NOVA EYE MEDICAL LIMITED — Annual Report 2007

Oct 25, 2007

2 0 0 7 A N N U A L R E P O R T

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Corporate Directory

Directors

Victor Previn BE (Executive Chairman) Peter Falzon BEc (Group Chief Executive Officer) Alex Sundich BEc, MComm, ACA, ASIA (Non Executive Director)

Website

www.ellex.com

Stock Exchange

Company Secretary

The Company is listed on the Australian Stock Exchange (ASX)

Kevin McGuinness BAA, ACA

ASX Code

Registered Office

ELX - Ordinary Shares

Ellex Medical Lasers Limited ABN 15 007 702 927 82 Gilbert Street Adelaide South Australia 5000 Telephone +61 8 8104 5200 Facsimile +61 8 8221 5651

Auditors

Deloitte Touche Tohmatsu 190 Flinders Street Adelaide South Australia 5000

Legal Advisors

Thomson Playford 101 Pirie Street Adelaide South Australia 5000

Share Registry

Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street Adelaide SA 5000

GPO Box 1903 Adelaide SA 5001

Enquiries within Australia 1300 556 161 Enquiries outside Australia +61 3 9415 4000 Email webenquiries@computershare.com.au Website www.computershare.com.au

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Annual Financial Report for the financial year ended 30 June 2007

Corporate Governance Statement	4
Directors’ Report (including Remuneration Report)	9
Auditors’ Independence Declaration	15
Independent Audit Report	16
Directors’ Declaration	17
Income Statement	18
Balance Sheet	19
Statement of Recognised Income and Expense	20
Cash Flow Statement	21
Notes to the Financial Statements	22
Additional Stock Exchange Information	64

3

Corporate Governance Statement

This statement outlines the main corporate governance practices in place throughout the financial year, which comply with the ASX Corporate Governance Council recommendations, unless otherwise stated.

Board of Directors and its Committees

Role of the Board

The Board’s primary role is the protection and enhancement of long-term shareholder value.

To fulfil this role, the Board is responsible for the overall corporate governance of the consolidated entity including its strategic direction, establishing goals for management and monitoring the achievement of these goals.

Board Process

To assist in the execution of its responsibilities, the Board has established an Audit Committee. Given the size of the organisation, the role of Nomination and Remuneration Committee is undertaken by the Board itself. There are written mandates and operating procedures, which are reviewed on a regular basis. The effectiveness of each committee is also monitored. The Board has also established a framework for the management of the consolidated entity including a system of internal control, a business risks management process and the establishment of appropriate ethical standards.

The full Board currently holds six scheduled meetings each year, plus strategy meetings and any extraordinary meetings at such other times as may be necessary to address any specific matters that may arise.

The agenda for meetings is prepared in conjunction with the Chairman, Chief Executive Officer and Company Secretary. Standing items include the Chief Executive Officer’s report, financial reports, strategic matters, governance and compliance. Submissions are circulated in advance. Executives are regularly involved in board discussions and directors have other opportunities, including visits to operations, for contact with a wider group of employees.

The Board conducts an annual review of its processes to ensure that it is able to carry out its functions in the most effective manner.

Composition of the Board

The names of the directors of the company in office at the date of this Statement are set out in the directors’ report on page 9 of this financial report.

The composition of the Board is determined using the following principles.

• A minimum of three directors, with a broad range of expertise both nationally and internationally

• A minimum of one non-executive director

• Enough directors to serve on committees without overburdening the directors or making it difficult for them to fully discharge their responsibilities

• At each Annual General Meeting one-third of the directors (except for the Managing Director/Chief Executive Officer) or, if their number is not a multiple of three, then the number nearest but not exceeding one-third shall retire from office by rotation. The directors to retire each year will be those directors who have served the longest since their last election.

Given the size of the organisation a small Board is considered appropriate. As such, compliance with all aspects of ASX Corporate Governance Best Practice is not practical. This will be reviewed by the Board continuously in light of growth and capacity of the organisation.

Conflict of Interest

Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the company. Where the Board believes that significant conflict exists, the director concerned does not receive the relevant board papers and is not present at the meeting whilst the item is considered. The Board has developed procedures to assist directors to disclose potential conflicts of interest. Details of director related entity transactions with the Company and consolidated entity are set out in Note 34 to the financial statements.

4

Corporate Governance Statement

Nomination Committee

The Board of Directors acts as the Nomination Committee and oversees the appointment and induction process for directors. The Chairman proposes a short list of candidates with the appropriate skills and experience, which is then presented to the full Board. Where appropriate, external consultants can be engaged to assist in the process. The full Board will approve, by a unanimous vote, the most suitable candidate. The newly appointed member of the Board must then stand for election at the next Annual General Meeting of the Company.

The performance of all directors is reviewed by the Chairman each year.

Director Education

The consolidated entity has a formal process to educate new directors about the nature of the business, current issues, the corporate strategy and the expectations of the consolidated entity concerning performance of directors. Directors also have the opportunity to visit consolidated entity facilities and meet with management to gain a better understanding of business operations.

Director Dealings in Company Shares

Directors and senior management may acquire shares in the Company, but are prohibited from dealing in Company shares or exercising options:

• For the period from 31 December until release of the half year result to the Australian Stock Exchange (“ASX”), and from 30 June to the release of the Company’s annual results to the ASX; or

• At any time whilst in possession of non-public price sensitive information.

Directors must obtain the approval of the Chairman of the Board and notify the Company Secretary before they sell or buy shares in the Company, and it is subject to Board veto. Directors must advise the ASX of any transactions conducted by them in shares in the Company.

Independent Professional Advice and Access to Company Information

Each director has the right of access to all relevant company information and to the Company’s executives and, subject to prior consultation with the Chairman, may seek independent professional advice at the consolidated entity’s expense. A copy of any advice received by the director is made available to all other members of the Board.

Remuneration Committee

The Board of Directors acts as the Remuneration Committee and reviews remuneration packages and policies applicable to the Chief Executive Officer, senior executives and directors themselves. The Board evaluates the performance of the Chief Executive Officer and monitors management succession planning. The Board is also responsible for share option schemes, policies and professional indemnity and liability insurance policies applicable. Remuneration levels are competitively set to attract and retain the most qualified and experienced directors and senior executives. The Board obtains independent advice on the appropriateness of remuneration packages, given trends in comparative companies both locally and internationally.

Director’s base fees are presently $20,000 per annum. The Chairman receives the base fee plus $10,000 per annum. Director’s fees cover all main Board functions but exclude membership of the Audit Committee. A fee of $5,000 per annum is payable for membership of the Audit Committee. In addition, the company pays compulsory superannuation.The Company does not have a formal Board Retirement scheme.

Further details of directors’ remuneration, superannuation and retirement payments are set out in the directors’ report and Note 4 to the financial statements.

5

Corporate Governance Statement

Audit Committee

The Audit Committee has a documented Charter, approved by the Board. The Chairman must be a non-executive director. The Committee advises on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the consolidated entity.

The members of the Audit Committee during and since the end of the year were:

Mr V Previn – Executive Director

Mr A Sundich – Non-Executive Director (Chairman of Audit Committee)

The external auditors, the Chief Executive Officer and Chief Financial Officer, are invited to Audit Committee meetings at the discretion of the Committee. The Committee met twice during the year.

The external auditor met with the Audit Committee and the Board of Directors twice during the year.

The Audit Committee also conducts an annual review of its processes and current performance against its Charter to ensure that it has carried out its functions in an effective manner. The Charter is available to members on request.

The responsibilities of the Audit Committee include:

• Reviewing the annual and half-year financial reports and other financial information distributed externally, including new accounting policies to ensure compliance with Australian Accounting Standards and generally accepted accounting principles

• Monitoring corporate risk assessment processes

• Considering whether non-audit services provided by the external auditor are consistent with maintaining the external auditor’s independence. The external auditor provides an annual declaration of independence

• Reviewing the nomination and performance of the external auditor

• Monitoring the establishment of an appropriate internal control framework and appropriate ethical standards

• Monitoring the companies control framework for the prevention of fraud and whether prompt and appropriate action is taken to rectify any deficiencies or breakdowns

• Monitoring the procedures to ensure compliance with the Corporations Act 2001 and the ASX Listing Rules and all other regulatory requirements

• Addressing any matters outstanding with auditors, Australian Taxation Office, Australian Securities and Investments Commission, ASX and financial institutions

The Audit Committee reviews the performance of the external auditors on an annual basis and normally meets with them during the year as follows:

• To discuss the external audit plans, identifying any significant changes in structure, operations, internal controls or accounting policies likely to impact the financial statements and to review the fees proposed for the audit work to be performed

• Prior to announcement of results:

• To review the half-year and preliminary final report prior to lodgement with the ASX, and any significant adjustments required as a result of the auditor’s findings

• To recommend Board approval of these documents

• To finalise half-year and annual reporting:

• Review the results and findings of the auditor, the adequacy of accounting and financial controls, and to monitor the implementation of any recommendations made

• Review the draft financial report and recommend Board approval of the financial report

• As required, to organise, review and report on any special reviews or investigations deemed necessary by the Board

6

Corporate Governance Statement

Internal Control Framework

The Board is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors and irregularities. The Board has instigated the following internal control framework:

• Financial reporting – Quarterly actual results are reported against budgets approved by the directors and revised forecasts for the year are prepared regularly.

• Continuous disclosure – A comprehensive policy and process is in place to identify matters that may have a material effect on the price of the Company’s securities and notify them to the ASX and post them on the Company’s web site. The Board of Directors and the Chief Financial Officer/Company Secretary are responsible for all communications with the ASX.

• Quality and integrity of personnel – Formal appraisals are conducted at least annually for all employees.

• Operating units control – The Chief Executive Officer and Chief Financial Officer ensure compliance with financial controls and procedures including information systems controls detailed in procedures manuals.

• Functional speciality reporting – Key areas subject to regular reporting to the Board include Treasury and Derivatives Operations and Tax Compliance matters.

• Investment appraisal – Guidelines for capital expenditure include annual budgets, detailed appraisal and review procedures, levels of authority and due diligence requirements where businesses are being acquired or divested.

Internal Audit

The Company does not have a formal and separate internal audit function. During the year ongoing review of operations of the business is undertaken by management.

Australian Quality Standard AS/NZS ISO 13485-2003

The consolidated entity strives to ensure that its products are of the highest standard. Towards this aim it has undertaken a program to achieve AS/NZS ISO 13485-2003 accreditation for each of its business segments.

Business Risk Management

The Audit Committee advises the Board and reports on the status of business risks. Major business risks arise from such matters as actions by competitors, government policy changes, the impact of exchange rate movements, difficulties in sourcing supplies and the purchase, development and use of information systems.

The consolidated entity’s risk management policies and procedures cover environment, occupational health and safety, property, financial reporting and internal control.

Training and development and appropriate remuneration and incentives with regular performance reviews create an environment of cooperation and constructive dialogue within employees and senior management. A succession plan is also in place to ensure senior positions are filled by competent and knowledgeable employees when retirements or resignations occur.

Further details of the company’s policies relating to interest rate management, forward exchange rate management and credit risk management are included in Note 36 to the financial statements.

Comprehensive practices are established such that:

• Capital expenditure and revenue commitments above a certain size require prior Board approval

• Financial exposures are controlled, including the use of derivatives

• Occupational health and safety standards and management systems are monitored and reviewed to achieve high standards of performance and compliance with regulations

• Business transactions are properly authorised and executed.

7

Corporate Governance Statement

Ethical Standards

The consolidated entity has advised each director, manager and employee that they must comply with the Corporate Governance Policy which outlines the ethical standards.

All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the consolidated entity. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment. The policy is reviewed regularly by the Board and processes are in place to promote and communicate this information.

The Role of Shareholders

The Board informs shareholders of all major developments affecting the consolidated entity’s state of affairs as follows:

• The Annual General Meeting provides a forum for all shareholders to interact with Directors on activities of the company.

• The full annual report is distributed to all shareholders (unless a shareholder has specifically requested not to receive the document), including relevant information about the operations of the consolidated entity during the year, changes in the state of affairs and details of future developments.

• The half-yearly report contains summarised financial information and a review of the operations of the consolidated entity during the period. The half-year reviewed financial report is lodged with the Australian Securities and Investments Commission and the ASX, and is sent to any shareholder who requests it.

• Proposed major changes in the consolidated entity which may impact on share ownership rights are submitted to a vote of shareholders.

• Any information which the Board considers worthy of disclosure to shareholders is activated by release to the ASX.

All documents that are released publicly are made available on the consolidated entity’s internet web site at www.ellex.com.

The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the consolidated entity’s strategy and goals. Important issues are presented to the shareholders as single resolutions.

The shareholders are requested to vote on the appointment and remuneration of directors, the granting of options and shares to directors and changes to the Constitution. Copies of the Constitution are available to any shareholder who requests it.

8

Directors’ Report

The directors of Ellex Medical Lasers Limited submit herewith the annual financial report of the company for the financial year ended 30 June 2007. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows:

The names and particulars of the directors of the Company during or since the end of the financial year are:

Directors

Directors
Name	Particulars
Victor Previn	Victor Previn is 49 years old and was appointed a director on 16 July 2001 after the acquisition of Ellex
Chairman	Laser Systems. Victor is currently an Executive Technical Director who has considerable experience in the
	ophthalmic laser industry and was one of the original founders and shareholders of Ellex.
Peter J Falzon	Peter Falzon is 44 years old and was appointed a director on 26 November 2002. Peter has considerable
CEO	experience in business development and global distribution of ophthalmic products having worked as a senior
	executive with Coherent in the US and Japan.
Alex M Sundich	Alex Sundich is 43 years old and was appointed a non-executive director on 22 July 2005. Alex is currently
Non-Executive Director	the Chief Operating Offcer of Mariner Financial Ltd. Prior to this, Alex was CFO of Record Investments
	Limited and was an investment banker involved in Mergers & Acquisitions and capital raisings.

The above named directors held office during and since the end of the financial year.

Company Secretary

Company Secretary
Kevin P McGuinness	Kevin McGuinness is 40 years old and has been the Chief Financial Offcer and Company Secretary since
COO	October 2002. In April 2006, Kevin was appointed Chief Operating Offcer in addition to his existing roles.
	Kevin is a Chartered Accountant with 7 years experience with Deloitte Touche Tohmatsu in both Australia and
	the UK and over 18 years senior fnancial management experience in public and privately owned companies.

Principal activities

Ellex Medical Lasers Limited is a global leader in the design and manufacture of lasers and ultrasound systems used by ophthalmologists to diagnose and treat eye disease.

Review of operations

The consolidated profit after tax and minority interests for the year was $4.4 million. This compares to $3.7 million for FY06.. Excluding one-off items, NPAT from on-going operations was $2.5 million compared to $2.0 million in FY06 year. The result for the year ended 30 June 2007 includes a tax benefit of $1.9 million relating to prior year tax losses in Japan being brought to account given this operation is now profitable. Reported profit for FY06 included profit on sale of the company’s head office in Adelaide of $1.7 million

The year ended 30 June 2007 saw Ellex achieve 28% growth in revenue and a 30% growth in earnings before tax (excluding the profit on sale of the company’s head office in Adelaide in 2006). Ellex completed its transition away from reliance on OEM revenue with only 4% of revenue coming from this source compared to 20% in FY06.

During the year, two strategic acquisitions were completed. In October 2006, Ellex acquired an Australian distributor of ophthalmic equipment, Coherent Lasers, to establish Ellex Australia Pty Ltd as a direct sales channel for its home market.

In December 2006, the acquisition of Innovative Imaging, Inc was completed. The acquisition of this company , which manufactures an ophthalmic ultrasound device was the first step in Ellex expanding beyond ophthalmic lasers into the broader ophthalmic device market. Both acquisitions were integrated successfully into the Ellex business during FY07.

Ellex Japan continues to show strong growth and is now solidly profitable. Our European sales channel also continues to perform solidly. Ellex is now turning its attention to the US and development of its direct sales channel and marketing infrastructure in the USA to drive growth in this market.

In June 2007 Ellex completed a $5.5 million share placement at $0.85 per share. $2.7 million of these funds were received prior to 30 June 2007 with the balance to be received in July 2007. These funds are to be used to retire debt arising from the acquisition described above and increased investment in working capital.

9

Directors’ Report

A detailed review of operations and results of these operations of the consolidated entity during the financial year are contained in the Chairman’s Report and Chief Executive Officer’s Report which forms part of the annual report for the consolidated entity.

Changes in state of affairs

During the financial year there was no significant change in the state of affairs of the consolidated entity other than that referred to in the financial statements or notes thereto.

Subsequent events

There has not been any matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial year, that has significantly affected, or may significantly affect, the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years.

Future developments

The company will continue to focus on the further development of its business being the development, manufacture and distribution of medical laser equipment for use in ophthalmic procedures worldwide.

Further disclosure of information regarding likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations is likely to result in unreasonable prejudice to the consolidated entity. Accordingly, this information has not been disclosed in this report.

Dividends

No dividend has been declared with respect to the year ended 30 June 2007 (30 June 2006: Nil).

Share options

Share options granted to directors and executives

During and since the end of the financial year there have been 366,664 share options granted to directors and executives of the company and the consolidated entity as part of their remuneration.

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Number of ordinary shares
Directors and executives Number of options granted Issuing entity under option
D Watton 133,332 Ellex Medical Lasers Limited 133,332
L Hall 133,332 Ellex Medical Lasers Limited 133,332
H Pummer 100,000 Ellex Medical Lasers Limited 100,000
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All options issued during and since the end of the financial year are subject to vesting rules based on meeting revenue and profit growth targets. At the date of this report, none of the options detailed above had been vested.

Share options on issue at year end or exercised during the year

Details of unissued shares or interests under option are:

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Number of shares
Issuing entity under option Class of shares Exercise price of option Expiry date of options
Ellex Medical Lasers Limited 1,000,000 Ordinary $0.30 30/09/2009
Ellex Medical Lasers Limited 199,998 Ordinary $0.70 30/09/2009
Ellex Medical Lasers Limited 1,333,333 Ordinary $0.40 30/09/2010
Ellex Medical Lasers Limited 1,333,333 Ordinary $0.50 30/09/2011
Ellex Medical Lasers Limited 166,666 Ordinary $0.90 30/09/2010
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The holders of such options do not have the right, by virtue of the option, to participate in any share issue or interest issue of any other body corporate or registered scheme.

10

Directors’ Report

Details of shares or interests issued during the financial year to directors and executives as a result of exercise of an option are:

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Number of shares Amount unpaid on
Issuing entity issued Class of shares Amount paid for shares shares
Ellex Medical Lasers Limited 400,000 Ordinary $0.30 NIL
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Indemnification of officers and auditors

During the financial year, the company paid a premium in respect of a contract insuring the directors of the company (as named above), the company secretary, and all executive officers of the company and of any related body corporate against a liability incurred as such a director, secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium.

On 9 July 2001, at an Extraordinary General Meeting, the company passed a resolution to adopt a Deed of Access and Indemnity for the current directors.

On 30 January 2003, the company signed a Deed of Access and Indemnity for Directors’ V Previn, P Falzon and Company Secretary K McGuinness. A Deed of Assumption was executed for A Sundich on 22 July 2005 in relation to the Deed of Access and Indemnity.

The Company has not otherwise, during the financial year indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate, against a liability incurred as such an officer or auditor.

Directors’ meetings

The following table sets out the number of directors’ meetings (including meetings of committees of directors) held during the financial year and the number of meetings attended by each director (while they were a director or committee member). During the financial year, eight board meetings and two audit committee meetings were held.

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Board of Directors Audit Committee
Directors Held Attended Held Attended
V Previn 8 8 2 2
P Falzon 8 8 N/A N/A
A Sundich 8 8 2 2
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Directors’ shareholdings

The following table sets out each director’s relevant interest in shares and rights or options in shares of the company or a related body corporate as at the date of this report.

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Interests of Directors Interests of Director Related Entities
Fully Paid Fully Paid
Directors Ordinary Shares Options Ordinary Shares Options
V Previn - - 3,566,034 -
P Falzon 760,000 2,200,000 - -
A Sundich 1,000,000 - 2,400,000 -
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11

Directors’ Report

Remuneration report

Remuneration policy for directors and executives

The Board reviews the remuneration packages of all Directors and Executive Officers on an annual basis. Remuneration packages of all directors and executive officers are reviewed with due regard to performance and other relevant factors.

In order to retain and attract executives of sufficient calibre to facilitate the efficient and effective management of the company’s operations, the Board seeks the advice of external advisors in connection with the structure of remuneration packages.

Director and executive details

The directors of Ellex Medical Lasers Limited during the year were:

• Victor Previn – Chairman

• Peter Falzon – Chief Executive Officer

• Alex Sundich – Non-executive Director

The group executives of Ellex Medical Lasers Limited during the year were:

• Bill Swaim – President, Ellex (USA) Inc

• Yukitaka Isoda – President, Ellex (Japan) Corporation

• Kevin McGuinness – Chief Financial Officer/Chief Operating Officer

• Don Watton – VP Global Service

• Herbert Pummer – VP Operations

• Athy Kalatzis – VP Business Development

• Simon Luscombe – General Manager, Ellex Australia

• Levi Hall – VP Corporate Communications

• Anthony Stevens – VP Engineering

• Christine Warren – VP Sales Greater Europe

Elements of director and executive compensation

Compensation packages contain the following key elements:

• a) Salary/fees

• b) Benefits – including the provision of motor vehicle, superannuation and health benefits

• c) Incentive schemes – including performance related bonuses and share options under the Directors’ and Employee Share Option plan as disclosed in notes 4 and 5 to the financial statements

The following table discloses the compensation of the directors of the Company:

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Short term employee benefits Post employment Share based payments Other Total
benefits long term
Cash Profit Non- Pension Other Equity Cash benefits
salary & sharing & monetary & super- settled settled
fees bonuses benefIts annuation - Options
2007 $ $ $ $ $ $ $ $ $
V Previn 193,332 - - 17,400 1,375 - - - 212,107
P Falzon 222,669 23,857 5,351 7,157 - - - - 259,034
A Sundich 25,000 - - 2,250 - - - - 27,250
TOTAL 441,001 23,857 5,351 26,807 1,375 - - - 498,391
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Directors’ Report

The following table discloses the compensation of the 5 highest remunerated executives of the company and group executives of the consolidated entity:

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Short term employee benefits Post employment Share based payments Other Total
benefits long term
Cash Profit Non- Pension Other Equity Cash benefits
salary & sharing & monetary & super- settled settled
fees bonuses benefIts annuation - Options
2007 $ $ $ $ $ $ $ $ $
Y Isoda 214,631 113,947 12,122 - - - - - 340,700
C Warren 232,807 64,997 - - - - - - 297,804
B Swaim 217,037 3,309 25,957 24,966 - - - - 271,269
H Pummer 229,031 12,724 687 5,196 - 6,177 - - 253,815
S Luscombe 122,955 69,047 - 16,532 - - - - 208,534
TOTAL 1,016,461 264,024 38,766 46,694 - 6,177 - - 1,372,122
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Elements of compensation related to performance

Compensation to directors and executives include performance based elements. Key Performance Indicators are based on profit and/or revenue as determined by the board.

Value of options issued to directors and executives

The following table discloses the value of options granted, exercised or lapsed during the year:

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Value of options Value of options Value of options Total value of options
granted at grant exercised at exercise lapsed at the date of granted, exercised
date date lapse and lapsed
$ $ $ $
K McGuinness - 14,440 - 14,440
D Watton 7,128 - - 7,128
L Hall 7,128 - - 7,128
H Pummer 6,177 - - 6,177
B Potter - 2,407 (2,067) 340
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Value of options - basis of calculation

• 1) The total value of options granted is calculated on the fair value of the option at the grant date multiplied by the number of options granted during the year.

• 2) The total value of the options included in compensation for the year is calculated in accordance with Accounting Standards.

• The value of the options is determined at grant date and included in compensation on a proportionate basis from grant date to vesting date. Where the options immediately vest the full value of the option is recognised in compensation in the current year.

• 3) Vesting of options listed above is subject to the following performance being achieved:

• Achieving 15% Compound Annual Growth in “Product Revenues” (other income is excluded) with the year ended June 2005 being the “base year”. If in a particular year revenue does not grow 15% but the Compound Annual Growth Revenue from the base year is greater than 15% per annum then the performance criteria will have been met; and

• Achieving the following EBITDA:

• Year to June 2006 – 7.5% of target revenue

• Year to June 2007 – 10.0% of target revenue

• Year to June 2008 – 12.5% of target revenue

13

Directors’ Report

Proceedings on behalf of the Company

There are currently no pending proceedings on behalf of the company.

Non-audit services

The auditors did not provide any non-audit services during the year. Details of amounts paid or payable to the auditor for all services provided during the year by the auditor are outlined in note 6 to the financial statements.

Auditor’s independence declaration

The auditor’s independence declaration is included on page 15 of the financial report.

Rounding off of amounts

The Company is a company of the kind referred to in ASIC Class Order 98/0100, dated 10 July 1998, and in accordance with that Class Order amounts in the directors’ report and the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated.

Signed in accordance with a resolution of the directors made pursuant to s.298(2) of the Corporations Act 2001.

On behalf of the Directors

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Victor Previn Chairman Adelaide, 22 August 2007

14

Independence Declaration to the directors of Ellex Medical Lasers Limited

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15

Independent Audit Report to the members of Ellex Medical Lasers Limited

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16

Directors’ Declaration

The directors declare that:

• (a) 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;

• (b) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and

• (c) the directors have been given the declarations required by s.295A of the Corporations Act 2001.

Signed in accordance with a resolution of the directors made pursuant to s.295(5) of the Corporations Act 2001.

On behalf of the Directors

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Victor Previn Chairman Adelaide, 22 August 2007

17

Income Statement for the financial year ended 30 June 2007

Note Revenue 2 Other income 2 Gain on sale of property, plant and equipment 2 Changes in inventories of fnished goods and work in progress Raw materials and consumables used Employee benefts expense 2 Legal fees 2 Depreciation and amortisation expense 2 Advertising and marketing expenses Finance costs 2 Product development costs Other expenses Proft before income tax 2 Income tax beneft/(expense) 3 Proft for the year Attributable to: Equity holders of the parent Minority Interest Earnings per share: Basic (cents per share) 28 Diluted (cents per share) 28	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	44,421 34,593 - - 1,534 506 - - - 1,670 - - 2,479 865 - - (25,567) (18,138) - - (12,447) (9,803) - - (31) (33) - - (1,275) (799) - - (1,644) (1,109) - - (514) (358) - - (488) (326) - - (3,644) (3,229) - -
	2,824 3,839 - - 1,544 (146) - (111)
	4,368 3,693 - (111)
	4,267 3,693 - - 101 - - -
	4,368 3,693 - -
	6.84 6.02 6.28 5.75

18

Notes to the Financial Statement are included on pages 22 to 63

Balance Sheet as at 30 June 2007

Current assets Cash & cash equivalents Trade and other receivables Other fnancial assets Inventories Current tax assets Other Total current assets Non-current assets Trade and Other Receivables Other fnancial assets Property, plant and equipment Deferred tax assets Goodwill Other intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Current tax payables Provisions Other liabilities Total current liabilities Non-current liabilities Borrowings Provisions Other liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Equity attributable to equity holders of the parent Minority interest Total equity	Note 35 7 8 9 10 7 11 12 3 13 14 16 17 20 18 19 21 22 23 25 26 27	Consolidated Company
		2007 2006 2007 2006 $’000 $’000 $’000 $’000
		2,740 - 5 1 11,763 6,871 2,805 - 167 46 - - 14,729 12,088 - - 365 - - - 651 562 - -
		30,415 19,567 2,810 1
		153 - 7,400 4,627 - - 24,395 24,231 2,732 2,230 - - 2,986 908 - - 21,465 18,844 - - 5,936 4,927 - -
		33,272 26,909 31,795 28,858
		63,687 46,476 34,605 28,859
		8,381 5,529 187 - 5,131 2,195 - - 254 75 99 99 1,078 877 - - 378 365 - -
		15,222 9,041 286 99
		1,220 58 - - 270 214 - - 3,595 2,019 - -
		5,085 2,291 - 99
		20,307 11,332 286 99
		43,380 35,144 34,319 28,760
		33,544 27,985 33,544 27,985 (1,957) (246) - - 11,672 7,405 775 775
		43,259 35,144 34,319 28,760 43,259 35,144 34,319 28,760 121 - - -
		43,380 35,144 34,319 28,760

Notes to the Financial Statement are included on pages 22 to 63

19

Statement of Recognised Income and Expense for the financial year ended 30 June 2007

Translation of foreign operations: Exchange differences taken to equity Net income recognised directly in equity Proft for the period Total recognised income and expense for the period Attributable to: Equity holders of the parent Minority interest	Note 26	Consolidated Company
		2007 2006 2007 2006 $’000 $’000 $’000 $’000
		(1,747) 88 - -
		(1,747) 88 - - 4,368 3,693 - (111)
		2,621 3,781 - (111)
		2,500 3,781 (111) 121 - - -
		2,621 3,781 - (111)

20

Notes to the Financial Statement are included on pages 22 to 63

Cash Flow Statement for the financial year ended 30 June 2007

Cash fows from operating activities Receipts from customers Grant income received Payments to suppliers and employees Interest received Interest and other costs of fnance paid Income tax paid Net cash provided by/(used in) operating activities Cash fows from investing activities Payments for capitalised development expenditure Payment for property, plant and equipment Payment for long-term deposits Payment for acquisition of businesses Proceeds from sale of property, plant and equipment Payment for intangible assets Net cash (used in)/provided by investing activities Cash fows from fnancing activities Proceeds from issues of equity Payment for share issue costs Proceeds from borrowings Repayment of leases Repayment of borrowings Net cash provided by/(used in) fnancing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the fnancial year Effects of exchange rate changes on the balance of cash held in foreign currencies Cash and cash equivalents at the end of the fnancial year	Note 35 35	Consolidated Company
		2007 2006 2007 2006 $’000 $’000 $’000 $’000
		44,152 31,987 - - 252 722 - - (41,256) (31,271) - - 17 9 - - (514) (358) - - (720) (218) - -
		1,931 871 - -
		(883) (1,326) - - (1,074) (895) - - (153) - - - (2,052) - - - - 4,291 - - (116) (19) - -
		(4,278) 2,051 - -
		2,741 - 2,741 - (7) - (193) - 4,900 - - 1 (73) (85) - - (167) (2,000) (2,544) -
		7,394 (2,085) 4 1
		5,047 837 4 1 (560) (1,485) 1 - (1,747) 88 - -
		2,740 (560) 5 1

Notes to the Financial Statement are included on pages 22 to 63

21

Notes to the Financial Statements for the financial year ended 30 June 2007

Note Contents

Note	Contents
1	Summary of accounting policies
2	Proft from operations
3	Income taxes
4	Key management personnel compensation
5	Executive share option plan
6	Remuneration of auditors
7	Trade and other receivables
8	Other current fnancial assets
9	Current inventories
10	Other current assets
11	Other non-current fnancial assets
12	Property, plant and equipment
13	Goodwill
14	Other intangible assets
15	Assets pledged as security
16	Current trade and other payables
17	Current borrowings
18	Current provisions
19	Other current liabilities
20	Current tax liabilities
21	Non-current borrowings
22	Non-current provisions
23	Other non-current liabilities
24	Provisions
25	Issued capital
26	Reserves
27	Retained earnings
28	Earnings per share
29	Dividends
30	Commitments for expenditure
31	Leases
32	Subsidiaries
33	Segment information
34	Related party disclosures
35	Notes to the cash fow statement
36	Financial instruments
37	Acquisition of businesses
	Additional stock exchange information

22

Notes to the Financial Statements

1. Summary of accounting policies

Statement of compliance

The financial report is a general purpose financial report which has been prepared in accordance with the Corporations Act 2001, Accounting Standards and Urgent Issues Group Interpretations, and complies with other requirements of the law. Accounting Standards include Australian equivalents to International Financial Reporting Standards (‘A-IFRS’). Compliance with the A-IFRS ensures that the consolidated financial statements and notes of the consolidated entity comply with International Financial Reporting Standards (‘IFRS’). The parent entity financial statements and notes also comply with IFRS except for the disclosure requirements in IAS 32 ‘Financial Instruments: Presentation’ as the Australian equivalent Accounting Standard, AASB 132 ‘Financial Instruments: Presentation’ does not require such disclosures to be presented by the parent entity where its separate financial statements are presented together with the consolidated financial statements of the consolidated entity.

Basis of preparation

The financial report has been prepared on the basis of historical cost, except for the revaluation of financial instruments. Cost is based on the fair values of the consideration given in exchange for assets.

The company is a company of the kind referred to in ASIC Class Order 98/0100, dated 10 July 1998, and in accordance with that Class Order, amounts in the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated.

In the current year, the Group 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 resulted in no changes to the Group’s accounting policies and have not affected the amounts reported for the current or prior years.

At the date of authorisation of the financial report, the following Standards and Interpretations were in issue but not yet effective:

• AASB 7 ‘Financial Instruments: Disclosures and Effective for annual reporting periods beginning on or after consequential amendments to other accounting standards 1 January 2007 resulting from its issue

• • AASB 101 ‘Presentation of Financial Statements’ – revised Effective for annual reporting periods beginning on or after standard 1 January 2007

• • Interpretation 10 ‘Interim Financial Reporting and Effective for annual reporting periods beginning on or after Impairment’ 1 November 2006

The accounting policies set out below have been applied in preparing the financial statements for the year ended 30 June 2007 and the comparative information presented in these financial statements for the year ended 30 June 2006.

The following significant accounting policies have been adopted in the preparation and presentation of the financial report:

(a) Borrowings Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit and loss over the period of the borrowing using the effective interest rate method.

• (b) Business combinations

Acquisitions of subsidiaries and businesses are accounted for using the purchase method. The cost of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination.

The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under AASB 3 ‘Business Combinations’ are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, which are recognised and measured at fair value less costs to sell.

23

Notes to the Financial Statements

1. Summary of accounting policies (cont’d)

(b) Business combinations (cont’d)

Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.

The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

• (c) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, cash in banks and investments in money market instruments, net of outstanding bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.

• (d) Derivative financial instruments

The consolidated entity enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risk, including forward foreign exchange contracts and collar options. Further details of derivative financial instruments are disclosed in note 36 to the financial statements.

The consolidated entity has not designated derivative financial instruments into qualifying hedge relationships.

Changes in the fair value of any financial instrument that does not qualify for hedge accounting are recognised immediately in the Income Statement.

• (e) Employee benefits

Provision is made for benefits accruing to employees in respect of wages and salaries, staff bonuses, annual leave, long service leave and sick leave when it is probable that settlement will be required and they are capable of being measured reliably.

Provisions made in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the compensation rate expected to apply at the time of settlement.

Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the consolidated entity in respect of services provided by employees up to reporting date.

Contributions to defined contribution super plans are expensed when incurred.

• (f) Financial assets

Investments are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs.

Subsequent to initial recognition, investments in subsidiaries are measured at cost.

Other financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Loans and receivables

Trade receivables, loans, and other receivables are recorded at amortised cost less impairment.

• (g) Financial instruments issued by the company

Debt and equity instruments

Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement.

Other fnancial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs.

24

Notes to the Financial Statements

1. Summary of accounting policies (cont’d)

• (g) Financial instruments issued by the company (cont’d)

Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest

expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

• (h) Foreign currency

Foreign currency transactions

All foreign currency transactions during the financial year are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at reporting date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined.

Exchange differences are recognised in profit or loss in the period in which they arise.

• i. exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur, which form part of the net investment in a foreign operation, are recognised in the foreign currency translation reserve and recognised in profit or loss on disposal of the net investment.

Foreign operations

On consolidation, the assets and liabilities of the consolidated entity’s overseas operations are translated at exchange rates prevailing at the reporting date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognised in the foreign currency translation reserve, and recognised in profit or loss on disposal of the foreign operation.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity on or after the date of transition to A-IFRS are treated as assets and liabilities of the foreign entity and translated at exchange rates prevailing at the reporting date. Goodwill arising on acquisitions before the date of transition to A-IFRS is treated as an Australian dollar denominated asset.

• (i) Goods and services tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except:

• i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or

• ii. for receivables and payables which are recognised inclusive of GST.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows.

• (j) Goodwill

Goodwill, representing the excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired, is recognised as an asset and not amortised, but tested for impairment annually and whenever there is an indication that the goodwill may be impaired. If the recoverable amount of the Cash Generating Unit (CGU) or group of CGUs is less than the carrying amount of the CGU (or groups of CGUs), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or groups of CGUs) and then to the other assets of the CGU (or groups of CGUs) pro-rata on the basis of the carrying amount of each asset in the CGU (or groups of CGUs). An impairment loss recognised for goodwill is recognised immediately in profit or loss and is not reversed in a subsequent period. Refer also note 1(l).

• (k) Government grants

Government grants are assistance by the government in the form of transfers of resources to the consolidated entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. Government grants include

25

Notes to the Financial Statements

1. Summary of accounting policies (cont’d)

(k) Government grants (cont’d)

government assistance where there are no conditions specifically relating to the operating activities of the consolidated entity other than the requirement to operate in certain regions or industry sectors.

Government grants relating to income are recognised as income over the periods necessary to match them with the related costs. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the consolidated entity with no future related costs are recognised as income of the period in which it becomes receivable.

Government grants relating to assets are treated as deferred income and recognised in profit and loss over the expected useful lives of the assets concerned.

• (l) Impairment of assets

At each reporting date, the consolidated entity reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the consolidated entity estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually and whenever there is an indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase.

• (m) Income tax

Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred tax

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business

26

Notes to the Financial Statements

1. Summary of accounting policies (cont’d)

(m) Income tax (cont’d)

combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the consolidated entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/consolidated entity intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period

Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess.

Tax consolidation

The company and all its wholly-owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. Ellex Medical Lasers Limited is the head entity in the tax-consolidated group. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the ‘separate taxpayer within group’ approach. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax-consolidated group are recognised by the company (as head entity in the tax-consolidated group).

Due to the existence of a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised as payable to or receivable by the company and each member of the group in relation to the tax contribution amounts paid or payable between the parent entity and the other members of the tax-consolidated group in accordance with the arrangement. Further information about the tax funding arrangement is detailed in note 3 to the financial statements. Where the tax contribution amount recognised by each member of the tax-consolidated group for a particular period is different to the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period, the difference is recognised as a contribution from (or distribution to) equity participants.

• (n) Intangible assets

Patents, trademarks and licences

Patents, trademarks and licences are recorded at cost less accumulated amortisation. Amortisation is charged on a straight line basis over the estimated useful lives of the products the patent covers. The estimated useful life and amortisation method is reviewed at the end of each annual reporting period.

Research and development costs

Expenditure on research activities is recognised as an expense in the period in which it is incurred. Where no internallygenerated intangible asset can be recognised, development expenditure is recognised as an expense in the period as incurred.

An intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following are demonstrated:

• the technical feasibility of completing the intangible asset so that it will be available for use or sale;

27

Notes to the Financial Statements

1. Summary of accounting policies (cont’d)

• (n) Intangible assets (cont’d)

• the intention to complete the intangible asset and use or sell it;

• the ability to use or sell the intangible asset;

• how the intangible asset will generate probable future economic benefits;

• the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

• the ability to measure reliably the expenditure attributable to the intangible asset during its development.

Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably.

Internally-generated intangible assets are stated at cost less accumulated amortisation and impairment, and are amortised over the period over which the products are actually sold:

• Capitalised development costs 5 – 15 years

(o) Inventories

Inventories are valued at the lower of cost and net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on a first in first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

(p) Leased assets

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Consolidated entity as lessee

Assets held under finance leases are initially recognised at their fair value or, if lower, at amounts equal to the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation.

Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the consolidated entity’s general policy on borrowing costs.

Finance leased assets are amortised on a straight line basis over the estimated useful life of the asset.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

• (q) Principles of consolidation

The consolidated financial statements are prepared by combining the financial statements of all the entities that comprise the consolidated entity, being the company (the parent entity) and its subsidiaries as defined in Accounting Standard AASB 127 ‘Consolidated and Separate Financial Statements’. A list of subsidiaries appears in note 32 to the financial statements. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements.

On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If, after reassessment, the fair values of the identifiable net assets acquired exceeds the cost of acquisition, the deficiency is credited to profit and loss in the period of acquisition.

The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised.

28

Notes to the Financial Statements

1. Summary of accounting policies (cont’d)

(q) Principles of consolidation (cont’d)

The consolidated financial statements include the information and results of each subsidiary from the date on which the company obtains control and until such time as the company ceases to control such entity.

In preparing the consolidated financial statements, all intercompany balances and transactions, and unrealised profits arising within the consolidated entity are eliminated in full.

• (r) Property, plant and equipment

Land and buildings, plant and equipment and leasehold improvements are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the items payable in the future to their present value as at the date of acquisition.

Depreciation is provided on property, plant and equipment, including freehold buildings but excluding land. Depreciation is calculated on a straight line basis and diminishing value basis so as to write off the net cost or other revalued amount of each asset over its expected useful life.

The following estimated useful lives are used in the calculation of depreciation:

• Buildings 40 years

• Plant and equipment 2.5 – 20 years

• Equipment under finance lease 4 – 5 years

• (s) Provisions

Provisions are recognised when the consolidated entity has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably.

Warranties

Provisions for warranty costs are recognised at the date of sale of the relevant products, at the directors’ best estimate of the expenditure required to settle the consolidated entity’s liability.

• (t) Revenue recognition

Sale of goods

Revenue from the sale of goods is recognised when the consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods.

Interest revenue

Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

• (u) Share-based payments

Equity-settled share-based payments granted, are measured at fair value at the date of grant. Fair value is measured by use of the Black Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the consolidated entity’s estimate of shares that will eventually vest.

• (v) Critical judgements

In the application of the Group’s accounting policies, management is required to make judgements estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis for making judgements. Actual results may differ from these estimates.

29

Notes to the Financial Statements

1. Summary of accounting policies (cont’d)

• (v) Critical judgements (cont’d)

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only the current period, or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the critical judgements that management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements:

Previously unused tax losses

In 2007, Japan has started to become profitable, and is expected to continue in this manner. Tax losses are recognised as deferred tax assets in the accounts (as per note 3) as they are expected to be utilised.

Earn-outs of goodwill to previous owners of businesses acquired

Calculations of the earn-outs to the previous owners of the businesses acquired during the year (as per note 37) have been made by management based on performance during the year, and budgeted performance over the 3 years of the earn-out clauses in the acquisition contracts.

2. Profit from operations

(a) Revenue Revenue from continuing operations consisted of the following items: Revenue from the sale of goods Interest revenue: Other entities (b) Proft before income tax Proft before income tax has been arrived at after crediting/(charging) the following gains and losses from continuing operations: Gain on disposal of property, plant and equipment Other Income Net foreign exchange gains R&D Income Other income	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	44,404 34,584 - - 17 9 - -
	44,421 34,593 - -
	- 1,670 - -
	- 1,670 - -
	436 67 - - 647 332 - - 451 107 - -
	1,534 506 - -

30

Notes to the Financial Statements

2. Profit from operations (cont’d)

2. Proft from operations (cont’d) Proft before income tax has been arrived at after charging the following expenses. The line items below are attributable to continuing operations: Cost of goods sold Finance costs: Finance leases Interest on loans Total interest expense Net bad and doubtful debts arising from: Other entities Depreciation of property, plant and equipment Amortisation of intangible assets Total research and development costs (including employee costs less capitalised costs) Operating lease rental expenses: Minimum lease payments Employee beneft expense: Share based payments: Equity settled share based payments Post employment benefts: Defned contribution plans Other employee benefts Plant and Equipment Written down value of property, plant and equipment disposed of Legal fees Inventory write-down to net realisable value	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	24,851 19,472 - - 15 17 - - 499 341 - -
	514 358 - - 1 - - -
	1 - - - 693 521 - - 582 278 - -
	1,275 799 - - 1,321 814 - - 788 260 - - 36 52 - - 618 521 - - 11,793 9,230 - -
	12,447 9,803 - - - 2,529 - - 31 33 - - - 4 - -

31

Notes to the Financial Statements

3. Income taxes (a) Income tax recognised in proft or loss Tax expense comprises: Current tax expense/(beneft) Deferred (beneft)/tax expense Total tax (beneft)/ expense Attributable to: Continuing operations The prima facie income tax expense on pre-tax accounting proft from operations reconciles to the income tax expense in the fnancial statements as follows: Proft from operations Income tax expense calculated at 30% Capital loss brought to account Non-deductible expenses Effect of higher tax rates of tax on overseas income (USA, Japan and Europe) Impact of adopting tax consolidation during the prior period Amortisation of Intellectual Property Previously unrecognised & unused tax losses now recognised as deferred tax assets Unused tax losses and tax offsets not recognised as deferred tax assets Other – R & D Tax Concession Other Under/(over) provision of income tax in previous year	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	534 346 - - (2,078) (200) - 111
	(1,544) 146 - 111
	(1,544) 146 - 111
	(1,544) 146 - 111 2,824 3,839 - -
	847 1,151 - - - (181) - - 14 12 - - 255 45 - - - - - 111 (251) (613) - - (1,850) - - - 2 452 - - (267) - - - (320) (301) - - 26 (419) - -
	(1,544) 146 - 111

The tax rate used in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. There has been no change in the corporate tax rate when compared with the previous reporting period.

(b) Deferred tax balances

(b) Deferred tax balances Deferred tax assets comprise: Temporary differences Unused tax losses - Japan Deferred tax liabilities comprise: Temporary differences	2,715 2,409 - - 1,850 - - -
	4,565 2,409 - -
	1,579 1,501 - -
	1,579 1,501 - -

32

Notes to the Financial Statements

3. Income taxes (cont’d)

Taxable and deductible temporary differences arise from the following:

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----- Start of picture text -----

Consolidated
Opening Charged to Charged Acquisi- Exchange Changes Closing
balance income to equity tions/ differences in tax rate balance
disposals
2007 $’000 $’000 $’000 $’000 $’000 $’000 $’000
Gross deferred tax assets:
Intellectual Property 501 - - - - - 501
R & D Grant Payable 751 (9) - - - - 742
Employee entitlement provision 235 49 - - - - 284
- - - - -
Previously unused tax losses 1,850 1,850
Other 290 (39) - - - - 251
Temporary timing difference on
unearned profits 632 305 - - - - 937
- - - -
2,409 2,156 4,565
Gross deferred tax liabilities
Capitalised R & D 1,464 87 - - - - 1,551
Other 37 (9) - - - - 28
1,501 78 - - - - 1,579
Net deferred tax 908 2,078 - - - - 2,986
----- End of picture text -----

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----- Start of picture text -----

Consolidated
Opening Charged to Charged Acquisi- Exchange Changes Closing
balance income to equity tions/ differences in tax rate balance
disposals
2006 $’000 $’000 $’000 $’000 $’000 $’000 $’000
Gross deferred tax assets:
Intellectual Property 501 - - - - - 501
R & D Grant Payable 628 123 - - - - 751
Employee entitlement provision 182 53 - - - - 235
Other 136 154 - - - - 290
Temporary timing difference on
unearned profits 509 123 - - - - 632
1,956 453 - - - - 2,409
Gross deferred tax liabilities
Capitalised R & D 1,150 314 - - - - 1,464
Other 98 (61) - - - - 37
1,248 253 - - - - 1,501
Net deferred tax 708 200 - - - - 908
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33

Notes to the Financial Statements

3. Income taxes (cont’d)

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----- Start of picture text -----

Company
Opening Charged to Charged Acquisi- Exchange Changes Closing
balance income to equity tions/ differences in tax rate balance
disposals
2007 $’000 $’000 $’000 $’000 $’000 $’000 $’000
Gross deferred tax assets:
Other - - - - - - -
Net deferred tax - - - - - - -
2006
Gross deferred tax assets:
Other 111 (111) - - - - -
Net deferred tax 111 (111) - - - - -
----- End of picture text -----

Unrecognised deferred tax balances The following deferred tax assets have not been brought to account as assets: Timing difference – Intellectual Property Tax losses – revenue (Japan)	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	3,729 4,167 - - - 1,850 - -
	3,729 6,017 - -

Tax consolidation

Relevance of tax consolidation to the consolidated entity

The company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 July 2004 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Ellex Medical Lasers Limited. The members of the tax-consolidated group are identified at note 32.

Nature of tax funding arrangements

Entities within the tax-consolidated group have entered into a tax funding arrangement with the head entity. The tax funding arrangement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax funding agreement is considered remote.

Tax Audit

The Australian Tax Office is currently conducting a routine tax audit on the company for the financial years 2004 and 2005. There is no reason to believe the audit will reveal any material discrepancy

34

Notes to the Financial Statements

4. Key management personnel compensation

The key management personnel of Ellex Medical Lasers Limited during the year were:

• Victor Previn – Chairman

• Peter Falzon – Chief Executive Officer

• Alex Sundich – Non-executive Director

• Bill Swaim – President, Ellex (USA) Inc

• Yukitaka Isoda – President, Ellex (Japan) Inc

• Kevin McGuinness – Chief Financial Officer/Chief Operating Officer

• Herbert Pummer – VP Operations

• Athy Kalatzis – VP Business Development

• Simon Luscombe – General Manager Ellex Australia

• Don Watton – VP Global Service

• Levi Hall – VP Corporate Communications

• Anthony Stevens – VP Engineering

• Christine Warren – VP Sales Greater Europe

(a) Key management personnel compensation

The Board reviews the compensation packages of all key management personnel on an annual basis. Compensation packages are reviewed and determined with due regard to current market rates and are benchmarked against comparable industry salaries, adjusted by a performance factor to reflect changes in the performance of the company.

The aggregate compensation of the key management personnel of the consolidated entity is set out below:

Short-term employee benefts Post-employment benefts Other long-term benefts Termination benefts Share-based payment	Consolidated	Company
	2007 $ 2006 $	2007 $ 2006 $
	2,532,337 1,991,368 - - 156,984 128,218 - - - - - - - - - - 20,433 34,295 - -
	2,709,754 2,153,881 - -

35

Notes to the Financial Statements

4. Key management personnel compensation (cont’d)

Key management personnel compensation

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----- Start of picture text -----

Short term employee benefits Post employment Share based Other Total
benefits payments long
term
Salary & Bonus Non- Pension Other Equity Cash
fees monetary & super- settled settled benefits
benefIts annuation - Options
2007 $ $ $ $ $ $ $ $ $
V Previn 193,332 - - 17,400 1,375 - - - 212,107
- - - -
P Falzon (ii) 222,669 23,857 5,351 7,157 259,034
A Sundich 25,000 - - 2,250 - - - - 27,250
K McGuinness 153,503 - 25,174 14,201 10,969 - - - 203,847
A Kalatzis 144,464 - - 13,002 5,279 - - - 162,745
H Pummer (i) (v) 229,031 12,724 687 5,196 - 6,177 - - 253,815
- - - - - -
C Warren (iii) 232,807 64,997 297,804
- - - -
B Swaim (iii) 217,037 3,309 25,957 24,966 271,269
- - - - -
S Luscombe (iii) 122,955 69,047 16,532 208,534
- - -
L Hall (i) (v) 142,508 6,362 8,420 6,833 7,128 171,251
D Watton (iv) 114,679 735 - 10,321 - 7,128 - - 132,863
- - -
A Stevens (iv) (v) 124,422 10,792 11,818 12,302 9,201 168,535
- - - - -
Y Isoda (iii) 214,631 113,947 12,122 340,700
- -
2,137,038 305,770 89,529 130,160 26,824 20,433 2,709,754
----- End of picture text -----

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----- Start of picture text -----

Short term employee benefits Post employment Share based Other Total
benefits payments long
term
Salary & Bonus Non- Pension Other Equity Cash
fees monetary & super- settled settled benefits
benefIts annuation - Options
2006 $ $ $ $ $ $ $ $ $
V Previn 190,919 - - 37,100 - - - - 228,019
- - - -
P Falzon (i)(ii) 233,904 25,062 11,695 19,855 290,516
A Sundich 25,000 - - 2,250 - - - - 27,250
D Lindh 45,000 - - 1,350 - - - - 46,350
- - - -
K McGuinness (i) 152,126 20,124 13,296 9,025 194,571
- - - -
A Kalatzis (i) 141,312 9,076 12,113 1,805 164,306
- - - -
B Potter (i) 100,884 20,209 9,269 1,805 132,167
- - - - - -
C Warren (iii) 201,780 44,298 246,078
- - - -
B Swaim (iii) 224,111 18,893 20,513 22,641 286,158
- - - - -
S Luscombe (iii) 88,411 28,780 10,547 127,738
- - - - -
M Plunkett (i) 88,413 7,957 1,805 98,175
- - - - -
Y Isoda (iii) 232,728 75,636 4,189 312,553
- - -
1,724,588 192,669 74,111 128,218 34,295 2,153,881
----- End of picture text -----

36

Notes to the Financial Statements

4. Key management personnel compensation (cont’d)

• i. During the year ended 30 June 2007, key management personnel were granted options on 5 July 2006. Further details of the options are contained in note 5 to the financial statements. During the year ended 30 June 2006, key management personnel were granted options on 30 September 2005 divided equally between Series 1, 2 and 3. Further details of the options are contained in note 5 to the financial statements.

• ii. In line with performance based elements of Mr P Falzon’s contract, he received bonuses paid as part of salary of $8,354 in November 2005, February and April 2006. In 2007, bonuses of $7,952 and $15,905 were paid in August 2006 and February 2007. The contract incorporated key performance indicators based on the consolidated net profit before tax results to be achieved.

• iii. In line with performance based elements of the contracts with key management personnel, bonuses paid as part of salary were granted during the years ended 30 June 2007 & 2006 based on specific criteria for regional performances during each quarter of the year. They are based on gross margins and net contribution to profit for the following:

• Ms C Warren received bonuses in 2007 of: $12,460, $35,923 and $16,614 in September 2006, January and May 2007 (2006: $28,049 and $16,249 in January and May 2006) respectively.

• Mr B Swaim received bonuses in 2007 of: $3,309 in February 2007 (2006: $12,457, $1,607 and $4,829 in November 2005, February and April 2006 respectively).

Mr S Luscombe received bonuses in 2007 of: $5,000, $41,324 and $22,723 in September 2006, February and June 2007 (2006: $4,780, $10,000 and $14,000 in November 2005, January and May 2006) respectively.

Mr Y Isoda received bonuses in 2007 of: $21,463, $21,463, $32,570 and $38,451 in August, November 2006, February and June 2007 (2006: $25,212 in November 2005, January and April 2006) respectively.

• iv. A general bonus was paid to staff during the year ended 30 June 2007, with key management personnel participating.

• v. In line with performance based elements of the contracts with key management personnel, bonuses paid as part of salary were granted during the year ended 30 June 2007 based on specific criteria for departmental performances during the year.

5. Executive share option plan

The consolidated entity has an ownership based compensation scheme for employees and executives (including executive directors). In accordance with the provisions of the scheme, as approved by shareholders at an Annual General Meeting, employees and executives are granted options to purchase parcels of ordinary shares at a price determined by the directors.

The options granted expire within three years of the grant date or when an employee ceases employment with the Company, whichever is the earlier.

The following share-based payment arrangements were in existence at the end of the period:

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----- Start of picture text -----

Exercise Fair value at
price grant date
Options series Number Grant date Expiry date $ $
Issued 30 September 2005 – 1 1,000,000 30/09/05 30/09/09 $0.30 $0.036
Issued 30 September 2005 – 2 1,333,333 30/09/05 30/09/10 $0.40 $0.019
Issued 30 September 2005 – 3 1,333,334 30/09/05 30/09/11 $0.50 $0.012
Issued 5 July 2006 – 1 199,998 05/07/06 30/09/09 $0.70 $0.119
Issued 5 July 2006 – 2 166,666 05/07/06 30/09/10 $0.90 $0.062
Total 4,033,331
----- End of picture text -----

37

Notes to the Financial Statements

5. Executive share option plan (cont’d)

All options issued during and since the end of the financial year are subject to vesting rules based on meeting revenue and profit growth targets.

The weighted average fair value of the share options granted during the financial year is $0.050 (2006: $0.022). Options were priced using the Black Scholes Model.

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----- Start of picture text -----

Option series
30 September 30 September 30 September
Inputs into the model 2005-1 2005-2 2005-3 5 July 2006-1 5 July 2006-2
Grant date share price $0.30 $0.30 $0.30 $0.625 $0.625
Exercise price $0.30 $0.40 $0.50 $0.70 $0.90
Expected volatility 17.5% 17.5% 17.5% 16% 16%
Option life 4 years 5 years 6 years 4 years 5 years
- - - - -
Dividend yield
Risk-free interest rate 5.02% 5.02% 5.02% 5.79% 5.79%
----- End of picture text -----

The following reconciles the outstanding share options granted under the Ellex Medical Lasers Limited Employee Share Option Plan at the beginning and end of the financial year:

Balance at beginning of the fnancial year Granted during the fnancial year Forfeited during the fnancial year Exercised during the fnancial year (i) Expired during the fnancial year Balance at end of the fnancial year Exercisable at end of the fnancial year	2007 2006
	Number of options Weighted average exercise price $ Number of options Weighted average exercise price $
	4,566,667 $0.41 1,163,335 $0.50 366,664 $0.63 4,200,000 $0.40 - - (224,000) - (690,066) $0.86 - - (209,934) $0.50 (572,668) $0.50
	4,033,331 $0.60 4,566,667 $0.41
	4,033,331 $0.60 4,566,667 $0.41

(i) Exercised during the financial year

The following share options granted under the employee share option plan were exercised during the financial year:

The following share-based payment arrangements were in existence at the end of the period:

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----- Start of picture text -----

Share price at exercise date
2007 Options series Number exercised Exercise date
$
Issued November 2003 290,067 30/11/06 $0.81
Issued 30 September 2005 – 1 66,666 30/11/06 $0.81
Issued 30 September 2005 – 1 333,333 09/02/07 $0.90
Total 690,066
----- End of picture text -----

38

Notes to the Financial Statements

6. Remuneration of auditors

Auditor of the parent entity Audit or review of the financial report

Consolidated	Consolidated	Company
2007	2006 2007		2006
$		$ $	$
113,750		72,300 10,000	10,000
113,750		72,300 10,000	10,000

The auditor of Ellex Medical Lasers Limited is Deloitte Touche Tohmatsu.

7. Trade and other receivables Current Trade receivables (i) Allowance for doubtful debts Sundry deposits recoverable Receivable – share placement Other receivables Goods and Services Tax (GST) recoverable Non Current Sundry deposits recoverable Receivable from controlled entity	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	8,175 6,688 - - (94) (97) - -
	8,081 6,591 - - 612 153 - - 2,805 - 2,805 - 217 60 - - 48 67 - -
	11,763 6,871 2,805 -
	153 - - - - - 7,400 4,627
	153 - 7,400 4,627

(i) The average credit period on sales of goods is 91 days (FY06: 75 days). An allowance has been made for estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience.

8. Other current fnancial assets At fair value: Foreign currency forward contracts	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	167 46 - -
	167 46 - -

39

Notes to the Financial Statements

9. Current inventories

Raw materials:

At cost At net realisable value

Work in progress: At cost At net realisable value

Finished goods:

At cost At net realisable value

10. Other current assets

Prepayments

1. Other non-current financial assets Investment in controlled entity

	Consolidated Company	Consolidated Company
	2007	2006 2007	2006
	$’000	$’000 $’000	$’000
	4,185	4,118 -		-
	152	57 -		-
	1,824	1,603 -		-
	15	7 -		-
	8,207	6,275 -		-
	346	28 -		-
	14,729	12,088 -		-

	Consolidated	Consolidated	Company
	2007	2006	2007	2006
	$’000	$’000 $’000		$’000
	651		562 -		-
	651		562 -		-

	Consolidated	Consolidated	Company
	2007	2006	2007	2006
	$’000	$’000	$’000	$’000
		-	- 24,395	24,231
		-	- 24,395	24,231

40

Notes to the Financial Statements

12. Property, plant and equipment

Gross carrying amount Balance at 1 July 2005 Additions Disposals Net foreign currency exchange differences Balance at 1 July 2006 Additions Additions in business acquisitions Disposals Net foreign currency exchange differences Balance at 30 June 2007 Accumulated depreciation/ amortisation and impairment Balance at 1 July 2005 Disposals Depreciation expense Balance at 1 July 2006 Disposals Depreciation expense Net foreign currency exchange differences Balance at 30 June 2007 Net book value As at 30 June 2006 As at 30 June 2007	Consolidated	Consolidated	Consolidated	Consolidated	Consolidated	Consolidated
	Freehold land	Leasehold Improve- ments	Buildings	Plant and equipment at cost	Equipment under fnance lease at cost	Total
	$’000	$’000	$’000	$’000	$’000	$’000
	740 - 1,948 3,500 294 6,482 - - - 862 33 895 (740) - (1,948) (411) - (3,099) - - - - 7 -
	- - - 3,958 327 4,285 - 70 - 946 58 1,074 - - - 125 - 125 - - - (61) - (61) - - - - - -
	- 70 - 4,968 385 5,423
	- - (182) (1,724) (106) (2,012) - - 202 276 - 478 - - (20) (482) (19) (521)
	- - - (1,930) (125) (2,055) - - - 21 - 21 - (8) - (685) - (693) - - - 36 - 36
	- (8) - (2,558) (125) (2,691)
	- - - 2,028 202 2,230
	- 62 - 2,410 260 2,732

The parent company has no property, plant & equipment at 30 June 2007.

41

Notes to the Financial Statements

12. Property, plant and equipment (cont’d)

Aggregate depreciation allocated, whether recognised as an expense or capitalised as part of the carrying amount of other assets during the year: Buildings Leasehold Improvements Plant and equipment Equipment under fnance lease 13. Goodwill Gross carrying amount Balance at beginning of fnancial year Additions (note 37) Balance at end of fnancial year Accumulated impairment losses Balance at beginning of fnancial year Impairment losses for the year Balance at end of fnancial year Net book value At the beginning of the fnancial year At the end of the fnancial year	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	- 20 - - 8 - - - 685 482 - - - 19 - -
	693 521 - -
	18,844 18,844 - - 2,621 - - -
	21,465 18,844 - -
	- - - - - - - -
	- - - -
	18,844 18,844 - -
	21,465 18,844 - -

Allocation of goodwill to cash-generating units

Goodwill has been allocated for impairment testing purposes to 4 individual cash-generating units as follows:

Individual cash-generating units (note 32 subsidiaries listing)

• Ellex Inc

• Ellex Medical Pty Ltd

• Innovative Imaging Inc

• Ellex Australia Pty Ltd

42

Notes to the Financial Statements

13. Goodwill (cont’d)

During the financial year the consolidated entity assessed the recoverable amount of goodwill and determined that there has been no impairment. The carrying amount of goodwill allocated to cash-generating units that are significant individually or in aggregate is as follows:

follows:
	Consolidated	Consolidated
		2007	2006
		$’000	$’000
Ellex Inc		3,876	3,876
Ellex Medical Pty Ltd		14,968	14,968
Innovative Imaging Inc		1,856	-
Ellex Australia Pty Ltd		745	-
		21,445	18,844

Ellex Medical Pty Ltd

The recoverable amount of the Ellex Medical Pty Limited operations is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 15.37% p.a. (2006: 15.10 % p.a.). This discount rate has been determined on a real (that is, inflation affected), pre financing and pre tax basis. Cash flows beyond that five year period have been extrapolated using a steady growth rate of 3% which is considered realistic given the growth potential of the industry in which Ellex operates. Management believes that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the Ellex Medical Pty Limited operations-global carrying amount to exceed its recoverable amount.

Ellex Inc

The recoverable amount of the Ellex Inc operations is determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 15.37% p.a. (2006: 15.10% p.a.). This discount rate has been determined on a real (that is, inflation affected), pre financing and pre tax basis. Using a discount rate consistent with Ellex Medical Pty Limited is considered reasonable. Cash flows beyond that five year period have been extrapolated using a steady growth rate of 3% which is considered realistic given the growth potential of the industry in which Ellex Inc operates. Management believes that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the Ellex Inc carrying amount to exceed its recoverable amount.

Ellex Australia Pty Ltd

Ellex Australia was acquired during the financial year. At the time of acquisition, a value in use calculation which uses cash flow projections covering a five-year period, and a discount rate of 15.37% p.a was performed. This discount rate has been determined on a real (that is, inflation affected), pre financing and pre tax basis. Using a discount rate consistent with Ellex Medical Pty Limited is considered reasonable. This operation has performed consistent with or above the cash flow projections prepared as part of the initial valuation. Management believes that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the Ellex Australia carrying amount to exceed its recoverable amount.

43

Notes to the Financial Statements

13. Goodwill (cont’d)

Innovative Imaging Inc

Innovative Imaging was acquired during the financial year. At the time of acquisition, a value in use calculation which uses cash flow projections covering a five-year period, and a discount rate of 15.37% p.a was performed. This discount rate has been determined on a real (that is, inflation affected), pre financing and pre tax basis. Using a discount rate consistent with Ellex Medical Pty Limited is considered reasonable. This operation has performed consistent with or above the cash flow projections prepared as part of the initial valuation. Management believes that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the Innovate Imaging carrying amount to exceed its recoverable amount.

Key assumptions :

The key assumptions used in the value in use calculations for Ellex Medical Pty Limited, Ellex Inc, Ellex Australia Pty Ltd and Innovative Imaging Inc are as follows:

	Cash fow trends	Market share
		and gross margin
Ellex Medical Pty Ltd	Ellex has traditionally generated strong cash fows from its operating	Based on a fve year plan
	activities. In 2005 and 2006, cash fow was negative as the business	and a steady growth for the
	reinvested funds into product development and the establishment	fve subsequent years.
	of a distribution business in Japan. As at June 2005, the Japanese
	business had passed the breakeven point and is now making a positive
	contribution to the bottom line. No adjustment has been made for any
	one-off items in forecast cash fows as it is not considered appropriate
	for valuation purposes.
Ellex Inc	Positive track record is considered a reasonable source of information	Based on a fve year plan
	to indicate the potential to generate a positive cash fow, although	and a steady growth for the
	in 2006 this was not the case, it is considered to be an unusual	fve subsequent years.
	occurrence as signifcant investment was made in this business.
Ellex Australia Pty Ltd	Positive track record in 2007 is considered a reasonable source of	Based on a fve year plan
	information to indicate the potential to generate a positive cash fow.	and a steady growth for the
		fve subsequent years.
Innovative Imaging Inc	Positive track record in 2007 is considered a reasonable source of	Based on a fve year plan
	information to indicate the potential to generate a positive cash fow.	and a steady growth for the
		fve subsequent years.

44

Notes to the Financial Statements

14. Other intangible assets

Gross carrying amount Balance at 1 July 2005 Additions Additions from internal developments Balance at 1 July 2006 Additions Additions through business acquisitions (note 37) Additions from internal developments Balance at 30 June 2007 Accumulated amortisation and impairment Balance at 1 July 2005 Amortisation expense Balance at 1 July 2006 Amortisation expense Balance at 30 June 2007 Net book value As at 30 June 2006 As at 30 June 2007	Consolidated	Consolidated	Consolidated
	Capitalised development	Patents	Total
	$’000	$’000	$’000
	3,913 97 4,010 - 19 19 1,326 - 1,326
	5,239 116 5,355 - 116 116 592 - 592 883 - 883
	6,714 232 6,946
	(82) (68) (150) (277) (1) (278)
	(359) (69) (428) (570) (12) (582)
	(929) (81) (1,010)
	4,880 47 4,927
	5,785 151 5,936

The parent entity has no intangible assets at 30 June 2007.

15. Assets pledged as security

In accordance with the security arrangements of liabilities, as disclosed in notes 17 and 21 to the financial statements, all non-current assets of the consolidated entity, have been pledged as security.

45

Notes to the Financial Statements

16. Current trade and other payables Trade payables (i) Payable to previous owners of acquisitions (note 37) Accruals Payable to directors Other payables	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	5,688 3,944 - - 673 - - - 1,148 1,150 187 - 75 152 - - 797 283 - -
	8,381 5,529 187 -

(i) The average credit period on purchases of certain goods from the invoice date is 55 days.

17. Current borrowings Secured At amortised cost: Bank overdrafts (note 35a) Commercial Bills Finance lease liabilities (note 31) Other – Finance Advance 18. Current provisions Employee benefts Warranty (note 24) 19. Other current liabilities Deferred grant income 20. Current tax liabilities Other – current tax liabilities (Australia)	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	- 560 - - 5,000 1,500 - - 76 76 - - 55 59 - -
	5,131 2,195 - -
	872 602 - - 206 275 - -
	1,078 877 - -
	378 365 - -
	378 365 - -
	254 75 99 99
	254 75 99 99

46

Notes to the Financial Statements

21. Non-current borrowings Secured At amortised cost: Commercial Bills Finance lease liabilities (note 31) 22. Non-current provisions Employee benefts 23. Other non-current liabilities Payable to previous owners of acquisitions (note 37) Deferred grant income	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	1,180 - - - 40 58 - -
	1,220 58 - -
	270 214 - -
	270 214 - -
	1,437 - - - 2,158 2,019 - -
	3,595 2,019 - -

24. Provisions Balance at 1 July 2006 Additional provisions recognised Payments made Reductions arising from payments/other sacrifces of future economic benefts Balance at 30 June 2007	Consolidated
	Warranty
	$’000
	275 293 (362) -
	206

The provision for warranty claims represents the directors’ best estimate of the future sacrifice of economic benefits that will be required under the consolidated entity’s warranty program. The estimate has been made on the basis of historical warranty trends and may vary as a result of new materials, altered manufacturing processes or other events affecting product quality.

1. Issued capital 68,397,507 fully paid ordinary shares (2006: 61,236,853)

	Consolidated	Consolidated	Company
	2007	2006	2007	2006
	$’000	$’000	$’000	$’000
	33,544	27,985	33,544	27,985
	33,544	27,985	33,544	27,985

Changes to the then Corporations Law abolished the authorised capital and par value concept in relation to share capital from 1 July 1998. Therefore, the company does not have a limited amount of authorised capital and issued shares do not have a par value.

47

Notes to the Financial Statements

25. Issued capital (cont’d)

25. Issued capital (cont’d) Fully paid ordinary shares Balance at beginning of fnancial year Issued Shares – capital raising Issued Shares – options exercised Share issue costs Balance at end of fnancial year	Consolidated Company 20072006
	No. No. ’000 $ ’000 ’000 $ ’000
	61,237 27,985 61,237 27,985 6,471 5,500 - - 690 252 - - - (193) - - 68,398 33,544 61,237 27,985

Fully paid ordinary shares carry one vote per share and carry the right to dividends.

Share options

Nil (2006: 366,667) unquoted employee options exercisable over ordinary shares at $0.50 each and expiring 30 November 2006; 290,067 were exercised and 76,600 lapsed during the financial year.

1,000,000 (2006: 1,400,000) unquoted employee options exercisable over ordinary shares at $0.30 each and expiring 30 September 2009 were on issue and were not exercised at the end of the financial year.

1,333,333 (2006: 1,400,000) unquoted employee options exercisable over ordinary shares at $0.40 each and expiring 30 September 2010 were on issue and were not exercised at the end of the financial year.

1,333,334 (2006: 1,400,000) unquoted employee options exercisable over ordinary shares at $0.50 each and expiring 30 September 2011 were on issue and were not exercised at the end of the financial year.

199,998 (2006: Nil) unquoted employee options exercisable over ordinary shares at $0.70 each and expiring 30 September 2009 were on issue and were not exercised at the end of the financial year.

166,666 (2006: Nil) unquoted employee options exercisable over ordinary shares at $0.90 each and expiring 30 September 2009 were on issue and were not exercised at the end of the financial year.

Ellex Medical Lasers Limited share options carry no rights to dividends and no voting rights. Further details of the Employee Share Option Plan are contained in notes 4 and 5 to the financial statements.

26. Reserves Share option reserve Balance at beginning of fnancial year Movements – Employee Share based payments Balance at end of fnancial year	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	52 - - - 36 52 - -
	88 52 - -

The share option reserve arises on the grant of share options to executives under the executive share option plan. Amounts are transferred out of the reserve and into issued capital when the options are exercised. Further information about share-based payments to employees is made in note 5 to the financial statements.

48

Notes to the Financial Statements

26. Reserves (cont’d)

Foreign currency translation reserve Balance at beginning of fnancial year Translation of foreign operations Balance at end of fnancial year 26. Reserves (cont’d)	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	(298) (386) - - (1,747) 88 - -
	(2,045) (298) - -

Exchange differences relating to the translation from US Dollars, Japanese Yen and the Euro, being the functional currencies of the consolidated entity’s foreign subsidiaries in the USA, Japan & France, into Australian dollars are brought to account by entries made directly to the foreign currency translation reserve.

consolidated entity’s foreign subsidiaries in the USA, Japan & France, directly to the foreign currency translation reserve.	into Australian dollars are brought to account by entries made
Net reserves 27. Retained earnings Balance at beginning of fnancial year Net proft attributable to members of the parent entity Balance at end of fnancial year	(1,957) (246) - -
	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	7,405 3,712 775 886 4,267 3,693 - (111)
	11,672 7,405 775 775

	Consolidated	Consolidated	Consolidated
		2007	2006
		Cents per	Cents per
28. Earnings per share		share	share
Basic earnings per share:
Total basic earnings per share		6.84	6.02
Diluted earnings per share:
Total diluted earnings per share		6.28	5.75

49

Notes to the Financial Statements

28. Earnings per share (cont’d)

Basic earnings per share

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

Earnings (a) Weighted average number of ordinary shares for the purposes of basic earnings per share	Consolidated
	2007 2006 $’000 $’000
	4,267 3,693
	2007 2006 No. No.
	62,347,075 61,236,853

• (a) Earnings used in the calculation of total basic earnings per share and basic earnings per share reconciles to net profit in the income statement as follows:

income statement as follows:
Net proft (excluding gain on sale of property, plant and equipment) Gain on sale of property, plant and equipment Earnings used in the calculation of basic EPS	2007 2006 $’000 $’000
	4,267 2,023 - 1,670
	4,267 3,693

Diluted earnings per share

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

Earnings (a) Weighted average number of ordinary shares for the purposes of diluted earnings per share (b), (c)	2007 2006 $’000 $’000
	4,267 3,693
	2007 2006 No. No.
	67,986,985 64,172,221

50

Notes to the Financial Statements

28. Earnings per share (cont’d)

• (b) Earnings used in the calculation of total diluted earnings per share and diluted earnings per share reconciles to net profit in the income statement as follows:

income statement as follows:
	Consolidated
	2007 $’000	2006 $’000
Net proft	4,267	3,693
Earnings used in the calculation of diluted EPS	4,267	3,693
The weighted average number of ordinary shares for the purposes of diluted earnings per share
average number of ordinary shares used in the calculation of basic earnings per share as follow
	2007	2006
	No.	No.
Weighted average number of ordinary shares used
in the calculation of basic EPS	62,347,075	61,236,853
Shares deemed to be issued for no consideration
in respect of:
Employee options	5,639,909	2,935,368
Weighted average number of ordinary shares used
in the calculation of diluted EPS	67,986,985	64,172,221

• (c) The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows:

• (d) The following potential ordinary shares are not dilutive and are therefore excluded from the weighted average number of ordinary shares for the purposes of diluted earnings per share:

Options which have a share price below the exercise price	2007 2006 No. No.
	- -
	- -

51

Notes to the Financial Statements

28. Earnings per share (cont’d)

(e) Total earnings per share in 2006 includes the gain from sale of property, plant and equipment of $1,670,000. Following is the split for both basic and diluted earnings per share highlighting the impact of the gain on the sale of property plant and equipment:

Basic earnings per share: From earnings excluding the gain on property, plant and equipment From gain on sale of property, plant and equipment Total basic earnings per share Diluted earnings per share: From earnings excluding the gain on property, plant and equipment From gain on sale of property, plant and equipment Total diluted earnings per share	Consolidated
	2007 2006 Cents per Cents per share share
	6.84 3.30 - 2.72
	6.84 6.02
	6.28 3.15 - 2.60
	6.28 5.75

29. Dividends

Fully paid ordinary shares Final dividend – franked to 30% Adjusted franking account balance	2007	2006
	Cents per Total Share $’000	Cents per Total Share $’000
	Nil Nil	Nil Nil
		Company
		2007 2006 $’000 $’000
		3,241 2,932

30. Commitments for expenditure

(a) Lease commitments

Finance lease liabilities and non-cancellable operating lease commitments are disclosed in note 31 to the financial statements.

52

Notes to the Financial Statements

31. Leases

Disclosures for lessees

Finance leases

Leasing arrangements

Finance leases relate to motor vehicles and plant and equipment with lease terms of between 4 to 5 years. The consolidated entity has options to purchase the equipment for a nominal amount at the conclusion of the lease agreements.

Finance lease liabilities

Not longer than 1 year Longer than 1 year and not longer than 5 years Longer than 5 years Minimum lease payments Less future fnance charges Present value of minimum lease payments Included in the fnancial statements as: Current borrowings (note 17) Non-current borrowings (note 21)	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	83 86 - - 42 61 - - - - - -
	125 147 - - (9) (13) - -
	116 134 - -
	76 76 - - 40 58 - -
	116 134 - -

Operating leases

Leasing arrangements

Operating leases relate to business premises with lease terms of between 3 to 5 years. The business premises lease will be reviewed at the end of the lease term. On sale of the building in Adelaide, Ellex Medical Pty Ltd has a lease agreement of 5 years with the option to renew for a further 5 years.

Non-cancellable operating lease payments Not longer than 1 year Longer than 1 year and not longer than 5 years	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	917 701 - - 1,971 1,735 - -
	2,888 2,436 - -

53

Notes to the Financial Statements

32. Subsidiaries

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----- Start of picture text -----

Ownership interest
Country of 2007 2006
Name of entity incorporation % %
Parent entity
Ellex Medical Lasers Limited Australia
Subsidiaries
Ellex Medical Pty Ltd Australia 100 100
Laserex Medical Pty Ltd Australia 100 100
Ellex Inc (i) USA 100 100
ResDev Labs Inc (ii) USA 100 100
Ellex (Japan) Corporation Japan 100 100
Ellex R&D Pty Ltd Australia 100 -
Ellex Australia Pty Ltd (note 37) Australia 80 -
Ellex Services Europe SARL France 100 -
Innovative Imaging Inc (i) (note 37) USA 100 -
----- End of picture text -----

(i) From 1 July 2007 Ellex (USA) Inc and Innovative Imaging, Inc merged to form Ellex (USA) Inc.

(ii) In July 2007, Resdev Labs Inc changed its name to Innovative Imaging, Inc.

33. Segment information

The primary segment of the consolidated group is the business of selling ophthalmic equipment, shown in the consolidated income statement and balance sheet in this annual report.

The secondary segment of the consolidated group is geographical as indicated below:

Segment revenues

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----- Start of picture text -----

Revenue from Segment Acquisition of
External customers Assets segment assets
2007 2006 2007 2006 2007 2006
$’000 $’000 $’000 $’000 $’000 $’000
Australia 4,462 1,525 46,680 36,993 952 848
USA 11,202 13,998 6,784 2,394 181 9
Europe 11,360 8,886 156 - 2 -
Japan 10,993 6,470 10,067 7,089 64 38
Asia 2,538 2,362 - - - -
Other 3,832 1,343 - - - -
Total of all segments 44,421 34,584 63,687 46,476 1,199 895
----- End of picture text -----

54

Notes to the Financial Statements

33. Segment information (cont’d)

Products and services within each business segment

The consolidated entity operates in five principal geographical areas – Australia, USA, Europe, Japan and Asia. The composition of each geographical segment is as follows:

• Australia The consolidated entity manufactures all of its products in Australia and sells some products in Australia. Ellex Australia Pty Ltd was established from 1 October 2006 and has sole distribution rights to Ellex and a number of other ophthalmic products to complete the full range.

• USA The consolidated entity has a distribution office based in Minneapolis, USA and sells a range of its products in the Americas. From 1 December 2006, Innovative Imaging Inc was acquired and ophthalmic ultrasounds were added to the sales base. Revenue for 2007 was $3,027 (2006: Nil). These products are manufactured and sold from California. USA includes OEM products sold in the USA of $1,562 in 2007 (2006: $6,741).

• Europe The consolidated entity sells a broad range of its products in Europe and the Middle East. From 1 February 2007, an office and warehouse has been established in Clermont-Ferrand, France which includes a service department and office manager.

• Japan The consolidated entity sells a broad range of its products in Japan.

• Asia The consolidated entity sells a broad range of its products in Asia.

34. Related party disclosures

(a) Equity interests in related parties

Equity interests in subsidiaries

Details of the percentage of ordinary shares held in subsidiaries are disclosed in note 32 to the financial statements.

(b) Key management personnel compensation

Details of key management personnel compensation are disclosed in note 4 to the financial statements.

(c) Key management personnel equity holdings

Fully paid ordinary shares of Ellex Medical Lasers Limited

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----- Start of picture text -----

Balance@ Granted as Options Net other Balance@ Balance held
1/7/06 compensation exercised change 30/06/07 nominally
2007 No. No. No. No. No. No.
V Previn 3,566,034 - - - 3,566,034 3,566,034
P Falzon 760,000 - - - 760,000 -
A Sundich 3,400,000 - - - 3,400,000 2,400,000
K McGuinness 220,000 - 333,333 (50,000) 503,333 -
A Kalatzis 107,379 - 66,667 10,000 184,046 -
C Warren - - - 31,700 31,700 -
B Swaim - - 50,000 - 50,000 -
D Watton - - 20,000 - 20,000 -
H Pummer 93,000 - - - 93,000 -
-
8,146,413 470,000 (8,300) 8,608,113 5,966,034
----- End of picture text -----

55

Notes to the Financial Statements

34. Related party disclosures (cont’d)

Fully paid ordinary shares of Ellex Medical Lasers Limited

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----- Start of picture text -----

Balance@ Granted as Options Net other Balance@ Balance held
1/7/05 compensation exercised change 30/06/06 nominally
2006 No. No. No. No. No. No.
V Previn 3,266,034 - - 300,000 3,566,034 3,566,034
P Falzon 620,000 - - 140,000 760,000 -
A Sundich 2,350,501 - - 1,049,499 3,400,000 2,400,000
K McGuinness 60,000 - - 160,000 220,000 -
A Kalatzis 47,379 - - 60,000 107,379 -
H Pummer - - - 93,000 93,000 -
M Plunkett 50,000 - - - 50,000 -
- -
6,393,914 1,802,499 8,196,413 5,966,034
----- End of picture text -----

Executive share options of Ellex Medical Lasers Limited

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----- Start of picture text -----

Balance@ Granted as Exercised Net other Balance@ Balance held
1/7/06 compensation change 30/06/07 nominally
2007 No. No. No. No. No. No.
P Falzon 2,200,000 - - - 2,200,000 -
K McGuinness 1,000,000 - (333,333) - 666,667 -
A Kalatzis 266,667 - (66,667) - 200,000 -
B Potter 200,000 - (66,666) (133,334) - -
B Swaim 50,000 - (50,000) - - -
L Hall - 133,332 - - 133,332 -
D Watton - 133,332 - - 133,332 -
H Pummer - 100,000 - - 100,000 -
-
3,716,667 366,664 (516,666) (133,334) 3,433,331
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Executive share options of Ellex Medical Lasers Limited

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----- Start of picture text -----

Balance@ Granted as Exercised Net other Balance@ Balance held
1/7/05 compensation change 30/06/06 nominally
2006 No. No. No. No. No. No.
P Falzon 150,000 2,200,000 - (150,000) 2,200,000 -
K McGuinness 150,000 1,000,000 - (150,000) 1,000,000 -
A Kalatzis 133,334 200,000 - (66,667) 266,667 -
B Potter - 200,000 - - 200,000 -
B Swaim 50,000 - - - 50,000 -
M Plunkett - 200,000 - - 200,000 -
- -
483,334 3,800,000 (366,667) 3,916,667
----- End of picture text -----

56

Notes to the Financial Statements

34. Related party disclosures (cont’d)

Each share converts into one ordinary share of Ellex Medical Lasers Limited on exercise. No amounts are paid or payable by the recipient on granting of the option.

(d) Transactions with other related parties

Other related parties include:

• the parent entity

• subsidiaries

• key management personnel of the consolidated entity

• other related parties

Amounts payable to and receivable from these related parties are disclosed in note 16 (V Previn – 2007: $68,409 and A Sundich $6,250, 2006: V Previn $151,727 and A Sundich nil) and note 7 to the financial statements. All loans advanced to and payable to related parties are unsecured.

35. Notes to the cash flow statement

Reconciliation of cash and cash equivalents For the purposes of the cash fow statement, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the fnancial year as shown in the cash fow statement is reconciled to the related items in the balance sheet as follows: Cash and cash equivalents Bank overdraft (note 17) Financing facilities Secured bank loan facilities with various maturity dates through to September 2007 and which may be extended by mutual agreement: • amount used • amount unused	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	2,740 - 5 1 - (560) - -
	2,740 (560) 5 1
	3,440 2,060 - - 4,460 4,940 - -
	7,900 7,000 - -

(a) Reconciliation of cash and cash equivalents

(b) Financing facilities

57

Notes to the Financial Statements

35. Notes to the cash flow statement (cont’d)

(c) Reconciliation of proft for the period to net cash fows from operating activities Proft/(loss) for the period Depreciation and amortisation of non-current assets Employee share options Interest income received and receivable Increase/(decrease) in tax balances Gain on sale of building Changes in net assets and liabilities, net of effects from acquisition and disposal of businesses: (Increase)/decrease in assets: Current receivables Non-current receivables Current inventories Other current assets Increase/(decrease) in liabilities: Current payables Other current & non current liabilities Net cash from operating activities	Consolidated Company
	2007 2006 2007 2006 $’000 $’000 $’000 $’000
	4,368 3,693 - (111) 1,275 799 - - 36 52 - - (17) (9) - - (1,899) (72) - 210 - (1,670) - - (1,781) (2,593) - - - - - (99) (1,996) (1,329) - - (559) (112) - - 2,059 1,671 - - 445 441 - -
	1,931 871 - -

36. Financial instruments

(a) Financial risk management objectives

The consolidated entity’s finance function provides services to the business, co-ordinates access to domestic and international financial markets, and manages the financial risks relating to the operations of the consolidated entity.

The consolidated entity does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The use of financial derivatives is governed by the consolidated entity’s policies approved by the board of directors and audit committee, which provide written principles on the use of financial derivatives. Compliance with policies and exposure limits is reviewed by the management on a continuous basis.

The consolidated entity’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The consolidated entity enters into a variety of derivative financial instruments to manage its exposure to foreign currency risk, including:

• Forward exchange contracts

• Collar options

58

Notes to the Financial Statements

36. Financial instruments (cont’d)

(b) Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 1 to the financial statements.

(c) Foreign currency risk management

The group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts and currency swap agreements.

Forward foreign exchange contracts

The consolidated entity has entered into contracts to protect against potential adverse currency fluctuations due to the sale and purchase of goods in foreign currencies. The consolidated entity has entered into forward foreign exchange contracts (for terms not exceeding 15 months) to hedge the exchange rate risk arising from these anticipated future transactions.

As at reporting date the aggregate amount of unrealised gains under forward foreign exchange contracts relating to anticipated future transactions is $46,028 (2006: unrealised gains of $43,930).

The following table details the forward foreign currency contracts outstanding as at reporting date:

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----- Start of picture text -----

Average exchange Foreign currency Contract value Fair value
rate
2007 2006 2007 2006 2007 2006
2007 2006
Outstanding contracts FC’000 FC’000 $’000 $’000 $’000 $’000
Sell US Dollars
Less than 3 months 0.7201 0.7307 100 350 139 479 20 8
3 to 6 months - 0.7377 - 200 - 271 - 1
Longer than 6 months - 0.7214 - 300 - 416 - 10
0.7201 0.7299 100 850 139 1,166 20 19
----- End of picture text -----

Under collar options contracts, the consolidated entity takes up options to protect against potential adverse currency fluctuations, due to sale and purchase of goods in foreign currencies.

59

Notes to the Financial Statements

36. Financial instruments (cont’d)

Collar options

The following table details the collar options outstanding as at reporting date.

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----- Start of picture text -----

Put Average Call Average
Strike Rate Strike Rate Contract value Fair value
2007 2006 2007 2006 2007 2006
2007 2006
Outstanding contracts $ $ $’000 $’000 $’000 $’000
Sell US Dollars
Not longer than 1 year 0.7333 0.748 0.6903 0.795 646 1,617 75 15
Longer than 1 year - 0.733 - 0.780 - 646 - 12
646 2,263 75 27
Sell JPY Dollars
Not longer than 1 year 94.875 - 92.625 - 2,383 - 72 -
- - - - - - - -
Longer than 1 year
2,383 - 72 -
Total 3,029 2,263 147 27
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(d) Interest rate risk management

The consolidated entity is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings.

Maturity profile of financial instruments

The following table details the consolidated entity’s exposure to interest rate risk as at the reporting date; all other financial assets and liabilities are non-interest bearing.

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----- Start of picture text -----

Fixed Interest Rate Maturity
Non-
Average Variable More than Interest
Interest Interest Less than 1 1 to 5 years 5 years Bearing Total
2007 Rate $’000 Rate $’000 year $’000 $’000 $’000 $’000 $’000
Financial Liabilities
Commercial Bills 7.43% - 5,000 1,180 - - 6,180
Finance Lease Liabilities 7.84% - 131 40 - - 171
- - -
5,131 1,220 6,351
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60

Notes to the Financial Statements

36. Financial instruments (cont’d)

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----- Start of picture text -----

Fixed Interest Rate Maturity
Non-
Average Variable More than Interest
Interest Interest Less than 1 1 to 5 years 5 years Bearing Total
2006 Rate $’000 Rate $’000 year $’000 $’000 $’000 $’000 $’000
Financial Liabilities
Bank overdraft 9.70% 560 - - - - 560
Commercial Bills 7.75% - 1,500 - - - 1,500
Finance Lease Liabilities 7.50% - 135 58 - - 193
560 1,635 58 - - 2,253
----- End of picture text -----

(e) Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The consolidated entity exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded are spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the audit committee annually. The consolidated entity measures credit risk on a fair value basis.

Trade accounts receivable consist of a large number of customers, spread across diverse geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable and, where appropriate, debtors insurance cover is purchased.

The consolidated entity does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.

The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the consolidated entity’s maximum exposure to credit risk without taking account of the value of any collateral or other security obtained:

(f) Fair value of financial instruments

The carrying amount of all financial assets and liabilities are recorded at their fair value.

(g) Liquidity risk management

The consolidated entity manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

37. Acquisition of businesses

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Shares acquired Cost of
Names of businesses acquired Principal activity Date of acquisition % acquisition $’000
Coherent Lasers (Aust) Pty Ltd Distribution of ophthalmic 1 October 2006 80 816
trading as Ellex Australia Pty Ltd equipment
Innovative Imaging Inc Manufacture & distribution of 1 December 2006 100 3,516
ophthalmic equipment
4,332
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61

Notes to the Financial Statements

37. Acquisition of businesses (cont’d)

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----- Start of picture text -----

Ellex Australia Pty Ltd Innovative Imaging Inc
Fair Fair Total fair
Fair value value on Fair value value on value on
Book value adjustment acquisition Book value adjustment acquisition acquisition
Net assets acquired $’000 $’000 $’000 $’000 $’000 $’000 $’000
Current assets
Cash & cash equivalents - - - 150 - 150 150
Trade & other receivables - - - 306 - 306 306
Inventories 52 - 52 593 - 593 645
Other assets - - - 16 - 16 16
Non-current assets
Capitalised development costs - - - - 592 592 592
Property, plant & equipment - - - - 122 122 122
Current liabilities
- - - -
Trade & other payables (120) (120) (120)
52 - 52 945 714 1,659 1,711
Goodwill on acquisition 2,621
4,332
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The initial accounting for the acquisition of the Coherent Lasers (Aust) Pty Ltd and the establishment of Ellex Australia Pty Ltd has only been provisionally determined at reporting date. For tax purposes, the tax values of the assets have been reset based on market values and other factors. This company is not part of the consolidated group for tax consolidations purposes.

Goodwill arose in the business combination because the cost of the combination included a control premium paid to acquire both entities. In addition, the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognised separately from goodwill as the future economic benefits arising from them cannot be reliably measured.

The Group also acquired the customer lists and customer relationships of both entities as part of the acquisition. These assets were not able to be reliably measured and separately recognised from goodwill because they are not capable of being separated from the Group and sold, transferred, licensed, rented or exchanged, either individually or together with any related contracts.

Establishment of new subsidiary – Ellex Australia and the acquisition of Coherent Laser business

Included in the net profit after tax for the period is $405 thousand (after minority interest adjustment) attributable to the additional business generated by Ellex Australia Pty Ltd. Also, included in the goodwill is $765 thousand attributable to Ellex Australia and an amount payable of $497 thousand (discounted) to the previous owner based on forecast sales generated over the next 3 years, payable annually on anniversary dates.

Had this business combination been effected at the beginning of the year, the revenue of the Group would be increased by $6 million, and net profit after tax of $540 thousand (after minority interest adjustment). The directors of the Group consider these ‘pro-forma’ numbers to represent an approximate measure of the performance of the combined group on an annualised basis and to provide a reference point for comparison in future periods.

62

Notes to the Financial Statements

37. Acquisition of businesses (cont’d)

Acquisition of new subsidiary – Innovative Imaging Inc

Included in the net profit for the period is $682 thousand attributable to the additional business generated by Innovative Imaging, Inc. Also, included in the goodwill is $1,614 thousand attributable to Innovative Imaging and an amount payable of $1,614 thousand (discounted) to the previous owner based on forecast sales generated over the next 3 years, payable annually on anniversary dates.

Had this business combination been effected at the beginning of the year, the revenue of the Group would be increased by $5.2 million, and net profit $1,169 thousand. The directors of the Group consider these ‘pro-forma’ numbers to represent an approximate measure of the performance of the combined group on an annualised basis and to provide a reference point for comparison in future periods.

63

Additional stock exchange information as at 20 September 2007

Number of holders of equity securities

Ordinary share capital

• 68,397,507 fully paid ordinary shares are held by 3,487 individual shareholders. All issued shares carry one vote per share.

• Options

• 4,033,331 Employee options are held by 10 individual option holders. All options are subject to vesting rules based on meeting revenue and profit growth targets and expire between 31 August 2009 and 31 August 2011.

Options do not carry a right to vote.

Distribution of holders of equity securities

Distribution of holders of equity securities
1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over	Ordinary Shares	Employee Options
	274,164 - 3,040,932 - 4,551,990 - 19,234,309 - 41,296,112 10
	68,397,507 10

There were 1,098 holders of less than a marketable parcel of 596 ordinary shares.

Substantial shareholders

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Fully paid
Ordinary shareholders Number Percentage
Citicorp Nominees Pty Limited 4,753,624 6.95%
Sedico Pty Ltd 3,566,034 5.21%
Alex Sundich 3,400,000 4.97%
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Additional stock exchange information as at 20 September 2007

Twenty largest holders of quoted equity securities

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Fully paid
Ordinary shareholders Number Percentage
ANZ Nominees Limited 6,104,361 8.92%
Citicorp Nominees Pty Limited 4,753,624 6.95%
Sedico Pty Ltd 3,566,034 5.21%
Intertec Healthcare Management LLC 2,730,000 3.99%
Pine Street Pty Ltd 2,400,000 3.51%
Mr Giuseppe Canala + Mrs Mira Canala <Giuseppe Canala S/F A/C 1,799,630 2.63%
HSBC Custody Nominees (Aust) Limited 1,389,508 2.03%
National Nominees Limited Equip Super A/C 1,189,673 1.74%
Unley Underwriters Pty Limited 1,107,424 1.62%
Citicorp Nominees Pty Limited 1,006,222 1.47%
Mr Alex Sundich + Mrs Gabrielle Upton 1,000,000 1.46%
Mr Douglas Robert Buchanan + Mrs Robyn Lorraine Buchanan Super Fund A/C 942,000 1.38%
Ms Choi Chu Lee 853,000 1.25%
Mr Anthony Mark Van Der Steeg 845,965 1.24%
Invia Custodian Pty Ltd 815,370 1.19%
Mr Peter Joseph Falzon 760,000 1.11%
Mr Douglas Robert Buchanan + Mrs Robyn Lorraine Buchanan 610,000 0.89%
Mr Matthius Maus 600,000 0.88%
Forbar Custodians Limited 511,898 0.75%
UBS Nominees Pty Ltd 504,036 0.74%
TOTAL 33,488,745 48.96%
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Company secretary

Kevin McGuinness BA,ACA

Share registry

Computershare Investor Services Limited Level 5, 115 Grenfell Street ADELAIDE South Australia 5000

Enquiries within Australia: 1300 556 161 Enquiries outside Australia: +61 3 9415 4000 Website: www.computershare.com.au

GPO Box 1903 ADELAIDE South Australia 5001

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Ellex Medical Lasers Limited ABN 15 007 702 927 82 Gilbert Street Adelaide South Australia 5000 Telephone +61 8 8104 5200 Facsimile +61 8 8221 5651