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2006Surgical Innovations Group plcAnnual Report and Accounts 2006

Surgical Innovations Group plcClayton Park Clayton Wood Rise Leeds LS16 6RF Tel: +44 (0)113 230 7597 Fax: +44 (0)113 230 7598 Web: www.sigroupplc.com

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Surgical Innovations Group plc specialises in the design and manufacture of innovative devices for use in minimally invasive surgery and industrial markets. Our vision is to be the world’s leading supplier of high quality, cost-effective instrumentation, empowering surgeons to provide patients with an improved quality of life; and to create engineering solutions which truly focus on the user’s needs.

01 Highlights 02 Business at a Glance 04 Chairman’s Statement 06 Business Review 10 Financial Review 13 Board of Directors 14 Report of the Directors 18 Report on Remuneration 21 Corporate Governance 23 Report of the Independent Auditor 24 Consolidated Profit and Loss Account 25 Consolidated Balance Sheet 26 Company Balance Sheet 27 Consolidated Cash Flow Statement 28 Notes to the Financial Statements 40 Five Year Summary IBC Advisers IBC Glossary of Terms

GLOSSARY OF TERMS

Autologous Blood Transfusion (ABT) Collection and re-infusion of a patient’s own blood during or after surgery.

Computer Numerically Controlled equipment (CNC) Computer Numerically Controlled machinery. These are machine tools for manufacturing turned and milled components.

Food and Drug Administration (FDA) Regulatory body governing the marketing of food, pharmaceuticals and medical devices in the United States.

Hand held instrumentation Instruments which are inserted through ports into the abdominal cavity to cut, grasp and manipulate tissue.

Laparoscopic Refers to minimally invasive surgery carried out in the abdominal cavity.

Minimally Invasive Surgery (MIS) Surgery carried out through small incisions (keyholes), thereby minimising wound trauma.

Original Equipment Manufacture (OEM) Manufacture of products supplied to other companies, for sale by those companies under their own brand.

Port access system Devices used for gaining access to the abdominal cavity through small incisions.

Resposable A device or range comprising reusable main elements and disposable accessories.

ADVISERS

Company Secretary and registered officeN Graham Bowland Clayton Park Clayton Wood Rise Leeds LS16 6RF

Registered number 2298163

Nominated adviserHanson Westhouse Securities Limited 6th Floor West One Wellington Street Leeds LS1 1BA

SolicitorsWalker Morris Kings Court 12 King Street Leeds LS1 2HL

AuditorGrant Thornton UK LLP No 1 Whitehall Riverside Leeds LS1 4BN

BrokerHanson Westhouse Securities Limited One Angel Court London EC2R 7HJ

RegistrarsCapita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU

BankersHSBC Bank Plc 7 Prospect Crescent Harrogate HG1 1RN

Barclays Bank Plc Barclays Business Centre P O Box 100 Leeds LS1 1PA

Public RelationsAbchurch Communications Ltd West One Wellington Street Leeds LS1 1BA

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01 Surgical Innovations Group plcAnnual Report and Accounts 2006 www.sigroupplc.com

Eighth successive year of record sales, profit and earnings per share

Pre-tax profits increased substantially, up 98% to £696,000 (2005: £352,000)

Revenue up by 11% to £4.46m (2005: £4.02m)

Basic earnings per share (EPS) increased by 69% to 0.27p (2005: 0.16p)

Significant growth in sales of minimally invasive surgery devices (up by 36%)

US sales focus aided by additional patent clearance and FDA approval

Research and development expenditure increased by 18% to £292,000 (2005: £248,000), representing a significant investment in the Group’s future product range

Simplification strategy implemented, improving production efficiencies for 2007 and beyond

Significant contracts already signed in 2007 with Teleflex Medical and Elemental Healthcare

+98% Pre-tax profits £696,000 (2005: £352,000)

+11% Revenue £4.46m (2005: £4.02m)

+18% Research and development expenditure £292,000 (2005: £248,000)

HIGHLIGHTS

+69% Basic earnings per share 0.27p (2005: 0.16p)

+11%Turnover (£’000) 4,460

02 03 04 05 06

4,108

3,032

2,750

2,224

+83%Operating profit (£’000) 735

02 03 04 05 06

401

242

183

78

+69%EPS (p) 0.27

02 03 04 05 06

0.16

0.08

0.05

0.03

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BUSINESS AT A GLANCE

WE ARE COMMITTED TO DEVELOPING PROGRESSIVE TECHNOLOGY AND EXPLOITING NEW MARKETS.

SURGICAL INNOVATIONS

GROUP PLCWe have a truly international

presence with representation in all major markets through a global

network of distributors and OEM partners. We are committed to

developing progressive technology and exploiting new markets.

SURGICAL INNOVATIONS LIMITED

MINIMALLY INVASIVE SURGERYSurgical Innovations specialises in the design and manufacture of creative solutions for Minimally Invasive Surgery (MIS) and industrial markets. Our pioneering products are user-oriented, with ergonomics at the core of our technology.

HAEMOCELL LIMITED

AUTOLOGOUS BLOOD TRANSFUSIONHaemocell specialises in equipment for Autologous Blood Transfusion (ABT). ABT is the collection and re-infusion of a patient’s own blood either during or after surgery, eliminating the widely-documented risks of infection from donated blood.

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PRODUCT DEVELOPMENT DIVISION

Surgical Innovations’ Product Development Division designs and develops innovative instrumentation and equipment for medical and industrial markets.

INSTRUMENTS DIVISION

Surgical Innovations’ Instruments Division manufactures and markets our surgical devices worldwide.

MEDICAL AND INDUSTRIAL SOLUTIONS

Our multidisciplinary team of designers and engineers employ the latest computer aided three-dimensional modelling combined with traditional engineering, surgical and scientifi c instrument-making skills.

1. LOGIC ‘Resposable’ Instrument System Logic comprises a range of

ergonomically-designed reusable handles with a choice of reusable or single use inserts, providing a high performance yet cost-effective solution.

2. QUICK Single Use Instrument Range Quick instruments are sterile-packed and

single use, delivering maximum performance in a simple, convenient format.

3. YELLOPORT Laparoscopic Port Access System YelloPort leads the way for reusable port

access systems. A range of single use accessories ensures all the advantages of a disposable in a reusable format.

4. FASTCLAMP Endoscopic Clamping System FastClamp guarantees a quick,

stable and unobtrusive clamping solution for instruments and scopes.

5. ENDOFLEX Laparoscopic Retraction System EndoFlex is generally regarded as

the world’s best retraction and tissue mobilisation system.

3

MIS INSTRUMENTATION

4 51 2

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CHAIRMAN’S STATEMENT

Summary of the Chairman’s Statement For the eighth successive year the Group

achieved a record level of sales, profit and earnings per share.

The Group’s reported sales revenue grew by 11% to £4.46m (2005: £4.02m).

Our immediate plans focus on the launch of our products developed during 2006.

Doug Liversidge CBENon-executive Chairman

“ I am delighted to be able to report another year of excellent progress for Surgical Innovations.”

IntroductionI am delighted to be able to report another year of excellent progress for Surgical Innovations Group Plc (the Group).

For the eighth successive year the Group achieved a record level of sales, profit and earnings per share (EPS).

The Group’s reported sales revenue grew by 11% to £4.46m (2005: £4.02m). Significantly, sales within our core business of Minimally Invasive Surgery (MIS) devices rose by 36%. This has encouraged your Board to invest additional resources in potentially lucrative internal development projects for new surgical devices.

Importantly, we have been able to deliver an improvement in our MIS operating margins as a result of our focus on manufacturing processes relating to our strategic product lines.

The Board has taken the view to capitalise £190,000 of research and development costs, net of specific grants, as they fulfil the requirements of the relevant accounting standards.

As a result, pre-tax profits have increased by 98% to £696,000 (2005: £352,000), which translates into basic EPS growth of 69% to 0.27p (2005: 0.16p).

Business review Instrument Division revenue increased by 36% to £3.65m (2005: £2.68m). This performance is testament to our key product lines; the YelloPort port access system and the Logic single use scissors range. We are currently focusing our efforts on the United States laparoscopic market and substantial work has been undertaken during the year to establish clear routes to market.

Product Development Division revenue totalled £313,000 (2005: £535,000). This income was generated from clients in both the medical device and industrial sectors. New customers were secured building upon our success with Rolls-Royce in 2005. This type of work from external customers can be extremely profitable, although it remains unpredictable, usually driven by urgent customer needs. Therefore, we took the decision to invest heavily in the year in internal MIS product development. Our aim is to build upon our international network of MIS distributors, with its high demand and enthusiasm for new innovative products.

Royalties from the licensing of EndoFlex to Cardinal Health totalled £249,000, a decrease of 11% on last year (2005: £281,000). After allowing for adverse currency exchange rates during 2006, the actual sales value of our licensed products fell by only 2%. We worked closely with Cardinal Health during the year to develop an international presence for EndoFlex, utilising our established distribution partners with a view to sustaining future royalty income. In addition we continue to receive a licence fee from Rolls Royce whilst exploring arrangements for future licence fees and development work from other industrial companies where our technology may have possible applications.

Our Autologous Blood business was adversely affected during the year by changes to our external manufacturing arrangements. I am pleased to report that we have now resolved these issues and we are actively seeking partners to develop a coherent strategy for both our intra operative and post operative product lines.

Overall the Group has enjoyed a successful year, laying a further platform for growth in profitability and new product development.

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Product development2006 saw a renewed focus on the development of devices to complement our existing MIS product portfolio. During the year our expenditure on research and development, before Government grants of £46,000, increased by 18% to £292,000 (2005: £248,000), representing 6.5% of sales (2005: 6.2%).

The creation of intellectual property is a key element of our investment in product development. I am delighted that we successfully filed patents on technology intrinsic to one of our products positioned for launch in 2007. Our current patent portfolio has enabled us to generate over £2.7m in royalties and licence fees. It is our intention to aggressively grow and defend our intellectual property portfolio.

Board of DirectorsOur Group Board has worked diligently as a team during the year and, importantly the level of support provided by the Non-executives to the Executive Directors continues to develop in line with the growth of the business. The Operations Board is now well established and has significant levels of expertise in all areas of operation of the business.

EmployeesThe Group is committed to the development and retention of its high calibre staff, which we believe is the key to achieving the Group’s ambitious growth plans. I am delighted to report that we have recently recruited an experienced clinical specialist to oversee forthcoming product launches in the United States and our other overseas markets.

I would like to take this opportunity to thank all staff for their dedication and support during the year in which we again continued to provide high quality innovative devices to the surgical profession.

OutlookOur immediate plans focus on the launch of our products developed during 2006. The United States is a key market for us and with US Food and Drug Administration (FDA) approval now received, together with patent clearance, we are well placed to establish a presence in this dynamic and growing market.

Although I have to report that Aesculap has decided not to renew its OEM scissors contract with us, such a situation is always a possibility with this type of business and plans are in hand to mitigate the effects. We recently signed a £1.15m three year extension to our contract with Teleflex Medical for distribution of our products in Europe. Furthermore, as part of a review of our distribution arrangements, we have appointed Elemental Healthcare, through a £1.74m four year contract, as our distributor in the UK. Negotiations are also underway with regard to establishing a master dealer for all our business in the Far East and Indian sub continent, where we believe there is a major opportunity for our products.

We approach 2007 and beyond with both enthusiasm and excitement. We look forward to achieving further improvements in our operating margins and the continuation of growth in the business.

Doug Liversidge CBENon-executive Chairman27 April 2007

INNOVATING...

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BUSINESS REVIEW

Summary of the Business Review The Directors are committed to

developing new innovative products whilst maintaining a competitive pricing structure.

2006 was a year in which we placed a much greater emphasis on internal product development in our core business of MIS instrumentation.

We continue to strengthen our intellectual property portfolio and have filed two new patents to protect our new YelloPort sealing technology.

Graham BowlandFinance Director

Stuart MoranTechnical Director

“ The strategy adopted during the year has been to continually build on the market position established by the Group.”

IntroductionSurgical Innovations Group plc (the Group) specialises in the design, manufacture and supply of innovative devices for use in Minimally Invasive Surgery (MIS) and industrial markets. Our established routes to market are through OEM partners and an international network of specialised independent distributors. The Group employs over 40 people within the two divisions of Product Development and Instrumentation. Significant revenue is derived from licensing arrangements of the Group’s EndoFlex patented technology.

Strategy and objectivesThe strategy adopted during the year has been to continually build on the market position established by the Group. This strategy is based largely on already established products, including YelloPort and Logic single use scissors and the development of the former with the forthcoming release of YelloPort Plus. To achieve future market growth, especially in the lucrative US market, the Directors are committed to developing new innovative products whilst maintaining a competitive pricing structure for our international strategic and distribution partners.

Business restructuringFollowing on from the creation of two divisions: Instruments and Product Development, we have now created a separate subsidiary company, Haemocell Limited, which will focus entirely on our Autologous Blood Transfusion systems. This provides the Instrumentation division with a clear objective to drive organic growth through MIS device sales, its core competence.

Product Development DivisionExternal product developmentRevenue for 2006 totalled £313,000. This was a significant reduction compared to the exceptional performance in the previous year (2005: £535,000) and reflects the unpredictable nature of this area of our business.

During the year we continued to promote EndoFlex Industrial, our unique technology which helps access complex spaces within the industrial sector. We secured new and repeat business from Rolls-Royce for the use of EndoFlex Industrial in the inspection and maintenance of jet engines whilst they are still on the wing of the aircraft.

We were also able to secure new business with GE Inspection Technologies for the inspection of large frame gas turbines.

In 2006, we were successful in securing a development contract with Gyrus ACMI for the design of a novel, handheld instrument for MIS. The project was completed in accordance with our plans and we are now looking forward to the commercialisation of this product.

We are continually reviewing and refining our business strategy in this sector to ensure that our product development expertise delivers the greatest possible shareholder value.

Internal product development2006 was a year in which we placed a much greater emphasis on internal product development in our core business of MIS instrumentation.

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During the year, our expenditure on research and development increased by 18% to £292,000 (2005: £248,000), before Government grants. This represents 6.5% as a percentage of sales, which is well ahead of the UK industry average of 5.0%.

We continue to win business around the world with YelloPort, our resposable port access system. However, we identified that for us to be successful in the lucrative US market we would require a next-generation product that delivers the highest performance for the lowest cost per procedure. The product development team has now created an innovative high specification product that is ergonomically designed to deliver excellent performance in a cost effective manner.

We continue to strengthen our intellectual property portfolio and have filed two new patents to protect our new YelloPort sealing technology. We are confident that this product will be fully commercialised in the current year.

We have also been able to take full advantage of Government research and development funding from our Regional Development Agency, Yorkshire Forward. The total grant income in 2006 was £46,000.

OutlookWe are now pursuing a rigorous product development schedule and expect to bring a number of new products to market in 2007. This focused development programme, underpinned by the skills and dedication of our development team, will allow us to maintain our position as a global innovator.

DEVELOPING...

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Instruments DivisionSales and marketingDuring 2006 the division increased sales of our devices for MIS by 36% to £3,650,000 (2005: £2,677,000). The chart above highlights the 170% organic growth in MIS devices over the past five years.

Sales of YelloPort increased by 53% to £878,000 (2005: £572,000). This was an exceptional performance and represents the highest ever annual turnover for the product line. Importantly, we achieved growth rates in all four of our sales regions, with significant improvements in the US (115%) and Europe (53%).

We have continued to develop routes to market and within the US have worked closely with companies who operate within the equipment managed service environment. YelloPort offers the ideal solution for these companies as a fundamental constituent in lowering their costs per procedure.

In addition we are collaborating with a major US Hospital Group, North Shore, to establish YelloPort within their port access system portfolio. We are delighted with the work undertaken so far and the positive feedback received from their clinical staff.

YelloPort is a key strategic product line for Surgical Innovations, gaining a reputation as the premier resposable system in the market. We intend to build upon this by introducing new variants which should cater for the demanding US market, currently dominated by single use port systems.

YelloPort has grown significantly in Europe and accounted for 48% of the sales of that product in 2006. Our well established markets in France, Belgium and Italy continue to use the system and in particular we saw growth in Italy where the resposable concept was embraced by hospital procurement managers. It was with great delight to learn that we have been successful in supplying YelloPort to the US Air Force base in North East Italy, and of the possibilities that this may bring with other worldwide US military bases.

Sales of our Logic single use scissors increased by 49% to £1,816,000, this is a remarkable performance with the number of low-cost alternatives now in the market. This performance can be attributed to our contracted OEM arrangements and sales through our own independent distributors.

We continue to search for new markets for our scissors and they have recently received FDA approval. This will enable us to market the product directly into the US through OEM arrangements, direct distribution and contracts with the major general purchasing organisations.

As a result of a change in manufacturing strategy Aesculap have not renewed their OEM contract. We have already established contingency plans to cover this eventuality and we can report that these are being successfully implemented.

We are pleased that our newly established fully disposable QuickRange of instruments gained further market acceptance. Sales increased by 123% to £341,000 (2005: £153,000). At the end of the year we embarked upon a cost down manufacturing programme and early results in 2007 are encouraging. With competitive pricing we have opportunities to develop both home and price sensitive international markets.

Manufacturing and qualityThe substantial growth in MIS devices has been achieved in conjunction with significant investment in our manufacturing processes.

“ We are well positioned for organic growth and increased global market share.”

BUSINESS REVIEW CONTINUED

Five year turnover MIS (£’000) 3,650

02 03 04 05 06

2,6772,487

1,890

1,341

Summary of the Business Review We have continued to develop routes

to market and within the US have worked closely with companies who operate within the equipment managed service environment.

The substantial growth in MIS devices has been achieved in conjunction with significant investment in our manufacturing processes.

We have appointed Elemental Healthcare as our distributor in the UK. This will provide a platform for substantial UK growth in all product areas.

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We have invested in the latest sliding head machining technology to complement our existing CNC equipment to offer integrated precision machining facilities.

Our new class 10,000 clean room facility is now in full operation ensuring that international packaging standards for our sterile products are maintained.

Finally, through continuous improvement and culture change practices we have instigated procedures and systems that guarantee the quality of our products.

OutlookThe opportunities for the Group within the laparoscopic field are prodigious. Recent market data values the US laparoscopic device market at £750m and this is set to rise to £1.5bn by 2010. Of interest to Surgical Innovations is the £150m port access market of which resposable devices such as YelloPort will grow at the expense of costly single use devices.

Whilst our immediate focus is the US we intend to develop and expand our other international markets. Significant resources are being utilised to establish a master dealership in the Far East and Indian sub continent where laparoscopic surgery is developing apace.

We are delighted that we have been able to create a presence in the Middle East through developing relationships with the region’s leading laparoscopic surgeons. Our range of quality reusable instrumentation is well suited to these cost conscious markets.

Our home market is of strategic importance to the development of the Group. As such we are delighted to have appointed Elemental Healthcare as our distributor in the UK. This will provide a platform for substantial UK growth in all product areas.

With the continued rise in laparoscopic surgery, in conjunction with the development of our routes to market, we are well positioned for organic growth and increased global market share.

Graham BowlandFinance Director27 April 2007

Stuart MoranTechnical Director27 April 2007

DELIVERING...

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Group resultsThe year to 31 December 2006 has been another year of growth for the Group.

The major financial headlines from the year ended 31 December 2006 are as follows:

2006 2005 Increase £ £ %

Group turnover 4,460 4,018 11%EBITDA 964 617 56%EBIT 735 401 83%Profit before taxation 696 352 98%EPS 0.27p 0.16p 69%

EBITDA is defined as:

2006 2005 £ £

Operating profit (EBIT) 735 401 Depreciation 229 216

Earnings before interest, taxation and depreciation 964 617

As in previous years we continue to place emphasis on our margins and this is highlighted in the following statistics:

2006 2005 2004

Net profit margin 15.61% 8.76% 5.74%EBIT margin 16.48% 9.98% 7.98%

Finance costsNet borrowing costs (i.e. the net of interest payable and interest receivable associated with working capital and debt facilities) reduced by £10,000 to £39,000 in 2006. This reduction in the cost of borrowing reflects the continued attention to working capital management applied throughout the year. To improve further on this we are reviewing our borrowing facilities through negotiation with our principal bankers, Barclays and HSBC.

Foreign currency The Group maintains foreign currency bank accounts and, wherever possible, supplier payments are made in Euros or Dollars to utilise currency receipts. The Group has used forward exchange contracts and will continue to do so as international business increases.

TaxationWe continue to benefit from the Government’s initiatives for expenditure in the field of research and development. As we are creating taxable profits, we are able to gain enhanced reductions against the profits.

The Group continues to benefit from available taxable losses of £800,000 and £16,000,000 in respect of the two distinct trades, MIS and Autologous Blood Transfusion respectively.

In recognition of projected taxable profits, the Group has also recognised a deferred taxation asset in accordance with FRS 19, which remains at £88,000 (2005: £88,000).

FINANCIAL REVIEW

“ The year to 31 December 2006 has been another year of growth for the Group.”


Summary of the Financial Review Net borrowing costs reduced

by £10,000 to £39,000 in 2006.

Net cash inflows from operating activities rose to £661,000 (2005: £279,000).

Shareholders’ funds increased by £705,000 to £2.799m (2005: £2.094m).

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Earnings per share (EPS)The Group achieved 0.27p underlying basic EPS in 2006, which represents an increase of 69% (2005: 0.16p).

The weighted average number of shares in issue in the year rose from 258.6m to 259.3m as a result of employees being issued shares under certain of the Group’s share option plans. Full details of all EPS calculations are set out in note 7 to the accounts on page 32.

Shareholders’ fundsShareholders’ funds increased by £705,000 to £2.799m (2005: £2.094m). This increase is principally due to the retained profit for the financial year of £696,000.

Cash flowThe Group benefited from another year of generating cash from operating activities to support its strategy of investment in organic growth.

The free cash flow and movement in net debt can be summarised as follows:

2006 2005 £’000 £’000

Cash flow from operating activities 661 279Interest and tax (36) (49)

Free cash flow available for investment 625 230Investment in capital expenditure (345) (73)Investment in capitalised research and development (190) —Issue of shares 9 42

Movement in net debt 99 199Opening net debt (440) (639)

Closing net debt (341) (440)

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Cash flow continuedCapital expenditure increased to £345,000 (2005: £73,000) in the year, £116,000 in excess of the annual depreciation charge. The major ongoing areas of expenditure for the Group continue to be manufacturing, plant and machinery and IT equipment. It is expected that capital expenditure in the coming year will be between £300,000 and £500,000.

International Financial Reporting Standards (IFRS)The Group will be required to report under IFRS for the year ending 31 December 2007.

We continue to plan for adoption and implementation of IFRS at this time. The principal areas where there may be a significant impact on the reported results of the Group are:

i) Intangible assets (IAS 38)Certain development expenditure is required to be capitalised. In 2006 we have capitalised £190,000 net of grant in respect of such expenditure which, as with UK GAAP, would be required to be capitalised under IFRS.

ii) Share-based payment (IFRS 2)The fair value of share options issued will be required to be charged to the profit and loss account over the relevant measurement period. FRS 20 captures the same requirements and we are now required to report under this standard.

As all share options were granted before July 2001, under FRS 20 no charge to the profit and loss account is required for the fair value of these options.

Graham BowlandFinance Director27 April 2007

FINANCIAL REVIEW CONTINUED

“ As in previous years we continue to place emphasis on our margins.”

+56%EBIDTA 964

02 03 04 05 06

617

445

287

166

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Douglas Liversidge CBENon-executive Chairman

Doug (age 70) was previously Chief Executive of G W Thornton during its flotation on the London Stock Exchange in March 1987. Until recently he was Chairman of Yorkshire and Humber Medilink and held the office of Master Cutler in Hallamshire in 1998–99. He is Non-executive Chairman of Biofusion PLC and is a director of a number of private companies.

Colin GlassNon-executive Director

Colin (age 63) is a Chartered Accountant and a partner in Winburn Glass Norfolk. He is a founder Director of Surgical Innovations Limited and was instrumental in securing early funding and in the reverse takeover of Haemocell plc in 1998, which resulted in the quotation of the Company on AIM. He is a Non-executive Director of several companies, including Straight PLC and Getech Group PLC, which are also quoted on AIM. Apart from his own expertise in financial and corporate advisory matters, he has built up a wide range of contacts from many different industries and organisations which has added considerably to his general business experience and which can be used to the benefit of the companies with which he is involved.

Ray SimkinsNon-executive Director

Ray (age 63) is a mechanical engineer by training. He has worked for Getz since 1966 where he has represented their business interests in the US, Japan, Thailand, Malaysia and Singapore. He is currently President of the Getz Group with interests throughout the Asia/Pacific region. Ray has been a Non-executive Director since 1996 and was instrumental in securing investment from Getz prior to the reverse takeover of Haemocell plc in 1998. He has a wealth of experience in international distribution management.


Graham (age 45) qualified as a Chartered Accountant in 1987 and joined Surgical Innovations in 1999. He has responsibility for finance matters at Group level and is also responsible for sales and the expansion of the international distribution network.

Stuart MoranTechnical Director

Stuart (age 43), one of the founders of the Company, joined the Surgical Innovations Limited Board in 1992 as Engineering Director, having previously worked for BP Research. In 2000 he was promoted to the Group Board as Technical Director and was appointed Joint Managing Director of the operating business. Stuart has overall commercial responsibility for external projects.

BOARD OF DIRECTORS

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The Directors present their annual report, together with the audited financial statements for the year ended 31 December 2006.

Principal activities and business reviewThe Company is the holding company of a Group whose principal activities in the year involved the design, development and manufacture of devices for use in Minimally Invasive Surgery (MIS) and industrial markets. Surgical devices are targeted at the operating theatre environment in both public and private hospitals. In international markets, the Group sells through independent healthcare distributors and through OEM and licensing contracts with major suppliers of medical equipment. A review of the Group’s activities during the period is included within the Chairman’s Statement, Business Review and Financial Review on pages 4 to 12.

Results and dividendsThe consolidated profit and loss account for the year is set out on page 24.

The Directors cannot recommend the payment of a dividend.

Research and developmentThe Group’s activities in this area have focused principally on the continuing development of innovative instruments for use in the field of MIS.

EmployeesThe commitment and ability of our employees are key factors in achieving the Group’s objectives.

Employment policies are based on the provision of appropriate training, whilst annual personal appraisals support skill and career development.

The Board encourages management feedback at all levels to facilitate the development of the Group’s business. The Group seeks to keep its employees informed on all matters affecting them by regular management and departmental meetings. The Company operates a Save As You Earn (SAYE) share option scheme.

DirectorsThe names of the current Directors of the Company and their biographical details are set out on page 13. All Directors served throughout the year.

Directors’ interestsThe interests in the share capital of the Company of those Directors in office at the end of the year were as follows:

Ordinary shares of 1p each 31 December 1 January 2006 2006 Beneficial Beneficial

D B Liversidge CBE 2,786,107 2,786,107S S Moran 3,199,005 3,199,005N G Bowland 115,892 115,892C Glass 2,495,888 2,495,888R Simkins 983,747 983,747

Apart from the interests disclosed above and the options referred to on page 20, no Directors were interested, at any time during the year, in the share capital of the Company or other Group companies. There have been no changes in Directors’ interests between the year end and 17 April 2007.

Otherwise than as disclosed in note 25, no Director has an interest in any material contract, other than contracts of service and employment, to which the Group was a party.

Copies of the Directors’ service contracts are available for inspection at the registered office of the Company, Clayton Park, Clayton Wood Rise, Leeds LS16 6RF and will be available at this year’s Annual General Meeting (AGM) for 15 minutes prior to and during the whole course of the meeting.

REPORT OF THE DIRECTORS

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Substantial shareholdingsOther than the Directors’ own holdings, the Board has been notified that as at 23 March 2007 the following are interested in 3% or more of the issued ordinary share capital of the Company:

Number of shares %

Getz Bros. & Co. 49,248,810 19.0M J McMahon 9,516,220 3.7

Share issuesDuring the year 405,000 shares were issued, details of which can be found in note 18 to the financial statements.

Creditor payment policyThe Group’s current policy concerning the payment of suppliers is to:

settle the terms of payment with those suppliers when agreeing the terms of each transaction;

ensure that those suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and

pay in accordance with its contractual and other legal obligations.

The payment policy applies to all payments to creditors for revenue and capital supplies of goods and services without exception. The Company has no trade creditors.

Statement of Directors’ responsibilitiesThe Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare financial statements in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). 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 these 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 whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

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 enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

In so far as the Directors are aware:

there is no relevant audit information of which the Company’s auditor is unaware; and

the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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Summary of key performance indicators (KPIs)The Directors have monitored the overall progress of the Group and the individual strategic elements by reference to certain financial and non-financial KPIs.

Financial performanceKPIs are in place to measure sales, profitability, rate of divisional growth, cash generation and returns on capital employed.

Customer satisfactionKPIs are established to measure and improve customer relationships, quality of service and our order delivery times.

Employee satisfactionKPIs are agreed to measure staff morale, training needs and personal development.

LeadershipKPIs are set to measure the performance of Directors and management in conjunction with overall Group strategy and planning.

InnovationKPIs are positioned to measure the creativity and inventiveness of employees to improve the number of patents filed, design rights applied for and internal products developed.

Principal risks and uncertaintiesThe management of the business and the nature of the Group’s strategy are subject to a number of risks.

The Directors have set out below the principal risks facing the business.

The Directors are of the opinon that a thorough risk management process is adopted which involves the formal review of all the risks identified below. Where possible, processes are in place to monitor and mitigate such risks.

Patents and proprietary rightsThe Group’s success is dependent upon its ability to establish, file and protect intellectual property relating to the development of its proprietary products for eventual sale or licence. Whilst the Group seeks patent protection where appropriate for its developments, there can be no assurance that patent applications will mature into granted patents or that existing patents will provide the Group with sufficient protection in the case of infringement by third parties, or be successfully challenged or revoked by competitors.

Regulatory approvalAs an international business a significant proportion of the Group’s products require registration from national or federal regulatory bodies prior to being offered for sale. With our major product lines now having FDA approval in the US, we are subject to their audit and inspection of our manufacturing facilities. There is no guarantee that any product developed by the Group will obtain and maintain national registration or that the Group will always pass regulatory audit of its manufacturing processes. Failure to do so could have severe consequences upon the Group’s ability to sell products in the relevant country.

Product obsolescenceDue to the nature of the market in which the Group operates, products are subject to technological advances and as a result obsolescence. The Directors are committed to the research and development strategy in place and are confident that the Group is able to react effectively to the developments within the market.

Dependence upon reimbursementThe commercial success of the Group’s products is partly dependent upon reimbursement levels for laparoscopic procedures set by governments, health authorities, private insurers and other organisations. There is no guarantee that changes in reimbursement policy in the Group’s main markets will not have an impact on the ability to sell products into those markets.

REPORT OF THE DIRECTORS CONTINUED

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Principal risks and uncertainties continuedFinancial risk The Directors are confident that the banking facilities currently in place are more than adequate for the Group’s working capital requirements.

Some of the Company’s sales and purchases are made in currencies other than Sterling and consideration is given to the use of forward currency contracts to reduce the exposure.

The Directors are satisfied that credit risk is adequately managed and the level of bad debts is consistent with the nature of the industry.

AuditorGrant Thornton UK LLP has indicated its willingness to continue in office. In accordance with Section 385 of the Companies Act 1985, a resolution for its re-appointment as independent auditor will be proposed at the AGM.

By order of the Board

N G BowlandCompany Secretary27 April 2007

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Directors’ remunerationThe Board recognises that Directors’ remuneration is of legitimate concern to the shareholders. The Group operates within an innovative and competitive arena that places constant demands on the technical abilities of the Group. Its performance depends on the individual contributions of the Directors and employees and it believes in rewarding all those who have made a positive contribution in the development of the Group.

The Board has, in accordance with best practice, decided to present this Report on Remuneration for shareholders’ approval so that shareholders can approve the policy detailed in this report.

Remuneration CommitteeThe Remuneration Committee, which meets as required, is made up of the following Directors:

D B Liversidge CBE (Chairman)

C Glass

R Simkins

Remuneration policyThe principal objective is to develop policies and recommend proposals appropriate to facilitating the recruitment, retention and motivation of Executive Directors and in so doing to avoid the Group bearing more than a reasonable and necessary cost. Where practical and appropriate, the remuneration of Executive Directors (and other senior management) is aligned with the interests of shareholders.

The Remuneration Committee considers that a successful remuneration policy needs to be sufficiently flexible to take account of future changes in the Group’s business environment and in remuneration practice. Any changes to policy for years after 2006 will be described in future Reports on Remuneration, which will continue to be subject to shareholder approval.

The remuneration of the Executive Directors comprises four main elements:

basic salary: to remain competitive in the marketplace, reflecting the experience, level of competence of the individual and comparative base salaries elsewhere within the Group;

annual bonus payment: to provide additional short-term remuneration which directly reflects Group and individual performance;

share options: through the regular grant of options to reward achievements of target and outstanding business performance over the longer term; and

pension arrangements: to enable Directors to make appropriate provision for retirement.

It is Group policy that a significant proportion of the remuneration of the Executive Directors should be performance related, with an annual bonus of up to 25% of basic salary.

REPORT ON REMUNERATION

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Contracts of serviceNo Director has a service contract with a notice period in excess of one year.

Directors’ emoluments – Information subject to auditDetails of individual Director’s emoluments for the year are as follows: Performance Total Total Salary related emoluments emoluments and annual excluding excluding Pension Pension fees bonus Benefits pensions pensions contributions contributions 2006 2006 2006 2006 2005 2006 2005 £’000 £’000 £’000 £’000 £’000 £’000 £’000

Executive N G Bowland 67 17 7 91 81 3 3 S S Moran 67 17 8 92 81 3 3 Non-executive D B Liversidge CBE 19 — — 19 18 — — C Glass 13 — — 13 12 — — R Simkins 12 — — 12 12 — —

Total 178 34 15 227 204 6 6

1. No payments were made to any Director in respect of compensation for loss of office in 2006 or 2005.2. Benefits received consist of the provision of motor cars.3. D B Liversidge CBE’s fees are paid to Quest Investments Limited, a company of which he is a Director.4. C Glass’ fees are paid to Winburn Glass Norfolk, a firm of which he is a partner.5. R Simkins’ fees are paid to Getz Bros & Co., a company of which he is an employee.6. Pension contributions represent payments made to defined contribution schemes. Non-executive Directors are not entitled to retirement benefits.7. Remuneration of the Non-executive Directors is determined by the Board.

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Directors’ share optionsDetails of the share options held by Directors are as follows: At 1 January and 31 December Option Date 2006 price granted

D B Liversidge CBE 1,000,000 3.00p November 2000 1,000,000 2.00p April 2001S S Moran 1,000,000 3.00p November 2000 1,000,000 2.00p July 2001N G Bowland 1,000,000 3.00p November 2000 1,000,000 2.00p July 2001C Glass 1,000,000 3.00p November 2000 1,000,000 2.00p April 2001R Simkins 2,000,000 2.00p May 2001

Share options are exercisable between three and ten years from the date of the grant.

The market price of the Company’s shares at the end of the financial year was 5.75p and the range of market prices during the year was between 1.88p and 6.00p.

On behalf of the Board

D B Liversidge CBEChairman27 April 2007

REPORT ON REMUNERATION CONTINUED

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Principles of good governanceThe Board continues to support the principles of good governance. The Board has adopted such procedures as it considers practical and appropriate for a group of its size so as to affect good governance.

Application of principlesDirectors The Company supports the concept of an effective Board leading and controlling the Group. The Board is responsible for approving Group policy and strategy. It meets regularly and has a schedule of matters specifically reserved to it for decision. Management supplies the Board with appropriate and timely information and the Directors are free to seek any further information they consider necessary. All Directors have access to advice from the Company Secretary and independent professionals at the Group’s expense. Training is available for new Directors and other Directors as necessary.

The Board members are:

D B Liversidge CBE – Non-executive Chairman

S S Moran – Technical Director

N G Bowland – Finance Director

C Glass – Non-executive Director

R Simkins – Non-executive Director

All Directors are subject to re-election every three years and at the first AGM after appointment.

This year Messrs D B Liversidge CBE and S S Moran retire by rotation and, being eligible, offer themselves for re-election.

Accountability and auditThe Board is responsible for maintaining a sound system of internal control to safeguard shareholders’ investments and the Company’s assets.

The Audit Committee comprises C Glass (Chairman), D B Liversidge CBE and R Simkins who are all Non-executive Directors.

The Committee considers the appointment and terms of engagement of the external auditor and assesses the independence of the external auditor and reviews the auditor’s policy for the rotation of audit partners.

The terms of reference of the Committee include reviewing the scope and results of the external audit and its effectiveness.

Communication with shareholdersThe Board is committed to effective communication between the Group and its shareholders.

It regards the AGM as a means of communicating directly with private investors and encourages their participation. All Directors normally attend the AGM and private investors have the opportunity to meet the Directors and discuss any issues on an informal basis. Separate resolutions are passed on each issue so that they can be given proper consideration and there is a resolution to approve the annual report and accounts.

The shareholders can gain access to information on the Group, as well as to the annual report, through the website, www.sigroupplc.com.

CORPORATE GOVERNANCE

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Internal controlsThe Board of Directors is ultimately responsible for the Group’s management and internal control systems. During the financial period and to the date of approval of the financial statements, they have reviewed the operation and effectiveness of the Group’s systems of internal control, which can provide only a reasonable but not absolute assurance against material misstatement or loss.

The Board discharges its responsibility for internal financial control through the following key procedures:

the establishment of an organisational structure appropriate to the size of the business, with clearly defined levels of authority and division of responsibilities for approval of external payments and receipt and dispatch of goods;

a comprehensive budgeting and financial reporting system which compares actual performance with budget on a monthly basis; and

the formulation by the Board of policies and of approval procedures in a number of key areas such as credit control, expenditure authorisation, stock ordering and quality assurance.

Going concernOn the basis of the budget for 2007 and forecasts prepared by the Directors, the Board has a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

On behalf of the Board

D B Liversidge CBEChairman27 April 2007

CORPORATE GOVERNANCE CONTINUED

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We have audited the Group and parent company financial statements (the financial statements) of Surgical Innovations Group plc for the year ended 31 December 2006 which comprise the principal accounting policies, the Group profit and loss account, the Group and Company balance sheets, the Group cash flow statement and notes 1 to 26. These financial statements have been prepared under the accounting policies set out therein.

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

Respective responsibilities of Directors and auditorThe Directors’ responsibilities for preparing the annual report and the financial statements in accordance with United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the financial statements. The information given in the Report of the Directors includes that specific information presented in the Chairman’s Statement, Business Review and Financial Review that is cross referred from the Business Review section of the Report of the Directors.

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 financial statements. This other information comprises only the Chairman’s Statement, Business Review, Financial Review, Report of the Directors, the unaudited part of the Report on Remuneration and Corporate Governance. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinionWe 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 financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group and 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 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 financial statements.

OpinionIn our opinion:

the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Group and the parent company’s affairs as at 31 December 2006 and of the Group’s profit for the year then ended;

the financial statements and the part of the Report on Remuneration to be audited have been properly prepared in accordance with the Companies Act 1985; and

the information given in the Report of the Directors is consistent with the financial statements.

Grant Thornton UK LLPRegistered AuditorChartered AccountantsLeeds27 April 2007

REPORT OF THE INDEPENDENT AUDITORTO THE SHAREHOLDERS OF SURGICAL INNOVATIONS GROUP PLC

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2006 2005 Notes £’000 £’000

Turnover 2 4,460 4,018

Cost of sales (2,593) (2,295)

Gross profit 1,867 1,723

Administrative expenses (1,132) (1,322)

Operating profit 3 735 401

Interest payable 5 (39) (49)

Profit on ordinary activities before taxation 696 352

Tax on profit on ordinary activities 6 — 50

Retained profit 7, 19 696 402

Basic and diluted earnings per ordinary share 7 0.27p 0.16p

As permitted by Section 230 of the Companies Act 1985, the holding company’s profit and loss account has not been included in these financial statements (note 8).

The consolidated profit and loss account above relates to continuing operations.

The Group has no material recognised gains and losses other than the profits above and therefore no separate statement of total recognised gains and losses has been presented.

CONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED 31 DECEMBER 2006

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2006 2005

Notes £’000 £’000 £’000 £’000

Fixed assets

Tangible fixed assets 9 784 668

Intangible fixed assets 10 190 —

974 668

Current assets

Stocks 12 1,215 852

Debtors 13 1,729 1,605

Cash at bank 4 25

2,948 2,482

Creditors: amounts falling due within one year 14 (1,022) (940)

Net current assets 1,926 1,542

Total assets less current liabilities 2,900 2,210

Creditors: amounts falling due after more than one year 15 (101) (116)

Net assets 2,799 2,094

Capital and reserves

Called up share capital 18 2,595 2,591

Share premium account 19 16,106 16,101

Capital reserve 19 329 329

Accumulated losses 19 (16,231) (16,927)

204 (497)

Shareholders’ funds 20 2,799 2,094

The financial statements on pages 24 to 39 were approved by the Board of Directors on 27 April 2007 and were signed on its behalf by:

D B Liversidge CBEDirector

CONSOLIDATED BALANCE SHEETAS AT 31 DECEMBER 2006

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2006 2005

Notes £’000 £’000 £’000 £’000

Fixed assets

Investments 11 1,018 1,018

Current assets

Debtors 13 2,207 2,199

Cash at bank 4 1

2,211 2,200

Creditors: amounts falling due within one year 14 (45) (44)

Net current assets 2,166 2,156

Net assets 3,184 3,174

Capital and reserves

Called up share capital 18 2,595 2,591

Share premium account 19 16,106 16,101

Accumulated losses 19 (15,517) (15,518)

589 583

Shareholders’ funds 3,184 3,174

The financial statements on pages 24 to 39 were approved by the Board of Directors on 27 April 2007 and were signed on its behalf by:

D B Liversidge CBEDirector

COMPANY BALANCE SHEETAS AT 31 DECEMBER 2006

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2006 2005

Notes £’000 £’000 £’000 £’000

Net cash inflow from operating activities 22 661 279

Returns on investments and servicing of finance

Interest payable on finance leases (22) (22)

Interest payable on bank overdrafts (17) (24)

Interest payable on convertible loan notes — (3)

Net cash outflow from returns on investments and servicing of finance (39) (49)

Taxation 3 —

Capital expenditure – purchases of tangible fixed assets (191) (64)

– purchases of intangible fixed assets (190) —

Net cash outflow from capital expenditure (381) (64)

Net cash inflow before financing 244 166

Financing

Issue of share capital 9 —

Receipts from borrowings 66 —

Capital repayments under bank loans (23) (9)

Capital repayments under finance leases (152) (109)

Redemption repayments of convertible loan notes — (68)

Net cash outflow from financing (100) (186)

Increase/(decrease) in cash 23 144 (20)

CONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2006

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1. Accounting policiesThe principal accounting policies, which remain unchanged from the previous year, are as follows:

(a) Basis of accountingThe financial statements have been prepared under the historical cost basis of accounting and under United Kingdom Generally Accepted Accounting Practice. FRS 20 has been adopted for the first time this year.

(b) Basis of consolidationThe Group financial statements consolidate those of the Company and of its subsidiary undertakings drawn up to 31 December 2006. The results of subsidiaries accounted for under the acquisition accounting method are included in the consolidated profit and loss account from the date of their acquisition. The results of subsidiaries, accounted for under the merger accounting method, are included in the consolidated profit and loss account as if they had always been part of the Group. Intra-Group sales and results are eliminated on consolidation and all sales and results relate to external transactions only.

(c) Tangible fixed assetsTangible fixed assets are stated at cost less depreciation. Depreciation is charged so as to write off the cost of tangible fixed assets less estimated residual value over their estimated useful economic lives at the following rates:

Office and computer equipment – 20% per annum on cost

Plant and machinery – 10 – 25% per annum on cost

Tooling – 20% per annum on cost

Placed equipment – 33.3% per annum on cost

Tooling developed for the Group’s own products is only depreciated when brought into use.

Placed equipment relates to equipment placed in clinical settings to generate a stream of disposables revenue. Utilisation of such equipment is measured and provision made where appropriate for impairment.

(d) Stocks and work in progressStocks and work in progress are stated at the lower of cost and net realisable value.

(e) Finance and operating leasesCosts in respect of operating leases are charged on a straight-line basis over the lease term. Leasing agreements which transfer to the Group substantially all the benefits and risks of ownership of an asset are treated as if the asset had been purchased outright. The assets are included in fixed assets and the capital element of the leasing commitments is shown as obligations under finance leases.

The lease rentals 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 against profit so as to give a constant periodic rate of charge on the remaining balance outstanding at each accounting period end. Assets held under finance leases are depreciated over the shorter of the lease terms and the useful economic lives of equivalent owned assets.

(f) PensionsThe Group operates a Group defined contribution personal pension scheme covering all of its employees. Contributions are charged against revenue as they are made.

(g) TurnoverTurnover is the total amount receivable by the Group for the supply of goods and services, excluding VAT and trade discounts. It also includes Royalty Income derived from agreements with other parties for them to manufacture and distribute products. Such Royalty Income is recognised in the same period as the licensee makes the related sale. Design and manufacturing fees are recognised in the period in which client approval and formal sign-off is received.

NOTES TO THE FINANCIAL STATEMENTS

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1. Accounting policies continued(h) Foreign currency translationTransactions denominated in foreign currencies are recorded at exchange rates ruling at the date of the transaction. Monetary assets and liabilities are translated at rates ruling at the balance sheet date. Exchange differences are dealt with through the profit and loss account.

Assets and liabilities of Haemocell Inc. are translated into Sterling at the rate of exchange ruling at the end of the financial year. The results of Haemocell Inc. are translated at the average rate of exchange for the year. Differences on exchange arising from the retranslation of the opening net investment in Haemocell Inc. and from the translation of the results of Haemocell Inc. at the average rate are taken to reserves.

(i) Research and developmentDevelopment costs incurred on specific projects are capitalised when recoverability can be assessed with reasonable certainty and amortised in line with the expected sales arising from the projects. All other research and development costs are written off in the year of expenditure.

(j) Deferred taxationDeferred tax is recognised in respect of all timing differences that have originated but which have not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more or a right to pay less or to receive more tax.

Deferred tax assets are recognised to the extent that they are regarded as recoverable. Assets are regarded as recoverable when it is regarded as more likely than not there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

(k) Financial instrumentsIncome and expenditure arising on financial instruments is recognised on the accruals basis and credited or charged to the profit and loss account in the financial period to which it relates.

(l) Equity-settled share-based paymentsAll share-based payment arrangements granted after 7 November 2002 that had not vested prior to 1 January 2005 are recognised in the financial statements.

2. TurnoverAnalysis by class of business 2006 2005 £’000 £’000

Minimally invasive surgery 3,650 2,677 Branded products 135 153 Autologous blood transfusion 63 172 Royalties and licence fees 299 481Design fees 313 535

4,460 4,018

Analysis by geographical area, excluding royalties and licence fees 2006 2005 £’000 £’000

United Kingdom 969 1,287Europe 2,530 1,585 USA 310 359 Rest of World 352 306

4,161 3,537

Operating profit and net assets are not disclosed by class of business, as this is prejudicial to the Group’s interests.

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3. Operating profitThe profit for the year is stated after charging: 2006 2005 £’000 £’000

Depreciation of owned tangible fixed assets 146 125 Depreciation of tangible fixed assets held under finance lease 83 91 Auditors’ remuneration – fees payable to the Company’s auditors for the audit of the Company’s annual financial statements 14 17 – tax compliance fees 4 5 Operating lease rentals: Land and buildings 84 63 Research and development – current year expenditure 56 248

4. EmployeesThe average monthly number of persons employed by the Group was:

2006 2005 Number Number

Production 27 28 Development 9 8 Sales 3 2 Administration 8 6

47 44

The costs incurred in respect of the employees were:

2006 2005 £’000 £’000

Wages and salaries 1,094 916 Social security costs 109 88 Pension costs 32 28

1,235 1,032

A detailed analysis of Directors’ emoluments is shown in the table on page 19.

5. Interest payable 2006 2005 £’000 £’000

On finance leases 22 22 On bank overdrafts 17 24 On convertible loan notes — 3

39 49

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

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6. TaxationTax on profit on ordinary activities 2006 2005 £’000 £’000

Current tax charge — —Deferred tax credit recognised in year — 50

Tax credit on profit on ordinary activities — 50

Factors affecting the tax charge for the yearThe taxation assessed for the year is lower than the standard rate of corporation tax in the UK at 30% (2005: 30%). The differences are explained as follows:

2006 2005 £’000 £’000

Profit on ordinary activities before taxation 696 352

Corporation tax at standard rate of 30% (2005: 30%) 209 106 Effects of: Research and development enhanced expenditure (94) (55) Expenses not tax deductible 6 5 Capital allowances for the year in excess of depreciation 5 10 Increase in provisions not tax deductible (4) 21 Losses utilised (123) (100) Losses not utilised 1 14 Income taxable at less than standard rate of corporation tax — (1)

Current tax charge for the year — —

Deferred taxationThe movement in the deferred taxation account during the year was:

2006 2005 £’000 £’000

Balance brought forward 88 38 Profit and loss account movement arising during the year — 50

Balance carried forward 88 88

The deferred taxation recognised in the financial statements at 19% is set out below:

2006 2005 £’000 £’000

Trade losses 88 88

The recoverability of the deferred tax asset is dependent on future taxable profits in excess of those arising from the reversal of deferred tax liabilities. The recognition of the deferred tax assets is based upon profit forecasts for the year ended 31 December 2007.

Deferred tax assets at 19% of £2,857,000 (2005: £2,934,000) in respect of trading losses carried forward, £20,000 (2005: £23,000) in respect of short-term timing differences and £6,000 (2005: £6,000) in respect of accelerated capital allowances have not been recognised on the grounds that there is insufficient evidence that these assets will be recoverable in the foreseeable future.

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7. Earnings per ordinary shareThe earnings per ordinary share has been calculated by dividing the profit attributable to ordinary shareholders for the year ended 31 December 2006 of £696,000 (2005: £402,000) by the weighted average number of ordinary shares in issue during the year of 259,300,058 (2005: 258,612,616) and amounted to 0.27p per share (2005: 0.16p per share).

The Group has one category of dilutive potential ordinary shares, those share options granted where the exercise price is less than the average price of the Company’s ordinary shares during the year. The dilution has no effect on basic earnings per share.

8. Profit for the financial year of Surgical Innovations Group plcThe profit for the financial year dealt with in the financial statements of the holding company, Surgical Innovations Group plc, was £889 (2005: £885).

9. Tangible fixed assets Office and Plant and computer Placed Tooling machinery equipment equipment Total Group £’000 £’000 £’000 £’000 £’000

Cost At 1 January 2006 1,142 420 407 — 1,969Additions 38 157 128 22 345Disposals — — (4) — (4)

At 31 December 2006 1,180 577 531 22 2,310

Depreciation At 1 January 2006 786 242 273 — 1,301Charge for period 130 36 63 — 229Disposals — — (4) — (4)

At 31 December 2006 916 278 332 — 1,526

Net book value At 31 December 2006 264 299 199 22 784

At 1 January 2006 356 178 134 — 668

The net book value of assets held under finance leases At 31 December 2006 116 251 36 — 403

Depreciation of assets held under finance leases 46 25 12 — 83


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10. Intangible fixed assets Capitalised development costs Group £’000

Cost At 1 January 2006 —Additions 190

At 31 December 2006 190

Net book amount at 31 December 2006 190

Net book amount at 31 December 2005 —

The £190,000 of capitalised development costs, net of £46,000 of Government grant, represents expenditure that fulfils the requirements of SSAP 13. These costs will be amortised over the future commercial life of the product, commencing on the sale of the first commercial item.

11. InvestmentsCompany £’000

Cost At 31 December 2006 and 1 January 2006 1,551

Provisions for diminution in value At 31 December 2006 and 1 January 2006 533

Net book value at 31 December 2006 (2005: £1,018) 1,018

The principal subsidiaries of the Group comprise:

Description Country of Proportion Proportion of shares Nature of incorporation held held held business and operation Group Company

Surgical Innovations Limited Ordinary £1 shares Design and manufacture of Great Britain 100% 100% surgical instruments B & P Biotechnology Limited Ordinary £1 A shares Intermediate holding company Great Britain 100% 100% Ordinary £1 B shares Bellhouse Technology Limited Ordinary £1 shares Holder of patents and Great Britain 100% — Deferred £1 shares intellectual property Haemocell Inc. Common $1 shares Import/export vehicle USA 100% 100%

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12. Stocks Group Company

2006 2005 2006 2005 £’000 £’000 £’000 £’000

Raw materials 630 518 — — Finished goods 585 334 — —

1,215 852 — —

13. Debtors Group Company

2006 2005 2006 2005 £’000 £’000 £’000 £’000

Trade debtors 1,417 1,322 — — Prepayments and accrued income 126 141 1 2 Corporation tax — 3 — — Deferred tax asset (note 6) 88 88 — — Other debtors 98 51 13 8 Amounts due from subsidiary undertakings — — 2,193 2,189

1,729 1,605 2,207 2,199

Included in Group trade debtors is an amount of £nil (2005: £67,000), which is due after more than one year.

14. Creditors: amounts falling due within one year Group Company

2006 2005 2006 2005 £’000 £’000 £’000 £’000

Bank loans and overdrafts 80 228 — — Trade creditors 497 395 — — Obligations under finance leases 164 121 — — Social security and other taxes 36 44 — — Accruals and deferred income 220 131 25 27 Other creditors 25 21 20 17

1,022 940 45 44

The Group’s borrowing facilities are in the form of a multi-currency overdraft facility provided by Barclays Bank PLC. The facility is secured by a fixed and floating charge over the assets of the Group.

15. Creditors: amounts falling due after more than one year Group Company

2006 2005 2006 2005 £’000 £’000 £’000 £’000

Bank loans 28 2 — — Obligations under finance leases 73 114 — —

101 116 — —


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16. Borrowings Group Company

2006 2005 2006 2005 £’000 £’000 £’000 £’000

Bank loans and overdrafts 108 230 — — Obligations under finance leases 237 235 — —

345 465 — —

Borrowings are repayable as follows:Due within one year Bank loans and overdrafts 80 228 — — Obligations under finance leases 164 121 — — Due after one year and within two years Bank loans 24 2 — —Obligations under finance leases 68 82 — —Due after two years and within five yearsBank loans 4 — — —Obligations under finance leases 5 32 — —

345 465 — —

17. Financial instrumentsThe Group’s policy is to maintain an appropriate balance between variable and fixed rate interest rate borrowings.

The Group uses financial instruments, other than derivatives, comprising borrowings, cash and various items, such as trade debtors, trade creditors etc. that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations.

The main risks arising from the Group financial instruments are interest rate risk and foreign currency risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged from previous years.

It is and has been throughout the year under review, the Group policy that no trading in financial instruments or derivatives shall be undertaken.

The fair values of financial instruments are not materially different from book values.

Short-term debtors and creditorsShort-term debtors and creditors have been excluded from the interest rate risk disclosure.

Interest rate riskThe Group finances its operations through a mixture of bank borrowings and finance leases. The Group exposure to interest rate fluctuations on its borrowings is managed by the use of both fixed and floating rate facilities. At the year end 84% (2005: 53%) of the total borrowings as noted in note 16 were at fixed rates.

The floating rate financial liabilities mainly comprise bank borrowings and overdrafts bearing interest at commercial rates.

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17. Financial instruments continuedCurrency riskThe Group is exposed to translation and transaction foreign exchange risk. The Group does, as appropriate, use derivative instruments to hedge against this risk. The Group maintains US Dollar and Euro bank accounts as follows:

US Dollar – £41,759 (2005: £9,000)

Euro – £76,944 (2005: £14,000)

In addition, the Group has short-term foreign currency debtors and creditors with a net exposure as follows:

US Dollar – £92,384 (2005: £72,171)

Euro – £137,556 (2005: £248,088)

Foreign exchange differences on retranslation of these assets and liabilities are taken to the profit and loss account of the Group.

18. Share capital 2006 2005 £’000 £’000

Authorised 325,000,000 (2005: 325,000,000) ordinary shares of 1p each 3,250 3,250

Allotted, called up and fully paid 259,556,188 (2005: 259,151,188) ordinary shares of 1p each 2,595 2,591

During the period the Company issued 405,000 ordinary shares of 1p at 2p in respect of the savings related share option scheme, at a time when the mid market price was 2.5p.

At 31 December 2006, the following share options were outstanding:

Number of shares Exercise dates

At At Option Date from 1 January 31 December price per which option may Date on which Scheme and date of grant 2006 Granted Exercised Lapsed 2006 1p share be exercised option expires

Savings relatedAugust 2001 405,000 — 405,000 — — 2p August 2004 August 2006ExecutiveNovember 2000 2,000,000 — — — 2,000,000 3p November 2003 November 2010Non-executive unapproved November 2000 2,000,000 — — — 2,000,000 3p November 2003 November 2010April 2001 4,000,000 — — — 4,000,000 2p April 2004 May 2011Enterprise Management July 2001 3,200,000 — — — 3,200,000 2p July 2004 July 2011Unapproved November 2000 1,000,000 — — — 1,000,000 3p November 2003 November 2010April 2001 2,000,000 — — — 2,000,000 2p April 2004 June 2011

None of the share options above fall with in the requirement of FRS 20 and as such no charge for share-based payments is recognised in the profit and loss account.


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19. Reserves Share Accumulated Capital premium losses reserve Group £’000 £’000 £’000

At 1 January 2006 16,101 (16,927) 329Premium on shares issued 5 — —Profit for the year — 696 —

At 31 December 2006 16,106 (16,231) 329

Share Accumulated premium losses Company £’000 £’000

At 1 January 2006 16,101 (15,518)Premium on shares issued 5 —Profit for the year — 1

At 31 December 2006 16,106 (15,517)

20. Reconciliation of movements in shareholders’ funds 2006 2005 £’000 £’000

Profit for the financial year 696 402 Issue of shares 9 42

Net increase in shareholders’ funds 705 444 Opening shareholders’ funds 2,094 1,650

Closing shareholders’ funds 2,799 2,094

21. Contingent liabilities and financial commitmentsThese are as follows:

(a) Contingent liabilitiesThere were no contingent liabilities at 31 December 2006 (2005: £25,000).

(b) Operating leasesAt 31 December 2006 the Group had annual commitments under non-cancellable operating leases as follows:

2006 2005 Land and Land and buildings buildings £’000 £’000

Within two to five years 82 61

(c) Capital commitmentsAt 31 December 2006 the Group had capital commitments of £97,000 (31 December 2005: £142,000).

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22. Reconciliation of operating profit to net cash inflow from operating activities 2006 2005 £’000 £’000

Operating profit 735 401 Depreciation of tangible fixed assets 229 216 (Increase)/decrease in stocks (363) 29 Increase in debtors (127) (340) Increase/(decrease) in creditors 187 (27)

Net cash inflow from operating activities 661 279

23. Reconciliation of net cash flow to movement in net debt 2006 2005 £’000 £’000

Increase/(decrease) in cash in the year 144 (20) Cash outflow from finance leases and loans 109 118 Cash outflow from loan note redemption — 68

Change in net debt resulting from cash flows 253 166 New finance leases and loans (154) (9) Issue of shares on conversion of loan notes — 42

Movement in net debt 99 199 Net debt at beginning of year (440) (639)

Net debt at end of year (341) (440)

24. Analysis of changes in net debt At At 1 January Cash Non-cash 31 December 2006 flow changes 2006 £’000 £’000 £’000 £’000

Cash at bank and in hand 25 (21) — 4Bank overdrafts (219) 165 — (54)Bank loan (11) (43) — (54)Finance leases (235) 152 (154) (237)

(440) 253 (154) (341)


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25. Transactions with related partiesA summary of transactions during the year and outstanding amounts at the balance sheet date is as follows:

Amounts Amounts payable at invoiced to 31 December the Group 2006 £’000 £’000

Quest Investments Limited (1) 19 2Winburn Glass Norfolk (2) 13 1Getz Bros & Co. (3) 12 4

As disclosed in the Report on Remuneration:

1. Director’s fees for D B Liversidge CBE are paid to Quest Investments Limited, a company of which he is a Director.

2. Director’s fees and advisory fees for C Glass are paid to Winburn Glass Norfolk, a firm of which he is a partner.

3. Director’s fees and advisory fees for R Simkins are paid to Getz Bros & Co., a company of which he is an employee.

26. PensionsThe Company currently operates a Group personal pension plan for the benefit of employees.

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2006 2005 2004 2003 2002 £’000 £’000 £’000 £’000 £’000

Turnover (including licence fees and royalties) 4,460 4,018 3,032 2,750 2,224

Cost of sales (2,593) (2,295) (1,432) (1,312) (1,048)

Gross profit 18,671 1,723 1,600 1,438 1,176

Administrative expenses (1,132) (1,322) (1,358) (1,255) (1,098)

Operating profit 735 401 242 183 78

Interest receivable — — — — 1

Interest payable (39) (49) (68) (47) (19)

Profit on ordinary activities for the year before taxation 696 352 174 136 60

Tax on profit on ordinary activities — 50 38 3 18

Retained profit for the year 696 402 212 139 78

Earnings per ordinary share 0.27p 0.16p 0.08p 0.05p 0.03p

FIVE YEAR SUMMARY

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GLOSSARY OF TERMS

Autologous Blood Transfusion (ABT) Collection and re-infusion of a patient’s own blood during or after surgery.

Computer Numerically Controlled equipment (CNC) Computer Numerically Controlled machinery. These are machine tools for manufacturing turned and milled components.

Food and Drug Administration (FDA) Regulatory body governing the marketing of food, pharmaceuticals and medical devices in the United States.

Hand held instrumentation Instruments which are inserted through ports into the abdominal cavity to cut, grasp and manipulate tissue.

Laparoscopic Refers to minimally invasive surgery carried out in the abdominal cavity.

Minimally Invasive Surgery (MIS) Surgery carried out through small incisions (keyholes), thereby minimising wound trauma.

Original Equipment Manufacture (OEM) Manufacture of products supplied to other companies, for sale by those companies under their own brand.

Port access system Devices used for gaining access to the abdominal cavity through small incisions.

Resposable A device or range comprising reusable main elements and disposable accessories.

ADVISERS

Company Secretary and registered officeN Graham Bowland Clayton Park Clayton Wood Rise Leeds LS16 6RF

Registered number 2298163

Nominated adviserHanson Westhouse Securities Limited 6th Floor West One Wellington Street Leeds LS1 1BA

SolicitorsWalker Morris Kings Court 12 King Street Leeds LS1 2HL

AuditorGrant Thornton UK LLP No 1 Whitehall Riverside Leeds LS1 4BN

BrokerHanson Westhouse Securities Limited One Angel Court London EC2R 7HJ

RegistrarsCapita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU

BankersHSBC Bank Plc 7 Prospect Crescent Harrogate HG1 1RN

Barclays Bank Plc Barclays Business Centre P O Box 100 Leeds LS1 1PA

Public RelationsAbchurch Communications Ltd West One Wellington Street Leeds LS1 1BA

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2006Surgical Innovations Group plcAnnual Report and Accounts 2006

Surgical Innovations Group plcClayton Park Clayton Wood Rise Leeds LS16 6RF Tel: +44 (0)113 230 7597 Fax: +44 (0)113 230 7598 Web: www.sigroupplc.com

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