Directors' report 

The directors of Norwood Immunology Limited submit herewith the financial report for the financial year ended 30 June 2008. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows:

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

Directors

Name

Mr. P. J. Hansen

Non-Executive Chairman, aged 63, joined the Board on 1 December 2000 in an executive capacity as Chief Executive Officer. Resigned as an executive director on 31 October 2003 and maintains a non-executive role.

Mr. R.F. Williams

Chief Executive Officer, aged 51, joined the board on 31 October 2003.

Dr. R.L. Boyd

Aged 57, appointed 21 December 2007 in an executive capacity as Chief Scientific Officer.

Mr. B Guzman

Aged 37, appointed 8 September 2006 in a Non-Executive Director capacity and resigned 21 December 2007.

Mr. H Stein

Aged 50, appointed 8 September 2006 in a Non-Executive Director capacity and resigned 21 December 2007.

The above named directors held office during and since the financial year except for:

Mr. B Guzman

Appointed 8 September 2006; resigned 21 December 2007

Mr. H Stein

Appointed 8 September 2006; resigned 21 December 2007

Dr. R.L. Boyd

Appointed 21 December 2007.

Company Secretaries

Mr. J.H. Bell

Aged 36, Chartered Accountant, serves as Company Secretary.

Mr. R. Scarrott

Aged 40, Chartered Accountant, joined Norwood Immunology in November 2003. Mr Scarrott is a member of the Institute of Chartered Accountants in England and Wales. Mr Scarrott resigned as joint Company Secretary on 13 March 2008.

Principal Activities

The Group's principal activities during the course of the financial year were developing and commercialising of technologies and intellectual property associated with the rejuvenation of the immune system (involving the re-growth of the thymus, generation of T cells and improved bone marrow function) and the development of adjuvanted virosomal vaccines. In addition, a progressively increasing focus has been on the development and possible commercialization of therapies based on the use of adult stem cells in both a veterinary and human setting. 

Review of Operations

Financial review

The consolidated loss after tax for the year ended 30 June 2008 was A$28,488,291 (2007: A$4,863,767), approximately £13.7 million (2007: £2 million). Consolidated cash at 30 June 2008 was A$1,243,759 (2007: A$5,720,438), approximately £0.6 million (2007: £2.2 million). All amounts expressed in pounds sterling have been converted, on a pro forma basis, at the 30 June 2008 rate of A$1:£0.4821 (2007: A$1:£0.4235).  

The Company has, throughout the year and thereafter, continued to focus on minimisation of expenditure and cash burn given the uncertainties surrounding its ability to raise finance in difficult capital markets. The Board is also exploring the potential sale and/or license of assets owned by the Group in order to provide capital for its future activities. A review and progress report on the Group's principal activities is given below:

Immunology

The Company has an ongoing Phase II clinical trial in collaboration with The University of Texas M D Anderson Cancer Center, of Houston, to determine whether an enhanced vaccine response can be achieved by using the Company's therapy to increase thymic activity and the output and function of T-cells via sex steroid suppression using the GnRH analogue Lupron Depot®.  This study is differentiated from the bone marrow transplant ('BMT') work discussed below, in that the aim is to modify the course of cancer using a specific vaccine as opposed to looking at general immune system enhancement. The trial involves Lupron Depot® being administered as an adjunctive immunology therapy with an experimental melanoma vaccine, to determine whether an enhanced immune response to that vaccine can be created. The trial is ongoing.

The Company has an ongoing Phase II clinical trial in cancer patients undergoing autologous (self-derived) BMT in the USA. The trial comprises an 80 patient double-blind randomized Phase II clinical trial (40 treated; 40 control) at the University of Texas M D Anderson Cancer Center and the Dana-Farber Cancer Institute, Harvard Medical School. The trial is a collaborative effort with a consortium of leading cancer clinicians and institutes, co-funded by the National Cancer Institute and the National Institute of Allergy and Infectious Diseases. Despite actions to increase trial centres and educate clinicians in those centres regarding the merits of the trial, recruitment continues to  progress at a slower rate than was originally anticipated. In view of this, the Company together with its partner, Abbott Laboratories (who have taken over Lupron Depot® distribution in the USA from TAP Pharmaceuticals) are currently evaluating the future of this trial with the Principal Investigator in order to assess whether a statistically relevant end point can be achieved in a realistic timescale.

The Company continues to conduct the majority of its research on the immune system at the laboratories of its Chief Scientific Officer (Immunology), Professor Richard Boyd, at Monash University, Melbourne, Australia. Under the terms of an agreement between Monash and the Company, relevant intellectual property developed in the Boyd laboratory at Monash is assigned to the Company. The Company has been mindful of the funding available to it and has continued to encourage collaborations with other institutions and applying for grants to maximise the benefit received from the Company's sponsorship of the Boyd laboratory. This strategy has enabled the net cost of our research into the immune system to be reduced still further from levels incurred in previous years, whilst maintaining the Group's participation in the intellectual property created at the Boyd laboratory.

Virosomal Vaccines

Virosome Biologicals' adjuvanted virosome technology has its first out-license in the field of intranasal influenza vaccines with Solvay Pharmaceuticals B.V. ('Solvay'), with milestones and royalties payable to Virosome Biologicals as the clinical development and commercialisation programme progresses. Solvay is responsible for clinical trials and development and commercialising of the vaccine.  Having successfully completed a phase I trial in May 2006 Solvay are progressing the program into a Phase II trial, however this trial has yet to commence, a delay which unfortunately is out of the Company's control given the trial conduct and timetable is the responsibility of its licence partner. 

The key research focus of Virosome Biologicals' during the financial year has been the development of pre-clinical models for its 

Respiratory Syncytial virus ('RSV') and Herpes Simplex virus (HSV) vaccines. The first of these programmes, RSV, completed its pre-clinical development in Q1 2008 and in July 2008 the Company announced a six month exclusive evaluation agreement for its RSV vaccine candidate with MedImmune LLC. Under the terms of this agreement, the Company received a payment of €200,000 and the reimbursement of certain costs associated with doing additional work relating to RSV for MedImmune.

The pre-clinical package on HSV is still in the course of preparation, and the Company expects to commence out-licensing discussions relating to this in Q1 2009. Future vaccine targets under development include Cytomegalovirus (CMV).

Funding Strategy

The Board recognise the importance of securing appropriate finance for the activities of the Group and have been exploring all options with advisers.

It is recognised that the recent financial crisis, and the performance of the Group, make raising finance through traditional capital market routes impractical. Accordingly, the Board have been exploring other options, including securing finance to fund projects allied to the future direction of the Group in the field of human and veterinary stem cells, and also the divestment of assets to raise capital. In this latter regard, the Board have commenced discussions regarding the sale of the Virosomal Vaccine development business and are currently in discussions with a party that may or may not lead to an offer for this business.

Directors' Meetings

Directors

Board of Directors

Audit Committee

Held

Attended

Held

Attended

Mr. R.L. Boyd*

9

9

-

-

Mr. P. J. Hansen

11

11

1

1

Mr B. Guzman*

2

2

1

1

Mr H. Stein*

2

2

1

1

Mr. R.F. Williams

11

11

1

1

* Whilst they were a director.

Share Options

Share Options Granted to Directors and Executives

During and since the end of the financial year no options were granted to directors and executives of the Company and no option were exercised.

The following options issued to executives, granted on 27 June 2003 expired on 30 November 2007 and were exercisable as follows:

• 11,150,000 options exercisable at 0.30 pence per option immediately.

• 4,200,000 options exercisable at the placing price per share less 15 per cent. The placing price is 38 pence per share or $1.00 per share based on an exchange rate of £ 0.382 : $1.00 as at 30 June 2004.

• 1,800,000 options exercisable at the placing price per share less 15 per cent, upon the transfer of patents involving the embryonic thymic epithelial cells. 

Employee Share Option Plan

Further details of the employee share option plan are disclosed in note 11 to the financial statements.

Indemnification of Officers and Auditors

During the financial year, the Company paid a premium in respect of a contract insuring the directors of the Company (as named above), and all executive officers of the Company and of any related body corporate against a liability incurred as such a director 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 financial year, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred as such an officer or auditor

Auditor's independence declaration

The auditor's independence declaration is included on page 6 of the financial report.

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

On behalf of the Directors

Richard Williams

Director

London , 2 March 2009

Directors' declaration

The directors declare that:

(a)    in the directors' opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and

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

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

On behalf of the Directors

Richard Williams

Director

London, 2 March 2009

Income statement 

for the financial year ended 30 June 2008

Consolidated

Company

Note

2008

$

2007

$

2008

$

2007

$

Revenue

6

259,985

123,683

-

-

Other income

6

287,433

225,871

174,331

212,833

Depreciation and amortisation expense

7

(58,277)

(23,444)

(5,197)

(9,891)

Employee benefits expense

7

(1,628,496)

(1,473,436)

(1,090,119)

(1,257,458)

Finance costs

8

(55,569)

(202,791)

(48,889)

(202,319)

Insurance

(106,801)

(83,859)

(100,592)

(83,859)

Investor relations

(139,074)

(230,829)

(139,074)

(230,829)

Legal costs

(47,483)

(146,872)

(45,313)

(145,476)

Net foreign exchange loss

7

(101,179)

(245,827)

(120,556)

(225,634)

Former parent entity management fees

26 (e)

-

(80,000)

-

(80,000)

Patent costs

(309,482)

(53,946)

(232,846)

(18,256)

Professional fees

(573,941)

(275,115)

(447,934)

(269,858)

Travel expenses

(202,127)

(268,342)

(193,694)

(254,883)

Research and development costs immediately expensed

(753,144)

(1,044,293)

(594,517)

(846,654)

Impairment of non-current assets

15,17,18

(24,880,532)

(637,641)

(25,785,655)

(637,641)

Other expenses 

(179,604)

(446,926)

(114,805)

(151,976)

Loss before tax 

(28,488,291)

(4,863,767)

(28,744,860)

(4,201,901)

Income tax expense

9

-

-

-

-

Loss for the year

(28,488,291)

(4,863,767)

(28,744,860)

(4,201,901)

Earnings per share

Basic and Diluted (cents per share)

24

(12.5)

(2.6)

Balance sheet as at 30 June 2008

Consolidated

Company

Note

2008

$

2007

$

2008

$

2007

$

Current assets

Cash and cash equivalents

1,243,759

5,720,438

1,055,322

5,334,884

Trade and other receivables

13

414,255

82,488

648,352

27,766

Prepayments

14

99,079

156,359

99,079

156,359

Total current assets

1,757,093

5,959,285

1,802,753

5,519,009

Non-current assets

Other financial assets

15

11,553

11,176

-

21,263,154

Plant and equipment

16

202,782

247,632

7,262

16,631

Goodwill

17

-

2,100,000

-

-

Other intangible assets

18

-

22,732,609

-

4,474,578

Total non-current assets

214,335

25,091,417

7,262

25,754,363

Total assets

1,971,428

31,050,702

1,810,015

31,273,372

Current liabilities

Trade and other payables

19

1,062,220

1,248,147

482,653

808,951

Other financial liabilities

20

449,425

821,439

449,425

821,439

Provisions

21

23,926

39,828

23,926

39,828

Total current liabilities

1,535,571

2,109,414

956,004

1,670,218

Non-current liabilities

Provisions

21

42,479

46,762

42,479

46,762

Total non-current liabilities

42,479

46,762

42,479

46,762

Total liabilities

1,578,050

2,156,176

998,483

1,716,980

Net assets

393,378

28,894,526

811,532

29,556,392

Equity

Issued capital

22

57,842,753

57,842,753

57,842,753

57,842,753

Foreign currency translation reserve

23

(12,857)

-

-

Accumulated losses

(57,436,518)

(28,948,227)

(57,031,221)

(28,286,361)

Total equity

393,378

28,894,526

811,532

29,556,392

Notes to the financial statements are included on pages 15 to 45.

Statement of changes in equity for the financial year ended

30 June 2008

Statement of changes in equity for the financial year ended 30 June 2008

Company

2008

2007

Issued capital

$

Accumulated losses 

$

Foreign currency translation reserve $

Total 

$

Issued capital

$

Accumulated losses

 $

Foreign currency translation reserve $

Total 

$

Opening balance

57,842,753

(28,286,361)

-

29,556,392

27,227,179

(24,084,460)

-

3,142,719

57,842,753

(28,286,361)

-

29,556,392

27,227,179

(24,084,460)

-

3,142,719

Loss for the year

-

(28,744,860)

-

(28,744,860)

-

(4,201,901)

-

(4,201,901)

Total recognised expense

-

(28,744,860)

-

(28,744,860)

-

(4,201,901)

-

(4,201,901)

Issue of shares

-

-

-

-

31,152,904

-

-

31,152,904

Share issue costs

-

-

-

-

(537,330)

-

-

(537,330)

Closing balance

(57,842,753)

(57,031,221)

-

811,532

57,842,753

(28,286,361)

-

29,556,392

Cash flow statement 

for the financial year ended 30 June 2008

Consolidated

Company

Note

2008

$

2007

$

2008

$

2007

$

Cash flows from operating activities

Receipts from customers

199,287

123,683

-

-

Payments to suppliers and employees

(4,328,407)

(3,810,493)

(3,970,353)

(3,489,561)

Interest and other costs of finance paid

(55,569)

(175,002)

(55,569)

(175,002)

Net cash used in operating activities

29 (c)

(4,184,689)

(3,861,812)

(4,025,922)

(3,664,563)

Cash flows from investing activities

Interest received 

143,337

207,030

170,852

206,110

Payment for plant and equipment

(10,458)

(256,556)

-

(14,101)

Payment for intangible assets

(47,923)

(109,165)

(47,923)

(109,165)

Purchase of business

29(b)

-

(5,242,599)

-

-

Purchase of other financial assets

(377)

(11,176)

-

(6,078,113)

Proceeds from sale of plant & equipment

318

-

318

-

Net cash provided by/(used in) investing activities

84,897

(5,412,466)

123,247

(5,995,269)

Cash flows from financing activities

Payment for share issue costs

-

(537,330)

-

(537,330)

Proceeds from issue of shares

-

16,805,945

-

16,805,945

Repayment of borrowings

(351,119)

(1,223,793)

(351,119)

(1,223,793)

Net cash (used in)/provided by financing activities

(351,119)

15,044,822

(351,119)

15,044,822

Net (decrease)/ increase in cash and cash equivalents

(4,450,911)

5,770,544

(4,253,794)

5,384,990

Cash and cash equivalents at the beginning of the year

5,720,438

237,805

5,334,884

237,805

Effects of exchange rate changes on the balance of cash held in foreign currencies

(25,768)

(287,911)

(25,768)

(287,911)

Cash and cash equivalents at the end of the year

29 (a)

1,243,759

5,720,438

1,055,322

5,334,884

Notes to the financial statements are included on pages 15 to 45.

Notes to the financial statements 

for the financial year ended 30 June 2008

1.

General information

Norwood Immunology Limited (the company) is incorporated in Australia and listed on London's AIM exchange.

Norwood Immunology Limited's registered office and its principal place of business are as follows:

Registered office

Minter Ellison

Rialto Towers' Level 23

525 Collins Street

Melbourne, VIC 3000

Australia

Principal place of business

c/- Suite 5, Level 1

405 Nepean Highway

Frankston VIC 3199

Australia

2.

Adoption of new and revised Accounting Standards

In the current year, the Consolidated entity has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations for the current reporting period. The adoption of these new and revised Standards and Interpretations did not have any material financial impact on the financial statements of the Company or the consolidated entity. The Consolidated entity has also adopted the following Standards as listed below which only impacted on the consolidated entity's financial statements with respect to disclosure.

• AASB 101 'Presentation of Financial Statements (revised October 2006)'

• AASB 7 'Financial Instruments: Disclosure'

Impact of accounting standards not yet effective

At the date of authorisation of the financial report, the following Standards and Interpretations that are relevant to the company and the consolidated entity were in issue but not yet effective.

2

Adoption of new and revised Accounting Standards (continued) 

The directors are currently evaluating the effect of these changes and will make the necessary amendments and disclosure as required.

Statement of Compliance

The financial report is a general purpose financial report prepared in accordance with the Australian Corporations Act 2001, Accounting Standards and Interpretations, and complies with other requirements of the law.

The financial report includes the separate financial statements of the company and the consolidated financial statements of the Consolidated entity.

Accounting Standards include Australian equivalents to International Financial Reporting Standards (A-IFRS).  Compliance with A-IFRS ensures that the financial report, comprising the financial statements and notes of the company and the consolidated entity, complies with International Financial Reporting Standards (IFRS).  

The financial statements were authorized for issue by the directors on 2 March 2009.

3

Summary of accounting policies

Basis of preparation

The financial report has been prepared on the basis of historical cost, except for the revaluation of certain non-current assets and financial instruments. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise noted.

Critical accounting judgements and key sources of estimation uncertainty

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

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

Judgments made by management in the application of A-IFRS that have significant effects on the financial statements and estimates with a significant risk of material adjustments in the next year are disclosed, where applicable, in the relevant notes to the financial statements.

Refer to note 4 for discussion of critical judgments in applying the consolidated entity's accounting policies, and key sources of estimation uncertainty.

3

Summary of accounting policies (continued)

Going concern basis

The financial report has been prepared on the going concern basis, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business.

The Company is an emerging pharmaceutical business and as such expects to be cash absorbing until its technologies are commercialised. For the financial year ended 30 June 2008, the consolidated entity incurred a net loss of $28,488,291 (Company: $28,744,860) and experienced negative cash flows from operations of $4,184,689 (Company: $4,025,922).

To continue as a going concern the Company requires the continued support of its loan note holders and shareholders, or to raise new facilities or equity from other parties or to realise assets to provide the necessary cash for the business to continue to trade. In the light of the current environment in world capital markets, the directors have concluded that realisation of group assets is the most appropriate route to ensure that capital is available to continue as a going concern.

As announced on 6 December 2008, the Company has now entered into a non-binding Letter of Intent (LOI) with a NASDAQ listed international biotechnology company focused on developing innovative vaccines interfering with early pathogen transmission events, for the sale of 100% of the Company's interest in Bestewil Holding B.V, the immediate holding company of Virosome Biologicals B.V. In connection with the execution of this LOI and the granting of a period of exclusivity to the NASDAQ company to 31 January 2009, the Company has received a non refundable goodwill deposit of €100,000.

The consideration proposed under the LOI includes cash on completion, the issue to the Company of a secured loan note by the acquirer, milestone payments due on successful development of the Virosome Biologicals' technology, share options in the NASDAQ company and a share in the ongoing income streams of certain of Virosome Biologicals' vaccine development programmes. The initial cash consideration would be sufficient to fund the remaining operations of the group for at least 12 months from the date of the accounts.  There are a number of uncertainties as to the completion of the sale, including the signing of a legally binding sale agreement, the potential acquirer raising the necessary finance and the approval of the sale by the Company's shareholders.  However, the directors have a reasonable expectation that the proposed transaction will be completed on the basis that the Company has a signed Letter of Intent with the NASDAQ company, has been paid an exclusivity fee of € 100,000 in connection with the transaction, has received a draft Sale and Purchase Agreement, their discussions to date with the NASDAQ company's management and their discussions with the Company's major shareholders.

These financial statements have therefore been prepared on a going concern basis which contemplates the continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business.

In the event that the Company is unable to complete the present sale transaction, there is material uncertainty whether the Company can continue as a going concern. If the Company is unable to continue as a going concern, it may be required to realise its assets and extinguish its liabilities other than in the normal course of business and at amounts different to those stated in the financial statements.

No adjustments have been made to the financial report relating to the recoverability and classification of the asset carrying amounts or the classification of liabilities that might be necessary should the Company not continue as a going concern.

3.

Summary of accounting policies (continued)

Significant accounting policies

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

(a)    Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) (referred to as 'the Consolidated entity' in these financial statements). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Consolidated entity.

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.  In the separate financial statements of the Company, intra-group transactions are generally accounted for by reference to the existing book value of the items. Where the transaction value of common control transactions differ from their consolidated book value, the difference is recognised as a contribution by or distribution to equity participants by the transaction entities. 

(b)    Borrowings

Borrowings are recorded initially at fair value, net of transaction costs.

Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit and loss over the period of the borrowing using the effective interest rate method.

(c)    Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of change in value and have a maturity date of three months or less at the date of acquisition.

Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.

(d)    Employee benefits

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

Liabilities are recognised in respect of employee benefits which are expected to be settled within 12 months are measured at their nominal values using the remuneration rate expected to apply at the time of settlement.

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

3.

Summary of accounting policies (continued)

(e)    Financial assets

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

Subsequent to initial recognition, investments in subsidiaries are measured at cost in the company financial statements.

Other financial assets are classified into the following specified categories: financial assets 'at fair value through profit or loss', 'held-to-maturity' investments, 'available-for-sale' financial assets, and 'loans and receivables'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Financial assets at fair value through profit or loss

The company has classified certain shares and options as financial assets at fair value through profit or loss. Financial assets held for trading purposes are classified as current assets and are stated at fair value, with any resultant gain or loss recognised in profit or loss. 

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at  amortised cost  using the effective interest rate method less impairment.

Interest income is recognised by applying the effective interest rate.

Impairment of financial assets

Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial asset the estimated future cash flows of the investment have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.

With the exception of available-for-sale equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

In respect of available-for-sale equity instruments, any subsequent increase in fair value after an impairment loss is recognised directly in equity.

(f)    Foreign currency 

The individual financial statements of each group entity are presented in its functional currency being the currency of the primary economic environment in which the entity operates. For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in Australian dollars, which is the functional currency of Norwood Immunology Limited and the presentation currency for the consolidated financial statements.

In preparing the financial statements of the individual entities, transactions in currencies other than the entity's functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in foreign currency are not retranslated.

3

Summary of accounting policies (continued)

(f)    Foreign currency (continued) 

Exchange differences are recognised in profit or loss in the period in which they arise except for exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned or likely to occur, which form part of the net investment in a foreign operation, and which are recognised in the foreign currency translation reserve and recognised in profit or loss on disposal of the net investment.

On consolidation, the assets and liabilities of the Consolidated entity's foreign operations are translated into Australian dollars at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchanges differences arising, if any, are classified as equity and transferred to the consolidated entity's foreign currency translation reserve. Such exchange differences are recognised in the profit or loss in the period in which the foreign operation is disposed.

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

             (g)    Goods and services tax

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

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

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

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables.

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

             (h)    Goodwill

Goodwill acquired in a business combination is initially measured at its cost, being the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. Goodwill is subsequently measured at its cost less any impairment losses. 

For the purpose of impairment testing, goodwill is allocated to each of the Consolidated entity's cash-generating units (CGUs), expected to benefit from the synergies of the business combination. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired.

If the recoverable amount of the CGU is less than the carrying amount of the CGU, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro-rata on the basis of the carrying amount of each asset in the CGU. An impairment loss recognised for goodwill is recognised immediately in profit or loss and is not reversed in a subsequent period.

On disposal of an operation within a CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal of the operation.

3.

Summary of accounting policies (continued)

             (i)    Impairment of assets

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

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

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

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

             (j)    Income tax

Current tax

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

Deferred tax

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

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill.

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

3.

Summary of accounting policies (continued)

              (j)    Income tax (continued)

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period

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

             (k)    Intangible Assets

Patents, trademarks and licences

Patents, trademarks and licences are recorded at cost less accumulated amortisation and impairment. Amortisation is charged on a straight line basis over their estimated useful lives. The estimated useful life and amortisation method is reviewed at the end of each annual reporting period, with any changes being recognised as a change in accounting estimate. 

Research and development costs

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

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

• the technical feasibility of completing the intangible asset so that it will be available for use or sale;
• the intention to complete the intangible asset and use or sell it;
• the ability to use or sell the intangible asset;
• how the intangible asset will generate probable future economic benefits;
• the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
• the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above.

Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately.

Amortisation of research and development assets

Amortisation is charged on a straight line basis over the useful economic life of 10 years, commencing only once the development project is completed, i.e. achieves regulatory approval and commences revenue generation from end market sales. Once amortisation commences, the estimated useful life and amortisation method is reviewed at the end of each annual reporting period. 

Intangible assets acquired in a business combination

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

Subsequent  to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately.

3.

Summary of accounting policies (continued)

 l)         Leased assets

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

               m)

Payables

Trade payables and other accounts payable are recognised when the company becomes obliged to make future payments resulting from the purchase of goods and services. 

(n)       Plant and equipment

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

Depreciation is provided on plant and equipment and is calculated on a straight line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. 

The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period.  

The gain or loss arising on disposal or retirement of an item of plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

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

• Plant, equipment and office furniture

5 - 15  years

• Computer software

3 years

(o)    Provisions

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

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cashflows estimated to settle the present obligation, its carrying amount is the present value of those cashflows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably.

An onerous contract is considered to exist where the company has a contract under which the unavoidable cost of meeting the contractual obligations exceed the economic benefits estimated to be received. Present obligations arising under onerous contracts are recognised as a provision to the extent that the present obligation exceeds the economic benefits estimated to be received.

3.

Summary of accounting policies (continued)

(p)    Revenue recognition

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

Licence fees

Licence fees are recognized in accordance with the substance of the relevant agreement.

Dividend and interest revenue

Dividend revenue is recognised on a receivable basis. Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial asset.

(q)    Other financial liabilities

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

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

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

4.

Critical accounting judgements and key sources of estimation uncertainty

The following are the critical judgements, that the Board has made in the process of applying the consolidated entity's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

Employee entitlements

Judgement is applied in determining the following key assumptions used in the calculation of long service leave at balance date:

• Future increases in wages and salaries

• Future increases in cost rates; and

• Experience of employee departures and period of service

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Impairment of non-current assets

Determining whether goodwill and other intangible assets are impaired requires an estimation of the value in use of the cash generating units to which goodwill and the other intangible assets have been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

The carrying amount of goodwill and other intangible assets at balance sheet date was nil (2007: $2,100,000 and $22,732,609 respectively) after impairment losses of $24,880,532 (2007: $637,641) recognised during the current financial year. Details of the impairment loss are provided in notes 17 and 18.

Fair value of other financial assets

Other financial assets in the Company relate to the investment in Bestewil B.V. Given the financial uncertainty of the entity and based on existing knowledge, outcomes within the next annual reporting period that are different from assumptions could require a material adjustment to the carrying amount of nil (2007:$21,263,154) and after an impairment loss of $21,263,154 (2007:nil). Details of the impairment loss are provided in note 15.

5.

Business and Geographical segments

Information on business segments

For management purposes, the Consolidated entity is organised into 2 major operating divisions - Immunology and Virosomal Vaccines. These divisions are the basis on which the Consolidated entity reports its primary segment information. The principal research of each of these divisions are as follows:

Immunology- improvement of immunity involving the re-growth of the thymus, generation of T cells and improved bone marrow function

Virosomal Vaccines - a new method of making virosomes, as well as the combination of an adjuvant (immune response stimulator) in the membrane of the virosome that targets them specifically to antigen presenting cells or B cells ,to improve the efficacy of vaccines.

Segment revenues

External sales

Inter-segment

Other

Total

2008

$

2007

$

2008

$

2007

$

2008

$

2007

$

2008

$

2007

$

Immunology

-

-

-

-

-

-

-

-

Virosomal Vaccines

259,985

123,683

-

-

144,096

18,841

404,081

142,524

Total of all segments

404,081

142,524

Eliminations

-

-

Unallocated

143,337

207,030

Consolidated revenue

547,418

349,554

Segment results

2008

$

2007

$

Immunology

(7,116,928)

(3,474,878)

Virosomal Vaccines

(20,133,867)

(661,867)

(27,250,795)

(6,230,557)

Eliminations

-

-

Unallocated 

(1,237,496)

(727,022)

Loss before tax 

(28,488,291)

(4,863,767)

Income tax expense 

-

-

Loss for the year

(28,488,291)

(4,863,767)

Segment assets and liabilities

Assets

Liabilities

2008

$

2007

$

2008

$

2007

$

Immunology

655,614

4,518,976

472,076

818,559

Virosomal Vaccines

808,128

21,064,957

1,226,282

(463,669)

Total of all segments

1,463,742

25,583,933

1,698,358

1,282,228

Eliminations

(646,715)

(24,473)

(646,715)

(24,473)

Unallocated

1,154,401

5,491,242

526,407

898,421

Consolidated

1,971,428

31,050,702

1,578,050

2,156,176

5.

Business and Geographical segments (continued)

Other segment information

Immunology

Virosomal Vaccines

2008

$

2007

$

2008

$

2007

$

Acquisition of segment assets

-

123,266

10,458

20,600,487

Impairment losses: Recognised in profit or loss

(4,522,501)

(637,641)

(20,358,031)

-

Depreciation and amortisation of segment assets

(5,197)

(9,891)

(53,080)

(14,551)

Information on geographical segments

The Consolidated entity's 2 divisions operate in two principal geographical areas - Australia & The Netherlands. The composition of each geographical segment is as follows:

Revenue from external customers

Segment assets

Acquisition of segment assets

2008

$

2007

$

2008

$

2007

$

2008

$

2007

$

Australia

-

-

1,163,300

9,985,746

-

123,266

Netherlands

259,985

123,683

808,128

21,064,956

10,458

20,600,487

259,985

123,683

1,971,428

31,050,702

10,458

20,723,753

Prior year revenues, costs, assets and liabilities have been restated to ensure comparability with the prior year.

Consolidated

Company

2008

$

2007

$

2008

$

2007

$

6.

Revenue

An analysis of the revenue for the year  from continuing operations is as follows: 

Licence fees revenue

259,985

123,683

-

-

Interest income

143,337

207,030

170,852

206,110

Other 

144,096

18,841

3,479

6,723

Total other income

287,433

225,871

174,331

212,833

7.

Loss before tax

Depreciation of non-current assets:

 - Office furniture and equipment

57,328

18,075

4,248

4,522

Amortisation of non-current assets

 - Intangibles

949

5,369

949

5,369

58,277

23,444

5,197

9,891

Employee benefits expense

 Post employment benefits:

 - Defined contributions plans

53,217

52,421

53,217

52,421

 Other employee benefits

1,575,279

1,421,015

1,036,902

1,205,037

1,628,496

1,473,436

1,090,119

1,257,458

Net foreign exchange loss

101,179

245,827

120,556

225,634

Consolidated

Company

2008

$

2007

$

2008

$

2007

$

8.

Finance costs

 - Interest - other entities

55,569

202,319

48,889

202,318

 - Interest - former holding company

-

472

-

-

55,569

202,791

48,889

202,319

9.

Income taxes

(a)    The components of tax expense comprise:

Current tax

-

-

-

-

Deferred tax

-

-

-

-

-

-

-

-

(b)    The prima facie tax on loss from ordinary activities before income tax is reconciled to the income tax as follows:

The prima facie tax on loss from ordinary activities before income tax at 30% (2007:30%)

(8,546,487)

(1,459,130)

(8,623,458)

(1,260,570)

Add tax effect of:

- Temporary differences and losses not recognized

8,764,138

1,526,733

8,841,109

1,328,173

- Entertainment

4,697

3,456

4,697

3,456

- Other

596

550

596

550

Less tax effect of 

- Research and Development (125% claim)

(222,944)

(71,609)

(222,944)

(71,609)

Income tax 

-

-

-

-

9.

Income taxes (continued)

Consolidated

Company

2008

$

2007

$

2008

$

2007

$

(c)    Tax assets and liabilities:

Assets

Deferred tax assets

-

-

-

-

Liabilities

Current

-

-

-

-

Current tax liability

-

-

-

-

Non current

Deferred tax liability

-

-

-

-