongoing)
• Enerji Limited (Non-Executive Director ongoing)
• Mariner Wealth Management Limited (appointed 6 March 2003; resigned 26 October 2006)
• Phoenix Development Fund (appointed 6 March 2003; resigned 23 September 2005 )
• Retail Star Limited (appointed 2 August 2004; resigned 15 August 2006)
• Signature Brands Limited (appointed 9 December 2004; resigned 14 July 2006)
• Snowball Group Limited (Chairman ongoing)
• Tidewater Investments Limited (Managing Director ongoing)

Andrew became a Director of the Company in December 2005 and is an Executive Director.

Angus Geddes

Non-Executive Director from 12 September 2006

Bachelor of Commerce, FFin Age 38

Angus has 17 years experience in the international and domestic financial markets in stockbroking, investment banking and research.

In 2000, Angus co-founded Mint Financial Group Pty Limited - which trades as Fat Prophets - and currently holds the position of Chief Executive Officer at Mint Financial Group Pty Limited and Fat Prophets Funds Management Australia Pty Ltd.

Angus has a Commerce Degree (Otago University, New Zealand) and a Graduate Diploma in Applied Finance and Investment.

Angus was appointed as a Director of the Company on 12 September 2006. He was previously a Director of the Company from November 2004 to February 2005 and an Alternative Director from March 2005 until October 2005.

All of the Directors have been in office from the commencement of the 2007 financial year until the date of this report unless otherwise stated.

B. Company Secretary

The following person held the position of Company Secretary during the financial year:

Clare Porta

Master of Commerce, Bachelor of Commerce, Bachelor of Arts, CFA, FFin

Clare is currently the Company Secretary of three ASX listed companies including Fat Prophets Australia Fund Limited. She has over ten years of experience in the finance industry encompassing company secretarial, transactional services, strategic investment management, equities research and investment banking.

Clare holds the Chartered Financial Analyst (CFA) designation and is a member of the CFA Institute and the CFA Society of Sydney. She is also a Fellow of the Financial Services Institute of Australasia (FFin) and an Affiliate Member of Chartered Secretaries Australia. Clare holds a Master of Commerce, a Bachelor of Commerce and a Bachelor of Arts.

Clare was appointed as Company Secretary of the Company in December 2005.

C. Interests in the Securities of the Company

The relevant interests of each Director in the securities of the Company shown in the Register of Directors' Shareholdings as at the date of this report is:

Director	Ordinary Shares	Options
Robert Bolton (Chairman)	40,600	-
Andrew Brown	1,741,346	-
Bruce Holman	40,000	-
Angus Geddes	1,592,020	1,911,275

Directors are not required under the Company's constitution to hold any Shares, Options or any other Securities in the Company.

D. Interests in Contracts or Proposed Contracts with the Company

Mint Financial Group, of which Angus Geddes is a Director, has a contract to manage the Fat Prophets Australia Fund Limited which is disclosed in the Remuneration Report of this Directors' Report (on page 27).

E. Principal Activities

The principal activity of the Company during the year was investment in securities listed on the Australian Stock Exchange.

There were no changes in the nature of the Company's principal activity during the financial year.

F. Operating Results

The profit of the Company after providing for income tax is \$2,276,701 (2006: \$450,535).

G. Dividends

The Directors have declared a fully franked final dividend of 2.0 cents per share and a 1.0 cent special dividend, after declaring a fully franked interim dividend of 2.0 cents per share

and a special dividend of 1.0 cents per share. For further details in respect of the dividends paid or recommended, refer to Note 18 of the financial statements.

H. Review of operations

	2007 \$	2006 \$
Profit from ordinary activities before income tax benefit	2,254,303	331,664
Income tax benefit	22,398	118,871
Profit from ordinary activities after income tax benefit	2,276,701	450,535

The net tangible asset backing of the Company as at 30 June 2007 was \$1.4304 per share before tax (\$1.3364 after tax). This is an improvement from \$1.1999 per share before tax as at 30 June 2006 (\$1.1482 after tax in 2006).

I. Significant changes in state of affairs

On 23 November 2006, Fat Prophets Funds Management Australia Pty Limited appointed Tidewater Asset Management Pty Limited, a wholly owned subsidiary of Tidewater Investments Limited, as the sub-contract manager to the Company in the place of Tidewater Investments Limited (previously Trent Capital Limited). On 24 May 2007, this sub-contract arrangement was extended to 20 April 2010.

During the 2007 financial year, 1,898,149 options in the Company were exercised at a price of \$1.00 per share. An on-market buy-back was also operational from 13 September 2006 which resulted in the buy-back and subsequent cancellation of 1,651,932 ordinary shares. Refer to Note 8 of the Financial Report for further details.

J. Earnings per share

Basic and diluted earnings (excluding net realised gains/losses on investment portfolio) were 7.1 cents per share (1.4 cents per share in 2006). Basic and Diluted earnings (including net realised gains/losses on investment portfolio) were 16.8 cents per share (7 cents per share in 2006).

K. Environmental regulation

The Company's operations are not subject to any significant environmental regulations under either Commonwealth or State legislation.

To the extent that any environmental regulations may have an incidental impact on the Company's operations, the Directors of the Company are not aware of any breach by the Company of those regulations.

L. Future Developments

The Company will continue to pursue its investment objectives for the long term benefit of the members. This will require continual review of the investment strategies that are currently in place and may require changes to these strategies to maximise returns.

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

M. Events Subsequent to Balance Date

No matter or circumstance has arisen since the end of the financial year which has significantly affected or may significantly affect:

• (a) the Company's operations in future financial years; or
• (b) the results of those operations in future financial years ; or
• (c) the Company's state of affairs in future financial years.

N. Meetings of Directors

The number of Directors' Meetings (including Meetings of committees of Directors) and number of Meetings attended by each of the Directors of the Company during the 2007 financial year were:

	Directors' Meetings		Audit Committee Meetings
	No. of meetings eligible to attend	No. of meetings attended	No. of meetings eligible to attend	No. of meetings attended
Robert Bolton	12	12	2	2
Andrew Brown	12	12	-	-
Bruce Holman	12	12	2	2
Angus Geddes	10	7	-	-

The number of Directors' Meetings and Audit Committee Meetings has been adjusted for each member to reflect the number of Meetings held during their tenure.

O. Remuneration Report

The Company has no employees other than its Directors. The Company's policy is to offer a sufficient level of remuneration to attract employees (Directors) who are financially literate and knowledgeable of investment management best practice. All Directors must have a deep understanding and commitment to good corporate governance.

As the Company has a performance fee scheme in place with the Manager, the Company has effectively linked performance with compensation in relation to the management of the Company's assets. With regard to Directors, no performance-based compensation exists nor is planned. This is because the primary role of the Directors is to ensure adherence to good governance and oversight of the Manager. In this capacity, performance based compensation schemes are not deemed to be appropriate by the Board.

Under the Company's constitution, each Director (other than a Managing Director or an Executive Director) may be paid out remuneration for ordinary services performed as a Director. Salary is the only form of compensation. No option or bonus plans are in place.

Under ASX Listing Rules, the maximum fees payable to directors may not be increased without prior approval from the Company at a general meeting. Directors will seek approval from time to time as deemed appropriate.

The Directors will be entitled to receive the following benefits:

(a) the maximum total remuneration of the Directors of the Company has been set at \$135,000 per annum to be divided amongst them in such proportions as they agree. The Board is not required to allocate the entire amount.

• (b) Angus Geddes is a Director of the Manager. The Manager will receive a management fee and performance fee (where relevant) for managing the Portfolio.
• (c) An entity associated with Angus Geddes is a shareholder of the Manager. The Manager will receive a management fee and performance fee (where relevant) for managing the Portfolio.

The Directors' remuneration for the year ended 30 June 2007 is detailed in the following table:

Name of Director	Base fee \$	Superannuation \$	Total \$
Robert Bolton (Chairman)	40,000	3,600	43,600
Bruce Holman	30,000	2,700	32,700
Andrew Brown	nil	nil	nil
Angus Geddes	nil	nil	nil
TOTAL	70,000	6,300	76,300

Angus Geddes, who is also a shareholder and Director of the Manager, is not entitled to be paid Directors' fees.

No Director of the Company has received or become entitled to receive a benefit, other than a remuneration benefit as disclosed in note 12(b) to the financial statements, by reason of a contract made by the Company or a related entity with the Director or with a firm of which they are a member, or with a Company in which they have a substantial interest.

P. Insurance of Directors

During the financial year, the Company has given indemnity and paid insurance premiums to insure Directors against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of Directors of the Company, other than conduct involving a wilful breach of duty in relation to the Company. During the year, premiums were paid in respect of the key management personnel liability and legal expenses insurance contract. Details of the nature of the liabilities covered and the amount of premiums paid have not been disclosed as disclosure is prohibited under the terms of the contract.

Q. Proceedings on behalf of the Company

There are no legal or other proceedings being made on behalf of the Company or against the Company as at the date of this report.

R. Non-Audit Services

No non-audit services have been provided by the Auditor or by another person on the Auditor's behalf during the year. This statement has been made in accordance with advice provided by the Company's audit committee and has been endorsed by a resolution of that committee.

S. Auditor's Independence Declaration

The lead auditor's independence declaration for the year ended 30 June 2007 has been received and can be found on page 29.

Signed in accordance with a resolution of the Board of Directors.

Robert Bolton Chairman

Dated this 29th day of August 2007 at Sydney

7. Income Statement

For the year ended 30 June 2007

	Notes	2007 \$	2006 \$
Investment Revenue from ordinary activities	3 (a)	2,930,870	996,898
Income from trading portfolio
Revenue from trading portfolio	3 (b)	42,775	40,693
Net realised gains on disposal Net unrealised gains		128,325 74,594	50,568 59,346
Expenses
Administrative expenses		(59,933)	(60,359)
Management fees		(544,910)	(472,815)
Audit fees	11	(30,700)	(28,601)
Share registry fees		(57,785)	(57,936)
Directors fees		(76,300)	(76,300)
Company secretarial fees		(20,500)	(10,250)
ASX listing fees		(23,633)	(21,569)
Brokerage expense		(1,644)	(4,278)
Other		(106,856)	(83,733)
Total expenses from ordinary activities		(922,261)	(815,841)
Operating profit before income tax benefit and capital gains		2,254,303	331,664
Income tax benefit relating to ordinary activities	5 (c)	22,398	118,871
Operating profit before capital gains		2,276,701	450,535
Capital profits realised
Net realised gains on investment portfolio		4,231,217	2,433,189
Income tax expense on investment portfolio		(1,118,399)	(630,961)
Net realised capital profits		3,112,818	1,802,228
Profit attributable to members of Fat Prophets Australia Fund
Limited		5,389,519	2,252,763
		2007	2006
		Cents	Cents
Basic and diluted earnings per share	17	7.10	1.40
(excluding net realised gains on investment portfolio)
Basic and diluted earnings per share	17	16.80	7.00
(including net realised gains on investment portfolio)

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

8. Balance Sheet

As at 30 June 2007

	Notes	2007 \$	2006 \$
Current assets
Cash and cash equivalents		6,628,605	2,437,517
Trade and other receivables	4	340,955	192,754
Held for trading portfolio Prepayments	6 (a)	1,381,500 13,942	1,308,550 75,782
Total current assets		8,365,002	4,014,603
Non-current assets
Available for sale portfolio	6 (b)	39,313,142	34,992,419
Deferred tax assets	5 (d)	126,561	176,316
Total non-current assets		39,439,703	35,168,735
Total assets		47,804,705	39,183,338
Current liabilities
Trade and other payables	7	337,987	106,589
Current tax liabilities	5 (e)	984,764	391,633
Total current liabilities		1,322,751	498,222
Non-current liabilities
Deferred tax liabilities	5 (f)	2,987,275	1,647,827
Total non-current liabilities		2,987,275	1,647,827
Total liabilities		4,310,026	2,146,049
Net assets		43,494,679	37,037,289
Equity
Share capital	8	31,763,329	31,510,850
Investment portfolio revaluation reserve	9 (a)	6,012,626	3,525,545
Realised capital profits reserve	9 (b)	4,911,457	1,798,639
Retained earnings	10	807,267	202,255
Total equity		43,494,679	37,037,289

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

9. Statement of Changes in Equity

For the year ended 30 June 2007

	Share Capital \$	Investment Portfolio Revaluation Reserve/ Realised Capital Profits Reserve \$	Retained Earnings \$	Total \$
As at 30 June 2005	31,475,729	1,321,187	137,940	32,934,856
Direct equity adjustments
Costs associated with initial public offer Tax adjustment on transaction costs due to	(20,874)	-	-	(20,874)
adoption of AASB 112 income taxes	55,995	-	-	55,995
Investment portfolio
Net unrealised gains on investment securities Tax on unrealised gains on investment	-	5,086,381	-	5,086,381
securities	-	(1,083,384)	-	(1,083,384)
Total direct equity adjustments	35,121	4,002,997	- -	4,038,118
Profit for the year Net realised gains on investment portfolio	- -	- -	2,252,763 (2,433,189)	2,252,763 (2,433,189)
Tax expense on net realised gains on
investment securities	-	-	630,961	630,961
Total recognised income and expense for year	-	-	450,535	450,535
Transactions with shareholders
Dividends paid from retained earnings	-	-	(386,220)	(386,220)
As at 30 June 2006	31,510,850	5,324,184	202,255	37,037,289
Direct equity adjustments Costs associated with initial public offer	6,262	-	-	6,262
Investment portfolio
Net unrealised gains on investment securities Tax on unrealised gains on investment	-	6,885,456	-	6,885,456
securities	-	(1,285,557)	-	(1,285,557)
Total direct equity adjustments	6,262	5,599,899	-	5,606,161
Profit for the year	-	-	5,389,519	5,389,519
Net realised gains on investment portfolio Tax expense on net realised gains on	-	-	(4,231,217)	(4,231,217)
investment securities	-	-	1,118,399	1,118,399
Total recognised income and expense for year	-	-	2,276,701	2,276,701
Transactions with shareholders
Dividends paid from retained earnings Issue of shares	- 1,898,149	- -	(1,666,807) -	(1,666,807) 1,898,149
Market buyback of shares	(1,651,932)	-	(4,882)	(1,656,814)
As at 30 June 2007	31,763,329	10,924,083	807,267	43,494,679

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

10. Cash Flow Statement

For the year ended 30 June 2007

	Notes	2007	2006
		\$	\$
Cash flows from operating activities
Proceeds from sale of trading portfolio		1,018,777	1,502,248
Purchase of trading portfolio		(890,452)	(1,994,670)
Interest received		200,012	182,899
Dividends received		2,658,389	830,040
Trust distributions		33,427	30,941
Other income received		3,773	4,246
Investment manager's fees paid		(535,307)	(502,148)
Other expenses paid		(248,899)	(351,193)
Tax paid		(392,407)	-
Net cash provided by/used in operating activities	15	1,847,313	(297,637)
Cash flows from investing activities
Proceeds from sale of investments		23,269,625	14,163,780
Purchase of investments		(19,500,381)	(19,267,699)
Net cash provided by/used in investment activities		3,769,244	(5,103,919)
Cash flows from financing activities
Proceeds from issue of shares		1,898,149	-
Market buyback of shares		(1,656,812)	-
Share issue and listing costs		-	(20,874)
Dividend payment		(1,666,806)	(386,220)
Net cash provided by/used in financing activities		(1,425,469)	(407,094)
Net (decrease)/increase in cash held		4,191,088	(5,808,650)
Cash at the beginning of the financial year		2,437,517	8,246,167
Cash at the end of the financial year		6,628,605	2,437,517

The above cash flow statement should be read in conjunction with the accompanying notes to the financial statements.

11. Notes to the financial statements

For the year ended 30 June 2007

1 Reporting Entity

Fat Prophets Australia Fund Limited is a company domiciled in Australia. The financial statements of Fat Prophets Australia Fund Limited are for the year ended 30 June 2007. The Company is primarily involved in making investments and deriving revenue and investment income from listed securities and unit trusts in Australia.

2 Summary of significant accounting policies

(a) Basis of accounting

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

The financial report covers Fat Prophets Australia Fund Limited which is a listed public company, incorporated and domiciled in Australia. The financial report has been prepared on an accruals basis, with the exception of valuation of investments as described in Note 2(b) below.

The financial report of the Company complies with all Australian equivalents to International Financial Reporting Standards (AIFRS) in their entirety.

The following is a summary of the material accounting policies adopted by the Company in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated.

Australian equivalents to International Financial Reporting Standards

Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards ("AIFRS"). Compliance with AIFRS ensures that the financial report of the Company complied with International Financial Reporting Standards.

(b) Holdings of securities

Classification

Securities are classified into either the investment portfolio (long term) or trading portfolio (short term) at acquisition.

Recognition

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

Investment Portfolio

Securities are classified as available-for-sale. After initial recognition at cost, securities are measured at fair value.

Gains or losses on available-for-sale securities are recognised as a separate component of equity until the securities are sold, collected or otherwise disposed of, or until the securities are determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement.

Trading Portfolio

Securities are classified as held for trading financial assets if acquired principally for the purposes of selling in the short term or if so designated by management and within the requirements of AASB139: recognition and measurement of financial instruments.

Realised and unrealised gains and losses arising from changes in the fair value of these assets are included in the income statement in the period which they arise.

Determination of Fair Value

AIFRS defines fair value for the purpose of valuing holdings of securities that are listed or traded on an exchange to be based on quoted "bid" prices for securities prevailing at the close of business on the balance date.

Impairment

At each reporting date, the Company assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available-for-sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in the income statement.

11. Notes to the financial statements

For the year ended 30 June 2007

2 Summary of significant accounting policies (continued)

Realised gains on investment portfolio included in net profit

Under AIFRS, the revaluation adjustment relating to long-term investments standing in the investment portfolio revaluation reserve at the time of realisation, which was previously transferred directly to the realised capital profits reserve, is now included in the net profit of the Company. The effect of this change in accounting policy is that net realised gains/losses (after tax) of \$3,112,818 (2006:(\$1,802,228)) are included in the income statement.

(c) Taxation

Income tax expense comprises of current and deferred tax. The charge for current Income tax expense is based on profit or loss for the year adjusted for any non-assessable or disallowed items except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted by the Balance Sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised for using the balance sheet liability method, in respect of temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax with be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled.

Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary difference can be utilised. The amount of benefits brought to account of which may be realised in the future is based on the assumption that no adverse change will occur in the income taxation legislation and the anticipation that the Company will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law.

Additional income taxes that arises from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised.

Trading Portfolio

A tax provision is made for the unrealised gain or loss on securities valued at fair value through the income statement.

Where the Company disposes of such securities, tax is calculated on gains made according to the particular parcels allocated to the sale for tax purposes offset against any losses carried forward.

Investment Portfolio

A tax provision is made for the unrealised gain or loss on securities valued at fair value through the investment portfolio revaluation reserve.

The expected tax on disposal of securities in the investment portfolio is recognised directly in equity and as deferred tax liability. Where the Company disposes of such securities, tax is calculated on gains made according to the particular parcels allocated to the sale for tax purposes offset against any capital losses carried forward. At this time the tax recognised directly in equity is transferred to net profit and adjusted to actual tax expense. The associated deferred tax liability is similarly adjusted and transferred to tax payable.

(d) Revenue from ordinary activities

Revenue from ordinary activities consists of dividends, interest, trust distributions, other income and gross proceeds from the sale of investments.

Interest and dividend revenue are recognised when earned

(e) Revenue Recognition

• ► Trading Income - profit and losses realised from the sale of investments and unrealised gains and losses on securities held at fair value are included in the income statement in the year they are incurred.
• ► Dividend Income - dividends and distributions are brought to account when the right to receive a dividend has been established.
• ► Interest Income - interest revenue is recognised as it accrues, taking into account the effective yield on the financial asset.
• ► Other Income - other revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and when the revenue can be reliably measured.

(f) Income to pay dividends

The Company may pay dividends from the profit, dividend and interest income it receives from its investments to the extent permitted by law and prudent business practices. Dividends will be franked to the extent that available imputation credits permit. Dividends that are paid from the realisation of a capital gain may be passed on to shareholders.

11. Notes to the financial statements

For the year ended 30 June 2007

2 Summary of significant accounting policies (continued)

(g) Cash

Cash and cash equivalents include cash on hand, deposits held at call with bank, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts.

For the purposes of the cash flow statement, cash includes deposits held at call with financial institutions net of bank overdrafts.

(h) Receivables

Receivables may include amounts for dividends, interest and securities sold. Dividends are receivable when they have been declared and are legally payable. Interest is accrued at the period end from the time of last payment. Amounts received for securities sold are recorded when a sale has occurred. Amounts are generally received within 30 days of being recorded as a receivable.

(i) Payables

Payables represent liabilities for goods and services provided to the Company prior to the end of the financial year which are unpaid at the reporting date. Payables are unsecured and are usually paid within 30 days of recognition.

(j) Goods and Services Tax (GST)

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

Cash flows are presented in the cash flow statement on a gross basis, except the GST component of investing and financing activities, which are disclosed as operating cash flows.

(k) Earnings per share

Basic and diluted earnings per share including realised profits and losses on the investment portfolio are calculated by dividing profit attributable to members of the Company by the weighted average number of ordinary shares outstanding during the year.

(l) Share Capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

(m) Adoption of New and Revised Accounting Standards

In the current year, Fat Prophets Australia Fund Limited has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for the current annual reporting period. The adoption of these new and revised Standards and Interpretations has not resulted in any changes to the Company's accounting policies that have affected the amounts reported for the current or prior year.

The following standards, amendments to standards and interpretations were on issue but not yet effective:

AASB 101 Presentation of Financial Statements (October 2006) has deleted the Australian specific Illustrative Financial Report Structure and reinstated the current IASB 1 guidance on Illustrative Financial Statement Structure. The revised AASB 101 is applicable for annual reporting periods beginning on or after 1 January 2007.

AASB 7 Financial Instruments: Disclosures (August 2005) replaces the presentation requirements of financial instruments in AASB 132. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007, and will require extensive additional disclosures with respect to the Company's financial instruments and share capital.

The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the Financial Statements of the Company.

The application of AASB 101 (revised) and AASB 7 will not affect any of the amounts recognised in the Financial Statements, but will change the disclosure presently made in relation to the Company's financial instruments and the objectives, policies and procedures for managing capital, and segment reporting.

These Standards and Interpretations will be first applied in the financial report of the Company that relates to the annual reporting period beginning after the effective date of each pronouncement, which will be the Company's annual reporting period beginning on July 1 2007.

(n) Functional and presentation currency

The functional and presentation currency of the Company is Australian dollars.

(o) Operating segments

The company operated in Australia only and the principal activity is investment.

11. Notes to the financial statements

	For the year ended 30 June 2007
		2007	2006
		\$	\$
3	Revenue
(a)	Revenue from investment portfolio Dividends received	2,675,232	808,449
	Trust distributions	33,427	30,941
	Interest received	218,438	153,303
	Underwriting income	3,773	4,205
	Total	2,930,870	996,898
(b)	Revenue from trading portfolio
	Dividends received	42,775	40,693
	Total	42,775	40,693
4	Trade and other receivables
	Current
	Accrued interest and dividends	245,414	162,969
	Unsettled sales GST receivable	74,174 21,367	- 25,385
	Other	-	4,400
		340,955	192,754
5	Income tax benefit
(a)	Income tax benefit recognised in the Income Statement
	The components of income tax benefit
	Current income benefit	30,619	118,871
	Deferred tax income relating to the origination and reversal of temporary differences	(8,221)	-
	Total income tax benefit	22,398	118,871
(b)	Income tax recognised directly in equity
	The following current and deferred amounts were charged directly
	to equity during the period:
	Current tax (benefit)
	Share-issue expenses Deferred tax	-	(6,262)
	Revaluation of investment portfolio	1,390,164	1,652,367
		1,390,164	1,646,105
(c)	Income tax benefit The prima facie income tax benefit on accounting profit (before realised
	gains on investment portfolio) reconciles to income tax benefit as follows:
	Prima facie income tax benefit calculated at 30% (2006: 30%)
	on the operating profit before realised gains on the investment portfolio Add/(Less) Effect of:	(676,291)	(99,499)
	Imputation gross up on dividends received	(302,961)	(87,786)
	Franking credits on dividends received	1,009,872	292,621
	Timing differences	(8,221)	13,535
	Income tax benefit	22,398	118,871
	The applicable weighted average effective tax benefit rates are as follows:	1.00%	26.38%

The decrease/increase in the weighted average effective rate for 2007 is as a result of significant imputation credits received as the result of participating in a buyback by an underlying investment compared to 2006.

11. Notes to the financial statements For the year ended 30 June 2007

5 Income tax benefit (Cont.)

				2007	2006
				\$	\$
(d)	Deferred tax assets
	Deferred tax assets comprises the estimated expenses at current income
	tax rates on the following items:
	Transaction costs on equity issue			122,370	173,086
	Temporary differences			4,191	3,230
	Total			126,561	176,316
(e)	Income tax liability
	Income tax payable			984,764	391,633
(f)	Deferred tax liabilities
	Provision for deferred income tax comprises the estimated expense
	at current income tax rates of 30% on the following items:
	Provision for capital gains tax on unrealised investments			2,972,765	1,665,323
	Temporary differences			14,510	(17,496)
				2,987,275	1,647,827
(g)	Reconciliations
	The overall movement in the deferred tax account is as follows:
	Opening balance			(1,471,511)	(323,668)
	(Charge)/credit to income statement			961	(14,539)
	Charge to Equity Closing balance			(1,390,164) (2,860,714)	(1,133,304) (1,471,511)
6	Other Financial Assets
(a)	Current
	Trading portfolio - at fair value			1,381,500	1,308,550
(b)	Non-Current
	Investment portfolio - at fair value			39,313,142	34,992,419
7	Trade and other payables
	Current
	Trade creditors			56,144	46,011
	Unsettled purchases			227,966	16,304
	Management fees			53,877 337,987	44,274 106,589
8	Share capital
	Ordinary shares			31,763,329	31,510,850
		2007	2007	2006	2006
		No.	\$	No.	\$
	Opening balance	32,185,001	31,510,850	32,185,001	31,475,729
	Share issue costs	-	6,262	-	35,121
	Share buy backs during the year	(1,651,932)	(1,651,932)	-
	Options exercised	1,898,149	1,898,149	-
	Closing balance	32,431,218	31,763,329	32,185,001	31,510,850

11. Notes to the financial statements For the year ended 30 June 2007

8 Share capital (Continued)

a. Terms and conditions

The Company has ordinary shares and options on issue. Prior to 20 April 2006, the Company had stapled securities on issue with each stapled security consisting of one fully paid ordinary share and one option exercisable at \$1.00 per share that were joined together (or stapled) and treated as one security quoted on the Australian Stock Exchange. Each stapled security became unstapled on 20 April 2006, at which time the ordinary share and option traded separately.

Each option can be converted into an ordinary share before the expiry date of 20 April 2008. During the financial year, 1,898,149 options were exercised. At 30 June 2007 30,286,852 options were on issue.

Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholder meetings.

In the event of winding up the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds of liquidation.

b. Investment portfolio revaluation reserve

The investment portfolio revaluation reserve records revaluations of available for sale portfolio.

c. Realised capital profit reserve

The realised capital profit reserve records realised gains on sales in the available for sale portfolio. Under certain circumstances dividends can be declared from this reserve.

9 (a) Investment portfolio revaluation reserve \$ \$
Balance at the beginning of the financial year 3,525,545	1,324,776
Unrealised gains during the year 6,885,456	5,086,381
Deferred income tax on movement in the year (1,285,557)	(1,083,384)
Transfer to the income statement (3,112,818)	(1,802,228)
Balance at the end of the financial year 6,012,626	3,525,545
(b) Realised capital profits reserve
Balance at the beginning of the financial year 1,798,639	(3,589)
Transfer from the income statement 3,112,818	1,802,228
Balance at the end of the financial year 4,911,457	1,798,639

The investment portfolio revaluation reserve and realised capital profits reserve are used to record increments and decrements on the continuous revaluation of investments to fair value and on the revaluation of investments disposed during the year respectively, as described in accounting policy note 2(b).

10	Retained earnings
	Opening balance	202,255	137,940
	Profit attributable to members of the Company
	(including net realised gains on the investment portfolio)	5,389,519	2,252,763
	Dividends provided for or paid	(1,666,807)	(386,220)
	Market share buyback	(4,882)	-
	Transfer of net gains to realised capital profits
	Reserve on realisation	(3,112,818)	(1,802,228)
		807,267	202,255
11	Auditors remuneration
	Auditing and reviewing the accounts	30,700	28,601
		30,700	28,601

12 Related party information

(a) Key management personnel

The names of the persons who were key management personnel of the Company during the financial year were:

Robert Bolton (Chairman) Bruce Holman (Director) Andrew Brown (Director) Angus Geddes (appointed 12 September 2006) (Director)

11. Notes to the financial statements

For the year ended 30 June 2007

12 Related party information (continued.)

(b) Key management personnel remuneration

The Company has applied the exemption under Corporations Amendments Regulation 2006 which exempts listed companies from providing remuneration disclosures in relation to their key management personnel in their annual financial reports by Accounting Standard AASB 124 Related Party Disclosures. These remuneration disclosures are provided in the Remuneration Report of the Directors' Report designated as audited.

The key management personnel remuneration excludes insurance premiums paid and payable by the Company in respect of key management personnel liability insurance.

During the year, premiums were paid in respect of the key management personnel liability and legal expenses insurance contract. Details of the nature of the liabilities covered and the amount of premiums paid have not been disclosed as such disclosure is prohibited under the terms of the contract.

Apart from the details disclosed in this note, no key management personnel have entered into a material contract with the Company during the financial year.

Shareholdings of key management personnel (and their Related Entities)

For the year ended 30 June 2007

Ordinary Shares	Balance at 1 July 2006	Shares held on appointment	Shares acquired / (disposed)	Shares issued upon option exercise	Balance at 30 June 2007
Robert Bolton
(Chairman)	20,300	-	-	20,300	40,600
Bruce Holman	20,000	-	-	20,000	40,000
Andrew Brown	545,673		800,000	395,673	1,741,346
Angus Geddes (Appointed 12
September 2006)		1,242,770	-	-	1,242,770
	585,973	1,242,770	800,000	435,973	3,064,716

	Balance at	Shares acquired /	Shares no longer deemed to be	Balance at
For the year ended 30 June 2006	1 July 2005	(disposed)	Director related	30 June 2006
Ordinary Shares
Robert Bolton (Chairman)	15,000	5,300	-	20,300
Bruce Holman	20,000	-	-	20,000
Andrew Brown		545,673	-	545,673
Angus Geddes (as Alternate to David Shearwood)	560,001	-	(560,001)	-
Jason McIntosh (as Alternate to David
Shearwood)	570,000	-	(570,000)	-
	1,165,001	550,973	(1,130,001)	585,973

For the year ended 30 June 2007

Options	Balance at 1 July 2006	Options held on appointment	Options acquired / (exercised)	Balance at 30 June 2007
Robert Bolton
(Chairman)	20,300		(20,300)	-
Bruce Holman	20,000		(20,000)	-
Andrew Brown	395,673		(395,673)	-
Angus Geddes (Appointed 12
September 2006)		1,042,770	-	1,042,770
	435,973	1,042,770	(435,973)	1,042,770

11. Notes to the financial statements

For the year ended 30 June 2007

12 Related party information

(b) Key management personnel remuneration (continued)

For the year ended 30 June 2006

			Options no longer deemed to
	Balance at	Options acquired	be Director	Balance at
Options	1 July 2005	/ (disposed)	related	30 June 2006
Robert Bolton (Chairman)	15,000	5,300	-	20,300
Bruce Holman	20,000	-	-	20,000
Andrew Brown		395,673	-	395,673
David Shearwood	-	-	-	-
Angus Geddes (as Alternate to	560,001	-	(560,001)	-
David Shearwood)
Jason McIntosh (as Alternate to David	570,000	-	(570,000)	-
Shearwood)
	1,165,001	400,973	(1,130,001)	435,973

Note: On 20 April 2006, the stapled securities unstapled to become one ordinary share and one option exercisable at \$1.00 each between 20 April 2006 and 20 April 2008. There were no shares granted during the reporting period as compensation.

Key management personnel transactions concerning dividends and ordinary shares are on the same terms and conditions applicable to ordinary members.

Andrew Brown is a Director of Tidewater Investments Limited ("Tidewater"). A controlled entity of Tidewater has a sub-contract arrangement with Fat Prophets Funds Management Australia Pty. Limited, the entity appointed to manage the investment portfolio of the Company. Tidewater receives no direct remuneration from the Company for those services. Tidewater recorded \$20,500 (2006: \$10,250) for company secretarial services to the Fat Prophets Australia Fund Limited. In its capacity as manager, Fat Prophets Funds Management Australia Pty Limited received \$544,910 (2006: \$472,815) in management fees.

In addition, Fat Prophets Funds Management Australia Pty Limited may receive a performance fee monthly of 15% of the gross return of the Portfolio that it is in excess of the ASX 300 Accumulation Index. In its capacity as manager, Fat Prophets Funds Management Australia Pty Limited was not entitled to performance fees for the year ended 30 June 2007 (2006: Nil).

The Board of Directors of Fat Prophets Australia Fund Ltd is responsible for determining and reviewing compensation arrangements for the Directors. The Board of Directors assess the appropriateness of the nature and amount of emoluments of each Director on a periodic basis by reference to workload and market conditions. The overall objective is to ensure maximum stakeholder benefit from the retention of a high quality Board whilst constraining costs.

13 Segment information

The Company was engaged in investment activities conducted in Australia and derived revenue from dividend, interest income and from the sale of investments.

11. Notes to the financial statements

For the year ended 30 June 2007

14 Financial Risk Management

The Company's principal financial instruments comprise equity securities, cash and short-term deposits. The main purpose of these financial instruments is to generate a return on the investment made by shareholders.

The Company also has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations.

The main risks arising from the Company's financial instruments are interest rate risk, credit risk, and market price risk. The Investment Manager reviews and agrees policies for managing each of these risks and they are summarised below. The Investment Manager also monitors the market price risk arising from all financial instruments.

(a) Credit risk

Credit risk represents the risk that the counterparty to the financial instrument will fail to discharge an obligation and cause the Company to incur a financial loss.

Market prices generally incorporate credit assessments into valuations and risk of loss is implicitly provided for in the carrying value of items in the Balance Sheet and liabilities as they are marked to market at year end. The total credit risk for items in the Balance Sheet is therefore limited to the amount carried in the Balance Sheet.

The Company is not exposed to any individually material credit risk.

(b) Interest rate risk

Interest rate risk represents the risk that the value of a financial instrument will fluctuate because of changes in market interest rates.

As at 30 June 2007, the Company's exposure to interest rate risk and the effective weighted average interest rate for each class of financial asset and financial liability is set out in the table below:

Year ended 30 June 2007	Weighted average interest rate (% pa)	Floating interest rate \$	Non- interest bearing \$	Total \$
Financial assets
Cash assets	6.00%	6,628,605	-	6,628,605
Trade & other receivables Held for trading & available for sale		-	340,955	340,955
investment portfolios		-	40,694,642	40,694,642
		6,628,605	41,035,597	47,664,202
Financial liabilities
Trade & other payables		-	337,987	337,987
		-	337,987	337,987
Net financial assets		6,628,605	40,697,610	47,326,215

Year ended 30 June 2006	Weighted average interest rate (% pa)	Floating interest rate \$	Non- interest bearing \$	Total \$
Financial assets
Cash assets	6.33%	2,437,517	-	2,437,517
Trade & other receivables Held for trading & available for sale		-	192,754	192,754
investment portfolios		-	36,300,969	36,300,969
		2,437,517	36,493,723	38,931,240
Financial liabilities
Trade & other payables		-	106,589	106,589
		-	106,589	106,589
Net financial assets		2,437,517	36,387,13 4	38,824,651

(c) Net fair value of financial assets and liabilities

The net fair value of financial assets and financial liabilities included in the Balance Sheet approximates their carrying amount.

11. Notes to the financial statements

For the year ended 30 June 2007

	2007	2006
15 Cash Flow Statement	\$	\$
(a) Reconciliation of net profit from ordinary activities after
income tax to net cash utilised in operating activities
Operating profit before capital gains	2,276,701	450,535
Unrealised and realised changes in the trading portfolio	(202,919)	(109,914)
Change in operating assets and liabilities:
Decrease / (increase) in trading portfolio	129,950	(937,495)
(Increase)/decrease in trade and other receivables	(78,045)	1,289
(Increase)/decrease in prepayments	61,840	(73,220)
Increase/(decrease) in trade and other payables	23,754	(20,465)
Increase/(decrease) in tax liabilities	(363,968)	391,633
Net cash inflow/(outflow) from operating activities	1,847,313	(297,637)

(b) Reconciliation of Cash

Cash at the end of the financial year as shown in the cash flow statement is reconciled to the related items in the balance sheet as follows:

Cash on hand	1	1
Cash at bank	6,628,604	2,437,51 6
	6,628,605	2,437,51 7

16 Events occurring after reporting date

No significant events have occurred since the reporting date which would impact on the financial position of the Company as disclosed in the Balance Sheet as at 30 June 2007 and the results and cash flows of the Company for the year ended on that date.

The financial report was authorised for issue on the 29th August 2007 by the Board of Directors.

17 Earnings per share

	2007 cents	2006 cents
Basic and diluted earnings per share (cents per share) (excluding net realised gains/losses on investment portfolio)	7.10	1.40
Basic and diluted earnings per share (cents per share) (including net realised gains/losses on investment portfolio)	16.80	7.00
Weighted average number of ordinary shares outstanding during the year used calculating basic and diluted earnings per share	32,074,153	32,185,001

11. Notes to the financial statements For the year ended 30 June 2007

18	Dividends Recognised Amounts				2007 \$	2006 \$
	Interim 2007 - Ordinary Shares				675,885	-
	Final 2006 - Ordinary Shares				990,922	-
	Interim 2006 - Ordinary Shares				-	386,220
	Total Dividends for financial year				1,666,807	386,220
		Dividend	Total Amount	Date of	Franking
		rate	\$	payment	%
	2007
	Ordinary Shares
	Interim	3.0 cps	990,922	20/04/2007	100%
	2006
	Ordinary Shares
	Final	2.1 cps	675,885	24/10/2006	100%
	Interim	1.2 cps	386,220	26/04/2006	100%

No Unfranked Dividends have been declared or paid during the year.

Unrecognised Amounts

Since the end of the financial year, the Directors have recommended the following dividends:

Ordinary Shares
Final (Ordinary and
Special)	3.0 cps	973,702	24/10/2007	100%

The final dividend for the financial year ended 30 June 2007 has not been recognised in this financial report because it was declared after 30 June 2007.

19	Franking Account	2007	2006
		\$	\$
	Franking account balance at the end of the financial year	815,031	127,098
	Franking credits that will arise from the payment of income tax payable as at the end of
	the financial year	984,764	391,633
	Franking credits that will arise from the receipt of dividends recognised as receivables
	at the reporting date	84,477	58,205
	Adjusted franking account balance	1,884,272	576,937
	Impact on the franking account of dividends proposed or declared before the financial report authorised for issue but not recognised as a distribution to equity holders during
	the year	(417,301)	(289,665)
		1,466,971	287,272

20 Contingent liabilities

The Investment Management Agreement entered into by the company with Fat Prophets Funds Management Australia Pty Limited is for an initial period of twenty five years, commencing from the date of listing.

21 Company Details

The registered office and principal place of business of the Company is: Level 33, 2 Park Street Sydney NSW 2000

12. Directors' declaration

The Directors of Fat Prophets Australia Fund Limited declare that

• 1 The financial report and the additional disclosures included in the Directors' Report designated as "Remuneration Report", as set out on pages 26 to 27, are in accordance with the Corporations Act 2001, including:
• (a) complying with Accounting Standards and the Corporations Regulations 2001; and
• (b) give a true and fair view of the financial position of the company as at 30 June 2007 and of its performance for the year ended on that date.
• 2 Andrew Brown as a person who performs the "Chief Executive Functions" for the purposes of the Act declared that:
• (a) the financial records of the company for the financial year have been properly maintained in accordance with section 286 of the Corporations Act 2001;
• (b) the financial statements and notes for the financial year comply with the Accounting Standards; and
• (c) the financial statements and notes for the financial year give a true and fair view.
• 3 At the date of this declaration, in the Directors' opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of the Board of Directors.

Robert Bolton Director

Dated this 29th day of August 2007 at Sydney

14. Additional ASX Information – Year Ended 30 June 2007

Additional information required by the Australian Stock Exchange Limited Listing Rules and not disclosed elsewhere in this Annual Report is set out below.

The securityholder information set out below was applicable as at 8 August 2007.

A. Distribution of shareholders

As at 8 August 2007, there were 32,451,720 shares held by 1,917 shareholders, all of which were quoted on the ASX. There are no restricted shares on issue. There are no unquoted shares on issue.

Category (size of holding)	Number of shareholders	Shares	Percentage
1 - 1,000	61	48,430	0.1
1,001 - 5,000	766	3,461,667	10.7
5,001 - 10,000	554	4,908,899	15.1
10,001 - 100,000	517	14,176,110	43.7
100,001 and over	19	9,856,614	30.4
	1,917	32,451,720	100.0

The number of shareholders holding less than a marketable parcel of ordinary shares is 7.

B. Top 20 Shareholders as at 8 August 2007

Holder Name	No of shares held	%
Cogent Nominees Pty Limited	2,852,062	8.79
Rowe Street Investments Pty Ltd	1,741,346	5.37
Mint Financial Group Pty Ltd	1,592,019	4.91
UBS Nominees Pty Ltd	587,736	1.81
Luton Pty Ltd	500,000	1.54
Mrs Stephanie Phillips	345,877	1.07
Di Iulio Homes Pty Limited	300,000	0.92
Innovative Solutions Pty Ltd	225,000	0.69
Roesler Investments Pty Ltd	200,000	0.62
Mr Peter Donald McKenna	198,398	0.61
Somoke Pty Limited	190,000	0.59
Mr Alan Udell & Mrs Rosemary Udell	168,000	0.52
Mrs Marcelle Jill McKenna	150,000	0.46
Mr Robert John Edwards & Mrs Annette Patricia Edwards	150,000	0.46
Gerbev Nominees Pty Ltd	150,000	0.46
Mrs Sophia Emmi	149,912	0.46
Mr Terrence Clifford Jorgensen	125,000	0.39
Huoncan Super Pty Ltd	121,264	0.37
Sanolu Pty Limited	110,000	0.34
Mr Kenneth Newton Hodson & Mrs Joy Lesley Hodson	100,000	0.31
Raymond Broderick	100,000	0.31
Mr Kevin Hon-leung Cheng	100,000	0.31
Mr James Joseph Gray	100,000	0.31
Mr Randall Brophy	100,000	0.31
A D Parnell & M Parnell & Parnell & Parnell Sup-Fund AC	100,000	0.31
Mrs Shelley Kathleen Wilson	100,000	0.31
Ms Michelle Diener	94,000	0.29
Mrs Kathryn Margaret Evans	90,000	0.28
Mr Peter Allan Bulman	90,000	0.28
	10,830,614	33.37

14. Additional ASX Information – Year Ended 30 June 2007 (Continued)

C. Range of Options Issued as at 8 August 2007

As at 8 August 2007, there were 30,266,350 options held by 1,567 optionholders, all of which were quoted on the ASX. There are no restricted options on issue. There are no unquoted options on issue.

	Number of
	Option holders	Options	Percentage
1 - 1,000	28	22,256	0.1
1,001 - 5,000	717	3,400,342	11.2
5,001 - 10,000	444	3,977,918	13.1
10,001 - 100,000	353	10,407,254	34.4
100,001 and over	25	12,458,580	41.2
	1,567	30,266,350	100.0

D. Top 20 Optionholders as at 8 August 2007

Holder Name	No of Options held	%
Huoncan Super Pty Ltd	2,781,060	9.19
Mint Financial Group Pty Ltd	1,911,274	6.32
Innovative Solutions Pty Ltd	1,379,225	4.56
Mr Fredrik Holger Uden	1,002,500	3.31
Mr Allan Bevan	954,100	3.15
Mr Simon Robert Evans & Mrs Kathryn Margaret Evans	477,835	1.58
Dr Joe Mathew	464,185	1.53
Mrs Shelley Kathleen Wilson	321,000	1.06
Mr David Colin Archibald	300,000	0.99
Comsec Nominees Pty Limited	288,320	0.95
Mr Roger Henry Clifford	250,000	0.83
Ten Broeke Investments Pty Ltd	237,000	0.78
Mr Patrick John Senior	219,580	0.73
Mr Anthony John Vetter	200,000	0.66
Ms Jean Plummer	200,000	0.66
Mr Jude Henry Mohan de Mel & Mrs Diane de Mel	199,500	0.66
Mr Grant Gosson	178,000	0.59
Mr Terrence Clifford Jorgensen	155,000	0.51
Ms Deborah Elizabeth Kneebone & Prof Alexander Cowell McFarlane	150,000	0.50
Mr Robert John Edwards & Mrs Annette Patricia Edwards	150,000	0.50
Equitas Nominees Pty Limited	150,000	0.50
Mr Guy Bowden	128,000	0.42
GEGM Investments Pty Ltd	124,934	0.41
	12,221,513	40.38

E. Voting rights

At a general meeting, Shareholders are entitled to one vote for each share held. On a show of hands, every shareholder present in person or by proxy shall have one vote and upon a poll, every shareholder so present shall have one vote for every share held.

F. Substantial Shareholders

The Company has been notified of two shareholders who hold relevant interests of in excess of 5% of the Company's ordinary shares as at 8 August 2007:

Entity	No of shares held	%
Select Asset Management Limited	3,486,534	10.74
Tidewater Investments Limited	1,741,346	5.37

G. Buy-back

There is a current on-market buy back program in effect.

H. Security Transactions

The Company conducted 496 security transactions during the financial year. Brokerage paid during the year including GST was \$5,137.09 for the trading portfolio and \$119,373.31 for the available for sale portfolio.