MTSX Metal Storm Limited ADS (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of April, 2008

Commission File Number 000-31212

Metal Storm Limited

(Translation of registrant’s name into English)

Building 4, 848 Boundary Road, Richlands,
Queensland, Australia 4077

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F: þ Form 20-F o Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934: o Yes þ No

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): n/a

 

 

CONTENTS TO ANNUAL REPORT

CORPORATE INFORMATION			2
CHAIRMAN’S REPORT			3
CHIEF EXECUTVE OFFICER’S REPORT			6
DIRECTORS			10
EXECUTIVE			12
DIRECTORS’ REPORT			14
CORPORATE GOVERNANCE STATEMENT			38
FINANCIAL STATEMENTS
INCOME STATEMENTS			48
BALANCE SHEETS			49
CASH FLOW STATEMENTS			50
STATEMENTS OF CHANGES IN EQUITY			51
NOTES TO THE FINANCIAL STATEMENTS			53
DIRECTORS’ DECLARATION			95
INDEPENDENT AUDIT REPORT TO MEMBERS OF METAL STORM LIMITED			96
ASX ADDITIONAL INFORMATION			99

Metal Storm Limited
Corporate information

ABN 99 064 270 006
Directors:		Share Register:
T J O’Dwyer (Chairman)		Australia:
J M Crunk		Computershare Investor Services Pty Ltd
P D Jonson		Level 19
J R Nicholls		307 Queen Street
L J Finniear		Brisbane QLD 4000 Australia
Chief Executive Officer:
L J Finniear		USA:
		Bank of New York
Company Secretary:		Depository Receipts Division
P R Wetzig		620 Avenue of the Americas
		6th Floor
Registered Office:		New York NY 10011 USA
Building 4
848 Boundary Road		Solicitors:
Richlands QLD 4077 Australia		Corrs Chambers Westgarth
		Jones Day
Principal Place of Business:
Australia:		Patent Attorney:
Building 4		Davis Collison Cave
848 Boundary Road
Richlands QLD 4077 Australia		Bankers:
Phone + 61 7 3123 4700		Suncorp Metway Limited (Australia) Wachovia Bank (US)
USA:
Suite 810		Auditors:
4350 N Fairfax Drive		PricewaterhouseCoopers
Arlington VA 22203 USA
Phone + 1 703 248 8218

Metal Storm Limited
Chairman’s Report

Much that is very positive for the future of Metal Storm Limited has occurred in the last 12 months.

To those who have seen the constant decline in the share price over that period it may not seem so, but the Company is making progress on its strategy to develop one of its many potential applications and concentrate on its profitable delivery to market. With that product as the clear demonstration of the efficacy of Metal Storm Technology, the second phase of development of additional product should be more easily delivered.

The major strategy is simple: show the capacity and capability of 3GL and Redback™ with all the design and engineering issues solved for both the delivery system and ammunition, and the market for every other product and application will be reachable.

Those sceptical about the technology’s value may view the length of development time and the dollars spent thus far without a contract for products as demonstrating a defective technology/or defective engineering and/or defective design.

The unstated but necessary assumption inherent in these sorts of negative assertions is that the time taken and the costs incurred are excessive. But any fair examination of the “too long, too much” argument shows it is not well based.

The time to achieve what has been done to date is about 7 years. In that time, the Company has spent about $43 million. Consider this comparison: it is not uncommon for the cost of an upgrade to an already existing motor vehicle to be in the order of $400 million and to take upwards of three years to develop.

In the case of Metal Storm, the Company has had to apply itself to the way that this technology would be first utilised and how it would function in that environment, what its use must mean for design parameters and how specific engineering problems, with regard to that function and use, would need to be solved for 100% performance in an environment and circumstances much more demanding than for any motor vehicle. To stay with the analogy for just a moment more, from the time of an original concept for a motor vehicle to the delivery of something genuinely functional appears to have been in excess of 20 years. During that time someone might well have asked “if it is so good, why is it taking so long for someone to pay great value for it”.

The answer to that lies in the complexity and detail of commercial arrangements for ground breaking, environment changing products.

Military forces have a great interest in this technology. Initially the Company believed that interest would translate quickly into purchase orders. But we now understand that while interest has not wavered, the technology has to be seen to be working over and over in a practical demonstration of useful product. Once that is in place military forces will acquire the product and the technology. It is not the same as (but certainly not disconnected from), the motor vehicle example. As late as the end of World War 1, horse use vastly outnumbered any sort of motorised vehicle contingent in either of the great army groups of that conflict, although a shift to mechanised vehicles had been in development from the 1880s.

In the last 12 months the Company has advanced on the production of a field ready 3GL certified to full standards and tactically useful. As well the critical design and early testing of mass production capable ammunition has been achieved. The weapon itself has passed through several further iterations of tested design in the last 12 months during which the Company has reduced its costs and worked well within the discipline required by the prospectus provided at the time of the Note issue. The ammunition complexity, which otherwise would have been a problem and delaying factor for Metal Storm, has been resolved by the agreement with STK.

The STK Agreement is an important one for the Company. Its commitment to produce field ready ammunition for Metal Storm weapons and to carry those into commercial manufacture provides an important development piece of a fully functional, working weapons system.

Metal Storm Limited
Chairman’s Report (continued)

Beyond the immediacy of that, the relationship with STK is important to the Company but our ability to settle any agreement with them could only be achieved once STK was satisfied the technology would deliver sales out of its potential markets and genuine opportunities existed for Metal Storm Technology to be effective commercially.

All of these issues of review are time consuming but a critical part of the development process. It is not always easy to convey the real progress being made by the Company to the market, in a way which reaches beyond cynical review. For instance, the videos which the Company provides to its website are not intended to be evidence of the technology’s function. They are produced as general information material and are not provided as scientific verification of results. Those on the website are often chosen because they are the easiest for presentation purposes. Consequently their dissection with the intention of proving or disproving any aspect of the technology will not yield an accurate or correct result.

In that context, the Company is aware of its obligations and the legal requirement to advise the market if at any stage there is a material defect in the technology. If that ever happens the Company understands that it is required to advise the market immediately and would do so.

In short, the Company will announce good news or bad news whenever the news is material and/or price sensitive. In circumstances where no information is being provided that means simply that the Company is advancing what it said it would advance satisfactorily and in accordance with the commercial timelines it has set.

Every day the Company has the task of martialling limited resources to meet the requirements imposed by the commercial outcome it is determined to achieve. In particular the Note Holders set covenants for the Company at the outset of their funding which imposed a strong financial discipline. The disciplines are not unfair but they are inflexible. In a commercial environment that means the Board and management and staff must perform.

The combination of all these ingredients is that the Company has made important progress towards a genuine commercial outcome but has not yet got to a point where this work is fulfilled by success.

The advances of the last 12 months would not have been possible without the dedicated input of our people, both here and in the USA.

The efforts of our people in our US office have been directed to contracted work done by Metal Storm Inc (MSI) and that has been an important part of improving cash flow for the company in the US. Their work is extended to assisting the Australian team efforts for design elements within 3GL and some ground breaking work on the MAUL prototype. Their contribution as a group is recognised by the Board for its contribution to the overall company outcomes.

With the retirement of Jim Crunk from the Metal Storm Board a new Director to the MSI Board was required. Mr Richard Metrey was appointed to join Mr Bill Henkel and Mr Peter Faulkner. They comprise the MSI Board and together with Metal Storm Limited Board continue to progress the opportunities in the USA. We warmly welcome them and thank them for their effort this year.

A moment ago I mentioned Mr Jim Crunk. The Board are grateful for his generous commitment of time and effort as a Board member. Demands on him in the US have meant that he is not re-standing for the Board and the Metal Storm Limited Board has determined not to fill the casual vacancy at this time.

Here in Australia our Chief Scientist of several years Dr Joe Cronin resigned from the company in February. Joe is a great bloke who devoted 100% of his energies to the success of the company and particularly to the engineering work on 3GL. The company would have liked to have retained Joe’s services into the future but his decision to resign did provide to the company an opportunity to redesign its engineering and science administration. I particularly want to acknowledge and thank Joe for the work he did. He joins a small group whose contribution to the company has been pivotal.

In that vein, the company acknowledges Sean O’Dwyer who resigned from the Company to work with his father, Mike O’Dwyer, the company founder and inventor during the past year. Sean’s role in technical development and IP protection was greatly appreciated by the team.

Metal Storm Limited
Chairman’s Report (continued)

To the staff at Metal Storm I extend very, very sincere thanks. Only they appreciate the constant tension of living inside a cash burning company. To our CEO I extend gratitude and thanks. We are fortunate to have found a man whose commitment is genuine, whose understanding of the engineering is as strong as his other skills and who is prepared to focus on the day-to-day as well as the outcome we must achieve equally. And last, to my Board. The heat in this kitchen is intense. Their labouring in it is absolutely committed despite each of them having other opportunities far greater then the company currently provides. They hang in, like myself, only because we can see a path to an outcome for all shareholders.

I thank the shareholders for their patience. Our course this last year has not been without difficulty, as I reflected on earlier. I do hope that over the next year we are able to reconnect value with the progress the Company will continue to make.

Terry O’Dwyer
Chairman

Metal Storm Limited
Chief Executive Officer’s Report

When I wrote last year’s CEO Report I had been with the company for six weeks. Now, with a full and fascinating year in the saddle behind me, I am looking forward to bringing you up to date on our recent successes and plans for the future.

In last year’s CEO Report I introduced you to a simple strategic planning structure which I called NOW – NEXT – AFTER NEXT.

The NOW strategy was to meet the technical and financial covenants set by the convertible note holders by June 30, 2007. This totally consumed the Company for the first half of 2007, as any failure to meet these covenants placed our shareholders’ investments in Metal Storm, and indeed the Company itself, in peril.

The covenants demanded that the Company produce fully functional prototypes of the Redback™ remotely operated weapons system, the 3GL three-shot grenade launcher and High Explosive, Enhanced Blast and Airburst 40mm munitions by the June 30 deadline.

The Metal Storm engineering team in Australia worked long and hard to prepare the weapons systems and munitions so that we could conduct live firing through May and June 2007 in Singapore. Witnessed by an independent expert appointed by the Trustee for the Convertible Note Holders, Metal Storm completed the test plans set by the independent expert and proved that the Company had indeed produced fully functional prototypes as required by the covenants.

Not satisfied with simply meeting the covenant objectives, the engineering team went on to conduct the first trials of Redback™ intercepting incoming rocket propelled grenades (RPGs). Using simulated RPGs travelling in excess of 1000 kph, the team scored direct hits on the incoming projectiles with airburst grenades, proving that Metal Storm weapons have the temporal precision to intercept such fast-moving targets. With this completed, our Redback™ partner Electro Optic Systems Ltd has commenced work on the laser sighting and RPG tracking modules.

Achieving the June objectives was an absolutely huge milestone for the Company and I congratulate all members of our engineering team on this success.

Completing the NOW outcomes brought the Company abruptly face to face with the requirements of the NEXT strategy, which was in essence to bring the prototypes to market as complete products, manufactured in volume, in the shortest time possible.

To do this the Company needed to achieve certain outcomes:

	•		Get a product ready to sell that buyers will pay for
	•		Officially qualify that product for military use
	•		Secure a partner(s) willing to invest in manufacturing the product on acceptable terms
	•		Secure a partner(s) willing to invest in marketing, sales and distribution of the product on acceptable terms
	•		Build a pipeline of committed interest from potential customers
	•		Remain agile as a Company to exploit potential opportunities for variants/other products that could represent a shorter path to substantial product revenue.

Without success in all of the above a final commercial outcome would not be possible, so in the second half of 2007 the Company set its mind and resources to the pragmatic achievement of these outcomes.

On the technical front our main challenge was the design of the 40mm ammunition. The Metal Storm ammunition tailpiece had performed satisfactorily in the June firings but it became clear that the design required too many fine tolerance machined parts to be cost effective. Put simply, it would cost too much to manufacture, potentially making Metal Storm munitions too expensive to sell.

Over the last six months the engineering team has delivered a brand new tailpiece design, dropping manufactured cost by 80% while improving performance and in-field reliability. In my view the design is a work of art and while the re-design and re-testing delayed our progress, I am now confident that we have a practical, cost-engineered product to work with. It is this new design that we will take forward to qualification.

Metal Storm Limited
Chief Executive Officer’s Report (continued)

Simultaneously, the lessons learned from the June firings have been used to enhance the 3GL and Redback™ designs to produce a new, more robust range of test weapons. Additionally the Redback™ program has been broadened to permit the developed Redback™ technology to be used in a wider variety of multi-barrel weapons systems.

The manufacturing and commercial strategy is another critical aspect of delivering Metal Storm weapons systems. A design masterpiece is no use without someone to build it and someone to sell it. In the second half of 2007 the Company set about the process of putting together the solution for qualification, manufacturing, marketing, sales and distribution.

The Joint Collaboration Agreement with Singapore Technologies Kinetics (STK) was finally signed at the Singapore Air Show in February 2008. Crafted over many months, this agreement sets into stone a solid process to take 3GL and the Metal Storm 40mm ammunition from where they are today to full mass production, with global marketing, sales and distribution.

I cannot over-emphasise the importance of this Agreement to Metal Storm. While on the weapon side it currently only covers 3GL, the ammunition can be used in all Metal Storm single and multi-barrel 40mm weapon systems. Once ammunition is qualified and manufactured, it opens up broad opportunities to sell 40mm weapons with qualified ammunition in a variety of configurations.

The Agreement focuses first on the qualification of the 40mm munitions and 3GL. STK is managing the qualification process using its extensive ballistics, munitions and weapons experience. Before the end of the year, thousands of rounds will be fired and a wide range of environmental, ballistics and safety tests will be carried out to qualify the ammunition and the 3GL. The 3GL/ammunition system will then be deemed qualified for safe man-firing by military forces in field trials.

On completion of the qualification, and once appropriate feedback from military trials is received, the Agreement takes 3GL and ammunition through production engineering and tooling to full mass production.

The Agreement also provides Metal Storm with the opportunity to use STK’s extensive multi-national marketing, sales and distribution channels, while keeping some key markets as Metal Storm exclusive sales territories. This is also important as Metal Storm itself does not have the channels to market its products in most countries.

US Operations

Metal Storm Incorporated (MSI) in the USA has yet to be mentioned only because the above message needed to be delivered cohesively first.

MSI, under the leadership of Peter Faulkner, is the key to Metal Storm keeping its agility and maintaining close touch with its primary customer base. While the Australian team has been focusing on core technology and products, MSI has been completing R&D and limited production contracts, creating new weapons systems based on US Military demand and expanding its business development and marketing capability in anticipation of qualified weapons and ammunition being available.

Highlight achievements for MSI through 2007 have been many. At the top of the list are the creation of two new Metal Storm products, FireStorm and MAUL.

The FireStorm four-barrel 40mm remotely operated weapons system was originally inspired by work done on an SBIR contract, but was designed and built in record time using Metal Storm R&D funds (ensuring the design IP belongs to Metal Storm). It is light, cost-effective and fires both lethal and non-lethal munitions. Last December it was integrated with an iRobot Warrior UGV to perform the acceptance test firing of non-lethal munitions for the Metal Storm Crowd Control SBIR contract. FireStorm can also fire the same 40mm ammunition that STK is currently qualifying, ensuring it fits within the overall product roadmap.

Metal Storm Limited
Chief Executive Officer’s Report (continued)

The Multi-Shot Under-Barrel Accessory Launcher (MAUL) is an 18mm (12 gauge) four-shot accessory shotgun that fits neatly under the barrel of an infantry combat weapon. It was originally conceived as a four-shot stand-off door breeching weapon using small FRAG-12 grenade munitions. A bench gun has been developed under contract with the US Marines Warfighting Laboratory, with resulting test firing meeting US Marines expectations. MSI has now moved beyond the contract scope to complete the full weapon design, in anticipation of further military contracts for MAUL in the near future.

MSI contract performance has continued to excel given such a small team and the additional product development and marketing work being carried out. In 2007 and early 2008 MSI completed the following significant contracts:

	•		ONR/SPAWAR — Anti-RPG capability and UGV weaponisation
	•		Dahlgren — The delivery of a four-barrel 40mm system plus spares for qualification testing
	•		US Marines Warfighting Lab — Development of the MAUL 18mm bench gun and munitions
	•		US Army – Development of Non-Lethal munitions for use in Metal Storm Launchers
	•		US Army – Design of IED Disruptor round for use in multi-shot stacked EOD launcher
	•		StarChase – Delivery of 12 StarChase launchers plus tracking munitions.

Partnership development is crucial where the partner delivers complementary technology or another avenue into the market. During 2007 MSI signed a number of partnership agreements including an agreement with iRobot. This important partnership pairs Metal Storm with the most successful military robot manufacturer in the world. The partnership is active and enthusiastic on both sides.

Putting the work by MSI into perspective, Metal Storm expects three major revenue streams going forward. The most immediate is R&D contract revenue and MSI is already delivering this. The next is higher margin, low volume sales of multi-barrel systems for niche applications, the delivery of which will not require dedicated manufacturing facilities. Finally the largest, but most long term, is the delivery of large volume products such as 3GL, MAUL and munitions, where full scale manufacturing, production engineering and tooling is needed. MSI plays a lead role for the Company for the first two revenue streams, and for the third MSI has an important role to play in developing the US market.

In conclusion, Metal Storm achieved its NOW objectives successfully and on time. While I was a little optimistic on the NEXT timing when I first joined the company, I know now that we have created a rock solid process with STK to get 3GL and 40mm ammunition to manufacture and worldwide sale in the shortest possible time.

Dealing with my earlier optimism on NEXT directly, I would like to address certain goals the Company set in association with the NEXT strategy at the AGM last year. These included:

1.		3GL certified on an M16/certified for man-firing by the end of 2007
2.		Limited release prototypes of 3GL by early 2008
3.		Field demonstration weapons & munitions that customers can trial by mid 2008
4.		Expected delivery of production 3GL weapons by the end of 2009
5.		Redback™ enhancements continuing through 2007
6.		Additional work to be carried out on Redback™ automated target detection and tracking
7.		Redback™ and related products being ready for military field trials by the end of 2007.

We delivered or expect to deliver on the original timeframe goals 2, 4, 5 and 6. Achievement of goals 1, 3 and 7 has been delayed by the need to re-design and qualify the ammunition tailpiece. However, in relation to goal 7 the Company did deliver a 4 barrel 40mm weapons pod to the US Military at Dahlgren for certification and military field trials in October 2007, The full Redback™ system was not supplied as Dahlgren required the use of an alternative mount for its particular application.

Goals delivered that were not defined at the last AGM included the development of the FireStorm and MAUL weapons systems – which add significant new capability and sales potential to the product portfolio. The Company has not rested, it has been agile in adapting to new opportunities – FireStorm and MAUL being clear examples of this. That said, the Company maintains its commitment to all of the above goals and their delivery.

Metal Storm Limited
Chief Executive Officer’s Report (continued)

AFTER – NEXT — As soon as we have qualified munitions at the end of this year, the AFTER NEXT strategy can ramp up, using our own skills and those of our partners to apply qualified munitions and qualified barrels in other configurations to meet the specific needs of military, homeland security and law enforcement agencies for lethal and non-lethal applications worldwide.

Finally, without teamwork there can be no real progress. The Company could not have achieved this progress without the dedication of its staff. Our teams on both sides of the Pacific are diligent and enthusiastic to meet challenges head-on, put in the hard work and deliver the outcomes the Company needs. This was clearly evident in the lead up to the June 07 test firings, and this dedication has been maintained ever since. I would particularly like to acknowledge the efforts of my executive team. Peter Pursey for his dedicated support in tackling the STK Agreement, Peter Faulkner for his balanced management of cost and creativity in MSI, Brett Farmer for sound management of our financial tightrope, and finally Joe Cronin, who left the company in February, for his dedication and engineering leadership through recent years.

Another team I wish to thank are my colleagues on the Board of Directors. Their constant positive energy and creative problem-solving skills have been an immeasurable support as we have tackled the challenges of the past year.

Most importantly, my last words go to an even larger team — the owners of the Company, our shareholders. I thank each one of you for your patience and ongoing support as we continue the hard work needed to bring these revolutionary products to market.

Dr Lee J Finniear
CEO & Managing Director

Metal Storm Limited
Directors

Mr Terry J O’Dwyer , B Com, Dip Adv Acc., FCA, FAICD
Non-Executive Chairman

Mr O’Dwyer, a chartered accountant has been a Director of Metal Storm Limited since 1998. He is the Executive Chairman of Backwell Lombard Capital and a past chairman of BDO Kendalls, Chartered Accountants, where he was a partner for 27 years until his retirement in June 2005. Mr O’Dwyer served as Executive Chairman of the company for a short period in 2006. Prior to that he was a member of the Audit and Finance Committees of the Company. During the past three years, Mr O’Dwyer has also served as a Director of the following other publicly listed companies:

	•		Bendigo Bank Limited*, appointed October 2000
	•		Brumby’s Bakeries Holdings Limited (Chairman), appointed November 2003, resigned July 2007
	•		MFS Limited (Chairman), appointed March 2005, resigned March 2007
	•		Break Free Limited (Chairman), appointed June 2000, and resigned March 2005 on merger with MFS Limited

* Denotes current Directorship

Mr O’Dwyer has been executive Chairman since 28 April 2006 and non-executive Chairman since 19 February 2007.  

Mr James Michael Crunk
Non-Executive Director

Mr Crunk has almost 25 years experience in the aerospace, defense, manufacturing and telecommunication industries and also has significant international experience in arranging and negotiating partnerships, joint ventures, strategic alliances, financing and major contracts.  He is the controller of a division of a large defense contractor and has been Chief Financial Officer of start-up companies, where he was responsible for capital structure, the formation of significant strategic alliances and obtaining commitments prior to operational start-up.

He has worked for Lockheed Martin in a number of senior positions including: Director of Business Planning & Finance; and Director, New Business & Venture Finance for Lockheed Martin-Telecommunications.  As Director of Business Planning & Finance for the Lockheed Martin-Space Operation, he was the leader of the NASA Privatisation/Commercialisation proposal area and was a senior member of the winning $US 4.3 billion NASA Consolidated Services Operations Contract Proposal team and was included in the proposal as the Vice President, Business Administration and Financial Management (CFO).  Prior to Lockheed Martin, he worked as President of Advanced Technology Ventures, Inc. and in senior financial and Business management roles including Director, Procurement & Contracts with global telecommunications satellite operator & service provider INTELSAT.

Mr. Crunk holds BS and MBA Degrees and is a Certified General Management Professional (CGMP).  He brings unique skills to the Board of Metal Storm particularly in the areas of US regulatory, administrative, defense procurement, cost accounting and audit matters.

Metal Storm Limited
Directors

Dr Peter Jonson
Non-Executive Director

Dr Peter Jonson was appointed a Director of Metal Storm Limited in February 2006. Peter has had extensive official and commercial experience in leadership positions in Australia with significant international involvement. Peter is a professional director and economist. He spends a considerable part of his time directly or indirectly helping scientists and technologists produce commercial outcomes from their research. He is a director of Village Roadshow Ltd and Pro Medicus Limited, Chair of Australian Institute for Commercialisation and Chair of Australian Aerospace and Defence Innovations Ltd. He also serves as Chair of the Australian Government’s Cooperative Research Centre (CRC) Committee. During 2001 he was Chair of the Major National Research Facilities Committee and, during 2002 he was Chair of the Biotechnology Centre of Excellence Panel of Experts. From 1992 to 2003 he was Chairman of the Melbourne Institute Advisory Board, and is now Chairman Emeritus.

Peter has been Chairman of ANZ Funds Management, Group Managing Director of Norwich Union Financial Services Ltd and Head of Research at James Capel Australia Limited. Peter held a number of senior positions as an economist with the Reserve Bank of Australia from 1972 to 1988. He is a Fellow of the Academy of the Social Sciences in Australia and a Fellow of the Australian Institute of Company Directors.

A

  Mr John Nicholls
Non-Executive Director

Mr. Nicholls was appointed a Director of Metal Storm in September 2006 pursuant to an agreement with Harmony Capital Partners Pte Limited, in connection with the Renounceable Rights Offer conducted in July 2006. 

He has extensive experience in the Australian and international business communities with start-up and established companies, having held senior management positions and directorships for several Australian and international companies in the manufacturing, distribution, trading and merchant banking industries. He is a director of Brandrill Limited and Nylex Limited, each of whom is listed on the Australian Stock Exchange.

He has extensive experience in multicultural environments as Chief Executive and as a Non Executive Director being continuously resident in Asia for 30 years prior to returning to Australia during the late 1990s.

Company Secretary

Mr Peter Wetzig , B.Com, Dip Corp Mgmt, FCIS, FCA, Barrister (sup Ct Qld)
Company Secretary

Mr Wetzig is a consulting Company Secretary and corporate governance professional. He has chartered accounting, legal and chartered secretarial qualifications and has a been a consultant to listed and unlisted companies and groups in the area of best practice corporate governance including the provision of outsourced company secretariat for the past 5 years. Previously he was General Manager, Commercial with the company from 1999 to December 2002.

Mr Wetzig joined the Company is his current capacity, as consulting company secretary, in April 2007.

Metal Storm Limited
Executive

Dr Lee Finniear
Chief Executive Officer

Dr Finniear was appointed as the Chief Executive Officer in February 2007. He is responsible for all aspects of the management of the operations of Metal Storm as well as managing the Company’s investor relations, business development and corporate affairs.

Prior to joining Metal Storm, Dr Finniear was engaged in managing business development marketing, technology commercialisation and solution delivery with both Asia Pacific and worldwide territories.

Among his previous roles he held the position of CEO of Derceto Limited, and Vice President — Asia Pacific for Intergraph Corporation, a Fortune 1000 global technology company.  Dr Finniear has held directorships with numerous companies and not-for-profit industry bodies. Dr Finniear is a Graduate of the Australian Institute of Company Directors, and has a degree in Engineering, and a PhD in Engineering and Artificial Intelligence.

Mr Brett Farmer
Chief Financial Officer

Mr Farmer joined Metal Storm in June 2005 as Financial Controller and was appointed Chief Financial Officer in August 2007. 

His position as CFO with Metal Storm is a pivotal position in the company which reports to the CEO and Board of Directors with overall responsibility for the finance function of Metal Storm as working and supporting the CEO and Board in driving business strategies aimed at improving their overall bottom line performance.

Mr Farmer is a qualified CPA, with a demonstrated background in commercial and administrative management, coupled with prior exposure in developing and implementing business strategy within an entrepreneurial environment.

Mr Farmer has a track record in accounting and finance to support the needs of a fast growing business.  Strong communication, presentation and business acumen, along with leadership, management and initiative in order to continually improve outcomes and to provide an inspirational environment that rewards success. 

Brigadier Peter Pursey AM
Program Development Manager

Mr Pursey was a non-executive Director of Metal Storm Limited from 1994 until his retirement from the Board in March 2003. He has actively contributed to the development of a number of the company’s weapon systems. In his current management role he assists with the development of a number of the company’s technology projects in Australia and the US.

Mr Pursey is a former Brigadier in the Australian Army and has a detailed knowledge of defence-related technology and strategic security issues. He was awarded the Order of Australia (AM) in 1993.

Metal Storm Limited
Executive

Mr Peter Faulkner
General Manager — Metal Storm Inc 

Mr Faulkner is responsible for the management and administration Metal Storm Inc.; contracting activities with the US Government and oversight of the U.S. based engineering team.

Mr Faulkner has more than 25 years of experience as a DoD contractor, focused on military weapons support systems. Prior to joining Metal Storm, he served as Vice President for ManTech International Corporation, one of the U.S. Government’s leading providers of innovative technologies and solutions for mission-critical national security programs. Preceding his 21 years at ManTech, Mr. Faulkner worked at Aircraft Armaments Incorporated (AAI).

Mr Arthur Schatz
Vice President — Business Development — Metal Storm Inc

Mr Schatz commenced with Metal Storm in 2001 and is based in Arlington, Virginia. He is responsible for strategic and business planning and product development priorities, with an emphasis on the planning, development and implementation of Operations strategy that will provide the focused future direction for the company, in conjunction with business development plans. For the 12 years prior to joining Metal Storm, he was employed by the Australian Government at the Australian Embassy in Washington, DC. His position as Assistant Director, Defense Industry was to provide support to Australian defence industry in the US marketplace.

During his tenure with the Embassy, he was instrumental in securing contracts worth hundreds of millions of dollars for Australian industry. Mr Schatz retired with the rank of Commander after serving in the US Navy for 20 years, and served as a Naval Test Project Pilot and as Head of the Undersea Warfare Branch at Operational Test and Evaluation Force (OPTEVFOR). Mr Schatz also acted as a consultant to the Naval Air Systems Command providing engineering and logistics support to several Aviation Program Managers.

Metal Storm Limited
Directors’ Report
31 December 2007

Your Directors submit their report for the year ended 31 December 2007 for Metal Storm Limited (“the Company”) and its subsidiaries (“the Group”).

Directors

The names and details of the Directors of the Company in office during the financial year and until the date of this report are as follows. Directors of the Company were in office for this entire period unless otherwise stated.

Names, qualifications, experience and special responsibilities

Mr Terry J O’Dwyer , B Com, Dip Adv Acc., FCA, FAICD (Non-Executive Chairman)

Mr O’Dwyer, a chartered accountant has been a Director of Metal Storm Limited since 1998. He is the Executive Chairman of Backwell Lombard Capital and a past chairman of BDO Kendalls, Chartered Accountants, where he was a partner for 27 years until his retirement in June 2005. Mr O’Dwyer served as Executive Chairman of the company for a short period in 2006. Prior to that he was a member of the Audit and Finance Committees of the Company. During the past three years Mr O’Dwyer has also served as a Director of the following other publicly listed companies:

Bendigo Bank Limited *, appointed October 2000
Brumby’s Bakeries Holdings Limited (Chairman), appointed November 2003, resigned July 2007
MFS Limited (Chairman), appointed March 2005, resigned March 2007
Break Free Limited (Chairman), appointed June 2000, and resigned March 2005 on merger with MFS
Limited

* denotes current Directorship

Mr O’Dwyer has been executive Chairman since the beginning of the financial year and non-executive Chairman since 19 February 2007.

Dr Lee Finniear , B Eng (Hons), PhD (Managing Director and Chief Executive Officer)

Dr Finniear was appointed Chief Executive Officer of Metal Storm Limited in February 2007 and Managing Director in May 2007.  He has worked in UK, Asia and USA and has held senior executive roles in technology companies that service defence organisations worldwide. In Dr Finniear’s previous role as CEO of Derceto Ltd, he operated businesses in New Zealand, USA and the UK. Prior to this he was Vice President at Intergraph Corporation, responsible for all business and staff in the Asia Pacific Region that service the Government, Transportation, Utilities and Defence industries.  He has strong business contacts in the American market and direct experience with defence industry acquisition procedures in this country. Dr Finniear has also had extensive experience in taking developed concepts through to commercial products, orders and sales.

Dr Finniear holds a bachelor of civil engineering first class honours from Loughborough University, UK and an Engineering PhD that focused on the application of artificially intelligent computer systems to engineering problems. 

Mr James M Crunk , BS, MBA, CGMP (Non-Executive Director)

Mr Crunk was appointed as a Director on 1 September 2005. He has almost 25 years experience in the US aerospace, defence, manufacturing and telecommunication industries and has significant international experience in arranging and negotiating partnerships, joint ventures, strategic alliances, financing and major contracts.

He is the Executive Vice President, Finance & Administration for a defence contractor and has been Chief Financial Officer of start-up companies, where he was responsible for capital structure, the formation of significant strategic alliances and obtaining commitments prior to operational start- up.

Mr Crunk is Chairman of the Audit and Finance Committees and a member of the Nominations and Remuneration Committee.

Metal Storm Limited
Directors’ Report
31 December 2007

Directors (continued)

Dr Peter D Jonson , B Comm (Hons), MA (Hons), PhD (Non- Executive Director)

Dr Jonson was appointed as a Director in February 2006. He has had extensive government and commercial experience in leadership positions in Australia with significant international involvement. He is a professional director and economist and spends a considerable part of his time directly or indirectly helping scientists and technologists produce commercial outcomes from their research.

During the past three years, Dr Jonson has held the following listed company directorships:

Pro Medicus Limited* appointed April 2000
Village Roadshow Limited*, appointed January 2001
Bionomics Limited *(Chairman), appointed November 2004

* Denotes current directorship

Dr Jonson is also Chairman of Australian Aerospace and Defense Innovations Ltd and the Federal Government’s Cooperative Research Centres Committee. Previously during 2001 he was Chair of the Major National Research Facilities Committee and during 2002 he was Chair of the Biotechnology Centre of Excellence Panel of Experts. He was the founding Chairman of the Australian Institute of Commercialisation, 2001 to 2006. From 1992 to 1994 he was Chairman of the Melbourne Institute Advisory Board, and is now Chairman Emeritus. Dr Jonson has been Chairman of ANZ Funds Management, Managing Director of Norwich Union’s Australian business and Head of Research at James Capel Australia Limited. He also held a number of senior positions as an economist with the Reserve Bank of Australia from 1972 to 1998.

Dr Jonson is also a member of the Audit and Finance Committees and Chairman of the Nominations and Remuneration Committee.

Mr John R Nicholls , B Comm, MBA (Non-Executive Director)

Mr. Nicholls was appointed a Director on 1 September 2006 pursuant to an agreement with Harmony Capital Partners Pte Limited (“Harmony”), in connection with the Renounceable Rights Offer conducted on 1 July 2006.

He has extensive experience in the Australian and international business communities in manufacturing and distribution with start-up and established companies, having held senior management positions and directorships for several Australian and international companies in the manufacturing, distribution, trading and merchant banking industries.

During the past three years, Mr. Nicholls has held the following listed company directorships:

Brandrill Limited*, appointed 16 December 2004
Chemeq Limited, appointed 17 May 2005, resigned 26 October 2006
Nylex Limited*, appointed 18 December 2006

* Denotes current directorship

He has extensive experience in multicultural environments as Chief Executive and as a Non-Executive Director being continuously resident in Asia for 30 years prior to returning to Australia during the late 1990s. Mr. Nicholls is also a member of the Audit and Finance Committees and the Nominations and Remuneration Committee.

Metal Storm Limited
Directors’ Report
31 December 2007

Directors (continued)

Mr Bruce S McComish , BCA (Hons), FCA, FCPA (Former Non-Executive Director)

Mr McComish was appointed as a Director in October 2004. He has extensive commercial experience in the Australian and international business communities, having held senior management positions for several Australian and international companies. Mr McComish was Chairman of the Audit Committee and the Finance Committees until 10 September 2006. Mr McComish resigned from the board in March 2007.

During the past three years Mr McComish has also served as a Director of the publicly listed company HFA Accelerator Plus Ltd (Appointed 20 September 2005 — current) and MFS Living and Leisure Group (Appointed 16 May 2006 — current).

Company Secretaries

Mr Peter R Wetzig , B Com, Dip CM, FCA, FCIS, Barrister (Qld)

Mr Wetzig was appointed Company Secretary of Metal Storm Limited on 26 April 2007. He is a Fellow, Chartered Secretaries Australia, a Fellow, Institute of Chartered Accountants in Australia and a corporate governance consultant to listed and unlisted companies. He was previously an executive of the company from 1999 to 2002 and occupying the role Chief Financial Officer and Company Secretary. Prior to holding this position he held a number of roles of senior management positions in ASX listed Queensland companies. Mr Wetzig has been a financial and governance executive for over 20 years.

Mr James D MacDonald , B Bus (Accty), CPA, FAICD

Mr MacDonald was the Company Secretary at the beginning of the financial year until his resignation on 26 April 2007. Mr MacDonald has been a Certified Practising Accountant for 25 years.

Interests in the shares and options of Metal Storm Limited

As at the date of this report, the interests of the Directors in the shares and options of the Company were:

						Options Over Ordinary
		Ordinary Shares				Shares
T J O’Dwyer			180,855				33,819	*
L J Finniear			—				1,000,000
J M Crunk			—				—
P D Jonson			340,000				—
J R Nicholls			—				—

Earnings per share

		2007				2006
		¢				¢
Basic and diluted loss per share		(1.69		)		(2.85		)

Dividends

No dividends have been paid or declared since the start of the financial year and the Directors do not recommend the payment of a dividend in respect of the year.

Metal Storm Limited
Directors’ Report
31 December 2007

Corporate information

Corporate structure

Metal Storm Limited is a company limited by shares that is incorporated and domiciled in Brisbane, Australia. Its subsidiaries, Metal Storm Inc. and Metal Storm USA Limited are incorporated in Delaware in the USA and based in Arlington, ProCam Machine LLC is formed in the USA and is based in Seattle, and Digigun LLC was formed in the USA and is based in Arlington. Metal Storm Limited has prepared a consolidated financial report incorporating the entities that it controlled during the financial year, which are outlined in the following illustration of the Company’s corporate structure:

Nature of operations and principal activities

Metal Storm Limited is a defence technology company, which is working with government agencies and departments, and the defence industry to develop weapons systems utilising the Metal Storm non-mechanical, electronically initiated stacked projectile technology with the principal focus on the 40mm category of weapons and munitions.

There have been no significant changes in the nature of those activities during the year.

Employees

The Company employed 28 staff as at 31 December 2007 (2006: 25 staff).

Metal Storm Limited
Directors’ Report
31 December 2007

Operating and financial review

Company overview

Metal Storm was incorporated as a private company in April 1994.

In May 1994 the Company acquired patents and intellectual property in relation to the technology from Mr J M O’Dwyer in consideration for 1,125,000 ordinary shares. Between May 1994 and March 1999, the Company issued a total of 2,625,000 ordinary shares to a variety of investors raising a total $1,993,875.

In anticipation of an initial public offering in Australia, the Company effected a 21.4 to 1 stock split that increased the Company’s issued capital from 3,750,002 to 80,250,042 ordinary shares. In June 1999, the Company raised $12 million in an initial public offering in Australia by offering and selling 4,000,000 ordinary shares at an issue price of $3.00. The Company’s ordinary shares listed on the Australian Stock Exchange in July 1999 under the symbol “MST”. In May 2000, the Company effected a 5 to 1 stock split, thereby increasing its issued capital from 84,250,042 to 421,250,210 ordinary shares.

In August 2000, the Company commenced a Level 1 American Depositary Receipts (“ADR”) program with The Bank of New York as depositary and ADRs traded on the over-the-counter market. In December 2001, the Company commenced a Level 2 ADR program with The Bank of New York as depositary and ADRs commenced trading on the NASDAQ Small Cap Market under the ticker symbol “MTSX”.

In December 2003, the Company acquired the Seattle-based ProCam Machine LLC (“ProCam”) in exchange for the issuance of 5,524,926 ordinary shares of Metal Storm Limited and $189,730 cash. On 1 June 2005, Metal Storm sold the net assets of ProCam to Monroe Machined Products, Inc. (“MMP”) for a total of $2,256,721 including inventory. An amount of $65,615 was retained in trust contingent on the satisfaction of certain conditions set forth in the Asset Purchase Agreement. This amount was paid to MMP during 2005.

The Company raised $3.0 million through a share purchase plan in May 2006 which was followed by a fully underwritten Renounceable Rights Issue of $27.5 million in September 2006.

Performance measurement

Management and the Board monitor the Company’s overall performance, from its strategic plan through to the performance of the Company against operating plans and financial budgets.

The Board, together with management, reviews monthly financial reports which are used to monitor performance against critical success factors. Directors receive these reports together with management’s analysis and commentary prior to each monthly Board meeting to allow Directors to actively monitor the Company’s performance.

Dynamics of the business

Metal Storm Limited is a defence technology company currently transitioning its technology from proof of concept to product implementation.

Strategy

The Company’s short term objective is to win commercial contracts for the supply and integration of Metal Storm ballistic weapons systems. Success in this objective will be the foundation for future expansion into non-military applications of the Company’s technology.

The Company strategy has two primary components. The first is to develop and sell complete, integrated Metal Storm weapons and ammunition. The second is to win development and systems integration contracts that deliver immediate revenue, enhance Metal Storm technology, and embed it into other weapons programs to create further demand for Metal Storm systems going forward. Both these components are pursued concurrently.

Metal Storm technology has unique features that make it well suited to the advanced military systems being fielded today. These features include a high firepower to weight ratio (resulting in very lightweight weapons), electronically

Metal Storm Limited
Directors’ Report
31 December 2007

programmable rates of fire, lethal and less-lethal ammunition in a single weapon, computerised fire control, and no moving parts to jam or maintain.

Because this technology has these unique features, the Company has identified the 40mm calibre, with its variety of forms and applications, as being its earliest product commercialisation opportunity. The Company has therefore dedicated its resources in the immediate future to developing a range of 40mm weapons, weapons components and ammunition.

The Company has also identified the 18mm calibre (12 gauges) as a potential secondary development for the Company in the areas of infantry weapons and explosive ordnance disposal. The technological advantages which apply in 40mm are also advantageous in an 18mm system and both developments have high correlation to each other.

Products and system integration

Over many years, the Company has built a substantial portfolio of intellectual property surrounding stacked projectile technology, and has enhanced this by building a range of demonstration weapons to prove its concepts and gather engineering data for further improvement.

The Company is now using this experience to integrate its technology into practical, fieldable weapons systems, both as complete standalone Metal Storm weapons, and as integrated additional components of platforms currently in use by military forces around the world.

Engineering

Prior to 30 June 2007 the Company succeeded in meeting significant development milestones to the satisfaction of its Convertible Note Holders. These included the development and successful testing of the following fully functional prototypes:

	•		Stabilised remotely operable weapons system including an Electro Optic Systems electronic fire control system and a Metal Storm Ballistic Weapon, as defined in the Teaming Agreement between Electro Optic Systems Pty Limited and the Company dated 2 August 2005 (subsequently named the “Redback™” system)
	•		Three Shot Grenade Launcher (known as “3GL”)
	•		Low velocity air burst rounds and low velocity high explosive rounds suitable for Metal Storm Ballistic Weapons in conjunction with Singapore Technologies Kinetics Ltd. (as defined in the Teaming Agreement between the Company and Singapore Technologies Kinetics Ltd dated 28 September 2005).

During the above test firings, the Company was also able to demonstrate the potential to intercept an incoming Rocket Propelled Grenade using Metal Storm technology.

With these critical milestones behind it, the company is now concentrating the majority of its engineering effort on further development of the 3GL, Redback™ and the 40mm munitions family. The primary engineering objectives for 2008 are to complete limited certification of the 40mm munitions, the 3GL and the Redback™ guns, and to manufacture qualified test weapons for provision to military forces for trial. This will involve the test firing of thousands of rounds to yield sufficient data for qualification. Once complete, the qualification process will enable the weapons and ammunition to be transported, taken through trials by military, law enforcement and homeland security agencies, independent of direct company involvement.

In addition to the 40mm product development, the Company expects to provide engineering support for opportunities requiring calibres other than 40mm, where there is a clear path to deliver substantial revenue and profit in the short or medium term. However, the Company expects that 90% of all engineering effort will remain focused on 40mm development during 2008.

Business development

The Company’s business development strategy is to focus on winning commercial contracts for the supply and integration of weapons systems that employ Metal Storm technology. The majority of business development effort

Metal Storm Limited
Directors’ Report
31 December 2007

is in the USA where there is a substantial defence research and development industry; however, opportunities are being sought in the Middle East, Asia and Europe.

Where possible the Company targets contracts where it can leverage its technology developments in the 40mm arena. This gives the Company the maximum chance of winning the contract, and also provides a greater chance of long term product sales.

In addition to lethal military systems, the company is expanding its range of munitions to include 40mm less-lethal payloads. The Company includes law enforcement and homeland security agencies in its business development.

Where there is a clear potential for further revenue and profit growth longer term, the Company expects to consider contracts for calibres other than 40mm For example Metal Storm Inc is currently developing a prototype 4 shot lightweight underslung 18mm (12 gauge) grenade launcher with stacked ammunition under a US military contract. The Company expects to see further demand for 18mm systems as lightweight accessory weapons for ground troops and law enforcement personnel, and as armament for small robotic air and land vehicles.

As a key element of its business development strategy, the Company conducts live fire trials and demonstrations to showcase the technical and operational capabilities of the technology and prototype products. These trials also serve an engineering purpose, providing essential performance data for design enhancement. Typically the Company aims to conduct these demonstrations for a select audience of military and defence industry.

Partner companies

Metal Storm has formed key product development and business development relationships with a number of organisations that have complementary technologies, expertise and markets. These include Singapore Technologies Kinetics Ltd (STK) for munitions development and manufacturing expertise, the US Army Armament Research and Development Engineering Centre (ARDEC), for munitions development, iRobot for advanced robotic vehicle integration, and Electro Optic Systems Holdings Ltd. (EOS) for turreting, target acquisition and aiming systems.

The relationships with STK, iRobot and EOS have the additional benefit that each company has a significant global marketing and business development capability.

Technology

Metal Storm’s core technology is an electronically initiated, stacked projectile launching system that removes the mechanisms and shortens the time normally required to fire projectiles by conventional means. Effectively, the only parts that move in Metal Storm’s technology are the projectiles contained within the barrels. Multiple projectiles are stacked end to end in the barrel and the technology allows each projectile to be fired sequentially from the barrel by electronic initiation of the propellant load.

Metal Storm’s fully loaded barrel tubes are essentially serviceable weapons, without the traditional ammunition feed or ejection system, breech opening or any other moving parts. Metal Storm barrels can be effectively grouped in multiple configurations to meet a diversity of applications.

Metal Storm’s technology is ideally suited to the new generation of ‘network centric’ weapons that are designed to connect electronically with today’s digitally controlled battlefield. Importantly, Metal Storm enabled systems are capable of local or remote operation through computerised fire control systems.

The Company’s technology achieves its performance by enabling numerous projectiles to be stacked in a barrel. Each projectile has its own propellant load, so that the leading projectile can be reliably fired without the resulting high pressure and temperature that is produced causing unplanned blow-by ignition of the following projectiles, and without collapse of the projectile column in the barrel.

The technology has the following features and benefits:

	•		Electronically programmable rates of fire from single shots to ultra-rapid rates;
	•		No moving parts, resulting in increased reliability and availability because there is less maintenance required and decreased possibility of malfunction;

Metal Storm Limited
Directors’ Report
31 December 2007

	•		Increased firepower to weight ratio resulting in a lighter weapon system with greater firepower compared to conventional systems;
	•		Modular pods that could operate as a complete weapons system in one container;
	•		Digital electronic operation;
	•		The potential of grouping multiple calibres and multiple lethalities in one gun system allowing the user to vary the use to a specific situation; and
	•		Numerous hybrid configurations and Special Forces applications.

A summary of progress of each major product is as follows:

3GL:

	•		Constructed first 3GL prototypes capable of being individually loaded and unloaded by hand
	•		Miniaturised the 3GL fire control system to create a fully integrated standalone 3GL weapon
	•		Successfully test fired the standalone 3GL with stacked inert munitions and with high explosive munitions
	•		Developed a revised, further improved 3GL to commence limited qualification testing in 2008.

Redback™:

	•		Developed integrated Redback™ pod complete with 4 individually reloadable barrels, plus integrated fire control system and round detection
	•		Tested integrated Redback™ firing multiple stacked rounds at the Australian Army Majura test range
	•		Tested integrated Redback™ firing live airburst, enhanced blast and high explosive warheads at multiple stationary targets and fast moving simulated Rocket Propelled Grenades (RPGs) in Singapore
	•		Developed new Redback™ 501 guns with advanced round exit detection and safety features incorporated
	•		Designed new Redback™ Pod to fit modified EOS Gymbal mount.

Ammunition

	•		Developed a new Metal Storm munitions that can be individually hand loaded into a weapon, based on a Metal Storm tailpiece that can be fitted to an off-the-shelf standard 40mm warhead
	•		Successfully tested the mention tail in live fire trials with HE, enhanced blast and airburst warheads
	•		Revised tail design to further improve cost and performance, including increased use of aluminium and high strength plastic moulded parts
	•		Further test firing throughout the year to refine tail design.

MAUL

	•		Developed as a bench gun under contract with the US Marines Warfighting Laboratory to test the concept of stacking multiple 12 gauge door breaching grenades into a lightweight underslung weapon
	•		Successful live fire trials of the MAUL bench gun
	•		Non-firing prototype MAUL created as a business development tool to show the concept of a lightweight accessory launcher capable of firing a variety of munitions including grenades, solid projectiles and less lethal projectiles.

Firestorm ROWS

	•		The Firestorm concept design developed under the existing contract with Space and Naval Warfare Centre
	•		First Firestorm built and integrated with iRobot Warrior UGV for exhibition at AUSA
	•		Integration of TeleRobotics targeting and fire control software to Firestorm
	•		Successful test firing of Firestorm on the iRobot Warrior UGV for US Army and law enforcement observers as part of US Army Crowd Control Contract.

Operating results for the year

The Company has continued with its efforts towards commercialisation of its electronically initiated ballistics technology with resources and activities applied to scientific and engineering work required to transition the Company’s core technology from concept prototypes to product readiness. Since 1 January 2007 there have been a number of announcements, which support progress towards commercialisation:

Metal Storm Limited
Directors’ Report
31 December 2007

2007 Work Program

January		Development of individually hand loadable, stacked projectile tail which can be fitted to an off-the-shelf high explosive 40mm munitions Customer acceptance of design review for US Army Explosive Ordnance Disposal (EOD) Disruptor contract
February		Development of the 4 barrel pod and integrated fire control system for the Redback™ remotely operated weapons station (ROWS) Exhibition of Redback™ ROWS and 3GL at Changi Airshow in Singapore Exhibition of Redback™ ROWS at IDEX in Abu Dhabi
March		Demonstration firings of the full Redback™ ROWS at the Australian Army Range at Majura Customer acceptance of US Marine Corps Multi-shot Accessory Underbarrel Launcher (MAUL) Critical Design Review. MAUL is a 4 shot 12 gauge stacked round accessory weapon designed to fire door-breaching grenades
April		Demonstrated fully integrated, individually loaded 3GL loading and firing 3 rounds. Presented paper on the use of stacked 40mm weapon systems for small UAVs; at the conference on armed UAVs - sponsored by the National Military Intelligence Association, the American Institute of Engineers and the Naval Aviation Foundation. The remote firing capability, recoil mitigation and small profile were of interest to numerous UAV manufacturers as well as DOD personnel.
May		Commenced extensive live fire trials of Redback™ and 3GL in Singapore
June		Live fire trials in Singapore satisfied Trust Deed technical covenants including:
		Demonstration of a stackable, hand loadable 40mm high explosive, enhanced blast and airburst munitions. Demonstration of the fully integrated three shot grenade launcher (3GL) firing a stack of three rounds. Demonstration of the fully integrated Redback™ ROWS firing rounds at multiple targets. Live fire trials in Singapore also demonstrated the ability of a multi-barrel pod to fire and intercept a simulated rocket propelled grenade (RPG), detonating multiple airburst rounds in close proximity Awarded new tasks under existing USMC contract bringing total funding to $374k Delivered final report on US Army EOD Disruptor contract Completed ONR/SPAWAR SBIR Phase II, Objective I – Anti-RPG Live Fire Test Exhibited the Metal Storm Crowd Control system at the ARDEC SBIR Day conference on June 21, 2007 at Picatinny Arsenal.
July		Awarded $64k contract with US Naval Surface Warfare Centre (NSWC) Dahlgren for delivery of a 4-barrel weapons pod for operational field testing and certification
August		Attended the Association for Unmanned Vehicle Systems International conference
September		Successfully tested the adapted M433 HEDP (INERT) in the Metal Storm stacked round configuration. Successful USMC MAUL product testing
October		Shipped final deliverables (launchers and projectiles) to Star Chase, LLC to complete $1.3M Pursuit Management System contract Shipped 4-barrel weapons pod to NSWC Dahlgren for operational field testing and certification. Developed “Firestorm”, a small, 40mm, lightweight 4 barrel remotely operated weapons system (ROWS) specifically designed for robotic platform applications. Exhibited “Firestorm” on the iRobot Warrior UGV at the annual Association of US Army (AUSA) convention in association with iRobot. Exhibited 3GL at AUSA in association with Vision Technologies.
November		Collaboration agreement signed with iRobot
December		Completed US Army SBIR Phase II Live Fire Demonstration of the Metal Storm Crowd Control ROWs using “Firestorm” Delivered final report on Army Crowd Control Contract Successful Firestorm Live Fire Product Testing Awarded $216k Contract with Lockheed Martin Corporation

Metal Storm Limited
Directors’ Report
31 December 2007

Financial results

The Group returned a net loss of $9,998,150 in 2007 representing a significant improvement on the 2006 loss of $15,337,010.

The main features of this result were:

	•		Revenue up 37% on prior year
	•		Employee expenses reduced 21%
	•		Professional fees reduced 24%
	•		Research and development expenditure up 69%

These features are reflective of the Group’s transformation that has seen:

	•		a reduction in the number of administration staff whilst almost doubling the engineering capacity, and
	•		a move to more appropriate facilities that include a machine shop, electrical workshop and design offices

The staff restructuring contributed a saving of $1,133,346 over the prior year whilst the move to more appropriate facilities allowed more research and development to be performed. This contributed to an increase in research and development expenditure of $681,035.

The significant increase in revenue resulted from higher average cash balances over 2007 compared with 2006, thereby increasing interest revenue from the prior year. Contract revenue increased 17% over the prior year. Further details can be found in Note 6 to the financial statements.

Cash position

The Company is required to maintain certain cash balances in its bank accounts and marketable securities. For the year to 31 December 2007, those minimum cash balances were maintained at all times.

Payments to suppliers and employees decreased $844,774 over the year. Receipts from customers were down $962,923 while interest received increased $781,755.

Overall the net movement in cash and cash equivalents was ($9,101,237).

Risk management

The Company takes a proactive approach to risk management. The Board is responsible for ensuring that risks, and also opportunities, are identified on a timely basis and that the Company’s objectives and activities are aligned with the risks and opportunities identified by the Board.

The Company believes that it is crucial for all Board members to be a part of this process, and as such the Board has not established a separate Risk Management Committee.

The Board has a number of mechanisms in place to ensure that management’s objectives and activities are aligned with the risks identified by the Board. These include the following:

	•		Board approval of a strategic plan, which encompasses the Company’s vision, mission and strategy, designed to meet stakeholders’ needs and manage business risk
	•		Implementation of Board approved operating plans and budgets and Board monitoring of progress against these budgets, including the establishment and monitoring of KPIs of both a financial and non-financial nature
	•		The establishment of a Finance Committee, which assists in discharging the Board’s responsibility to manage the organisation’s financial risks. The Committee advises the Board on such matters as the

Metal Storm Limited
Directors’ Report
31 December 2007

Company’s liquidity, currency, interest rate and credit policies and exposures and monitors management’s actions to ensure they are in line with Company policy.

Significant events after the balance date

On 22 February, Metal Storm Limited announced it had entered into a Collaboration Agreement with Singapore Technologies Kinetics (ST Kinetics) to take its 3GL three-shot grenade launcher and 40mm ammunition to manufacture. Under the terms of the Agreement, Metal Storm and ST Kinetics have agreed to collaborate in the design, development, testing, qualification, manufacture of prototypes and demonstration of weapons and munitions as well as the commercial production and marketing of munitions and selected Metal Storm ballistic weapons that only use those munitions.

On February 26, the Company received a $2,000,000 unsecured short term loan with commercial terms and conditions. 

There has not been any matter or circumstance, other than that referred to in the directors’ report, 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 Company, the results of those operations, or state of affairs of the Company in future financial years.

Likely developments and expected results

Disclosure of certain information regarding likely developments in the operations of the Company in future financial years and the expected results of those operations is likely to result in unreasonable prejudice to the Company. Where this applies this information has not been disclosed in this report.

Operations subject to significant environmental regulation

The Company’s operations are not subject to any particular and significant environmental regulations.

Share options

Unissued shares

As at the date of this report, there were 19,044,688 unissued ordinary shares under unlisted options (19,044,688 at the reporting date), and 176,756,604 unissued ordinary shares under listed options (176,756,604 at the reporting date). Refer to notes 23 and 31 of the financial statements for further details of options outstanding. Option holders do not have any right, by virtue of the option, to participate in any share issue of the Company.

Shares issued as a result of the exercise of options

During the financial year, there were no unlisted staff options exercised to acquire fully paid ordinary shares in Metal Storm Limited. However, there were 44,220 listed convertible note options exercised to acquire fully paid ordinary shares in Metal Storm Limited (51,231 in 2006).

Indemnification and insurance of directors and officers

During the year, the Company paid a premium in respect of a contract insuring the Directors of the Company (as named earlier in this report), the Company Secretary, Mr Peter Wetzig, and all executive officers of the Company and any related body corporate against a liability incurred as 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.

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

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited)

This Remuneration Report outlines the director and executive remuneration arrangements of the Company in accordance with the requirements of the Corporations Act 2001 and its Regulations. It also provides the remuneration disclosures required by paragraphs Aus 25.4 to Aus 25.7.2 of AASB 124 Related Party Disclosures, which have been transferred to the Remuneration Report in accordance with Corporations Regulation 2M.6.04. For the purposes of this Key Management Personnel (KMP) of the Group are defined as those persons having authority for planning, directing and controlling the major activities of the Group, and includes the five executives in the Company and the Group receiving the highest remuneration.

Remuneration philosophy

The performance of the Company depends upon the quality of its Directors and executives. To prosper, the Company must attract, motivate and retain highly skilled Directors and executives.

To this end, the Company embodies the following principles in its remuneration framework:

	•		Provide competitive rewards to attract high calibre executives;
	•		Link executive rewards to long-term shareholder value;
	•		Significant portion of executive compensation ‘at risk’, dependent upon meeting pre-determined performance benchmarks; and
	•		Establish appropriate, demanding performance hurdles in relation to variable executive compensation.

In the year under review, the role of the Nominations and Remuneration Committee (formerly the Remuneration Committee) of the Board of Directors of the Company and its responsibility for determining and reviewing remuneration arrangements for the Directors, the Chief Executive Officer (CEO) and the senior management team; determining the composition of the Board and its Committees; and identifying qualified individuals to become Board members and oversee the evaluation of the Board and its Committees was taken over by the full Board of Directors. This measure was taken to reflect the importance on which the board and its directors placed on this matter in the 2007 year.

The Board assesses the appropriateness of the nature and amount of remuneration of Directors and senior managers on a periodic basis by reference to relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and executive team.

Remuneration structure

In accordance with best practice corporate governance, the structure of non-executive Director and senior manager remuneration is separate and distinct.

Remuneration policy and its relationship to company performance

The Company’s financial performance over the last five years has been in line with the need for significant investment in the research and development of its patented electronically initiated “stacked projectile” technology prior to entering the product commercialisation phase.

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

The following is a summary of the Company’s financial performance over the last 5 years:

		2003				2004*				2005*				2006*				2007*
		$				$				$				$				$
Net (loss) after tax attributable to members			(6,357,630	)			(13,104,127	)			(10,914,600	)			(15,337,010	)			(9,998,150	)
Cash (Outflow) from operating activities			(5,392,942	)			(11,192,138	)			(11,241,259	)			(7,953,311	)			(11,255,896	)
(Loss) per share (cents per share)			(1.44	)			(2.62	)			(2.09	)			(2.85	)			(1.69	)
Dividends Paid			—				—				—				—				—
Opening Share Price			0.47				0.44				0.26				0.20				0.16
Closing Share Price			0.44				0.26				0.20				0.16				0.09

The Company has undergone a significant consolidation since 1 January 2007 of changes in direction and personnel made in 2005/2006. Dr Lee Finniear was appointed as CEO in February 2007, and one Director retired from the Board in March 2007, Mr McComish. The focus of the company as a weapons systems integrator rather than a licensor (adopted in 2005) has been strengthened and the Company is continuing to build on this strategy. Whilst increasing the demands on the Company, if this is successful, it will give the Company greater control over product development, the sub-contractors used, earlier access to the revenues generated and arguably a larger proportion of revenues. Product development has been concentrated on 40 mm weapons and munitions and the engineering has been increasing focused to ensure that the demanding technical integration of the technology will be adequately and promptly responded to by the Company.

Accordingly in setting remuneration policy the Board has regard to the need for the Company to attract and retain Directors and executives with the appropriate mix of skill and experience required to lead the Company through its development phase with the objective of commercialisation of the Company’s technology and delivering shareholder value.

Non-executive Director remuneration

Objective
The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain Directors of a high calibre, whilst incurring a cost which is acceptable to shareholders.

Structure
The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive Directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the Directors as agreed. The current aggregate amount is $500,000.

The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst Directors is reviewed by the Company annually. The board considers advice from external consultants as well as the fees paid to non-executive Directors of comparable companies when undertaking the annual review process.

Each Director receives a fee for being a Director of the Company. An additional fee may also be paid for each board Committee on which a Director sits. The payment of additional fees for serving on a Committee recognises the additional time commitment required by Directors who serve on one or more sub Committees.

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

During the year under review directors, with the exception of Mr Nicholls, agreed, subject to the approval of members in general meeting, to take a portion of their Directors’ fees in the form of new shares in order to assist the Company’s cash flow. The proposal will be for shares to be allocated under this agreement to the following values:

		Value of Shares
		$
Mr JM Crunk			7,500
Mr PD Jonson			5,000
Mr TJ O’Dwyer			6,666

The Board considered it good governance for Directors to have a stake in the company on whose board they sit.

The remuneration of non-executive Directors for the period ending 31 December 2007 is detailed on page 20 of this report.

Senior manager and executive Director remuneration

Objective
The Company aims to reward executives and key management personnel with a level and mix of remuneration commensurate with their position and responsibilities within the Company and so as to:

	•		Reward executives and key management personnel for Company and individual performance against targets set by reference to appropriate benchmarks;
	•		Align the interests of executives with those of shareholders;
	•		Link reward with the strategic goals and performance of the Company; and
	•		Ensure total remuneration is competitive by market standards.

Structure
In determining the level and make-up of executive and key management personnel remuneration, the Board considers market levels of remuneration for comparable roles.

Employment contracts have been entered into with a number of key management personnel. Details of these contracts are provided on pages 28 to 30 of this report.

Remuneration consists of the following key elements:

	•		Fixed remuneration
	•		Variable remuneration — Short Term Incentive (‘STI’);

The proportion of fixed remuneration and variable remuneration is established for each key management personnel by the Remuneration Committee.

Fixed remuneration

Objective
The level of fixed remuneration is set so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market.

Fixed remuneration is reviewed annually by the Nominations and Remuneration Committee and the process consists of a review of companywide and individual performance, relevant comparative remuneration in the market and internally and, where appropriate, external advice on policies and practices. In 2007 this role was performed by the full board.

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

Structure
Executives are given the opportunity to receive their fixed (primary) remuneration in a variety of forms including cash and fringe benefits such as novated motor vehicle leases, superannuation salary sacrifice arrangements and expense payment plans. It is intended that the manner of payment chosen will be optimal for the recipient without creating extra cost for the Company. The fixed remuneration component of executives is detailed in Table 1 on page 31.

Variable remuneration — short term incentive (STI)

Objective
The objective of the STI program is to link the achievement of the Company’s operational targets with the remuneration received by the executives charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the executive to achieve the operational targets and such that the cost to the Company is reasonable in the circumstances.

Structure
Actual STI payments granted to each executive depend on the extent to which specific operating targets set at the beginning of the financial year are met. The operational targets consist of a number of Key Performance Indicators (KPIs) covering both financial and non-financial measures of performance. Typically included are measures such as contribution to net operating results, risk management, productivity improvements and leadership/team contribution. The Company has predetermined benchmarks which must be met in order to trigger payments under the short term incentive scheme.

On an annual basis, after consideration of performance against KPIs, the individual performance of each executive is rated and taken into account when determining the amount, if any, of the short term incentive pool is allocated to each executive.

The aggregate of annual STI payments available for executives across the Company is subject to the approval of the Board. Payments made are usually delivered as a cash bonus or the issue of options or shares.

The STI program was only applicable to the Chief Executive Officer for 2007. Dr Lee Finniear was paid a $40,000 cash bonus, granted by the Board on 13 September 2007 following the successful achievement of key operational targets that had been identified by the Board. The 2006 STI bonuses were paid in the 2007 financial year.

Employment contracts

Employment agreements have been entered into with the incoming Chief Executive Officer and the former Chief Financial Officer & Company Secretary. The Senior Vice-President – Director of US Operations was employed under letters of offer.

Dr L J Finniear, Chief Executive Officer (from 19 February 2007)

Under the terms of this contract dated 26 February 2007, Dr Finniear will be paid a fixed component of $270,000 (including superannuation contributions) plus 1,000,000 options vesting half yearly (500,000 per half year) over 1 year at an exercise price of $0.185 with an expiry date of 5 years from date of issue. Dr Finniear is entitled to short-term annual incentives equivalent to an amount up to 30% of his fixed component. Dr Finniear is also entitled to an after tax bonus of $40,000 subject to satisfactory performance on 19 February 2009 or such other date agreed to between Dr Finniear and the Board.

Dr Finniear may resign from his position and terminate this contract by providing three months written notice. The Company may terminate this employment agreement by providing three month’s written notice or providing payment in lieu of the notice period (based on the fixed component of Dr Finniear’s remuneration) plus a severance payment equal to six months of his fixed component. On termination, options that have not vested will be forfeited.

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

The Company may terminate the contract at any time if serious misconduct has occurred, by providing three months written notice or providing payment in lieu of the notice period (based on the fixed component of Dr Finniear’s remuneration) plus a severance payment equal to six months of fixed component.

B I Farmer, Chief Financial Officer (since 19th August 2007 previously Financial Controller)

Under the terms of this contract dated 6 May 2005, Mr Farmer will be paid a fixed component ($135,000 at reporting date).

Mr Farmer may resign from his position and terminate this contract by providing one month’s written notice. The Company may terminate this employment agreement by providing one month’s written notice or providing payment in lieu of the notice period (based on the fixed component of Mr Farmer’s remuneration).

The Company may terminate the contract at any time if serious misconduct had occurred, by providing one months notice or payment in lieu or part thereof.

J Cronin, Managing Engineer

Under the terms of this contract dated 11 June 2004, Dr Cronin will be paid a fixed component ($195,000 at reporting date) plus 200,000 options vested quarterly (25,000 per quarter) over 2 years. Dr Cronin is entitled to short-term annual incentives equivalent to an amount up to 10% of his base salary as detailed in Table 1.

The Company could terminate the contract at any time if serious misconduct had occurred, by providing one months notice or payment in lieu or part thereof.

Dr Cronin has provided one month’s written notice, in accordance with his contract, of his resignation effective 29 February 2008.

J D MacDonald, Chief Financial Officer & Company Secretary

Under the terms of this contract dated 4 October 2004, Mr MacDonald was paid a fixed component ($235,463 at reporting date) plus 500,000 options vesting quarterly (62,500 per quarter) over 2 years. Further to this Mr MacDonald is entitled to short-term annual incentives equivalent to an amount up to 10% of his base salary as detailed in Table 1.

Mr MacDonald could resign from his position and terminate this contract by providing one month’s written notice. The Company could terminate this employment agreement by providing one month’s written notice or providing payment in lieu of the notice period (based on the fixed component of Mr MacDonald’s remuneration). On termination, options that have not vested were forfeited.

The Company could terminate the contract at any time if serious misconduct had occurred, by providing one months notice or payment in lieu or part thereof. Upon a takeover, change of control or sale of the Company, Mr MacDonald was entitled to one year’s fixed component, including bonus and options entitlements at full value and all options earned or held would vest immediately.

Mr MacDonald resigned on 13 April 2007.

G L Bergeron III, former Chief Technology Officer

Under the terms of this contract dated 27 September 2006, which superseded the previous contract dated 11 June 2004, Mr Bergeron was to be paid a fixed component at an annualised rate of $238,883. Under the terms of this contract Mr Bergeron was employed for a term commencing on 8 September 2006 and concluding on 31 January 2007. Mr Bergeron was not entitled to any short or long-term annual incentives under the terms of this contract. This contract was concluded on 31 January 2007 and no termination costs were paid.

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

P D Faulkner, Senior Vice President – Director of US Operations

Mr Faulkner is employed under an offer letter arrangement. He will be paid a fixed component (US$190,600 at reporting date) plus 200,000 options vested quarterly (25,000 per quarter) over 2 years. Mr Faulkner is entitled to short-term annual incentives equivalent to an amount up to 10% of his base salary as detailed in Table 1.

A D Schatz, Vice President — Business Development

Under the terms of his contract, Mr Schatz will be paid a fixed component (US$130,000 at reporting date). Mr Schatz is entitled to commission payments of 4% on the first $100,000 of a funded order and 1% on the amount greater than $100,000.

The Company may terminate this employment agreement by providing one months notice or providing payment in lieu of the notice period (based on the fixed component of Mr Schatz’s remuneration).

The Company may terminate the contract at any time if serious misconduct had occurred, by providing one months notice or payment in lieu or part thereof.

S T Rolander, Vice President — Corporate Services

Under the terms of this contract dated 12 August 2004, Mr Rolander will be paid a fixed component (US$120,700 at reporting date) plus 100,000 options vested quarterly (12,500 per quarter) over 2 years. Mr Rolander is entitled to short-term annual incentives equivalent to an amount up to 10% of his base salary as detailed in Table 1.

The Company may terminate this employment agreement by providing ninety days notice or providing payment in lieu of the notice period (based on the fixed component of Mr Rolander’s remuneration).

The Company may terminate the contract immediately at any time if serious misconduct has occurred.

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

Remuneration of key management personnel

Table 1: Directors’ remuneration for the year ended 31 December 2007

												Non
				Salary				Cash				Monetary
				& Fees				Bonus				Benefit				Other				Super				Options				Termination		Total Remuneration				Performance Related
Name		Position		$				$				$				$				$				$				$		$				%
T J O’Dwyer		Chairman (Non-Executive)			80,000				-				-				-				-				-			-			80,000			-
B S McComish		Director (Non-Executive) — resigned 08/03/07			12,333				-				-				-				-				-			-			12,333			-
J M Crunk		Director (Non-Executive)			85,248				-				-				-				-				-			-			85,248			-
PD Jonson		Director (Non-Executive)			60,000				-				-				-				-				-			-			60,000			-
J R Nicholls		Director (Non-Executive)			50,000				-				-				-				-				-			-			50,000			-
Total Non Executive Directors					287,581				-				-				-				-				-			-			287,581				-
L J Finniear		Managing Director & Chief Executive Officer — appointed 19/02/07			214,361				40,000				-				-				21,597				89,700			-			365,658				10.9	%
Total Executive Directors					214,361				40,000				-				-				21,597				89,700			-			365,658				10.9	%
P R Wetzig		Company Secretary — appointed 16/04/07			50,720				-				-				-				-				-			-			50,720			-
B I Farmer		Chief Financial Officer — appointed 17/08/07			50,365				-				-				-				4,533				-			-			54,898			-
P D Faulkner		Senior Vice President — Director of US Operations			227,929				19,709				10,279				2,937				-				10,223			-			271,077				7.3	%
J Cronin		Managing Engineer – resigned effective 29/02/08			177,368				19,500				17,632				-				19,364				-			-			233,864				8.3	%
JD MacDonald		Chief Financial Officer – resigned 13/04/07			142,905				22,750				-				-				10,712				-			-			176,366				12.9	%
S T Rolander		Vice President - Corporate Services			144,339				13,076				7,730				2,021				-				-			-			167,166				7.8	%
A D Schatz		Vice President — Business Development			174,484				-				-				2,334				-				-			-			176,818			-
G L Bergeron		Chief Technical Officer – resigned 31/01/07			19,475				-				1,318				216				-				-			-			21,009			-
Total Other Key Management 987,585									75,035				36,959				7,508				34,608				10,223			-			1,151,918				6.5	%
Total Remuneration of Key Management Personnel 1,489,527									115,035				36,959				7,508				56,205				99,923			-			1,805,158				6.4	%

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

Remuneration of key management personnel

Table 2: Directors’ remuneration for the year ended 31 December 2006

												Non
				Salary &				Cash				Monetary																				Total				Performance
				Fees				Bonus				Benefit				Other				Super				Options				Termination				Remuneration				Related
Name		Position		$				$				$				$				$				$				$				$				%
B S McComish		Director (Non-Executive)			31,667				-				-				-				-				-				-				31,667			-
J M Crunk		Director (Non-Executive)			93,210				-				-				-				-				-				-				93,210			-
PD Jonson		Director (Non-Executive) – appointed 06/02/06			53,750				-				-				-				-				-				-				53,750			-
J R Nicholls		Director (Non-Executive) –appointed 01/09/06			16,322				-				-				-				-				-				-				16,322			-
W A Downing		Deputy Chairman – resigned 01/11/06			105,108				-				-				-				-				174,617				-				279,725			-
D L Aspach		Director (Non-Executive) – resigned 01/07/06			32,515				-				-				-				-				-				-				32,515			-
Total Non Executive Directors					332,572				-				-				-				-				174,617				-				507,189				-
T J O’Dwyer		Executive Chairman – appointed 28/04/06			80,000				-				-				-				-				-				-				80,000			-
D A Smith		Managing Director & Chief Executive Officer – resigned 28/04/06			114,219				-				3,774				2,847				-				36,625				241,258				398,723			-
Total Executive Directors					194,219				-				3,774				2,847				-				36,625				241,258				478,723				-
JD MacDonald		Chief Financial Officer			214,438				69,188				-				-				25,207				28,214				-				337,047				20.5	%
G L Bergeron		Chief Technology Officer			256,833				77,453				6,671				14,088				-				-				-				355,045				21.8	%
P D Faulkner		Senior Vice President – Director of US Operations			235,803				12,409				5,112				10,451				-				8,998				-				272,773				4.5	%
J Cronin		Managing Engineer – resigned effective 29/02/08			153,044				23,063				15,939				-				16,543				11,286				-				219,875				10.5	%
S T Rolander		Vice President - Corporate Services			151,012				18,316				N A								-				-				-				169,328				10.8	%
A D Schatz		Vice President — Business Development			220,762				-				N A								-				-				-				220,762			-
I A Gillespie		Chief Operating Officer – resigned 20/10/06			224,802				165,500				-				-				34,157				-				-				424,459				39.0	%
J C Chehansky		Senior Vice President – Business Development — resigned 01/05/06			88,611				-				3,474				1,055				-				3,345				62,882				159,367			-
Total Other Key Management					1,545,305				365,929				31,196				25,594				75,907				51,843				62,882				2,158,656				17.0	%
Total Remuneration of Key Management Personnel					2,072,096				365,929				34,970				28,441				75,907				263,085				304,140				3,144,568				11.6	%

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

Table 3:           Compensation ordinary share options: granted and vested during the year (Consolidated)

During the financial year the following options were granted to Directors in respect of Directors Fees for the 2007 financial year. Options issued to executives were granted as equity compensation for services performed in the 2007 year in accordance with employment contracts and letters of offer. These options were not issued as part of an incentive plan.

		Granted								Terms and Conditions for each Grant																					Vested
										Fair
										Value												First				Last
						Grant				per				Exercise				Expiry				Exercise				Exercise
31 Dec 2007		No.				Date				Option				Price				Date				Date				Date				No.				%
Directors
T J O’Dwyer			—				—				—				—				—				—				—				—				—
L J Finniear			500,000				26/02/07			$	0.09			$	0.19				08/03/12				18/08/07				08/03/12				500,000				100.0
L J Finniear*			500,000				26/02/07			$	0.09			$	0.19				08/03/12				18/02/08				08/03/12				500,000				100.0
J M Crunk			—				—				—				—				—				—				—				—				—
P D Jonson			—				—				—				—				—				—				—				—				—
J R Nicholls			—				—				—				—				—				—				—				—				—
B S McComish			—				—				—				—				—				—				—				—				—
Other Key Management Personnel
P R Wetzig			—				—				—				—				—				—				—				—				—
B I Farmer			—				—				—				—				—				—				—				—				—
P D Faulkner			25,000				06/02/06			$	0.10			$	0.40				31/03/12				31/03/07				31/03/12				25,000				100.0
P D Faulkner			25,000				06/02/06			$	0.10			$	0.40				30/06/12				30/06/07				30/06/12				25,000				100.0
P D Faulkner			25,000				06/02/06			$	0.11			$	0.40				30/09/12				30/09/07				30/09/12				25,000				100.0
J Cronin			—				—				—				—				—				—				—				—				—
J D MacDonald			—				—				—				—				—				—				—				—				—
S T Rolander			—				—				—				—				—				—				—				—				—
A D Schatz			—				—				—				—				—				—				—				—				—
G L Bergeron			—				—				—				—				—				—				—				—				—
Total			1,075,000																												1,075,000

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

Table 3:           Compensation ordinary share options: granted and vested during the year (Consolidated)

(continued)

		Granted												Terms and Conditions for each Grant																	Vested
										Fair
										Value												First				Last
						Grant				per				Exercise				Expiry				Exercise				Exercise
31 Dec 2006		No.				Date				Option				Price				Date				Date				Date				No.				%
Directors
T J O’Dwyer			—				—				—				—				—				—				—				—				—
W A Downing			490,000				28/04/06			$	0.06			$	0.40				28/04/11				28/04/06				28/04/11				490,000				100.0
D L Alspach			450,000				28/04/06			$	0.06			$	0.40				28/04/11				28/04/06				28/04/11				450,000				100.0
D A Smith			125,000				28/04/06			$	0.06			$	0.40				30/06/11				30/06/06				30/06/11				125,000				100.0
D A Smith			125,000				28/04/06			$	0.06			$	0.40				30/06/11				30/06/06				30/06/11				125,000				100.0
D A Smith			125,000				28/04/06			$	0.06			$	0.40				30/06/11				30/06/06				30/06/11				125,000				100.0
D A Smith			125,000				28/04/06			$	0.06			$	0.40				30/06/11				30/06/06				30/06/11				125,000				100.0
D A Smith			125,000				28/04/06			$	0.06			$	0.40				30/06/11				30/06/06				30/06/11				125,000				100.0
P D Jonson			—				—				—				—				—				—				—				—				—
J R Nicholls			—				—				—				—				—				—				—				—				—
Other Key Management Personnel
J D MacDonald			62,500				26/08/05			$	0.11			$	0.40				31/03/11				31/03/06				31/03/11				62,500				100.0
J D MacDonald			62,500				26/08/05			$	0.11			$	0.40				30/06/11				30/06/06				30/06/11				62,500				100.0
J D MacDonald			62,500				26/08/05			$	0.12			$	0.40				30/09/11				30/09/06				30/09/11				62,500				100.0
I A Gillespie			—				—				—				—				—				—				—				—				—
G L Bergeron			—				—				—				—				—				—				—				—				—
J Cronin			25,000				26/08/05			$	0.11			$	0.40				31/03/11				31/03/06				31/03/11				25,000				100.0
J Cronin			25,000				26/08/05			$	0.11			$	0.40				30/06/11				30/06/06				30/06/11				25,000				100.0
J Cronin			25,000				26/08/05			$	0.12			$	0.40				30/09/11				30/09/06				30/09/11				25,000				100.0
P D Faulkner			25,000				06/02/06			$	0.09			$	0.40				31/12/10				06/02/06				31/12/10				25,000				100.0
P D Faulkner			25,000				06/02/06			$	0.09			$	0.40				31/03/11				31/03/06				31/03/11				25,000				100.0
P D Faulkner			25,000				06/02/06			$	0.09			$	0.40				30/06/11				30/06/06				30/06/11				25,000				100.0
P D Faulkner			25,000				06/02/06			$	0.09			$	0.40				30/09/11				30/09/06				30/09/11				25,000				100.0
P D Faulkner			25,000				06/02/06			$	0.10			$	0.40				31/12/11				31/12/06				31/12/11				25,000				100.0
P D Faulkner			25,000				06/02/06			$	0.10			$	0.40				31/03/12				31/03/07				31/03/12				—				—
P D Faulkner			25,000				06/02/06			$	0.10			$	0.40				30/06/12				30/06/07				30/06/12				—				—
P D Faulkner			25,000				06/02/06			$	0.11			$	0.40				30/09/12				30/09/07				30/09/12				—				—
S T Rolander			12,500				12/08/04			$	0.18			$	0.40				31/03/11				31/03/06				31/03/11				12,500				100.0
S T Rolander			12,500				12/08/04			$	0.19			$	0.40				30/06/11				30/06/06				30/06/11				12,500				100.0
S T Rolander			12,500				12/08/04			$	0.19			$	0.40				30/09/11				30/09/06				30/09/11				12,500				100.0
A D Schatz			—				—				—				—				—				—				—				—				—
J C Chehansky			37,500				26/05/06			$	0.04			$	0.40				31/03/11				26/05/06				31/03/11				37,500				100.0
J C Chehansky			37,500				26/05/06			$	0.05			$	0.40				30/06/11				30/06/06				30/06/11				37,500				100.0
Total			2,140,000																												2,065,000

Metal Storm Limited
Directors’ Report
31 December 2007

Remuneration report (audited) (continued)

Table 4:           Ordinary share options granted as part of remuneration

														Total value
														of options
		Value of				Value of				Value of				granted,				%
		options				options				options				exercised				Remuneration
		granted				exercised				lapsed				and lapsed				consisting of
		during the				during the				during the				during the				options for the
		year				year				year				year				year
31 December 2007		$				$				$				$				%
L J Finniear			89,700				—				—				89,700				24.5	%
31 December 2006
D A Smith			36,625				—				—				36,625				9.2	%
P D Faulkner			8,998				—				—				8,998				7.1	%
J C Chehansky			3,345				—				—				3,345				2.1	%

Options are valued using the Black-Scholes option pricing model. See Note 31 of the financial report.

There were no alterations to the terms and conditions of options granted as remuneration since their grant date.

There were no forfeitures during the period.

The maximum grant, which will be payable assuming that all services criteria are met, is equal to the number of options or rights granted multiplied by the fair value at the grant date. The minimum grant payable assuming that services criteria are not met is zero.

Metal Storm Limited
Directors’ Report
31 December 2007

Directors’ meetings

The following table sets out the number of Director’s 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, 10 Board meetings, 5 Audit Committee meetings, no Finance Committee meetings and 1 Nominations and Remuneration Committee meeting were held.

										Meetings of Committees
																										Nominations and
		Board of Directors								Audit Committee								Finance Committee								Remuneration Committee
		10 meetings held								5 meetings held								0 meetings held								1 meeting held
		during year								during year								during year								during year
		Held								Held								Held								Held
Directors		(3)				Attended				(3)				Attended				(3)				Attended				(3)				Attended
T J O’Dwyer			10				10				—				—				—				—				—				—
B S McComish (2)			2				0				—				—				—				—				—				—
J M Crunk			10				10				5				5				0				0				1				0
P D Jonson			10				10				4				2	(5)			0				0				1				1
J R Nicholls			10				10				5				5				0				0				1				1	(1)
L J Finniear (4)			7				7				—				—				—				—				—				—