77471 deltex cover 15/4/08 10:00 page 2 · pdf filesurgical patients arises as a direct...

77471 DELTEX COVER 15/4/08 10:00 Page 2

Deltex Medical is the market leadingdeveloper of minimally-invasivehaemodynamic monitoringsolutions.

The Company’s Cardiac function monitor, the

CardioQ™ is used on patients undergoing

surgery and in many patients in intensive care

to monitor and optimise the heart’s

performance. Using the CardioQ has been

proven to help patients get better, quicker.

Clinical studies have repeatedly demonstrated

that haemodynamic optimisation results in

significant reductions in the length of hospital

stay of between 30% and 40%.

Deltex Medical expects that haemodynamic

optimisation will become a global standard of

care for patients at risk from haemodynamic

compromise.

77471 PRE 15/4/08 10:29 Page ii

report and accounts 2007 1

Financial Highlights

● Turnover increased by 18.7% to £4,168,000 (2006: £3,511,000), with growth in all key territories

● UK surgical probe sales up over 50%

● USA probe sales up nearly 50%

● Recurring orders from key International distributors up 45%

● Gross margin improved to 70.0% from 66.3%

● Operating loss after investment in gearing up for next stage of growth £2,223,000

(2006: £2,014,000)

● Cash of £763,000

● Next phase of US expansion to be financed by £666,667 of committed new equity capital

from a US development fund at 22.0p per share

Operating Highlights

● CardioQTM established as a standard of care in fast-track surgery in two key London

teaching hospitals

● UK surgical probe sales overtook intensive care probes sales in the second half

● CardioQ at the top of the UK NHS innovation agenda

● Rapid implementation recommended by UK health minister

● First physician payments made under new reimbursement regime in USA

● Largest and most successful implementation project ever undertaken completed in USA

● Colorectal surgeons in Spain embark on the largest audit of CardioQ in fast-track surgery

● Probe manufacturing capacity doubled

● New “I2” awake patient probe launched – significantly expanding opportunity

Contents

Financial and Operating Highlights 1

Chairman’s Statement 2

Operating Review 10

Directors and Advisers 13

Directors’ Report 14

Independent Auditors’ Report 19

Consolidated Income Statement 20

Consolidated Statement of

Recognised Income and Expense 20

Consolidated Balance Sheet 21

Consolidated Statement of Cash Flows 22

Notes to the Financial Statements 23

Reconciliation of Group Balance Sheet 46

Explanations of reconciling items from

UK GAAP to IFRS 48

Independent Auditors’ Report – Parent 49

Company Balance Sheet 50

Notes to the Company

Financial Statements 51

77471 PRE 15/4/08 10:38 Page 1

Deltex Medical made significant progress in 2007, achieving sustained and accelerating growth in each of its key

markets. Revenue for the Group increased by just under 19% from £3,511,000 in 2006 to £4,168,000.

Sales of disposable probes which amounted to £3,185,000 accounted for 76% of total revenue. In the second half

of the year in the UK, our home market, sales of surgical probes overtook those for intensive care for the first time.

The UK surgical probe business grew by approximately 55% over 2006.

Cash at the year-end and operating losses for the period were in line with expectations at £763,000 and £2,223,000

respectively. Cash consumption for the year was also in line with the Company’s expectations as the Company

started to reconfigure its operations in anticipation of its next phase of growth.

Group Summary

Deltex Medical’s CardioQTM oesophageal Doppler monitor (ODM) is changing the way doctors care for patients

having major surgery or who are in intensive care. Scientific evidence of the highest quality from independently

conducted, randomised controlled clinical trials, is being translated into routine clinical practice in leading hospitals

around the world and as a consequence patients are recovering from their surgery faster and leaving hospital

sooner and in better health than they otherwise would do.

The weight of evidence supporting the routine use of the CardioQ is so overwhelming that a US Government-

commissioned technology assessment published early in 2007 stated that its use in surgery leads to a “clinically

significant reduction in major complications”, “a clinically significant reduction in the total number of complications”

and “to a reduction in hospital stay”. The evidence supporting each of these conclusions was considered to be

“strong”. Strong in the setting of a formal technology assessment is defined as: “Evidence supporting the qualitative

conclusion is convincing. It is highly unlikely that new evidence will lead to a change in this conclusion”.

Based on this technology assessment, the US Government agency responsible for healthcare for the elderly and the

poor, the Centers for Medicare and Medicaid Services (CMS), determined that use of the CardioQ was “reasonable

and necessary” and that the proven benefits warranted doctors being paid (“reimbursed”) for using it in Medicare

and Medicaid patients. Already, private insurers are following the CMS lead and are reimbursing doctors that

manage their patients using the CardioQ.

In the UK, two world-renowned London teaching hospitals have made use of the CardioQ routine practice (that is,

a standard of care) within their enhanced surgical recovery programmes for patients having major bowel surgery.

Similar care packages are being developed for other major surgical procedures performed at these hospitals. Many

other hospitals, district general and large teaching institutions alike, are working towards implementation of surgical

care packages that incorporate routine use of the CardioQ.

Doctors and healthcare administrators around the world are increasingly aware of the potential health and economic

benefits of wide-scale adoption of the CardioQ in their hospitals. Our primary role is to facilitate implementation of

the CardioQ as a standard of care through a programme of structured education, training and post-implementation

support that enables doctors to help their patients recover more fully and more quickly from their surgery and

hospital managers to provide a better quality of care more efficiently and more cost effectively.

The CardioQ helps patients by enabling doctors to reduce the complications that arise from a medical condition that

is common to almost all patients having surgery and many others in intensive care or arriving in the accident and

emergency department. This condition is known as hypovolaemia - a reduction in circulating blood volume - and in

surgical patients arises as a direct consequence of the combined effects of pre-operative starvation, the anaesthetic

agents used to put the patient to sleep and the blood and fluid losses associated with the surgical procedure itself.

Hypovolaemia means that the body struggles to get sufficient blood to the tissues and vital organs which are

consequently starved of essential oxygen. This can cause medical complications including peripheral and major

organ failure, which if not dealt with quickly can lead to severe compromise or even death.

The body compensates for developing hypovolaemia through the sequential shut down of the circulatory system

and diversion of blood to critical organs. This helps to maintain blood pressure at normal levels and preserve oxygen

delivery to those organs at the expense of other systems. The CardioQ uses disposable ultrasound probes placed in

the oesophagus to measure real-time blood flow which is an earlier and much more sensitive indicator of changes in

circulating blood volume than blood pressure. This allows the doctor to detect and deal rapidly with the early stages

Chairman’s Statement

report and accounts 20072

77471 PRE 14/4/08 20:46 Page 2

of hypovolaemia before it becomes a clinical problem. In contrast, blood pressure-based monitoring systems,

however sophisticated, are unable to detect hypovolaemia until it is so severe that the body’s compensatory

mechanism begins to fail, at which point the patient is in a critical condition.

Trading Results

Sales 2007 2007 2007 2007 2007 2007 2006 2006 2006 2006 2006 2006

Probes Monitors Probes Monitors Other Total Probes Monitors Probes Monitors Other Total

units units £’000 £’000 £’000 £’000 units units £’000 £’000 £’000 £’000

Direct markets

UK CardioQ 25,730 60 2,041 398 135 2,574 24,075 53 1,837 324 124 2,285

UK SupraQ – 3 – 60 – 60 – 14 – 280 – 280

UK total 25,730 63 2,041 458 135 2,634 24,075 67 1,837 604 124 2,565

USA 7,075 12 518 63 6 587 4,760 11 349 58 5 412

Spain 520 9 50 85 1 136 110 – 12 – – 12

Distributor markets

Europe 9,400 25 436 102 6 544 5,515 6 264 25 11 300

Far East &

Latin America 4,240 36 140 122 5 267 4,730 15 170 51 1 222

46,965 145 3,185 830 153 4,168 39,190 99 2,632 738 141 3,511

Sales

Revenue for the Group in 2007 was £4,168,000 compared to £3,511,000 in 2006, an increase of almost 19%.

Revenue derived from sales of disposable probes was ahead by 21% over the prior period (2007: £3,185,000;

2006: £2,632,000). These results demonstrate continued strong growth in demand and uptake of the CardioQ’s

offering.

Revenue generated from sales of CardioQ monitors was up by 68% from £458,000 in 2006 to £770,000 in 2007,

with a notable increase in larger, multiple monitor installations as hospitals seek to implement use of the CardioQ

as a standard of care in major surgical procedures and in intensive care.

The Company continued its policy of selling SupraQs to hospitals willing and able to undertake research into

establishing potential markets for this wholly non-invasive technology as part of the the development programme.

Excluding SupraQ sales, Group sales grew by 27% year on year.

Cash

Cash on hand at the end of the period was £763,000. Cash consumption in the second half of the year and the

underlying rate of cash burn going into 2008 were in line with the Company’s plans. The sales growth delivered in

the Company’s key markets equated to an increase of an average £64,000 per month in the revenue run-rate: these

increases in invoiced sales translate in due course into larger regular cash in-flows. Over the year the Company

made a small number of selective increases in the underlying cost base (i.e. the normalised run-rate of costs): net

of areas where the Company reduced its cost base, these increases were considerably lower than the increase in

the underlying revenue run-rate, meaning the Company made significant continued progress towards eliminating

its underlying cash burn. After taking account of the cash needed to fund the remaining underlying cash burn, the

Company continued to use the remaining cash available to it to invest in development projects and one-off items

aimed at creating longer term value.

Despite this continued reduction in underlying cash burn, total cash consumption before financing was £2,231,000,

£529,000 higher than in 2006 (£1,702,000).

Cash consumption included a net increase in working capital of £302,000 and expenditure on a number of key

projects aimed at positioning the Company for its next phase of growth. These included the costs of developing

and launching the new I2 range of probes; developing the next generation monitor, the CardioQ-ODMTM, which is to

be released shortly; extending the clean room in which we build probes so as to double its capacity; developing and

building prototypes of the next generation SupraQ monitor; bringing in-house the first of a series of sub-assembly

processes as the Company moves towards increased automation of probe manufacture and undertaking a project

to totally redesign the probe ultrasound componentry to make it more suited to mass production as well as

continuing the trend towards increased margins.


77471 PRE 14/4/08 20:46 Page 3

The Directors expect to continue to invest in these and other important medium and long-term projects over time

depending on the cash and other resources available to the Company at any given point.

The Company announces today that it has accepted an irrevocable undertaking from Nexus Medical Partners II, LP

to subscribe for 3,030,303 ordinary shares of 1p each at a price of 22.0p per share to raise £666,667. The funds to

be invested are specifically for use in expanding the US market, including the hiring of additional management and

field staff in key locations to manage and support the growing demand for the Company’s products. The funds are

managed by Nexus Medical Partners on behalf of a US State Government to promote economic development.

The undertaking has been accepted by the Company subject to appropriate approvals being obtained at the

Company’s forthcoming Annual General Meeting and assumes no material adverse changes in the Company’s

business prior to the shares being issued. Ed Snape, a non-executive director of Deltex Medical, is also a principal

of Nexus Medical Partners.

The shares will rank pari passu with the existing issued shares of the Company. This allotment is conditional on the

appropriate authorities being received at the next general meeting of the Company. Following the issue of these

new shares, subject to no changes, the Company will have a total of 95,931,956 ordinary shares in issue. This total

includes an allotment of 413,746 new ordinary shares which are also subject to approval at the next general meeting

of the Company as announced on 25 January 2008. Application will be made for these shares to be admitted to

trading on the Alternative Investment Market.

Operating results

Operating losses for the year were £2,223,000 compared to £2,014,000 in 2006. As well as the impact of the one-off

longer term investment projects noted above, this operating result is after a number of non-cash accounting charges,

including £328,000 for share based payment, £244,000 charges in respect of research work undertaken by hospitals

under barter arrangements and movements on all provisions of £89,000.

Markets

Deltex Medical sells its products directly to hospitals, using its own team of sales people and clinical trainers in the

United Kingdom, the United States of America and in Spain. Early in 2008 we took the first step towards establishing

a “direct” presence in Germany, taking in-house responsibility for sales and training while engaging the help of a

distributor for regulatory and logistical support. In all other territories we work with a network of distributors which

we support through a small UK-based sales and clinical training team.

Our goal is to achieve market leadership in the provision of systems for haemodynamic management through

successful sales operations in each of the UK, USA, France, Germany and Japan – the leading healthcare markets

in the world today – and become recognised as a leading global medical technology company through innovation

both in technology and in delivering that technology to the end user.

United Kingdom

Sales of CardioQ monitors specifically for use in operating theatres were ahead of the prior year despite the UK

NHS focusing its efforts on restricting spend in March in response to political pressure to produce a surplus at the

year-end. Sales of surgical probes in 2007 reflected the accelerating adoption of routine use in the operating theatre

and in particular as part of emerging enhanced recovery surgical care protocols. In the second half of the year

surgical probe sales volumes overtook intensive care probe volumes for the first time.

In 2007 we sold 14,415 surgical probes compared to 10,440 in 2006, an increase of 38% in the number of patients

treated. The underlying increase in surgical probe sales run-rate, the amount of probes sold each month, over the

course of the year was in excess of 50% – a remarkably strong performance in a very difficult market.

In the UK critical care market, the Company saw a decline in its probe sales of approximately £128,000. This was

caused primarily by a trend amongst UK doctors to try to keep patients awake and spontaneously breathing as

much as possible while in intensive care. The I2 probe range launched in September 2007 has meant the CardioQ

can now be used on those patients in intensive care who are now awake but would previously have been sedated.

Despite this fall in probe volumes the CardioQ remains the cardiac output monitoring technology of choice in a

majority of UK intensive care units: indeed the Company expects the forthcoming results of a survey of critical

care units in England and Wales to show that the Company has further extended its leading position in this market.

Chairman’s Statement continued


77471 PRE 14/4/08 20:46 Page 4

During 2007 use of the CardioQ has been established as part of the written standard treatment protocols in

colorectal surgery at two of London’s most important teaching hospitals: University College London Hospital (UCLH)

and St Thomas’ Hospital. The CardioQ has played a central role in the success to date of the “ESTREP” enhanced

recovery programme jointly developed between surgeons at the two sites. After six months ESTREP had already

delivered reductions in average lengths of hospital stay of nearly a half for colorectal surgery. Both sites are in the

process of rolling the ESTREP programme out into other surgical disciplines.

Applying a similar programme to that developed at UCLH and St Thomas’ Hospital, surgeons and anaesthetists from

Darent Valley hospital in Kent have seen material reductions in length of hospital stay and the time patients take to

get back to normal function after major bowel surgery. Patients treated using a combination of minimally invasive

surgical techniques and the CardioQ in the context of an enhanced recovery programme left hospital on average

after five days and reported themselves feeling fully recovered after a further seven days: a total of 12 days. By

contrast patients treated with open surgery, no CardioQ and outside the enhanced recovery programme only left

hospital after an average of 11 days (compared to an NHS average of 13 days), before needing another 29 days

to feel fully recovered from the surgery: a total of 40 days. This means that on average a patient treated under this

new surgical protocol is “back to normal” (i.e back at work) before the average patient in the NHS has even been

discharged from hospital. While the CardioQ is only responsible for some of this transformational change, it is better

supported by clinical evidence than either enhanced recovery techniques or laparoscopic surgery and the cost of

treating a patient with the CardioQ is only a fraction of the cost of laparoscopic surgery.

Despite the many practical issues facing UK doctors and healthcare managers wishing to implement routine use

of any new medical device technology as a standard of care we have seen consistent and sustained growth in our

operating theatre business since its launch in 2003 and the Directors believe that ours has been the fastest growing

new broad application technology in NHS hospitals since at least 2003.

It is the Directors’ opinion that the success of our efforts in growing this business on the basis of both compelling

clinical and economic stories has resulted in the CardioQ being chosen as a “trailblazer” technology for two new

initiatives established by the Department of Health and the NHS – the Centre for Evidence-based Purchasing and

the National Technology Adoption Hub.

The Centre for Evidence-based Purchasing (CEP) aims to evaluate new technologies and determine their merit

based on objective analysis of published clinical data through a process of technology assessment similar to that

undertaken on oesophageal Doppler monitoring in the USA by the Agency for Health Research and Policy (AHRQ).

It is anticipated that CEP will become the medical device equivalent of the National Institute for Health and Clinical

Excellence (NICE) and that its recommendations will drive accelerated uptake of proven technologies within the

NHS. CEP has commissioned a technology assessment of oesophageal Doppler monitoring from the Health

Economic Research Unit at Aberdeen University and is expected to publish its recommendations in 2008. The

Aberdeen report is currently scheduled for publication in October and CEP have indicated that their own report

may be published earlier than this.

In parallel with the CEP initiative, the Department of Health and NHS established the NHS National Technology

Adoption Hub in 2007. This body aims to examine and recommend ways to overcome the practical issues that

slow the implementation of proven new medical technologies at the operational level within the NHS. The mission

of the NTAH is:

“…to work directly with the NHS at a clinical, managerial and procurement level to identify and overcome the barriers

to adoption for innovative technologies which have already demonstrated clear benefits to patients and will improve

system efficiency.”

In selecting CardioQ as one of its first ever wave of projects, the NTAH project selection panel initially considered

a list of 24 technologies put forward by a variety of NHS bodies including CEP, NICE, UKHTA (the UK Government’s

health technology assessment agency), the NHS National Innovation Centre and the NHS Institute for Innovation and

Improvement. After an initial review these technologies were reduced to a shortlist of six technologies from which

the first wave of four was selected after comprehensive due diligence. The CardioQ was the only technology used

for hospital in-patients to be selected.

The NTAH plans to project manage and audit implementation projects with three NHS Trusts with a view to

producing guidance on effective implementation of the CardioQ for other NHS Trusts to follow. In March 2008, the


77471 PRE 14/4/08 20:46 Page 5

first of these Trusts, the Whittington in London, purchased four additional monitors in order to expand significantly

its CardioQ usage in operating theatres. Of the three sites, the Whittington is both the smallest hospital and the

most established existing CardioQ user.

Since the year end UK sales have continued to demonstrate strong growth, with sales of both CardioQ monitors

and probes comfortably ahead of the corresponding months in 2007. Sales of probes for use during surgery

have continued to grow at the rates experienced in 2007 and sales of probes into critical care units have also

been satisfactory. The Company’s pipeline continues to grow strongly.

United States of America

The United States of America is the largest healthcare market in the world and is a strategic imperative for any

medical technology company with aspirations to be truly global player. Once a medical technology is proven and

approved for sale, the single most important factor for success in this market is physician reimbursement – the

payment to the doctor using the technology for the effort and expertise involved. It is important to note that

physician reimbursement is wholly unrelated to payment to the manufacturer for the technology, which is dealt

with by the hospital.

In 2007 sales of probes were almost 50% higher than in the prior year (2007: 7,075 units; 2006: 4,760 units). Our

most successful hospital start-up to date, in San Diego, California, where we tested our new US implementation

model, was an important contributor to this growth.

Sales of probes in the USA in 2007 was a reflection of changes in clinical practice driven by a wider acceptance

and understanding of the published clinical data. The ability to claim reimbursement for use of the CardioQ is

anticipated to accelerate future adoption, but had no impact on sales in 2007.

In mid-2007 the US Government body responsible for the provision of healthcare to the elderly and the poor, and

the “bellwether” for reimbursement that private insurance companies invariably follow – the Centers for Medicare

and Medicaid Services (CMS) – published a memorandum stating that the use of oesophageal Doppler monitoring

in surgical patients requiring fluid optimisation and for cardiac output monitoring of ventilated patients in the

intensive care unit would be reimbursed.

The breadth of this coverage determination is a testament to the wealth of clinical data supporting the use of the

CardioQ reviewed by the US government Agency for Health Research and Quality and published as a technology

assessment early in 2007 as part of the reimbursement decision process.

Physician reimbursement is dependent upon three elements: firstly, the procedure must be recognised by CMS as

being reasonable and necessary for its patients in order to be reimbursable (“covered”); secondly, the procedure

must have a reference code allocated to it to allow processing through the reimbursement system and; thirdly, the

code must be allocated a value that is then translated into dollars in the physician’s pocket once the claim is

processed by regional CMS payer.

Conservatively, this coverage determination is applicable to some 5,000,000 patients every year in the USA and

represents a major milestone for Deltex Medical.

Since the year end the Company has been notified by a small number of clinicians that they have received

reimbursement from private health providers and that the vast majority of such payments have been towards the

top of the range of physician expectations. First claims have been filed with CMS by physicians from a number

of hospitals, although the Company has not yet been notified of any payments actually made.

Early in 2007 we began working with one of the largest groups of anaesthetists in the US who were seeking to

establish use of the CardioQ as a standard of care in surgery and in intensive care. This group provides services

to 12 acute surgical hospitals in southern California and is responsible for the care of around 50,000 patients each

year having surgery who could benefit from management using the CardioQ.

Through our new implementation model, pioneered in the USA, we were able to take the first of the group’s hospitals

from zero usage to treating around 25% of its major surgical patients (more than 100 patients each month) in eight



77471 PRE 14/4/08 20:46 Page 6

weeks of focused, multidisciplinary education and training. During the training process we hired a dedicated clinical

trainer to provide ongoing support at the hospital and we have continued to see probe usage grow in both surgery

and in intensive care. Early indications are that physician reimbursements recently made by key private insurers will

further increase usage over time.

Early in 2008 we embarked on the roll out the education phase of the implementation model to the next two hospitals

serviced by the anaesthetic group. Monitors have been delivered to the second hospital ahead of formal training

being undertaken.

It is our expectation that we will see the percentage of patients treated using the CardioQ in each of these sites

expand as reimbursement in CMS patients is finalised with the regional CMS contract payer.

Already we are seeing an interest in expanding adoption in existing hospitals and a marked increase in interest from

new hospitals wishing to embark on a programme to make use of the CardioQ standard clinical practice.

International

Sales in our international markets were significantly ahead of those in 2006 as the benefits of our programme to

restructure key distribution arrangements continued. Growth has been sustained in each of our key international

territories with overall underlying growth of around 30% year on year.

Direct International Markets

Through our new direct sales operation in Spain we have been working with the head of the Spanish Society of

Surgeons to establish use of the CardioQ as a standard of care in colorectal surgery. This pilot project involves

seven key hospitals undertaking an audit of patient outcomes under a care protocol based on the University

College London Hospital and St Thomas’ Hospital’s ESTREP programme. The results of this audit are expected to

be presented to the national colorectal surgery meeting in Spain late in 2008. If the results of the audit mirror those

seen elsewhere, the surgeons leading the project have informed the Company that they expect to see the protocol

established as standard practice across Spain where in excess of 200 hospitals perform colorectal surgery.

In January 2008 we changed our distribution arrangements in Germany and established a small semi-direct sales

operation. In the semi-direct model a third-party distributor provides logistics and customer services, regulatory

and tender management support, while Deltex Medical is responsible for all sales, marketing and clinical training.

Our focus in Germany in 2008 is the continued development of relationships with key anaesthetists, surgeons

and hospital administrators and establishing use of the CardioQ as a protocolised standard of care in one of

the country’s leading teaching hospitals ahead of a wider rollout in 2009.

Since the year-end the Charite hospital in Berlin, one of the largest teaching hospitals in Europe, has embarked on

a programme of evaluation and small, focused clinical trials intended to establish the best way to incorporate routine

use of the CardioQ into a range of surgical procedures at the hospital.

Distributed International Markets

We continue to work with distributors in all the other international markets and have seen particularly encouraging

results since our decision to move the key distributors on to monthly ordering patterns for probes following a stock

reduction exercise undertaken the first half of 2006.

The run-rate of probes sold across those territories on monthly ordering schedules increased over the year from

550 to 800 probes per month.

We have only focused minimal time and effort on the Japanese market because, although we have had approval

to sell for some time, the level of reimbursement negotiated by our former distributor (in this case to the hospital

to cover the cost of the probe) was inadequate. In 2007 we secured our right to sell in Japan in our own name

and will return to this market as and when it is appropriate and feasible to do so.


77471 PRE 14/4/08 20:46 Page 7

Clinical Publications

Meta analysis

The technique of meta-analysis (a systematic scientific review which considers related evidence as a whole)

underpins many of the conclusions of Health Technology Assessments (HTAs). It is also used heavily by doctors

within clinical circles to determine technologies and interventions which should be established as standards of care.

The first independent meta-analysis of the randomised controlled clinical outcome trials of ODM was undertaken

by an eminent group of UK doctors and its results were first presented in September 2006. It concluded that ODM

reduces post-operative complications and reduces length of hospital stay by an average of nearly three days.

The results of this review were presented at a number of important clinical meetings over 2007 and the Directors

understand that the authors intend to submit it to a leading medical journal for publication in 2008.

In January 2008, a second meta-analysis, undertaken by doctors in New Zealand, was published which concluded

that ODM “use for monitoring and optimisation of flow-related haemodynamic variables improves short-term

outcome in patients undergoing major abdominal surgery”. This meta-analysis has just been published in the

journal Anaesthesia and is therefore the first meta-analysis to be published in a leading peer-reviewed journal.

In March 2008, a third meta-analysis was published in a peer-reviewed journal. This meta-analysis was conducted

by doctors from the departments of surgery and anaesthesia at the Cambridge University Hospitals NHS Trust.

The analysis examined results from the four previously published randomised controlled clinical trials into the use

of ODM in abdominal surgery that involved a total of almost 400 patients.

The authors reported that use of ODM in abdominal surgery, based on the pooled data analysed, resulted in

significantly fewer post-operative complications and a consequent significant reduction in length of hospital stay.

The Directors are not aware of any randomised controlled study, either published or pending publication, which

shows any technology other than ODM to have been used successfully to direct fluid administration during surgery

to improve patient outcomes and reduce hospital lengths of stay. Alternative approaches to haemodynamic

monitoring use derived rather than direct measurements of blood flow and are unable to report changes in flow

either as quickly or as sensitively as ODM.

In July 2007 in his report “A Framework for Action”, prepared for Healthcare for London a consultation group led by

London’s 31 NHS Primary Care Trusts, Professor Sir Ara Darzi (now Lord Darzi, a UK Government health minister)

noted of the CardioQ:

“Seven randomised trials have shown simple use of cheap ultrasound technology to reduce length of stay

consistently by 2-3 days in elective abdominal surgery. The evidence is clear here and changes should be rapidly

implemented”.

Research and Development

Our research and development efforts in 2007 focused on two key areas: providing a monitoring solution for the

conscious patient and an upgrade of the CardioQ monitor.

The conscious patient solution has two elements, the SupraQ, a wholly non-invasive monitor for intermittent spot-

checking of cardiac function and the new I2 range of oesophageal probes.

The second generation SupraQ project continues to make good progress and will enter the clinical evaluation phase

of its development later in 2008, subject to finalisation of clinical protocols and ethics committee approval at the

investigating hospital.

The I2 probe allows doctors to extend the use of the CardioQ beyond patients who are under general anaesthetic

or deeply sedated to those who are fully awake. Originally intended for short-term post-operative management of

patients waking up after surgery, the probe has proven so well tolerated that its use has been extended successfully

to fully conscious patients in a variety of clinical settings, including major surgery under spinal anaesthesia, the

accident and emergency department and on the ward.



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In the second quarter of 2008 we will launch the CardioQ-ODM, an upgraded version of the CardioQ, in the UK and

key international markets. We anticipate submitting a request for approval to sell this new monitor in the USA to the

US Food and Drug Administration (FDA) during the second quarter of this year.

The new lighter-weight CardioQ-ODM upgrades a number of key components and allows us to take advantage

of newer technologies that provide faster processing capabilities, larger memory capacity, easier and faster data

downloading and better screen resolution. The software interface has been refined to offer improved ease of use,

customisable screen layouts and a series of tools to help doctors target patient therapy more effectively.

Board membership

In May 2007 Peter Smedvig chose not to stand for re-election to the Board of Directors after many years of valuable

service to the Company. Today we are able to announce that Julian Cazalet will be joining the Board of Directors

effective 7 April 2008. Julian recently retired after 34 years at Cazenove, a leading UK investment bank, where he

advised many listed companies and acted in the flotation of a number of new companies on the London Stock

Exchange. Most recently he was Managing Director – Corporate Finance at JPMorgan Cazenove.

Prospects

Deltex Medical made significant progress during 2007 in all its key markets, with major milestones in market

development achieved in the USA. The momentum driving sales growth in 2007 has been maintained into 2008

and the first quarter of 2008 has seen a number of significant events that will enable the Company to sustain and

build upon 2007’s progress throughout 2008. Not least of these is the first reimbursement of doctors for use of

the CardioQ in operating theatres in the United States.

Routine use of the CardioQ represents the translation of evidence-based medicine into evidence-based practice –

the goal of all developed healthcare systems around the world. The publication of independently conducted

analyses of the overwhelming body of evidence supporting the use of oesophageal Doppler-guided haemodynamic

management can only accelerate the adoption of the CardioQ.

We remain confident in our ability to deliver increasing and sustainable value for our shareholders as we help more

and more hospitals establish use of the CardioQ as a standard of care for all patients undergoing major surgery or

in intensive care and as we develop new and innovative ways of providing the unique benefits of Doppler-guided

haemodynamic management to all patients who need it, wherever they may be in the healthcare system.

Nigel Keen

Chairman

15 April 2008


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Margins

Gross margins in 2007 increased to 70.0% from 66.3% in 2006, reflecting sales price increases, manufacturing

efficiencies and the mix of sales between products and markets.

The Company has achieved steady growth in margins since 2001 when gross margins were 46%. Future increases

in sales volumes should enable the Company to further develop its margins as it continues to take advantage of

manufacturing and purchasing economies of scale.

During 2006 the Company moved the majority of its recurring International probe business with distributors on to

a monthly standing order basis, thereby allowing it considerably greater certainty in probe production planning

and scheduling. As a result, the Company was able to build 41% more probes in 2007 than in 2006 without any

significant increase in labour or overhead.

The Company has made considerable progress on a number of projects aimed both at reducing the unit production

costs of probes and at automating some of the more labour intensive processes in their manufacture. The Company

anticipates that automation of probe manufacture will better position it to be able to meet future rapid increases in

demand: it should also entail a number of design changes to the probes which will allow the Company to further

strengthen its intellectual property position. During the second half of 2007, the Company extended the clean room

used for probe manufacture in order to double its capacity.

Sales

The Company’s focus throughout 2007 remained on promoting and supporting routine probe consumption with a

view to delivering sustainable increases in probe run rates at doctor, hospital, regional and national levels in all

its key markets. The Company constantly assesses and reviews the ways in which it supports its products to ensure

both that it maximises the return on its resources and that early adoption of its technology is firmly rooted into

customers’ practice.

In addition to progress with sales of the CardioQ-ODM system in 2007, the Company completed a small number of

transactions on a barter basis aimed specifically at opening up new markets.

● In the UK two non-invasive SupraQ monitors were sold to the Freeman Hospital in Newcastle for evaluation of

patients in the hours immediately prior to surgery and at pre-operative assessment clinics which take place in

the weeks before a patient’s operation: the Freeman is one of the Company’s top ten CardioQ-ODM accounts

and a leading proponent and practitioner of enhanced recovery programmes for major abdominal surgery. A

further SupraQ monitor was sold to a leading hospital in South-West England for use in studies in accident and

emergency on patients presenting prior to major trauma surgery. A major London teaching hospital acquired six

CardioQ-ODM monitors for use during surgery and, in return, is working closely with the Company to implement

the pilot phase of a radical redesign of its approach to managing patients requiring emergency surgery to

repair broken hips and to assess its clinical and cost effectiveness: outcomes after emergency hip repair

surgery are generally poor across Europe and an integrated enhanced recovery type programme with CardioQ-

ODM at its heart would be extremely beneficial to the Company in establishing its technology as a standard of

care for major orthopaedic surgery.

● A small group of the most eminent colorectal surgeons in Spain acquired eight monitors for use in an audit of

the impact of an enhanced recovery programme in Spain. The programme is based around the ESTREP

processes jointly developed and implemented for colorectal surgery at University College London Hospital and

St Thomas’s Hospital, both of which specifically require oesophageal Doppler guided fluid management during

surgery. The Spanish surgeons are looking to replicate the impressive results achieved at these two major

London teaching hospitals and present them to the national annual meeting of Spanish colorectal surgeons

in November. The Company believes that the surgeons leading this project have the stature necessary to

lead wide-scale implementation of their eventual recommendations for enhanced recovery programmes

across Spain.

● In January 2007, the Company sold six monitors and 150 probes to the US military for use in clinical trials in

Iraq. Although no results have yet been disclosed from the trials the Company understands that the doctors

conducting the trial have found limited utility for the CardioQ in treating US military personnel as their body

armour tends to mean most severe injuries are to the head and neck. However, the doctors have indicated high

satisfaction with the probes in treating civilian casualties.

Operating Review


77471 PRE 14/4/08 20:46 Page 10

● In August 2007 the Company entered into a barter deal with one of the prestigious US teaching hospitals. In

return for the loan of monitors and provision of 300 probes, the hospital is undertaking two trials into the use of

the CardioQ on obese patients during surgery. Successful outcomes are expected to lead to accelerated uptake

of the CardioQ in the hospital itself as well as establishing the need for oesophageal-Doppler guided fluid

management to become a standard of care in obese patient surgery. Under its normal terms for undertaking

research, the hospital would have charged the Company at least $0.5 million, but it agreed to the Company’s

barter proposal because of the high enthusiasm to undertake new research into a patient group whose

anaesthetics are very difficult to manage.

Sales and distribution costs

Sales and distribution costs increased by £339,000 from £2,186,000 in 2006 to £2,525,000 in 2007.

The increase in sales and distribution costs reflects: two additional sales and clinical training staff in the USA to

support growth in key strategic accounts; the full year impact of expansion of the international sales force

undertaken in 2006; an additional clinical trainer in the UK to support the progress made in London and a further

additional clinical trainer dedicated to maintaining the Company’s market leading position in the UK critical care

cardiac output monitoring market. The Company has continued to support relevant clinical meetings in Europe and

the UK and has expanded the range of such meetings to ensure it closely identifies with the evolution of enhanced

recovery programmes.

Deltex Medical continues to focus the majority of its marketing efforts on low cost, high impact activities which

clearly communicate the clinical benefit of haemodynamic optimisation to doctors and the economic benefit to all

those involved in the hospital purchasing decision. In the UK, the Company’s most mature market, these activities

are supported by a focused Public Relations campaign which has succeeded in raising the profile of the Company’s

technology per se and its unique role in enhanced recovery programmes amongst clinicians, health service

managers and policy makers.

Each of the clinical and economic cases for using the CardioQ continues to grow stronger with each new clinical

trial, each new “real world” evaluation or audit, each new case study and, more recently, each new meta-analysis

or health technology assessment. The Company seeks to tailor the message to the clinical and economic

circumstances of each territory, or segment of territory in which it is active. At the same time, the Company is

seeking to position the clinical benefits of its products within the priorities of groups of leading international doctors.

Administrative expenses

Administrative expenses increased by £418,000 from £1,916,000 in 2006 to £2,334,000 in 2007. This reflects

increased charges for a number of non-cash costs including £82,000 in respect of share-based payments (2007:

£328,000; 2006: £246,000) and £241,000 increase with respect to the charge for clinical trials and evaluations set-up

through barter arrangements (2007: £244,000; 2006: £3,000).

Over the last five years the proportion of administrative expenses relating to sales and marketing activities has

increased significantly, with all the Company’s senior managers having a considerable degree of customer facing

sales and marketing responsibility.

Research and development

Research and development (R&D) costs increased by £41,000 from £241,000 in 2006 to £282,000 in 2007. R&D

costs include only spend through the Company’s R&D team and is considerably supplemented both by senior

manager and field team time and input.

During the second half of 2007 the Company launched two new probe variants: the l2S and the l2P which are

designed respectively for intra-operative and peri-operative oesophageal Doppler guided fluid management. The

l2S probes provide monitoring for up to six hours, the l2P for up to 24 hours. In March 2008 the Company formally

launched the 72 hour l2C probe designed for intensive care use either for oesophageal Doppler guided fluid

management or for cardiac output monitoring. The l2 range of probes are significantly softer than the Company’s

traditional range of probes meaning they are well tolerated both by patients waking up with a probe in situ, or having

a probe placed while awake: however, unlike previous soft probes, the l2 probes retain the rapid insertion and

focusing characteristics of the stiffer traditional probes.


77471 PRE 14/4/08 20:46 Page 11

In the intensive care unit, where the CardioQ-ODM is frequently used more to monitor cardiac output than to

actively guide fluid management, there are a number of alternative technologies which are positioned as ‘minimally

invasive’ cardiac output monitors. While the CardioQ-ODM is categorised as ‘minimally invasive’ for regulatory

purposes, it is the only established cardiac output monitoring technology which does not involve cutting the patient

or the insertion of catheters into the patient’s vascular system. The new l2 probes mean that the Company can

clearly differentiate the safety and ease of use of its products through live demonstrations on their managers

and field staff at clinical meetings.

In March 2008, the Company announced the launch of a significantly upgraded version of the CardioQ monitor

called the CardioQ-ODM. In late 2008 or the first half of 2009, subject to satisfactory results from clinical trials and

the appropriate regulatory approvals, the Company expects to be in a position to launch its first fully commercialised

version of the wholly non-invasive SupraQ together with a single-patient disposable SupraQ probe. The geographical

spread and timing of this launch will also depend on the Company’s cash resources at the time and its assessment

of the likely rate of uptake of the SupraQ.

Balance sheet and cashflow

Stock at 31 December 2007 was £441,000, an increase of £58,000 over the year (2006: £383,000). In 2006 the

Company completed a programme to reduce its own stock levels as well as those of certain of its distributors.

As a result the Company’s production schedules in 2007 were more closely tied to sales volumes than ever before

and, as anticipated, the Company’s stock levels have increased broadly in line with sales growth. In addition,

towards the end of 2007, the Company embarked on a programme to build the final batches of CardioQ monitors

and start manufacture of the new CardioQ-ODM version.

Increased levels of production to meet higher sales volumes and the planned final build of the CardioQ version

of monitor meant that trade creditors increased from £373,000 to £443,000 over the year.

Net trade receivables increased by £204,000 to £866,000 at 31 December 2007 (2006: £662,000) primarily as a

result of significantly increased monitor sales to distributors in the final quarter of 2007, but also reflecting strong

sales of probes and monitors in all territories. As a result of this increase in debtors, the Company was able to

increase its borrowing under its working capital facility by £110,000 to £407,000. This facility allows the Company

to borrow against its UK receivables and certain of its receivables from distributors relating to sales under monthly

standing orders. The amount available at any one time is tending to increase as UK and International sales continue

to grow. In the light of higher sales volumes in the USA, the Company has entered discussions with its bankers

aimed at introducing a similar facility in respect of US receivables.

The £86,000 increase in prepayments and accrued income to £711,000 at 31 December 2007 is mostly attributable

to net movements in the Company’s rights to data from studies it has funded through barter transactions: these will

be written off in future years as the work is done by the hospitals involved. This approach to clinical trials is a highly

effective way for the Company to support important research in hospitals at reasonably low cost and for very low

amounts of cash: the value of data generated from this and other, separately or independently funded research,

is expected to be many times the amount of the Company’s cash costs.

Details of the Company’s cash flow during 2007 and of its cash balances are given in the Chairman’s statement

on pages 3 to 4.

The Company is configured to reach the break-even point through continuing growth from sales as its products

become established as standards of care. To maximise the long term value it creates for shareholders the Company

needs to balance short term goals against the objective of maintaining and exploiting its first-mover advantage in

the major new global potential markets created by changes to patient care enabled by its innovative technology.

The future rate of adoption of its products is uncertain as is the optimal means of supporting this adoption in certain

key target markets. Therefore, the Company regularly reviews its strategic options and its financing arrangements to

reflect the circumstances encountered from time to time.

Andy Hill

Chief Executive

15 April 2008

Operating Review continued


77471 PRE 14/4/08 20:46 Page 12

Non-executive directors

Nigel Keen MA FCA

Chairman, aged 61

Nigel has been involved with Deltex Medical since 1988,

and chairman since 1996. He is also non-executive

chairman of Axis-Shield plc, The Laird Group plc and

Oxford Instruments plc. Nigel is also a non-executive

director of Bioquell plc. Nigel is the chairman of the

Remuneration Committee and the Audit Committee.

Dr Edwin Snape MSc PhD

Vice-chairman, aged 68

Ed has been connected with Deltex Medical for over

10 years and vice-chairman since 1999. He is currently

Chairman of Memry Corporation, a director of Callisto

Pharmaceuticals and has extensive experience in

medical device and life sciences business in the USA

and Europe.

Dr George Flouty MD

Aged 63

George joined the Deltex Medical Board in July 2000.

He has 24 years experience in the pharmaceutical

and medical devices industries and was a Medical

Director at Pfizer’s Global Pharmaceutical Group until

retiring in 2001.

Julian Cazalet MA FCA

Aged 60

Julian Joined the Board in April 2008. He was until

December 2007 a Managing Director – Corporate

Finance of JPMorgan Cazenove. After graduating

in Economics from Cambridge, he qualified as a

Chartered Accountant with Whinney Murray before

joining Cazenove in 1973. He became a Partner in

1978. From 1989 he worked in Corporate Finance,

firstly in Equity Capital Markets and subsequently

advising listed companies. He is a Director of

Herald Investment Trust plc and of The White Ensign

Association Limited.

Professor Sir Duncan Nichol

Aged 66

Duncan has been an influential figure in the provision

of acute health services in the UK throughout his

career. He worked for the NHS for nearly 30 years in

a number of senior management roles and was Chief

Executive from 1989 to 1994. Duncan is also currently

a non-executive director of Synergy Healthcare plc,

the AIM listed provider of healthcare support services

to the NHS and, from 1994 until 2002, he was a

non-executive director of BUPA, the UK based health

insurance and private hospital group.

Executive directors

Andy Hill BSc MBA

Chief Executive, aged 45

Prior to joining Deltex Medical, Andy was responsible

for establishing the European businesses of a number

of early stage US medical technology companies.

Andy joined the Board in October 2002 and was

appointed Chief Executive in January 2003.

Ewan Phillips MA ACA

Finance Director, aged 43

Ewan joined Deltex Medical in August 2001. He has

a background in corporate finance.

Secretary and Advisers

Company secretary and registered office

Paul Mitchell BSc ACA

Terminus Road

Chichester

West Sussex PO19 8TX

Tel: +44 (0) 1243 774837

Fax: +44 (0) 1243 532534

www.deltexmedical.com

Company registered number: 3902895

Nominated adviser and broker

Charles Stanley Securities

25 Luke Street

London

EC2A 4AR

Independent auditors

PricewaterhouseCoopers LLP

Savannah House

3 Ocean Way

Ocean Village

Southampton

SO14 3TJ

Solicitors

Eversheds

85 Queen Victoria Street

London

EC4V 4JL

Principal bankers

The Royal Bank of Scotland plc

62-63 Threadneedle Street

PO Box 412

London

EC2R 8LA

PR advisers

Gavin Anderson & Company

85 Strand

London

United Kingdom

WC2R 0DW

Registrars

Capita Registrars

Northern House

Woodsome Park

Fenay Bridge

Huddersfield

HD8 0LA


Directors and Advisers

77471 PRE 14/4/08 20:46 Page 13

The directors present their report and the audited financial statements for the year ended 31 December 2007.

Business review and principal activities

The Group’s principal activities during the year were the manufacture and marketing of oesophageal Doppler

haemodynamic monitoring systems.

The results for the Group show a loss for the financial year of £2,188,000 (2006: loss of £1,994,000) and sales of

£4,168,000 (2006: £3,511,000). Net cash used in operating activities for 2007 was £2,129,000 (2006: £1,545,000).

A detailed review of the Group’s performance, financial results and future development is contained within the Chairman’s

Statement on pages 2 to 9 and in the Operating Review on pages 10 to 12. Subsequent events are detailed in note 27.

Principal risks and uncertainties

The Group’s strategy has been and continues to be the establishment of haemodynamic optimisation using the

CardioQ as a standard of care firstly in the Group’s home market of the UK, then secondly in the USA and other

major markets for medical technology both through direct sales and marketing and, where appropriate, through

distribution partnerships. The Group regularly reviews its strategic options and financing arrangements to reflect

circumstances encountered from time to time.

The directors have therefore identified the following as being principal risks and uncertainties facing the Group:

● Changes in the rates of adoption of the Group’s products in key markets;

● The availability to the Group of resources, including cash to pursue it’s strategy.

The Group has established internal controls to assess the impact or potential impact of actual or potential

developments affecting these risks. In addition, to more accurately understand more accurately the rate of

adoption in those territories where the Group does not sell direct to hospitals, distributor stockholdings were

reduced during 2006, and trading relationships with distributors in almost all major markets changed so that they

order products on a monthly basis. These changes have enabled the Company to better monitor rates of adoption

and improve the working capital management. Further details of cash management are given in the Chairman’s

Statement on pages 3 and 4.

A faster than expected change in the adoption of the Group’s products could expose the Group to supply chain

and production capacity risks. In addition, supply chain disruptions such as delays or losses of inventory also

present a potential risk to the Group’s ability to progress its strategic aims. The Group mitigates these risks through

effective supplier selection, management and procurement practices. Furthermore, scaleable production plans have

been developed to ensure that the Group is able to react to any significant changes in the rate of adoption of the

Group’s technology.

Key performance indicators

At this stage of its development, the Group’s two key performance indicators are probe sales and the underlying

cash burn rate (i.e. the difference between normalised run-rates for revenues and costs).

The directors regularly monitor the Group’s progress by reference to these two key performance indicators. A summary

of the progress made against these indicators during the year ended 31 December 2007 is set out below.

Probe sales

Probe sales increased by £553,000 in 2007 from £2,632,000 to £3,185,000.

Rates of regular probe consumption by hospitals at the end of 2007 were higher in each of the UK, USA, Spain and

the international distributor business than at the start of the year. Further details of probe sales are given in the

Chairman’s Statement on pages 3 to 7 under the heading Trading Results.

Underlying cash burn rate

The underlying cash burn rate is based around management’s estimate of the normalised levels of sales and costs: it

increases if the Group changes its cost base or working capital profile and decreases as the Group’s sales grow.

The underlying cash burn at the start of 2006 was estimated at approximately £50,000 per month. During the year the

Group increased its costs in a number of areas. After taking into account increases in sales, the underlying cash rate at

the end of 2007 was estimated at approximately £45,000 per month with further progress made since the end of the

year. Further details of the underlying cash burn are given in the Chairman’s Statement on pages 2 to 9 in the section

headed “cash” and in the Operating Review on page 12.

In addition to these key performance indicators, the directors also regularly monitor progress in a number of other

areas including actual cash flows, working capital balances, including stock levels and debtor collections, sales and

other transactions involving monitors, progress with research and development projects and with clinical studies.

Dividends

The directors do not recommend payment of a dividend (2006: £nil).

Directors’ Report for the year ended 31 December 2007


77471 PRE 14/4/08 20:46 Page 14

Research and development

The Group has an active research and development programme aimed at regularly updating and further improving

existing products and, in the longer term, broadening the range of the Group’s products. The amount charged to the

Income Statement in 2007 was £282,000 (2006: £241,000). The amount capitalised as an intangible asset in 2007

was £101,000 (2006: £90,000).

Financial risk management

The Group’s financial instruments comprise some cash and various items, such as trade receivables and trade

creditors that arise directly from its operations.

It is, and has been throughout the year under review, the Group’s policy that it shall not undertake any trading in

financial instruments.

The board reviews and agrees policies for managing liquidity, interest rate and exchange rate risks. The policies

have remained unchanged throughout the year and are summarised below:

Liquidity risk

The Group’s cash position is principally managed to ensure that sufficient funds are available to meet liquidity

requirements. In addition the Group has in place and makes use of an invoice discounting facility with its bankers to

supplement working capital needs. From time to time, additional funding is raised to allow the Group to invest in its

strategic projects to develop the business in its chosen markets.

Currency risk

The Group has an overseas subsidiary in the USA and as a result the Group’s sterling balance sheet can be

affected by movements in the US dollar/sterling exchange rates.

The Group also has transactional currency exposures. Such exposures arise from sales and purchases by operating

units in currencies other than the unit’s functional currency. However, given the size of the Group’s operations, the

costs of managing exposure to currency risk exceed any potential benefits and therefore the Group does not

engage in any hedging in respect of currency risks. The directors will revisit the appropriateness of this policy

should the Group’s operations change in size or nature.

Credit risk

The Group is exposed to credit related losses in the event of non-performance by counterparties in connection with

financial instruments. The Group takes actions to mitigate this exposure by ensuring adequate background on credit

risk is known about counterparties prior to contracting with them and through selection of counterparties with

suitable credit ratings.

Directors and their interests

Biographical details of the directors are given on page 13.

The directors who served during the year were:

Non-executive Executive

Nigel Keen (Chairman) Andy Hill

Dr Ed Snape (Vice-chairman) Ewan Phillips

Sir Duncan Nichol

Dr George Flouty

Peter Smedvig (retired 3 May 2007)

Julian Cazalet (appointed 7 April 2008)

In accordance with article 77 of the Company’s Articles of Association, Sir Duncan Nichol, Nigel Keen and

Ewan Phillips retire by rotation at the forthcoming AGM and each one, being eligible, offers himself for re-election.

In accordance with article 73 of the Company’s Articles of Association, Julian Cazalet retires and being eligible,

offers himself for re-election.

None of the directors had a material interest in any contract of significance to which the Company, or its

subsidiaries, was a party during the financial year.

Directors’ interests 31 December 31 December

2007 2006

Nigel Keen 4,255,114 4,255,114

Dr Edwin Snape 3,256,399 3,256,399

Dr George Flouty 343,984 343,984

Sir Duncan Nichol 108,961 108,961

Andy Hill 179,334 172,486

Ewan Phillips 977,156 767,156

9,120,948 8,904,100

9.86% 11.12%

Amounts in italics relate to percentage of issued share capital at 31 December 2007 and 31 December 2006.

Julian Cazalet was appointed to the Board on 7 April 2008 at which time he owned 1,250,000 1p ordinary shares.


77471 PRE 14/4/08 20:46 Page 15

Details of the share options of those directors who served during the year are as follows:

At 1 Granted At 31 Exercise Exercise Exercise

January during December Price period period

2007 2007 Lapsed 2007 £ from to

Andy Hill

2001 Executive

Share Option

Scheme 200,000 – – 200,000 0.25 27 November 2005 26 November 2012

200,000 – – 200,000 0.15 28 October 2006 27 October 2013

400,000 – – 400,000 0.24 12 October 2007 11 October 2014

400,000 – – 400,000 0.2075 28 March 2009 27 March 2016

– 400,000 – 400,000 0.295 29 June 2010 28 June 2017

EMI Scheme 333,333 – – 333,333 0.01 24 March 2004 27 October 2013

156,739 – – 156,739 0.01 15 March 2005 11 October 2014

154,085 – – 154,085 0.01 15 March 2007 19 May 2016

– 314,615 – 314,615 0.01 27 March 2008 28 June 2017

1,844,157 714,615 – 2,558,772

Ewan Phillips

2001 Executive

Share Option

Scheme 100,000 – – 100,000 0.25 7 November 2004 6 November 2011

60,000 – – 60,000 0.25 27 November 2005 26 November 2012

120,000 – – 120,000 0.15 28 October 2006 27 October 2013

400,000 – – 400,000 0.24 12 October 2007 11 October 2014

400,000 – – 400,000 0.2075 28 March 2009 27 March 2016

– 400,000 – 400,000 0.295 29 June 2010 28 June 2017

EMI Shares 583,333 – – 583,333 0.01 24 March 2004 27 October 2013

156,739 – – 156,739 0.01 15 March 2005 11 October 2014

259,225 – – 259,225 0.01 15 March 2007 19 May 2016

– 235,962 – 235,962 0.01 27 March 2008 28 June 2017

2,079,297 635,962 – 2,715,259

3,923,454 1,350,577 – 5,274,031

All shares and options at 31 December 2007 and 31 December 2006 related to ordinary 1p shares.

Included in the 4,255,114 (2006: 4,255,114) shares of Nigel Keen are 589,700 (2006: 589,700) 1p ordinary shares

where Nigel Keen’s sole interest is as a trustee and executor of the Pauline Thomas Charity Will Trust. Mr Keen has

no beneficial interest in the shareholding of the trust.

At 31 December 2007 Mr Keen was a director of Cygnus Venture Partners Limited, a company which advised

certain shareholders who owned 1,064,599 1p ordinary shares (2006: 1,064,599 1p ordinary shares).

Dr Edwin Snape owns 376,474 1p ordinary shares (2006: 376,474) and is a director of New England Partners which,

with associated companies, owns 2,879,925 1p ordinary shares (2006: 2,879,925 1p ordinary shares).

None of the directors had a material interest at any time during the year in any contract of significance, other than a

service contract, with the Company or any of its subsidiaries.

Directors remuneration

The remuneration paid to the directors was:

Salary 2007 2006

and fees Bonus Benefits Pension Total Total

£ £ £ £ £ £

George Flouty 18,000 – – – 18,000 18,000

Andy Hill 220,000 – 7,500 1,800 229,300 225,948

Nigel Keen 25,000 – – – 25,000 25,000

Duncan Nichol 18,000 – – – 18,000 18,000

Ewan Phillips 165,000 – 7,500 6,723 179,223 149,955

Peter Smedvig

(retired 3 May 2007) 6,200 – – – 6,200 18,000

Ed Snape 18,000 – – – 18,000 18,000

470,200 – 15,000 8,523 493,723 472,903

Throughout the year ended 31 December 2007, all amounts in respect of fees payable in respect of Nigel Keen’s

services as Chairman were made to Imperialise Limited, a company of which Mr Keen is the sole director and the

majority shareholder. Mr Cazalet was appointed on 7 April 2008 and therefore is not included in the above table.

Directors’ Report continued

for the year ended 31 December 2007


77471 PRE 14/4/08 20:46 Page 16

Directors’ bonus

Discretionary bonuses have been awarded retrospectively to executive directors, in respect of work carried out in

the year up to 31 December 2006, through an Enterprise Management Incentive Scheme which allowed the

directors concerned to sacrifice an element of their entitlement to cash bonuses in return for share options

exercisable at the nominal value of 1p per ordinary share.

Period covered Number of options Exercise price

£

Andy Hill January 2006 to December 2006 314,615 0.01

Ewan Phillips January 2006 to December 2006 235,962 0.01

These bonuses have been charged to the Income Statement in accordance with IFRS2 “Share based payments”.

Details of the service contracts of the executive directors at 31 December 2007 are set out in the table below:

Andy Hill Ewan Phillips

Commencement date 31 October 2002 11 September 2001

Notice period Six months Six months

Aggregate remuneration £220,000 salary, car allowance, £165,000 salary, car allowance,

discretionary bonus, pension discretionary bonus, pension

contribution of 4% of salary contribution of 4% of salary

Compensation on early termination None None

Non-competition Standard restrictions on soliciting Standard restrictions on soliciting

customers or suppliers or working customers or suppliers or working

for competing businesses for for competing businesses for

12 months 12 months

Major interests in shares

The following are beneficial interest of 3% or more of which the Directors have been notified in accordance with

Chapter 5 of the Disclosure and Transparency Rules, of the Company’s ordinary share capital, the only class of

voting capital, at 15 April 2008:

Number of % of issued

ordinary shares share capital

Charles Stanley & Co. Limited 4,851,121 5.24

Barclays plc 4,753,431 5.14

Nigel Keen 4,255,114 4.60

Close Brothers Group 3,389.111 3.66

New England Partners 2,879,925 3.11

Charitable and political donations

No donations were made by the Company or Group during the year for political or charitable purposes.

Creditor payment policy

The Group seeks to abide by the payment terms agreed with suppliers whenever it is satisfied that the supplier has

provided the goods and services in accordance with the agreed terms and conditions. The average time taken to

pay purchase invoices by the Company during the year cannot be calculated as invoices received relating to the

Company’s activities were settled on its behalf by subsidiaries. The average time taken by fellow subsidiaries to

satisfy liabilities was 60 days (2006: 90 days).

Going concern

The Board has a reasonable expectation that the Group has adequate resources to continue in operational existence

for the foreseeable future and accordingly continues to adopt the going concern basis in preparing the financial

statements as detailed in note 1.

Disclosure of information to auditors

As far as each of the directors are aware, there is no relevant audit information of which the Group’s auditors are

unaware; and they have taken all the steps that they ought to have taken as directors in order to make themselves

aware of any relevant audit information and to establish that the Groups auditors are aware of that information.

Auditors

PricewaterhouseCoopers LLP have indicated their willingness to continue in office and a resolution concerning their

re-appointment will be proposed at the Annual General Meeting.


77471 PRE 14/4/08 20:46 Page 17

Directors’ responsibilities

The directors are responsible for preparing the annual report and the financial statements in accordance with

applicable laws and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the

directors have prepared the group financial statements in accordance with International Financial Reporting

Standards (IFRS) as adopted by the European Union. In preparing these financial statements, the directors have

also elected to comply with IFRSs, issued by the International Accounting Standards Board (IASB). The parent

company financial statements have been prepared under UK GAAP. The financial statements are required by law

to give a true and fair view of the state of affairs of the company and the group and of the profit or loss of the

group for that period.

In preparing those financial statements the directors are required to:

● Select suitable accounting policies and then apply them consistently.

● Make judgements and estimates that are reasonable and prudent.

● State that the financial statements comply with IFRSs as adopted by the European Union and IFRSs issued

by the IASB.

● Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group

will continue as a going concern.

The directors confirm that they have complied with the above requirements in preparing the financial statements.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any

time the financial position of the company and the group and to enable them to ensure that the financial statements

comply with the Companies Act 1985 and, as regards the group financial statements, article 4 of the IAS Regulation.

They are also responsible for safeguarding the assets of the company and the group and hence for taking

reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the group website, www.deltexmedical.com.

Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation

in other jurisdictions.

Annual General Meeting

The Notice convening the Annual General Meeting, which will take place at 11:30am on Tuesday 13 May at

Radisson Edwardian Grafton Hotel, 130 Tottenham Court Road, London W1T 5AY, accompanies this report.

By order of the board

Paul Mitchell

Company Secretary

15 April 2008

Directors’ Report continued



77471 PRE 14/4/08 20:46 Page 18

We have audited the group financial statements of Deltex Medical Group Plc for the year ended 31 December 2007

which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Statement of

Cash Flows, the Consolidated Statement of Recognised Income and Expense and the related notes. These group

financial statements have been prepared under the accounting policies set out therein.

We have reported separately on the parent company financial statements of Deltex Medical Group Plc for the year

ended 31 December 2007.

Respective responsibilities of directors and auditors

The directors’ responsibilities for preparing the Annual Report and the group financial statements in accordance with

applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set

out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory

requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has

been prepared for and only for the company’s members as a body in accordance with Section 235 of the

Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility

for any other purpose or to any other person to whom this report is shown or into whose hands it may come save

where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the group financial statements give a true and fair view and whether the

group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4

of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors’ Report is

consistent with the group financial statements. The information given in the Directors’ Report includes that specific

information presented in the Chairman’s Statement and the Operating Review that is cross referred from the

Business Review section of the Directors’ Report.

In addition we report to you if, in our opinion, we have not received all the information and explanations we

require for our audit, or if information specified by law regarding director’s 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

group financial statements. The other information comprises only the Chairman’s Statement, the Operating Review

and the Directors’ Report. We consider the implications for our report if we become aware of any apparent

misstatements or material inconsistencies with the group 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 group financial statements. It also includes an assessment of the significant estimates

and judgments made by the directors in the preparation of the group financial statements, and of whether the

accounting policies are appropriate to the group’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 group financial

statements 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 group financial statements.

Opinion

In our opinion:

● the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European

Union, of the state of the group’s affairs as at 31 December 2007 and of its loss and cash flows for the year

then ended;

● the group financial statements have been properly prepared in accordance with the Companies Act 1985 and

Article 4 of the IAS Regulation; and

● the information given in the Directors’ Report is consistent with the group financial statements.


Chartered Accountants and Registered Auditors

Southampton

15 April 2008


Independent Auditors’ Reportto the members of Deltex Medical Group plc

77471 PRE 14/4/08 20:46 Page 19

2007 2006

Note £’000 £’000

Revenue 2 4,168 3,511

Cost of sales (1,250) (1,182)

Gross profit 2,918 2,329

Administrative expenses (2,334) (1,916)

Sales and distribution costs (2,525) (2,186)

Research and development costs (282) (241)

(5,141) (4,343)

Operating loss 3,4 (2,223) (2,014)

Finance income 6 33 8

Finance costs 6 (21) (11)

Loss before taxation (2,211) (2,017)

Tax on loss 7 23 23

Loss for the year 22 (2,188) (1,994)

Loss per share – basic and diluted 9 (2.5p) (2.6p)

Consolidated Statement of Recognised Income and Expensefor the year ended 31 December 2007

2007 2006

£’000 £’000

Exchange differences taken to reserves 8 (9)

Loss for the year (2,188) (1,994)

Total recognised expense for the year (2,180) (2,003)

Consolidated Income Statementfor the year ended 31 December 2007


77471 PRE 14/4/08 20:46 Page 20

2007 2006

Note £’000 £’000

Assets

Non-current assets

Property, plant and equipment 10 37 47

Trade and other receivables 14 20 52

Intangible assets 11 190 91

Total non-current assets 247 190

Current assets

Inventories 13 441 383

Trade and other receivables 14 1,570 1,241

Current income tax recoverable 14 47 45

Cash and cash equivalents 763 418

Total current assets 2,821 2,087

Total assets 3,068 2,277

Liabilities

Current liabilities

Borrowings 16 (407) (297)

Trade and other payables 17 (1,204) (1,160)

Provisions for other liabilities and charges 18 (77) (50)

Total liabilities (1,688) (1,507)

Net assets 1,380 770

Equity

Share capital 22 925 800

Share premium 22 16,423 14,086

Capital redemption reserve 22 17,476 17,476

Other reserves 22 1,342 1,014

Translation reserve 22 (1) (9)

Retained earnings/(deficit) 22 (34,785) (32,597)

Total equity 1,380 770

The financial statements on pages 20 to 48 were approved by the Board of Directors on 15 April 2008 and were

signed on its behalf by:

N J Keen

E A Phillips


Consolidated Balance Sheetat 31 December 2007

77471 PRE 14/4/08 20:46 Page 21

2007 2006

£’000 £’000

Cash flows from operating activities

Operating loss (2,223) (2,014)

Depreciation of property, plant & equipment 38 49

Amortisation of intangibles 2 2

Loss on disposal of fixed asset (1) –

Impairment of trade acquisition – 62

Earnings before interest, tax, depreciation and amortisation (2,184) (1,901)

Cost of equity settled share schemes 328 246

Operating cash flows before movements in working capital (1,856) (1,655)

Decrease in inventories 41 73

Decrease in debtors (293) (307)

Increase in creditors (50) 307

Increase in provisions 27 16

Cash used in operations (2,131) (1,566)

Interest paid (21) (11)

Income taxes received 23 32

Net cash used in operating activities (2,129) (1,545)

Cash flows from investing activities

Purchase of property, plant & equipment (29) (12)

Acquisition of trade – (62)

Capitalised development expenditure (101) (90)

Interest received 28 7

Net cash used in investing activities (102) (157)

Cash flows from financing activities

Issue of ordinary share capital 2,613 1,491

Expenses in connection with share issue (151) (43)

Proceeds from increase in borrowings 110 78

Repayment of obligations under finance leases – (6)

Net cash generated from financing activities 2,572 1,520

Net increase/(decrease) in cash and cash equivalents 341 (182)

Cash and cash equivalents at beginning of the year 418 606

Effect of exchange rate fluctuations on cash held 4 (6)

Cash and cash equivalents at end of the year 763 418

Consolidated Statement of Cash Flowsfor the year ended 31 December 2007


77471 PRE 14/4/08 20:46 Page 22

1. Principal accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below.

These policies have been consistently applied to all the years presented, unless otherwise stated.

General information

These financial statements are the consolidated financial statements of Deltex Medical Group plc, a public limited

company registered and domiciled in the United Kingdom and its subsidiaries (“the Group”). The address of the

registered office is Deltex Medical Group plc, Terminus Road, Chichester, PO19 8TX, registered number 3902895.

Basis of reporting

The Group previously prepared its annual financial statements in accordance with United Kingdom Accounting

Standards (UK GAAP). These financial statements have been prepared in accordance with International Financial

Reporting Standards (IFRS) and IFRIC interpretations endorsed by the European Union (EU) and with those parts

of the Companies Act 1985 applicable to companies reporting under IFRS. The Group’s transition date for IFRS is

1 January 2006, and the disclosures required by IFRS 1 concerning the transition from UK Accounting Standards

to IFRS are given in note 28.

(a) Standard, amendments and interpretations effective in 2007International Financial Reporting Standards (IFRS)IFRS 7, “Financial instruments: Disclosures”, and the complementary amendment to IAS 1, “Presentation of

financial statements – Capital disclosures”, introduces new disclosures relating to financial instruments and does

not have any impact on the classification and valuation of the Group or Company’s financial instruments, or the

disclosures relating to taxation and trade and other payables.

International Financial Reporting Interpretations Committee (IFRIC)IFRIC 8, “Scope of IFRS 2”, requires consideration of transactions involving the issuance of equity instruments,

where the identifiable consideration received is less than the fair value of the equity instruments issued in order to

establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Group

or Company’s financial statements. The Company already applies an accounting policy which complies with the

requirements of IFRIC 8, refer to note 21.

(b) Standards, amendments and interpretations effective in 2007, but not relevant The following standards, amendments and interpretations to published standards are mandatory for accounting

periods beginning on or after 1 January 2007 but they are not relevant to the Group or Company’s operations:

International Financial Reporting Standards (IFRS)IFRS 4, “Insurance contracts”

International Financial Reporting Interpretations Committee (IFRIC)IFRIC 7, “Applying the restatement approach under IAS 29, Financial reporting in hyper-inflationary economies”

IFRIC 9, “Re-assessment of embedded derivatives”

IFRIC 10, “Interim financial reporting and impairment”

(c) Standards, amendments and interpretations to existing standards that are not yet effective and have not beenearly adopted by the Group and CompanyThe following standard has been published and is mandatory for the group’s accounting periods beginning on or

after 1 January 2009, but the Group has not early adopted it:

International Financial Reporting Standards (IFRS)IFRS 8, “Operating segments” (effective from 1 January 2009) is not expected to have a significant impact on the

Group’s reporting of segmental information.

International Financial Reporting Interpretations Committee (IFRIC)IFRIC 11, IFRS 2 Share-based payment – Group and Treasury Share Transactions is applicable from 1 January

2008 and does not have an impact on the Group’s operations.

(d) Interpretation to existing standards that are not yet effective and not relevant for the Group and Company’soperationsThe following interpretations to existing standards have been published and are mandatory for the Group and

Company’s accounting periods beginning on or after 1 January 2008 or later periods but are not relevant to the

Group’s operations:

International Financial Reporting Standards (IFRS)IFRS 3 (revised), Business Combinations and IAS 27, Consolidated and Separate Financial Statements

International Financial Reporting Interpretations Committee (IFRIC)IFRIC 12, “Service concession arrangements”

IFRIC 13, “Customer loyalty programmes”

IFRIC 14, International Accounting Standard 19, “The limit on a defined benefit asset, minimum funding

requirements and their interaction.”


Notes to the Financial Statementsfor the year ended 31 December 2007

77471 NOTES 15/4/08 17:23 Page 23

1. Principal accounting policies continued

First – time adoption of IFRS

The Group’s transition date for IFRS is 1 January 2006. Comparative data for 2006 has been restated to conform to the

new accounting policies set out below. The new policies reflect exemptions from restating certain financial information

as permitted under IFRS 1 “First – time Adoption of International Financial Reporting Standards”. The exemptions taken

by the Group are stated below:

● IFRS 3 “Business Combinations” has been applied prospectively from 1 January 2006 and consequently

acquisitions prior to the date of transition to IFRS have not been restated.

● Cumulative translation differences on net investments in foreign subsidiaries have been set at zero at the date

of transition to IFRS.

Basis of consolidation

The consolidated financial statements have been prepared under the historical cost convention.

The consolidated income statement and balance sheet include the financial statements of the parent company and

all of its subsidiaries. All intra group transactions, balances, income and expenses are eliminated on consolidation.

Revenue recognition

Revenue is measured at the fair value of the consideration receivable and represents amounts receivable for goods

and services provided in the normal course of business, net of discounts, VAT and other sales related taxes and

exclude intercompany sales.

● Monitor and probe revenueRevenue on monitors and probes is recognised at the point when substantially all of the risks and rewards of

ownership are transferred to the customer; normally this is on despatch. In respect of service contracts and

other agreements for ongoing support, revenue is recognised in equal monthly instalments over the period of

the contract to match the benefits to the customer.

● Clinical trial dataWhere goods are exchanged for trial data, the exchange is treated as revenue under a barter transaction. The

revenue is measured at fair value of the trial data or at the fair value of the goods supplied, where the fair value

of the trial data cannot be reliably measured.

● Operating leasesWhen assets are leased out under an operating lease, the asset is included in the balance sheet based on the

nature of the asset. Lease income is recognised over the term of the lease on a straight-line basis.

Segmental reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject

to risks and returns that are different from those of other business segments. A geographical segment is engaged in

providing products or services within a particular economic environment that are subject to risks and returns which

are different from those of segments operating in other economic environments.

For reporting purposes, the results of the Group are allocated between three reporting business segments which

operate in specific market areas and are as described in note 2. The Group accounting policies are applied

consistently across the three business segments. Head office and other costs, which cannot be fairly allocated,

are shown separately.

Foreign currency translation

The functional and presentational currency for the parent company is UK Pounds Sterling. Group companies use

their local currency as their functional currency. Transactions denominated in currencies other than the functional

currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet

date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing

on the balance sheet date, with any gains or losses being included in the net profit or loss of the period. Exchange

differences arising on non-monetary assets and liabilities are recognised directly in equity.

On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates

prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for

the period. Exchange differences arising, if any, are dealt with through the Group’s reserves, until such a time as

the subsidiary is sold whereupon the cumulative exchange differences relating to the net investment in that foreign

subsidiary are recognised as part of the profit or loss on disposal in the Income Statement. However, cumulative

exchange differences arising prior to 1 January 2006 remain in equity as permitted by IFRS 1 (see note 28).

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of

the foreign entity and translated at the closing rate. The group has elected to treat goodwill and fair value adjustments

arising on acquisitions before the date of transition to IFRS as Sterling denominated assets and liabilities.

Notes to the Financial Statements continued



77471 NOTES 14/4/08 21:30 Page 24


Derivative financial instruments and hedging activities

Derivatives are initially held at fair value on the date a derivative contract is entered into and are subsequently

remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative

is designated as a hedging instrument, and if so, the nature of the item being hedged.

Gains and losses accumulated in equity are included in the Income Statement when the foreign operation is partially

disposed of or sold.

Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective

interest method less provision for impairment. A provision for impairment of trade receivables is established when there

is objective evidence that the group will not be able to collect all amounts due according to the original terms of the

receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial

reorganisation, and default or delinquency in payments (more than 60 days overdue) are considered indicators that the

trade receivable is impaired. The amount of the provision 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 asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the

Income Statement within “sales and marketing”. When a trade receivable is uncollectible, it is written off against the

allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against

“sales and marketing costs” in the Income Statement.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation in respect of a past event and

it is probable that settlement will be required of an amount that can be reliably estimated. Provisions are measured at

the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects

current market assessments of the time value of money and the risks specific to the obligation. The increase in the

provision due to passage of time is recognised as interest expense.

A provision for national insurance that may become payable on share option gains is calculated based on the closing

share price.

Property, plant and equipment

Tangible fixed assets are stated at cost, net of depreciation and any provision for impairment. The cost of purchased

assets includes the original purchase price together with any incidental expenses of acquisition. The cost of assets

produced by the Group includes an appropriate element of production overhead costs.

Depreciation is calculated so as to write down tangible fixed assets to their estimated realisable values, by equal

annual instalments over their expected useful economic lives at the following rates:

Leasehold property and improvements five years

Plant and machinery three to five years

Research and development equipment two years

Machines loaned to customers three years

Motor vehicles four years

Fixtures, fittings and equipment three to five years

Estimated residual values and useful lives are reviewed annually and adjusted where necessary.

Intangible fixed assets

Goodwill

Goodwill, arising from the purchase of subsidiary undertakings, represents the excess of the fair value of the

purchase consideration over the fair value of the net assets acquired.

Goodwill is recognised as an asset and reviewed for impairment annually or where there are indications that the

carrying value may not be recoverable. Any impairment is recognised immediately in the Income Statement and

is not subsequently reversed.

Research and development expenditure – internally generated

Costs for self-initiated research and development activities are assessed as to whether they qualify for recognition

as internally generated intangible assets. Apart from complying with the general recognition requirements and

initial measurement of an intangible asset, qualification criteria are met only when technical as well as commercial

feasibility can be demonstrated and cost can be measured reliably. It must also be probable that the intangible

asset will generate future economic benefits and that it is clearly identifiable and allocable to a specific product.

Further to meeting these criteria, only such costs that relate solely to the development phase of a self-initiated

project are capitalised. Any costs that are classified as part of the research phase of a self-initiated project are

expensed as incurred. If the research phase cannot be clearly distinguished from the development phase, the

respective project related costs are treated as if they were incurred in the research phase only.


77471 NOTES 14/4/08 21:30 Page 25


Amortisation is calculated so as to write down the value of the intangible assets by equal annual instalments over

their expected useful economic lives at the following rates:

Monitors five years

Probes five years

Impairment of fixed tangible assets and intangible assets excluding goodwill

At each balance sheet date the Group 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 to determine the extent of any impairment loss. The recoverable amount

is the higher of the asset’s value in use and its fair value less costs to sell. Value in use is calculated using cash flow

projections for the asset (or group of assets where cash flows are not identifiable for specific assets) discounted at the

Group’s cost of capital.

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 as an expense in the Income Statement, unless the relevant asset is carried at a revalued amount, in

which case the impairment loss is treated as a revaluation decrease.

Retirement benefit costs

Retirement benefit costs are accounted for in accordance with IAS 19 (amended).

The Group provides pension arrangements to the majority of full time UK employees through a money purchase

(defined contribution) scheme. Contributions and pension costs are based on pensionable salary and are charged as

an expense as they fall due. The Group has no further payment obligations once the contributions have been paid.

The Group maintains a deferred contribution Salary Reduction Simplified Employee Pension Plan (“SARSEP”) for US

employees which allows eligible employees to have a percentage of their before tax compensation contributed to an

Individual Retirement Account. Under the terms of SARSEP, the Group may make discretionary contributions on behalf

of the employees that are charged to the Income Statement in the year in which they are payable. There are no post

retirement obligations in respect of this scheme payable by the Group.

Investments

Investments are stated at cost less any provisions for diminution in value.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis.

Work in progress and finished goods are included on a basis appropriate to the state of completion of the various

individual items taking account of production materials and components together with an appropriate share of directly

attributable labour and overheads. Net realisable value represents the estimated selling price less all estimated costs of

completion and costs to be incurred in marketing, selling and distribution. Provision is made for obsolete, slow-moving

or defective items where appropriate.

Finance and operating leases

Costs in respect of operating leases are charged to the Income Statement on a straight-line basis over the lease term.

Where fixed assets are financed by finance lease agreements, which transfer to the Group substantially all the benefits

and risks of ownership, the assets are treated as if they had been purchased outright and are included in tangible

fixed assets. Such amounts are written off over the period of the lease. The capital element of the finance lease

commitment is shown as obligations under finance leases. The finance lease payments are treated as consisting of

capital and interest elements. The capital element is applied to reduce the outstanding obligations and the interest

element is charged to the Income Statement on a straight line basis over the lease term.

Clinical and other trials

The cost of trialling for clinical, economic and other purposes to support the Group’s sales and promotional activity, or

the cost of purchasing the rights to the use of the data arising from such trials, is written off as the trial is delivered.

Current and deferred taxation

The tax expense represents the sum of current tax and deferred tax. Tax is recognised in the Income Statement except

to the extent that it relates to items recognised in equity in which case it is recognised in equity.

The current tax is based on taxable results for the year calculated using tax rates that have been enacted or

substantially enacted by the balance sheet date.

Deferred tax is provided using the balance sheet liability method on temporary differences between the carrying

amounts of assets and liabilities in the financial statement and the corresponding tax bases used in the computation of

taxable profit. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax

assets are recognised to the extent that it is probable that taxable profits will be available against which deductible

temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises

from goodwill or from the initial recognition (other than in a business combination) of other assets or liabilities in a

transaction that affects neither the tax profit nor the accounting profit.




77471 NOTES 14/4/08 21:30 Page 26


The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it

is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the

asset is realised. Tax assets and liabilities are offset when there is a legally enforceable right to offset current tax

assets against current liabilities and when the deferred income taxes relate to the same fiscal authority.

Share based payments

The Group awards directors, employees and certain of the Company’s distributors and advisors equity-settled share-

based payments, from time to time, on a discretionary basis. In accordance with IFRS2 “Share–based payments”,

equity settled share-based payments are measured at fair value at the time of grant. Fair value is measured by use

of Black Scholes model. The fair value determined at the grant date of the equity–settled share-based payments is

expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of shares that

will eventually vest. The options are subject to vesting conditions of up to six years, and their fair value is recognised

as an expense with a corresponding increase in “other reserves” equity over the vesting period. The proceeds received

net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium

when the options are exercised.

The fair value of the equity-settled share-based payment is re-charged by the Group company to the subsidiary

operating company at fair value. The expense is therefore recognised in the subsidiary operating company, with the

equity reserve being recognised in the Group company.

Cash and cash equivalents

Cash and cash equivalents includes cash in hand and deposits held at call with banks.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options

are shown in equity as a deduction, net of tax, from the proceeds.

Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective

interest method.

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently

stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value

is recognised in the Income Statement over the period of the borrowing using the effective interest method.

Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the

liability for at least 12 months after the balance sheet date.

Significant judgements

In the process of applying the Group’s accounting polices, management has made a number of judgements, none

of which are considered to have a significant effect on the amounts recognised in the financial statements.

Basis of preparation

In common with many companies of its size and which are at its stage of development, the directors manage carefully

the Group's limited resources to develop the opportunities open to it without overstretching the funding capabilities of

the business.

The funds the Group has available to it are provided both by the results of its commercial activities and through the

new funding provided to it by the capital markets and the Group drives its development of the market in keeping with

this level of funding, having sufficient flexibility in its cost structure to tailor expenditure to accord with income levels.

In preparing these financial statement the directors have reviewed projected cash flow forecasts for the next year from

the date of the approval of these financial statements. This review indicates that the Group is expected to continue

trading at current levels as a going concern on the basis of increasing net cash inflows from sales over expenditure

of the Group.

The Directors believe it appropriate to prepare the financial statements on the going concern basis.


77471 NOTES 14/4/08 21:30 Page 27

2. Business and geographical segments

For management purposes, the Group is currently organised into three operating divisions UK, USA and International.

These divisions are the basis on which the Group reports its primary segment information.

The principal activities of each segment are as follows:

● the UK division employs a direct sales team in the marketing, sales and support of the Group’s CardioQ monitor

and associated probes within the UK territory;

● the USA division employs a direct sales team in the marketing, sales and support of the Group’s CardioQ monitor

and associated probes with the USA territory;

● the International division supports distributors in selected territories to promote the marketing, sales and support

of the CardioQ and its associated probes these territories. This division is also responsible for the Group’s direct

sales operation in Spain.

The segment results for the year ended 31 December 2007 are as follows:

UK USA International Unallocated Total

£’000 £’000 £’000 £’000 £’000

Total segment revenue 2,892 587 947 – 4,426

Inter segment revenue (258) – – – (258)

Group revenue 2,634 587 947 – 4,168

Segment/operating result 379 (52) (210) (2,340) (2,223)

Finance income 33

Finance costs (21)

Loss before taxation (2,211)

Tax on loss 23

Loss for the financial year (2,188)

The segment results for the year ended 31 December 2006 are as follows:


£’000 £’000 £’000 £’000 £’000

Total segment revenue 2,699 412 534 – 3,645

Inter segment revenue (134) – – – (134)

Group revenue 2,565 412 534 – 3,511

Segment/operating result 316 64 (466) (1,928) (2,014)

Finance income 8

Finance costs (11)

Loss before taxation (2,017)

Tax on loss 23

Loss for the financial year (1,994)

Revenue includes £264,000 (2006: £373,000) of sales under barter transactions.

Unallocated costs include those costs that cannot be split between segments, including expenditure on research and

development and clinical trials.

Inter-segment transfers or transactions are entered into under the normal commercial terms and conditions that would

also be available to unrelated third parties.




77471 NOTES 14/4/08 21:30 Page 28

2. Business and geographical segments continued

The segment assets and liabilities at 31 December 2007 and capital expenditure are as follows:


£’000 £’000 £’000 £’000 £’000

Assets 777 178 470 1,643 3,068

Liabilities 235 44 45 1,364 1,688

Capital expenditure – – – 29 29

Assets Liabilities

£’000 £’000

Segment assets/liabilities 1,425 324

Unallocated:

Intangible assets 190 –

Tangible fixed assets 34 –

Taxation receivable 47 –

Prepayments and accrued income 642 –

Cash and cash equivalents 730 –

Borrowings – 407

Trade and other payables – 880

Provisions – 77

3,068 1,688

The segment assets and liabilities at 31 December 2006 and capital expenditure are as follows:


£’000 £’000 £’000 £’000 £’000

Assets 679 165 314 1,119 2,277

Liabilities 220 28 43 1,216 1,507

Capital expenditure – – – 13 13

Assets Liabilities

£’000 £’000

Segment assets/liabilities 1,158 291

Unallocated:

Intangible assets 91 –

Tangible fixed assets 43 –

Taxation receivable 45 –

Prepayments and accrued income 561 –

Cash and cash equivalents 379 –

Borrowings – 297

Trade and other payables – 869

Provisions – 50

2,277 1,507

Segment assets consist primarily of inventories and trade and other receivables. Unallocated assets comprise primarily

of intangible assets, tangible fixed assets, prepayments and accrued income and cash and cash equivalents.

Segment liabilities primarily comprises accrued income and employee costs. Unallocated liabilities comprise trade and

other payables, provisions and other borrowings.


77471 NOTES 14/4/08 21:30 Page 29

2. Business and geographical segments continued

The following table provides an analysis of the Group’s sales by revenue stream.

2007 2007 2007 2007 2006 2006 2006 2006

Probes Monitors Other Total Probes Monitors Other Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000

Analysis of turnover

by destination

Direct markets

United Kingdom 2,041 458 135 2,634 1,837 604 124 2,565

United States of America 518 63 6 587 349 58 5 412

Spain 50 85 1 136 12 – – 12

Distributor markets

Rest of Europe 436 102 6 544 264 25 11 300

Rest of the World 140 122 5 267 170 51 1 222

3,185 830 153 4,168 2,632 738 141 3,511

It is not practicable to split the assets and liabilities between the different revenue streams.

3. Auditor remuneration

Services provided by the group’s auditor and network firms.

During the year the group (including its overseas subsidiaries) obtained the following services from the group’s auditor

at costs as detailed below:

2007 2006

£’000 £’000

Audit services

– Fees payable to company auditor for the audit of parent company

and the consolidated accounts 20 20

Non- Audit services

Fees payable to the company’s auditor and its associates for other services

– The audit of company’s subsidiaries pursuant to legislation 45 42

– Other services pursuant to legislation 8 –

– Accounting advice 8 –

– Company secretarial services – 1

81 63

4. Expenses by nature

The following items have been charged/(credited) in arriving at operating loss:

2007 2006

£’000 £’000

Changes in inventories of finished goods and work in progress 74 (6)

Raw materials and consumables used 968 943

Employee benefit costs 3,159 2,816

Other employee costs 442 347

Depreciation, and amortisation charges (note 10, 11) 40 51

Net research and development expenditure (exc. employee costs) 244 169

Clinical trial costs 303 3

Operating lease commitments – land & buildings 84 99

Foreign exchange loss 12 17

Charge in respect of service costs settled by award of share options

(excluding employees) 9 12

Write down of investments – 62

Distributor re-organisation costs – 60

Meeting and other PR costs 281 286

Professional and consultancy fees 441 449

Other costs 334 217

Total cost of sales, distribution costs and administrative expenses 6,391 5,525




77471 NOTES 14/4/08 21:30 Page 30

5. Employees

The average monthly number of persons including executive directors by function was as follows:

2007 2006

Number Number

By activity

Sales and marketing 29 22

Production 12 13

Office and management 12 11

Research and development 1 2

54 48

2007 2006

£’000 £’000

Staff costs (for the above persons)

Wages and salaries paid to employees 2,526 2,300

Social security costs 255 233

Other pension costs – defined contribution plans 50 45

Share based payments 328 238

3,159 2,816

Director’s emoluments2007 2006

£ £

Aggregate emoluments 460,200 438,696

Sums paid to third parties for directors’ services 25,000 25,000

Contributions to directors’ personal pension schemes 8,523 9,207

493,723 472,903

Benefits are accruing to two (2006: two) directors under personal pension plans.

Included in the above figure is an amount paid to the employing company of a non-executive director for the services

of that director of £25,000 (2006: £25,000).

Highest paid director2007 2006

£ £


Contributions to directors’ personal pension schemes 1,800 1,707

229,300 225,948

6. Finance income and costs2007 2006

£’000 £’000

Finance income

Bank interest receivable 28 8

Other interest receivable 5 –

33 8

Finance costs

Finance lease interest payable – 1

Finance interest payable 21 10

21 11


77471 NOTES 14/4/08 21:30 Page 31

7. Taxation2007 2006

£’000 £’000

Current tax:

Payable R&D tax credit (23) (23)

Adjustment for prior periods – –

Total current tax and tax on loss on ordinary activities (23) (23)

The taxable receipt for the year is lower than the standard rate of corporation tax in the UK of 30% (2006: 30%)

applied to the Group’s loss on ordinary activities before tax.

The tax differences are explained below:

2007 2006

£’000 £’000

Loss on ordinary activities before tax (2,211) (2,017)

Loss on ordinary activities multiplied by the standard rate

in the UK 30% (2006: 30%) (663) (605)

Effects of:

Expenses not deductible for tax purposes 95 75

Difference between depreciation charges and capital allowance claims (1) 3

Losses carried forward 624 522

Tax rate on difference on receivable research and development tax credit (13) (15)

Higher tax rates of overseas losses (65) (3)

(23) (23)

Deferred tax

At 31 December 2007, the Group had an unrecognised potential deferred tax asset of £10,942,000 (2006: £10,360,000)

representing accumulated trading losses carried forward which are available against future profits and depreciation

in excess of capital allowances of £18,000 (2006: £19,000) and share option charges of £192,000 (2006: £100,000).

During the year, as a result of the change in UK Corporation Tax rates, which will be effective from 1 April 2008,

deferred tax balances have been remeasured. All deferred tax relating to temporary differences is expected to

reverse after 1 April 2008 and has therefore been measured at the tax rate of 28% as this is the tax rate that will

apply on reversal.

8. Net foreign exchange losses2007 2006

£’000 £’000

Foreign exchange 12 17

9. Loss per share

Basic loss per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted

average number of ordinary shares issued during the year. The Group had no dilutive potential ordinary shares in

either year, which would serve to increase the loss per ordinary share. Therefore there is no difference between the

loss per ordinary share and the diluted loss per ordinary share.

The loss per share calculation for 2007 is based on the loss of £2,188,000 and weighted average number of shares

in issue of 87,737,746. For 2006 the loss per share calculation was based upon the restated loss of £1,994,000 and

weighted average number of shares in issue of 74,181,000.




77471 NOTES 14/4/08 21:30 Page 32

10. Tangible fixed assets

Property Fixtures, Machines

plant and fittings and loaned to

equipment equipment customers Total

£’000 £’000 £’000 £’000

Cost

At 1 January 2006 348 237 260 845

Exchange – (3) (10) (13)

Additions 8 5 – 13

At 31 December 2006 356 239 250 845

Additions 11 18 – 29

Disposals (2) (9) – (11)

At 31 December 2007 365 248 250 863

Depreciation

At 1 January 2006 326 180 254 760

Exchange – (2) (9) (11)

Charge for the year 17 30 2 49

At 31 December 2006 343 208 247 798

Charge for year 7 29 2 38

Disposals (1) (9) – (10)

At 31 December 2007 349 228 249 826

Net book value

At 1 January 2006 22 57 6 85

At 31 December 2006 13 31 3 47

At 31 December 2007 16 20 1 37

Depreciation expense of £3,000 (2006: £6,000) has been charged in cost of goods sold, £Nil (2006: £3,000) in research

and development and £35,000 (2006: £40,000) in administrative expenses.

The net book value of tangible fixed assets includes amounts of £Nil (2006: £Nil) in respect of assets held under finance

leases. The depreciation charge for the year relating to assets held under finance leases was £Nil (2006: £7,000).

11. Intangible assets

Research and

Development

£’000

Cost

At 1 January 2006 8

Additions 90

At 31 December 2006 98

Additions 101


Amortisation

At 1 January 2006 5

Charge for year 2


Charge for year 2


Net book value

At 1 January 2006 3



Amortisation of £2,000 (2006: £2,000) has been included in research and development in the Income Statement.


77471 NOTES 14/4/08 21:30 Page 33

12. Subsidiary undertakings

Details of the Group’s principal trading subsidiaries are set out below. In all cases the holding is 100% of the

ordinary shares:

– Deltex Medical Limited incorporated and operating in Great Britain, manufactures and markets medical devices;

– Deltex Medical Holdings, Inc incorporated and operating in the United States of America, markets and sells medical

devices in the USA which are manufactured by the Group in the UK;

– Deltex Medical, Espana, incorporated and operating in Spain, markets and sells medical devices in Spain which are

manufactured by the Group in the UK.

13. Inventories

2007 2006

£’000 £’000

Raw materials and consumables 117 133

Work in progress 38 34

Finished goods 286 216

441 383

There is no material difference between the book value and the replacement cost of the inventories shown. Based on

inventory holdings and sales history, no specific or general provisions for obsolete or slow moving inventory (2006: £Nil)

is considered necessary.

14. Trade and other receivables2007 2006

£’000 £’000

Amounts falling due within one year:

Trade receivables 922 674

Less: provision for impairment of trade receivables (76) (64)

Trade receivables – net 846 610

Corporation tax recoverable 47 45

Other debtors 13 6

Prepayments and accrued income 711 625

1,617 1,286

Amounts falling due after more than one year:


1,637 1,338

All non-current receivables are due within two years (2006: three years) from the balance sheet date.

Trade receivables that are less than two months past due are not considered impaired. As of 31 December 2007,

trade receivables of £191,000 (2006: £230,000) were more than two months past due but not impaired. These relate to

a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade

receivables is as follows:

2007 2006

£’000 £’000

Up to two months 137 127

Two to six months 24 –

More than six months 30 103





77471 NOTES 14/4/08 21:30 Page 34

14. Trade and other receivables continued

As of 31 December 2007, specific trade receivables of £76,000 (2006: £64,000) were impaired and provided for.

Based on the payment profile of the Group’s debtors, it is not considered necessary to provide a general provision

for bad debts. The ageing of these receivables is as follows:

2007 2006

£’000 £’000

Over six months 76 64

The carrying amounts of the group’s trade and other receivables are denominated in the following currencies:

2007 2006

£’000 £’000

Pounds 486 386

Euros 253 208

US Dollars 127 68


Movement on the group provision for impairment of trade receivables are as follows:

2007 2006

£’000 £’000

At 1 January 64 66

Provision for receivables impairment 62 –

Receivables written off during the year as uncollectible (50) –

Unused amounts reversed – (2)


The creation and release of provision for impaired receivables have been included in sales and marketing costs in the

income statement. Amounts charged to the allowance account are generally written off, when there is no expectation

of recovering additional cash.

The other classes within trade and other receivables do not contain impaired assets.

The directors consider that the carrying amount of trade and other receivables approximates their fair value.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned

above. The group does not hold any collateral as security.

15. Cash and cash equivalents

Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity

of three months or less. The carrying amount of these assets approximates their fair value.


77471 NOTES 14/4/08 21:30 Page 35

16. Borrowings

Borrowings comprise an amount of £407,000 (2006: £297,000) representing the cash drawn down under an invoice

discounting facility. The amount outstanding under this facility is secured by way of a fixed charge over the Group’s

UK and a proportion of the International trade debtors. Amounts drawn down under the facility are repayable within

90 days from the end of the month of invoice.

The facility is subject to six months notice on either side and is not subject to annual review.

The directors consider the carrying value of the borrowings approximates to their fair value.

The carrying amounts of the group’s borrowings are denominated in the following currencies:

2007 2006

£’000 £’000

Pounds 302 242

Euros 105 55

407 297

As at 31 December the Group had £37,000 (2006: £Nil) undrawn under the above facility.

17. Trade and other payables

2007 2006

£’000 £’000

Trade creditors 443 373

Obligations under finance leases – 1

Other tax and social security payable 103 98

Other creditors 127 171

Accruals and deferred income 531 517

1,204 1,160

The directors consider that the carrying amount of trade payables approximates to their fair value.

18. Provision for other liabilities and charges

2007 2006

£’000 £’000

At 1 January 50 34

Charged to the Income Statement 27 16


The above provision relates to national insurance that may become payable on share option gains and is included as a

non-current liability.




77471 NOTES 14/4/08 21:30 Page 36

19. Pension obligations

The Group operates a defined contribution pension scheme for its UK employees. The assets of the scheme are

held separately from those of the Group in independently administered funds. The Group also maintains a defined

contribution Salary Reduction Simplified Employee Pension Plan (“SARSEP”) for US employees. Under the terms of

the SARSEP, the Group may make discretionary contributions on behalf of the employees. The pension cost

represents the contributions paid and payable by the Group to these schemes and in aggregate amounted to

£50,000 (2006: £45,000).

20. Called up share capital

Authorised 2007 2006

£’000 £’000

6,587,546,210 ordinary shares of 1 pence each 65,875 65,875

Called up, allotted and fully paid 2007 2006

£’000 £’000

92,487,907 1p ordinary shares (2006: 80,057,125) 925 800

The movement in the Company’s issued share-capital during the year is as follows:

During the year, the Company issued 899,437 1p ordinary shares pursuant to the exercise of options. The Company

also placed 11,133,192 1p ordinary shares with institutional and other investors. In addition a total of 398,153 1p

ordinary shares were issued to certain of the Company’s advisors who elected to take shares in lieu of cash payment

for their services to the Company.

Employee options

Current and former employees of the Group hold options to subscribe for shares in the Company. The following table

sets out movements in share options during the year:

Employee share options Executive Enterprise

Share Management

Option Incentive

Scheme Scheme Total

No. No. No.

At 1 January 2007 4,434,188 2,105,343 6,539,531

Additions 1,570,000 716,108 2,286,108

Exercised (5,000) (84,437) (89,437)

Lapsed (120,000) (40,000) (160,000)

At 31 December 2007 5,879,188 2,697,014 8,576,202

All options relate to one 1p ordinary share.


77471 NOTES 14/4/08 21:30 Page 37

20. Called up share capital continued

As at 31 December 2007 the following options to subscribe for ordinary shares of 1p each were outstanding under

employee share schemes:

Number of shares Exercise price Exercise period Exercise period

£ from to

Current Employees

16,016 1.07 4 December 2001 3 December 2008

12,012 1.07 12 May 2002 11 May 2009

43,043 2.20 12 January 2003 11 January 2010

74,000 1.00 5 April 2004 4 April 2011

167,000 See note (a) 7 November 2004 6 November 2011

0.25

14,000 See note (a) 19 March 2005 18 March 2012

0.25


0.25

572,000 See note (a) 28 October 2006 27 October 2013

0.15

958,334 See note (b) 0.01 24 March 2004 27 October 2013

1,382,000 See note (a) 12 October 2007 11 October 2014

0.24


1,376,000 See note (a)

0.2075 28 March 2009 27 March 2016

627,574 See note (b) 0.01 15 March 2007 19 May 2016

1,548,000 See note (a)

0.295 29 June 2010 28 June 2017

716,108 See note (b) 0.01 7 April 2008 28 June 2017

8,445,085


£ from to

Former Employees

32,032 1.07 18 June 2001 17 June 2008


11,011 2.20 12 January 2003 11 January 2010

6,006 2.20 7 February 2003 6 February 2010

14,000 0.24 12 October 2007 11 October 2014

131,117

8,576,202

Notes:

(a) Options exercisable subject to the criterion set by the board that the shares of Deltex Medical Group plc should

have outperformed the FTSE Techmark MediScience Index between the date of grant and the date of exercise

of the option.

(b) Enterprise Management Incentive Scheme

Other options

Options, other than employee share options are as follows:

As at 1 Lapsed Exercised As at 31 January during the in the December Exercise Exercise Exercise

2007 period period 2007 price period PeriodNo. No. No. No. £ from to

Company contractor (1) 20,000 – – 20,000 0.25 19 March 2005 18 March 2012

Actamed Limited (1) 120,000 120,000 – – 0.25 1 July 2004 30 June 2007

Company distributors (2) 500,000 – – 500,000 0.2125 31 July 2004 31 December 2008

Company distributors (2) 400,000 – – 400,000 0.20 4 May 2005 31 December 2008

Company distributors (2) 800,000 – 800,000 – 0.175 3 May 2006 15 December 2007

Company distributors (2) 250,000 – – 250,000 0.19 13 October 2008 12 October 2015

2,090,000 120,000 800,000 1,170,000

(1) Options are exercisable in whole on any one occasion during the exercise period.

(2) Options are exercisable in part or in whole at any time during the exercise period.





77471 NOTES 14/4/08 21:30 Page 38

21. Share based payments

The Group has two share option schemes: the Deltex Medical Group plc Approved Share Option Scheme and the

Deltex Medical Group plc Enterprise Management Incentive plan (“EMI”).

Options granted under the Approved Share Option Scheme are at the market price on the date of grant. Options

granted under the EMI scheme are granted at 1p per option.

Details of share options outstanding during the year for the Approved Share Options Scheme is as follows:

2007 2006

Number of Weighted Number of Weighted

share average share average

options exercise price options exercise price

No. (in £) No. (in £)

Outstanding at the beginning of the period 4,434,188 0.284 3,372,188 0.323

Granted during the period 1,570,000 0.295 1,419,000 0.208

Forfeited during the period (120,000) 0.291 (357,000) 0.394

Exercised during the period (5,000) 0.150 – –

Expired during the period – – – –

Outstanding at the end of the period 5,879,188 0.287 4,434,188 0.284

Exercisable at the end of the period 2,955,188 0.320 1,674,188 0.320

The options outstanding at 31 December 2007 had a weighted average exercise price of 28.7p (2006: 28.4p), and a

weighted average remaining contractual life of 84 months (2006: 88 months). On 29 June 2007, options were granted

with an estimated fair value of 13.0p per share and £204,100 in aggregate. On 28 March 2006, options were granted

with an estimated fair value of 13.0p per share and £184,470 in aggregate.

The inputs into the Black-Scholes model are as follows:

June March

2007 2006

Fair value at measurement date 13.0p 13.0p

Share price 29.50p 20.75p

Exercise price 29.50p 20.75p

Expected volatility 48.00% 62.10%

Expected option life

(expressed as weighted average life used in the modelling) 4 years 6 years

Risk free interest rate 5.76% 4.48%

Details of share options outstanding during the year for the EMI Scheme is as follows:

2007 2006

Number of Weighted Number of Weighted

share average share average

options exercise price options exercise price

No. (in £) No. (in £)

Outstanding at the beginning of the period 2,105,343 0.01 1,665,071 0.01

Granted during the period 716,108 0.01 734,546 0.01

Forfeited during the period (40,000) 0.01 (232,535) 0.01

Exercised during the period (84,437) 0.01 (61,739) 0.01

Expired during the period – – – –

Outstanding at the end of the period 2,697,014 0.01 2,105,343 0.01

Exercisable at the end of the period 2,697,014 0.01 1,353,332 0.01


77471 NOTES 14/4/08 21:30 Page 39

21. Share based payments continued

The options outstanding at 31 December 2007 had a weighted average exercise price of 1p (2006: 1p), and a

weighted average remaining contractual life of 90 months (2006: 94 months). On 29 June 2007, options were with

an estimated fair value of 29.0p per share and £205,148 in aggregate. On 19 May 2006 options were granted with

an estimated fair value of 18p per share and £132,218 in aggregate.

The inputs into the Black-Scholes model are as follows:

June May

2007 2006

Fair value at measurement date 29.0p 18.0p

Share price 29.50p 18.75p

Exercise price 1.0p 1.0p

Expected volatility 48.2% 49.0%


(expressed as weighted average life used in the modelling) 3 years 3 years

Risk free interest rate 5.76% 4.48%

Where appropriate, for both schemes, the expected volatility has been based on historical volatility over a period

of the same length as the expected option life and ending on the grant date. Where the historic period is shorter

than the expected option life, volatility has been measured over the maximum amount of time historic information

can be obtained.


operating company at fair value. The expenses is therefore recognised in the subsidiary operating company, with

the equity reserve being recognised in the Group Company.

22. Statement of changes in equity

Retained

Share Share Capital Other Translation earnings/

capital premium redemption Reserve reserve (deficit)

£’000 £’000 £’000 £’000 £’000 £’000

At 1 January 2006 726 12,712 17,476 768 – (30,603)

Shares issued during the year 74 – – – –

Premium on shares issued

during the year – 1,417 – – – –

Issue expenses – (43) – – –

Loss for the financial year – – – – (1,994)

Credit in respect of service cost

settled by award of options – – – 246 – –

Exchange movements taken

to reserves – – – (9) –

At 31 December 2006 800 14,086 17,476 1,014 (9) (32,597)

Share issued during the year 125 – – – –

Premium on shares issued

during the year – 2,488 – – – –

Issue expenses – (151) – – – –

Loss for the financial year – – – – – (2,188)

Credit in respect of service

cost settled by award of options – – – 328 – –

Exchange movements taken

to reserves – – – – 8 –

At 31 December 2007 925 16,423 17,476 1,342 (1) (34,785)

The cumulative goodwill relating to acquisitions made prior to 1998, which has been eliminated against reserves, is

£6.4 million (2006: £6.4 million).




77471 NOTES 14/4/08 21:30 Page 40

23. Commitments

(a) Operating lease commitments

At 31 December 2007 the Group had future aggregate minimum lease payment commitments for land and buildings

and vehicles, under non-cancellable operating leases as follows:

2007 2007 2006 2006

Land and Land and

Buildings Other Buildings Other

£’000 £’000 £’000 £’000

Expiring within one year 62 12 62 8

Expiring within two to five years 104 14 163 2

166 26 225 10

(b) Clinical trial support

The Group has contracted for, but not incurred an additional £50,000 with regard to clinical trial support at the

balance sheet date.

24. Financial risk management

The Group’s financial instruments comprise some cash and various items, such as trade debtors and trade creditors

that arise directly from its operations.

It is, and has been throughout the period under review, the group’s policy that no trading in financial instruments shall

be undertaken.

The board reviews and agrees policies for managing liquidity, interest rate and exchange rate risks. The policies have

remained unchanged throughout the year and are summarised below:

Liquidity risk

The Group is principally managed to ensure that sufficient equity funds are available to meet liquidity requirements.

The Group also has available to it an invoice discounting facility with the Group’s bankers to supplement working

capital needs.

Currency risk

The Group has overseas subsidiaries in the USA and as a result the Group’s sterling balance sheet can be affected

by movements in the US dollar/sterling exchange rates.

The Group also has transactional currency exposures. Such exposures arise from sales and purchases by operating

units in currencies other than the unit’s functional currency.

At 31 December 2007, if the currency had strengthened by 10% against the US dollar with all other variables held

constant, post-tax loss for the year would have been £21,000 (2006: £3,000) lower. Equity would have been

£21,000 (2006: £3,000) lower.

The Group does not engage in any hedging in respect of currency risks.


77471 NOTES 14/4/08 21:30 Page 41

24. Financial risk management continued

Credit risk

The Group is exposed to credit related losses in the event of non-performance by counterparties in connection with

financial instruments.

The Group takes actions to mitigate this exposure by ensuring adequate background on credit risk is known about

counterparties prior to contracting with them and through selection of counterparties with suitable credit ratings.

Interest rate and currency profile of financial assets and liabilities

The interest rate and currency rate profile of financial assets and liabilities of the Group as at 31 December 2007 was:

2007 2007 2007 2007 2006 2006 2006 2006

Floating Fixed Nil Floating Fixed Nil

Rate Rate Rate Total Rate Rate Rate Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000

Financial assets

Sterling 1,195 – – 1,195 712 – – 712

Euros 340 – – 340 278 – – 278

US dollar 154 – – 154 141 – – 141

1,689 – – 1,689 1,131 – – 1,131

Financial liabilities

Sterling 1,551 – 77 1,628 1,427 1 50 1,478

Euros 12 – – 12 11 – – 11

US dollar 51 – – 51 18 – – 18

1,614 – 77 1,691 1,456 1 50 1,507

The Group places its cash balances on deposit at floating rates of interest. Surplus cash balances are placed on short

term deposit (less than six months). No interest rate swaps are used.

Financial liabilities principally comprise the Group’s borrowings under an invoice discounting facility with the Royal

Bank of Scotland and trade creditors. All interest is payable at floating rate of 2.5% above LIBOR.

In 2006, the fixed rate financial liabilities comprised finance leases with a weighted average fixed interest rate of 9.12%

over a weighted average term of 2 months.

Borrowing facilities

During 2004 a £500,000 invoice discounting facility with the Company’s bankers was negotiated, £407,000 of this

facility had been drawn down at 31 December 2007 (2006: £297,000), £37,000 remained undrawn (2006: £Nil).

Amounts drawn down under this facility are repayable within 90 days from the end of the month of invoice. This

is an ongoing facility.

Fair value of financial assets and liabilities

There is a close approximation between the book values and the fair values of the Group’s financial assets and

liabilities. Fair value is the amount at which a financial instrument could be exchanged in an arm’s length transaction

between willing parties, other than a forced or liquidation sale, and excludes accrued interest.

Primary financial instruments held or issued to finance the Group’s operations as at 31 December 2007 were:

Financial liabilities maturity

2007 2006

Less than Less than

1 year 1 year

£’000 £’000

Borrowings (407) (297)

Trade and other payables (1,132) (1,062)

(1,539) (1,359)




77471 NOTES 14/4/08 21:30 Page 42

24. Financial risk management continued

Financial assets and liabilities by category

2007 2006

Loans and Loans and

receivables receivables

£’000 £’000

Assets as per balance sheet


Cash and cash equivalents 763 418

Total 1,685 1,092

Other Other

financial financial

liabilities liabilities

Liabilities as per balance sheet

Borrowings 407 297

Summary of methods and assumptions

Cash balances and short term borrowings Fair value approximates to the carrying amount because of the

short maturity of these instruments.

Long term borrowings The fair values of fixed rate liabilities have been calculated by

discounting cash flows at prevailing interest rates.

Currency exposures on monetary assets

The tables below show the extent to which members of the Group have monetary assets and liabilities in currencies

other than their local currency. Foreign exchange differences on re-translation of these assets and liabilities are taken

to the Income Statement.

Net foreign currency monetary assets

US Dollars Euros Total

£’000 £’000 £’000

2007 – functional currency

Sterling 62 345 407


Sterling 65 270 335

Net foreign currency monetary liabilities

US Dollars Euros Total

£’000 £’000 £’000


Sterling 6 8 14


Sterling 1 11 12


77471 NOTES 14/4/08 21:30 Page 43

25. Related party transactions

Transactions within the group are not disclosed as all such transactions have been eliminated on consolidation.

Directors’ interests in the share capital of the Company are disclosed on page 15.

The following transactions were carried out with related parties:

Key management compensation

2007 2006

£’000 £’000

Aggregate emoluments 821 816

Sums paid to third parties for directors’ services 25 25

Contributions to directors’ personal pension schemes 17 16

863 857

In addition to the above is an amount of £282,000 (2006: £205,000) charged to the Income Statement with respect to

IFRS2 “Share based payments” for key management.

26. Contingent liabilities

The directors are not aware of any contingent liabilities.

27. Subsequent events

Conditional placing

On April 7 2008, the Company announced that it had accepted an irrevocable undertaking from Nexus Medical

Partners II, LP to subscribe for 3,030,303 ordinary shares of 1p each at a price of 22.0p per share to raise £666,667.

The funds to be invested are specifically for use in expanding the US market, including the hiring of additional

management and field staff in key locations to manage and support the growing demand for the Company’s

products. The funds are managed by Nexus Medical Partners on behalf of a US State Government to promote

economic development.






appropriate authorities being received at the next general meeting of the Company. Following the issue of these new

shares, subject to no other changes, the Company will have a total of 95,931,956 ordinary shares in issue. This total

includes an allotment of 413,746 new ordinary shares which are also subject to approval at the next general meeting of

the Company as announced on 25 January 2008. Application will be made for these shares to be admitted to trading

on the Alternative Investment Market.




77471 NOTES 14/4/08 21:30 Page 44

28. Explanation of transition to IFRS

For all periods up to and including 31 December 2006 the Group prepared its financial statements in accordance with

UK GAAP.

In preparing these financial statements, the Group has started from an opening balance sheet as at 1 January 2006,

the Group’s date of transition to IFRS, and made those changes in accounting policies and other restatements required

by IFRS.

When a company adopts IFRS for the first time it is generally required to present comparative data as though IFRS had

always been applicable. However, the standard which covers the initial introduction of IFRS, IFRS 1: First-time adoption

of International Financial Reporting Standards, allows companies to take advantage of a number of exemptions from

restating historical data in order to simplify the transition process.

Business Combinations

The Group has elected not to apply IFRS 3 Business Combinations retrospectively to business combinations that

took place prior to the transition date. Consequently goodwill arising on business combination before the transition

date remains at its previous UK GAAP carrying value of £Nil, as at the date of transition.

Cumulative translation differences

IAS 21 The Effects of ‘Changes in Foreign Exchange Rates’ requires annual translation differences arising on

the opening net assets and net profit or loss of each foreign subsidiary to be treated as a separate component

of shareholders’ equity, and the cumulative net surplus/deficit for each subsidiary carried forward and added

to/subtracted from any gains/losses on the future disposal of that subsidiary. Deltex Medical has taken the option

to set these cumulative gains/losses at zero as at the date of transition to IFRS. Any gains and losses recognised

in the income statement on subsequent disposals of foreign operations will therefore include only those translation

differences arising after 1 January 2006, the IFRS transition date.

The analysis below shows a reconciliation of net assets and profit as reported under UK GAAP at 1 January 2006 to

the revised numbers under IFRS as reported in these financial statements.


77471 NOTES 14/4/08 21:30 Page 45

IFRS

UK effect

GAAP (Note a) IFRS

£’000 £’000 £’000

Assets

Non-current assets

Property, plant and equipment 85 – 85

Trade and other receivables 99 – 99

Intangible assets – 3 3

Total non-current assets 184 3 187

Current assets

Inventories 443 – 443


Current income tax recoverable 59 – 59

Cash and cash equivalents 606 – 606

Total current assets 2,016 – 2,016

Total assets 2,200 3 2,203

Liabilities

Current liabilities

Borrowings (219) – (219)

Trade and other payables (871) – (871)

Provisions (34) – (34)

Total liabilities (1,124) – (1,124)

Net assets 1,076 3 1,079

Equity

Share capital 726 – 726

Share premium 12,712 – 12,712

Capital redemption reserve 17,476 – 17,476

Other reserves 768 – 768

Translation reserve – – –

Retained earnings/(deficit) (30,606) 3 (30,603)

Total equity 1,076 3 1,079

Reconciliation of Income Statementfor the year ended 31 December 2006

UK

IFRS

GAAP

effect

IFRS(Note b)

£’000 £’000 £’000

Revenue 3,511 – 3,511

Cost of sales (1,182) – (1,182)

Gross profit 2,329 – 2,329

Net operating expenses (4,431) 88 (4,343)

Operating loss (2,102) 88 (2,014)

Financial income 8 – 8

Financial expenditure (11) – (11)

Loss on ordinary activities before taxation (2,105) 88 (2,017)

Tax on loss on ordinary activities 23 – 23

Loss for the financial year (2,082) 88 (1,994)

Reconciliation of Group Balance Sheetat 1 January 2006


77471 NOTES 14/4/08 21:30 Page 46

IFRS

UK effect

GAAP (Note c) IFRS

£’000 £’000 £’000

Assets

Non-current assets

Property, plant and equipment 47 – 47


Intangible assets – 91 91

Total non-current assets 99 91 190

Current assets

Inventories 383 – 383

Trade and other receivables 1,241 – 1,241

Current income tax recoverable 45 – 45

Cash and cash equivalents 418 – 418

Total current assets 2,087 – 2,087

Total assets 2,186 91 2,277

Liabilities

Current liabilities

Borrowings (297) – (297)

Trade and other payables (1,160) – (1,160)

Provisions (50) – (50)

Total liabilities (1,507) – (1,507)

Net assets 679 91 770

Equity

Share capital 800 – 800

Share premium 14,086 – 14,086

Capital redemption reserve 17,476 – 17,476

Other reserves 1,014 – 1,014

Translation reserve – (9) (9)

Retained earnings/(deficit) (32,697) 100 (32,597)

Total equity 679 91 770


Reconciliation of Group Balance Sheetat 31 December 2006

77471 NOTES 14/4/08 21:30 Page 47

a) Explanation of effects of IFRS on the Group balance sheet at 1 January 2006

1 January

2006

£’000

Total equity under UK GAAP 1,076

Research and development reclassification 3

Total equity under IFRS 1,079

b) Reconciliation of loss and recognised income and expense of the Group for the year ended 31 December 2006

31 December

2006

£’000

Loss after tax under UK GAAP (2,082)

Research and development expenditure reclassification 88

Loss after tax under IFRS (1,994)

c) Explanation of effects of IFRS on the Group balance sheet at 31 December 2006

31 December

2006

£’000

Total equity under UK GAAP 679

Research and development reclassification 91

Total equity under IFRS 770

d) Explanation of effects of IFRS on the 2006 Group cash flow statement

The impact on the cash flow is minimal, as the conversion from UK GAAP to IFRS comprises non-cash adjustments.

There are changes to the order in which items are presented, but these have no overall financial impact. The IFRS

adjustments are mainly reflected between the different categories of working capital.

Explanations of reconciling items from UK GAAP to IFRS


77471 NOTES 14/4/08 21:30 Page 48

We have audited the parent company financial statements of Deltex Medical Group plc for the year ended 31 December

2007 which comprise the Balance Sheet and the related notes. These parent company financial statements have been

prepared under the accounting policies set out therein.

We have reported separately on the group financial statements of Deltex Medical Group Plc for the year ended

31 December 2007.

Respective responsibilities of directors and auditors

The directors’ responsibilities for preparing the Annual Report and the parent company financial statements in accordance

with applicable law and United Kingdom 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 in accordance with relevant legal and regulatory

requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been

prepared for and only for the company’s members as a body in accordance with Section 235 of the Companies Act 1985

and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to

any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our

prior consent in writing.

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 in accordance with the Companies Act 1985. We also report to you whether in

our opinion the information given in the Directors’ Report is consistent with the parent company financial statements. The

information given in the Directors’ Report includes that specific information presented in the Operating 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 Chairman’s Statement, Operating Review and

the Director’s 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. 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 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.

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 31 December 2007;

● the parent company financial statements 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.


Chartered Accountants and Registered Auditors

Southampton

15 April 2008


Independent Auditors’ Reportto the members of Deltex Medical Group plc

77471 NOTES 14/4/08 21:30 Page 49

2007 2006

Note £’000 £’000

Fixed assets

Investments 4 26,422 26,422

Current assets

Debtors:

amounts falling due within one year 5 16 31

amounts falling due after more than one year 5 3,480 1,424

Cash at bank and in hand 651 266

4,147 1,721

Creditors:

amounts falling due within one year 6 (183) (135)

Net current assets 3,964 1,586

Net assets 30,386 28,008

Capital and reserves

Called up share capital 7 925 800

Share premium account 9 16,423 14,086

Capital redemption reserve 9 17,476 17,476

Other reserves 9 1,342 1,014

Profit and loss account 9 (5,780) (5,368)

Equity shareholders’ funds 10 30,386 28,008

These financial statements were approved by the board of directors on 15 April 2008 and signed on its behalf by:

N J Keen

E A Phillips

Company Balance Sheetat 31 December 2007


77471 NOTES 14/4/08 21:30 Page 50

1. Principal accounting policies

These financial statements have been prepared under the historical cost convention, and the accounting policies set

out below, all of which have been applied consistently throughout the year and in accordance with applicable United

Kingdom accounting standards.

Investments

Investments are stated at cost less any provisions for diminution in value.

Deferred taxation

Deferred taxation is recognised on a full provision basis for timing differences between the recognition of gains and

losses in the financial statements and their recognition in the taxation computation. Deferred tax is measured at the

average tax rates that are expected to apply in the period in which the timing differences are expected to reverse

based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. A deferred

tax asset is only recognised if it is considered more likely than not there will be suitable profits against which the

underlying timing difference can be reversed. Deferred tax is measured on a non-discounted basis.

Foreign currency translation

Foreign currency assets and liabilities are translated into sterling at the rate of exchange ruling at the balance sheet

date. Transactions in overseas currencies are translated at the rate of exchange ruling on the date of the transaction

or at a contracted rate if applicable. Any gains or losses arising during the year have been dealt with through the

profit and loss account.

Pension costs

The Company provides pension arrangements to its executive directors through the directors, defined contribution

personal pension schemes. Contributions and pension costs are based on pensionable salary and are charged as an

expense as they fall due. The Company has no further payment obligations once the contributions have been paid.

Share based payments

The Company awards directors, employees and certain of the Group’s distributors and advisors equity-settled share-

based payments, from time to time, on a discretionary basis. In accordance with FRS20 “Share–based payments”,

equity settled share-based payments are measured at fair value at the time of grant. Fair value is measured by use

of Black Scholes model. The fair value determined at the grant date of the equity–settled share-based payments is

expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the number of

shares that will eventually vest. The options are subject to vesting conditions of up to six years, and their fair value

is recognised as an expense with a corresponding increase in “other reserves” equity over the vesting period.

The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value)

and share premium when the options are exercised. Provision for National Insurance payable on such gains is

recognised in accordance with UITF25.

The fair value of the equity-settled share-based payment is re-charged by the Company to the subsidiary operating

company at fair value. The expense is therefore recognised in the subsidiary operating company, with the equity

reserve being recognised in the Group Company.

Related party transactions and cash flow statement

The Company is the ultimate parent undertaking of the Deltex Medical Group and is therefore included in the

consolidated financial statements of that Group, which are publicly available. Consequently the Company has taken

advantage of the exemptions from preparing a cash flow statement under the terms of FRS1 (Revised 1996) “Cash

Flow Statements” and the exemptions under FRS 8 “Related Party Disclosures” relating to the disclosure of transactions

with other Group companies.”

2. Loss for the year

As permitted by Section 230 of the Companies Act 1985 the Company has elected not to present its own profit and

loss account for the year. Deltex Medical Group plc reported a loss for the financial year ended 31 December 2007

of £412,000 (2006: £525,000).


Notes to the Company Financial Statements for the year ended 31 December 2007

77471 NOTES 14/4/08 21:30 Page 51

3. Directors emoluments

The remuneration of the non-executive directors was as follows:

2007 2006

£ £


Sums paid to third parties for directors’ services 25,000 25,000

Contributions to directors’ personal pension schemes – –

85,200 97,000

There are no (2006: Nil) benefits accruing to directors under personal pension plans.

Included in the above figure is an amount paid to the employing company of a non-executive director for the services

of that director of £25,000 (2006: £25,000).

All executive directors in office at the year-end receive their emoluments from Deltex Medical Limited, a subsidiary

undertaking of the Group. Their services to the Company are incidental to their services to the Group as a whole.

The average number of non-executive directors by function was as follows:

2007 2006

No. No.

Administration 4 5

The company had no additional employees other than the directors.

4. Investments

2007 2007 2007 2006 2006 2006

Investments Loans Investments Loans

in subsidiary to subsidiary in subsidiary to subsidiary

undertakings undertakings Total undertakings undertakings Total

£’000 £’000 £’000 £’000 £’000 £’000

At 1 January 846 25,576 26,422 844 25,576 26,420

Additions – – – 2 – 2

At 31 December 846 25,576 26,422 846 25,576 26,422

Loans to subsidiary undertakings in the amount of £25,576,000 relates to long term balances with Deltex Medical

Limited and Deltex Medical Holdings, Inc. The directors consider that these balances are intended to be, for all

practical purposes, permanent equity and do not expect them to be repayable in the foreseeable future. These loans

have therefore been treated as part of Deltex Medical Group plc net investment in these subsidiaries, with exchange

difference arising on the long term balance with Deltex Medical Holdings, Inc. being dealt with as adjustments to

reserves. Balances since 1 January 2006 have been treated as long term debtors, as the directors believe the amounts

loaned to subsidiary undertakings are likely to be repaid within ten years.

Details of the Company’s principal trading subsidiary undertakings are set out below. In all cases the holding is 100%

of the ordinary shares:

● Deltex Medical Limited incorporated and operating in Great Britain, manufactures and markets medical devices;

● Deltex Medical Holdings, Inc incorporated and operating in the United States of America, markets and sells

medical devices in the USA which are manufactured by the group in the UK;

● Deltex Medical, Espana, incorporated and operating in Spain, markets and sells medical devices in Spain which

are manufactured by the group in the UK.

Notes to the Company Financial Statements continued



77471 NOTES 14/4/08 21:30 Page 52

5. Debtors

2007 2006

£’000 £’000

Amounts falling due within one year:

Other debtors 6 6

Prepayments and accrued income 10 25

16 31

Amounts falling due after more than one year:

Loans to subsidiary undertakings 3,480 1,424

3,496 1,455

6. Creditors: amounts falling due within one year

2007 2006

£’000 £’000

Other creditors 87 79

Accruals and deferred income 96 56

183 135

7. Called up share capital

Authorised 2007 2006

£’000 £’000

6,587,546,210 ordinary shares of 1 pence each 65,875 65,875

Called up, allotted and fully paid 2007 2006

£’000 £’000

92,487,907 1p ordinary shares (2006: 80,057,125) 925 800

The movement in the Company’s issued share-capital during the year is as follows:

During the year, the Company issued 899,437 1p ordinary shares pursuant to the exercise of options. The Company

also placed 11,133,192 1p ordinary shares with institutional and other investors. In addition a total of 398,153 1p

ordinary shares were issued to certain of the Company’s advisors who elected to take shares in lieu of cash payment

for their services to the Company.

Employee options

Current and former employees of the Group hold options to subscribe for shares in the Company. The following table

sets out movements in share options during the year:

Employee share options

Executive Enterprise

Share Management

Option Incentive

Scheme Scheme Total

No. No. No.

At 1 January 2007 4,434,188 2,105,343 6,539,531

Additions 1,570,000 716,108 2,286,108

Exercised (5,000) (84,437) (89,437)

Lapsed (120,000) (40,000) (160,000)

At 31 December 2007 5,879,188 2,697,014 8,576,202



77471 NOTES 14/4/08 21:30 Page 53

7. Called up share capital continued

As at 31 December 2007 the following options to subscribe for ordinary shares of 1p each were outstanding under

employee share schemes:


£ from to

Current Employees


12,012 1.07 12 May 2002 11 May 2009

43,043 2.20 12 January 2003 11 January 2010

74,000 1.00 5 April 2004 4 April 2011


0.25

14,000 See note (a) 19 March 2005 18 March 2012

0.25


0.25


0.15


1,382,000 See note (a) 12 October 2007 11 October 2014

0.24


1,376,000 See note (a) 28 March 2009 27 March 2016

0.2075

627,574 See note (b) 0.01 15 March 2007 19 May 2016

1,548,000 See note (a) 29 June 2010 28 June 2017

0.295

716,108 See note (b) 0.01 7 April 2008 28 June 2017

8,445,085

Former Employees

32,032 1.07 18 June 2001 17 June 2008


11,011 2.20 12 January 2003 11 January 2010

6,006 2.20 7 February 2003 6 February 2010


0.24

131,117

8,576,202

Notes:

(a) Options exercisable subject to the criterion set by the board that the shares of Deltex Medical Group plc should

have outperformed the FTSE Techmark MediScience Index between the date of grant and the date of exercise of

the option.

(b) Enterprise Management Incentive Scheme.

Other options

Options, other than employee share options are as follows:

As at 1 Lapsed Exercised As at 31 January during the in the December Exercise Exercise Exercise

2007 period period 2007 price period PeriodNo. No. No. No. £ from to

Company contractor (1) 20,000 – – 20,000 0.25 19 March 2005 18 March 2012

Actamed Limited (1) 120,000 120,000 – – 0.25 1 July 2004 30 June 2007

Company distributors (2) 500,000 – – 500,000 0.2125 31 July 2004 31 December 2008

Company distributors (2) 400,000 – – 400,000 0.20 4 May 2005 31 December 2008

Company distributors (2) 800,000 – 800,000 – 0.175 3 May 2006 15 December 2007

Company distributors (2) 250,000 – – 250,000 0.19 13 October 2008 12 October 2015

2,090,000 120,000 800,000 1,170,000

(1) Options are exercisable in whole on any one occasion during the exercise period.

(2) Options are exercisable in part or in whole at any time during the exercise period.





77471 NOTES 14/4/08 21:30 Page 54

8. Share based payments

The Group awards directors, employees and certain of the Company’s distributors and advisors equity-settled share-

based payments, from time to time, on a discretionary basis, in accordance with FRS20 “Share-based payments”.

The terms and conditions of all awards and grants made since 7 November 2002 are as follows:

Number of Contractual

Employees instruments Vesting life of

Grant date Plan entitled granted conditions option

June 2007 Enterprise All UK employees 716,108 Exercise after 10 years

Management date of next

Incentive Scheme preliminary

announcement

following issue of

award

June 2007 Executive Share All employees 1,570,000 Three years of 7 years

Option Scheme service plus

satisfaction of

performance

conditions

May 2006 Enterprise All UK employees 734,546 Exercise after 10 years



announcement

following issue of

award

March 2006 Executive Share All employees 1,419,000 Three years of 7 years


satisfaction of

performance

conditions

December 2005 Unapproved Certain of the 800,000 None 1 year

options Group’s distributors (renewed)

October 2005 Unapproved Certain of the 250,000 None 1 year


February 2005 Unapproved Certain of the 400,000 None 1 year


October 2004 Executive Share All employees 1,475,000 Three years of 7 years


satisfaction of

performance

conditions

October 2004 Enterprise All UK employees 460,215 Exercise after date 10 years

Management of next preliminary

Incentive Scheme announcement

following issue of

award

December 2003 Unapproved Certain of the 1,000,000 None 1 year

options Company’s (renewed)

distributors

October 2003 Enterprise All UK employees 1,583,333 Exercise after 10 years



announcement

following issue of

award

October 2003 Executive Share All employees 764,000 Three years of 7 years


satisfaction of

performance

conditions


77471 NOTES 14/4/08 21:30 Page 55

8. Share based payments continued

Executive Share Option Scheme

June March October October November

2007 2006 2004 2003 2002

Fair value at

measurement date 16.0p 13.0p 18.0p 11.0p 19.0p

Share price 29.50p 20.75p 28.0p 15.0p 8.0p

Exercise price 29.50p 20.75p 28.0p 15.0p 25.0p

Expected volatility 48.00% 62.10% 70.40% 84.40% 90.00%


(expressed as weighted

average life used in the

modelling) 4 years 6 years 6 years 6 years 5 years

Risk free interest rate 5.76% 4.48% 4.73% 5.03% 4.57%

Enterprise Management Incentive Scheme

June May October October

2007 2006 2004 2003

Fair value at measurement date 29.0p 18.0p 27.0p 14.0p

Share price 29.50p 18.75p 28.0p 15.0p

Exercise price 1.0p 1.0p 1.0p 1.0p

Expected volatility 48.2% 49.0% 32.20% 84.40%


(expressed as weighted average life

used in the modelling) 3 years 3 years 2 years 4 years

Risk free interest rate 5.76% 4.85% 4.63% 4.97%

Distributor Options

December October February December

2005 2005 2005 2003

Fair value at measurement date 4.0p 11.0p 5.0p 11.0p

Share price 17.5p 19.0p 20.0p 21.25p

Exercise price 17.5p 19.0p 20.0p 21.25p

Expected volatility 48.60% 56.30% 42.90% 93.40%


(expressed as weighted average life

used in the modelling) 1 year 6 years 2 years 2 years

Risk free interest rate 4.20% 4.40% 4.60% 4.33%

Where appropriate, the expected volatility has been based on historical volatility over a period of the same length as

the expected option period and ending on the grant date. Where the historic option life is shorter than the expected

option life, volatility has been measured over the maximum amount of time historic information can be obtained. The

options have been valued using the Black Scholes model.


operating company at fair value. The expenses is therefore recognised in the subsidiary operating company, with

the equity reserve being recognised in the Group Company.




77471 NOTES 14/4/08 21:30 Page 56

9. Reserves

Profit

and loss

Other Share Capital account/

reserves premium redemption (deficit)

£’000 £’000 £’000 £’000

At 1 January 2007 1,014 14,086 17,476 (5,368)

Premium on shares issued during the year – 2,488 – –

Issue expenses – (151) – –

Loss for the financial year – – – (412)

Credit in respect of service costs settled by

award of share options 328 – – –

At 31 December 2007 1,342 16,423 17,476 (5,780)

10. Reconciliation of movements in shareholders funds

2007 2006

£’000 £’000

Opening shareholders’ funds 28,008 26,839

Increase in share capital during the year 125 74

Premium on shares issued, net of costs 2,337 1,374

Loss for the financial year (412) (525)

Credit in respect of service costs settled by award of share options 328 246

Closing shareholders funds 30,386 28,008

11. Ultimate parent company

There are no shareholders with overall control of the Company as at 31 December 2007 or 31 December 2006.

12. Related party transactions

Exemption has been taken under FRS 8 from disclosing related party transactions between the Company and its

subsidiary undertakings.

The directors of Deltex Medical Group plc had no material transactions with the Company during the year, other than

as a result of service agreements. Details of the directors’ remuneration are disclosed in the Directors’ Report in the

Consolidated Financial Statements on pages 15 to 17.

13. Contingent liabilities

The directors are not aware of any contingent liabilities.

14. Subsequent events

Conditional placing

On April 7 2008, the Company announced that it had accepted an irrevocable undertaking from Nexus Medical

Partners II, LP to subscribe for 3,030,303 ordinary shares of 1p each at a price of 22.0p per share to raise £666,667.

The funds to be invested are specifically for use in expanding the US market, including the hiring of additional

management and field staff in key locations to manage and support the growing demand for the Company’s

products. The funds are managed by Nexus Medical Partners on behalf of a US State Government to promote

economic development.






appropriate authorities being received at the next general meeting of the Company. Following the issue of these new

shares, subject to no other changes, the Company will have a total of 95,931,956 ordinary shares in issue. This total

includes an allotment of 413,746 new ordinary shares which are also subject to approval at the next general meeting of

the Company as announced on 25 January 2008. Application will be made for these shares to be admitted to trading

on the Alternative Investment Market.


77471 NOTES 14/4/08 21:30 Page 57

Shareholder Notes


77471 NOTES 14/4/08 21:30 Page 58


Shareholder Notes

77471 NOTES 14/4/08 21:30 Page 59

Shareholder Notes


77471 NOTES 14/4/08 21:30 Page 60

77471 NOTES 14/4/08 21:30 Page 61

Deltex Medical Group plc

Terminus Road

Chichester PO19 8TX

United Kingdom

Tel: +44 (0) 1243 774837

Customer Service: 0845 085 0001

Fax: +44 (0) 1243 532534

www.deltexmedical.com

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