Revolutionising eye care - optos.com

Notes to the Consolidated Financial Statements
continued

6 DIRECTORS AND EMPLOYEES 2006 2005
$’000 $’000



Staff costs for the Group during the year: 19,156 13,133
Wages and salaries 2,055 1,596
Social security costs
Defined contribution pension costs 259 202
Share-based payments 1,820 885

23,290 15,816

Share-based schemes and outstanding options are set out in Note 20.

The average monthly number of persons employed during the year was as follows:

2006 2005
No No

Executive Directors 4 5
Field (Sales and Support) 108 86
Manufacturing 37 28
Product Development 14
Central 15 26
Marketing 38 14
12

214 173

The above tabulation excludes the non-executive Directors.

Details of the fees, emoluments, pension contributions and gains on exercise of share options attributable to each Director during the year are given in the section
headed ‘Directors’ Remuneration’ in the Directors’ Remuneration Report on pages 28-31.

PENSION SCHEME ARRANGEMENTS
Optos operates a defined contribution pension scheme, the Optos Group Personal Pension Scheme, for its Directors and senior employees. The assets of the
scheme are held separately from those of the Company in an independently administered fund. There were no outstanding contributions at 30 September 2006
or 30 September 2005.

7 TAXATION 2006 2005
$’000 $’000

(396)
(396)
Current income tax
–
UK corporation tax on income for the year –
(396)
Research and development tax credits –

Total corporation tax credit –

Deferred income tax

Origination and reversal of timing differences

Adjustment to estimated recoverable deferred tax assets (11,907)

Total deferred tax credit (11,907)

Total income tax credit (11,907)

US corporation tax has been reduced to $nil as a result of the recognition of $1,112,000 of previously unrecognised tax losses.

Optos plc Annual Report & Accounts 2006 49

Notes to the Consolidated Financial Statements
continued

A reconciliation between tax expense and the product of accounting loss multiplied by Optos’ UK domestic tax rate for the year ended 30 September 2006 is as follows:

2006 2005
$’000 $’000

Corporation tax reconciliation

Loss on ordinary activities before tax (1,100) (2,593)
(330) (778)
Loss on ordinary activities multiplied by the rate of corporation tax in the UK of 30% (2005: 30%)

Effects of: 263 199
Disallowed expenses 1,102 488
Unrecognised deferred tax assets (834)
Prior year tax losses utilised against current year profits (9,131) –
Prior year tax losses now recognised (2,977) –
Effect of higher overseas tax rates 91
Adjustment In respect of prior years – (396)

Total tax credit for the year (11,907) (396)

Deferred income tax at 30 September 2006 and 30 September 2005, recognised in the balance sheet, related to the following: 2006 2005
$’000 $’000





Deferred income tax 13,660 1,210
Tax losses (797) (136)
Capital allowances in advance of depreciation (956) (1,074)
Other timing differences

Net deferred income tax asset 11,907 –

Deferred income tax recognised in the income statement, related to the following: 2006 2005
$’000 $’000





Deferred income tax 12,450 229
Tax losses (661) 4
Capital allowances in advance of depreciation 118
Other timing differences (233)

Deferred income tax credit 11,907 –

Tax losses:
Deferred tax asset balances for gross unused tax losses of approximately $37,000,000 (2005: $33,000,000), arising primarily in the UK, have not been recognised on the
grounds that there is insufficient evidence that these assets will be recoverable. These assets will be recovered when future tax charges are sufficient to absorb these tax
benefits. The continued availability of the tax losses is subject to certain conditions being met and the level of losses not being challenged by the relevant tax authority.

Following a review of future prospects for the US operation, a deferred tax asset has been recognised in respect of historic US tax losses as there is now sufficient
evidence to conclude that these losses will be recoverable in the future.

50 Optos plc Annual Report & Accounts 2006

Notes to the Consolidated Financial Statements
continued

8 PROFIT/(LOSS) PER ORDINARY SHARE
Basic earnings per share is calculated by dividing the profit/(loss) for the financial year after taxation by the weighted average number of ordinary shares outstanding
during the period.

Diluted earnings per share amounts are calculated by dividing the profit for the year to 30 September 2006 after taxation by the weighted average number of ordinary
shares outstanding during the period (adjusted for the effects of dilutive options). The 2005 loss attributable to ordinary shareholders and the weighted average
number of ordinary shares for the purpose of calculating the diluted loss per share are identical to those for the basic loss per share. This is because the conversion of
loan notes, exercise of share options and warrants, would not have the effect of increasing the loss per share and is therefore not dilutive. The 2005 loss per share has
been adjusted for the share consolidation.

The basic earnings/(loss) per share is calculated as follows:

2005
2006

Profit/(loss) after taxation ($’000s) 10,807 (2,197)

58,426,930 46,036,899
3,113,912 –
Weighted average number of ordinary shares in issue

Effect of dilution: share options

Adjusted weighted average number of ordinary shares for diluted earnings per share 61,540,842 46,036,899

Basic profit/(loss) per share (cents) 18.5c (4.8c)

Diluted profit/(loss) per share (cents) 17.6c (4.8c)

9 TANGIBLE FIXED ASSETS Leasehold P200 Plant and Total
Improvements Equipment Equipment $’000

$’000 $’000 $’000 104,439
32,698
(1,428)

Cost 736 99,366 4,337 357
At 1 October 2005 815 30,689 1,194
Additions (33) (1,286) (109) 136,066
Disposals
Exchange adjustment – 357 – 38,084
20,919
At 30 September 2006 1,518 129,126 5,422
(672)
Depreciation 374 35,123 2,587 92
At 1 October 2005
Charge for year 118 19,893 908 58,423
Disposals
Exchange adjustment – (576) (96) 77,643

– 92 – 71,069
37,775
At 30 September 2006 492 54,532 3,399 (4,656)

Net book value at 30 September 2006 1,026 74,594 2,023 251

Cost 104,439

At 1 October 2004 732 66,948 3,389 25,092
14,397
Additions 4 36,773 998 (1,457)

Disposals – (4,606) (50) 52

Exchange adjustment – 251 – 38,084

At 30 September 2005 736 99,366 4,337 66,355

Depreciation 295 22,928 1,869
At 1 October 2004 79 13,569 749
Charge for year – (1,426) (31)
Disposals – 52 –
Exchange adjustment

At 30 September 2005 374 35,123 2,587

Net book value at 30 September 2005 362 64,243 1,750

Optos plc Annual Report & Accounts 2006 51

Notes to the Consolidated Financial Statements
continued

P200 equipment refers to retinal examination equipment located at healthcare professional sites and being utilised on a pay-per-examination basis and significant
parts and major spares. P200 equipment is depreciated upon activation at the relevant healthcare professional site.

The carrying value of plant and equipment and P200 equipment held under finance leases at 30 September 2006 was $61,053,000 (2005: $48,556,000).
Leased assets are pledged as security for the related finance lease and hire-purchase liabilities.

10 INTANGIBLE FIXED ASSETS Development Software Total
Costs Costs $’000
$’000 $’000




Cost 5,120 1,678 6,798
At 1 October 2005 2,169 294 2,463
Additions – internal development

At 30 September 2006 7,289 1,972 9,261

Accumulated amortisation

At 1 October 2005 – 1,063 1,063

Amortisation in year – 354 354



At 30 September 2006 – 1,417 1,417

Net carrying amount 7,289 555 7,844
At 30 September 2006

Development Software Total
Costs Costs $’000
$’000 $’000

Cost 2,485 1,536 4,021
At 1 October 2004 2,635 142 2,777
Additions – internal development

At 30 September 2005 5,120 1,678 6,798

Accumulated amortisation

At 1 October 2004 – 771 771

Amortisation in year – 292 292



At 30 September 2005 – 1,063 1,063

Net carrying amount

At 30 September 2005 5,120 615 5,735



Intangibles comprise principally P200MA development costs $6,163,000 (2005: $5,120,000). These have been capitalised as intangible assets and, along with the other

development costs, will be amortised over the number of production units expected to be obtained from the asset. The carrying value of development costs will be

reviewed for impairment annually when the asset is not yet in use or, more frequently, when an indication of impairment arises during the reporting year.

11 INVENTORIES 2006 2005
$’000 $’000

3,693 2,708

Raw materials, spares and consumables

12 TRADE AND OTHER RECEIVABLES 2006 2005
$’000 $’000

4,219 2,890
1,311 432
1,832
Trade debtors 1,565
Value-added tax recoverable 7,362
Prepayments 4,887



52 Optos plc Annual Report & Accounts 2006

Notes to the Consolidated Financial Statements
continued

Trade receivables, which generally have 30-90 days’ terms, are recognised and carried at original invoice amount less an allowance for uncollectible amounts.
Provision is made when there is objective evidence that the Group will not be able to collect the debts. Balances are written off when the probability of recovery
is assessed as being remote. The charge recognised in respect of the allowance for uncollectable debt was $208,000 (2005: $140,000).

13 CASH AND CASH EQUIVALENTS 2006 2005
$’000 $’000

7,752 2,163
28,400 –

Cash at bank and in hand
Short-term deposits

36,152 2,163

For the purposes of the consolidated cash flow statement, cash and cash equivalents comprise the following:

2006 2005
$’000 $’000

Cash and cash equivalents 36,152 2,163
Cash at bank and in hand – (6,853)
Overdraft

36,152 (4,690)

Cash at bank earns interest at floating rates based on daily bank deposit rates. The Company had an overdraft facility of £5,000,000 ($8,814,000) with the Bank of
Scotland. The overdraft facility carried an interest rate 2% above the Bank of Scotland base rate. Following the listing of the Group on the London Stock Exchange on
15 February 2006, the Group’s overdraft with the Bank of Scotland was cleared. The Group did not seek to renew the overdraft facility upon its expiry at the end of
March 2006. At 30 September 2005, the Group had available $2,047,000 of undrawn committed borrowing facilities in respect of which all conditions precedent had
been met. There were no restrictions on the use of these facilities.

14 TRADE AND OTHER PAYABLES 2006 2005
$’000 $’000



Trade payables 3,548 3,457
Other taxes and social security costs 1,032 551
Other payables 422
Accruals 420
Related parties 5,252 3,357
19
–

10,252 7,806

Optos’ policy for the year to 30 September 2006, for all suppliers, was to fix terms of payment when agreeing the terms of the credit account, to ensure that the supplier
was aware of the terms, and to abide by the agreed terms of payment. Trade payables are paid on the 20th of the month following the month of invoice, equivalent to
an average of 35 days.

Other payables are non-interest bearing and have an average term of between 30 and 60 days.

15 FINANCIAL LIABILITIES 2006 2005
$’000 $’000

40,940 31,587
– 6,853
Current 38,440
Finance leases 40,940
Bank overdraft 44,496
40,220 1,763
– 8,814
–
Non-current 55,073
Finance leases 40,220
Secured loan stock 2006
Unsecured loan stock 2007



Optos plc Annual Report & Accounts 2006 53

Notes to the Consolidated Financial Statements
continued

Convertible secured and unsecured loan stock
In November 2001, the Company obtained £1,000,000 of loan stock funding from the Bank of Scotland, convertible at the Bank’s option at a price of 40p per share into
ordinary shares of 1p each. The loan was repayable in 2006 and carried an interest rate 3% above the Bank of Scotland base rate.

In September 2003, the Company obtained £5,000,000 of loan stock funding, convertible at the subscriber’s option at a price of 50p per share into ordinary shares of 1p
each. No interest was payable on this loan stock.

Upon adoption of IAS32/39, on 1 October 2005, the carrying value of the secured loan stock 2006 and unsecured loan stock 2007 was reduced by $1,439,000,
of which $2,744,000 reflects the removal of the original value of the conversion options (which was taken to equity), and the balance of $1,305,000 represents the
imputed interest calculated on an amortised costs basis from date of issue to 1 October 2005 (which is taken to retained earnings). Both the secured loan stock 2006
and unsecured loan stock 2007 were converted into ordinary shares upon flotation, the carrying value at date of conversion was $9,229,000.

Finance lease commitments
Upon placement of P200 equipment at a customer site, the healthcare professional enters into a three-year lease agreement with a third-party provider of vendor
finance. Optos enters into a matching financing agreement with the third-party provider of vendor finance involving the transfer of P200 equipment to the finance
provider with legal title being transferred back to Optos at the end of the period. As the significant risks and rewards of ownership are retained by Optos, the proceeds
received from the third-party providers of vendor finance are recorded as finance lease obligations, which are repayable by instalments and are secured over the
related P200 assets. Optos had finance lease obligations at 30 September 2006 as set out below:

2006 2005
$’000 $’000

Amounts payable: 45,649 36,365
Within one year 26,843 31,790
Between one and two years 16,144 15,096
Between two and five years

88,636 83,251
Less: finance charges allocated to future periods (7,476) (7,168)

81,160 76,083
40,940 31,587
Finance leases and hire-purchase contracts are shown as:

Current

Non-current 40,220 44,496

81,160 76,083

The weighted average outstanding lease term is 20.8 months (2005: 21.9 months). The weighted average effective borrowing rate for 2006 was 8.4% (2005: 6.9%).
All leases are on a fixed repayment term and no arrangements have been entered into for contingent rental payments.

16 OPERATING LEASE COMMITMENTS – MINIMUM LEASE PAYMENTS

At 30 September 2006, the Group had commitments under non-cancellable operating leases as follows:

2006 2005
Land and Buildings $’000 $’000

When the lease expires: 27 22
Within one year 900 626
In the second to the fifth year 3,420 2,622
After the fifth year

4,347 3,270

The Group has entered into four commercial leases on property, in June 1999, August 1999, December 2005 and May 2006. The lease entered into on 12 August 1999
is for a period of 20 years, the June 1999 lease for 10 years , the December 2005 lease for 10 years and the May 2006 lease for a period of 5 years. There are no renewal
options or escalation costs included within the contracts. There are no restrictions placed upon the lessee by entering into these leases.

Management considered the operating leases on transition and concluded that none should be considered finance leases under IFRS.

54 Optos plc Annual Report & Accounts 2006

Notes to the Consolidated Financial Statements
continued

17 PROVISIONS 2006 2005
$’000 $’000



At 1 October 843 558
Arising during the year 343 285
Utilised (47)
–
At 30 September 1,139
843

Current 114 281
Non-current 1,025 562

1,139 843

Social security contributions on share options
Social security contributions on share options are considered to fall within the scope of IFRS2 and are measured as though a cash-settled option under IFRS2.
The provision is calculated based on the number of options outstanding at the balance sheet date that are expected to be exercised and using the fair value of
the options at the balance sheet date. It is expected that the costs will be incurred during the exercise period to 31 December 2012.

18 Government grants 2006 2005
$’000 $’000



At 1 October 714 947

Received during the year – 88

Released to the income statement – (321)



At 30 September 714 714

Current – –
Non-Current 714 714

714 714

Government grants relate to development costs capitalised as intangible assets.

19 CALLED UP SHARE CAPITAL 2006 2005
No (million) No (million)

Equity Share Capital 120

Authorised share capital 90 2005
Ordinary shares of 2p each ( 2005: 1p each) $’000

The Company has one class of ordinary share which carries no rights to fixed income. 2006 91,954,282
$’000 _

_
_
Ordinary shares of 1p each 34,791
544
At 1 October 92,126,193 _
136,576
Issue of shares prior to consolidation 350,000
92,126,193
Exercise of employee share options prior to consolidation 361,660

Consolidation of shares (46,418,927)

Issued on IPO 12,000,000

Exercise of employee share options post-IPO 489,631

Conversion of loan stock 6,683,984

Exercise of other options and warrants 568,297

Other share issues post-consolidation 17,500

At 30 September, ordinary shares of 2p each (2005: 1p each) 66,178,338

Optos plc Annual Report & Accounts 2006 55

Notes to the Consolidated Financial Statements
continued

Share Share Share Share
Capital Premium Capital Premium

Consideration received on issue of shares 2006 2006 2005 2005
$’000 $’000 $’000 $’000

Issued on IPO 415 51,744 – –
Cost of issue of ordinary share capital – (5,605) – –
Exercise of employee share options 20 765 – –
Conversion of loan stocks – –
Exercise of other options and warrants 217 10,213 – –
Other share issues 35 1,554 2 55
9 232

Consideration received 696 58,903 2 55



Following the annual general meeting of the Group held on 27 January 2006, the members voted to consolidate each ordinary share of £0.01 in the Group on a

2:1 basis, consolidating two ordinary shares of £0.01 each into one ordinary share of £0.02. The members then voted to increase the share capital of the Group by

£600,000 to £1,800,000 by the creation of an additional 30.0 million ordinary shares.

As at 1 October 2005, the Company had 46.1 million ordinary shares of £0.02 outstanding. On 15 February 2006, the Company issued 19.2 million ordinary shares of
£0.02 in respect of new capital raised during the IPO, loan stock conversion and through the exercise of various options and warrants. In addition to this, during the year
ended 30 September 2006, 0.7 million ordinary shares were issued to staff exercising options and 0.2 million ordinary shares were issued to third parties. As at
30 September 2006, the Company had 66,178,338 ordinary shares in issue.

20 SHARE-BASED PAYMENTS
The Company has operated discretionary share option arrangements. The discretionary options have been granted pursuant to four different types of option agreement.
Most terms of those options agreements are identical. However, the terms on which options vest differ between the types of agreement. The four types of vesting are as
follows:
• Time-based vesting over the three years commencing on the date on which the option was granted. One third of the options vest on grant and the remaining

two-thirds vest over the following 36 months on a monthly basis.
• Time-based vesting over three years as described above but with full acceleration of vesting on the admission of the Company’s shares to trading on certain stock

exchanges, including the London Stock Exchange.
• Time-based vesting by reference to the flotation of the Company. Under this form of option agreement, one third of the shares under option vest on the admission

of the Company’s shares to trading on certain stock exchanges, including the London Stock Exchange. The remaining two-thirds then vest in two tranches – on the
date six months after admission and on the date 12 months after admission.
• Vesting as to one third immediately with the remaining two-thirds vesting subject to satisfaction of performance targets. Such targets are based on the Company
achieving two successive quarters of positive operating profit and two successive quarters of positive earnings over the period from grant to 31 March 2006 and
31 March 2007 respectively. These performance periods were accelerated by 12 months due to the IPO, and the conditions have been achieved.

In addition to the above, two further vesting arrangements have been utilised in respect of two separate grants. The first grant is subject to time-based vesting with
one third of the option vesting on the first, second and third anniversaries of the date of grant. The second grant is subject to performance-based vesting, with the
option vesting over four quarters dependent on the North American business attaining certain performance levels relating to net installs, revenue per site of existing
customers and control of expenditure.

All option agreements contain provisions for the full acceleration of the option on a change in the control of the Company. Option holders who cease to be employees
of the Group are entitled to exercise their vested options in full for a period of either one month or six months following cessation of employment, depending on the
reasons for that cessation. All agreements contain provisions enabling the adjustment of the number of shares subject to option and the exercise price in the event of
capitalisation issue, subdivision or consolidation of ordinary shares. All options are to be settled by way of equity with a maximum term of 10 years.

In addition, the Company operated a share save scheme under which options were granted in 2002 and mature in 2007.

Option movements during year
The expense recognised from equity-settled, share-based payment transactions for employee services received during the year to 30 September 2006 is $1,820,000
(September 2005: $885,000) with an additional $343,000 (2005: $285,000) in respect of National Insurance.

56 Optos plc Annual Report & Accounts 2006

Notes to the Consolidated Financial Statements
continued

The following table illustrates the number and weighted average exercise prices (“WAEP”) of, and movements in, share options during the year ended 30 September 2006.



After Consolidation Prior to Consolidation

2006 2006 2005 2005
No WAEP No WAEP

Outstanding at the beginning of the year (1) 5,530,818 £0.92 8,046,135 £0.43
Granted during the year 544,250 £1.06 4,432,500 £0.50
Forfeited during the year (157,801) £1.16 (1,382,209) £0.50
Exercised during the year (670,461) £0.85 £0.65
(34,791)

Outstanding at the end of the year (1) 5,246,806 £0.93 11,061,635 (1) £0.46

Exercisable at the end of the year 4,073,493 £0.94 7,244,976 £0.45

(1) Included within this balance are options over 2,440,900 2p shares (4,881,800 1p shares) that have not been recognised in accordance with IFRS 2 as the options were
granted on or before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2.

Share options outstanding at the end of the period have the following exercise prices:



After Prior to
Consolidation Consolidation

Price Per Share 2006 2005
After Consolidation No No

Share option scheme £0.046 – 352,000
Expiry dates £0.41 200,000 600,000
April £0.42 100,000 200,000
March 2007 £1.00 227,000
November 2007 £1.30 97,500 637,600
September 2008 - June 2009 £1.45 196,700 110,000
September 2009 - October 2010 £0.80 108,700 1,723,000
September 2010 - February 2011 £1.00 777,625 513,084
October 2011 £1.00 66,759 862,500
January 2012 - May 2012 £1.00 315,250 1,072,000
June 2012 - November 2012 £1.00 526,127 848,500
January 2013 - December 2013 £1.00 329,056 3,589,915
February 2014 - December 2014 £1.00 2,317,071
January 2015 - December 2015 £2.07 16,500 –
January 2016 32,500 –
June 2016

Share save scheme £1.00 163,018 326,036
Expiry Dates
March 2007

Outstanding at the end of the year 5,246,806 11,061,635

The fair value of equity-settled, share options granted is estimated as at the date of grant using a binomial model, taking into account the terms and conditions upon

which the options were granted. The following table lists the inputs to the model used for the years ended 30 September 2006 and 30 September 2005.



After Prior to
Consolidation Consolidation
2006 2005



Dividend yield (%) Nil Nil

Expected volatility (%) 70% 70%

Historical volatility (%) 70% 70%

Risk-free interest rate (%) 4.8% 4.5%

Expected life of option (years) 5 7

Weighted average share price £1.06 £0.5



The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the

assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. As the Company has only a limited history

of quoted share price volatility, the expected volatility has been based on the historical volatility of comparative companies.

Optos plc Annual Report & Accounts 2006 57

Notes to the Consolidated Financial Statements
continued

No other features of options granted were incorporated into the measurement of fair value.

Other options and warrants falling outside the scope of IFRS2 comprise:

A warrant instrument dated 17 December 1999 which entitled TBCC Funding Trust II to subscribe for up to 114,476 ordinary shares at a price of £1.30 per share in the
event of a sale of the Company or its admission to a recognised stock exchange prior to 22 December 2006. This warrant was not exercised during the year and has
since lapsed.

Two option agreements dated 17 May 2002, under which Brewin Dolphin Securities Limited had options to subscribe for up to 10,500 ordinary shares at a price of £0.80 per
share in the event of a sale of the Company or its admission to a recognised stock exchange prior to 17 May 2009. These options were exercised during the year.

An option and warrant agreement dated 26 July 2002, under which Amadeus II ‘‘A’’, Amadeus II ‘‘B’’, Amadeus II ‘‘C’’, Amadeus II Affiliates LLP and Amadeus II ‘‘D’’ GmbH
& Co. KG had the right to subscribe for 557,797 ordinary shares at a price of £1.00 per share upon the earlier of 31 December 2007 and either a sale of the Company or its
admission to a recognised stock exchange. This option and warrant agreement was exercised during the year.

21 RELATED PARTY TRANSACTIONS
During the year to 30 September 2006, purchases totalling $92,472 (2005: $391,000) at normal market prices were made by Group companies from Crombie Anderson
Limited, of which the D C Anderson is a Director and controlling shareholder, of which $Nil was outstanding at 30 September 2006 (2005: $19,000). No guarantees have
been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.

Compensation of key management personnel 2006 2005
$’000 $’000



Short-term employee benefits 2,471 1,828
Post-employment benefits 100 109
Share-based payments 614
Termination benefits 1,301 –
643

4,515 2,551

22 FINANCIAL INSTRUMENTS
The Group’s principal financial instruments comprise bank overdrafts, short-term debt, loans and cash.

The main purpose of these financial instruments is to manage the Group’s funding and liquidity requirements. The Group has other financial instruments, such as
trade receivables and trade payables, which arise directly from its operations. The principal financial risks to which the Group is exposed are those relating to foreign
currency, credit, liquidity and interest rate.

Foreign currency risk
The Group has invested in overseas operations and also buys and sells goods and services in currencies other than in the functional currency of its relevant operations.
As a result, the Group’s non-US dollar revenues, profits, assets, liabilities and cash flows can be affected by movements in exchange rates.

The Group monitors its foreign currency exposure and, when deemed necessary by the Board, seeks to minimise its transaction exposure by using forward foreign
currency contracts to eliminate exposures on any committed significant transactions. The Board has determined that it was not necessary to use forward foreign
currency contracts in 2006. It is Group policy not to engage in any speculative transaction of any kind.

Credit risk
The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The Group’s
credit risk is primarily attributable to its trade receivables.

The Group is exposed to risk over a large number of customers and there is no significant concentration of risk. Creditworthiness checks are undertaken before
entering into contracts with new customers and credit limits are set as appropriate. The amounts presented in the balance sheet are net of allowance for doubtful
receivables. An allowance for impairment is made where there is an identifiable loss event which, based on previous experience, is evidence of a reduction in the
recoverability of cash flows.

Liquidity risk
The Group aims to mitigate its liquidity risk by managing its cash resources and improving its credit rating to facilitate effective fund-raising. The Group’s funding
objective is to maintain continuity of funding and flexibility through the use of finance leases. Excess cash is placed on short-term interest-bearing deposit accounts.

Interest rate risk
The majority of the Group’s borrowings are at fixed rates of interest. Excess cash is placed on short-term interest-bearing deposit accounts.

Interest rate risk is regularly monitored to ensure that the mix of variable and fixed rate borrowing is appropriate for the Group in the short to medium term. Based on
current levels of net debt, interest rate risk is not considered to be material. The associated cash flow risk, which can have a negative impact on the Group if interest
rates decrease as well as a positive impact if interest rates increase, is also not considered to be material.

58 Optos plc Annual Report & Accounts 2006

Notes to the Consolidated Financial Statements
continued

Fair values of financial assets and financial liabilities
Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial instruments.

Carrying Amount Fair Value Carrying Amount Fair Value
2006 2006 2005 2005
$’000 $’000 $’000 $’000

Financial assets 36,152 36,152 2,163 2,163
Cash

Financial liabilities

Bank overdraft – – (6,853) (6,853)
(76,083) (74,618)
Obligations under finance leases (81,160) (80,079) (8,814)
(8,814) (2,204)
Fixed rate borrowing – – (1,763)

Floating rate borrowing

The fair value of items has been calculated by discounting the expected future cash flows at prevailing interest rates, or in the case of convertible debt, by reference to
the value of an ordinary share. The carrying amounts of all other financial instruments of the Group, ie short-term trade receivables and payables that are not included
in the above table, is a reasonable approximation of fair value. The carrying amount recorded in the balance sheet of each financial asset represents the Group’s
maximum exposure to credit risk.

Interest rate risk profile of financial assets and liabilities
The following tables set out the carrying amount, by maturity, of the Group’s financial instruments that are exposed to interest rate risk:

Year ended 30 September 2006 Within 1-2 2-3 Total
1 Year Years Years $’000
$’000 $’000 $’000



Fixed rate (45,649) (26,843) (8,668) (81,160)
Obligations under finance leases 36,152 – – 36,152

Floating rate
Cash

Year ended 30 September 2005 Within 1-2 2-3 Total
1 year years years ‘$000
$’000 $’000 $’000



Fixed rate (36,365) (31,790) (7,928) (76,083)
Obligations under finance leases (1) (8,814) (8,814)
Unsecured loan stock (3) –

Floating rate 2,163 – – 2,163
Cash (2) (6,853) – – (6,853)
Bank overdraft (3) (1,763) – (1,763)
Secured loan stock (3) –

(1) Includes $4,446,000, $626,000 and $356,000 denominated in $Canadian, Euro and GBPounds respectively.
(2) Includes $316,000 and $325,000 denominated in $Canadian and Euro respectively.
(3) Denominated in GBPounds.

Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. Interest on financial instruments classified as floating rate is repriced
at intervals of less than one year. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not
subject to interest rate risk.

Optos plc Annual Report & Accounts 2006 59

Notes to the Consolidated Financial Statements
continued

23 RECONCILIATIONS OF PREVIOUSLY REPORTED UK GAAP TO IFRS
For all periods up to and including the year ended 30 September 2005, the Group prepared its financial statements in accordance with United Kingdom generally
accepted accounting practice (“UK GAAP”). These financial statements for the year ended 30 September 2006 are the first the Group is required to prepare in
accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. The first results prepared on an IFRS basis were contained in
the Group’s unaudited results announcement for the six months ended 31 March 2006.

As a general rule, the Group is required to apply IFRS applicable as at 30 September 2006 retrospectively to determine its restated financial position as at 30 September
2004 (“the transition date”). The significant accounting policies meeting those requirements are outlined in Note 2. In preparing these financial statements, the Group
has started from an opening balance sheet as at 1 October 2004, the Group’s date of transition to IFRS, and made those changes in accounting policies and other
restatements as required by IFRS1 for the first-time adoption of IFRS. This Note summarises the principal adjustments made by the Group in that restatement.
However, under IFRS1 “First-time adoption of IFRS”, there are certain exemptions to this general principle that the Group has adopted, as follows:

Share-based payments
Optos has applied IFRS2 “Share-based Payment” retrospectively only to equity-settled awards that had not vested as at 1 October 2004 and were granted on or after
7 November 2002.

Financial instruments
Optos has elected to apply IAS32 “Financial Instruments: Disclosure and Presentation” and IAS39 “Financial Instruments: Recognition and Measurement” prospectively
from 1 October 2005. Consequently, the relevant information for 2005 does not reflect the impact of these standards and is accounted for on a UK GAAP basis.

Cumulative foreign currency translation differences
Optos has elected to deem the cumulative differences on the retranslation into sterling of the Group’s net investment in foreign operations to be $nil as at
30 September 2004. As a result, in the event of the subsequent disposal of a foreign operation, any gain or loss on disposal will only include cumulative translation
differences arising on or after 30 September 2004.

The transition from UK GAAP to IFRS has no effect on the cash flows generated by the Group. The IFRS cash flow statement is presented in a different format from that
reported under UK GAAP, with cash flows split into three categories – operating, investing and financing. The reconciling items between the UK GAAP presentation
and the IFRS presentation have no net impact on the cash flows generated. In preparing the cash flow statement under IFRS, cash and cash equivalents include cash
in hand, deposits available on demand and bank overdrafts.

23(a) Effect on consolidated profit and loss account for the year ended 30 September 2005
The effect of the changes to the Group’s accounting policies on the consolidated profit and loss account was as follows:

Impact of Transition to IFRS

Under UK NI on Share Holiday
Accounting Research and Government Share Pay Accrual Under
Standards Development Grant Depreciation Options Options IFRS GAAP
$’000 $’000 $’000 $’000 $’000 $’000
$’000 $’000
Revenue 48,399 – – – – –
Cost of sales (16,924) – – (32) – – – 48,399
– (16,956)
Gross profit 31,475 – – (32) – –
Other income 321 – – – – – – 31,443
Selling and distribution costs – – – – – – 321
Administrative expenses (9,689) 2,635 (88) – – – (23)
(20,146) – (9,689)
(17,622)
Operating profit before 1,961 2,635 (88) (32) – – (23)
share-based payments – – (885) – 4,453
– – (285) (1,170)
Share-based payments
3,283
Operating profit after 1,961 2,635 (88) (32) (285) (885) (23) 78
share-based payments 78 – – – – – –
Finance revenue – – – – – – (5,954)
Finance costs (5,954)
(885) (23) (2,593)
Loss before tax (3,915) 2,635 (88) (32) (285) – – 396
Income tax credit 396 – – – –
(885) (23) (2,197)
Loss for year (3,519) 2,635 (88) (32) (285)

60 Optos plc Annual Report & Accounts 2006

Notes to the Consolidated Financial Statements
continued

23(b) RECONCILIATIONS OF PREVIOUSLY REPORTED UK GAAP TO IFRS

Effect on Group balance sheet as at 1 October 2004
The effect of the changes to the Group’s accounting policies on the equity of the Group at 30 September 2004 was as follows:

Impact of Transition to IFRS

Under UK Share
Accounting Development Computer Significant Government Option NI Holiday IFRS
Standards Expenditure Software Parts Grant Pay Accrual GAAP
$’000 $’000 $’000 $’000 $’000 $’000 $’000
$’000
45,977
3,249

Non-current assets

Property, plant and equipment 44,417 – (764) 2,324 – – –

Intangible assets – 2,485 764 – – – –

Total non-current assets 44,417 2,485 – 2,324 – – – 49,226

Current assets

Inventories 4,720 – – (2,324) – – – 2,396
3,825
Trade and other receivables 3,825 – – – – – –
–
Corporation tax recoverable – – – – – – – 6,109

Cash and cash equivalents 6,109 – – – – – –

Total current assets 14,654 – – (2,324) – – – 12,330

Current liabilities

Trade and other payables (7,931) – – – – – (129) (8,060)
–
Government grants – – – – – – – –
–
Provisions – – – – – – –

Financial liabilities – – – – – – –

Total current liabilities (7,931) – – – – – (129) (8,060)

Total assets less current liabilities 51,140 2,485 – – – – (129) 53,496

Non-current liabilities

Financial liabilities (72,056) – – – – – – (72,056)
(558)
Provisions – – – – – (558) – (626)

Government grants – – – – (626) – –

Total non-current liabilities (72,056) – – (626) (558) – (73,240)

Net liabilities (20,916) 2,485 – – (626) (558) (129) (19,744)

Equity and liabilities

Equity attributable to equity holders of the parent



Issued capital 1,663 – – – – – – 1,663

Share premium 52,417 – – – – – – 52,417

Retained earnings (75,682) 2,485 – – (626) (558) (129) (74,510)

Other reserves 686 – – – – – – 686

(20,916) 2,485 – – (626) (558) (129) (19,744)

Optos plc Annual Report & Accounts 2006 61

Notes to the Consolidated Financial Statements
continued

23(c) Effect on Group balance sheet as at 30 September 2005
The effect of the changes to the Group’s accounting policies on the equity of the Group at 30 September 2005 was as follows:

Impact of Transition to IFRS

Under UK
Accounting Development Computer Significant Inventory Government Currency Share Holiday IFRS
Standards Expenditure Software Parts Reclass. Grant Translation Option NI Pay Accrual GAAP
$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000

66,355
5,735
Total non-current assets

Property, plant and equipment 62,508 – (615) 4,584 (122) – – – –

Intangible assets – 5,120 615 – – – – – –

Total non-current assetts 62,508 5,120 – 4,584 (122) – – – – 72,090

Current assets

Inventories 7,202 – – (4,584) 90 – – – – 2,708
4,887
Trade and other receivables 4,887 – – – – – – – – 2,163

Cash and cash equivalents 2,163 – – – – – – – –

Total current assets 14,252 – – (4,584) 90 – – – – 9,758

Current liabilities

Trade and other payables (7,654) – – – – – – – (152) (7,806)
–
Government grants – – – – – – – – –
(281)
Provisions – – – – – – – (281) – (38,440)

Financial liabilities (38,440) – – – – – – – –

Total current liabilities (46,094) – – – – – – (281) (152) (46,527)

Total assets less current liabilities 30,666 5,120 – – (32) – – (281) (152) 35,321

Non-current liabilities

Financial liabilities (55,073) – – – – – – – – (55,073)
(562)
Provisions – – – – – – – (562) – (714)

Government grants – – – – – (714) – – –

Total non-current liabilities (55,073) – – – – (714) – (562) – (56,349)

Net liabilities (24,407) 5,120 – – (32) (714) – (843) (152) (21,028)

Equity and liabilities

Equity attributable to equity holders of the parent



Issued capital 1,665 – – – – – – – – 1,665

Share premium 52,472 – – – – – – – – 52,472

Retained earnings (78,544) 5,120 – – (32) (714) 29 (843) (152) (75,136)

Other reserves – – – – – – (29) – – (29)

(24,407) 5,120 – – (32) (714) – (843) (152) (21,028)

23(d) Principal adjustments
The principal effects of the changes arising from adoption of IFRS are explained below:

Computer software
Under UK accounting standards, all capitalised computer software was included within tangible fixed assets. Under IAS 38 “Intangible Assets”, capitalised computer
software must be presented as an intangible asset unless it is integral to an item of property, plant and equipment. Under IFRS, non-integral computer software with
a carrying value of $615,000 has been reclassified from property, plant and equipment to intangible assets at 30 September 2005 (2004: $764,000).

Development costs
Under UK accounting standards, research and development costs were written off in the period in which they were incurred. Under IAS 38 “Intangible Assets”,
development costs associated with new products must be capitalised from the time at which the development project satisfies the conditions specified within IAS
38 “Intangible Assets”. These conditions can be summarised as technical feasibility, intention to complete, ability to use or sell, probable future economic benefits,
availability of adequate resources and the ability to measure reliably the expenditure.

62 Optos plc Annual Report & Accounts 2006

Notes to the Consolidated Financial Statements
continued

The resulting asset will be amortised over the number of production units expected to be obtained from the asset by the entity. The carrying value of development
costs will be reviewed for impairment annually when the asset is not yet in use or, more frequently, when an indication of impairment arises during the reporting year.
Under IFRS, an intangible asset of $5,120,000 has been recognised at 30 September 2005 (2004: $2,485,000). Research and development costs expensed through the
income statement in the year ended 30 September 2005 decreased by $2,635,000.
Amortisation of the intangible asset will commence when the asset is available for use.
Government grant
Under UK accounting standards, when the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to
the costs that it was intended to compensate. Where the grant related to an asset, the fair value was credited to a deferred income account and was released to the income
statement over the expected useful life of the relevant asset by equal annual instalments. Under IAS 20 “Government Grants”, the $714,000 government grant associated with
the development costs which was credited to the income statement in line with the expenditure in the 2005 and 2004 financial statements has been reversed.
Share-based payments
Under UK accounting standards, the cost of awards made under the Group’s employee share schemes was based on the intrinsic value of the awards.
Under IFRS 2 “Share-based Payment”, the cost of employee share schemes is based on the fair value of the awards that must be assessed using an option pricing
model. Generally, the fair value of the award is expensed on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual
forfeitures during the vesting period due to failure to satisfy either service conditions or non-market performance conditions. As a result of these changes, the cost of
employee share schemes recognised during the year ended 30 September 2005 increased by $1,170,000, including related social security costs. An employer’s National
Insurance liability of $285,000 was recorded in respect of the options in the year ended 30 September 2005.
Foreign currency translation differences
Under UK accounting standards, cumulative foreign currency translation differences arising on the retranslation into sterling of the Group’s net investment in foreign
operations were recognised within reserves. Under IAS 21 “The Effects of Changes in Foreign Exchange Rates”, cumulative foreign currency translation differences must
be recognised as a separate component of equity and should be taken into account in calculating the gain or loss on the disposal of a foreign operation. As permitted
under IFRS 1, Optos has elected to deem cumulative translation differences to be $nil on 1 October 2004.
Property, plant and equipment – significant parts
Under UK accounting standards, significant parts are classified within inventory. Under IAS 16, “Property, Plant and Equipment”, significant parts must be included
within Property, Plant and Equipment. Parts are amortised from the point when the assets are available for use. It has been assessed that available for use is the point
in time when the assets are installed at customer premises. The scan heads and component parts have been assessed as the significant parts. Significant parts with a
carrying value of $4,584,000 (2004: $2,324,000) were reclassified from Inventory to Property, Plant and Equipment as at 30 September 2005.
Holiday pay accrual
As required by IAS 19, “Employee benefits”, an accrual of $152,000 has been included in the balance sheet at 30 September 2005, representing the holiday pay accrual as at
that date and a charge of $23,000 included in the profit and loss for the year ended 30 September 2005. No such accrual was made under UK accounting standards.
Taxation
While the above changes may require an adjustment for the effect of taxation, these would impact the unrecognised deferred tax asset and, as such, have not been
disclosed within this statement
Financial instruments
Upon adoption of IAS32/39, on 1 October 2005, the carrying value of the secured loan stock 2006 and unsecured loan stock 2007 was reduced by $1,439,000,
of which $2,744,000 reflects the removal of the original value of the conversion options (which was taken to equity) and the balance of $1,305,000 represents the
imputed interest calculated on an amortised costs basis from date of issue to 1 October 2005 (which was taken to retained earnings). Both the secured loan stock
2006 and unsecured loan stock 2007 were converted into ordinary shares upon flotation; the carrying value at date of conversion was $9,229,000.

Optos plc Annual Report & Accounts 2006 63

Independent Auditors’ Report
to the Members of Optos plc (Company)

We have audited the parent company financial statements of Optos plc for the year ended 30 September 2006, which comprise the Company Balance Sheet and
the related Notes 1 to 17. These parent company financial statements have been prepared under the accounting policies set out therein. We have also audited the
information in the Directors’ Remuneration Report that is described as having been audited.

We have reported separately on the Group financial statements of Optos plc for the year ended 30 September 2006.

This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so
that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.

Respective Responsibilities of Directors and Auditors
The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the parent company financial statements in accordance with applicable
United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the parent company financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant
legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements
and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you
whether, in our opinion, the information given in the parent company Directors’ Report is consistent with the financial statements. The information given in the
Directors’ Report includes that specific information presented in the Operating and Financial Review that is cross-referred from the Business Review section of the
Directors’ Report.

In addition, we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we
require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed.

We read other information contained in the Annual Report and consider whether it is consistent with the audited parent company financial statements. The other
information comprises only the Highlights, the History of Optos, A Closer Look at Optos, optomap® Retinal Exam, the Chairman’s Statement, the Operational and
Financial Review, Board of Directors, Corporate Governance, Corporate Social Responsibility, the unaudited part of the Directors’ Remuneration Report and the
Directors’ Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company
financial statements. Our responsibilities do not extend to any other information.

Basis of Audit Opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the Directors’ Remuneration Report to be
audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the parent company financial statements,
and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient
evidence to give reasonable assurance that the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are free from
material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of
information in the parent company financial statements and the part of the Directors’ Remuneration Report to be audited.

Opinion
In our opinion:
• the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the

Company’s affairs as at 30 September 2006;
• the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the

Companies Act 1985; and
• the information given in the Directors’ Report is consistent with the parent company financial statements.

Ernst & Young LLP
Registered Auditor
Glasgow

18 December 2006

64 Optos plc Annual Report & Accounts 2006

Company Balance Sheet
At 30 September 2006



2006 2005
$’000
Notes $’000
3,330
Non-current assets 3 4,365 1,391
Tangible fixed assets 4 1,422
Investments in subsidiaries 4,721

Total non-current assets 5,787 2,729
56,804
Current assets 5 3,446
Stock 6 39,864 –
Debtors 7 32,283
Cash at bank and in hand 59,533

Total current assets 75,593 (37,703)

Creditors falling due within one year 8 (9,235) 21,830
66,358
26,551

Net current assets (10,759)
–
Total assets less current liabilities 72,145
(10,759)
Creditors falling due after more than one year 9 (160)
Provisions 10 (843) 15,792

Total assets less liabilities (1,003) 1,665
52,472
Net assets 71,142 (38,345)

Capital and reserves 15,792

Called up share capital 13 2,361
111,375
Share premium account 14 (42,594)

Profit and loss account 14

Shareholders’ funds 71,142

Approved by the Board of Directors on 18 December 2006 and signed on its behalf by:

Allan Watson
Director

Optos plc Annual Report & Accounts 2006 65

Notes to the Company Financial Statements
For the year ended 30 September 2006

1 ACCOUNTING POLICIES
Basis of preparation
The Company financial statements have been prepared in accordance with UK GAAP and applicable accounting standards. In preparing the financial statements
for the year ended 30 September 2006, the Company has adopted FRS20 “Share-based Payment”; FRS21 “Events After the Balance Sheet Date”; FRS23 “The Effects
of Changes in Foreign Exchange Rates”; FRS25 “Financial Instruments: Disclosure and Presentation”; FRS26 “ Financial Instruments: Measurement”; and, FRS28
“Corresponding Amounts”. Further information is provided in Note 14 to the financial statements.

No profit and loss account is presented for Optos plc, as permitted by Section 230 of the Companies Act 1985.

Depreciation
Depreciation is provided on all tangible fixed assets at rates calculated to write off the cost or valuation, less estimated residual value, of each asset evenly over its
expected useful life, as follows:

Leasehold improvements 10 years
Other equipment 3-5 years
P200 equipment
5 years

P200 equipment refers to retinal examination devices located at healthcare practitioner sites and being utilised on a pay-per-examination basis.

Government grants in respect of capital expenditure are credited to a deferred income account and are released to profit over the expected useful lives of the relevant
assets by equal annual instalments. Grants of a revenue nature are credited to income so as to match them with the expenditure to which they relate.

Leasing and hire-purchase commitments
Assets held under finance leases and hire-purchase contracts are capitalised in the balance sheet and are depreciated over the lease term or useful life as appropriate.
The interest element of the rental obligations is charged to the profit and loss account over the period of the lease and represents a constant proportion of the balance
of capital repayments outstanding. Rentals paid under operating leases are charged to income as they occur over the term of the lease.

Stock
Stock primarily comprises spares components relating to P200 equipment. Stocks are valued at the lower of cost and net realisable value. Costs incurred in bringing
each product to its present location and condition are accounted for as follows:
• Raw materials spares & consumables – purchase cost on a first-in, first-out basis;
• Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make

the sale.

Foreign currencies
The Company’s reporting currency is the US dollar.

Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to profit
or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial
transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The Company’s share capital and share premium account are denominated in £sterling and are translated at the historical rates of exchange

Deferred taxation
Deferred tax is recognised in respect of all timing differences that have originated, but not reversed, at the balance sheet date where transactions or events have
occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax, with the following exceptions:
• provision is made for deferred tax that would arise on remittance of the retained earnings of overseas subsidiaries only to the extent that, at the balance sheet date,

dividends have been accrued as receivable;
• deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which

the future reversal of the underlying timing differences can be deducted.

Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and
laws enacted or substantially enacted at the balance sheet date.

Pension schemes
The Company operates a defined contribution pension scheme. The assets of the scheme are invested and managed independently of the finances of the Company.
The contributions payable to the scheme in respect of the accounting period are charged directly to the profit and loss account.

Research and development
Research and development expenditure is written off as incurred.

66 Optos plc Annual Report & Accounts 2006

Notes to the Company Financial Statements
continued

Share-based payments
Employees (including senior executives) of the Company receive remuneration in the form of share-based payment transactions, whereby employees render services
as consideration for equity instruments (“equity-settled transactions”).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an
expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. In valuing equity-settled transactions,
no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (“market conditions”), if applicable.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting
irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service
conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“the vesting date”). The cumulative expense
recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s
best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in
cumulative expense recognised as at the beginning and end of that period.

Where the terms of an equity-settled award are modified, or a new award is designated as replacing a cancelled or settled award, the cost based on the original
award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over the remainder of the new vesting period for
the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award,
both as measured on the date of modification. No reduction is recognised if this difference is negative.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the income statement for
the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any
excess over fair value being treated as an expense in the income statement.

The Company has taken advantage of the transitional provisions of FRS 20 in respect of equity-settled awards and has applied FRS 20 only to equity-settled awards
granted after 7 November 2002 that had not vested on 1 January 2005.

Trade and other debtors
Trade debtors, which generally have 30-90 days’ terms, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts.
Provision is made when there is objective evidence that the Company will not be able to collect the debts. Balances are written off when the probability of recovery
is assessed as being remote.

Cash and cash equivalents
Cash and short-term deposits in the balance sheet comprise cash at banks and in hand and short-term deposits with an original maturity of three months or less.

Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition,
interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Financial instruments
Prospective adoption of FRS25 and FRS26
As permitted by FRS26, the Group has elected to apply FRS25 “Financial Instruments: Disclosure and Presentation” and FRS26 “Financial Instruments: Recognition and
Measurement” prospectively from 1 October 2005. As a result, the relevant comparative information for the year ended 30 September 2005 and as at 30 September
2005 does not reflect the impact of these standards and is accounted for in accordance with previous UK GAAP.

Derivative financial instruments
In 2005, Optos used derivative financial instruments, principally forward currency contracts, to reduce its exposure to exchange rate movements. Under previous
UK GAAP, such derivative contracts are not recognised as assets and liabilities on the balance sheet, and gains or losses arising on them are not recognised until the
hedged item has itself been recognised in the financial statements.

From 1 October 2005, derivative financial instruments are recognised as assets and liabilities measured at their fair value at the balance sheet date. Changes in
fair values will be recognised in the income statement and this is likely to cause volatility in situations where the carrying value of the hedged item is either not
adjusted to reflect fair value changes arising from the hedged risk or is so adjusted but that adjustment is not recognised in the income statement. However, under
certain conditions specified within IAS39, hedge accounting may be used to mitigate income statement volatility. The Company had no such financial instruments
outstanding at 1 October 2005 or in use during the year ended 30 September 2006.

Optos plc Annual Report & Accounts 2006 67

Notes to the Company Financial Statements
continued

Compound financial instruments
Optos had in issue secured loan notes 2006 and unsecured loan notes 2007, both of which were convertible at the holder’s option into ordinary shares of 1p each.
Under previous UK GAAP, convertible bonds are treated as debt, with the finance cost being measured on the assumption that the debt will not be converted.
Under new UK GAAP, from 1 October 2005 convertible bonds are split into a liability and a conversion option. On issue, the fair value of the liability component is
determined using a market rate for an equivalent non-convertible bond and recognised in non-current liabilities as part of borrowings on an amortised cost basis
until extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option. If the conversion option meets the definition
of an equity instruments no subsequent changes in the value are recognised in the financial statements. However, where settlement is in a currency other than the
functional currency of Optos, the remainder of the proceeds are recognised as a financial liability with the change in value of the conversion option in subsequent
accounting periods being recognised in the income statement. At the date of issue, the compound financial instruments were denominated in the functional currency
of Optos and, accordingly, the remainder of the proceeds have been treated as an equity instrument.
At 1 October 2005, the carrying value of the secured loan stock 2006 and unsecured loan stock 2007 was reduced by $1,439,000, of which $2,745,000 reflects the
removal of the original value of the conversion options (which is taken to equity) and the balance of $1,306,000 represents the imputed interest calculated on an
amortised costs basis from date of issue to 1 October 2005 (which is taken to retained earnings). The impact on 2006, up to the point of conversion, has been to
increase finance costs by $253,000 for imputed interest and a decrease in administrative expenses of $162,000 related to foreign exchange movements.
Share warrants
Optos had in issue a number of share warrants entitling the holders to subscribe for ordinary shares of 1p each at set prices under certain conditions. Previous UK GAAP
requires the net proceeds of an issue to be credited direct to shareholders’ funds. Thereafter, the accounting depends on whether the warrant is exercised or is allowed
to lapse. If it is exercised, the proceeds on the original issue of the warrant are included in the net proceeds of the shares issued; if is lapses, they are included instead in
the statement of total recognised gains and losses.
Under new UK GAAP, a non-derivative contract involving the delivery of a fixed number of own equity instruments, in exchange or a fixed amount of cash, is classified
as an equity instrument. Any consideration received, such as a premium on issues, is added directly to equity. Subsequent changes in the fair value of the instrument
are not recognised in the financial statements. However, where settlement is in a currency other than the functional currency of Optos, the net proceeds are
recognised as a financial liability with the change in value of the conversion option in subsequent accounting periods being recognised in the income statement.
At the date of issue, the warrants were denominated in the functional currency of Optos and, accordingly, have been treated as an equity instrument.
Derecognition of financial assets & liabilities
Financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where the rights to receive cash flows from
the asset have expired; the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a
third party under a ‘pass-through’ arrangement; or the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially
all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by
another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is
treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any
costs or fees incurred are recognised in profit or loss.

2 LOSS attributable to the Company
Directors
Details of Director remuneration, pension benefits and share options are included in the Directors’ Remuneration report on pages 28-31.
Auditors remuneration
The total fees payable by the Company to Ernst & Young LLP for work performed in respect of the audit of the Company was $30,000 (2005: $18,000).

68 Optos plc Annual Report & Accounts 2006

Notes to the Company Financial Statements
continued

3 TANGIBLE FIXED ASSETS Leasehold Plant and P200 Total
Improvements Equipment Equipment $’000

$’000 $’000 $’000 9,182
2,691
(327)
11,546
Cost: 606 4,420 4,156
At beginning of year 5,852
Additions 573 1,112 1,006 1,489
Disposals (160)
– (10) (317) 7,181

At end of year 1,179 5,522 4,845 3,330
4,365
Depreciation:
Total
At beginning of year 283 2,911 2,658 Equipment

Provided during year 77 887 525 $’000

Disposals – – (160) 255
227
At end of year 360 3,798 3,023

Net book value: 323 1,509 1,498
At beginning of year

At end of year 819 1,724 1,822

Included in the net book values above are the following amounts relating to assets acquired under finance lease or hire-purchase contracts.

P200
Equipment

$’000

At beginning of year 255

At end of year 227

The depreciation charged for the year on these assets was $72k (2005: $87k)

4 INVESTMENTS

Subsidiary Undertakings
2006 2005
Cost $’000 $’000

At beginning of year 2 2
Additions 28 –

At end of year 30 2
Long-term loan 1,392 1,389

1,422 1,391



Details of the investments in which the Group and the Company (unless indicated) holds 20% or more of the nominal value of any class of share capital are as follows:

Name of Company Country of Registration Proportion

Optos Inc USA 100%
Optos Canada Inc Canada 100%
Optos GmbH Germany 100%

5 Stock 2006 2005
$’000 $’000

3,446 2,729

Raw materials, spares and consumables

Optos plc Annual Report & Accounts 2006 69

Notes to the Company Financial Statements
continued

6 Debtors 2006 2005
$’000 $’000

38,008 54,880
375 459
Amounts owed by Group undertakings 432
Trade debtors 1,311
Value-added tax recoverable 170 1,033
Pre-payments
39,864 56,804


7 CASH AT BANK AND IN HAND 2006 2005
$’000 $’000

4,283 –
28,000 –
Cash at bank and in hand
Short-term deposits 32,283 –



8 Creditors: amounts falling within one year 2006 2005
$’000 $’000

191 173
– 6,853
Obligations under finance leases 2,427
and hire-purchase contracts (see Note 11) 2,281
Bank overdraft 198 140
Trade creditors 297 218
Other taxes and social security costs 1,626
Other creditors 3,048 26,266
Accruals 3,220
Amounts due to Group undertakings 37,703
9,235


9 Creditors : amounts falling due after more than one year 2006 2005
$’000 $’000

160 182
– 1,763
Obligations under finance leases and – 8,814
hire-purchase contracts (see Note 11)
Secured loan stock 2006 160 10,759
Unsecured loan stock 2007



Secured and unsecured loan stock
In November 2001, the Company obtained £1,000,000 of loan stock funding from the Bank of Scotland, convertible at the Bank’s option at a price of 40p per share into
ordinary shares of 1p each. The loan is repayable in 2006 and carries an interest rate 3% above the Bank of Scotland base rate.

In September 2003, the Company obtained £5,000,000 of loan stock funding, convertible at the subscriber’s option at a price of 50p per share into ordinary shares of 1p
each. No interest is payable on this loan stock.

Upon adoption of IAS32/39, on 1 October 2005, the carrying value of the secured loan stock 2006 and unsecured loan stock 2007 was reduced by $1,439,000, of which
$2,744,000 reflects the removal of the original value of the conversion options (which was taken to equity), and the balance of $1,305,000 represents the imputed
interest calculated on an amortised costs basis from date of issue to 1 October 2005 (which is taken to retained earnings). Both the secured loan stock 2006 and
unsecured loan stock 2007 were converted into ordinary shares upon flotation; the carrying value at date of conversion was $9,229,000.

70 Optos plc Annual Report & Accounts 2006

Notes to the Company Financial Statements
continued

10 Provisions 2006 2005
$’000 $’000



At 1 October – –
–
Arising during the year 879 –

Utilised (36) –



At 30 September 843



Social security contributions on share options
Social security contributions on share options are calculated based on the number of options vested at the balance sheet date valued at market rate less exercise price.
It is expected that the costs will be incurred during the exercise period to 31 December 2012.



11 Obligations under finance leases and hire-purchase contracts 2006 2005
$’000 $’000



Amounts payable:
Within one year 211 231
Between one and two years 129 122
Between two and five years 34 44
374 397

Less: finance charges allocated to future periods (23) (42)

351 355

Finance leases and hire-purchase contracts are shown as:
Current 191 173
Non-current 160 182

351 355

Upon placement of P200 equipment at a customer site, the healthcare professional enters into a three-year lease agreement with a third-party provider of vendor
finance. Optos enters into a matching financing agreement with the third-party provider of vendor finance involving the transfer of P200 equipment to the finance
provider, with legal title being transferred back to Optos at the end of the period. As the significant risks and rewards of ownership are retained by Optos, the proceeds
received from the third-party providers of vendor finance are recorded as finance lease obligations which are repayable by instalments and are secured over the
related P200 assets.

12 Other financial commitments

At 30 September 2006, the Company had annual commitments under non-cancellable operating leases as set out below:

Land
and Buildings

2006 2005
$’000 $’000

Operating leases which expire: – 30
In less than one year – 218
In two to five years 294 189
In over five years
437
294

Optos plc Annual Report & Accounts 2006 71

Notes to the Company Financial Statements
continued

13 SHARE CAPITAL 2006 2005
No. (million) No. (million)

Authorised:

Equity shares 90 120
Ordinary shares of 2p
(2005: 1p each)

2006 2005
Allotted, Called Up and Fully Paid: $’000 $’000

Equity shares 2,361 1,665
Ordinary shares of 1p each

Equity-settled, share-based payments

Share options outstanding at the end of the year were 5,246,806 (2005: 11,061,635 prior to consolidation). Further details of equity-settled, share-based payments can
be found in Note 20 to the Group financial statements.

2006 2005
No No

91,954,282
_
Ordinary shares of 1p each
_
At 1 October 92,126,193 _
34,791
Issue of shares prior to consolidation 350,000 544
_
Exercise of employee share options prior to consolidation 361,660 136,576

Consolidation of shares (46,418,927)

Issued on IPO 12,000,000

Exercise of employee share options 489,631

Conversion of loan stock 6,683,984

Exercise of other options and warrants 568,297

Other share issues post-consolidation 17,500

At 30 September: ordinary shares of 2p each (2005: 1p each) 66,178,338 92,126,193

Share Share Share Share
Capital Premium Capital Premium

Consideration Received on Issue of Shares 2006 2006 2005 2005
$’000 $’000 $’000 $’000
Issued on IPO
Cost of issue of ordinary share capital 415 51,744 – –
Exercise of employee share options – (5,605) – –
Conversion of loan stocks 20 – –
Exercise of other options and warrants 765 – –
Other share issues 217 10,213 – –
35 1,554 2 55
Consideration received 9
232 2 55
696
58,903

72 Optos plc Annual Report & Accounts 2006

Notes to the Company Financial Statements
continued

14 OTHER EQUITY Profit and Share Special
Loss Premium Equity Reserve
Account Reserve
Account $’000 $’000 $’000
$’000
52,417 – 686
(35,006)
At 1 October 2004 – – (686)
686 55 – –
Reclasssification – – – –
Issue of ordinary shares – – –
Share-based payments 670
Loss for the year (4,695) 52,472 – –

At 30 September 2005 (38,345) – 2,744 –

Implementation of FRS 25/26 (1,305) 52,472 2,744 –

At 1 October 2005 (39,650) 10,213 (2,744) –
54,295 – –
Conversion of loan 1,543 (5,605) – –
Issue of ordinary shares – – –
Cost of issue of ordinary shares – – – –
Share-based payments –
Loss for the year 1,393 –
(5,880) 111,375 –
At 30 September 2006
(42,594)

Under FRS20, the cost of employee share schemes, including SAYE schemes, is based on the fair value of the awards that must be assessed using an option pricing
model and expensed on a straight-line basis over the vesting period. As a result, the cost of employee share schemes recognised in 2005 increased losses by $670,000.

15 Related party transactions
During the year to 30 September 2006, purchases totalling $92,472 (2005: $391,000) at normal market prices were made by the Company from Crombie Anderson
Limited, of which the D C Anderson is a Director and controlling shareholder, of which $Nil was outstanding at 30 September 2006 (2005: $19,000). The amounts
outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of
the amounts owed by related parties.

16 Pension commitments
The Company operates a defined contribution pension scheme, the Optos Group Personal Pension Scheme, for its Directors and senior employees. The assets of the
scheme are held separately from those of the Company in an independently administered fund. There were no outstanding contributions at the year end (2005: $nil).

17 Financial risk management objectives and policies
A description of the Group’s financial risk management objectives and policies is provided in Note 22 to the Group’s financial statements. These financial risk
management objectives and policies also apply to the Company.


Optos plc Annual Report & Accounts 2006 73

Glossary of Terms

510(k) macula
pre‑marketing process under section 510(k) of the US Federal Food, Drug and highly sensitive part of the retina responsible for detailed central vision
Cosmetic Act whereby manufacturers notify the FDA of their intent to market
a medical device ophthalmologist
a medically qualified specialist of eye surgery and pathology
age‑related macular degeneration (or AMD)
eye disease that progressively destroys the macula; AMD is the leading cause ophthalmoscope
of severe vision loss in people over 50 in the Western world an instrument for examining the interior structure of the eye, especially the retina

angiographic optician
diagnostic test in which dye is injected and an image created to determine a professional in respect of which these are two variants: dispensing optician
the blood flow in an area – a provider of glasses and contact lenses; ophthalmic optician – a person
qualified to perform eye examinations and prescribe eye wear
binocular indirect ophthalmoscope (or BIO)
an instrument designed to visualise the interior of the eye, with the instrument optometrist
at arm’s length from the subject’s eye and the observer viewing an inverted a primary level eyecare provider who performs eye examinations and prescribes
image through a convex lens located between patient and instrument eye wear

CE Panoramic200
Conformite Europeene, a product marking applying to products regulated the Panoramic200 Scanning Laser Ophthalmoscope supplied by Optos
by the European Commission’s health, safety and environmental protection that delivers the optomap® Retinal Exam
legislation, which indicates that a manufacturer has conformed with all the
obligations required and is allowed to freely distribute the product pathology
the manifestations of disease
choroid
a collection of blood vessels in the rear of the eye which feed the retinal sensory posterior pole
layer with nutrients and oxygen the rear hemisphere from the central vertical equator of the eye

diabetes primary level care
a chronic health condition where the body is unable to produce insulin and break the point in the healthcare system that is responsible for the detection of health
down glucose in the blood problems

diabetic retinopathy retina
a consequence of unmanaged blood sugar levels in a person with diabetes light-sensitive nerve tissue in the eye that coverts light into electrical impulses for
whereby the retinal blood vessels are damaged, causing destruction of the transmission to the brain via the retinal nerve fibre layer and the optic nerve
retina itself
retinal detachment
direct ophthalmoscope separation of the retina from its attachments to the back of the eyeball
an ophthalmoscope that produces an upright, or unreversed, image of
approximately 15 times magnification scanning laser ophthalmoscopes
a device that uses reflected laser light scanned into the eye to analyse the retina
ellipsoidal mirror
a reflecting surface formed to the shape of a concave three-dimensional ellipse secondary level care
that has the property of two focal points that part of the healthcare system that diagnoses health problems and is often
(but not always) concerned with defining treatment plans
FDA
US Food and Drug Administration single image capture
a term used by Optos to discriminate a single retinal image (optomap® Retinal
fluorescein angiography Exam) from a sequence of retinal images used, for instance, in fluorescein
a procedure allowing the blood vessels at the back of the eye to be angiography (optomap® fa Medical Procedure)
photographed as a fluorescent dye is injected into the patient’s bloodstream
slit lamp biomicroscope
fundus an instrument that combines a microscope with special lights that allows a
the interior posterior surface of the eyeball which includes the retina and the practitioner to view the front of the eye and the retina (with the additional lens)
macula
SLO
fundus camera scanning laser ophthalmoscope
conventional device derived from practitioner photography that is used to
photograph small areas of the fundus virtual point scan
a term used by the Company to define the effect created by the patented system
glaucoma that gives rise to wide field of view created by the Panoramic200 instrument – it
disorder of the eye, characterised by increased pressure within the eyeball, conveys the effect of being equivalent to positioning a scanning system inside
resulting in damage to the optic nerve and retinal nerve fibres, with resulting the patient’s eye
loss of vision
vitreous humour
the clear, gel‑like substance that fills the eyeball behind the lens

74 Optos plc Annual Report & Accounts 2006

Optos plc Annual Report & Accounts 2006 75





United Kingdom United States & Canada Germany

Optos plc Optos Inc. Optos GmbH
Queensferry House 199 Forest Street Hauptstrasse 161
Carnegie Business Campus Marlborough, MA 01752 D-68259 Mannheim
Dunfermline, Fife United States
Scotland KY11 8GR +49 (0) 621 71419100
United Kingdom Toll-free:
1-800-854-3039
+44 (0) 1383 843 300
Outside of the US:
+001 (508) 787-1400

www.optos.com