3741

Foreign exchange ~~loss~~gain (loss). Foreign exchange ~~loss~~gains (loss) includes the net unrealized gain or loss on cash balances held in foreign currencies as well as net realized gains and losses on foreign currency transactions.

Impairment of intangible assets. Each reporting period, our Board of Directors reviews the carrying value of each non-current asset to ensure its carrying value does not exceed its recoverable amount. Where the carrying amount of the asset is greater than its recoverable amount, the asset is revalued down to its recoverable amount and an impairment charge is recorded.

~~Corporate compliance expenses~~. Corporate compliance expenses consist primarily of costs incurred by us to satisfy the requirements under Australian and U.S. listing and accounting standards. Costs include items such as share register fees, listing fees, audit fees and accounting and administration costs attributed to corporate compliance.

~~Other expenses from ordinary activities~~~~. Other expenses from ordinary activities consist primarily of accounting and administrative services, travel, insurance, marketing and overhead expenses.~~

Results of Operations

Year ended June 30, ~~2005~~2006 compared to year ended June 30, ~~2004~~2005

Revenues ~~from ordinary activities~~

Revenues ~~from ordinary activities increased~~decreased to A$~~2,653,113~~762,023 for the year ended June 30, 2006 from A$892,135 for the year ended June 30, 2005, ~~from~~a decrease of A$~~2,321,227~~130,112, or 14.6%. Revenues consisted of A$762,023 and A$892,135 in interest income in the years ended June 30, 2006 and 2005 respectively. The decrease in revenues in the 2006 fiscal year was attributable to lower interest income as a result of a reduction in cash and cash equivalents.

Other Income

Other income decreased to A$288,263 for the year ended June 30, ~~2004, an increase~~2006 from A$1,760,978 for the year ended June 30, 2005, a decrease of A$~~331,886,~~1,472,715, or ~~14.3%~~83.6%. ~~Revenues~~Other income in the year ended June 30, 2006 consisted of A$288,173 government grant income. Other income in the year ended June 30, 2005 consisted of ~~A$892,135 interest income,~~ A$629,692 government grant income and A$1,125,000 received under the licensing and research collaboration we entered into with Schering A.G. and Neurosciences Victoria Ltd. in March 2003. ~~Revenues~~The decrease in other income in the 2006 fiscal year ended June 30, 2004 consisted of A$211,327 interest income, A$647,400 government grant income, and A$1,462,500 received under the licensing and research collaboration we entered into with Schering A.G. and Neurosciences Victoria Ltd. in March 2003. The increase in revenues iswas attributable to ~~a A$680,808 increase in interest income arising from~~ the ~~funds we received in June 2004 in connection with our US$20 million private placement of securities in the United States. This increase was partially offset by a A$337,500~~ reduction in funding from Schering A.G. and Neurosciences Victoria ~~Ltd,~~Ltd. due to the completion ~~of one~~ of the contracts in connection with our collaboration with Schering A.G and Neurosciences Ltd in June ~~2004. We estimate that our revenues in the 2006 fiscal year will consist of approximately A$700,000 of interest income and A$115,855 of government grant income.~~2005.

~~Depreciation~~Research and ~~amortization~~development expenses

~~Depreciation~~Research and ~~amortization~~development expenses (including research and development expenses paid to related parties) remained substantially consistent at A$~~1,165,227~~7,613,045 for the year ended June 30, 2006 from A$7,687,596 for the year ended June 30, 2005. Research and development expenses in the year ended June 30, 2005 consisted of expenses related to clinical trials for our PBT-1 compound as a treatment for Alzheimer’s disease that ceased in April 2005 and A$911,250 of expenses associated with our licensing and research collaboration with Schering A.G. and Neurosciences Victoria Ltd. that was concluded in June 2005. Research and development expenses in the year ended June 30, 2006 consisted of expenses associated with two clinical trials for our PBT-2 lead compound and the pre-clinical programs for our other compounds. In fiscal year 2007, our research and development will be primarily directed at PBT-2, including the Phase IIa clinical trial for PBT-2. In addition, further expenditure is expected in developing our other potential lead compounds at a pre-clinical level.

Personnel expenses

Personnel expenses decreased to A$3,418,008 for the year ended June 30, 2006 from A$5,750,929 for the year ended June 30, 2005, ~~compared~~a decrease of A$2,332,921, or 40.6%. The decrease in personnel expenses in the 2006 fiscal year was primarily due to the closure of our U.S. office in August 2005 and a reduction in staff in the United States and Australia. Personnel expenses in the 2005 fiscal year include A$~~1,195,006~~2,211,792 in cash and equity payments (including the expensing of options grants) made to Dr. Jon Alsenas, our former U.S. based director and Chief Executive Officer, and A$449,800 in equity issued to a consultant. The decrease in personnel expenses in the 2006 fiscal year was offset in-part by employee salary increases and the grant of options to directors and employees at the beginning of the 2006 calendar year. Only a portion of the total fair value of such options granted to our directors and employees was recognized as personnel expenses for the fiscal year ended June 30, 2006 and a further A$924,782 will be recognized in future fiscal years.

Intellectual property expenses

Intellectual property expenses decreased to A$466,426 for the year ended June 30, ~~2004.~~

Each reporting period, our Board of Directors reviews the carrying value of each non-current asset to ensure its carrying value does not exceed its recoverable amount. Where the carrying amount of the asset is greater than its recoverable amount, the asset is revalued down to its recoverable amount. On June 30, 2005, our Board of Directors reviewed the assets and determined to write-off all of the core intellectual property relating to PBT-1 which resulted in a charge of2006 from A$~~10,388,339.~~

~~Patents, research and development expenses~~

~~Patents, research and development expenses increased to A$7,687,596~~729,583 for the year ended June 30, 2005, ~~from~~a decrease of A$~~5,232,581~~263,157, or 36.1%. The decrease in intellectual property expenses in the 2006 fiscal year was primarily due to our company handling more of the work associated with patent applications in-house in the 2006 fiscal year, while we engaged more external consultants in the 2005 fiscal year. In addition, in the 2005 fiscal year a new patent application was filed at a cost of approximately A$100,000.

Audit fees

Audit fees remained substantially consistent at A$205,815 for the year ended June 30, ~~2004, an increase of~~2006 from A$2,455,015, or 46.9%. The increase in expenses is attributable to an increase in pre-clinical and clinical trial costs, as we accelerated the research of PBT-1 and PBT-2. We expect that our patents, research and development expenses will increase in the 2006 fiscal year to approximately A$8.5 million, primarily due to further clinical trials and introducing new candidates for development.

~~Legal expenses~~

~~Legal expenses decreased to A$1,047,448~~202,032 for the year ended June 30, 2005, ~~from~~an increase of A$~~1,650,467~~3,783, or 1.9%.

Travel expenses

Travel expenses decreased to A$212,184 for the year ended June 30, ~~2004, a decrease of~~2006 from A$603,019, or 36.6%. The decrease in legal expenses was primarily due to the settlement of the dispute with P.N. Gerolymatos S.A. for which a provision of A$971,764 was made in the 2004 fiscal year. As a result of the settlement, our legal fees in respect of the action declined by A$94,938. This reduction was partially offset by the increase in legal fees of A$189,966 associated with Securities and Exchange Commission compliance following the filing of a registration statement in connection with the June 2004 private placement in the United States. In fiscal year 2005, legal fees in respect of employment matters also increased by A$58,027 and our intellectual property expenses increased by A$210,215. We expect that our legal expenses in the 2006 fiscal year will be substantially similar to those for the 2005 fiscal year.

~~Employee benefits expense~~

~~Employee benefits expenses increased to A$2,438,303~~432,316 for the year ended June 30, 2005, ~~from~~a decrease of A$~~1,060,730~~220,132, or 50.1%. The decrease in travel expenses in the 2006 fiscal year was due, in part, to the cessation of travel between the United States and Australia of Dr. Jon Alsenas, our former U.S. based director and Chief Executive Officer, following his resignation in June 2005, which expenses amounted to A$141,683 in the 2005 fiscal year.

Marketing expenses

Marketing expenses decreased to A$134,750 for the year ended June 30, ~~2004, an increase of~~2006 from A$1,377,573, or 129.9%. The increase in employee benefits expenses was primarily due to the increase in staff from 12 employees at June 30, 2004 to 17 employees at June 30, 2005. The increase in staff in the 2005 fiscal year was due to the acceleration of our research and development for our principal product candidate PBT-2 during such period, and the establishment of our office in the United States. The increase in the number of employees also affected our costs associated with their employment (such as taxes on salaries). Employee benefits expenses also increased in the 2005 fiscal year because Dr. Jonas Alsenas, who served as our Chief Executive Officer from March 2004 to June 2005, was paid for the majority of the 2005 fiscal year unlike the previous fiscal year in which he was compensated only for the last quarter. Mr. Alsenas received compensation of A$696,358 (excluding equity) through June 16, 2005, when he resigned as our Chief Executive Officer and director. We anticipate that employee benefit expenses for the 2006 fiscal year will be approximately A$1,690,000.

~~Consulting fee expenses~~

~~Consulting fee expenses decreased to A$1,607,892~~442,920 for the year ended June 30, 2005, ~~from~~a decrease of A$~~1,706,809~~308,170, or 69.6%. The decrease in marketing expenses in the 2006 fiscal year was primarily due to the cessation of services provided to our U.S. subsidiary by a public relations and marketing consultant following the closure of our U.S. office in August 2005.

Depreciation expenses

Depreciation expenses increased to A$118,196 for the year ended June 30, ~~2004, a decrease of A$98,917, or 5.8%. The decrease in consulting fees was primarily due to a reduction in consulting fees paid to directors for additional consulting services amounting~~2006 compared to A$246,860. The fees paid to our research and development consultants declined by A$27,963 in the 2005 fiscal year. This decrease was partially offset by A$60,000 paid to the Company Secretary. A new consultant was also engaged in the United States to whom we paid A$115,906 in the 2005 fiscal year. We anticipate that consulting fee expenses for the 2006 fiscal year will be substantially similar to those for the 2005 fiscal year.

~~Corporate compliance expenses~~

~~Corporate compliance expenses increased to A$562,123~~65,223 for the year ended June 30, 2005, ~~from~~an increase of A$~~419,708~~52,973, or 81.2%. The increase in depreciation expenses in the 2006 fiscal year is the result of the acceleration of leasehold improvement depreciation in line with the life of the lease agreement.

Amortization expenses

We recorded amortization expenses relating to PBT-1 core intellectual property of A$83,200 for the year ended June 30, ~~2004, an increase~~2005. As a result of the impairment of the carrying value of our core intellectual property relating to PBT-1 to nil recoverable amount on June 30, 2005, we did not incur any amortization expenses relating to our intellectual property in the 2006 fiscal year.

Other expenses

Other expenses (including other expenses paid to related parties) decreased to A$~~142,415,~~824,625 for the year ended June 30, 2006 from A$1,204,930 for the year ended June 30, 2005, a decrease of A$380,305, or ~~33.9%~~46.1%. The ~~increase~~decrease in ~~corporate compliance~~other expenses ~~is attributable to additional Securities and Exchange Commission filing requirements following the filing of the registration statement~~ in ~~connection with the June 2004 private placement in the United States and additional listing fees. We anticipate that corporate compliance expenses for~~ the 2006 fiscal year ~~will be substantially similar~~is primarily due to ~~those for~~reduced expenditures following the ~~2005 fiscal year.~~closure of our U.S. office in August 2005.

Foreign exchange ~~losses~~gain (losses)

~~Foreign~~We recorded a foreign exchange ~~losses increased~~gain of A$223,454 for the year ended June 30, 2006 compared to a foreign exchange loss of A$1,362,572 for the year ended June 30, ~~2005 from A$182,768 for the year ended June 30, 2004, an increase~~2005. In 2006, we incurred a foreign exchange gain of A$~~1,179,804, or 645.5%. The increase in foreign exchange losses in the 2005 fiscal year is~~1,135,003 attributable to the ~~significant increase in foreign currency funds because the funds~~cash balances that we ~~received~~held in ~~connection with our June 2004 private placement in~~U.S. dollars, a foreign exchange gain of A$75,005 attributable to the ~~United States~~cash balances that were held in Great British Pounds, a foreign exchange loss of A$941,047 attributable to cash balances that were held in Euro and a foreign exchange loss of A$45,507 attributable to foreign currency transactions. In 2005, we incurred a foreign exchange loss of A$1,297,790 attributable to the cash balances that we held in U.S. ~~dollars.~~dollars, a foreign exchange loss of A$50,574 attributable to the cash balances that were held in Great British Pounds and a foreign exchange loss of A$14,208 attributable to foreign currency transactions. In 2005, the Australian dollar appreciated by 4.3% against the U.S. dollar, while the Australian dollar depreciated by 9.4% against the U.S. dollar in 2006.

Impairment of intangible assets

Impairment of intangible assets was A$~~10,388,339~~786,240 for the year ended June 30, 2005. This was a one-off non-cash expense incurred as a result of ~~the consolidated entity’s~~our decision to impair the core intellectual property carrying value to nil recoverable amount based on expected future discounted cash flows. The impairment occurred following the announcement in April 2005 regarding the cessation of the PBT-1 clinical trial due to toxicity issues and the decision to continue research into PBT-2 as the lead compound. The core intellectual property related primarily to externally acquired patents for PBT-1.

~~Other expenses from ordinary activities~~

Other expenses from ordinary activities increased to A$1,402,210 for the year ended June 30, 2005 from A$758,772 for the year ended June 30, 2004, an increase of A$643,438, or 84.8%. The increase in expenses from ordinary activities is primarily due to an increase in office overheads of A$141,863 associated with the establishment of an office in the United States in August 2004 and the travel expenses between the United States and Australia of A$141,863 by the consolidated entity’s U.S. based director and Chief Executive Officer prior to his resignation in June 2005. Other expenses also increased due to the increased cost of insurance associated with clinical trials of A$40,530 and the increase in the cost of directors and officers insurance of A$96,304. We also incurred additional marketing costs of A$212,461 when consultants were engaged in the United States following the June 2004 private placement. Our office occupancy cost in Australia also increased by A$85,682.

4044

~~Year ended June 30, 2004 compared to year ended June 30, 2003~~

~~Revenues from ordinary activities~~

Revenues from ordinary activities increased to A$2,321,227 for the year ended June 30, 2004 from A$1,816,478 for the year ended June 30, 2003, an increase of A$504,749, or 27.8%. Revenues in the year ended June 30, 2004 consisted of A$211,327 interest income, A$647,400 government grant income, and A$1,462,500 received under the licensing and research collaboration that we entered into with Schering A.G. and Neurosciences Victoria Ltd. in March 2003. Revenues in the year ended June 30, 2003 consisted of A$111,686 interest income, A$967,000 government grant income, A$231,304 reimbursements attributable to an agreement with the Bank of New York (under which 50% of the costs associated with the NASDAQ listing were reimbursed) and A$506,250 under our licensing and research collaboration with Schering A.G. and Neurosciences Victoria Ltd. The increase in revenues is attributable to our collaboration with Schering A.G. and Neurosciences Victoria Ltd. which was in force during the entire 2004 fiscal year, as well as the increase in interest income arising primarily from the funds we received in June 2004 in connection with our US$20 million private placement.

~~Depreciation and amortization expenses~~

~~Depreciation and amortization expenses remained substantially consistent at A$1,195,006 for the year ended June 30, 2004 compared to A$1,185,973 for the year ended June 30, 2003.~~

~~Patents, research and development expenses~~

Patents, research and development expenses increased to A$5,232,581 for the year ended June 30, 2004 from A$1,861,295 for the year ended June 30, 2003, an increase of A$3,371,286, or 181.1%. The increase in expenses is attributable to expenses of A$1,873,125 incurred in connection with the licensing and research collaboration we entered into with Schering A.G. and Neurosciences Victoria Ltd. and pre-clinical trial fees of A$1,984,181 in connection with the new government START grant that commenced in September 2003. See Item 5C. “Operating and Financial Review and Prospects - Research and Development, Patents and Licenses.”

~~Legal expenses~~

Legal expenses increased to A$1,650,467 for the year ended June 30, 2004 from A$848,660 for the year ended June 30, 2003, an increase of A$801,807, or 94.5%. The increase in legal expenses was primarily due to the settlement of the dispute with P.N. Gerolymatos S.A for which a provision of A$971,764 was made in the 2004 fiscal year.

~~Employee benefits expense~~

Employee benefits expenses increased to A$1,060,730 for the year ended June 30, 2004 from A$760,980 for the year ended June 30, 2003, an increase of A$299,750, or 39.4%. The increase in employee benefits expenses was primarily due to an increase in staff from six persons to 12 persons. The increase in staff in fiscal 2004 was due to the increase of research and development for our new lead product candidate PBT-2 during such period, in addition to our earlier product PBT-1, and our move towards commercialization.

~~Consulting fee expenses~~

Consulting fee expenses increased to A$1,706,809 for the year ended June 30, 2004 from A$567,730 for the year ended June 30, 2003, an increase of A$1,139,079, or 200.6%. The increase in consulting fee expenses was primarily due to a A$777,721 increase in fees paid (in cash, shares and options) to Professor Ashley Bush under his new contract (see Item B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources”) as well as an increase in directors’ fees. In the 2003 fiscal year we engaged the outside expertise of Mercer Human Resources to determine the appropriate level of compensation for directors. This resulted in an increase in directors’ fees of A$467,746 (consisting of part cash and 249,999 ordinary shares valued at A$120,000) during the year ended June 30, 2004 to bring the directors fees into line with industry standards. These increases are partially offset by a A$106,388decrease in consulting fees paid to other various consultants in the year ended June 30, 2004, primarily due to a decrease in the activities of our Scientific Advisory Board and scientific commercial optimization group, the latter of which was disbanded in 2003 because it was not providing our company the advice it required, and in the 2003 fiscal year we received services from a number of one-off consultants that were no longer required in fiscal 2004.

~~Corporate compliance expenses~~

~~Corporate compliance expenses remained substantially consistent at A$419,708 for the year ended June 30, 2004 compared to A$395,604 for the year ended June 30, 2003.~~

~~Foreign exchange losses~~

Foreign exchange losses increased to A$182,768 for the year ended June 30, 2004 from A$12,481 for the year ended June 30, 2003, an increase of A$170,287, or 1,364.4%. The increase in foreign exchange losses in the 2004 fiscal year is attributable to the significant increase in foreign currency funds because the funds that we received in connection with our June 2004 private placement in the United States were held in U.S. dollars.

~~Other expenses from ordinary activities~~

~~Other expenses from ordinary activities remained substantially consistent at A$758,772 for the year ended June 30, 2004 compared to A$768,593 for the year ended June 30, 2003.~~

Inflation and Seasonality

Management believes inflation has not had a material impact on our company’s operations or financial condition and that our operations are not currently subject to seasonal influences.

B. ~~Liquidity and Capital Resources~~LIQUIDITY AND CAPITAL RESOURCES

We are a development stage company and have had no sales income to date, and as of June 30, ~~2005~~2006 our accumulated deficit totaled A$~~50,473,473.~~49,235,574. From inception until our initial public offering in March 2000 we financed our operations primarily through borrowings from two of our then directors, which were repaid from the proceeds of such offering. Since our initial public offering we have financed our operations primarily through sales of equity securities, proceeds from the exercise of options, government grants, licensing and research collaborations and interest earned on investments.

In March 2003, we completed the conversion of our 7,289,310 outstanding listed options into ordinary shares. As a result of the conversion, we received approximately A$3.5 million in net proceeds, which were added to our working capital.

In September 2003, we raised an additional approximately A$4.7 million, net of issuance costs, through a private placement of 7.1 million ordinary shares to institutional and accredited investors at a subscription price of A$0.70 per share.

In April 2004, we raised approximately US$20 million before issuance costs ($26.4 million net of issuance costs) in a private placement in the United States, which amount was held in escrow pending receipt of the requisite approval of the transaction by our shareholders that was obtained on June 1, 2004. The private placement was for 4,000,000 ADRs to institutional and professional investors at a price of US$5.00 per ADR. The private placement also involved the acquisition by the investors of five-year warrants to purchase an additional 3,000,000 ADRs at an exercise price of US$8.00 per ADR. Should these warrants be exercised in full, we would raise an additional US$24 ~~million.~~million (approximately A$32 million). To date, no warrants have been exercised.

In December 2004, we raised approximately A$4.7 million in net proceeds through the exercise of options to purchase 9,506,666 ordinary shares having an exercise price of A$0.50 per share.

We had A$~~21,453,304~~10,013,778 of cash and cash equivalents at June 30, ~~2005,~~2006, compared to A$~~29,580,398~~21,453,304 at June 30, ~~2004.~~2005.

Cash Flows

The following table summarizes our cash flows for the periods presented:

	Year ended June 30,
	2006			2005
	(A$)
Net cash used in operating activities		(11,651,215	)		(11,418,813	)
Net cash used in investing activities		(55,251	)		(50,466	)
Net cash (used in) provided by financing activities		(2,020	)		4,704,757
Net decrease in cash and cash equivalents		(11,708,486	)		(6,764,522	)
Cash and cash equivalents at beginning of period		21,453,304			29,580,398
Exchange rate adjustments on cash held in foreign currencies		(268,960	)		(1,362,572	)
Cash and cash equivalents at end of period		10,013,778			21,453,304

Net cash used in operating activities was A$~~11,418,813, A$5,347,420~~11,651,215 and A$~~3,590,613~~11,418,813 during the years ended June 30, ~~2005, 2004~~2006 and ~~2003,~~2005, respectively. Our payments to suppliers and employees during the years ended June 30, ~~2005, 2004~~2006 and ~~2003~~2005 were A$~~13,959,679, A$7,896,711~~12,647,636 and A$~~5,271,577~~13,959,679, respectively. The ~~increase~~decrease in payments from the year ended June 30, ~~2004~~2005 to the year ended June 30, ~~2005~~2006 was due to the ~~acceleration~~closure of ~~the research~~our U.S. office in August 2005 as well as a reduction in interest received on our bank deposits and ~~development for our PBT-1 and PBT-2 product candidates.~~government grant income. During the years ended June 30, ~~2005, 2004~~2006 and ~~2003,~~2005, our payments to suppliers and employees were offset by government grants of A$~~532,283, A$909,946~~231,710 and A$~~836,575,~~532,283, respectively, and interest income of A$~~883,583, A$176,845~~764,711 and A$~~106,835,~~883,583, respectively. Additionally, during the ~~years~~year ended June 30, 2005, ~~2004 and 2003,~~ our payments to suppliers and employers ~~were~~was further offset by A$1,125,000 ~~A$1,462,500 and A$506,250, respectively,~~ for research funding attributable to our collaboration with Schering A.G. and Neurosciences Victoria Ltd. that was concluded in June 2005.

Net cash used in investing activities was A$~~50,466, A$134,362~~55,251 and A$~~87,929~~50,466 during the years ended June 30, 2006 and 2005, ~~2004 and 2003~~ respectively. ~~The higher expenditures~~

Net cash used in financing activities was A$2,020 during the ~~2004 fiscal~~ year ended June 30, 2006 compared to ~~other years is primarily the result of fit-out costs associated with the move to our new offices in Parkville, Victoria, Australia in 2004.~~

~~Net~~net cash provided by financing activities ~~was~~of A$4,704,757 ~~A$31,781,165 and A$3,569,792~~ during the ~~years~~year ended June 30, ~~2005, 2004 and 2003, respectively.~~2005. Cash flows ~~from~~used in financing activities during the year ended June 30, 2006 reflected the costs associated with the issuance of shares to a consultant in lieu of cash. Cash flows provided by financing activities during the year ended June 30, 2005 reflected the exercise of options into ordinary share capital. ~~Cash flows from financing activities during~~

We realized a foreign exchange gain of A$268,960 for the year ended June 30, ~~2004 reflected net proceeds~~2006 compared to a realized foreign exchange loss of A$4,675,019 from a private placement in September 2003, net proceeds of A$26,352,147 from a private placement of our ADRs to institutional and professional investors in the United States in June 2004 and net proceeds of A$757,166 from the exercise of our publicly traded options. Cash flows from financing activities during1,362,572 for the year ended June 30, ~~2003 reflected~~2005. In 2005, the ~~exercise of options into ordinary share capital.~~Australian dollar appreciated by 4.3% against the U.S. dollar, while the Australian dollar depreciated by 9.4% against the U.S. dollar in 2006.

From inception to June 30, ~~2005,~~2006, our capital expenditures have totaled A$~~556,989~~328,382 (including A$200,000 of noncash expenditures), consisting of computer equipment, furniture and fixtures, fit-out costs and laboratory equipment that is being used in connection with our research at the University of Melbourne. Capital expenditures for equipment are being depreciated on a straight-line basis over the estimated useful lives of three to 14 years, with a net balance at June 30, ~~2005~~2006 of A$~~166,214.~~102,375. We currently do not have significant capital spending requirements, but we expect to continue to engage in capital spending consistent with anticipated growth in our operations and personnel.

As of June 30, ~~2005,~~2006, our principal commitments consisted of obligations under our agreements with Professor Ashley Bush, ~~and~~ Mr. Geoffrey ~~Kempler.~~Kempler and Dr. Ross Murdoch. Under the ten year contract we entered into with Professor Ashley Bush in January, 2004, effective as of February 1, 2003, we agreed to pay Professor Bush a consulting fee of US$100,000 per year increasing on the anniversary of the agreement by the U.S. consumer price index. We also agreed, as a bonus package, to issue to Professor Bush 1,650,000 ordinary shares (of which 825,000 ordinary shares were issued during the 2004 fiscal year and 825,000 ordinary shares were issued ~~in August 2005)~~during the 2006 fiscal year) and to grant ~~Professor Bush~~to him options to purchase 825,000 ordinary shares at an exercise price of A$0.50 per share (of which options to purchase 412,000 ordinary shares were granted during the 2004 fiscal year and options to purchase 413,000 ordinary shares were granted during the 2006 fiscal year). The shares and options vest in ~~August 2005).~~four equal installments on each of the six months anniversaries following the effective date of the agreement. In addition, subject to the achievement of certain milestones, Professor Bush, is entitled to purchase up to 5,000,000 additional ordinary shares at a price per share that is 10% below the mean market price of our ordinary shares during the 30-day period prior to their purchase. Once a milestone has been achieved, up to 2,500 ordinary shares out of the total tranche of ordinary share to which he becomes entitled may be purchased each six months after such achievement. The first milestone has been achieved (the publication of results of a Phase II trial) and as such, Professor Bush is now entitled to purchase up to 1,250,000 ordinary shares in accordance with the foregoing terms. The ordinary shares issued and options granted to Professor Bush under the agreement are subject to certain resale restrictions. During the period of twenty years after the effective date of the agreement, Professor Bush is also entitled to receive royalties equal to 5% of the income that we derive from the exploitation of new intellectual property developed by him or contributed to our company though his services pursuant to the agreement. On June 15, 2005, we entered into an agreement with Geoffrey Kempler in connection with his appointment as our Chief Executive Officer. Under this contract, we agreed to pay Mr. Kempler a base salary of A$367,000 per annum ~~plus superannuation,~~(which may be increased at the discretion of the Board of Directors), a A$100,000 bonus upon satisfactory completion of a successful Phase I trial for PBT-2 and an additional A$100,000 upon satisfactory completion of a ~~proof of study concept study~~Phase II efficacy study. The Phase I trial for ~~PBT-2.~~PBT-2 was successfully completed during the year ended June 30, 2006 and as such, the A$100,000 bonus is now payable. Under the agreement with Mr. Kempler, we are required to continue to remunerate him in accordance with its terms until June 1, 2010 if he terminates the contract for good reason or we terminate the ~~consolidated entity terminates it~~contract without cause. See Item 6.C. “Directors, Senior Management and Employees - Board Practices - Election of Directors” Under an employment agreement we entered into with Dr. Ross Murdoch, effective as of August 7, 2006, in connection with his services as our President and Chief Operating Officer, we agreed to pay Dr. Murdoch a base salary of A$295,000 per year, plus superannuation equivalent to 9% of the base salary (or the percentage stipulated by applicable Australian law). In addition, we agreed that we would grant to Dr. Murdoch options to purchase 1,250,000 ordinary shares, 25% of which will be fully vested upon grant (the effective date of the agreement) and the remaining options shall vest in three equal installments on each of the one year anniversaries from May 29, 2006. The options will be exercisable for nil consideration on or before August 7, 2014 and will not be exercisable unless the price of our ordinary shares has achieved and maintained a minimum value of A$0.40 for five consecutive trading days. These options will be granted under the 2004 ASX Plan. We have also agreed that if we will terminate the agreement without cause or if Dr. Murdoch will terminate the agreement with good reason (as such terms are defined in the agreement) (i) we will pay to Dr. Murdoch, within 90 days of such termination, the sums he would have been entitled to receive had he continued to provide services until May 29, 2008, or, if termination occurs after May 29, 2007, had he continued to provide services for one year following the termination date; and (ii) any unvested options shall be accelerated and will become fully vested and he will be entitled to exercise his options during the remainder of their term.

4447

On July 28, 2004, we and The General Hospital Corporation of Massachusetts settled all outstanding litigation with P.N. Gerolymatos S.A., or P.N.G., regarding the exploitation rights to certain patents relating to pharmaceutical compositions and uses of clioquinol, or PBT-1. Pursuant to the settlement agreement, all patent oppositions in Europe and Australia were withdrawn and the law suits then pending before the U.S. District Court for the District of Columbia and the Court of Athens in Greece ~~have been~~were dismissed. Under the settlement agreement, we and P.N.G. agreed to recognize the rights of each other to develop clioquinol in our respective territories. As a result of the settlement agreement, we now hold the rights to selected uses of clioquinol and pharmaceutical compositions in the United States and selected uses of clioquinol in Japan, ~~while~~and P.N.G. holds certain patent rights on the uses of clioquinol for Europe and other territories. Under the settlement agreement, we issued 1,350,000 of our ordinary shares to P.N.G.~~, which are being~~ (which were held in escrow for 12 ~~months,~~months), and made a payment of US$150,000 to P.N.G. Such settlement in the total value of A$971,764 was expensed in fiscal year ~~2004 (see Note 9 to the financial statements).~~2004. Under the settlement agreement we also agreed to pay a sales royalty to P.N.G. on sales of PBT-1 in the United States and Japan and we are entitled to receive a percentage of P.N.G.’s income on sales of PBT-1 in the other territories. In April 2005, we announced to the market our decision not to proceed with supporting the initiation of the PLACQUE study evaluating PBT-1. P.N.G. is also entitled to receive 2% of our worldwide income from PBT-2.

~~We also have a~~Our remaining commitment under a three year lease for our principal office that ~~we moved to~~expires in ~~June 2004. The total lease commitment over the three year period~~2007 is A$~~306,781.~~92,726.

We believe our existing cash and cash equivalents as well as anticipated cash flow from government grants, interest income and potential option exercises will be sufficient to support our current operating plan to November 30, 2006; however, we have based this estimate on assumptions that may prove to be incorrect. Our future funding requirements will depend on many factors, including, but not limited to:

~~costs and timing of obtaining regulatory approvals;~~

~~the costs and timing of obtaining, enforcing and defending our patent and intellectual property;~~

~~the progress and success of pre-clinical and clinical trials of our product candidates; and~~

~~the progress and number of our research programs in development.~~

In March 2005, we commenced a series of Phase I clinical trials for our current principal product candidate PBT-2 at a facility associated with the Utrecht University Hospital in Utrecht, the Netherlands. On November 7, 2005, we announced the successful completion of the Phase I trial for PBT-2, a double blind, placebo-controlled single dose escalation study, conducted on 55 healthy, male volunteers between the ages of 18 and 50, which was designed to evaluate the safety, tolerability and pharmacokinetics (absorption, distribution, metabolism, and excretion) of PBT-2. Data from the study shows that PBT-2 was well ~~tolerated with little difference in the incidence of adverse events between those receiving PBT-2 and those receiving the placebo.~~tolerated. Additionally, the pharmacokinetic analysis demonstrated that the drug exposure increased predictably and in a linear manner, both of which are strong characteristics for a ~~central nervous system drug.~~development candidate. Concurrent findings in a pre-clinical mouse model indicate that PBT-2 passes into the brain of mice with more extensively than its predecessor, PBT-1. ~~We have~~In early 2006, we also successfully completed ~~three out of four stages of~~ a second Phase I multi-dose escalation safety clinical trial of PBT-2 in 32 elderly, healthy, male and female ~~volunteers. We anticipate completing~~volunteers (45 to 75 years). On May 5, 2006, we announced that we received an expert report in respect of the ~~final dosing stage in December 2005. In addition,~~Phase I trials for PBT-2. The expert report was prepared by Dr. Craig Ritchie, psychiatrist and Director of Mental Health Clinical Trials at University College London and a clinical advisor to our company. Dr. Craig Ritchie concluded that the ~~preclinical toxicology studies and GMP manufacturing development required for~~Phase I results provide the confidence needed to move forward to formal Phase II testing in people with Alzheimer’s disease. For additional details regarding our clinical trials see Item 4.A. “Information on the Company - History and ~~Phase III clinical studies~~Development of ~~PBT-2 are concurrently underway.~~the Company.” We anticipate that expenditures for the Phase III program for PBT-2 will amount to A$~~700,000,~~5,501,000 however such expenditures may ~~adjust~~change due to numerous factors. For information on such factors, see Item 5.C. ~~"Operating~~“Operating and Financial Review and Prospects - Research and Development, Patents and Licenses."” We expect to fund such expenditures from our working capital.

We believe our existing cash and cash equivalents as well as anticipated cash flow from government grants, interest income and potential option exercises will be sufficient to support our current operating plan to March 31, 2007; however, we have based this estimate on assumptions that may prove to be incorrect. Our future funding requirements will depend on many factors, including, but not limited to:

costs and timing of obtaining regulatory approvals;

the costs and timing of obtaining, enforcing and defending our patent and intellectual property;

the progress and success of pre-clinical and clinical trials of our product candidates; and

the progress and number of our research programs in development.

We anticipate that we will require substantial additional funds in order to achieve our long-term goals and complete the research and development of our current principal pharmaceutical product candidate. In addition, we will require additional funds to pursue regulatory clearances, and defend our intellectual property rights, establish commercial scale manufacturing facilities, develop marketing and sales capabilities and fund operating expenses. We intend to seek such additional funding through public or private financings and/or through strategic alliances or other arrangements with corporate partners. We cannot, however, be certain that such additional financing will be available from any sources on acceptable terms, or at all, or that we will be able to establish new strategic alliances or other arrangements with corporate partners on acceptable terms, or at all. Any shortfall in funding could result in our having to curtail our operations, including our research and development activities, which could have a material adverse effect on our business, financial condition and results of operations.

Our failure to raise additional capital before March 2007 would have a material adverse effect on our company’s ability to continue as a going concern and to achieve its business objectives. Our auditors have included a going concern uncertainty paragraph in their report. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should we be unable to continue as a going concern.

Conditions in Australia

We are incorporated under the laws of, and our principal offices and research and development facilities are located in, the Commonwealth of Australia. Therefore, we are directly affected by political and economic conditions in Australia.

C. ~~Research and Development, Patents and Licenses~~RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

Our primary activity since incorporation in 1997 has been the acquisition and development of patents as well as research and development of our core technology. Research and development expenses amounted to A$~~7,687,596, A$5,232,581~~7,613,045 and A$~~1,717,770~~7,687,596 during the years ended June 30, 2006 and 2005, ~~2004 and 2003,~~ respectively. In addition to these expenses, A$143,525 was spent in relation to patent costs during the year ended June 30, 2003. We did not incur any costs classified as patent costs during the years ended June 30, 2005 or 2004. Costs associated with patent applications and defense of patent applications are classified as ~~legal expenses.~~intellectual property expenses and amounted to A$466,426 and A$729,583 during the years ended June 30, 2006 and 2005, respectively.

Our ~~patents,~~ research and development expenses consist primarily of compensation and related costs for research and development personnel, expenses for testing facilities and payments under our research and/or clinical agreements. Research and development expenses also include costs associated with the acquisition and development of patents subsequent to December 1999. We do not maintain accounting systems to accurately track research and development costs on an individual project basis because a significant portion of our historic research and development expenses benefited our two major research and development projects, and therefore were not tracked individually by project; rather, we tracked these costs by the type of costs incurred. Such costs are charged to operations as incurred. See Note ~~1(e)~~4 to the consolidated financial statements.

The development of a clinical compound includes a number of steps and phases, including pre-clinical and clinical testing. Despite best efforts to plan and manage research and development, the actual timing and cost for completion of each step involved in the development of a clinical compound depends on many factors. The decision to proceed to the next step of a multi-stage development program is based on the outcome of multiple variables of any current stage and previous stages (including tolerability, specific toxicities, overall safety, pharmacokinetics and efficacy) and may be influenced by outside factors (including the competitive commercial environment and regulatory environment). Government or regulatory authorities, clinicians and other experts may, following their review of the results of a previous step, require that an initial development program be included or revised in order to strengthen the safety, efficacy and/or commercial understanding and potential of the compound, which could result in changes in the cost, duration, prioritization and even outcome of a development program. Furthermore, the required duration of treatment in clinical trials has an impact on the duration of a development program for a therapeutic agent and can vary considerably, from less than a month (for example, antibiotics) to several years (for example, treatments requiring long-term outcome measures). An appropriate duration of treatment in clinical trials with our MPACs is yet to be confirmed and will depend on future clinical results, as well as discussions with regulatory authorities. Once the duration of such treatment has been determined, the question whether the development stages must be undertaken sequentially or may be undertaken in parallel can be addressed. Due to the numerous variables and the uncertain nature of the development of a clinical compound, we are not able to reasonably estimate the nature, timing and costs of the future expenditures necessary to complete our research and development projects, the anticipated completion dates of each project, and when material net cash flows from our research and development programs will commence.

In March 2003, we announced our first major licensing and research collaboration with Schering A.G., a major international pharmaceutical company, and Neurosciences Victoria Ltd. Under this collaboration, we, through our contractor the University of Melbourne, undertook specific research and development projects, and Schering A.G. funded ~~up to~~approximately A$2.7 million of our research and development costs over the life of ~~the~~such projects and agreed to pay additional milestone payments and royalties from ~~discoveries.~~discoveries resulting from such projects. Despite the arrangement between the parties, the early results of the research and development did not support the continuation of the collaboration past June 30, 2005. As a result, the parties concluded this collaboration as of June 30, 2005. See Item 4A. “Information on the Company - History and Development of the Company.”

~~We have also identified and filed~~Our company is the exclusive licensee of an international patent application in the name of the General Hospital Corporation directed to a novel target for an ~~Alzheimer's~~Alzheimer’s disease vaccine. The Commonwealth Government of Australia provided us with a A$227,252 BIF grant for the initial proof of concept stage of this research. The research under this BIF grant finished at the end of January 2005 ~~following~~having achieved the ~~completion of certain project milestones stipulated in the grant,~~scientific milestone demonstrating that a mouse could generate antibodies that preferentially recognize dimerized ~~βAmyloid.~~ ‘toxic linked’ forms of beta-amyloid and not the endogenous monomeric form of beta amyloid. Currently we are undertaking the screening of mouse hybridomas (hybrid cells produced by injecting a specific antigen into a mouse, collecting an antibody-producing cell from the mouse’s spleen, and fusing it with a long-lived cancerous immune cell called a myeloma cell). Individual hybridoma cells will be cloned and tested ~~We are currently negotiating~~to try to identify a ~~contractual agreement with Prima to undertake the characterization and scale-up of~~mouse monoclonal antibody candidate for use in a prospective ~~antibody candidates that were identified during the initial proof of concept stage for testing in future~~mouse passive vaccine ~~trials in Alzheimer's disease model mice.~~trial during 2007. We will be utilizing the resources of ~~Prima, the Austin Research Institute,~~ the University of Melbourne and the Mental Health Research Institute, and possibly other institutes, to ~~pursue~~conduct this therapeutic approach. The research will assess the ability of the immune system to selectively produce specific antibodies which target the “toxic linked” forms of beta amyloid associated with the pathology of Alzheimer’s disease, as an effective treatment for the disease.research.

~~We announced on July 26,~~In 2001, ~~that~~ we were granted a START grant from the Australian IR&D Board ~~in the amount of A$1.74 million~~ to expand our core intellectual property for drug treatment of neuro-degenerative diseases. Under the terms of the grant, we received A$1.4 million ~~during the~~over three ~~year period commencing January 1, 2001,~~years for up to 50% of the project costs related to our development of a treatment for Alzheimer’s disease. The grant was payable on the achievement of each of six milestones and we received the final payment under the START grant in October 2003.

~~We announced on~~In February ~~18,~~ 2004, ~~that~~ we were granted a second START grant from the Australian IR&D Board ~~in the amount of A$1.35 million~~ to take our second generation drug candidate for Alzheimer’s disease, PBT-2, through safety testing and Phase I clinical trials. The research under this grant was initially to be completed over a two year period until September 1, 2005 and such period was subsequently extended until December 2005. Under the terms of the grant, we ~~are to receive~~received A$1.35 million ~~during~~over the ~~two-year period commencing September 1, 2003,~~term of the grant for up to 50% of the project costs related to the toxicology testing program and early human trials. ~~The~~Under this second START grant, PBT-2 completed advance toxicology in December 2004, ~~commenced~~successfully completed the first Phase I clinical trials in ~~March~~November 2005 and ~~is expected to conclude the~~successfully completed a second Phase I ~~trials~~trial in ~~December 2005. At June 30, 2005, we had claimed A$1.07 million under this grant. The quarterly report for the period ending September 2005 is yet to be filed.~~early 2006.

On May 7, 1999, we entered into a patent assignment and license agreement with the University of Melbourne. The agreement provided for the assignment of various patents and patent rights to us. In consideration of the assignment of the patents, we were required to make certain payments to the University of Melbourne and to pay a royalty of 1.5% on the net price of products sold utilizing such patents. In addition, we ~~must also~~were required to pay the lesser of 1.5% of the net invoice price of products sold or 10% of royalties received from any license we granted or sub-licensee we appoint to utilize the patents.

~~Under~~ This agreement expired and was superseded by the ~~terms of a~~ research funding and intellectual property assignment agreement dated December 1, 2000 between us and the University of ~~Melbourne,~~Melbourne.

On December 1, 2000, we ~~were required to pay~~entered into a research funding and intellectual property assignment agreement with the University ~~for~~of Melbourne, under which the University of Melbourne agreed to conduct certain research projects ~~an agreed minimum~~on our behalf for a sum of A$297,000 (inclusive of goods and services tax), each year for a period of three ~~years~~years. In consideration for the assignment of rights to intellectual property developed by the University of Melbourne during the research period, we agreed to pay to the University of Melbourne royalties equal to 1.5% of the net invoice price of all products incorporating such intellectual property sold by us or on our behalf, or, the lesser of 1.5% of the net invoice price of such products sold by a licensee or assignee and 10% of gross revenues received from ~~December 1, 2000. Since~~licensees or assignees relating to the exploitation of such intellectual property. Following the expiration of this agreement, the parties ~~have~~ entered into a second research funding and intellectual property assignment agreement, which is deemed to have commenced ~~from~~as of the ~~natural expiry~~expiration date of the previous agreement on December 1, 2003 and expires in December 2006. The financial consideration terms under the original agreement ~~provides for an annual determination~~remain unchanged by the second research funding and intellectual property assignment agreement. In addition, pursuant to the terms of the second research ~~budget. During~~funding and intellectual property assignment agreement, we agreed to provide the ~~period from July 2004~~University of Melbourne certain funding for the research projects. We have provided or will provide to ~~June 2005, we provided~~the University of Melbourne funding in an amount equal to A$600,000 (exclusive of goods and service tax) during each of the years running December 2004 to November 2005 and December 2005 to November 2006. During the ~~University of Melbourne. We~~2005 fiscal year we also provided the University of Melbourne an additional A$1,012,500 ~~during the 2005 fiscal year~~ in research funding in connection with our licensing and research collaboration with Schering A.G. and Neurosciences Victoria Ltd. that was concluded in June 2005.

On February 8, 2000, we entered into a patent assignment agreement with The Biomolecular Research Institute, or BRI. The agreement provides for the assignment of various patent applications and patent rights from BRI to us. In consideration of the assignment of the patents, we are required to pay BRI a royalty of 1.5% on the net invoiced price of products sold utilizing such patents. In addition, we must also pay the lesser of 1.5% of the net invoice price of products sold or 10% of royalties received from any licensee or sub-licensee we appoint to utilize such patents, or a minimum of A$2,000 a year. If the patent rights are assigned before a total of A$20,000 has been paid as royalties, the difference between the royalties paid and A$20,000 must be paid to BRI.

Under the terms of a license agreement between us and The General Hospital Corporation of Massachusetts, or GHC, we were required to pay GHC a total of US$166,590 (approximately A$228,395) for the 30 month period beginning January 1, 2001 and US$182,000 (approximately A$249,358) for a period of 30 months from August 1, 2001 for the right to use the results of research under a license for certain patent rights. These obligations have ~~subsequently~~ been satisfied.

On January 1, 2001, we entered into another license agreement with GHC, whereby we obtained an exclusive license with respect to certain patents and permits us to sublicense the patent rights to others. The agreement also provides us with the non-exclusive right to use materials, substances and information that were used by GHC in research sponsored by us. In consideration of the license, we are required to pay GHC royalties of 1.5% of the net sales price of products sold utilizing patents exclusively licensed to us. We are also required to pay certain milestone payments upon submission of a registered dossier to a registration authority in the United States or Europe and first product approval in the United States or Europe, to be reduced from the royalties. In addition, we are obligated to pay GHC 1.5% of any and all non-royalty payments, including license fees, received from our affiliates. On March 15, 2004, the exclusive license was amended so that we are required to pay GHC the royalties payable to it for any future exploitation of rights to certain U.S. patents relating to PBT-1 regardless of the inventorship determination, as required under the settlement agreement among us, P.N.G. and GHC.

Under the terms of a strategic alliance agreement that we entered into with Kendle Pty Ltd., or Kendle, on January 6, 2004, Kendle provides us with consultancy services in relation to the coordination, planning and management of intellectual property, research and development, planning, management and commercialization strategy. Kendle provides its services to us at an hourly rate ranging from A$70 to A$210 an hour, depending on the seniority of the consultant. For the years ended June 30, ~~2005, 2004~~2006 and ~~2003,~~2005, fees earned by Kendle amounted to A$~~1,107,266, A$379,045~~126,981 and A$~~475,289~~878,226, respectively. These fees are included in our ~~statements of~~ financial ~~performance~~statements as Patents, research and development expense. Dr. George Mihaly, a director of our company, served as a director of Kendle, formerly known as Synermedica Pty Ltd., until December 2004.

4953

On July 28, 2004, we entered into a settlement agreement with P.N. Gerolymatos S.A., or P.N.G., with respect to patent inventorship claims relating to the use of clioquinol (PBT-1) for use in Alzheimer’s disease. Under the settlement agreement, we agreed to pay a sales royalty to P.N.G. on the sales of PBT-1 in the United States and Japan, and we are entitled to receive a percentage of P.N.G.’s income on sales of PBT-1 in the other territories. P.N.G. is also entitled to receive 2% of our worldwide income from PBT-2. See Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”

D. ~~Trend Information~~TREND INFORMATION

We are a development stage company and it is not possible for us to predict with any degree of accuracy the outcome of our research or commercialization efforts.

E. ~~Off-Balance Sheet Arrangements~~OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.

F. ~~Tabular Disclosure of Contractual Obligations~~TABULAR DISCLOSUREOF CONTRACTUAL OBLIGATIONS

The following table summarizes our minimum contractual obligations ~~and commercial commitments~~ as of June 30, ~~2005~~2006 and the effect we expect them to have on our liquidity and cash flow in future periods.

Contractual Obligations

Payments due by period

Total

less than 1 year

1-3 years

3-5

years

more than 5 years

Total

less than 1 year

1-3 years

3-5

years

more than 5 years

Operating lease obligations

A$ 204,257

A$106,569

A97,688

A$ --

A$92,726

—

Purchase obligations *

3,139,305

685,128

1,606,481

635,191

212,505

Purchase obligations*

A$2,152,887

A$787,704

A$1,365,183

—

Total

A$3,343,562

A$791,697

A$1,704,1,69

A$635,191

A$212,505

A$2,245,613

880,430

A$1,365,183

—

* Includes obligations under our contracts with Professor Ashley Bush and Mr. Geoffrey Kempler. See Item B. "Liquidity and Capital Resources" and Note 14 to the

*	Includes obligations under our contracts with Professor Ashley Bush, Dr. Ross Murdoch and Mr. Geoffrey Kempler. See Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources” and Note 16 to our consolidated financial statements.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. ~~Directors and Senior Management~~DIRECTORS AND SENIOR MANAGEMENT

Our directors and executive officers are as follows:

Name	Age	Position
Geoffrey P. Kempler	5051	Chairman of the Board of Directors and Chief Executive Officer
Ross Thomas Murdoch	4041	President and Chief Operating Officer
Richard Revelins	4344	Chief Financial Officer and Secretary
Dianne Angus	4546	Senior Vice President of Business Development, Intellectual Property and Research
Peter ~~Marks~~Marks(1)	50	Director
Colin L. ~~Masters~~Masters(3)	5859	Director
Brian D. ~~Meltzer~~Meltzer(1)(2)	5253	Director
George W. ~~Mihaly~~Mihaly(1)(2)	5253	Director

50(1) Member of the Audit Committee

(2) Member of the Remuneration Committee and Nominations Committee

(3) Chairman of the Scientific Advisory Board. Professor Ashley Ian Bush and Professor Rudolph Emile Tanzi are also members of the Scientific Advisory Board.

Geoffrey Paul Kempler has served as Chairman of our Board of Directors since November 1997, ~~and~~ between November 1997 and August 2004 he served as our Chief Executive ~~Officer. He~~Officer, and in June 2005 he again assumed the position of Chief Executive ~~Officer in June 2005.~~Officer. Mr. Kempler is one of the founders of our company and has been primarily responsible for the successful negotiation of our company’s existing contractual relationships with Massachusetts General Hospital, the University of Melbourne and the Biomolecular Research Institute.company. Mr. Kempler is a qualified psychologist and the major shareholder of Aroma Science Pty Ltd., which holds the Australian distribution and marketing rights to the Aveda range of products. Mr. Kempler, who has extensive experience in investment and business development, has managed our operations to date and has been responsible for the implementation of our strategic plan and the commercialization of our technology. Mr. Kempler has a B.Sc degree in science from Monash University and Grad. Dip. App. Soc. Psych. degree from Swinburne University.

Dr. Ross Thomas Murdoch has served as Chief Operating Officer and Head of Research and Development of our company since May 2002, initially in a part-time capacity and since July 2002 in a full-time capacity, and was appointed President of our company in July 2004. Dr. Murdoch has almost 17 years of experience in the local and international pharmaceutical industry and has accumulated extensive experience in all the scientific, operational and commercial aspects of drug research and development. Prior to joining our company and ~~since~~from February 2001, Dr. Murdoch served as chief executive officer and chief scientific officer of Kinacia Pty Ltd, an Australian-based pharmaceutical company. Previously and from June 1998, Dr. Murdoch was employed by Astra Merck and after its merger with Zeneca, he served as global head of clinical project management for AstraZeneca. From 1990 to May 1998, Dr. Murdoch was employed by SmithKline Beecham, where he managed its Australian research program until his transfer to SmithKline Beecham in the United States in 1995, where he became a director in global project management, leading drug development in the cardiovascular, pulmonary and metabolism therapeutic areas. Dr. Murdoch has a B.Sc degree with honors from Monash University, a PhD in Pharmacology from the University of Melbourne, a postgraduate certificate in health economics from the Monash University Business School, and is a graduate of the Australian Institute of Company Directors.

Richard Revelins has served as our Company Secretary since February 2000 and was appointed Chief Financial Officer of our company in June 2004. Mr. Revelins is an executive director and principal of Peregrine Corporate Limited, an Australian-based investment bank. Mr. Revelins has held senior positions in international merchant banks and is currently a director of a number of public companies, including, Peregrine Strategic Limited and X-ploration Limited, as well as Atlas Iron Limited, Mintails Limited, Eleckra Mines Limited, Mining Project Group Limited, all of which are listed on the ~~Australian Stock Exchange, including Atlas Gold Limited, Gaming and Entertainment Group Limited, Yamarna Goldfields Limited~~ASX, and Cangold Inc., a company listed on the Canadian Venture ~~Exchange.~~Exchange, as well as a number of private companies. Mr. Revelins has a Bachelor of Economics degree from Monash University, Melbourne. Mr. Revelins serves as our Chief Financial Officer on a part-time basis and devotes approximately one to two work days a week to such position.

Dianne Angus has served as Vice President of Intellectual Property and Licensing of our company since August 2002 and was promoted to Senior Vice President of Business Development, Intellectual Property and Research in July 2004. From ~~1992 to 2000, Ms. Angus managed the intellectual property, licensing and biotechnology product development interests of two Australian companies, AMRAD Corporation Limited and Florigene Limited. From~~ June 2000 to August 2002, Ms. Angus was a Director of Dianne Angus and Associates Pty Ltd. providing strategic business development and intellectual property services to the biotech sector. From 1992 to 2000, Ms. Angus managed the intellectual property, licensing and biotechnology product development interests of two Australian companies, AMRAD Corporation Limited and Florigene Limited. Ms. Angus has worked in the commercial biotechnology sector for 13 years, directing technology evaluation and acquisition and product licensing. During such time, Ms. Angus has managed large and diverse intellectual property portfolios, conducting global patent and trademark prosecution, contract rights and enforcement. Ms. Angus has also negotiated many commercial licenses, research and product development agreements ranging from major entities such as Novartis, Monsanto, Suntory, Du Pont to numerous Australian, Japanese and American research institutes. Ms. Angus has undertaken due diligence assessments on several Australian biotechnology companies for investment brokers. Ms. Angus has a Bachelor of Science (Education) and a Bachelor of Science (Honour’s) degree from the University of Melbourne, a Masters degree in Biotechnology from Monash University, a Graduate Diploma in Intellectual Property Law from the University of Melbourne, a Diploma in Intellectual Property Practice from the Institute of Patent and Trade Mark Attorneys of Australia and is a registered Australian Patent and Trade Mark Attorney.

Peter Marks~~was appointed by our Board of Directors~~ has served as a director of our company ~~to fill a casual vacancy in~~since July ~~2005 and was elected by our shareholders as a director of our company in November~~ 2005. Since late 2001, Mr. Marks has served as Executive Chairman of Premier Bionics Ltd., an investment company listed on the ASX and London Stock Exchange (AIM) that isfocused on investing in later stage Australian-based research and development projects that demonstrate strong commercial potential. From ~~July 1985~~September 1998 until ~~July 1988,~~March 2001, Mr. Marks ~~served as an Associate~~was employed by KPMG Corporate Finance Ltd (Australia), where he rose to Director ~~of McIntosh Securities, now Merrill Lynch Australia, from August 1988 until November 1990, he held senior corporate finance positions at Barings Securities Ltd.~~ and ~~from December 1990 until December 1991, Burdett Buckeridge & Young Ltd. in their Melbourne offices. In his roles with these various financial institutions, he~~ was responsible for ~~advising a substantial number of listed and unlisted companies on issues ranging from corporate and company structure, to valuations, business strategies, acquisitions and international opportunities.~~heading up the equity capital markets group in Melbourne. From January 1992 until July 1994, Mr. Marks served as Head of the Melbourne Companies Department at the Australian Stock Exchange and was a founding Director of Momentum Funds Management Pty Ltd, an Australian venture capital firm. From ~~September 1998~~December 1990 until ~~March 2001,~~December 1991, Mr. Marks served as director of corporate finance at Burdett Buckeridge & Young Ltd. in their Melbourne offices, from August 1988 until November 1990, he held senior corporate finance positions at Barings Securities Ltd. and from July 1985 until July 1988, he served as an Associate Director of McIntosh Securities, now Merrill Lynch Australia. In his roles with these various financial institutions, Mr. Marks was ~~employed by KPMG Corporate Finance Ltd (Australia), where he rose to Director and was~~ responsible for ~~heading up the equity capital markets group in Melbourne.~~advising a substantial number of listed and unlisted companies on issues ranging from corporate and company structure, to valuations, business strategies, acquisitions and international opportunities. Mr. Marks holds a Bachelor of Economics degree, a Bachelor of Law degree and Graduate Diploma in Commercial Law from Monash University in Melbourne, Australia, and an MBA degree from the Scottish School of Business at the University of Edinburgh. ~~Mr. Marks is also a member of our Audit Committee.~~

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Professor Colin Louis Masters has served as a director of our company since December 1999. Professor Masters graduated with a degree in Medicine from the University of Western Australia in 1970. Since such time, Professor Masters has held many senior scientific research positions predominantly in the area of ~~Alzheimer's~~Alzheimer’s disease research and is currently a Professor and Head of the Department of Pathology at the University of Melbourne. Professor Masters is Chief of Neuropathology and Director of Research Laboratories at the Mental Health Research Institute of Victoria and Consultant in Pathology at the Royal Melbourne Hospital. Professor Masters chairs our Scientific Advisory Board and is primarily responsible for the implementation of the research strategy of our company. Professor Masters has a B.Med.Sci. degree with Honours, an M.B., B.S., M.D., F.R.C. Path (U.K.) degree and F.R.C. Path (Aust), F.A.A. degree, all from the University of Western Australia.

Brian Derek Meltzer has served as a director of our company since December 1999. Mr. Meltzer is a merchant banker with the international investment bank Babcock & Brown. HeMr. Meltzer has over 20 years experience in finance, including 12 years at AIDC ~~Ltd~~Ltd. where he was ~~Non-Executive Director~~executive director of ~~Investment Advisory Services. He~~investment advisory services. Mr. Meltzer is a director of Momentum Ventures Limited, licensed by the government as an Innovation Investment Fund with venture capital investments including biotechnology. Mr. Meltzer is a non-executive director on the boards of a number of private companies. He is also a director on the boards of the Australia-Israel Chamber of Commerce and the Paraplegic and Quadriplegic Association of Victoria (Paraquad). Mr. Meltzer ~~is Chairman of our Audit Committee, Remuneration Committee and Nomination Committee. Mr. Meltzer~~ has B. Com. and MEc. degrees from the University of Auckland and Monash University, respectively.

Dr. George William Mihaly has served as director of our company since December 1999. Dr. Mihaly also serves as a director of Prima Biomed Ltd., a public company, and Waide Pty Ltd., a private company. Dr. Mihaly has had an extensive and successful career spanning the research and commercial facets of the pharmaceutical industry. During the period from mid-1994 to early 2000, Dr. Mihaly was the founding Executive Chairman and Managing Director of Synermedica Pty Ltd., or Synermedica, one of Australia’s leading independent consultant research organizations, or CRO, to the pharmaceutical industry. Synermedica merged with the global CRO, Kendle International Inc., in April 2000 and Dr. Mihaly continued as Managing Director of the merged entity in Australia (now called Kendle Pty Ltd.) until December 2004. Over the course of the last 23 years in academia and industry, Dr. Mihaly has amassed extensive experience in both the science and logistics of setting up, monitoring, managing and evaluating results from Phase I, II, III and IV clinical trials. Dr. Mihaly has a B.Pharm., from Monash University, M.Sc. from Sydney University and Ph.D. ~~degrees~~degree from Melbourne University, and is a fellow of the Australian Institute of Company Directors. ~~Dr. Mihaly is a member of our Audit Committee, Remuneration Committee and Nomination Committee.~~

~~In June 2005, Dr. Jonas Alsenas resigned as our Chief Executive Officer and director.~~

B. ~~Compensation~~COMPENSATION

The following table sets forth all compensation we paid to each of our directors and with respect to all of our directors and executive officers as a group for the year ended June 30, ~~2005:~~2006:

	Salaries, fees, commissions and bonuses			Pension, retirement and other similar benefits
~~Jonas Alsenas~~⁽¹⁾	~~A$1,779,526~~		~~A$432,266~~
Geoffrey P. Kempler		A$~~311,759~~434,545	(1)		A$~~26,220~~33,455
Peter Marks		A$75,000			—
Colin L. Masters		A$115,000		--	—
Brian D. Meltzer		A$~~104,869~~97,569		--	A$7,431
George W. Mihaly		A$~~129,869~~105,000		--	—
All directors and officers as a group, consisting of ~~seven~~eight persons at June 30, ~~2005~~⁽¹⁾ 2006		A$~~3,068,693~~⁽¹⁾1,377,162			A$~~499,436~~⁽¹⁾83,190

~~(1) On June 15, 2005, Jonas Alsenas resigned as our Chief Executive Officer and director. The table sets forth compensation we paid to Jonas Alsenas, prior to his resignation,during the year ended June 30, 2005 and such compensation is included in the compensation we paid to all of our directors and executive officers as a group for the year ended June 30, 2005.~~

(1)

Under an employment agreement we entered into with Mr. Geoffrey Kempler, Mr. Kempler was entitled to a bonus of A$100,000 for achievement of the satisfactory completion of a successful Phase I trial within the time frame specified by our company’s strategic plan determined by our Board of Directors in the 2006 fiscal year. The Phase I trial for PBT-2 was successfully completed during the year ended June 30, 2006 and as such, the A$100,000 bonus is now payable. This bonus has been included in the above table. See Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”

In accordance with the approval of our shareholders at our 2004 annual general meeting of shareholders, the aggregate amount available per annum for the remuneration of our non-executive directors for their services (payable in cash, ordinary shares or options) is A$1,250,000. ~~Our shareholders further authorized us at our 2004 annual general meeting of shareholders to pay~~During the fiscal year ended June 30, 2006, we paid to each of our ~~non-employee~~non-executive directors an annual ~~base~~director service fee ~~for director services in an aggregate amount~~ of A$40,000 ~~by way~~and additional fees for their services as members of ~~issuance of 83,333~~committees of our ~~ordinary shares to each director. The number~~Board of shares issued was calculated based on a price per ordinary share equal to the lesser of: 80% of the average market price for our ordinary shares calculated over the five days prior to the our 2004 annual general meeting of shareholders, or 80% of the average closing price for our ordinary shares calculated over the six months prior to our 2004 annual general meeting of shareholders. These shares were issued under and pursuant to the terms of our 2004 Employees’, Directors’& Consultants’ Share and Option Plan. See Item 6.E. “Directors, Senior Management and Employees - Share Ownership - Stock Option Plans.”Directors.

As of June 30, ~~2005,~~2006, our directors and executive officers as a group, then consisting of ~~seven~~eight persons, held options to purchase an aggregate ~~2,100,000~~3,400,000 of our ordinary shares. Of such options, options to purchase ~~1,600,000~~2,900,000 ordinary shares are currently exercisable for nil consideration on or before June 30, 2010. These options may not be exercised until and unless the price of our ordinary shares has achieved and maintained a minimum value of A$1.00 for five consecutive trading days. ~~These options may not be exercised until December 17, 2005(12 months from the date of grant).~~The ordinary shares issued upon exercise of these options may not be disposed of without the prior consent of our Board of Directors. The remaining options to purchase 500,000 ordinary shares are exercisable for A$0.50 on or before December 17, 2007. ~~All of~~Of the foregoing options, options to purchase 2,100,000 ordinary shares were granted during the 2005 fiscal year and options to purchase 1,300,000 ordinary shares were granted during the 2006 fiscal year under our 2004 Employees’, Directors’& Consultants’ Share and Option Plan. See Item 6.E. “Directors, Senior Management and Employees - Share Ownership - Stock Option Plans.”

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See Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources,” for details regarding the employment agreements we entered into with Mr. Geoffrey Kempler, in connection with his appointment as our Chief Executive Officer and Dr. Ross Murdoch in connection with his services as our President and Chief Operating Officer.

C. ~~Board Practices~~BOARD PRACTICES

Introduction

Our Board of Directors is elected by and accountable to our shareholders. Our Board of Directors’ responsibilities are divided into operating activities, financial and capital markets activities and scientific activities. The Chairman of our Board of Directors, currently Mr. Geoffrey Kempler, is responsible for the management of the Board of Directors and its functions.

~~Non-Executive and Independent Directors~~

~~Our Board of Directors currently has five directors, of which three are non-executive directors under Australian law.~~

In addition, in general, under NASDAQ Marketplace Rules promulgated pursuant to the Sarbanes-Oxley Act of 2002, as of July 31, 2005, a majority of our Board of Directors must qualify as independent directors within the meaning of the NASDAQ Marketplace Rules and our audit committee must have at least three members and be comprised only of independent directors, each of whom satisfies the respective “independence” requirements of NASDAQ and the Securities and Exchange Commission. However, under a recent amendment to the NASDAQ Marketplace Rules, foreign private issuers, such as our company, may follow certain home country corporate governance practices without the need to seek individual exemptions from NASDAQ. Instead, a foreign private issuer must provide NASDAQ with a letter from outside counsel in its home country certifying that to the extent that the issuer's corporate governance practices is not in accordance with NASDAQ Marketplace Rules, it follows home country law and practice. On March 30, 2005, we provided NASDAQ with a notice of non-compliance with respect to the NASDAQ requirement to maintain a majority of independent directors, as defined under the NASDAQ Marketplace Rules, and the requirement that audit committee members meet the independence standard of NASDAQ. Instead, we follow Australian law and practice which does not require a company to appoint a certain number of independent directors to its board of directors or audit committee. However, under the ASX Best Practice Guide, the ASX recommends, but does not require, that a ASX-listed company have a majority of independent directors on its board of directors and that the audit committee be comprised of independent directors, within the meaning of the rules of the ASX. We currently comply with the foregoing recommendations of the ASX Best Practice Guidance. In addition, in accordance with the rules of the Securities and Exchange Commission, we have the mandated three independent directors, as defined by such rules, on our Audit Committee. See below in this Item 6C. "Directors, Senior Management and Employees - Board Practices - NASDAQ Marketplace Rules and Home Country Practices."

Our Board of Directors has determined that each of Messrs. Brian Meltzer, George Mihaly and Peter Marks qualifies as an independent director under the ASX, NASDAQ Stock Market and Securities and Exchange Commission requirements.

~~Term~~Election of Directors

Directors are elected at our annual general meeting of shareholders. Under our Constitution, the term of office of our directors are staggered, such that at every annual general meeting of shareholders one-third, rounded down to the nearest whole number, of the directors, except a Managing Director, must retire from office and may offer himself/herself for re-election. No director, except a Managing Director, shall retain office for a period in excess of three years without submitting for re-election. Under Australian law, directors who have reached the age of 72 must stand for re-election annually. Our Board of Directors has the power to appoint any person to be a director, either to fill a vacancy or as an additional director (provided that the total number of directors does not exceed the maximum allowed by law), and any director so appointed may hold office only until the next annual general meeting when he or she shall be eligible for election. Mr. Kempler is our Managing Director. Dr. Masters must retire and may stand for re-election at our 2006 annual general meeting of ~~shareholders.~~shareholders that is expected to be held on November 30, 2006. Messrs. Marks, Meltzer ~~Mihaly~~ and ~~Marks,~~Mihaly must retire and may stand for re-election at our 2008 annual general meeting of shareholders. In light of the one-third director rotation requirement, one of our directors (not including our Managing Director) will be required to retire and stand for re-election at our 2007 annual general meeting of shareholders.

Non-Executive and Independent Directors

Australian law does not require a company to appoint a certain number of independent directors to its board of directors or audit committee. However, under the ASX Best Practice Guide, the ASX recommends, but does not require, that a ASX-listed company have a majority of independent directors on its board of directors and that the audit committee be comprised of independent directors, within the meaning of the rules of the ASX. Our Board of Directors currently has five directors, of which three are non-executive directors within the meaning of the ASX Best Practice Guide, and our audit committee consists of such three non-executive directors. Accordingly, we currently comply with the foregoing recommendations of the ASX Best Practice Guidance.

In addition, in general, under NASDAQ Marketplace Rules, a majority of our Board of Directors must qualify as independent directors within the meaning of the NASDAQ Marketplace Rules and our audit committee must have at least three members and be comprised only of independent directors, each of whom satisfies the respective “independence” requirements of NASDAQ and the Securities and Exchange Commission. On March 30, 2005, we provided NASDAQ with a notice of non-compliance with respect to the requirement to maintain a majority of independent directors, as defined under NASDAQ Marketplace Rules, and the requirement that audit committee members meet the independence standard of NASDAQ. Instead, under Australian law and practice, we are not required to appoint a certain number of independent directors to our Board of Directors or audit committee, as described above. However, as of July 2005, we have a majority of independent directors, within the meaning of NASDAQ Marketplace Rules, on our Board of Directors and our audit committee members meet the independence requirements of NASDAQ and the Securities and Exchange Commission.

Our Board of Directors has determined that each of Messrs. Peter Marks, Brian Meltzer, George Mihaly qualifies as an independent director under the ASX, NASDAQ Stock Market and Securities and Exchange Commission requirements.

Directors’ Service Contracts

We do not have any service contracts with our directors, other than the agreement that we entered into with Mr. Kempler, the Chairman of our Board of Directors, in connection with his appointment as our Chief Executive Officer. ~~Our~~There are no arrangements or understandings between us and any of our directors ~~are not entitled to any~~for benefits upon termination of their ~~service as our directors.~~service.

On June 15, 2005, we entered into an employment agreement with Mr. Geoffrey Kempler, under which Mr. Kempler agreed to serve as our Chief Executive Officer. We agreed to provide Mr. Kempler the following payments and benefits: (i) base annual salary of A$367,000 per year (which may be increased at the discretion of the Board of Directors); (ii) bonus of A$100,000 for achievement of the satisfactory completion of a successful Phase ~~One~~I trial within the time frame specified by our ~~company's~~company’s strategic plan determined by our Board of Directors and a further A$100,000 bonus ~~for~~upon the satisfactory completion of a ~~proof of concept study~~Phase II efficacy study. The Phase I trial for PBT-2 was successfully completed during the year ended June 30, 2006 and as such, ~~as a Phase Two (A) trial on efficacy and dosage.~~the A$100,000 bonus is now payable. Should the agreement terminate due to death or disability, we shall pay a pro-rata bonus; (iii) subject to shareholder approval and within 30 days thereof, we have the option to grant options, exercisable for nil consideration, for a number of ordinary shares to be determined by the Remuneration Committee based upon Mr. Kempler’s performance in the future. ~~The~~If granted, the options will ~~vest~~have the following terms: (A) vesting over a period of four years, in four equal installments, at the end of each of the four years from the date of ~~grant. The~~grant; (B) the options will expire at the end of the eight years from the date of ~~grant. These~~grant; (C) the options may not be exercised until or unless the price of our ordinary shares has achieved and maintained a minimum value of ~~$1.00~~A$1.00 for five consecutive trading ~~days.~~days; and (D) Mr. Kempler will not be entitled to sell any of the shares issued upon exercise of the options unless he has the prior consent of the Board of Directors; (iv) up to 20 days vacation a year. Vacation days that are not used in any calendar year will be carried over for use in the following year to a maximum carry-over of two years; and (v) reimbursement of reasonable business expenses incurred in the performance of his duties. Mr. Kempler is entitled to participate in the employee benefits established by our company, as applicable to executives, including, without limitation, a Section 401(k) retirement plan, health, dental, life insurance and short and long term disability plans.

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In the event of termination of Mr. Kempler’s employment:

By our company without cause (as defined in the agreement) or by Mr. Kempler with good reason (as defined in the agreement), Mr. Kempler ~~shall~~will be entitled to: (i) the sums he would have been entitled to receive had he continued to provide services under the agreement until June 1, 2010, notwithstanding that such services will not be required to be provided within 90 days of the termination date; (ii) business expenses that have not been reimbursed and accrued, unused vacation days; and (iii) the acceleration of the vesting of any unvested options to purchase ordinary shares which may be purchased during the remainder of the exercise period by such options.

By our company with cause (as defined in the agreement) or by Mr. Kempler without good reason (as defined in the agreement), Mr. ~~Kempler's~~Kempler’s bonus compensation will be pro-rated if the termination occurs in the first year and he will be entitled to business expenses that have not been reimbursed and accrued and unused vacation days. He will only be permitted to exercise unvested options to purchase shares that had been grated to him prior to the employment agreement.

Due to death or disability (as defined in the agreement), we shall pay Mr. Kempler or his estate, as applicable, all accrued base salary, pro-rata bonus, business expenses that have not been reimbursed and accrued, unused vacation days (and in the case of disability, less such amounts under any disability policy maintained by our company).

Mr. Kempler or his estate, as applicable, will be entitled to exercise vested options for ordinary shares.

The agreement contains customary confidentiality provisions.

Indemnification of Directors and Officers

Our Constitution provides that, subject to the Australian Corporations Act, every director, secretary, manager or officer of our company or any person employed by our company as auditor shall be indemnified ~~out~~our of our funds against all liability incurred by such person as a director or officer in defending proceedings, whether civil or criminal, in which judgment is given in the persons favor or in which the person is acquitted in connection with any application under the Australian Corporations Act in which relief is granted to the person by a Court.

Under our Constitution no director, auditor or other officer shall be liable for (i) any acts, receipts, neglect or defaults of any other director or officer for joining in any receipt or other act for ~~conformity or for~~conformity; (ii) any loss or expense that may happen to us through the inefficiency or deficiency of title to any property acquired by order of the directors or on our ~~behalf or for~~behalf; (iii) the inefficiency or deficiency of any security in or upon which any of our monies shall be ~~invested or for~~invested; (iv) any loss or damage arising from bankruptcy, insolvency or tortuous act of any person with whom any monies, securities or effects shall be ~~deposited or for~~deposited; (v) any loss occasioned by any error of judgment, omission, default or oversight on the persons ~~part~~part; or ~~for an~~(vi) any other loss damage or misfortune whatsoever which shall happen in relation to those things unless the same shall happen through the persons own negligence, default, breach or duty, breach of trust or dishonesty.

In addition, our Constitution provides that to the extent permitted by law, we may pay, or agree to pay, a premium in respect of a contract insuring a person who is liable or has been an officer of our company or one of our subsidiaries against a liability:

incurred by the person in his or her capacity as an officer of our company or a subsidiary of our company provided that the liability does not arise out of a conduct involving a willful breach of duty in relation to our company or a subsidiary of our company; or

for costs and expenses incurred by that person defending proceedings, whatever their outcome.

We maintain a directors’ and officers’ liability insurance policy. We have established a policy for the indemnification of our directors and officers against certain liabilities incurred as a director or officer, including costs and expenses associated in successfully defending legal proceedings.

Committees of the Board of Directors

Our Board of Directors has established the following committees:

Audit Committee. Our Audit Committee, which was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, assists our Board of Directors in overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent public accountants’ qualifications and independence, the performance of our internal audit function and independent public accountants, and such other duties as may be directed by our Board of Directors. The Audit Committee is also required to assess risk management.

Our Audit Committee currently consists of three board members, each of whom satisfies the “independence” requirements of the Securities and Exchange ~~Commission.~~Commission, NASDAQ Marketplace Rules and ASX Rules. Our Audit Committee is currently composed of Messrs. Peter Marks, Brian Meltzer and George Mihaly. Messrs. Marks, Meltzer and Mihaly also qualify as independent directors within the meaning of the NASDAQ Marketplace Rules and ASX Rules. See above in this Item 6C. “Directors, Senior Management and Employees - Board Practices - Non-Executive and Independent Directors.” Our Board of Directors has determined that Mr. Brian Meltzer qualifies as a financial expert. The audit committee meets at least four times per year.

Remuneration Committee. In the first quarter of 2005, our Board of Directors appointed a Remuneration Committee, which is comprised solely of independent directors, within the meaning of NASDAQ Marketplace Rules. The Remuneration Committee is responsible for reviewing, the salary, incentives and other benefits of our executive officers and to make recommendations on such matters for approval by our Board of Directors. The Remuneration Committee is also responsible for overseeing and advising our Board of Directors with regard to the adoption of policies that govern our compensation programs, including share and ADR option and employee benefit plans. Additionally, the Remuneration Committee administers our share and ADR option plans and any other employee benefit plans. Messrs. Mihaly and Meltzer are the current members of the Remuneration Committee, each of whom qualifies as an ~~"independent director"~~“independent director” within the meaning of NASDAQ Marketplace Rules.

Nominations Committee. In July 2005, our Board of Directors appointed a Nominations Committee, which is comprised solely of independent directors, within the meaning of NASDAQ Marketplace Rules. The Nominations Committee is responsible for identifying and recommending to the Board of Directors director nominees for election at the annual meetings of shareholders, as well as candidates to fill any vacancies on the Board of Directors or as an addition to existing directors. Messrs. Mihaly and Meltzer are the current members of the Nominations Committee, each of whom qualifies as an ~~"independent director"~~“independent director” within the meaning of NASDAQ Marketplace Rules.

Scientific Advisory Board. Our Scientific Advisory Board oversees and administers our research activities. Our company’s Scientific Advisory Board is comprised of a number of the leading scientists in the field of age-related degenerative disorders. Professor Colin Masters is the Chairman of our Scientific Advisory Board. The current members of our Scientific Advisory Board are as follows:

Professor Colin Louis Masters has served as an executive director of our company since December 1999. Professor Masters graduated with a degree in Medicine from the University of Western Australia in 1970. Since such time Professor Masters has held many senior scientific research positions predominantly in the area of Alzheimer’s disease research and is Professor and Head of the Department of Pathology at the University of Melbourne. Professor Masters is Chief of Neuropathology and Director of Research Laboratories at the Mental Health Research Institute of Victoria and Consultant in Pathology at the Royal Melbourne Hospital. Professor Masters chairs our Scientific Advisory Board and is primarily responsible for the implementation of the research strategy of our company. Professor Masters has a B.Med.Sci. degree with Honors, an M.B., B.S., M.D., F.R.C. Path (U.K.) degree and F.R.C. Path (Aust), F.A.A. degree, all from the University of Western Australia.

Professor Ashley Ian Bush is the Director of the Laboratory for Oxidation Biology within the Genetics and Aging Unit at the Massachusetts General Hospital and Associate Professor in the Department of Psychiatry of Harvard Medical School. Professor Bush is also Principal Fellow/Associate Professor, Departments of Pathology and Psychiatry, University of Melbourne. Professor Bush, born and educated in Melbourne, established his laboratory at the Massachusetts General Hospital after receiving the distinguished Harness Fellowship in 1992. His discovery of the role of metals and oxidative stress in Neurological disorders has formed the basis of our platform technology.

Professor Rudolph Emile Tanzi is Professor of Neurology at the Harvard Medical School and Associate Geneticist, Neurology Services, the Director of Genetics and the Aging Unit, at the Massachusetts General Hospital. Professor Tanzi played a lead role in the discovery of genes and the mechanisms that underlie the cause of Alzheimer’s disease, particularly as they relate to the molecular genetics of this disorder. His laboratory at the Massachusetts General Hospital is one of the leaders in the field. Over the last ten years Professor Tanzi has helped guide the development of our platform technology.

~~NASDAQ Marketplace Rules and Home Country Practices~~D.EMPLOYEES

~~NASDAQ Marketplace Rule 4350, or Rule 4350, was recently amended to permit foreign private issuers,~~At June 30, 2006, we had 10 employees. Of such as our company, to follow certain home country corporate governance practices without the need to seek individual exemptions from NASDAQ. Instead, a foreign private issuer must provide NASDAQ with a letter from outside counselemployees, three persons were employed in ~~its home country certifying that to the extent that the issuer does not comply with Rule 4350 it complies with its home country law~~research and ~~practice. On March 30, 2005, we provided NASDAQ with a notice that we do not comply with the following requirements of Rule 4350,~~development, five persons in management and ~~instead follow Australian law~~administration and ~~practice~~two persons in ~~respect of such requirements:~~

The requirement to maintain a majority of independent directors, as defined under the NASDAQ Marketplace Rules. Instead, we follow Australian law and practice which does not require a company to appoint a certain number of independent directors to its board of directors. However, under the ASX Best Practice Guide, the ASX recommends, but does not require, that an ASX-listed company have a majority of independent directors on its board of directors.

The requirement that audit committee members meet the independence standard of the NASDAQ Marketplace Rules. Instead, we follow Australian law and practice which does not require a company to appoint a certain number of independent directors to its audit committee. However, under the ASX Best Practice Guide, the ASX recommends, but does not require, that the audit committee of an ASX-listed company be comprised of independent directors, within the meaning of the rules of the ASX.

We currently comply with the foregoing recommendations of the ASX Best Practice Guidance. In addition, in accordance with the rules of the Securities and Exchange Commission, we have the mandated three independent directors, as defined by such rules, on our Audit Committee.

D.~~Employees~~operations.

At June 30, 2005, we had 17 employees. Of such employees, seven persons were employed in research and development, eight persons in management and administration and two persons in operations.

At June 30, 2004, we had 12 employees. Of such employees, five persons were employed in research and development, five persons in management and administration and two persons in operations.

~~At June 30, 2003, we had eight employees. Of such employees, three persons were employed in research and development, three persons in management and administration and two persons in operations.~~

As of June 30, 2005, except for one employee located in the United States, all of our employees were located in Australia. ~~During the fiscal years ended~~Such U.S. employee ceased working for our company in August 2005. As of June 30, ~~2004~~2006 and ~~2003~~2004 all of our employees were located in Australia.

Australian labor laws and regulations are applicable to all of our employees. The laws concern various matters, including severance pay rights at termination, retirement or death, length of work day and work week, minimum wage, overtime payments and insurance for work-related accidents.

E. ~~Share Ownership~~SHARE OWNERSHIP

Beneficial Ownership of Executive Officers and Directors

The following table sets forth certain information as of ~~December 15, 2005~~September 21, 2006 regarding the beneficial ownership of our ordinary shares by each of our directors and executive officers and by all of our directors and executive officers as a group:

Name
Number of Ordinary Shares
Beneficially Owned (1)

Percentage of
Ownership (2)
Geoffrey P. Kempler 18,055,000 (3)(4) 14.09%
Richard Revelins437437 542,808 (5)(6) *
Ross T. Murdoch437437 50,000 (7) *
Dianne Angus - *
Peter Marks 43,111 (8) *
Colin L. Masters 184,666 (9) *
Brian D. Meltzer 626,666 (10)(11) *
George W. Mihaly 526,666 (12)(13) *
All directors and executive officers as a group (seven persons)
20,028,917 (14) 15.63%

Name	Number of Ordinary Shares Beneficially Owned (1)		Percentage of Ownership (2)
Geoffrey P. Kempler	18,055,000	(3)(4)	14.06%
Richard Revelins	592,808	(5)(6)	*
Ross T. Murdoch	50,000	(7)	*
Dianne Angus	-		*
Peter Marks	343,111	(8)(9)	*
Colin L. Masters	1,184,666	(10)(11)	*
Brian D. Meltzer	626,666	(12)(13)	*
George W. Mihaly	526,666	(14)(15)	*
All directors and executive officers as a group (eight persons)	21,378,917	(16)	16.65%

*Less than 1%

*	~~Less than 1%~~

(1)

Beneficial ownership is determined in accordance with the rules of the ~~SEC,~~Securities and Exchange Commission, and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this annual report are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.

(2)	The percentages shown are based on ~~128,144,260~~128,394,260 ordinary shares issued and outstanding as of ~~December 15, 2005.~~ September 21, 2006.

(3)

Of such shares, 30,000 ordinary shares are held directly by Mr. Kempler, 13,965,000 ordinary shares are held by Baywick Pty Ltd., an Australian corporation owned by Mr. Kempler, 90,000 ordinary shares are held of record by Crystal Triangle Pty Ltd., an Australian corporation owned by Mr. Kempler and 2,970,000 ordinary shares are held of record by NRB Developments Pty Ltd., an Australian corporation in which Mr. Kempler holds a 50% interest. Mr. Kempler may be deemed to be the beneficial owner of the ordinary shares held directly by Baywick Pty Ltd., Crystal Triangle Pty Ltd. and NRB Developments Pty Ltd.

(4)

Includes 1,000,000 ordinary shares issuable upon the exercise of currently exercisable options ~~exercisable~~ for nil consideration on or before June 30, ~~2010.~~2010 granted under the 2004 ASX Plan (as defined below). These options may not be exercised ~~until December 17, 2005 and thereafter, only if~~unless the price of our ordinary shares has achieved and maintained a minimum value of A$1.00 for five consecutive trading days.

(5)	~~Of such shares, 42,808 are held~~Held by Darontack Pty Ltd., an Australian corporation owned by Mr. Revelins.

(6)	Includes options to purchase 500,000 ordinary shares exercisable at A$0.50 on or before December 17, 2007 granted under the 2004 ASX Plan (as defined below), held by Darontack Pty Ltd., an Australian corporation owned by Mr. Revelins.

(7)	~~Of such shares, 50,000 ordinary~~Such shares are held by Angela Murdoch, ~~Dr Murdochs’~~Dr. Murdoch’s wife. Dr. Murdoch disclaims beneficial ownership of the ordinary shares held by his wife Angela Murdoch.

(8)	Of such shares, 43,111 ordinary shares are held by Lampam Pty ~~Ltd.,~~Ltd, an Australian corporation owned by Mr. Marks. ~~Does not include~~

(9)

Includes options to purchase 300,000 ordinary shares at nil consideration on or before June 30, 2010 ~~that have been approved~~granted under the 2004 ASX Plan (as defined below). These options may not be exercised unless the price of our ordinary shares has achieved and maintained a minimum value of A$1.00 for ~~grant by our shareholders but have not yet been granted.~~five consecutive trading days.

~~(9)~~(10)

Of such shares, 166,666 ordinary shares are held directly by Dr. Masters, 16,000 ordinary shares are held by Helen Masters, Dr. Masters’ wife, 1,000 ordinary shares are held by Seth Masters, Dr. Masters’ son, and 1,000 ordinary shares are held by Kate Masters, Dr. Masters’ daughter. ~~Does not include~~Dr. Masters disclaims beneficial ownership of the ordinary shares held by his wife, Helen Masters, and children, Seth Masters and Kate Masters.

(11)

Includes options to purchase 1,000,000 ordinary shares at nil consideration on or before June 30, 2010 ~~that have been approved~~granted under the 2004 ASX Plan. These options may not be exercised unless the price of our ordinary shares has achieved and maintained a minimum value of A$1.00 for ~~grant by our shareholders but have not yet been granted.~~five consecutive trading days.

~~(10)~~(12)

Of such shares, 326,666 ordinary shares are held by Navon Pty Ltd., an Australian corporation owned by Mr. Meltzer.

~~(11)~~

Includes 300,000 ordinary shares issuable upon the exercise of options, exercisable for nil consideration on or before June 30, 2010. These options may not be exercised until December 17, 2005 and thereafter, only if the price of our ordinary shares has achieved and maintained a minimum value of A$1.00 for five consecutive trading days.

~~(12)~~

Of such shares 166,666 ordinary shares are held directly by Mr. Mihaly, 4,000 ordinary shares are held by each of Kieren Mihaly and Warwick Mihaly, Dr. Mihaly’s sons, and 52,000 ordinary shares are held of record by Waide Pty Ltd., an Australian corporation owned by Mr. Mihaly.

(13)

Includes 300,000 ordinary shares issuable upon the exercise of currently exercisable options ~~exercisable~~ for nil consideration on or before June 30, ~~2010.~~2010 granted under the 2004 ASX Plan (as defined below). These options may not be exercised ~~until December 17, 2005 and thereafter, only if~~unless the price of our ordinary shares has achieved and maintained a minimum value of A$1.00 for five consecutive trading days.

(14)

~~Does not include options to purchase an aggregate 1,300,000~~Of such shares 166,666 ordinary shares atare held directly by Dr. Mihaly, 52,000 ordinary shares are held of record by Waide Pty Ltd., an Australian corporation owned by Dr. Mihaly, and 4,000 ordinary shares are held by each of Kieren Mihaly and Warwick Mihaly, Dr. Mihaly’s sons. Dr. Mihaly disclaims beneficial ownership of the ordinary shares held by his sons, Kieren Mihaly and Warwick Mihaly.

(15)

Includes 300,000 ordinary shares issuable upon the exercise of currently exercisable options for nil consideration on or before June 30, 2010 ~~that have been approved by~~granted under the 2004 ASX Plan (as defined below). These options may not be exercised unless the price of our ~~shareholders~~ordinary shares has achieved and maintained a minimum value of A$1.00 for ~~grant to Messrs. Marks and Masters but have not yet been granted.~~five consecutive trading days.

(16)	See Footnotes (3) - (15).

Stock Option Plans

Employee and Consultants Option Plan 2000

In November 2000, we adopted our Employee and Consultants Option Plan 2000, or the 2000 Plan. The 2000 Plan is designed to reward executives, employees and consultants for their contributions to our company and to provide a method of retaining key personnel for the growth and development of our intellectual property rights. Under the 2000 Plan, the number of ordinary shares issuable upon exercise of options granted under the 2000 Plan from time to time, that have not expired and have not been exercised, may not exceed 3,000,000. Options granted under the 2000 Plan were exercisable (irrespective of the date of grant) at any time from 12 months after the date of grant until June 30, 2005, at an exercise price of A$0.50 per share. The options cannot be transferred and will not be quoted on the ASX.

~~During the 2005 fiscal year, no options were granted or exercised under the 2000 Plan.~~ On June 30, 2005, all outstanding options granted under the 2000 Plan ~~expired. We~~expired and we do not intend to grant any further options under the 2000 Plan.

2004 Option Plans

In November 2004, we adopted the 2004 Employees’, Directors’ and Consultants’ Share and Option Plan (the “2004 ASX Plan”) and the 2004 American Depository Share (ADS) Option Plan (the “2004 ADS Plan”; and together with the 2004 ASX Plan, the “2004 Plans”). Under the 2004 ASX Plan we may issue ordinary shares traded on the ASX, and under the 2004 ADS Plan we may issue American Depository Shares (“ADSs”) ~~reported~~listed on the NASDAQ Capital Market. We were initially authorized to issue under the 2004 Plans up to an aggregate 12,000,000 ordinary shares or ADSs representing 12,000,000 ordinary shares. In November 2005, our shareholders approved an amendment to the 2004 Plans to provide for the issuance thereunder of an additional 10,000,000 ordinary shares (or ADSs representing 10,000,000 ordinary shares), so that we may issue under the 2004 Plans up to an aggregate 22,000,000 ordinary shares or ADSs representing 22,000,000 ordinary shares. Any increase in such maximum number of ordinary shares or ADSs issuable under the 2004 Plans is subject to shareholder approval. As

2004 ASX Plan. The purpose of ~~June 30, 2005,~~the 2004 ASX Plan (“2004 ASX Plan”) is to promote the interest of our company and the interest of the employees, directors and consultants of our company and its subsidiaries. Under the 2004 ASX Plan, we may issue to employees, directors and consultants of our company and its subsidiaries, from time to time, up to an aggregate ~~6,928,439~~12,000,000 ordinary shares, ~~had been~~either by issuance of ordinary shares or under options to purchase ordinary shares granted under the 2004 ASX Plan.

The 2004 ASX Plan is administered by the Remuneration Committee. Subject to Board approval where required by applicable law, the Remuneration Committee has the authority, in its sole discretion, to grant options under the 2004 ASX Plan, to interpret the provisions of the 2004 ASX Plan and to prescribe, amend, and rescind rules and regulations relating to the 2004 ASX Plan or any issue or grant thereunder as it may deem necessary or advisable, subject to any other approval if required by applicable law. All decisions made by the Remuneration Committee pursuant to the provisions of the 2004 ASX Plan will be final, conclusive and binding on all persons.

The number of shares issued or ~~were issuable under~~options granted, the exercise price and option term or options granted, the vesting schedule and escrow periods of shares issued and options granted, under the 2004 ~~Plans,~~ASX Plan are determined by the Remuneration Committee, in accordance with the provisions of the ASX Plan, and ~~5,071,561 ordinary shares were available for future issuances or grants~~specified in an offer document from our company and accepted by the eligible person, subject to the terms of the 2004 ASX Plan. Options granted under the 2004 ~~Plans (prior~~ASX Plan will be unlisted and exercisable at an exercise price equal to less than market value of an ordinary share on the ~~November 2005 increase in~~ASX at the ~~maximum number~~date of ~~ordinary shares issuable~~grant, or such other exercise price that the Remuneration Committee determines to be appropriate under the circumstances. The term of an option granted under the 2004 ~~Plans).~~ASX Plan will be determined by the Remuneration Committee, however no option will be exercisable after the expiration of ten years from the date of its grant. Except as otherwise provided in the 2004 ASX Plan or determined by the Remuneration Committee and set forth in an offer document, the issuance of shares and exercise of options granted under the 2004 ASX Plan will either (i) be subject to an escrow, under which such shares or options cannot be disposed of or exercised, respectively, within six months from the date of issue or grant (or 12 months if issued or granted to a director); or (ii) will vest over a four year period in four equal installments, 25% at the end of each year from the date of grant. Shares issued and options granted under the 2004 ASX Plan may be subject to other performance criteria and hurdles, as determined by the Remuneration Committee.

2004 ADS Plan. The purpose of the 2004 ADS Plan is to promote the interests of our company and its non-Australian based employees, officers, consultants, independent contractors and directors. Options granted under the 2004 ADS Plan may be incentive stock options, as provided in Section 422 of the Internal Revenue Code of 1986, as amended, or the Code, or non-qualified stock options. Incentive stock options may only be granted to employees of our company and its subsidiaries (including, without limitation, officers and directors who are also employees of our company and its subsidiaries) and may not be granted to any owner of 10% or more of the total combined voting power of all classes of stock of ~~the Company~~our company and ~~its~~ subsidiaries, or a 10% Holder. To the extent that the aggregate fair market value, determined on the date that an option is granted, of ADSs, with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year exceeds US$100,000, such option shall be treated as a non-qualified stock option.

Under the 2004 ADS Plan, we may grant to employees, officers, consultants, independent contractors and directors of our company or any of its subsidiaries, from time to time, options to purchase up to an aggregate 1,200,000 ADSs (representing 12,000,000 of our ordinary shares). The number of ADSs with respect to which options may be granted to any employee under the 2004 ADS Plan in any calendar year shall not exceed 500,000 ADSs (representing 5,000,000 of our ordinary shares). ADSs that are forfeited under the terms of the 2004 ADS Plan and ADSs that are the subject of options that expire unexercised or which are otherwise surrendered by an optionee without receiving any payment or other benefit with respect thereto may again become available for new option grants under the 2004 ADS Plan.

The 2004 ADS Plan is administered by our Remuneration Committee. Subject to Board approval where required by applicable law, the Remuneration Committee has authority, in its sole discretion, to grant options under the 2004 ADS Plan, to interpret the provisions of the 2004 ADS Plan and to prescribe, amend, and rescind rules and regulations relating to the 2004 ADS Plan or any options granted thereunder as it may deem necessary or advisable, subject to any other approval if required by applicable law. All decisions made by the Remuneration Committee pursuant to the provisions of the 2004 ADS Plan shall be final, conclusive and binding on all persons.

The type of option (incentive stock option or non-qualified stock option), exercise price, option term and vesting schedule of options granted under the 2004 ADS Plan are determined by the Remuneration Committee, in accordance with the provisions of the ADS Plan, and specified in an option agreement by and between our company and the optionee, subject to the terms of the 2004 ADS Plan. The exercise price per each ADS will be determined by the Remuneration Committee at the time any option is granted, however the exercise price of an incentive stock option will not be less than 100% of the fair market value of such ADS on the date of the grant and the price of an incentive stock option granted to a 10% Holder will not be less than 110% of the fair market value of such ADS on the date of the grant. Options granted under the 2004 ADS Plan will not be exercisable after the expiration of ten years from the date of grant, and in the case of an incentive stock option granted to a 10% Holder, the term of the option will be five years from the date of grant or such shorter term as may be provided in the option agreement. The options will vest over a four year period in four equal installments, 25% at the end of each year from the date of grant, unless otherwise provided by the Remuneration Committee in an option agreement.

Options granted under the 2004 ADS Plan are not assignable or transferable by the grantee, other than by will or the laws of descent and distribution, and may be exercised during the lifetime of the grantee only by the grantee or his guardian or legal representative.

AsA summary of the status of the 2004 Plans as of June 30, 2005 ~~options to purchase 3,800,000 ordinary shares (or 380,000 ADRs) had been issued under~~and 2006, and changes during the ~~ADS Plan, at an exercise price of US$0.50 per share (or US$5.00 per ADR). No options granted under the ADS Plan have been exercised to date.~~years ended on those dates, is presented below:

~~2004 ASX Plan.~~ The purpose of the 2004 ASX Plan ("2004 ASX Plan") is to promote the interest of our company and the interest of the employees, directors and consultants of our company and its subsidiaries. Under the 2004 ASX Plan, we may issue to employees, directors and consultants of our company and its subsidiaries, from time to time, up to an aggregate 12,000,000 ordinary shares, either by issuance of ordinary shares or under options to purchase ordinary shares granted under the 2004 ASX Plan.

The number of shares issued or options granted, the exercise price and option term or options granted, the vesting schedule and escrow periods of shares issued and options granted, under the 2004 ASX Plan are determined by the Remuneration Committee, in accordance with the provisions of the ASX Plan, and specified in an offer document from our company and accepted by the eligible person, subject to the terms of the 2004 ASX Plan. Options granted under the 2004 ASX Plan will be unlisted and exercisable at an exercise price equal to less than market value of an ordinary share on the ASX at the date of grant, or such other exercise price that the Remuneration Committee determines to be appropriate under the circumstances. The term of an option granted under the 2004 ASX Plan will be determined by the Remuneration Committee, however no option will be exercisable after the expiration of ten years from the date of its grant. Except as otherwise provided in the 2004 ASX Plan or determined by the Remuneration Committee and set forth in an offer document, the issuance of shares and exercise of options granted under the 2004 ASX Plan will either (i) be subject to an escrow, under which such shares or options cannot be disposed of or exercised, respectively, within six months from the date of issue or grant (or 12 months if issued or granted to a director); or (ii) will vest over a four year period in four equal installments, 25% at the end of each year from the date of grant. Shares issued and options granted under the 2004 ASX Plan may be subject to other performance criteria and hurdles, as determined by the Remuneration Committee.

	Year ended June 30,
	2005					2006
	Amount			Weighted average exercise price		Amount		Weighted average exercise price

Options outstanding at the beginning of the year		6,500,000		$	0.48		—		—
Granted		2,265,000			—		6,500,000	$	0.48
Exercised		—			—		—		—
Forfeited		(37,500	)		—		—		—

Options outstanding at the end of the year		8,727,500		$	0.36		6,500,000	$	0.48

Options exercisable at the end of the year		4,900,000		$	0.64		4,900,000	$	0.64

Options that may be granted as of the end of the year		12,844,061					5,071,561

6569

~~As of June 30, 2005, 428,439 ordinary shares had been issued under the ASX Plan.~~

In addition, as of June 30, ~~2005, options to purchase 1,100,000~~2006, 428,439 ordinary shares ~~having an exercise price of A$0.50 per share and options to purchase 1,600,000 ordinary shares having an exercise price of nil per share had~~have been ~~granted under the ASX Plan. No options granted~~issued under the ASX Plan ~~have been exercised~~that were not subject to ~~date.~~options.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. ~~Major Shareholders~~MAJOR SHAREHOLDERS

The following table sets forth certain information, as of ~~December 15, 2005,~~September 21, 2006, regarding the beneficial ownership by all shareholders known to us to own beneficially more than 5% of our ordinary shares. ~~The voting rights of our major shareholders do not differ from the voting rights of other holders of our ordinary shares.~~

Name	Number of Ordinary Shares Beneficially Owned (1)		Percentage of Outstanding Ordinary Shares (2)	Number of Ordinary Shares Beneficially Owned (1)		Percentage of Outstanding Ordinary Shares (2)
Geoffrey P. Kempler	18,055,000	(3)(4)	14.09%	18,055,000	(3)(4)	14.06%
Jagen Nominees Pty Ltd.	14,008,500	(5)	10.93%
Jagen Nominees Pty Ltd				14,008,500	(5)	10.91%

(1)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this annual report are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.

(2)

The percentages shown are based on ~~128,144,260~~128,394,260 ordinary shares issued and outstanding as of ~~December 15, 2005.~~

September 21, 2006.

(3)

6670

(4)

Includes 1,000,000 ordinary shares issuable upon the exercise of options, exercisable for nil consideration on or before June 30, ~~2010.~~2010 granted under the 2004 ASX Plan. These options may not be exercised until December 17, 2005 and thereafter, only if the price of our ordinary shares has achieved and maintained a minimum value of A$1.00 for five consecutive trading days.

(5)

Mr. Boris Liberman is the sole owner of Jagen Nominees Pty Ltd. and may be deemed to hold the voting and investment powers for the ordinary shares held by Jagen Nominees Pty Ltd.

~~Significant Changes in the Ownership of~~ Major Shareholders Voting Rights

In June 2004, we completed a private placement of four million ADRs and five-year warrants to purchase an additional three million ADRs to institutional and professional investors, as a result of which the ownership interest of ourOur major shareholders at such time was diluted. Fifteen of the investors, who appointed OrbiMed Advisors LLC as their nominee, acquired 800,000 ADRs (representing 8,000,000 ordinary shares) and currently exercisable five-year warrants to purchase 600,000 ADRs (representing 6,000,000 ordinary shares) at an exercise price of US$8.00 per ADR. See Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources.” During the period of April 11, 2005 through April 13, 2005, OrbiMed Advisors LLC sold the 800,000 ADRs (representing 8,000,000 ordinary shares) that it held of record.do not have different voting rights.

Record Holders

As of ~~December 16, 2005,~~September 21, 2006, there were ~~2,059~~2,158 holders of record of our ordinary shares, of which ~~six~~seven record holders, holding approximately ~~0.242%~~0.25% of our ordinary shares, had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor are they representative of where such beneficial holders reside, since many of these ordinary shares were held of record by brokers or other nominees. The majority of trading by our U.S. investors is done by means of ADRs that are held of record by ANZ Nominees Ltd., which held ~~46.21%~~46.03% of our ordinary shares as of such date.

B. ~~Related Party Transactions~~RELATED PARTY TRANSACTIONS

Dr. Mihaly served as a director of Kendle, formerly known as Synermedica Pty Ltd., until December 2004. Kendle provides analysis and review of the commercialization of our technology, intellectual property management and clinical trial management and monitoring. An ongoing agreement at normal commercial rates that is terminable at will exists between us and Kendle, with costs incurred on a daily basis. ~~During~~We paid Kendle A$379,045 for services it provided to us in fiscal ~~2005, we paid Kendle~~year 2004 and A$577,757 for services it provided to us in fiscal year 2005 until December 31, 2004.

Aroma Science, a company owned by Mr. Kempler, provided us with computer, administration and meeting facilities. We paid Aroma Science A$81,470 for its services in the fiscal year ended June 30, 2004. These services have ceased to be provided to us since our Australian office moved to new premises in June 2004.

See Note 21 to the consolidated financial statements.

C. ~~Interests of Experts and Counsel~~INTERESTSOF EXPERTS AND COUNSEL

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. ~~Financial Statements and Other Financial Information~~FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION

See our consolidated financial statements, including the notes thereto, in Item 18.

Legal Proceedings

On July 28, 2004, we and The General Hospital Corporation of Massachusetts settled all outstanding litigation with P.N. Gerolymatos S.A., or P.N.G., regarding the exploitation rights to certain patents relating to pharmaceutical compositions and uses of clioquinol, or PBT-1. Pursuant to the settlement agreement, all patent oppositions in Europe and Australia will be withdrawn and the law suits then pending before the U.S. District Court for the District of Columbia and the Court of Athens in Greece have been dismissed.Under the settlement agreement, we and P.N.G. agreed to recognize the rights of each other to develop clioquinol in our respective territories. As a result of the settlement agreement, we now hold the rights to selected uses of clioquinol and pharmaceutical compositions in the United States and selected uses of clioquinol in Japan, while P.N.G. holds certain patent rights on the uses of clioquinol for Europe and other territories. Under the settlement agreement, we issued 1,350,000 of our ordinary shares to P.N.G., which were held in escrow for 12 months, and made a payment of US$150,000 to it. Such settlement in the total value of A$971,764 was expensed in fiscal 2004 (see Note 9 to the financial statements). Under the settlement agreement we also agreed to pay a sales royalty to P.N.G. on sales of PBT-1 in the United States and Japan and we are entitled to receive a percentage of P.N.G.’s income on sales of PBT-1 in the other territories.

We are not involved in any material legal proceedings. ~~See Note 16 to the financial statements.~~

Dividend Distribution Policy

We have never paid cash dividends to our shareholders. We intend to retain future earnings for use in our business and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Any future dividend policy will be determined by the Board of Directors and will be based upon ~~conditions then existing,~~various factors, including our results of operations, financial condition, current and anticipated cash needs, future prospects, contractual restrictions and other ~~conditions~~factors as the Board of Directors may deem relevant.

B. ~~Significant Changes~~SIGNIFICANT CHANGES

There have been no significant changes in the operation or financial condition of our company since June 30, ~~2005.~~2006.

ITEM 9.THE OFFER AND LISTING

A. ~~Offer and Listing Details~~OFFERAND LISTING DETAILS

Australian Stock Exchange

Our ordinary shares have traded on the ASX since our initial public offering on March 29, 2000. The following table sets forth, for the periods indicated, the high and low market quotations for our ordinary shares, as quoted on the ASX.

	Per Ordinary Share (A$)
	High		Low
Fiscal Year Ended June 30,
2002		2.60		0.50
2003		2.39		0.44
2004		1.18		0.45
2005		0.70		0.13
2006		0.30		0.15

Fiscal Year Ended June 30, 2006:
First Quarter		0.23		0.15
Second Quarter		0.30		0.16
Third Quarter		0.245		0.19
Fourth Quarter		0.24		0.16

Fiscal Year Ended June 30, 2005:
First Quarter		0.69		0.49
Second Quarter		0.70		0.51
Third Quarter		0.60		0.43
Fourth Quarter		0.48		0.13

Month Ended:
March 2006		0.22		0.19
April 2006		0.24		0.16
May 2006		0.225		0.16
June 2006		0.215		0.16
July 2006		0.49		0.18
August 2006		0.385		0.26

Per Ordinary Share (A$)
High Low
Fiscal Year Ended June 30,

2001 1.29 0.36
2002 2.60 0.50
2003 2.39 0.44
2004 1.18 0.45
2005 0.70 0.13

Fiscal Year Ended June 30, 2004:

First Quarter 1.15 0.55
Second Quarter 0.72 0.45
Third Quarter 0.65 0.48
Fourth Quarter �� 1.18 0.58

Fiscal Year Ended June 30, 2005:

First Quarter 0.69 0.49
Second Quarter 0.70 0.51
Third Quarter 0.60 0.43
Fourth Quarter 0.48 0.13

Month Ended:

June 2005 0.18 0.18
July 2005 0.18 0.16
August 2005 0.23 0.18
October 2005 0.19 0.17
November 2005 0.17 0.29

NASDAQ Capital Market

Since September 5, 2002 our Level II ADRs have traded on the NASDAQ Capital Market under the symbol “PRAN.” The following table sets forth, for the periods indicated, the high ask and low bid prices of our Level II ADRs on the NASDAQ Capital Market:

	Per ADR (US$)
	High		Low
Fiscal Year Ended June 30,
2003 (from September 5, 2002)		12.80		2.96
2004		10.50		2.95
2005		5.19		0.98
2006		2.40		1.20

Fiscal Year Ended June 30, 2006:
First Quarter		1.73		1.20
Second Quarter		2.40		1.21
Third Quarter		1.85		1.30
Fourth Quarter		1.89		1.35

Fiscal Year Ended June 30, 2005:
First Quarter		5.19		3.40
Second Quarter		5.05		3.70
Third Quarter		4.99		3.36
Fourth Quarter		3.55		0.98

Month Ended:
March 2006		1.69		1.30
April 2006		1.89		1.43
May 2006		1.75		1.45
June 2006		1.89		1.35
July 2006		3.05		1.35
August 2006		3.06		2.05

6973

Per ADR (US$)
High Low
Fiscal Year Ended June 30,

2003 (from September 5, 2002) 12.80 2.96
2004 10.50 2.95
2005 5.19 0.98

Fiscal Year Ended June 30, 2004:

First Quarter 7.49 3.87
Second Quarter 5.65 2.95
Third Quarter 5.21 3.69
Fourth Quarter 10.50 4.43

Fiscal Year Ended June 30, 2005:

First Quarter 5.19 3.40
Second Quarter 5.05 3.70
Third Quarter 4.99 3.36
Fourth Quarter 3.55 0.98

Month Ended:

June 2005 1.46 1.20
July 2005 1.46 1.20
August 2005 1.73 1.35
September 2005 1.60 1.32
October 2005 1.50 1.21
November 2005 2.23 1.25

B. ~~Plan of Distribution~~PLAN OF DISTRIBUTION

Not applicable.

C. ~~Markets~~MARKETS

The principal listing of our ordinary shares and listed options to purchase ordinary shares is on the ASX. As of April 5, 2002, our ADRs were eligible to trade on the NASDAQ Capital OTC Bulletin Board in the United States and since September 5, 2002, our ADRs have traded on the NASDAQ Capital Market under the symbol “PRAN.” We entered into a Deposit Agreement with the Bank of New York under which the Bank of New York, acting as depositary, issues ADRs, each of which evidences an ADS, which in turn represents ten of our ordinary shares.

D.SELLING S~~Selling Shareholders~~HAREHOLDERS

Not applicable.

E. ~~Dilution~~DILUTION

Not applicable.

F. ~~Expenses of the Issue~~EXPENSESOF THE ISSUE

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. ~~Share Capital~~SHARE CAPITAL

Not applicable.

B.MEMORANDUM AND A~~Memorandum and Articles of Association~~RTICLES OF ASSOCIATION

Incorporated by reference to our Registration Statement on Form 20-F dated August 26, 2002.

C. ~~Material Contracts~~MATERIAL CONTRACTS

~~On May 7, 1999,~~Effective as of December 1, 2003, we entered into ana research funding and intellectual property assignment agreement with the University of Melbourne under which the University of Melbourne agrees to conduct certain research projects on our behalf. The agreement is for a period of three years and expires in December 2006. In consideration for the assignment of ~~patents and~~rights to intellectual property ~~licensing with~~developed by the University of ~~Melbourne. The agreement provides for~~Melbourne during the ~~assignment of various patents and patent rights to our company. In consideration of the assignment of the patents,~~research period, we agreed to ~~make certain payments~~pay to the University of Melbourne ~~and~~royalties equal to ~~pay a royalty~~1.5% of ~~1.5% on~~ the net invoice price of all products incorporating such intellectual propertysold ~~utilizing such patents. In addition, we agreed to pay~~by us or on our behalf, or, the lesser of 1.5% of the net invoice price of such products sold by a licensee or assignee and 10% of ~~royalties~~gross revenues received from ~~any license~~licensees or ~~sub-licensee~~assignees relating to the exploitation of such intellectual property. In addition, we ~~appoint~~agreed to ~~utilize the patents.~~

~~Under the terms of a research funding and intellectual property assignment agreement dated December 1, 2000, between us and~~provide the University of Melbourne ~~we were required~~certain funding for the research projects. We have provided or will provide to ~~pay~~ the University of Melbourne ~~for research projects~~funding in an agreed minimum of A$297,000 (inclusive of goods and services tax) each year for a period of three years from December 1, 2000. Since the expiration of this agreement, the parties have entered into a second research funding and intellectual property assignment agreement, which is deemedamount equal to have commenced from the natural expiry of the previous agreement and expires in December 2006. The agreement provides for an annual determination of the research budget. During the period from July 2004 to June 2005, we provided A$600,000 (exclusive of goods and service tax) during each of the years December 2004 to November 2005 and December 2005 to November 2006. During the ~~University of Melbourne. We~~2005 fiscal year we also provided the University of Melbourne an additional A$1,012,500 ~~during the 2005 fiscal year~~ in research funding in connection with our licensing and research collaboration with Schering A.G. and Neurosciences Victoria Ltd. that was concluded in June 2005.

On February 8, 2000, we entered into ana patent assignment agreement ~~for the assignment of patents and intellectual property licensing~~ with BRI. The agreement provides for the assignment of various patent applications and patent rights from BRI to us. In consideration of the assignment of the patents, we are required to pay BRI a royalty of 1.5% on the net invoiced price of products sold utilizing such patents. In addition, we must also pay the lesser of 1.5% of the net invoice price of products sold or 10% of royalties received from any licensee or sub-licensee we appoint to utilize such patents, or a minimum of A$2,000 a year. If the patent rights are assigned before a total of A$20,000 has been paid as royalties, the difference between the royalties paid and A$20,000 must be paid to BRI.

On January 1, 2001, we entered into a license agreement with GHC, whereby we obtained an exclusive license with respect to certain patents that permits us to sublicense the patent rights to others. The agreement also provides us with the non-exclusive right to use materials, substances and information that were used by GHC in research sponsored by us. In consideration of the license, we are required to pay GHC royalties of 1.5% of the net sales price of products sold utilizing patents exclusively licensed to us. We are also required to pay certain advance milestone payments, to be reduced from the royalties. In addition to the royalties we are obligated to pay GHC 1.5% of any and all non-royalty payments, including license fees received from our affiliates. Each party to the agreement may terminate the agreement if the other party defaults in its materials obligations and does not remedy the default within sixty days after notice is given. GHC can terminate the licenses and rights granted to us under the agreement in any country in the event that after the first commercial sale in that country there will be a continuous one year period in which no products are sold. On March 15, 2004, the exclusive license was amended so that we are required to pay GHC the royalties payable to it for any future exploitation of rights to certain U.S. patents relating to PBT-1 regardless of the inventorship determination, as required under the settlement agreement among us, P.N.G. and GHC.

In March 2003, we announced our first major licensing and research collaboration with Schering A.G., a major international pharmaceutical company, and Neurosciences Victoria Ltd. Under this collaboration, we, through our contractor the University of Melbourne, undertook specific research and development projects, and Schering A.G. funded approximately A$2.7 million of our research and development costs over the life of such projects and agreed to pay additional milestone payments and royalties from discoveries resulting from such projects. Despite the arrangement between the parties, the early results of the research and development did not support the continuation of the collaboration past June 30, 2005. As a result, the parties concluded this collaboration as of June 30, 2005. See Item 4A., “Information on the Company - History and Development of the Company.”

Under the terms of a strategic alliance agreement that we entered into with Kendle dated January 6, 2004, Kendle provides us with consultancy services in relation to the co-ordination, planning and management of intellectual property, research and development, planning, management and commercialization strategy. Kendle provides its services to us at a rate of A$70 to A$210 per hour, depending on the seniority of the consultant. For the years ended June 30, ~~2005, 2004~~2006 and ~~2003,~~2005, we paid Kendle A$~~1,107,266, A$379,045~~126,981 and A$~~475,289,~~878,226, respectively.

~~Under this collaboration,~~
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We entered into an arrangement with Kendle International Inc. to conduct our clioquinol Phase II/III Alzheimer disease clinical trial for PBT-1. We paid Kendle International Inc. A$229,040 and GPB £200,156 (approximately A$498,068) and A$48,229 GPB £79,504 (approximately A$197,838) for fiscal years 2005 and 2006, respectively. This trial has now ceased. On November 4, 2005, we ~~through our contractor~~entered into an agreement with Kendle International B.V. to conduct the ~~University~~Phase 1 double blind randomized, DOSE escalation study to assess the safety, tolerability and pharmacokinetics of ~~Melbourne, undertook specific research~~single and ~~development projects,~~multiple doses of oral PBT-2 in healthy volunteers. We paid Kendle International B.V. EUR323,657 (approximately A$556,561) and ~~Schering A.G. funded up to~~EUR905,290 (approximately A$~~2.7 million~~1,556,737) for fiscal years 2005 and 2006, respectively. Kendle International Inc. is the parent entity of ~~our research~~Kendle International B.V and development costs over the life of the projects and agreed to pay additional milestone payments and royalties from discoveries. Despite the arrangement between the parties, the early results of the research and development did not support the continuation of the collaboration past June 30, 2005. As a result, the parties concluded this collaboration as of June 30, 2005. See Item 4A., “Information on the Company - History and Development of the Company.”Kendle Pty Ltd.

We entered into a consulting agreement dated January 17, 2000 with Professor Ashley Bush for the provision of research and development services relating to inventions and treatments for diseases caused by metal-mediated oxidative stress, which expired in January 2003. On January 8, 2004, we entered into a new consulting agreement with Professor Bush, under which Professor Bush agreed to provide us with consulting services for a period of ten years. In consideration of his services, we agreed to pay Professor Bush an annual consulting fee of US$100,000, to issue to Professor Bush 1,650,000 ordinary shares (of which 825,000 ordinary shares were issued during the 2004 fiscal year and 825,000 ordinary shares were issued during the 2006 fiscal year), and to grant Professor Bush options to purchase 825,000 ordinary shares at an exercise price A$0.50 per share (of which options to purchase 412,00 ordinary shares were granted during the 2004 fiscal year and 413,000 options were granted during the 2006 fiscal year).

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On July 28, 2004, we entered into a settlement agreement with P.N. Gerolymatos S.A., or P.N.G., under which we issued 1,350,000 of our ordinary shares to P.N.G., which were being held in escrow for 12 months, and made a payment of US$150,000 to it. Under the settlement agreement, we agreed to pay a sales royalty to P.N.G. on the sales of PBT-1 in the United States and Japan, and we are entitled to receive a percentage of P.N.G.’s income on sales of PBT-1 in the other territories. See Item 8A. “Financial Information - Financial Statements and Other Financial Information - Legal Proceedings.”

D. ~~Exchange Controls~~EXCHANGE CONTROLS

Australia has largely abolished exchange controls on investment transactions. The Australian dollar is freely convertible into U.S. dollars. In addition, there are currently no specific rules or limitations regarding the export from Australia of profits, dividends, capital, or similar funds belonging to foreign investors, except that certain payments to non-residents must be reported to the Australian Cash Transaction Reports Agency, which monitors such transactions, and amounts on account of potential Australian tax liabilities may be required to be withheld unless a relevant taxation treaty can be shown to apply.

The Foreign Acquisitions and Takeovers Act 1975

Under Australian law, in certain circumstances foreign persons are prohibited from acquiring more than a limited percentage of the shares in an Australian company without approval from the Australian Treasurer. These limitations are set forth in the Australian Foreign Acquisitions and Takeovers Act, or the Takeovers Act.

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Under the Takeovers Act, as currently in effect, any foreign person, together with associates, is prohibited from acquiring 15% or more of the shares in any company having total assets of A$50 million or more. In addition, a foreign person may not acquire shares in a company having total assets of A$50 million or more if, as a result of that acquisition, the total holdings of all foreign persons and their associates will exceed 40% in aggregate without the approval of the Australian Treasurer. If the necessary approvals are not obtained, the Treasurer may make an order requiring the acquirer to dispose of the shares it has acquired within a specified period of time. Under the current Australian foreign investment policy, however, it is unlikely that the Treasurer would make such an order where the level of foreign ownership exceeds 40% in the ordinary course of trading, unless the Treasurer finds that the acquisition is contrary to the national interest. The same rule applies if the total holdings of all foreign persons and their associates already exceeds 40% and a foreign person (or its associate) acquires any further shares, including in the course of trading in the secondary market of the ADRs. At present, we do not have total assets of A$50 million.

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If the level of foreign ownership exceeds 40% at any time, we would be considered a foreign person under the Takeovers Act. In such event, we would be required to obtain the approval of the Treasurer for our company, together with our associates, to acquire (i) more than 15% of an Australian company or business with assets totaling over A$50,000,000; or (ii) any direct or indirect ownership interest in Australian residential real estate.

The percentage of foreign ownership in our company would also be included in determining the foreign ownership of any Australian company or business in which it may choose to invest. Since we have no current plans for any such acquisitions and do not own any property, any such approvals required to be obtained by us as a foreign person under the Takeovers Act will not affect our current or future ownership or lease of property in Australia.

Our Constitution does not contain any additional limitations on a non-resident’s right to hold or vote our securities.

Australian law requires the transfer of shares in our company to be made in writing. No stamp duty will be payable in Australia on the transfer of ADRs.

E. ~~Taxation~~TAXATION
The following is a discussion of Australian and United States tax consequences material to our shareholders. To the extent that the discussion is based on tax legislation which has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question or by court. The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.
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Holders of our ADSs should consult their own tax advisors as to the United States, Australian ~~Tax Consequences~~or other tax consequences of the purchase, ownership and disposition of ADSs, including, in particular, the effect of any foreign, state or local taxes.

AUSTRALIAN TAX CONSEQUENCES
In this section we discuss the material Australian tax considerations that apply to non-Australian tax residents with respect to the acquisition, ownership and disposal byof the absolute beneficial ~~owners~~ownership of ADSs, which are evidenced by ADRs. This discussion is based upon existing Australian tax law as of the date of this annual report, which is subject to change, possibly retrospectively. This discussion does not address all aspects of Australian income tax law which may be important to particular investors in light of their individual investment circumstances, such as ADSs or shares held by investors subject to special tax rules (for example, financial institutions, insurance companies or tax exempt organizations). In addition, this summary does not discuss any foreign or state tax considerations, other than stamp duty. Prospective investors are urged to consult their tax advisors regarding the Australian and foreign income and other tax considerations of the purchase, ownership and disposition of the ADSs or shares.

Nature of ~~ADRs~~ADSs for Australian Taxation Purposes

Holders of our ADSs ~~held by a U.S. holder will be~~are treated ~~for Australian taxation purposes~~ as ~~held under a ‘bare trust’ for such holder. Consequently,~~the owners of the underlying ordinary shares ~~will be regarded as owned by the ADS holder~~ for Australian income tax and capital gains tax purposes. ~~Dividends~~Therefore, dividends paid on the underlying ordinary shares will ~~also~~ be treated for Australian tax purposes as ~~dividends~~if they were paid directly to the ~~ADS holder,~~owners of ADSs, and the disposal of ADSs will be treated for Australian tax purposes as the ~~person beneficially entitled to those dividends. Therefore, in~~disposal of the underlying ordinary shares. In the following analysis we discuss the application of the Australian income tax ~~consequences~~and capital gains tax rules to non-Australian resident holders of ~~ordinary shares which, for Australian taxation purposes, will be the same as to U.S. holders of~~ ADSs.

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Taxation of Dividends

Australia operates a dividend imputation system under which dividends may be declared to be ‘franked’ to the extent of tax paid on company profits. Fully franked dividends are not subject to dividend withholding tax. Dividends ~~payable by our company~~that are not franked or are partly franked and are paid to non-Australian resident stockholders ~~will be~~are subject to dividend withholding tax, but only to the extent the dividends are ~~unfranked. Dividend~~not franked.
Dividends paid to a non-resident stockholder are subject to withholding tax ~~will be imposed~~ at 30%, unless athe stockholder is a resident of a country with which Australia has a double taxation agreement. ~~Under~~In accordance with the provisions of the ~~current~~ Double Taxation Convention between Australia and the United States, the maximum rate of Australian tax ~~withheld~~ on unfranked dividends ~~paid by us~~ to which a resident of the United States is beneficially entitled is ~~generally limited to~~ 15% if, where the U.S. resident holds less than 10% of the voting rights ofin our company, ~~unless~~or 5% where the ~~shares~~US resident holds 10% or more of the voting rights in our company. The Double Taxation Convention between Australia and the United States does not apply to limit the rate tax on dividends where the ADSs are effectively connected to a permanent establishment or a fixed base carried on by the owner of the ADSs in Australia through which the stockholder carries on business or provides independent personal services, respectively. ~~Where the U.S. resident holds 10% or more of the voting rights of our company, the withholding tax rate is reduced to 5%.~~
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Tax on Sales or other Dispositions of Shares - Capital Gains Tax

Non-Australian resident stockholders will not be subject to Australian capital gains tax on the gain made on a sale or other disposal of our shares, unless they, together with associates, hold 10% or more of our issued capital at any time during the five years before the disposal of the shares.

Under a proposed amendment to Australian tax law that is currently before Federal Parliament, if enacted, the exemption for non-resident stockholders would be extended. If aenacted in the current draft form, non-Australian resident ~~stockholder did own a 10% or more interest, that stockholder would~~stockholders will not be subject to Australian capital gains tax on the capital gain made on a disposal of our shares, unless they, together with associates, hold 10% or more of our issued capital, tested either at the time of disposal or over any continuous 12 month period in the 24 months prior to disposal, and the ~~same extent as~~value of our shares at the time of disposal are wholly or principally attributable to Australian ~~resident stockholders.~~ real property assets.
The Australian Taxation Office maintains the view that the Double Taxation Convention between the United States and Australia does not limit Australian capital gains ~~tax.~~tax on U.S. residents. Australian capital gains tax applies to net capital gains at a taxpayer’s marginal tax rate but for certain stockholders a discount of the capital gain may apply if the shares have been held for 12 months or more. For individuals, this discount is 50%. Net capital gains are calculated after reduction for capital losses, which may only be offset against capital gains.

Tax on Sales or other Dispositions of Shares - Stockholders Holding Shares on Revenue Account

Some non-Australian resident stockholders may hold shares on revenue rather than on capital account, for example, share traders. These stockholders may have the gains made on the sale or other disposal of the shares included in their assessable income under the ordinary income provisions of the income tax law, if the gains are sourced in Australia.

Non-Australian resident stockholders assessable under these ordinary income provisions in respect of gains made on shares held on revenue account would be assessed for such gains at the Australian tax rates for non-Australian residents, which start at a marginal rate of 29%. Some relief from the Australian income tax may be available to such non-Australian resident stockholders under the Double Taxation Convention between the United States and Australia, for example, because the stockholder does not have a permanent establishment in Australia.

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To the extent an amount would be included in a non-Australian resident stockholder’s assessable income under both the capital gains tax provisions and the ordinary income provisions, the capital gain amount would generally be reduced, so that the stockholder would not be subject to double tax on any part of the income gain or capital gain.
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Dual Residency

If a stockholder were a resident of both Australia and the United States under those countries’ domestic taxation laws, that stockholder may be subject to tax as an Australian resident. If, however, the stockholder is determined to be a U.S. resident for the purposes of the Double Taxation Convention between the United States and Australia, the Australian tax would be subject to limitation by the Double Taxation Convention. Stockholders should obtain specialist taxation advice in these circumstances.

Stamp Duty

Any transfer of shares through trading on the Australian Stock Exchange, whether by Australian residents or foreign residents are not subject to stamp duty within Australia.

Australian Death Duty

Australia does not have estate or death duties. No capital gains tax liability is realized upon the inheritance of a deceased person’s shares. The disposal of inherited shares by beneficiaries, may, however, give rise to a capital gains tax liability.

Goods and Services Tax

The issue or transfer of shares will not incur Australian goods and services tax and does not require a stockholder to register for Australian goods and services tax purposes.

~~United States Federal Income Tax Consequences~~UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of certain material U.S. federal income tax consequences that generally would apply to U.S. Holders (as defined below) who hold ADRs as capital assets. This summary is based on the United States Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the bilateral taxation convention between Australia and the United States, or the Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. This summary does not address all tax considerations that may be relevant with respect to an investment in ADRs. This summary does not discuss all the tax consequences that may be relevant to a U.S. Holder in light of such holder’s particular circumstances or to U.S. Holders subject to special rules, including broker-dealers, financial institutions, certain insurance companies, investors liable for alternative minimum tax, tax-exempt organizations, regulated investment companies, non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar, persons who hold the ADRs through partnerships or other pass-through entities, persons who acquired their ADRs through the exercise or cancellation of any employee stock options or otherwise as compensation for their services, investors that actually or constructively own 10% or more of our voting shares, and investors holding ADRs as part of a straddle or appreciated financial position or as part of a hedging or conversion transaction.

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If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ADRs, the U.S. federal income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns ADRs and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of ADRs.

This summary does not address the effect of any U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation. You are urged to consult your tax advisors regarding the foreign and U.S. federal, state and local tax considerations of an investment in ADRs.

For purposes of this summary, the term “U.S. Holder” means an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States, a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any political subdivision thereof, an estate whose income is subject to U.S. federal income tax regardless of its source, or a trust if (a) a court within the United States is able to exercise primary supervision over administration of the trust, and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

Taxation of Dividends

For U.S. federal income tax purposes, U.S. Holders of ADRs will be treated as owning the underlying ordinary shares, or ADSs, represented by the ADRs held by them. Subject to the passive foreign investment company rules discussed below, the gross amount of any distributions received with respect to the underlying ordinary shares represented by the ADRs, including the amount of any Australian taxes withheld there from, will constitute dividends for U.S. federal income tax purposes, to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax principles. You will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess of our earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in the ADRs, and any amount in excess of your tax basis will be treated as gain from the sale of ADRs. See “Disposition of ADRs” below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends-received deduction generally available to corporations under Section 243 of the Code.

Dividends that we pay in A$, including the amount of any Australian taxes withheld there from, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in A$ and converts A$ into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of our ADRs.

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Subject to complex limitations, any Australian withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends generally will be treated as foreign-source passive income or financial services income for U.S. foreign tax credit purposes. U.S. Holders should note that recently enacted legislation eliminates the “financial services income” category with respect to taxable years beginning after December 31, 2006. Under this legislation, the foreign tax credit limitation categories will be limited to “passive category income” and “general category income.” A U.S. Holder will be denied a foreign tax credit with respect to Australian income tax withheld from dividends received with respect to the underlying ordinary shares represented by the ADRs to the extent such U.S. Holder has not held the ADRs for at least 16 days of the ~~30-day~~31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the ADRs are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit.

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Subject to certain limitations, “qualified dividend income” received by a noncorporate U.S. Holder in tax years beginning on or before December 31, ~~2008~~2010 will be subject to tax at a reduced maximum tax rate of 15 percent. Distributions taxable as dividends paid on the underlying shares represented by the ADRs should qualify for the 15 percent rate provided that either: (i) we are entitled to benefits under ~~the income tax treaty between~~ the Tax Treaty or (ii) the ADRs are readily tradable on an established securities market in the United States and certain other requirements are met. We believe that we are entitled to benefits under the Tax Treaty and that the ADRs currently are readily tradable on an established securities market in the United States. However, no assurance can be given that the ADRs will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied. With respect to the ADRs, the U.S. Holder must have held such ADRs for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. The rate reduction also does not apply to dividends received from passive foreign investment companies, see discussion below, or in respect of certain hedged positions or in certain other situations. The legislation enacting the reduced tax rate contains special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders of ADRs should consult their own tax advisors regarding the effect of these rules in their particular circumstances.

Disposition of ADRs

If you sell or otherwise dispose of ADRs, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ADRs. Subject to the passive foreign investment company rules discussed below, such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if you have held the ADRs for more than one year at the time of the sale or other disposition. In general, any gain that you recognize on the sale or other disposition of ADRs will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.

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In the case of a cash basis U.S. Holder who receives A$ in connection with the sale or disposition of ADRs, the amount realized will be based on the U.S. dollar value of the A$ received with respect to the ADRs as determined on the settlement date of such exchange. A U.S. Holder who receives payment in A$ and converts A$ into U.S. dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.

An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ADRs, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service, or the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ADRs.

Passive Foreign Investment Companies

There is a substantial risk that we are a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Our treatment as a PFIC could result in a reduction in the after-tax return to the U.S. Holders of our ADRs and may cause a reduction in the value of such securities.

For U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, cash is considered to be an asset which produces passive income. Passive income generally includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. As a result of our substantial cash position and the decline in the value of our stock, we believe that we became a PFIC ~~in 2004~~during the taxable year ended June 30, 2005, and will once again qualify as a PFIC for the taxable year ended June 30, 2006, under a literal application of the asset test that looks solely to market value.

If we are a PFIC, dividends will not qualify for the reduced maximum tax rate, discussed above, and, unless you timely elect to “mark-to-market” your ADRs, as described below:

· you will be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ADRs ratably over ~~the~~your holding period for such ADRs,

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· the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, in effect for that year and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year,

· the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxable as ordinary income in the current year, and

· you will be required to make an annual return on IRS Form 8621 regarding distributions received with respect to ADRs and any gain realized on your ADRs.

The PFIC provisions discussed above apply to U.S. persons who directly or indirectly hold stock in a PFIC. Both direct and indirect shareholders of PFICs are subject to the rules described above. Generally, a U.S. person is considered an indirect shareholder of a PFIC if it is:

· A direct or indirect owner of a pass-through entity, including a trust or estate, that is a direct or indirect shareholder of a PFIC,

· A shareholder of a PFIC that is a shareholder of another PFIC, or

· A 50%-or-more shareholder of a foreign corporation that is not a PFIC and that directly or indirectly owns stock of a PFIC.

An indirect shareholder may be taxed on a distribution paid to the direct owner of the PFIC and on a disposition of the stock indirectly owned. Indirect shareholders are strongly urged to consult their tax advisors regarding the application of these rules.

If we cease to be a PFIC in a future year, a U.S. Holder may avoid the continued application of the tax treatment described above by electing to be treated as if it sold its ADRs on the last day of the last taxable year in which we were a PFIC. Any gain would be recognized and subject to tax under the rules described above. Loss would not be not recognized. A U.S. Holder’s basis in its ADRs would be increased by the amount of gain, if any, recognized on the sale. A U.S. Holder would be required to treat its holding period for its ADRs as beginning on the day following the last day of the last taxable year in which we were a PFIC.

If the ADRs are considered “marketable stock” and if you elect to “mark-to-market” your ADRs, you would not be subject to the rules described above. Instead, you will generally include in income any excess of the fair market value of the ADRs at the close of each tax year over your adjusted basis in the ADRs. If the fair market value of the ADRs had depreciated below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the ADRs over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that you included in income with respect to such ADRs in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss ~~(to the extent of net mark-to-market gains)~~ on the disposition of ADRs with respect to which the mark-to-market election is made, is treated as ordinary income or ~~loss. Loss on a disposition,~~loss (except that loss is treated as capital loss to the extent ~~in excess of~~the loss exceeds the net mark-to-market gains, ~~would~~if any, that a U.S. Holder included in income with respect to such ordinary shares in prior years). However, gain or loss from the disposition of ordinary shares (as to which a “mark-to-market” election was made) in a year in which we are no longer a PFIC, will be ~~treated as~~ capital gain or loss. Our ADRs should be considered “marketable stock” if they traded at least 15 days during each calendar quarter of the relevant calendar year in more than de minimis quantities.

8084
A U.S. Holder of ADRs will not be able to avoid the tax consequences described above by electing to treat us as a qualified electing fund, or QEF, because we do not intend to prepare the information that U.S. Holders would need to make a QEF election.

Backup Withholding and Information Reporting

Payments in respect of ADRs may be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate equal to the fourth lowest income tax rate applicable to individuals (which, under current law, is 28%). Backup withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification.

Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.

Any U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain additional U.S. information reporting requirements.

U.S. Gift and Estate Tax

An individual U.S. Holder of ADRs will be subject to U.S. gift and estate taxes with respect to ADRs in the same manner and to the same extent as with respect to other types of personal property.

F. ~~Dividend and Paying Agents~~DIVIDENDS AND PAYING AGENTS

Not applicable.

G. ~~Statement by Experts~~STATEMENTBY EXPERTS

Not applicable.

85

H. ~~Documents on Display~~DOCUMENTSON DISPLAY

We are subject to the reporting requirements of the United States Securities Exchange Act of 1934, as amended, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act, and in accordance therewith, we are required to file annual and interim reports and other information with the Securities and Exchange Commission.

81
As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, transactions in our equity securities by our officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. We make our Securities and Exchange Commission filings electronically and they are available on the Securities and Exchange Commission’s website. We are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we will distribute annually to our shareholders an annual report containing financial statements that have been examined and reported on, with an opinion expressed by, an independent registered public accounting firm, and we will ~~file~~submit reports ~~with~~to the Securities and Exchange Commission on Form 6-K containing unaudited financial information for the first six months of each fiscal year.

This annual report and the exhibits thereto and any other document that we have to file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the Securities and Exchange Commission public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549; and on the Securities and Exchange Commission Internet site (http://www.sec.gov). You may obtain information on the operation of the Securities and Exchange Commission’s public reference room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by visiting the Securities and Exchange Commission’s website at http://www.sec.gov, and may obtain copies of our filings from the public reference room by calling (202) 551-8090. The Exchange Act file number for our Securities and Exchange Commission filings is 000-49843.

The documents concerning our company which are referred to in this annual report may also be inspected at our offices located at Suite 2, 1233 High Street, Armadale, Victoria, Australia, 3143.

I. ~~Subsidiary Information~~SUBSIDIARY INFORMATION

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

We invest our excess cash in interest-bearing accounts and time deposits with ~~government-insured institutions.~~banks in Australia. Our management believes that the financial institutions that hold our investments are financially sound and accordingly, minimal credit risk exists with respect to these investments. Certain of our cash equivalents are subject to interest rate risk. Due to the short duration and conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk. Our major market risk is changes in foreign exchange rates as we have approximately A$~~7.3~~5,943,335 million in time deposits held in U.S. dollars as of June 30, ~~2005.~~2006. A hypothetical 10% adverse movement in end-of-period exchange rates would reduce the cash balance by approximately A$~~0.7 million.~~594,334.

8286
We have engaged an external consultant to assist us to optimize our interest returns and manage our foreign exchange risk. We do not currently utilize derivative financial instruments or other financial instruments subject to market risk.

We conduct our activities almost exclusively in Australia. However, we are required to make certain payments in U.S. dollars and other currencies. A hypothetical 10% adverse movement in end-of-period exchange rates could have a material impact on our operating results. At June 30, ~~June 2005,~~2006, we had US$~~12,191~~253,213 and EUR$~~314,407~~168,428 in payables. A hypothetical 10% adverse movement in the USU.S. and EUR exchange rates could increase the cost of these payables by A$~~51,419.~~63,656.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

11~~CONTRIBUTED EQUITY (continued)~~

~~(c)~~~~Movements in share options~~

Years Ended June 30,

2005

2004

2003

Number of Options

Comp.
Expense ($)

Number of Options

Comp.
Expense ($)

Number of Options

Comp.
Expense ($)

Beginning of the year 21,269,167 - 21,085,000 8,000 27,894,310 8,000
Issued during the year 3,080,000 289,699 1,709,167 - 618,274 -
Expired during the year (11,150,501 ) - (200,000 ) (8,000 ) - -
Exercised during the year (Note 11(b)) (9,506,666 ) - (1,325,000 ) -
(7,427,584
)

-

End of the year 3,692,000 289,699 21,269,167 - 21,085,000 8,000

~~Details of option issuances are summarized as follows.~~

~~2003~~

On July 10, 2002, the Company issued 13,274 options to an employee and 100,000 options to an outside consultant under the Employee and Consultants Option Plan 2000 (see Note 15(b)) as a reward for services rendered to the Company. Of the 100,000 options issued to the consultant, one-third are exercisable beginning May 2001, another third May 2002 and the final third May 2003. The options are exercisable until June 30, 2005 at an exercise price of A$0.50 per option. These options are forfeited in the event the employee or consultant terminate employment with the Company. 13,274 options were exercised on 10 July 2002. The balance of the options lapsed on June 30, 2005.

On October 31, 2002, the Company issued 100,000 options to an outside consultant under the Employee and Consultants Option Plan 2000 (see Note 15(b)) as a reward for services rendered to the Company. Such options were exercisable on or before June 30, 2005 at an exercise price of A$0.50 per option. These options are forfeited in the event the consultant terminates employment with the Company. These options lapsed on June 30, 2005.

·	On October 31, 2002, the Company issued 200,000 options to an outside consultant in consideration for services rendered. Such options are exercisable on or before October 1, 2005 at an exercise price of A$0.50 per option.

On March 1, 2003, the Company issued 55,000 options to underwriters in connection with the underwriters’ subscription of the remaining balance of the listed options with an expiration date of March 1, 2003 that had not been exercised by existing option holders. Such options were exercised on the same day at an exercise price of A$0.50 per option.

·	On June 6, 2003, the Company issued 5,000 options to an outside consultant in consideration for services rendered. Such options are exercisable beginning March 1, 2005 through June 30, 2005 at an exercise price of A$1.50 per option. These options lapsed on June 30, 2005.

On June 6, 2003, the Company issued 145,000 options to employees under the Employee and Consultants Option Plan 2000 (see Note 15(b)) as a reward for services rendered to the Company. Of the 145,000 options, 50,000 options are immediately exercisable, 20,000 options are exercisable beginning August 1, 2003, 25,000 options are exercisable beginning December 25, 2003, and 50,000 options are exercisable beginning May 31, 2004. All options have an exercise price of A$0.50 per option and are exercisable until June 30, 2005. These options are forfeited in the event the employees terminate employment with the Company. These options lapsed on June 30, 2005.

~~F-23~~

~~PRANA BIOTECHNOLOGY LIMITED~~

~~(A Development Stage Enterprise)~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)~~

1112. ~~CONTRIBUTED EQUITY (continued)~~

~~2004~~

On August 8, 2003, the Company issued 10,000 options to outside consultants under the Employee and Consultants Option Plan 2000 (see Note 15(b)) as a reward for services rendered to the Company. Of the 10,000 options issued to the consultants, half are exercisable beginning December 1, 2003 and the other half are exercisable beginning January 1, 2005. The options are exercisable until June 30, 2005 at an exercise price of A$0.50 per option. These options are forfeited in the event the consultants terminate employment with the Company. These options lapsed on June 30, 2005.

·	On September 10, 2003, the Company issued 5,000 options to an outside consultant in consideration for services rendered to the Company. Such options are exercisable between March 2, 2005 and June 30, 2005 at an exercise price of A$1.50 per option. These options lapsed on June 30, 2005.

On September 15, 2003, the Company issued 244,667 options to employees and 17,500 options to outside consultants under the Employee and Consultants Option Plan 2000 (see Note 15(b)) as a reward for services rendered to the Company. Of the 244,667 options issued to employees, 58,000 were escrowed until August 1, 2004, 166,667 were escrowed until May 31, 2004 and 20,000 were escrowed until August 31, 2004. Of the options issued to the consultants, 2,500 are exercisable beginning July 1, 2004, 7,500 are escrowed until July 31, 2004 and 7,500 are escrowed until August 31, 2004. The options are exercisable until June 30, 2005 at an exercise price of A$0.50 per option. These options are forfeited in the event the employees or consultants terminate employment with the Company. These options lapsed on June 30, 2005.

·	On October 31, 2003, the Company issued 500,000 options to an outside consultant in consideration for services rendered to the Company. Such options were exercisable on or before April 23, 2004 at an exercise price of A$0.70 per option. The options were exercised in April 2004.

On November 27, 2003, the Company issued 500,000 options to an outside consultant under the Employee and Consultants Option Plan 2000 (see Note 15(b)) as a reward for services rendered to the Company. Such options are exercisable on or before June 30, 2005 at an exercise price of A$0.50 per option. These options lapsed on June 30, 2005.

On December 5, 2003, the Company issued 20,000 options to employees under the Employee and Consultants Option Plan 2000 (see Note 15(b)) as a reward for services rendered to the Company. The options are exercisable between July 1, 2004 and June 30, 2005 at an exercise price of A$0.50 per option. These options are forfeited in the event the employees terminate employment with the Company. These options lapsed on June 30, 2005.

·	On May 10, 2004, the Company issued 412,000 options to Professor Ashley Bush, an outside consultant, as per the ten year consulting contract with Professor Bush (see Note 14). Such options are exercisable on or before February 1, 2007 at an exercise price of A$0.50 per option.

~~2005~~

On December 17, 2004, the Company issued 1,600,000 options to directors under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 15(b)) in recognition of future contributions to the growth and success of the Company. The options are escrowed for one year from the date of grant and are exercisable once the ASX share price reaches A$1.00 for five consecutive trading days. The options are exercisable at A$nil consideration and expire on June 30, 2010. This issue was approved by shareholders at the 2004 Annual General Meeting.

On December 17, 2004, the Company issued 380,000 options to a director under the 2004 ADS Option Plan (see Note 15(b)) as per his employment contract. The options vested on June 14, 2005 following an agreement between Jonas Alsenas and the Company on Jonas stepping down as CEO and director of the Company and are exercisable at US$5.00. The options expire on December 17, 2012 and upon exercise convert to ADRs (1 ADR = 10 Shares). This issue was approved by shareholders at the 2004 Annual General Meeting.

On December 17, 2004, the Company issued 600,000 options to outside consultants under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 15(b)) in consideration for services rendered to the Company. Of the 600,000 options, 400,000 options vest immediately and 200,000 options vest quarterly until the expiration date. The options are exercisable until December 17, 2007 at an exercise price of A$0.50 per option.

~~F-24~~

~~PRANA BIOTECHNOLOGY LIMITED~~

~~(A Development Stage Enterprise)~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)~~

11~~CONTRIBUTED EQUITY~~ISSUED CAPITAL (continued)

On February 21, 2005, the Company issued 500,000 options to the Company Secretary under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 15(b)) as reward for services rendered to the Company. Such options are exercisable on or before December 17, 2007 at an exercise price of A$0.50 per option.

~~(d)~~(c) Movement in warrants

Years Ended June 30,

2005

2004

2003

Number of Warrants

Comp.
Expense ($)

Number of Warrants

Comp.
Expense ($)

Number of Warrants

Comp.
Expense ($)

Beginning of the year 3,000,000 - - - - -
Issued during the year 320,000 453,563 3,000,000 - - -

End of the year 3,320,000 453,563 3,000,000 - - -

~~Details of warrant issuances are summarized as follows.~~

~~2004~~

·	On June 4, 2004, the Company issued 3,000,000 warrants to US investors as part of the 1 June 2004 US capital raising disclosed in (b) above. These warrants are convertible to 30,000,000 shares (3,000,000 ADRs) at an exercise price of US$8.00 per warrant on or before June 4, 2009.

~~2005~~

On December 17, 2004, the Company issued 320,000 warrants to an outside consultant in consideration for services rendered to the Company for the June 1, 2004 US capital raising disclosed in (b) above. The resulting compensation expense was accounted for as an issuance cost and therefore recorded as a deduction of contributed equity in the Statements of Shareholders’ Equity. The warrants are convertible to 3,200,000 shares (320,000 ADRs) at an exercise price of US$8.00 per warrant on or before June 4, 2009.

	Years Ended June 30,
	2006				2005
	Number of Warrants		Comp. Expense ($)		Number of Warrants		Comp. Expense ($)
Beginning of the year		3,000,000		-		3,000,000		-
Issued during the year		-		-		-		-

End of the year		3,000,000		-		3,000,000		-

~~(e)~~(d) Terms and conditions of contributed equity

Ordinary shares

Ordinary shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company.

Options and warrants

Option holders and warrant holders do not have the right to receive dividends and are not entitled to vote at a meeting of the Company. Options and warrants may be exercised at any time from the date they vest to the date of their expiry. Share options convert into ordinary shares on a one for one basis on the date they are exercised. Warrants and US options convert into ~~ordinary shares,~~ADRs, being one warrant or US option for one ADR, which equals ten ordinary shares, on the date they are exercised.

(e)Shares issued after reporting date

Date	Details	Number	Issue Price	Comp. Expense ($)
August 31, 2006	Issued to a consultant	250,000	0.1725	43,125
		250,000		43,125

			June 30,
			2006		2005
13. RESERVES

(a) Share Based Payments
Options over fully paid ordinary shares	12(b	)		898,252		478,999
Options over ADRs	12(c	)		1,515,434		1,515,434
Warrants over ADRs	12(d	)		453,563		453,563

				2,867,249		2,447,996

The share based payment reserve arises on the grant of options and/or issuance of warrants to directors, executives, consultants or employees. Amounts are transferred out of the reserve and into issued capital when the options and/or warrants are exercised.

~~F-25~~F-22

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

1113. ~~CONTRIBUTED EQUITY~~RESERVES (continued)

~~(f)~~(b) ~~Shares,~~Movements in share options ~~and warrants issued after reporting date~~over fully paid ordinary shares

~~Details of share issuances are as follows:~~

Date

Details

Number

Issue Price

Comp. Expense ($)

August 10, 2005 Issue of shares to consultant Professor Ashley Bush as per consulting contract (Note 14) 825,000 0.37 305,250
825,000 305,250

	Years Ended June 30,
	2006					2005
	Number of Options			Comp. Expense ($)		Number of Options			Comp. Expense ($)
Beginning of the year		3,312,000			478,999		21,269,167			-
Issued during the year		2,678,000			258,020		2,700,000			478,999
Expired during the year		(200,000	)		-		(11,150,501	)		-
Forfeited during the year		(37,500	)		-		-			-
Amortization of option expenses		-			161,233		-			-
Exercised during the year (Note 11(b))		-					(9,506,666	)		-

End of the year		5,752,500			898,252		3,312,000			478,999

Details of option issuances are summarized as ~~follows:~~follows.

~~On August 10,~~ 2005 ~~the Company issued 413,000 options to consultant Professor Ashley Bush in accordance with the ten year consulting contract with same (see Note 14).~~

On December 17, 2004, the Company issued 600,000 options to outside consultants under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 17) in consideration for services rendered to the Company. Of the 600,000 options, 400,000 options vested immediately and 200,000 options vest quarterly over a one-year vesting period. The options ~~were issued under the 2004 Employees, Directors and Consultants Share and Option Plan. Such options expire on February 1, 2007 and~~ are exercisable until December 17, 2007 at an exercise price of A$0.50 per option.

June 30,

2005

2004

2003

Notes
12. RESERVE AND ACCUMULATED DEFICIT

Asset revaluation reserve 12(a) 14,661,942 14,661,942 14,661,942
Accumulated deficit during the development stage 12(b) (50,473,473 ) (25,464,876 ) (15,579,262 )

~~(a)~~~~Asset revaluation reserve~~
i~~Nature and purpose of reserve~~
~~The asset revaluation reserve is used to record increments and decrements in the value of non-current assets~~
ii~~Movements in reserve~~

Balance at beginning of year 14,661,942 14,661,942 14,661,942
Revaluation of core intellectual property to directors’ valuation -
-

-

Balance at end of year 14,661,942 14,661,942 14,661,942

On December 17, 2004, the Company issued 1,600,000 options to directors under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 17) in recognition of future contributions to the growth and success of the Company. The options are escrowed for one year from the date of grant and are exercisable once the ASX share price reaches A$1.00 for five consecutive trading days. The options are exercisable at A$nil consideration and expire on June 30, 2010. This issue was approved by shareholders at the 2004 Annual General Meeting.

On July 1, 2000, as allowed by AASB 1041, the directors deemed the carrying value of the consolidated entity’s core intellectual property at valuation to be cost. As a result, the asset revaluation reserve is no longer available to absorb any future write-downs of core intellectual property. Subsequent to July 1, 2000, future write-downs of these assets to the recoverable amount must be made through the Statements of Financial Performance.

On February 21, 2005, the Company issued 500,000 options to the Company Secretary under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 17) as reward for services rendered to the Company. Such options vested immediately and are exercisable on or before December 17, 2007 at an exercise price of A$0.50 per option.

2006

On August 10, 2005, the Company issued 413,000 options to an outside consultant as reward for services rendered to the Company. Such options are exercisable on or before February 1, 2007 at an exercise price of A$0.50 per option. This issue was approved by shareholders at the 2005 Annual General Meeting.

On February 2, 2006, the Company issued 890,000 options to employees under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 17) in recognition of future contributions to the growth and success of the Company. The options are exercisable once the ASX share price reaches A$1.00 for five consecutive trading days. The options are exercisable at A$nil consideration and expire on June 30, 2010.

On February 2, 2006, the Company issued 1,300,000 options to directors under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 17) in recognition of future contributions to the growth and success of the Company. The options are escrowed for one year from date of grant and are exercisable once the ASX share price reaches A$1.00 for five consecutive trading days. The options are exercisable at A$nil consideration and expire on June 30, 2010. This issue was approved by shareholders at the 2005 Annual General Meeting.

On June 30, 2006, the Company issued 75,000 options to an employee under the 2004 Employees, Directors and Consultants Share and Option Plan (see Note 17) in recognition of future contributions to the growth and success of the Company. The options are exercisable once the ASX share price reaches A$1.00 for five consecutive trading days. The options are exercisable at A$nil consideration and expire on June 30, 2010.

~~F-26~~F-23

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

13.

RESERVES (continued)

(c)Movements in share options over ADRs

	Years Ended June 30,
	2006				2005
	Number of Options		Comp. Expense ($)		Number of Options		Comp. Expense ($)
Beginning of the year		380,000		1,515,434		-		-
Issued during the year		-		-		380,000		1,515,434

End of the year		380,000		1,515,434		380,000		1,515,434

Details of option issuances are summarized as follows.

2005

On December 17, 2004, the Company issued 380,000 options to a director under the 2004 ADS Option Plan (see Note 17) as per his employment contract. The options vested on June 14, 2005 following an agreement between Jonas Alsenas and the Company on Jonas Alsenas stepping down as CEO and director of the Company and are exercisable at US$5.00. The options expire on December 17, 2012 and upon exercise convert to ADRs (1 ADR = 10 ordinary shares). This issue was approved by shareholders at the 2004 Annual General Meeting.

(d)Movement in warrants

	Years Ended June 30,
	2006				2005
	Number of Warrants		Comp. Expense ($)		Number of Warrants		Comp. Expense ($)
Beginning of the year		320,000		453,563		-		-
Issued during the year		-		-		320,000		453,563

End of the year		320,000		453,563		320,000		453,563

Details of warrant issuances are summarized as follows.

2005

On December 17, 2004, the Company issued 320,000 warrants to an outside consultant in consideration for services rendered to the Company for the June 2004 US capital raising. The resulting compensation expense was accounted for as an issuance cost and therefore recorded as a deduction of issued capital in the Statements of Shareholders’ Equity. The warrants are convertible to 320,000 ADRs (3,200,000 ordinary shares) at an exercise price of US$8.00 per warrant on or before June 4, 2009.

(e) Terms and conditions of contributed equity

Options and warrants		~~June 30,~~
	~~2005~~		~~2004~~	~~2003~~

12~~RESERVE AND ACCUMULATED DEFICIT (continued)~~
Option holders and warrant holders do not have the right to receive dividends and are not entitled to vote at a meeting of the Company. Options and warrants may be exercised at any time from the date they vest to the date of their expiry. Share options convert into ordinary shares on a one for one basis on the date they are exercised. Warrants and US options convert into ADRs, being one warrant or US option for one ADR, which equals ten ordinary shares, on the date they are exercised.

(b) Accumulated deficit during the development stage

Balance at beginning of year (25,464,876 ) (15,579,262 ) (10,994,424 )
Net loss for the year (25,008,597 ) (9,885,614 ) (4,584,838 )

Balance at end of year (50,473,473 ) (25,464,876 ) (15,579,262 )
In Australia, there is not a set number of authorized shares, shares are not reserved for the exercise of options, and shares do not have a par value.

F-24

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

13.RESERVES (continued)

Years Ended June 30,

2005

2004

2003

13 STATEMENTS OF CASH FLOWS

(a) Reconciliation of the net loss to the net cash flows from operations

Net loss (25,008,597) (9,885,614) (4,584,838)

Non-cash items

Depreciation of property, plant and equipment 65,223 95,002 85,971
Amortization of intangible assets 1,100,004 1,100,004 1,100,002
Non-cash issue of shares and options in consideration of operating expenses 439,457 983,305

169,763
Foreign exchange loss 1,362,572 182,768 12,481
Impairment of core intellectual property 10,388,339 - -

Changes in assets and liabilities

(Decrease)/increase in payables 665,231 2,120,733 (371,116)
(Increase)/decrease in receivables (81,559) 50,906 (35,887)
(Increase)/decrease in prepayments (422,396) (20,407) 8,005
Increase in provision for employee entitlements 72,913 25,883 25,006

Net cash flows used in operating activities (11,418,813) (5,347,420) (3,590,613)

(b) Reconciliation of cash

Cash balance comprises:
- cash on hand 1,163,077 8,531,593 2,263,783
- term deposit/on call 11,290,227 21,048,805 1,200,000
- commercial bill 9,000,000 - -

Closing cash balance 21,453,304 29,580,398 3,463,783

(f)Options and warrants issued after reporting date

There have been no options or warrants issued after reporting date.

	June 30,
	2006			2005

14. ACCUMULATED DEFICIT DURING DEVELOPMENT STAGE
Balance at beginning of year		(37,516,265	)		(21,421,837	)
Net loss for the year		(11,719,309	)		(16,094,428	)

Balance at end of year		(49,235,574	)		(37,516,265	)


15. CASH FLOW STATEMENT

(a) Reconciliation of the net loss to the net cash flows from operations
Net loss	(11,719,309	)	(16,094,428	)

Non-cash items
Depreciation of plant and equipment	118,196		65,223
Amortization of intangible assets	-		83,200
Non-cash issue of equity in consideration of operating expenses	856,503		2,144,191
Foreign exchange (gain)/loss	(268,960	)	1,362,572
Impairment of core intellectual property	-		786,240
Loss on sale of non-current asset	894		-

Changes in assets and liabilities
Increase in trade and other receivables	(19,685	)	(81,559	)
Decrease/(increase) in other current assets	384,333		(422,396	)
(Decrease)/increase in trade and other payables	(1,032,823	)	665,231
Increase in provision for employee entitlements	29,636		72,913

Net cash flows used in operating activities	(11,651,215	)	(11,418,813	)

(b) Reconciliation of cash and cash equivalents

Cash and cash equivalents balance comprises:
- cash and cash equivalents on hand	684,006		1,163,077
- term deposit/on call	6,829,772		11,290,227
- commercial bill	2,500,000		9,000,000

Closing cash and cash equivalents balance	10,013,778		21,453,304

(c)Non-cash financing and investing activities

During the years ended June 30, ~~2005, 2004~~2006 and ~~2003,~~2005, the Company issued shares, options and warrants in connection with non-cash transactions. See Notes ~~11(b)~~12(b), ~~11(c)~~13(b), 13(c) and ~~11(d)~~13(d).

~~F-27~~F-25

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

1416. EXPENDITURE ~~COMMITMENTS~~COMMITTMENTS

The Company has entered into a ten year contract with Professor Ashley Bush, commencing February 1, 2003 which includes a payment of US$100,000 per annum for ten years increasing at the rate of the US Consumer Price Index on the anniversary of the contract. The contract also includes the issue of 1,650,000 bonus shares of which 825,000 were issued during the 2004 financial year and 824,000 options at an exercise price A$0.50 of which 412,000 were issued during the 2004 year. The balance of 825,000 shares and 413,000 options were issued on August 10, 2005.

The Company moved premises in June 2004 and entered into an operating lease for a three year period totaling A$306,781, including rent increases by 3.5% per annum. Outgoing costs are set yearly by the landlord.

Future minimum lease payments under the office lease are as follows as of June 30, ~~2005:~~2006:

Fiscal year
2005		105,911
2006	106,569	110,749
2007	97,688	92,726
2008	-
2009	-
2010	-
Thereafter	-	-
Total	204,257	309,386

~~The CFO Solution provides administrative support at a rate~~Refer to note 20 in respect of ~~A$15,000 per month which can be terminated with three months notice by either the Company or The CFO Solution.~~

~~The Company has~~employment contracts with ~~various consultants that are payable within less than one year.~~Mr. Geoffrey Kempler and Dr. Ross Murdoch.

~~The Company has also entered into a contract with Geoffrey Kempler. For details refer to Note 19.~~

~~15.~~ 17. EMPLOYEE ENTITLEMENTS AND SUPERANNUATION COMMITMENTS

								Years Ended June 30,
	Notes					Notes		2006		2005
(a) Employee Entitlements

The aggregate employee entitlement liability is composed of:					The aggregate employee entitlement liability is composed of:
Provisions (current)			78,602	42,597					76,672		78,602
Provisions (non-current)			45,200	8,292					76,766		45,200
		10	123,802	50,889			10		153,438		123,802
Number of employees: 17 (2004: 12 employees)
Number of employees: 14 (2005: 17 employees)

(b) Employee and Consultants Option Plans

At the Annual General Meeting held on November 22, 2000, shareholders approved the establishment of the Employee and Consultants Option Plan 2000 designed to reward directors, employees and consultants for their contributions to the Company. It was also proposed as a method of retaining key personnel, for the growth and development of the Company’s intellectual property rights. The options could not be transferred and were not quoted on the ASX. At June 30, 2005, there were no directors, seven employees (including three executives), and five consultants participating in the Scheme. All options were issued with an exercise price of A$0.50 and expired on June 30, 2005. No further options will be issued under this plan.

~~F-28~~F-26

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

15
17. EMPLOYEE ENTITLEMENTS AND SUPERANNUATION COMMITMENTS (continued)

At the Annual General Meeting held on November 17, 2004, the shareholders approved the establishment of new Employee and Consultant Plans designed to reward directors, employees and/or consultants for their contributions to the Company. As per the previous plan, the new plans are to be used as a method of retaining key personnel for the growth and development of the ~~Company’s intellectual property rights.~~Company’s. Due to Prana’s US presence, a US plan (the 2004 ADS Option Plan) and an Australian plan (the 2004 Employees, Directors and Consultants Share and Option Plan) were developed. At June 30, ~~2005,~~2006, equity had been issued to one previous director while a director under the 2004 ADS Option Plan and ~~four~~five directors, ~~and~~ three consultants and 12 employees under the 2004 Employees, Directors and Consultants Share and Option ~~Plan..~~Plan. At the 2004 Annual General Meeting shareholders authorized the Company to issue in aggregate of up to 12 million ordinary shares under the plans. This was increased to 22 million ordinary shares at the 2005 Annual General Meeting. The Share Plan Committee, a sub-committee of the Remuneration Committee administers the Plans and is able to change the terms of the equity issued under them from the default terms.

Under the 2004 ADS Option Plan, the default exercise price must equal or exceed the fair value of the ADS on the date the options are awarded. The option expiry date cannot exceed ten years from the date the options were awarded. The default vesting conditions are 25% per year on the date the options were awarded.

Under the 2004 Employees, Directors and Consultants Share and Option Plan, the default exercise price must be equal or less than the market value of the ordinary shares on ASX on the date of grant. The option expiry date cannot exceed ten years from the date the options were granted. The default vesting conditions are 25% per year on the date the options were granted.

Information with respect to the number of options granted under the Employee and Consultants Option Plan 2000 is as follows:

	Years Ended June 30,															Years Ended June 30,
	2005					2004					2003					2006				2005
	Number of Options			Exercise Price ($)		Number of Options			Exercise Price ($)		Number of Options			Exercise Price ($)		Number of Options		Exercise Price ($)		Number of Options			Exercise Price ($)
Beginning of the year		897,167			0.50		555,000			0.50		210,000			0.50		-		-		897,167			0.50
Issued during the year		-			-		792,167			0.50		358,274			0.50		-		-		-			-
Exercised during the year		-			-		(450,000	)		0.50		(13,274	)		0.50		-		-		-			-
Expired during the year		(897,167	)		0.50		-			-		-			-		-		-		(897,167	)		0.50


End of the year		-			-		897,167			0.50		555,000			0.50		-				-

Information with respect to the number of options granted under the 2004 Employees, Directors and Consultants Share and Option Plan as follows:

Years Ended June 30,

2006

2005

Number of Options

Exercise Price ($)

Number of Options

Exercise Price ($)

Beginning of the year 2,700,000 0.50 - -
Issued during the year 2,265,000 nil 1,600,000 -
Issued during the year - - 1,100,000 0.50
Forfeited during the year (37,500 ) nil - -

End of the financial year 4,927,500 2,700,000

Years Ended June 30,

2005

2004

2003

Number of Options

Exercise Price ($)

Number of Options

Exercise Price ($)

Number of Options

Exercise Price ($)

Beginning of the year - - - - - -
Issued during the year 1,600,000 - - - - -
Issued during the year 1,100,000 0.50 - - - -

End of the financial year 2,700,000 0.50 - - -

~~F-29~~F-27

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

15~~EMPLOYEE ENTITLEMENTS AND SUPERANNUATION COMMITMENTS (continued)~~

17.EMPLOYEE ENTITLEMENTS AND SUPERANNUATION COMMITMENTS (continued)

Information with respect to the number of shares issued under the 2004 Employees, Directors and Consultants Share and Option Plan as follows:

	~~Years Ended June 30,~~
	~~2005~~		~~2004~~		~~2003~~
	~~Number of Shares~~		~~Number of Shares~~		~~Number of Shares~~
~~Beginning of the year~~		-		-		-
~~Issued during the year~~		~~428,439~~		-		-


~~End of the financial year~~		~~428,439~~		-		-

	Years Ended June 30,
	2006		2005
	Number of Shares		Number of Shares
Beginning of the year		428,439		-
Issued during the year		-		428,439

End of the financial year		428,439		428,439

Information with respect to the number of options granted under the 2004 ADS Option Plan as follows:

~~Years Ended June 30,~~

~~2005~~

~~2004~~

~~2003~~

~~Number of Options~~

~~Exercise Price ($)~~

~~Number of Options~~

~~Exercise Price ($)~~

~~Number of Options~~

~~Exercise Price ($)~~

~~Beginning of the year~~

~~Issued during the year~~¹

~~380,000~~

~~US5.00 (A$6.57)~~

~~End of the year~~¹

~~380,000~~

~~US5.00 (A$6.57)~~

	Years Ended June 30,
	2006					2005
	Number of Options		Exercise Price ($)			Number of Options		Exercise Price ($)

Beginning of the year		380,000		US$5.00 (A$6.85	)		-		-
Issued during the year¹		-		-			380,000		US$5.00 (A$6.57	)

End of the year¹		380,000					380,000

¹ These options are exercisable into ADRs (one US option converts to one NASDAQ ADR = ten ASX shares)

The ~~difference between the total market value of options issued during a financial year at the date of issue, and the total amount received from~~benefit to executives, ~~and~~ employees, ~~is not recognized in the financial statements except for the purposes of determining~~ director and ~~executive remuneration in respect of that financial year as detailed in the Remuneration Report and Note 19 of the financial statements. The benefit to~~ consultants is recognized in the financial statements over the period in which the services are provided. Refer to note 20 for further information.

Options issued carry no dividend rights or right to vote.

16~~CONTINGENT LIABILITIES~~

~~The consolidated entity is not involved in any legal or arbitration proceedings and, so far as directors are aware, no such proceedings are pending or threatened against the consolidated entity.~~

1718. SUBSEQUENT EVENTS

No matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in subsequent financial years.

Years Ended June 30,

2005

2004

2003

18 LOSS PER SHARE

Basic loss per share (0.20 ) (0.13 ) (0.08 )

Weighted average number of ordinary shares on issue used in the calculation of basic loss per share
122,754,061

75,701,818

61,131,313

	Years Ended June 30,
	2006			2005
19. LOSS PER SHARE
Basic and diluted loss per share		(0.09	)		(0.13	)

Weighted average number of ordinary shares on issue used in the calculation of basic and diluted loss per share		128,053,601			122,754,061

The options and warrants in place do not have the effect to dilute the loss per share.

~~F-30~~F-28

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

~~19.~~20. ~~DIRECTORS’ AND EXECUTIVES’ REMUNERATION~~KEY MANAGEMENT PERSONNEL COMPENSATION

(a) The ~~directors and executive information has been prepared in accordance with AASB 1046:~~ ~~Directors and Executives Disclosures by Disclosing Entities~~:

~~Directors~~Key Management Personnel of Prana Biotechnology Ltd during the year:

Geoffrey Kempler

Executive Chairman

~~CEO~~

~~Appointed November 11, 1997~~

~~Re-appointed June 16, 2005~~Chief Executive Officer

Colin Masters

Executive Director

Brian Meltzer

~~Appointed December 9, 1999~~Non-Executive Director

George Mihaly

Non-Executive Director

~~Appointed December 9, 1999~~

~~Brian Meltzer~~Peter Marks

Non-Executive Director

Appointed ~~December 9, 1999~~

~~Jonas Alsenas~~

~~Executive Director~~

~~Appointed March 25, 2004~~

~~CEO~~

~~Appointed August 9, 2004~~

~~Stepped down June 16,~~July 29, 2005

~~Specified Executives of Prana Biotechnology Ltd during the year:~~

Ross Murdoch

President and ~~COO~~

~~Employed September 20, 2002~~Chief Operating Officer

Dianne Angus

Senior Vice President of Business Development, IP ~~Licensing~~ and Research

~~Employed August 1, 2002~~

Richard Revelins

Company Secretary

~~Appointed February 7, 2002~~

~~CFO~~

~~Appointed June 2004~~

Chief Financial Officer

(b)Key Management Personnel Remuneration

Remuneration of all ~~Executive and Non-executive Directors, Officers and Employees~~Key Management Personnel of the Company is determined by the Board following recommendation by the Remuneration Committee.

The Company is committed to remunerating Senior Executives in a manner that is market competitive and consistent with ‘Best Practice’ including the interests of Shareholders. Remuneration packages are based on fixed and variable components, determined by the Executive’s position, experience and performance, and may be satisfied via cash or equity.

Non-executive Directors are remunerated out of the aggregate amount approved by Shareholders and at a level that is consistent with industry standards. Non-executive Directors do not receive performance based bonuses and prior Shareholder approval is required to participate in any issue of equity. No retirement benefits are payable other than statutory superannuation, if applicable.

~~(b) Directors and Specified Executives Remuneration~~

					Post-Employment
	Short Term Benefits				Superannuation		Equity
2006 Directors’ Remuneration	Base Fee $		Bonus $		Contribution $		Options $		Total $
Geoffrey Kempler ^{1 & 3}		334,545		100,000		33,455		92,770		560,770
Colin Masters ²		115,000		-		-		16,775		131,775
Brian Meltzer ¹		97,569		-		7,431		27,831		132,831
George Mihaly ¹		105,000		-		-		27,831		132,831
Peter Marks ²		75,000		-		-		5,033		80,033

		727,114		100,000		40,886		170,240		1,038,240

Base Fee
2005 Cash Shares Superannuation
Equity³
Total

Directors:
Geoffrey Kempler 262,197 - 26,220 49,562 337,979
Colin Masters ¹
75,000 40,000 - - 115,000
George Mihaly ¹
75,000 40,000 - 14,869 129,869
Brian Meltzer ¹
50,000 40,000 - 14,869 104,869
Jonas Alsenas ²
696,358 - - 1,515,434 2,211,792

726,289 120,000 26,220 1,594,734 2,899,509

¹ ~~The fee includes the issue of 83,333 shares each as approved at the 2004 Annual General Meeting valued at A$40,000 at date of issue.~~

² ~~The fee includes payment relating to Jonas Alsenas stepping down as CEO per the Separation Agreement and General Release. See Note 19(c).~~

³~~The~~This equity was issued as per ~~Annual General Meeting~~the AGM held on November 17, 2004. As per Australian ~~Accounting Standards,~~accounting standards the options issued to ~~the~~ Directors ~~have been~~were valued at grant date and are being expensed over the ~~grant date.~~anticipated life of the options. As a result, the value does not reflect the current market price of the ~~Company~~Company’s shares. The Board ~~believe~~believes that if the options were valued in today’s market, they would have minimal intrinsic value given the ~~exercise~~market condition attached to the options that the share price must reach A$1.00 for five consecutive trading days.

²This equity was issued as per the AGM held on November 30, 2005. As per Australian accounting standards the options issued to Directors were valued at grant date and are being expensed over the anticipated life of the options. As a result, the value does not reflect the current market price of the Company’s shares. The Board believes that if the options were valued in today’s market, they would have minimal intrinsic value given the market condition attached to the options that the share price must reach A$1.00 for five consecutive trading days. The option price was calculated using the Barrier Pricing Model applying the following inputs:

~~F-31~~F-29

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

20.KEY MANAGEMENT PERSONNEL COMPENSATION (continued)

Issue Date: February 2, 2006

Pricing Model: American

Option Type: Call

Barrier Type: Up and In

Strike Price: A$0.00

Spot Price: A$0.21

Barrier: A$1.00

Days to Expiry: 1609

Volatility: 110%

Risk-free Interest Rate: 5.35%

Expected Dividends: A$0.00

Option Price: A$0.18

³Mr Kempler achieved a bonus milestone, the successful completion of the Phase 1 trial for PBT-2 as set out in his employment contract. There is a potential for a further A$100,000 bonus for the satisfactory completion of a proof of concept study such as a Phase Two (A) trial on efficacy and dosage.

	Short Term Benefits				Post-Employment
	Base Fee				Superannuation		Equity		Termination
2005 Directors’ Remuneration	Cash $		Shares $		Contribution $		Options $		Benefits $		Total $
Geoffrey Kempler ³		262,197		-		26,220		49,562		-		337,979
Colin Masters ¹		75,000		40,000		-		-		-		115,000
Brian Meltzer ^{1 & 3}		50,000		40,000		-		14,869		-		104,869
George Mihaly ^{1 & 3}		75,000		40,000		-		14,869		-		129,869
Jonas Alsenas ^{2 & 3}		264,092		-		-		1,515,434		432,266		2,211,792
		726,289		120,000		26,220		1,594,734		432,266		2,899,509

¹The base fee includes the issue of 83,333 shares each as approved at the 2004 AGM valued at A$40,000 at date of issue.

²Payment relates to Jonas Alsenas stepping down as CEO per the Separation Agreement and General Release.

³ This equity was issued as per the AGM held on November 17, 2004. As per Australian accounting standards the options issued to Directors were valued at grant date and are being expensed over the anticipated life of the options. As a result, the value dues not reflect the current market price of the Company’s shares. The Board believes that if the options were valued in today’s market, they would have minimal intrinsic value given the market condition attached to the options (A$1.00 share price for five consecutive trading days) or the exercise price of the options.

The option price for the options issued to Mr Geoffrey Kempler, Mr Brian Meltzer and Dr George Mihaly were calculated using the Barrier Pricing Model applying the following inputs:

Issue Date: December 17, 2004

Pricing Model: American

Option Type: Call

Barrier Type: Up and In

Strike Price: A$0.00

Spot Price: A$0.56

Barrier: A$1.00

Days to Expiry: 2008

Volatility: 70%

Risk-free Interest Rate: 5.05%

Expected Dividends: A$0.00

Option Price: A$0.51

F-30

19 ~~DIRECTORS’ AND EXECUTIVES’ REMUNERATION~~
PRANA BIOTECHNOLOGY LIMITED
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

20.KEY MANAGEMENT PERSONNEL COMPENSATION (continued)

2005 Base Fee Superannuation Equity Total

Specified Executives
Ross Murdoch ⁴
275,000 24,750 - 299,750
Dianne Angus^{1 & 3 & 4}
180,000 16,200 2,670 198,870
Richard Revelins²
60,000 - 110,000 170,000

515,000 40,950 112,670 668,620

The option price for Dr Jonas Alsenas was calculated using the Black-Scholes Model applying the following inputs:

Issue Date: December 17, 2004

Exercise Price: USD$5.00

Stock Price: USD$4.75

Years to Expiry: 8

Volatility: 59%

Risk-free Interest Rate: 3.85%:

Dividend Yield: 0%

Option Price: USD$3.08 (AUD$3.99)

					Post-Employment
	Short Term Benefits				Superannuation		Equity
2006 Executives’ Remuneration	Base Fee $		Bonus $		Contribution $		Options $		Total $
Richard Revelins		80,000		-		-		-		80,000
Ross Murdoch ¹		285,000		-		25,650		-		310,650
Dianne Angus ²		185,048		-		16,654		-		201,702

		550,048		-		42,304		-		592,352

¹ On January 1, 2006, Dr Murdoch received a salary increase to A$295,000 plus 9% superannuation.

² On January 1, 2006, Ms Angus received a salary increase to A$195,000 plus 9% superannuation. Ms Angus received additional remuneration in recognition of additional hours worked over her contracted 4 days per week.

					Post-Employment
	Short Term Benefits				Superannuation		Equity
2005 Executives’ Remuneration	Base Fee $		Bonus $		Contribution $		Options $		Total $
Richard Revelins¹		60,000		-		-		110,000		170,000
Ross Murdoch ²		275,000		-		24,750		-		299,750
Dianne Angus ^2,3&4		170,000		10,000		16,200		2,670		198,870

		505,000		10,000		40,950		112,670		668,620

¹ The equity amount relates to 500,000 options issued to Mr Revelins for his services as Chief Financial Officer, valued at grant date. The option price was calculated using the Black-Scholes Model applying the following inputs:

Issue Date: February 21, 2005

Exercise Price: A$0.50

Stock Price: A$0.53

Years to Expiry: 3

Volatility: 52%

Risk-free Interest Rate: 5.47%:

Dividend Yield: 0%

Option Price: A$0.22

² No equity was received by these executives during the year.

³ The equity amount relates to equity issued in the year ended June 30, 2004 that vested ~~in the current financial year.~~on August 1, 2004.

²~~The equity amount relates to 500,000 options issued to Mr. Revelins for his services as CFO valued at grant date.~~

³⁴ Base ~~fee~~Fee includes additional ~~hours~~house worked above ~~four~~4 days per week ~~plus~~and a bonus was paid in recognition of additional work not otherwise remunerated in respect of ~~PBT-1~~the PBT1 patent dispute and clinical trial advancement.

F-31

PRANA BIOTECHNOLOGY LIMITED

⁴~~No equity was received by these executives during the 2005 year.~~(A Development Stage Enterprise)

~~There were only three executives~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in ~~the Company and consolidated entity during 2005.~~Australian dollars (unless otherwise noted)

20.KEY MANAGEMENT PERSONNEL COMPENSATION (continued)

The following Director was under contract at June 30, ~~2005:~~2006:

		Duration	Notice Requirements	Termination	Bonus Entitlements	Equity Entitlements
Geoffrey Kempler		Until termination by either party Signed June 15, 2005	For Good Reason Mr. Kempler may terminate with 30 days notice	pay remuneration entitlements up to June 1, 2010 accrued entitlements, bonuses and equity issues *accelerate the vesting of any unvested options	The Company will pay Mr Kempler a bonus in the amount of A$100,000 for achievement of the satisfactory completion of a successful Phase One trial within the timeframe specified by the Company Strategic Plan (achieved financial year 2006) and a further A$100,000 bonus for the satisfactory completion of a proof of concept study such as a Phase Two (A) trial on efficacy and dosage.	Entitlement under contract at 2005 AGM not exercised.

			Without Good Reason Mr. Kempler may terminate with 90 days notice	*Bonus pro-rated only if termination occurs in 1^st year

			Without Cause the Company may terminate with 90 days notice	pay remuneration entitlements up to June 1, 2010 accrued entitlements, bonuses and equity issues *accelerate the vesting of any unvested options
~~Without Good Reason Mr. Kempler~~
			With Cause the Company may terminate ~~with~~ ~~90 days~~without notice	*Bonus pro-rated only if termination occurs in 1^st year
~~Without Cause the Company may terminate with~~ ~~90 days notice~~	pay remuneration entitlements up to June 1, 2010 accrued entitlements, bonuses and equity issues *accelerate the vesting of any unvested options
~~With Cause the Company may terminate without notice~~	*Bonus pro-rated only if termination occurs in 1^st ~~year~~

F-32

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

20.KEY MANAGEMENT PERSONNEL COMPENSATION (continued)

The following Senior Executives were under contract at June 30, ~~2005:~~2006:

Mr. R. Murdoch has a contract dated May 31, 2004 which provides for a base annual salary of A$275,000 plus superannuation at a rate of 9% and options in the Company to the value of 25% of the base salary per annum based on the achievement of performance milestones. The terms and conditions of the issue of options may be subject to change in future years as the Company develops its remuneration policies. The term of the employment contract is for a period of three years commencing on May 29, 2002. As the period has expired, the employment contract will continue until termination by either party. The employment contract can be terminated on four months notice. Accrued entitlements are payable upon termination. In the case of redundancy, nine months salary is payable and all options will vest immediately.

	Duration	Notice Requirements	Termination	Bonus Entitlements	Equity Entitlements
Ross Murdoch	Until termination by either party Signed August 7, 2006	For Good Reason Dr Murdoch may terminate with 30 days notice	* pay remuneration entitlements up to 29 May 2008 or if termination occurs after May 29, 2007, then 1 year from the time of termination (less any payout made for the notice period). The Company can elect to pay such sum as cash, equity in the Company or as a combination of both cash and equity. * accrued entitlements * accelerate the vesting of any unvested options	Nil.	1,250,000 options with zero exercise price, 25% vest on August 7, 2006, 25% will vest on May 29, 2007, 25% on May 29, 2008 and the remaining 25% on May 29, 2009. The options will expire 8 years from date of grant, being August 7, 2014 and can not be exercised until the share price achieves a minimum value of A$0.40 for five consecutive trading days..

		Without Good Reason Dr Murdoch may terminate with 120 days notice	accrued entitlements permitted to keep and/or exercise options that have vested at the time of termination

		Without Cause the Company may terminate with 120 days notice	* pay remuneration entitlements up to May 29, 2008 or if termination occurs after May 29, 2007, then 1 year from the time of termination (less any payout made for the notice period). The Company can elect to pay such sum as cash, equity in the Company or as a combination of both cash and equity. * accrued entitlements * accelerate the vesting of any unvested options

		With Cause the Company may terminate without notice	accrued entitlements permitted to keep and/or exercise options that have vested at the time of termination.

~~F-32~~F-33

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

	As of and For the Years Ended June 30,
	2006		2005
21. AUDITORS’ REMUNERATION

Amounts received or due and receivable for:
- audit fees		202,600		175,481
- tax fees		185		11,631
- other fees		3,030		14,920

		205,815		202,032

19 22. RELATED PARTY TRANSACTIONS

a. ~~DIRECTORS’ AND EXECUTIVES’ REMUNERATION~~Equity Interests in Subsidiaries

Prana owns 100% of its subsidiaries, Prana Biotechnology Inc and Prana Biotechnology UK Ltd.

b.Key Management Personnel Remuneration

Details of key management personnel remuneration is disclosed in note 20 to the financial statements.

22.RELATED PARTY TRANSACTIONS (continued)

Ms D. Angus has a contract dated October 21, 2003, amended in September 2004, which provides for a base annual salary of A$165,000 plus superannuation at a rate of 9% and options in the Company to the value of 20% of the base salary per annum based on the achievement of performance milestones. The terms and conditions of the issue of options may be subject to change in future years as the Company develops its remuneration policies. The term of the employment contract is for a period of three years commencing on August 1, 2002. As the period has expired, the employment contract will continue until termination by either party. The employment contract can be terminated on four months notice. Accrued entitlements are payable upon termination. In the case of redundancy, nine months salary is payable and all options will vest immediately.c.Key Management Personnel Equity Holdings

2004

Base Fee Consultant Fee Superannuation Equity Total

Directors:
Geoffrey Kempler 266,818 - 18,182 - 285,000
Jonas Alsenas 32,365 - - - 32,365
Colin Masters ¹
40,000 8,333 - - 48,333
George Mihaly ¹
40,000 78,858 347 - 119,205
Brian Meltzer ¹
40,000 50,000 - - 90,000

419,183 137,191 18,529 - 574,903

Fully Paid Ordinary Shares of Prana Biotechnology Ltd	Balance July 1, 2005		Received as Remuneration		Received on Exercise of Options		Net Change Other¹		Balance June 30, 2006		Balance held Nominally
	No.		No.		No.		No.		No.		No.
Geoffrey Kempler		17,055,000		-		-		-		17,055,000		-
Colin Masters		184,666		-		-		-		184,666		-
Brian Meltzer		326,666		-		-		-		326,666		-
George Mihaly		226,666		-		-		-		226,666		-
Peter Marks		43,111		-		-		-		43,111		-
Richard Revelins		42,808		-		-		50,000		92,808		-
Ross Murdoch		50,000		-		-		-		50,000		-
Dianne Angus		-		-		-		-		-		-

		17,928,917		-		-		50,000		17,978,917		-

Fully Paid Ordinary Shares of Prana Biotechnology Ltd	Balance July 1, 2004		Received as Remuneration		Received on Exercise of Options		Net Change Other		Balance June 30, 2005		Balance held Nominally
	No.		No.		No.		No.		No.		No.
Geoffrey Kempler		17,055,000		-		-		-		17,055,000		-
Colin Masters		101,333		83,333		-		-		184,666		-
Brian Meltzer		243,333		83,333		-		-		326,666		-
George Mihaly		143,333		83,333		-		-		226,666		-
Richard Revelins		42,808		-		-		-		42,808		-
Ross Murdoch		50,000		-		-		-		50,000		-
Dianne Angus		-		-		-		-		-		-

		17,635,807		249,999		-		-		17,885,806		-

¹ ~~The base fee includes the issue of 83,333 shares each as approved at the 2003 Annual General Meeting valued at A$40,000 at date of issue.~~These options were acquired on market

2004 Base Fee Consultant Fee Superannuation
Equity ¹
Total

Specified Executives
Ross Murdoch 235,417 - 21,188 100,748 357,353
Dianne Angus
151,827 - 13,665 31,751 197,243

387,244 - 34,853 132,499 554,596

¹ ~~The Black Scholes Model was used to calculate the value of these options at grant date.~~

~~There were only two executives in the Company during 2004.~~

~~F-33~~F-34

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

19 22. ~~DIRECTORS’ AND EXECUTIVES’ REMUNERATION~~RELATED PARTY TRANSACTIONS (continued)

~~(c) Remuneration Options~~

Options Granted as Remuneration 2005: Granted No. Grant Date Value per option at Grant Date Exercise Price First Exercise Date
Last Exercise
Date
Directors:
Geoffrey Kempler¹
1,000,000 December 17, 2004 $0.51 - After December 17, 2005, if the share price reaches A$1.00 for 5 consecutive trading days June 30, 2010
George Mihaly¹
300,000 December 17, 2004 $0.51 - After December 17, 2005, if the share price reaches A$1.00 for 5 consecutive trading days June 30, 2010
Brian Meltzer¹
300,000 December 17, 2004 $0.51 - After December 17, 2005, if the share price reaches A$1.00 for 5 consecutive trading days June 30, 2010
Jonas Alsenas^{2, 3}
380,000 November 17, 2004 US3.08 ($3.99) US$5.00 ($6.50) June 14, 2005 December 17, 2012

1,980,000

Specified Executives:
Richard Revelins²
500,000 February 21, 2005 $0.22 $0.50 February 21, 2005 December 17, 2007

500,000

¹~~The Barrier Pricing Model was used to calculate the value of these options at grant date, being December 17, 2004.~~

²~~The Black Scholes Model was used to calculate the value of these options at grant date, being November 17, 2004 and February 21, 2005.~~

³~~The options issued to Jonas Alsenas are exercisable into ADR’s (1 ADR = 10 shares).~~

Options Granted as Remuneration 2004:	Granted No.	Grant Date	Value per option at Grant Date	Exercise Price	First Exercise Date	Last Exercise Date
Executives:
Ross Murdoch	50,000	6 June 2003	$0.345	$0.50	31 May 2004	30 June 2005
Ross Murdoch	15,000	6 June 2003	$0.345	$0.50	25 December 2003	30 June 2005
Share Options of Prana Biotechnology Ltd							Balance July 1, 2005 No.		Granted as Remuneration No.		Options Exercised No.		Options Sold No.		Options Expired No		Balance June 30, 2006 No.		Total Exercisable June 30, 2006 No.		Total Not Exercisable June 30, 2006 No.
Geoffrey Kempler								1,000,000		-		-		-		-		1,000,000		-		1,000,000
Colin Master								-		1,000,000		-		-		-		1,000,000		-		1,000,000
Brian Meltzer								300,000		-		-		-		-		300,000		-		300,000
George Mihaly								300,000		-		-		-		-		300,000		-		300,000
Peter Marks								-		300,000		-		-		-		300,000		-		300,000
Richard Revelins								500,000		-		-		-		-		500,000		500,000		-
Ross Murdoch	166,667	15 September 2003	$0.483	$0.50	31 May 2004	30 June 2005		-		-		-		-		-		-		-		-
Dianne Angus	20,000	6 June 2003	$0.345	$0.50	1 August 2003	30 June 2005		-		-		-		-		-		-		-		-
Dianne Angus	10,000	6 June 2003	$0.345	$0.50	25 December 2003	30 June 2005
Dianne Angus	58,000	15 September 2003	$0.483	$0.50	1 August 2004	30 June 2005
								2,100,000		1,300,000		-		-		-		3,400,000		500,000		2,900,000

	319,667

Share Options of Prana Biotechnology Ltd	Balance July 1, 2004 No.		Granted as Remuneration No.		Options Exercised No.		Options Sold No.			Options Expired No			Balance June 30, 2005 No.		Total Exercisable June 30, 2005 No.		Total Not Exercisable June 30, 2005 No.
Geoffrey Kempler		9,167,500		1,000,000		-		(7,290,000	)		(1,877,500	)		1,000,000		-		1,000,000
Colin Master		1,000,000		-		-		-			(1,000,000	)		-		-		-
Brian Meltzer		300,000		300,000		-		(300,000	)		-			300,000		-		300,000
George Mihaly		300,000		300,000		-		-			(300,000	)		300,000		-		300,000
Richard Revelins		50,000		500,000		-		-			(50,000	)		500,000		500,000		-
Ross Murdoch		281,667		-		-		-			(281,667	)		-		-		-
Dianne Angus		88,000		-		-		-			(88,000	)		-		-		-
		11,187,167		2,100,000		-		(7,590,000	)		(3,597,167	)		2,100,000		500,000		1,600,000

For further information on equity entitlements under employment contracts, refer to note 20.

~~F-34~~F-35

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

As of and For the Years Ended June 30,

2005

2004

2003

20. AUDITORS’ REMUNERATION

Amounts received or due and receivable for:
- audit fees 175,481 129,522 126,178
- tax fees 11,631 59,580 23,400
- audit related fees 14,920 6,900 7,400

202,032 196,002 156,978

~~21.~~~~RELATED PARTY~~ ~~AND SPECIFIED EXECUTIVE DISCLOSURES~~

~~Specified Directors’ and Specified Executives’ Remuneration~~
~~Details of specified directors’ and specified executives’ remuneration are disclosed in note 19 to the financial statements.~~

As of and For the Years Ended June 30,

2005

2004

2003

Director-related entity transactions

Kendle Pty Ltd, a Director-related company to G. Mihaly until December 2004, provided continuous analysis and reviews of the consolidated entity’s commercialization and intellectual property management as well as clinical trial management and monitoring (on normal commercial terms and conditions).
Fees paid to Kendle Pty Ltd up until December 31, 2004 were:
577,757 379,045 475,289

Amount owing to Kendle Pty Ltd (included in Payables, inclusive of GST) N/A 53,039 48,968

Aroma Science Pty Ltd, a Director-related company to G Kempler, provided office, computer administration and meeting facilities (on normal commercial terms and conditions) up until June 30, 2004.
Fees paid to Aroma Science Pty Ltd during the year were:
- 81,470 114,247

Amount owing to Aroma Science Pty Ltd (included in Payables, inclusive of GST) - - 492

~~Specified Directors’ and Specified Executives’ Equity Holdings~~

~~Number of Shares held by Specified Directors’ and Specified Executives’~~

Balance July 1, 2004 Received as Remuneration Options Exercised Net Change Other
Balance
June 30, 2005

No. No. No. No. No.
Specified Directors
Geoffrey Kempler 17,055,000 - - - 17,055,000
Colin Masters 101,333 83,333 - - 184,666
George Mihaly 143,333 83,333 - - 226,666
Brian Meltzer 243,333 83,333 - - 326,666

Specified Executives
Ross Murdoch 50,000 - - - 50,000
Dianne Angus - - - - -
Richard Revelins 42,808 - - - 42,808

~~F-35~~

~~PRANA BIOTECHNOLOGY LIMITED~~

~~(A Development Stage Enterprise)~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)~~

21 ~~RELATED PARTY AND SPECIFIED EXECUTIVE DISCLOSURES (continued)~~

~~Specified Directors’ and Specified Executives’ Equity Holdings~~
~~Number of Options held by Specified Directors and Executives~~

Balance
July 1, 2004
No.

Granted as Remuneration
No.

Options Exercised
No.

Options Sold
No.

Options Expired
No

Balance
June 30, 2005
No.

Total Exercisable June 30, 2005
No.

Total Not Exercisable June 30, 2005
No.

Specified Directors
Geoffrey Kempler 9,167,500 1,000,000 - (7,290,000 ) (1,877,500 ) 1,000,000 - 1,000,000
Colin Master 1,000,000 - - - (1,000,000 ) - - -
George Mihaly 300,000 300,000 - (300,000 ) - 300,000 - 300,000
Brian Meltzer 300,000 300,000 - - (300,000 ) 300,000 - 300,000

~~Specified Executives~~

Ross Murdoch 281,667 - - - (281,667 ) - - -
Dianne Angus 88,000 - - - (88,000 ) - - -
Richard Revelins 50,000 500,000 - - (50,000 ) 500,000 500,000 -

~~PART I~~

~~F-36~~

~~PRANA BIOTECHNOLOGY LIMITED~~

~~(A Development Stage Enterprise)~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)~~

22 23. SEGMENT INFORMATION

The consolidated entity’s activities are predominantly within Australia and cover research into Alzheimer’s Disease and other major age-related degenerative disorders.

2324. FINANCIAL INSTRUMENTS

(a) Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which revenues and expenses are recognized, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 1 to the financial statements.

(b) Interest rate risk

The consolidated entity has cash on deposit which is professionally managed by external parties to optimize the impact of interest rate fluctuations pursuant to conservative investment guidelines.

At June 30, 2006, the consolidated entity had the following cash accounts:

US$4,217,217 (A$5,778,009) in a 30 day term deposit at a fixed interest rate of 4.98% which matured on July 7, 2006;

A$1,051,763 in at call deposit accounts, earning interest of 5.65%;

A$242,285 in Australia dollar cheque accounts at variable interest rates ranging from 4.75% to 5.80% as of June 30, 2006;

US$120,667 (A$165,326) in a US cheque account at a interest rate of 4.44% as of June 30, 2006;

GBP$12,255 (A$30,495) in a GBP cheque account at a variable interest rate of 2.90% as of June 30, 2006;

EUR$142,758 (A$245,487) in a EUR cheque account at a variable interest rate of 2.09% as of June 30, 2006;

A$2,500,000 in a 32 day commercial bill with a fixed interest rate of 5.82% which matured on July 24, 2006;

A$32,379 in a seven month term deposit at a fixed interest rate of 5.50% which matures on July 17, 2006;

A$10,000 in a 180 day term deposit at a fixed interest rate of 4.00% which matures on July 17, 2006; and

A$413 in petty cash which does not earn any interest.

The weighted average interest rate is 2.60% for cash and cash equivalents and 5.34% for terms deposits over 3 months and apart from usual variances in general rates of interest the consolidated entity is not exposed to any significant interest rate risk.

At June 30, 2005, the consolidated entity had the following cash accounts:

~~$31,359 in a six month term deposit at a fixed interest rate of 4.50% which matures on November 17, 2005;~~

US$5,077,088 ($(A$6,667,232) in a 31 day term deposit at a fixed interest rate of 2.88% which matured on July 11, 2005;

$A$4,591,636 in at call deposit accounts, earning interest of 5.40%;

$A$194,880 in Australia dollar cheque accounts at variable interest rates ranging from 4.28% to 4.60% as of June 30, 2005;

US$445,783 ($(A$585,402) in various US cheque accounts at variable interest rates from 0% to 2.80% as of June 30, 2005;

GBP$161,425 ($(A$382,595) in a GBP cheque account at a variable interest rate of 2.90% as of June 30, 2005;

$A$9,000,000 in a 30 day commercial bill with a fixed interest rate of 5.57% which matured on July 29, 2005; and

A$31,359 in a six month term deposit at a fixed interest rate of 4.50% which matures on November 17, 2005;

$200 in petty cash which does not earn any interest.

The weighted average interest rate is 4.57% and apart from usual variances in general rates of interest the consolidated entity is not exposed to any significant interest rate risk.

~~At June 30, 2004, the consolidated entity had the following cash accounts:~~

~~$30,000 in a six month term deposit at a fixed interest rate of 5.20%;~~

~~$1,600,000 in 120 day term deposits at fixed interest rates between 5.35% and 5.44%;~~

~~US$13,500,000 ($19,418,805) in a 27 day term deposit at a fixed interest rate of 0.60%;~~

~~$1,299,608 in Australian dollar cheque accounts at variable interest rates ranging from 3.97% to 4.40% as of June 30, 2004;~~

~~US$5,027,554 ($7,231,785) in a US cheque account at a variable interest rate of 0.05% as of June 30, 2004; and~~

~~$200 in petty cash which does not earn any interest.~~

~~The weighted average interest rate is 0.89% and apart from usual variances in general rates of interest the Company was not exposed to any significant interest rate risk.~~

Receivables and payables are non-interest bearing.

~~F-37~~F-36

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

~~23.~~24. FINANCIAL INSTRUMENTS (continued)

The consolidated entity’s exposure to interest rates and the effective weighted average interest rate for classes of financial assets and liabilities is set out below:

June 30, 2005		Floating Interest Rate		Fixed Interest Maturing in				Non-Interest bearing		Total		Average Interest Rate
June 30, 2006																Floating Interest Rate		Fixed Interest Maturing in				Non-Interest bearing		Total		Average Interest Rate

				1 year or less		1-5 years												1 year or less		1-5 years
Financial Assets
Cash			1,162,877		20,290,227		-		200		21,453,304		4.57	%			683,593		9,329,772		-		413		10,013,778		2.60	%
Receivables			-		-		-		174,476		174,476		-				-		-		-		194,161		194,161


			1,162,877		20,290,227		-		174,676		21,627,780
Other current assets																	-		42,379		-		-		42,379		5.15	%

																	683,593		9,372,151		-		194,574		10,250,318
Financial Liabilities	Financial Liabilities														Financial Liabilities
Payables			-		-		-		2,571,181		2,571,181		-				-		-		-		1,538,358		1,538,358
Provisions			-		-		-		123,802		123,802		-				-		-		-		153,438		153,438
																	-		-		-		1,691,796		1,691,796

			-		-		-		2,694,983		2,694,983

June 30, 2004		Floating Interest Rate		Fixed Interest Maturing in				Non-Interest bearing		Total		Average Interest Rate
June 30, 2005																Floating Interest Rate		Fixed Interest Maturing in				Non-Interest bearing		Total		Average Interest Rate

				1 year or less		1-5 years												1 year or less		1-5 years
Financial Assets
Cash			8,531,393		21,048,805		-		200		29,580,398		0.89	%			1,162,877		20,290,227		-		200		21,453,304		4.57	%
Receivables			-		-		-		92,917		92,917		-				-		-		-		174,476		174,476		-
																	1,162,877		20,290,227		-		174,676		21,627,780

			8,531,393		21,048,805		-		93,117		29,673,315


Financial Liabilities	Financial Liabilities														Financial Liabilities
Payables			-		-		-		2,661,950		2,661,950		-				-		-		-		2,571,181		2,571,181		-
Provisions			-		-		-		50,889		50,889		-				-		-		-		123,802		123,802		-
																	-		-		-		2,694,983		2,694,983

-					-		-		2,712,839		2,712,839

(c) ~~Net fair~~Fair values

The carrying amount of financial assets and financial liabilities recorded in the financial statements represents their respective ~~net~~ fair values, determined in accordance with the accounting policies disclosed in Note 1 to the financial statements.

~~F-38~~F-37

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

23. FINANCIAL INSTRUMENTS (continued)

(d) Credit risk

Financial assets, which potentially expose the consolidated entity to concentrations of credit risk, consist primarily of cash and ~~receivables.~~cash equivalents and term deposits over three months. The consolidated entity’s cash and cash equivalents and term deposits over three months are placed with high credit quality financial ~~institutions and receivables are presented net of any allowances for estimated doubtful receivables.~~institutions. Accordingly, the Directors believe the consolidated entity has no significant concentration of credit risk.

2425. ADDITIONAL COMPANY INFORMATION

Prana Biotechnology Limited is a listed public company, incorporated and operating in Australia.

Registered Office		Principal Place of Business
Suite 2		Level 2
1233 High Street		369 Royal Parade
Armadale Vic ~~3148~~3143		Parkville Vic 3052
Australia		Australia

Tel: +61 (03) 9824 8166		Tel: +61 (03) 9349 4906

~~F-39~~F-38

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

2526. RECONCILIATION TO US GAAP

The financial statements have been prepared in accordance with ~~A-GAAP,~~A-IFRS, which differ in certain significant respects from accounting principles generally accepted in the United States of America (“US GAAP”). The following is a summary of the adjustments to net loss and total equity required when reconciling such amounts recorded in the financial statements to the corresponding amounts in accordance with US GAAP, considering the differences between ~~A-GAAP~~A-IFRS and US GAAP.

Reconciliation of net loss

Years Ended June 30,

2005

2004

2003

Net loss in accordance with A-GAAP (25,008,597 ) (9,885,614 ) (4,584,838 )
US GAAP adjustments:

Share-based compensation (a)
Options issued to consultants for services rendered 155,800 (429,811 ) (81,610 )
Options issued to directors and employees for services
rendered
(17,829 ) (87,768 ) (28,108 )
Options issued to underwriters in connection with
subscription of listed options
- -
(26,400
)
Shares issued to consultants and directors for services
rendered
(21,996 ) (33,023 ) (31,004 )

Intangible assets - Core intellectual property (b)
Reversal of amortisation expense attributable to
costs capitalised under A-GAAP but expensed
under US GAAP
60,670 60,670
60,670

Reversal of amortisation expense attributable to
upward asset revaluation
977,463 977,463
977,463

Reversal of impairment expense attributable to costs
capitalised under A-GAAP but expensed under US
GAAP
9,804,092 - -

Intangible assets - Capitalised patent costs (c)
Costs capitalised under US GAAP but expensed
under A-GAAP
263,232 477,390
717,119

Amortisation expense attributable to above (307,806 ) (287,506 ) (247,689 )
Impairment of costs capitalised under US GAAP
but expensed under A-GAAP

(3,580,048
)
- -
Deferred tax effect of US GAAP adjustments (d)
-

-

-

Net loss in accordance with US GAAP (17,675,019 ) (9,208,199 ) (3,244,397 )

Loss per share in accordance with US GAAP:
Basic and diluted (0.14 ) (0.12 ) (0.05 )
Weighted average shares - basic and diluted 122,754,061 75,701,818 61,131,313

~~F-40~~

~~PRANA BIOTECHNOLOGY LIMITED~~

~~(A Development Stage Enterprise)~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)~~

25~~RECONCILIATION TO US GAAP (continued)~~

			Years Ended June 30,
			2006			2005

Net loss in accordance with A-IFRS				(11,719,309	)		(16,094,428	)
US GAAP adjustments:
Share-based compensation	(a	)
Options issued to consultants for services rendered				-			196,389
Options issued to directors and employees for services rendered				-			1,686,905
Shares issued to consultants and directors for services rendered				-			(186,995	)

Intangible assets - Capitalised patent costs	(b	)
Costs capitalised under US GAAP but expensed under A-IFRS				-			284,924
Amortisation expense attributable to above				-			(307,806	)
Impairment of costs capitalised under US GAAP but expensed under A-IFRS				-			(3,378,418	)
Deferred tax effect of US GAAP adjustments	(c	)		-			-
Net loss in accordance with US GAAP				(11,719,309	)		(17,799,429	)

Loss per share in accordance with US GAAP:
Basic and diluted				(0.09	)		(0.15	)
Weighted average shares - basic and diluted				128,053,601			122,754,061

Reconciliation of shareholders’ equity

Years Ended June 30,

2005

2004

Total equity in accordance with A-GAAP 19,594,176 38,702,559
US GAAP adjustments:

Intangible assets - Core intellectual property (b)
Costs capitalised under A-GAAP but expensed under US GAAP - (910,058 )
Reversal of amortisation expense attributable to above - 276,415
Reversal of upward asset revaluation - (14,661,942 )
Reversal of amortisation expense attributable to above - 4,453,360
Intangible assets - Capitalised patent costs (c)
Costs capitalised under US GAAP but expensed under A-GAAP - 4,551,285
Amortisation expense attributable to above - (926,663 )
Deferred tax effect of US GAAP adjustments (d) - -
Total equity in accordance with US GAAP 19,594,176 31,484,956

			Years Ended June 30,
			2006		2005

Total equity in accordance with A-IFRS				8,729,350		19,594,176
US GAAP adjustments:				-		-
Share-based compensation	(a	)		-		-
Intangible assets - Capitalised patent costs	(b	)		-		-
Deferred tax effect of US GAAP adjustments	(c	)		-		-
Total equity in accordance with US GAAP				8,729,350		19,594,176

~~Rollforward analysis of shareholders’ equity under US GAAP~~

Years Ended June 30,

2005

2004

Balance in accordance with US GAAP, beginning of year 31,484,956 7,378,083
Issuance of shares in connection with private placement, net of
issue costs
- 31,018,665
Issuance of shares in connection with exercise of options, net of
issue costs
4,708,574 762,500
Issuance of options to consultants for services rendered (a) 24,699 429,811
Issuance of options to directors and employees for services rendered (a) 17,829 87,768
Issuance of shares to consultants and directors for services rendered (a) 277,136 1,016,328
Issuance of shares for legal settlement 756,000 -
Net loss in accordance with US GAAP (17,675,019 ) (9,208,199 )

Balance in accordance with US GAAP, end of year
19,594,176 31,484,956

~~F-41~~F-39

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

2526. RECONCILIATION TO US GAAP (continued)

Roll forward analysis of shareholders’ equity under US GAAP

			Years Ended June 30,
			2006			2005

Balance in accordance with US GAAP, beginning of year				19,594,176			31,484,956
Issuance of shares in connection with exercise of options, net of issue costs				-			4,708,574
Issuance of options to consultants for services rendered	(a	)		194,351			(15,890	)
Issuance of options to directors and employees for services rendered	(a	)		224,902			17,829
Issuance of shares to consultants and directors for services rendered	(a	)		435,230			442,136
Issuance of shares for legal settlement				-			756,000
Net loss in accordance with US GAAP				(11,719,309	)		(17,799,429	)
Balance in accordance with US GAAP, end of year				8,729,350			19,594,176

a.	Share-based compensation

As described in Note 1(s), Prana adopted AASB 2: ~~Options~~Share-Based Payment. In accordance with the transitional provisions of AASB 2, the Standard has been applied retrospectively to all share-based payments granted / issued ~~to consultants for services rendered~~after November 7, 2002 and that were not yet vested as of January 1, 2005.

~~As disclosed in Note 11(c), the Company issued 600,000, 1,444,500 and 405,000 share options to outside consultants during the years ended~~Through June 30, 2005, 2004 and 2003, respectively. Under A-GAAP, the Company recognized compensation expense based on the directors’ valuation of the options issued during the year ended June 30, 2005. No compensation cost was recognized in respect of the options issued by the Company during the years ended June 30, 2004 and 2003 under A-GAAP. Under US GAAP, the options issued to the outside consultants arePrana accounted for options granted to employees and directors under ~~Statements of Financial Accounting Standards (“SFAS”) No. 123:~~ ~~Accounting for Stock Based Compensation~~ ~~(“SFAS 123”) and Emerging Issues Task Force Issue No. 96-18:~~ ~~Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services~~ (“EITF 96-18”). Accordingly, the Company has calculated compensation cost based on the estimated fair value of the options measured on the date the services were completed by the respective consultants,U.S. GAAP using the ~~Black-Scholes model with the following weighted average assumptions:~~

~~risk-free interest rate of 4.9% for 2005, 5.5% for 2004 and 4.5% for 2003;~~

~~no dividends;~~

~~expected volatility of 62% for 2005, 82% for 2004 and 48% for 2003; and~~

~~expected life of two years for 2005, 2004, and 2003.~~

The compensation cost is charged to operations ratably over the vesting period. The resulting difference between the A-GAAP compensation expense (if any) and the US GAAP compensation expense is recognized in the reconciliation.

~~Options issued to directors and employees for services rendered~~

As disclosed in Note 11(c), the Company issued 2,480,000, 264,667 and 158,274 share options to directors and employees during the years ended June 30, 2005, 2004 and 2003, respectively. Under A-GAAP, no compensation cost has been recognized in respect of the share options issued by the Company. Under US GAAP, the Company has elected to account for the issuance of share options to the directors and employeesintrinsic value method in accordance with Accounting Principles Board ~~(“APB”)~~ Opinion No. 25: Accounting for Stock Issued to Employees (“APB 25”) and related interpretations ~~(“APB 25”).~~to measure employee stock compensation. Under APB 25, compensation ~~cost is~~expense was recognized to the extent that the quoted market price of the stock ~~exceeds~~exceeded the exercise price of the options at the measurement date, and iswas charged to earnings ratably over the vesting period. For options that vest upon the achievement of a target stock price, compensation expense iswas recognized when the target is achieved.

~~Had compensation cost related to~~The following table illustrates the ~~issuance of options to directors and employees been recorded at fair value~~effect on ~~the date of grant in accordance with SFAS 123, the consolidated entity’s~~U.S. GAAP net loss and loss per share ~~amounts (calculated in accordance with US GAAP) would have been reduced~~if Prana had applied the fair value recognition provisions of Statements of Financial Accounting Standards ("SFAS") No. 123: Accounting for Stock Based Compensation ("SFAS 123") to stock-based employee compensation for the ~~pro forma amounts indicated below:~~year ended June 30, 2005.

Years Ended June 30,

2005

2004

2003

US GAAP net loss, as reported (17,675,019 ) (9,208,199 ) (3,244,397 )
Add: Stock-based employee compensation expense included
in US GAAP reported net loss

17,829

87,768

28,108

Deduct: Total stock-based employee compensation expense
determined under fair value based method

(1,708,925
)

(137,741
)

(41,331
)
US GAAP pro forma net loss (19,366,115 ) (9,258,172 (3,257,620 )
US GAAP basic and diluted loss per share
- As reported (0.14 ) (0.12 ) (0.05 )
- Pro forma (0.16 ) (0.12 ) (0.05 )

~~F-42~~F-40

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

2526. RECONCILIATION TO US GAAP (continued)

~~Options issued to underwriters in connection with subscription of listed options~~

	June 30, 2005
U.S. GAAP net loss, as reported		(17,799,429	)
Add: Stock-based employee compensation expense included in U.S. GAAP reported net loss		17,829
Deduct: Total stock-based employee compensation expense determined under fair value based method		(1,708,925	)

U.S. GAAP pro forma net loss		(19,490,525	)

U.S. GAAP basic and diluted loss per share
- As reported		(0.15	)
- Pro forma		(0.16	)

~~As disclosed~~Additionally, through June 30, 2005, Prana accounted for options granted to consultants under SFAS 123 and Emerging Issues Task Force Issue No. 96−18: Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in ~~Note 11(c), the Company issued 55,000 share options to underwriters on March 1, 2003 in connection~~Conjunction with ~~the underwriters’ subscription of the remaining balance of the listed options with an expiration date of March 1, 2003 that had not been exercised by existing option holders.~~Selling, Goods or Services ("EITF 96−18") under US GAAP. Under ~~A-GAAP, no~~SFAS 123 and EITF 96-18, compensation cost was ~~recognized in respect of the share options issued by the Company. Under US GAAP, the options issued to the underwriters were accounted for under SFAS 123. Accordingly, the consolidated entity has~~ calculated ~~compensation cost~~ based on the estimated fair value of the options measured on ~~March 1, 2003. Because the options are exercisable only on~~ the date ~~of grant,~~ the ~~Company estimated~~services were completed by the ~~fair value of the options based on the intrinsic value of the options.~~respective consultants.

~~Shares~~Through June 30, 2005, Prana also accounted for shares issued to consultants and directors ~~for services rendered~~

~~As disclosed~~under U.S. GAAP in Note 11(b), the Company issued 228,215, 1,119,225 and 146,969 shares to outside consultants in consideration for services rendered to the Company during the years ended June 30, 2005, 2004 and 2003, respectively. The Company also issued 249,999 shares to directors in consideration for services rendered to the Company during each of the years ended June 30, 2005 and 2004. Under A-GAAP, the consolidated entity recognized compensation expense based on the directors’ valuation of the services rendered or shares issued. Under US GAAP, the shares issued to the outside consultants and directors are accounted for underaccordance with SFAS 123 and EITF 96-18. Accordingly, compensation ~~expense is~~cost was based on the quoted market price of the shares measured on the date the services were completed.

Effective July 1, 2005, for U.S. GAAP purposes Prana adopted SFAS No. 123(R), Share-Based Payment (“SFAS 123R”) which replaces SFAS 123 and supersedes APB 25. Under the modified prospective method of SFAS 123R, Prana applies SFAS 123R for equity-based compensation awards (or portion thereof): (i) granted on or after July 1, 2005; (ii) modified on or after July 1, 2005; and (iii) not yet vested as of July 1, 2005. Such equity-based compensation awards are measured based on the fair value using the Black-Scholes model (for options without market conditions) or Barrier Pricing model (for options with market conditions). The ~~resulting difference between the A-GAAP~~ compensation ~~expense and the US GAAP compensation expense~~ is recognized as an expense in the ~~accompanying reconciliation.~~

b.	~~Intangible assets - Core intellectual property~~

~~Under A-GAAP, the consolidated entity capitalised costs associated with the acquisition and development~~statement of ~~core intellectual property until December 1999. Such costs were amortized on a straight-line basis~~operations over the estimated useful life of 15 years. In December 1999, the directors revalued the intangible assets upwards by A$14,661,942 and recorded the revaluation in the asset revaluation reserve in equity. The increased asset value resulted in additional amortisation forrequisite service period. Prior periods subsequent to the revaluation. All costs associated with the acquisition and development of core intellectual property incurred subsequent to the December 1999 revaluation are expensed as incurred under A-GAAP.

Under US GAAP, costs associated with the acquisition of core intellectual property are capitalised while costs associated with the development of core intellectual property are expensed as incurred. Upward revaluations of intangible assets arehave not allowed (except in connection with a purchase business combination). Accordingly, the amortization expense attributable to the costs capitalized under A-GAAP but expensed under US GAAP as well as the amortization expense attributable to the upward asset revaluation is reversed in the accompanying reconciliation.been restated.

As a result of ~~the cancellation of a clinical study~~adopting SFAS 123R on July 1, 2005, Prana’s U.S. GAAP loss before income taxes and net loss for the ~~compound PBT-1~~year ended June 30, 2006 was A$76,469 higher than if Prana had continued to account for share-based compensation to employees and directors under APB 25. The impact of adopting SFAS 123R did not have a material impact on basic and diluted loss per share, cash flows from operating activities and cash flows from financing activities for the year ended June 30, 2006.

Total U.S. GAAP share-based compensation costs charged to the statement of operations was A$1,046,159 and A$444,075 for the years ended June 30, 2006 and 2005, respectively. No income tax benefits were recognized and no compensation cost was capitalized as part of property and equipment during the periods presented.

The retrospective transition provision of AASB 2 and the modified prospective transition provision of SFAS 123R give rise to GAAP differences in ~~April 2005 due~~share−based compensation for the ended June 30, 2005. There are no U.S. GAAP reconciling items attributable to ~~toxicity issues,~~share−based compensation for the ~~consolidated entity reviewed~~year ended June 30, 2006 as the ~~carrying value~~impact on compensation cost resulting from differences in the standards, such as the determination of the ~~core intellectual property and resolved~~measurement date for share−based payments made to impair the value to A$nil as of June 30, 2005 based on estimated future discounted cash flows. The A-GAAP impairment expense relating to costs capitalised under A-GAAP but expensed under US GAAP has been reversed in the accompanying reconciliation.nonemployees, is de minimis.

~~F-43~~F-41

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

2526. RECONCILIATION TO US GAAP (continued)

c.b.

Intangible assets - Capitalised patent costs

Under ~~A-GAAP, all~~A-IFRS, patent costs ~~associated with~~are recognized at cost less accumulated amortization and impairment, provided the ~~acquisition and development of patents incurred subsequent to~~costs meet the ~~December 1999 revaluation of core intellectual property~~criteria for recognition as an intangible asset (see ~~paragraph (b) above)~~Note 2(g)). Patent costs that do not meet the criteria for recognition as an intangible asset are expensed as incurred. At June 30, 2006 and 2005, Prana had no capitalized patent costs under A-IFRS.

For USU.S. GAAP purposes, up until December 31, 2004, all costs associated with the acquisition of patents, legal costs incurred in connection with successful patent ~~defences~~defenses and costs associated with successful patent applications deemed to be recoverable from the future development of products were ~~capitalised~~capitalized and amortized on a ~~straight-line~~straight−line basis over the estimated useful life of 15 years. Such ~~capitalised~~capitalized costs are tested for recoverability whenever events or circumstances indicate that the carrying amount of the costs may not be recoverable. All other costs associated with patents were expensed as incurred. Effective January 1, 2005, ~~the Company~~Prana changed its USU.S. GAAP accounting policy and expenses all patent costs as incurred.

As a result of the cancellation of a clinical study for the PBT−1 compound ~~PBT-1~~ in April 2005 due to toxicity issues, the consolidated entity reviewed the carrying value of the USU.S. GAAP ~~capitalised~~capitalized patent costs and resolved to impair the ~~capitalised~~capitalized costs to the fair value of A$nil based on estimated future discounted cash flows. ~~The resulting impairment expense has been recognized~~

For the year ended June 30, 2006, there are no GAAP differences in respect to intangible assets. In the ~~accompanying reconciliation.~~future, GAAP differences may arise to the extent that development costs meet the criteria for capitalization under A-IFRS (as development costs are expensed as incurred under U.S. GAAP).

d.c.

Deferred tax effect of US GAAP adjustments

The deferred tax effect of US GAAP adjustments is A$nil because it is more likely than not that the net deferred tax asset will not be realized, and accordingly, the consolidated entity has recorded a 100% valuation allowance against the net deferred tax asset.

~~F-44~~F-42

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

2526. RECONCILIATION TO US GAAP (continued)

e.	~~Statement of cash flows~~

~~The presentation of the Statements of Cash Flows in accordance with A-GAAP differs from that required in accordance with SFAS No. 95:~~ ~~Statement of Cash Flows~~ (“SFAS 95”) under US GAAP. Under A-GAAP, cash held in term deposits with original maturities of less than one year is classified as cash. Under US GAAP, term deposits with original maturities greater than 90 days do not qualify as cash or cash equivalents; rather, such term deposits are classified as current investments. Accordingly, the net change in term deposits with original maturities greater than 90 days is classified as a component of cash flows from investing activities for US GAAP purposes.

~~The following is a reconciliation of the Statements of Cash Flows had the statement been prepared using the presentation requirements of SFAS 95 (A-GAAP measurement principles have been adopted):~~

Years Ended June 30,

2005

2004

2003

Net cash flows used in operating activities, as reported (11,418,813 ) (5,347,420 ) (3,590,613 )

Net cash flows used in investing activities, as reported (50,466 ) (134,362 ) (87,929 )
Less: Term deposits with original maturities greater than 90 days (31,359 ) (1,630,000 ) -
Net cash outflows used in investing activities, as adjusted (81,825 ) (1,764,362 ) (87,929 )

Net cash flows from financing activities, as reported 4,704,757 31,781,165 3,569,792

Net increase/(decrease) in cash held, as adjusted (6,795,881 ) 24,669,383 (108,750 )

Opening cash brought forward 29,580,398 3,463,783 3,585,014

Exchange rate adjustments on foreign currency transactions (1,362,572 ) (182,768 ) (12,481 )

Cash at end of year, as reported 21,453,304 29,580,398 3,463,783

Less: Term deposits with original maturities greater than 90 days (31,359 ) (1,630,000 ) -

Cash at end of year, as adjusted 21,421,945 27,950,398 3,463,783

~~F-45~~

~~PRANA BIOTECHNOLOGY LIMITED~~

~~(A Development Stage Enterprise)~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)~~

25~~RECONCILIATION TO US GAAP (continued)~~

f.d.

Classification differences

Under ~~A-GAAP,~~A-IFRS, the consolidated entity classifies interest income ~~is reported~~ as ~~a component of revenue from ordinary activities.~~revenue. Under US GAAP, interest income is ~~reported~~classified as ~~a component of~~ non-operating income.

Under ~~A-GAAP,~~A-IFRS, amortisation of intangible assets used in research and development projects is reported in depreciation and amortisation expense. Under US GAAP, amortisation of intangible assets used in research and development projects is reported in research and development expense.

~~Under A-GAAP, other expenses from ordinary activities consist of the following:~~

Years Ended June 30,

2005

2004

2003

Travel 432,316 284,105 295,257
Insurance 191,705 53,451 62,403
Marketing 442,920 230,459 198,832
Office overhead costs 322,017 190,488 198,704
Other 13,252 269 13,397

Total
1,402,210 758,772 768,593

~~Under US GAAP, travel, insurance, marketing and office overhead costs are classified as general and administrative costs.~~

g.e.

Additional US GAAP disclosures

Share-based compensation

The following table summarizes the activity of share options issued to directors under the 2004 Employees, Directors and Consultants Share and Option Plan (adopted on November 17, 2004) during the ~~year ended June 30, 2005 and share options issued to employees under the Employee and Consultants Option Plan 2000 during the~~ years ended June 30, ~~2004~~2006 and ~~2003:~~2005:


	Years Ended June 30,															Years Ended June 30,
	2005					2004					2003					2006					2005
	Number of options			Weighted average exercise price ($)		Number of options		Weighted average exercise price ($)			Number of options			Weighted average exercise price ($)		Number of options			Weighted average exercise price ($)		Number of options			Weighted average exercise price ($)
Outstanding at beginning of year		409,667			0.50		145,000		0.50			-			-		2,100,000			0.12		409,667			0.50
Granted		2,100,000			0.12		264,667		0.50			158,274			0.50		2,265,000			nil		2,100,000			0.12
Exercised		-			-		-		-			(13,274	)		0.50		-			-		-			-
Forfeited		-			-		-		-	-		-			-		(37,500	)		nil		-			-
Expired		(409,667	)		0.50		-		-			-			-		-			-		(409,667	)		0.50
Outstanding at end of year (a)		2,100,000			0.12		409,667		0.50			145,000			0.50		4,327,500			0.06		2,100,000			0.12
Exercisable at end of year		500,000			0.50		311,667		0.50			50,000			0.50
Exercisable at end of year (b)																	500,000			0.50		500,000			0.50

(a)

Of the ~~2,100,000~~4,327,500 options outstanding as of June 30, ~~2005, 1,600,000~~2006, 3,827,500 options have an exercise price of A$nil and a ~~weighted average~~ remaining contractual life of ~~six~~four years. The remaining 500,000 options have an exercise price of A$0.50 with a ~~weighted average~~ remaining contractual life of ~~three~~one and half years.

(b)

The 500,000 options exercisable as of June 30, 2006, have an exercise price of A$0.50 with a remaining contractual life of one and half years.

~~F-46~~F-43

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

2526. RECONCILIATION TO US GAAP (continued)

The weighted average grant date fair value of the options issued to directors under the 2004 Employees, Directors and Consultants Share and Option Plan during the ~~year ended June 30, 2005 and options issued to employees under the Employee and Consultants Option Plan 2000 during the~~ years ended June 30, ~~2004~~2006 and ~~2003~~2005 is A$~~0.44,~~0.18 and A$0.44, ~~and A$0.43,~~ respectively. The fair value was estimated at the date of the grant using the Black-Scholes option pricing model for options without market conditions and the Barrier option pricing model was used for options with market conditions, with the following weighted average assumptions:

risk-free interest rate of 5.3% for 2006 and 5.2% for ~~2005, 4.9% for 2004 and 4.3% for 2003;~~2005;

no dividends;

expected volatility of 117.2% for 2006 and 65.7% for ~~2005, 74.3% for 2004 and 82.0% for 2003;~~2005; and

expected life of four years for 2006 and five years for ~~2005 and two years for 2004 and 2003.~~2005.

Risk−free interest rate - This is the government bond rate (having a term that most closely resembles the expected life of the option) in effect at the grant date. The Australian government bond rate has been used for options which convert to full paid ordinary shares and the U.S. government bond rate has been used for options which convert to ADRs.

Dividend yield - Prana has never declared or paid dividends on its common stock and does not anticipate paying any dividends in the foreseeable future.

Expected volatility - Prana estimates expected volatility based on historical volatility over the estimated life of the option and other factors.

Expected life - This is the period of time that the options granted are expected to remain outstanding. This estimate is based primarily on historical trend of option holders to exercise their option near the date of expiry. As a result the expected life is considered to equal the period from grant date to expiry date.

The following table summarizes the activity of share options issued to directors under the 2004 ADS Option Plan (adopted on November 17, 2004) during the ~~year~~years ended June 30, 2006 and 2005. Each option is exercisable for one ADR which equals ten shares. ~~The~~No options have been issued under the 2004 ADS Option Plan ~~was adopted on November 17, 2004 and therefore no options were issued under~~in the ~~plan in prior years.~~year ended June 30, 2006.

	Year ended June 30, 2006					Year ended June 30, 2005
	Number of options over ADRs		Weighted average exercise price ($)			Number of options over ADRs		Weighted average exercise price ($)
Outstanding at beginning of year		380,000		US$5.00			-		-
Granted		-		-			380,000		US$5.00
Exercised		-		-			-		-
Expired		-					-
Forfeited		-		-			-		-
Outstanding at end of year (c)		380,000		US$5.00 (A$6.85	)		380,000		US$5.00 (A$6.57	)

Exercisable at end of year (c)		380,000		US$5.00 (A$6.85	)		380,000		US$5.00 (A$6.57	)

	~~Year ended June 30, 2005~~
	~~Number of options~~ ~~over ADRs~~		~~Weighted average exercise price ($)~~
~~Outstanding at beginning of year~~		-		-
~~Granted~~		~~380,000~~	$	~~US5.00 ($6.57~~	)
~~Exercised~~		-		-
~~Expired~~		-
~~Forfeited~~		-		-
~~Outstanding at end of year (b)~~		~~380,000~~	$	~~US5.00 ($6.57~~	)

~~Exercisable at end of year~~		~~380,000~~	$	~~US5.00 ($6.57~~	)

~~(b)~~(c)

All 380,000 options outstanding and exercisable as of June 30, ~~2005~~2006 have an exercise price of US$5.00 ~~($6.57)~~(A$6.85) and a ~~weighted average~~ remaining contractual life of ~~eight~~six and half years.

The ~~weighted average~~ grant date fair value of the options issued to directors under the 2004 ADS Option Plan during the year ended June 30, 2005 iswas A$3.99. The fair value was estimated at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

risk-free interest rate of 5.4%;

no dividends;

expected volatility of 73.6%; and

expected life of eight years.

The methodology for developing each of the assumptions is the same as that described above.

~~F-47~~F-44

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

2526. RECONCILIATION TO US GAAP (continued)

The following table summarizes the activity of share options issued to consultants during the year ended June 30, ~~2005, 2004~~2006 and ~~2003:~~2005:

	Years Ended June 30,														Years Ended June 30,
	2005					2004					2003				2006					2005
	Number of options			Weighted average exercise price ($)		Number of options			Weighted average exercise price ($)		Number of options		Weighted average exercise price ($)		Number of options			Weighted average exercise price ($)		Number of options			Weighted average exercise price ($)
Outstanding at beginning of year		1,109,500			0.35		815,000			0.51		410,000		0.50		1,212,000			0.50		1,109,500			0.35
Granted		600,000			0.50		1,444,500			0.57		405,000		0.51		413,000			0.50		600,000			0.50
Exercised		-			-		950,000			0.61		-		-		-			-		-			-
Forfeited		-			-		-			-		-		-		-			-		-			-
Expired		(497,500	)		0.52		(200,000	)		0.50		-		-		(200,000	)		0.50		(497,500	)		0.52
Outstanding at end of year ~~(c)~~(d)		1,212,000			0.50		1,109,500			0.35		815,000		0.51		1,425,000			0.50		1,212,000			0.50

Exercisable at end of year		1,045,333			0.50		1,089,500			0.42		815,000		0.50
Exercisable at end of year (d)																1,425,000			0.50		1,045,333			0.50

~~(c)~~(d)

All ~~1,212,000~~1,425,000 options outstanding and exercisable as of June 30, ~~2005,~~2006, have an exercise price of A$0.50 with an average remaining contractual life of ~~two years.~~one year.

The weighted average grant date fair value of options issued to consultants during the years ended June 30, ~~2005, 2004~~2006 and ~~2003~~2005 is A$~~0.27, A$0.30~~0.34 and A$~~0.19,~~0.27, respectively. ~~Refer to Note 25(a), Options~~ ~~issued to consultants for services rendered~~ ~~for the assumptions used to estimate the grant date~~The fair ~~value.~~

~~As previously disclosed, the Company issued 55,000 share options to underwriters on March 1, 2003 which were immediately exercised on the same day. Because the options were exercisable only on~~value was estimated at the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

risk-free interest rate of 5.0% for 2006 and 4.9% for 2005;

no dividends;

expected volatility of 68% for 2006 and 62% for 2005; and

expected life of two years for 2006 and 2005.

During the years ended June 30, 2006 and 2005, the Company ~~estimated the~~granted 825,000 and 1,578,215 shares to consultants, respectively, with a a weighted average grant date fair value of A$~~0.48 based on~~0.56 and A$0.57, respectively.

F-45

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

26.RECONCILIATION TO US GAAP (continued)

During the ~~intrinsic~~year ended June 30, 2005, the Company granted 249,999 shares to directors with a weighted average grant date fair value of A$0.48. No shares were granted to directors during the ~~options.~~year ended June 30, 2006.

~~Refer to Notes 11(b) and 11(d) for information regarding shares and~~The following table summarizes the activity of warrants granted to consultants ~~and directors~~during the year ended June 30, 2005:

	Years Ended June 30,
	2006					2005
	Number of warrants		Weighted average exercise price (USD$)			Number of warrants		Weighted average exercise price (USD$)
Outstanding at beginning of year		320,000		8.00			-		-
Granted		-		-			320,000		8.00
Exercised		-		-			-		-
Forfeited		-		-			-		-
Expired		-		-			-		-
Outstanding at end of year (e)		320,000		8.00			320,000		8.00

Exercisable at end of year (e)		320,000		8.00 (A$10.96	)		320,000		8.00 (A$10,51	)

(e)

All 320,000 warrants outstanding and exercisable as of June 30, 2006 have an exercise price of USD$8.00 with a remaining contractual life of three years.

The weighted average grant date fair value of warrants issued to consultants during the years ended June 30, 2005 ~~2004 and 2003~~is A$1.42. The fair value was estimated at the date of grant using the Black-scholes model with the following weighted average assumptions:

risk-free interest rate of 3.5%;

no dividends;

expected volatility of 71%; and

expected life of four and a half years.

3,000,000 warrants were issued as part of the June 2004 capital raising. No compensation expense has been recognised for these warrants which are exercisable on or before June 4, 2009 at an exercise price of USD$8.00. These warrants are convertible to one ADR which is equal to ten ordinary fully paid shares.

The following table summarizes the activity of share options issued to directors and employees under the Employee and Consultants Option Plan 2000 (adopted on November 22, 2000) during the year ended June 30, 2005. Each option was exercisable for one ordinary share. No options have been issued under the Employee and Consultants Option Plan 2000 for the year ended June 30, 2006 as all options issued under the plan expired on June 30, 2005.

	Year ended June 30, 2005
	Number of options over Ordinary Shares			Weighted average exercise price (A$)
Outstanding at beginning of year		459,667			0.50
Granted		-			-
Exercised		-			-
Expired		(459,667	)		0.50
Forfeited		-			-
Outstanding at end of year		-			-

Exercisable at end of year		-			-

F-46

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

26.RECONCILIATION TO US GAAP (continued)

The following table summarizes the activity of share options issued to consultants under the Employee and Consultants Option Plan 2000 (adopted on November 22, 2000) during the year ended June 30, 2005. Each option was exercisable for one ordinary share. No options have been issued under the Employee and Consultants Option Plan 2000 for the year ended June 30, 2006 as all options issued under the plan expired on June 30, 2005.

	Year ended June 30, 2005
	Number of options over Ordinary Shares			Weighted average exercise price (A$)
Outstanding at beginning of year		437,500			0.50
Granted		-			-
Exercised		-			-
Expired		(437,500	)		0.50
Forfeited		-			-
Outstanding at end of year		-			-

Exercisable at end of year		-			-

Income tax

The consolidated entity has adopted SFAS No. 109: Accounting for Income Taxes (“SFAS 109”) for US GAAP purposes. SFAS 109 requires a “liability approach” to accounting for income taxes, which as it applies to the consolidated entity, is very similar to that adopted under ~~A-GAAP.~~A-IFRS.

Under A-GAAP, the deferred tax asset in respect of income tax losses carried forward disclosed in Note 4 is not recognized unless the benefit is virtually certain of realisation. Under US GAAP, the benefit is not recognized unless realisation is more likely than not.

~~F-48~~F-47

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

2526. RECONCILIATION TO US GAAP (continued)

The components of ~~A-GAAP loss from ordinary activities~~A-IFRS income (loss) before income tax expense consisted of the following for the years ended June 30, ~~2005, 2004~~2006 and ~~2003:~~2005:

	Years ended June 30, 2005									Years ended June 30,
	2005			2004			2003			2006			2005

Australia		(24,933,300	)		(9,885,614	)		(4,584,838	)		(11,793,191	)		(16,019,131	)
Foreign		(75, 297	)		-			-			73,882			(75,297	)

		(25,008,597	)		(9,885,614	)		(4,584,838	)		(11,719,309	)		(16,094,428	)

The components of the US GAAP deferred tax assets and liabilities as of June 30, ~~2005~~2006 and ~~2004~~2005 are as follows:

	June 30, 2005						June 30,
	2005			2004			2006			2005
Deferred tax assets

Net operating loss carryforwards		11,700,174			6,097,949			16,529,172			11,700,174
Foreign exchange losses		410,951			31,500			268,960			410,951
Provision accruals		37,141			15,268			46,031			37,141
Other		57,954			61,550			61,744			57,954

Total gross deferred tax assets		12,206,220			6,174,767			16,905,907			12,206,220


Deferred tax liability		-			-			-			-

Net deferred tax asset		12,206,220			6,206,267			16,905,907			12,206,220


Valuation allowance		(12,206,220	)		(6,206,267	)		(16,905,907	)		(12,206,220	)


Net recorded deferred taxes		-			-			-			-

As of June 30, ~~2005,~~2006, the Company has net operating loss carryforwards in Australia of A$~~38,940,507~~56,353,023 that may be carried forward indefinitely and net operating loss carryforwards in the United States of A$~~60,073~~1,415 that can be carried forward for 20 ~~years~~

~~F-49~~

~~PRANA BIOTECHNOLOGY LIMITED~~

~~(A Development Stage Enterprise)~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)~~

25~~RECONCILIATION TO US GAAP (continued)~~years.

Recently issued but not yet adopted accounting pronouncements

In ~~December 2004,~~May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. ~~123 (revised 2004):~~154: ~~Share-Based Payments~~ (“SFAS 123R”). This statement eliminates the option to apply the intrinsic value measurement provisions of APB 25 to stock compensation awards issued to directors and employees. Rather, SFAS 123R requires companies to measure the cost of director and employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which the director or employee is required to provide services in exchange for the award -- the requisite service period (usually the vesting period). SFAS 123R applies to all awards granted after the required effective date (July 1, 2005 for Prana) and to awards modified, repurchased, or cancelled after that date.

As permitted by SFAS 123, the consolidated entity currently accounts for share-based payments to directors and employees using APB 25, the intrinsic value method. Accordingly, the adoption of the SFAS 123R fair value method may have a significant impact on the consolidated entity’s results of operations, although it will have no impact on its overall financial position. The full impact of the adoption of SFAS 123R cannot be predicted at this time, as it depends on levels of share-based payments for future grants. However, had the consolidated entity adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123, as disclosed in Note 25(a), ~~Share-based compensation -~~~~Options issued to directors and employees for services rendered~~.

~~In December 2004, the FASB issued SFAS No. 153:~~ ~~Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29~~ ~~(“SFAS 153”), which amends APB Opinion No. 29:~~ ~~Accounting for Nonmonetary Transactions~~ to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning after June 15, 2005 (fiscal 2006 for Prana). At this time, management reasonably believes that the adoption of SFAS 153 will not have a material effect on the consolidated entity’s financial position or results of operations.

~~In May 2005, the FASB issued SFAS No. 154:~~ Accounting Changes and Error Corrections (“(“ SFAS 154”), a replacement of APB Opinion No. 20: Accounting Changes and SFAS No. 3: Reporting Accounting Changes in Interim Financial Statements, effective for fiscal years beginning after December 15, 2005 (fiscal 2007 for Prana). SFAS 154 changes the requirements for the accounting for and reporting of a voluntary change in accounting principle as well as the changes required by an accounting pronouncement which does not include specific transition provisions. At this time management reasonably believes that the adoption of SFAS 154 will not have a material effect on the consolidated entity’s financial position or results of operations.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes” (“FIN 48”) as an interpretation of SFAS 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition of tax benefits previously recognized and additional disclosures for unrecognized tax benefits, interest and penalties. The evaluation of a tax position in accordance with this Interpretation begins with a determination as to whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement for recognition in the financial statements. FIN 48 is effective no later than fiscal years beginning after December 15, 2006, and is required to be adopted by the consolidated entity on July 1, 2007. The consolidated entity is currently assessing the impact of the adoption of FIN 48.

F-48

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

26.RECONCILIATION TO US GAAP (continued)

In September 2006, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements (“SAB 108”) which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for companies with fiscal years ending after November 15, 2006 and is required to be adopted by the Company in fiscal 2007. However, early application is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006, filed after the publication of this guidance. The consolidated entity is currently assessing the impact of the adoption of SAB 108.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”).. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This Statement is required to be adopted by the consolidated entity on July 1, 2008. The consolidated entity is currently assessing the impact of the adoption of this Statement.

f.	Development Stage

The Company meets the definition of a development stage enterprise under SFAS No. 7, “Accounting and Reporting by Development Stage Enterprises” (“SFAS 7”). The following additional disclosures, prepared on an A-IFRS basis considering the AASB 1 exemptions, are required in accordance with SFAS 7:

Cumulative consolidated statement of operations from the inception of the development stage (November 11, 1997) to June 30, 2006 - A-IFRS basis:

	Period from inception of development stage (November 11, 1997) to June 30, 2006

Revenues		2,573,069
Other income		6,656,945

Research and development expenses		(24,090,644	)
Research and development expenses - related party		(2,289,419	)
Personnel expenses		(14,824,101	)
Intellectual property expenses		(5,578,538	)
Auditor fees		(897,234	)
Travel expenses		(1,432,346	)
Public relations and marketing expenses		(1,277,963	)
Depreciation expenses		(508,972	)
Amortization expenses		(461,760	)
Other expenses		(4,741,534	)
Other expenses - related party		(242,470	)
Foreign exchange loss		(1,334,367	)
Impairment of intangible assets		(786,240	)

Loss before income tax expense		(49,235,574	)

Income tax expense		-

Net loss		(49,235,574	)

F-49

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

26.RECONCILIATION TO US GAAP (continued)

Cumulative consolidated cash flow statement form the inception of the development stage (November 11, 1997) to June 30, 2006 - A-IFRS basis:

			Period from inception of development stage (November 11, 1997) to June 30, 2006
Cash Flows from Operating Activities
Payments to suppliers and employees				(45,753,872	)
Payments to suppliers and employees - related party				(2,531,889	)
Interest received				2,506,124
Government grant received				3,354,228
NASDAQ reimbursements received				231,304
Neuroscience Victoria monies received				3,093,750
Net cash flows used in operating activities				(39,100,355	)


Cash Flows from Investing Activities
Proceeds from sale of equipment				375
Payments for purchase of equipment				(412,615	)
Net cash flows used in investing activities				(412,240	)

Cash Flows from Financing Activities
Proceeds from issue of shares				46,854,565
Payment of share issue costs				(3,669,074	)
Proceeds from exercise of options				9,812,471
Payment for underwriting costs				(144,000	)
Repayment of borrowings				(2,038,728	)
Net cash flows provided by financing activities				50,815,234

Net decrease in cash and cash equivalents				11,302,639

Opening cash and cash equivalents brought forward				-
Exchange rate adjustments on cash and cash equivalents held in foreign currencies				(1,288,861	)

Closing cash and cash equivalents carried forward	15 (b	)		10,013,778

F-50

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

26.RECONCILIATION TO US GAAP (continued)

Equity issuances from the inception of the development stage (November 11, 1997) to June 30, 2006 - A-IFRS basis:

Date		Number of Shares	Issued Capital
	Balance, November 11, 1997 (Inception)	-	-

November 11, 1997	Issuance of shares to founders	20	20
	Balance, June 30, 1998	20	20

	Balance, June 30, 1999	20	20

December 23, 1999	297 for 1 share split	5,920	-
June 1, 2000	Issuance of shares in connection with private placement	960	960
July 1, 2000	5,000 for 1 share split	34,493,100	-
	Issuance of shares in connection with initial public offering, net of issue costs	16,000,000	7,470,863
	Issuance of shares in connection with exercise of options	5,000	2,500
	Balance, June 30, 2000	50,505,000	7,474,343

February 15, 2001	Issuance of shares in connection with private placements, net of issue costs	6,666,666	4,745,599
April 4, 2001	Non-cash issuance of shares to consultants	50,000	20,000
June 27, 2001	Non-cash issuance of shares to consultants	38,600	28,950
	Balance, June 30, 2001	57,260,266	12,268,892

February 4, 2002	Issuance of shares in connection with exercise of options	134,000	67,000
February 12, 2002	Issuance of shares in connection with exercise of options	2,000	1,000
February 22, 2002	Issuance of shares in connection with exercise of options	76,000	38,000
February 27, 2002	Issuance of shares in connection with exercise of options	40,000	20,000
March 6, 2002	Issuance of shares in connection with exercise of options	90,000	45,000
March 8, 2002	Non-cash issuance of shares to consultants	164,835	115,384
March 8, 2002	Non-cash issuance of shares to consultants	26,959	28,846
March 12, 2002	Issuance of shares in connection with exercise of options	82,690	41,346
March 12, 2002	Issuance of shares in connection with exercise of options	190,000	95,000
March 14, 2002	Issuance of shares in connection with exercise of options	10,000	5,000
March 20, 2002	Issuance of shares in connection with exercise of options	12,000	6,000
March 21, 2002	Issuance of shares in connection with exercise of options	100,000	50,000
March 25, 2002	Issuance of shares in connection with exercise of options	3,000	1,500
April 9, 2002	Issuance of shares in connection with exercise of options	8,000	4,000
April 9, 2002	Issuance of shares in connection with exercise of options	24,500	12,250
April 10, 2002	Issuance of shares in connection with exercise of options	2,500	1,250
April 11, 2002	Issuance of shares in connection with exercise of options	2,500	1,250
April 11, 2002	Issuance of shares in connection with exercise of options	100,000	50,000
May 10, 2002	Issuance of shares in connection with exercise of options	100,000	50,000

F-51

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

26.RECONCILIATION TO US GAAP (continued)

May 23, 2002	Issuance of shares in connection with exercise of options	180,000	90,000
June 16, 2002	Issuance of shares in connection with exercise of options	3,500	1,750
	Balance, June 30, 2002	58,612,750	12,993,468

August 7, 2002	Issuance of shares in connection with exercise of options	4,000	2,000
October 7, 2002	Issuance of shares in connection with exercise of options	13,274	6,637
July 13, 2002	Non-cash issuance of shares to consultants	13,550	27,371
September 18, 2002	Issuance of shares in connection with exercise of options	32,000	16,000
September 30, 2002	Issuance of shares in connection with exercise of options	25,000	12,500
October 15, 2002	Issuance of shares in connection with exercise of options	20,081	10,040
November 20, 2002	Issuance of shares in connection with exercise of options	113,000	56,500
November 22, 2002	Issuance of shares in connection with exercise of options	33,072	16,536
November 25, 2002	Issuance of shares in connection with exercise of options	7,000	3,500
December 4, 2002	Non-cash issuance of shares to consultants	15,318	26,653
December 12, 2002	Issuance of shares in connection with exercise of options	50,000	25,000
January 8, 2003	Issuance of shares in connection with exercise of options	50,000	25,000
January 22, 2003	Issuance of shares in connection with exercise of options	2,620	1,310
January 30, 2003	Issuance of shares in connection with exercise of options	9,700	4,850
January 30, 2003	Non-cash issuance of shares to consultants	118,101	115,739
February 14, 2003	Issuance of shares in connection with exercise of options	499,403	249,702
February 20, 2003	Issuance of shares in connection with exercise of options	483,746	241,873
February 28, 2003	Issuance of shares in connection with exercise of options	2,530,483	1,265,242
March 5, 2003	Issuance of shares in connection with exercise of options	3,107,891	1,553,945
March 15, 2003	Issuance of shares in connection with exercise of options	25,000	12,500
April 3, 2003	Issuance of shares in connection with exercise of options	421,314	210,657
	Underwriting costs		(144,000	)
	Balance, June 30, 2003	66,187,303	16,733,023

August 11, 2003	Issuance of shares in connection with exercise of options	50,000	25,000
August 13, 2003	Issuance of shares in connection with exercise of options	25,000	12,500
August 27, 2003	Issuance of shares in connection with exercise of options	16,000	8,000
August 27, 2003	Non-cash issuance of shares to consultants	70,768	49,538
August 29, 2003	Issuance of shares in connection with exercise of options	34,000	17,000
September 16, 2003	Issue of shares in connection with private placements, net of costs	7,102,853	4,675,019
January 12, 2004	Non-cash issuance of shares to directors	249,999	120,000
January 12, 2004	Non-cash issuance of shares to consultants	67,955	43,491
February 20, 2004	Non-cash issuance of shares to consultants	155,502	85,526
April 8, 2004	Issuance of shares in connection with exercise of options	200,000	140,000
April 15, 2004	Issuance of shares in connection with exercise of options	100,000	70,000
April 16, 2004	Issuance of shares in connection with exercise of options	200,000	100,000
April 16, 2004	Issuance of shares in connection with exercise of options	200,000	140,000
April 20, 2004	Issuance of shares in connection with exercise of options	300,000	150,000
April 22, 2004	Issuance of shares in connection with exercise of options	200,000	100,000
May 10, 2004	Non-cash issuance of shares to consultants	825,000	684,750

F-52

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

26.RECONCILIATION TO US GAAP (continued)

June 1, 2004	Issuance of shares in connection with private placements, net of costs	40,000,000	26,343,646
	Expired options		8,000
	Balance, June 30, 2004	115,984,380	49,505,493

August 9, 2004	Non-cash issuance of shares for settlement of litigation	1,350,000	756,000
September 16, 2004	Non-cash issuance of shares to consultants	49,775	39,616
December 8, 2004	Issuance of shares in connection with exercise of options, net of costs	9,506,666	4,145,811
December 17, 2004	Non-cash issuance of shares to directors	249,999	118,703
February 21, 2005	Non-cash issuance of shares to consultants	178,440	96,822
	Balance, June 30, 2005	127,319,260	54,662,445

August 10, 2005	Issuance of shares in connection with exercise of options, net of issue costs	825,000	435,230
	Balance, June 30, 2006	128,144,260	55,097,675

F-53

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

Note 27. U.S. GAAP Condensed Financial Information

The following financial information is the audited U.S. GAAP condensed financial information of Prana as of and for the years ended June 30, 2006 and 2005.

CONDENSED CONSOLIDATED BALANCE SHEET

(in Australian dollars)

	June 30, 2006			June 30, 2005

Current assets
Cash and cash equivalents		10,013,778			21,453,304
Trade and other receivables		194,161			174,476
Other current assets		110,832			495,165

Total current assets		10,318,771			22,122,945


Property and equipment, net		102,375			166,214

Total assets		10,421,146			22,289,159


Liabilities
Trade and other payables		1,538,358			2,571,181
Current provisions		76,672			78,602

Total current liabilities		1,615,030			2,649,783


Non-current provisions		76,766			45,200

Total liabilities		1,691,796			2,694,983


Commitments and contingencies		-			-

Stockholders’ equity
Common stock		-			-
Additional paid-in capital		62,144,533			61,290,050
Accumulated deficit during the development stage		(53,415,183	)		(41,695,874	)

Total stockholders’ equity		8,729,350			19,594,176


Total liabilities and stockholders’ equity		10,421,146			22,289,159

F-54

PRANA BIOTECHNOLOGY LIMITED

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

Note 27. U.S. GAAP Condensed Financial Information continued

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in Australian dollars, except number of shares)

	Year ended June 30, 2006			Year ended June 30, 2005

Other income:
Government grants		288,173			629,692
Corporate partner income		-			1,125,000
Other		90			6,286
		288,263			1,760,978
Operating expenses:
Research and development		(8,083,208	)		(7,659,390	)
Research and development - related parties		-			(577,757	)
General and administrative		(4,909,841	)		(6,688,164	)
Foreign currency gain/(loss), net		223,454			(1,362,572	)
Impairment of intangible assets		-			(4,164,659	)
Total operating expenses		(12,769,595	)		(20,452,542	)

Loss from operations		(12,481,332	)		(18,691,564	)

Non-operating income:
Interest income		762,023			892,135

Loss before income tax expense		(11,719,309	)		(17,799,429	)

Income tax expense		-			-

Net loss		(11,719,309	)		(17,799,429	)

Loss per share (basis and diluted)		(0.09	)		(0.15	)

Weighted average number of ordinary shares used in computing basic and diluted net loss per share		128,053,601			122,754,061

F-55

SIGNATURES

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


	Prana Biotechnology Limited

Dated: September 29, 2006	By:	/s/ Geoffrey P. Kempler
		Geoffrey P. Kempler
		Chief Executive Officer

~~Dated: December 21, 2005~~

9093

	Year Ended June 30,
	2005			2004			2003			2002			2001
	(in A$, except per share and share data)
A-GAAP:
Revenue from ordinary activities		2,653,113			2,321,227			1,816,478			793,970			516,182
Depreciation and amortization expense		(1,165,227	)		(1,195,006	)		(1,185,973	)		(1,160,595	)		(1,140,658	)
Patents, research and development expense		(7,109,839	)		(4,853,536	)		(1,386,006	)		(1,961,159	)		(2,311,619	)
Patents, research and development expense - related parties		(577,757	)		(379,045	)		(475,289	)		(537,327	)		(64,785	)
Legal expense		(1,047,448	)		(1,650,467	)		(848,660	)		(923,816	)		(252,675	)
Employee benefits expense		(2,438,303	)		(1,060,730	)		(760,980	)		(378,853	)		(122,199	)
Consulting fee expense		(1,607,892	)		(1,706,809	)		(567,730	)		(604,873	)		(306,530	)
Corporate compliance expense		(562,123	)		(419,708	)		(395,604	)		(339,383	)		(196,629	)
Foreign exchange loss		(1,362,572	)		(182,768	)		(12,481	)		-			-
Impairment of intangible assets		(10,388,339	)		-			-			-			-
Other expenses from ordinary activities - related parties		-			(81,470	)		(114,247	)		(30,000	)		(30,000	)
Other expenses from ordinary activities		(1,402,210	)		(677,302	)		(654,346	)		(306,431	)		(230,066	)
Net loss		(25,008,597	)		(9,885,614	)		(4,584,838	)		(5,448,467	)		(4,138,979	)
Loss per share - basic and diluted		(0.20	)		(0.13	)		(0.08	)		(0.10	)		(0.08	)
Weighted average number of ordinary shares outstanding - basic and diluted		122,754,061			75,701,818			61,131,313			57,623,389			53,090,491

U.S. GAAP:
Net loss		(17,675,019	)		(9,208,199	)		(3,244,397	)		(4,728,019	)		(3,048,784	)
Loss per share - basic and diluted		(0.14	)		(0.12	)		(0.05	)		(0.08	)		(0.06	)
Weighted average number of ordinary shares outstanding - basic and diluted		122,754,061			75,701,818			61,131,313			57,623,389			53,090,491

	As at June 30,
	2005			2004			2003			2002			2001
	(in A$ )
A-GAAP:
Cash assets		21,453,304			29,580,398			3,463,783			3,585,014			6,854,873
Working capital		19,427,962			27,041,537			3,093,745			2,840,984			6,454,969
Total assets		22,289,159			41,415,398			16,389,926			17,581,319			22,287,460
Contributed equity		55,405,707			49,505,493			16,741,023			13,001,486			12,276,892
Accumulated deficit during development stage		(50,473,473	)		(25,464,876	)		(15,579,262	)		(10,994,424	)		(5,545,957	)
Total equity		19,594,176			38,702,559			15,823,703			16,668,986			21,392,877

U.S. GAAP:
Total assets		22,289,159			34,197,794			7,944,306			7,231,703			10,298,744
Accumulated deficit during development stage		(41,783,900	)		(24,108,881	)		(14,900,682	)		(11,656,285	)		(6,928,266	)
Contributed equity		61,378,076			55,593,837			22,278,765			18,372,088			16,332,427
Total equity		19,594,176			31,484,956			7,378,083			6,715,803			9,404,161

Month	High		Low
June 2005		0.7810		0.7472
July 2005		0.7686		0.7364
August 2005		0.7754		0.7461
September 2005		0.7767		0.7453
October 2005		0.7644		0.7436
November 2005		0.7491		0.7259

Year Ended June 30,	At Period End	Average Rate	High	Low
2002	0.5614	0.5682	0.5747	0.4858
2003	0.6713	0.5623	0.6729	0.5280
2004	0.6903	0.7139	0.8005	0.6345
2005	0.7620	0.7535	0.7988	0.6852
2006	0.7301	0.7478	0.7792	0.7014

Month	High	Low
April 2006	0.7604	0.7109
May 2006	0.7792	0.7465
June 2006	0.7652	0.7269
July 2006	0.7674	0.7377
August 2006	0.7715	0.7551
September 2006	0.7720	0.7463

				Page
PART I				15
ITEM 1.		IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS		15
ITEM 2.		OFFER STATISTICS AND EXPECTED TIMETABLE		15
ITEM 3.		KEY INFORMATION		15
A.		Selected Financial Data	1	5
B.		Capitalization and Indebtedness	3	8
C.		Reasons for the Offer and Use of Proceeds	3	8
D.		Risk Factors	3	8
ITEM 4.		INFORMATION ON THE COMPANY		1419
A.		History and Development of the Company	14	19
B.		Business Overview	17	22
C.		Organizational Structure	31	34
D.		Property, Plants and Equipment	31	34
ITEM 4A.		UNRESOLVED STAFF COMMENTS		34
ITEM 5.		OPERATING AND FINANCIAL REVIEW AND PROSPECTS		3134
A.		Operating Results	32	35
B.		Liquidity and Capital Resources	43	45
C.		Research and Development, Patents and Licenses	46	50
D.		Trend Information	50	54
E.		Off-Balance Sheet Arrangements	50	54
F.		Tabular Disclosure of Contractual Obligations	50	54
ITEM 6.		DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		5055
A.		Directors and Senior Management	50	55
B.		Compensation	53	58
C.		Board Practices	55	59
D.		Employees	61	64
E.		Share Ownership	61	65
ITEM 7.		MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		6670
A.		Major Shareholders	66	70
B.		Related Party Transactions	67	71
C.		Interests of Experts and Counsel	67	71
ITEM 8.		FINANCIAL INFORMATION		6871
A.		Financial Statements and Other Financial Information	68	71
B.		Significant Changes	68	72
ITEM 9.		THE OFFER AND LISTING		6972
A.		Offer and Listing Details	69	72
B.		Plan of Distribution	70	74
C.		Markets	70
D.	~~Selling Shareholders~~	7074

D.		Selling Shareholders		74
E.		Dilution	71	74
F.		Expenses of the Issue	71	74
ITEM 10.		ADDITIONAL INFORMATION		7174
A.		Share Capital	71	74
B.		Memorandum and Articles of Association	71	74
C.		Material Contracts	71	74
D.		Exchange Controls	73	76
E.		Taxation	74	77
F.	~~Dividend~~	Dividends and Paying Agents	81	85
G.		Statement by Experts	81	85
H.		Documents on Display	81	86
I.		Subsidiary Information	82	86
ITEM 11.		QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS		8286
ITEM 12.		DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		8387
PART II
~~PART II~~	8387
ITEM 13.		DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		8387
ITEM 14.		MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		8387
ITEM 15.		CONTROLS AND PROCEDURES		8387
ITEM 16.		RESERVED		8488
ITEM 16A.		AUDIT COMMITTEE FINANCIAL EXPERT		8488
ITEM 16B.		CODE OF ETHICS		8488
ITEM 16C.		PRINCIPAL ACCOUNTANT FEES AND SERVICES		8488
ITEM 16D.		EXEMPTIONS FROM THE LISTING ~~REQUIREMENTS AND~~ STANDARDS FOR AUDIT ~~COMMITTEE~~COMMITTEES		8589
ITEM 16E.		~~PURCHASE~~PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND ~~AFFILIATES AND~~AFFILIATED PURCHASERS		8589
ITEM 17.		FINANCIAL STATEMENTS		8589
ITEM 18.		FINANCIAL STATEMENTS		8690
ITEM 19.		EXHIBITS		8690
SIGNATURES				9093

Balance Sheet Data:
	As at June 30,
	2006			2005			2004			2003			2002
	(in A$ )
A-IFRS:
Cash and cash equivalents		10,013,778			21,453,304			-			-			-
Working capital		8,780,413			19,427,962			-			-			-
Total assets		10,421,146			22,289,159			-			-			-
Net assets		8,729,350			19,594,176			-			-			-
Issued capital		55,097,675			54,662,445			-			-			-
Share based payment reserves		2,867,249			2,447,996			-			-			-
Accumulated deficit during development stage		(49,235,574	)		(37,516,265	)		-			-			-
Total equity		8,729,350			19,594,176			-			-			-

U.S. GAAP:
Total assets		10,421,146			22,289,159			34,197,794			7,944,306			7,231,703
Accumulated deficit during development stage		(53,415,183	)		(41,695,874	)		(24,108,881	)		(14,900,682	)		(11,656,285	)
Contributed equity		62,144,533			61,290,050			55,593,837			22,278,765			18,372,088
Total equity		8,729,350			19,594,176			31,484,956			7,378,083			6,715,803


Invention		Status	Comments
~~Amyloid Precursor Protein (“APP”) Modulators for use in Alzheimer’s disease, entitled,~~ “A method for assaying and treating Alzheimer’s ~~Disease~~”Disease” ~~Inventor:~~Filed: November 12, 1992 Applicant: The University of Melbourne Assigned to Prana Biotechnology Limited	~~Five patents~~	Patents granted ~~two~~ in Australia, ~~and one in~~ Europe, Japan and the United States. ~~An application~~Application in ~~the United States and~~ Canada is under examination. A divisional patent in is under appeal the United States.	The invention includes claims directed to the use of specified modulators of cation interaction with ~~APP~~amyloid precursor protein and the use of these agents in the treatment of Alzheimer’s disease. Granted European claims include the use of zinc binding agents for oral administration in the treatment of Alzheimer’s disease.

~~Metal binding domain inhibitors of Β-amyloid, entitled,~~ “Beta amyloid peptide ~~inhibitors~~”inhibitors” ~~Inventor:~~Filed: July 21, 2000 Applicant: Biomolecular Research Institute and University of Melbourne Assigned to Prana Biotechnology Limited	~~This~~	International (PCT) application has entered national phase in Europe, Canada, Japan and the United ~~States and Australia. Currently accepted~~States. A patent has been granted in Australia and ~~pending elsewhere.~~examination is expected in the other jurisdictions.	The invention encompasses claims to agents capable of inhibiting binding of specified metal ions to the N-terminus of ~~Β-amyloid~~beta-amyloid and the use of these agents in the treatment of amyloid related conditions including Alzheimer’s disease.

~~A screen for Β-amyloid formation and inhibitors, entitled,~~ “An An in vitro system for determining the formation of Ab ~~Amyloid~~” Amyloid” ~~Inventor:~~Filed: October 19, 1994 Applicant: The General Hospital Corporation Licensed to Prana Biotechnology Limited	~~One patent~~	Patents have been granted in the United States and Japan. ~~Examination is pending for a further Japanese~~Further patent applications in Japan and ~~Canadian application.~~Canada have examinations requested.	The invention is directed to an assay for the formation of ~~Β-amyloid~~beta-amyloid in a biological sample and inhibitors of ~~Β-amyloid~~beta-amyloid formation.

~~A differential screen for 40/42 Β-amyloid, entitled,~~ “A diagnostic assay for Alzheimer’s ~~Disease~~”Disease” ~~Inventor:~~Filed: October 19, 1994 Applicant: The General Hospital Corporation Licensed to Prana Biotechnology Limited	~~One patent~~	Two patents granted in the United States and ~~a further United States application has been issued. Canadian application has been allowed.~~one patent granted in Canada.	The invention is directed to an antibody based diagnostic assay for the detection and quantification of ~~Β-amyloid~~beta-amyloid species.

~~Known metal binding agents for treatment of Amyloidosis, entitled,~~ “Identification of agents for use in the treatment of Alzheimer’s ~~Disease~~”Disease” ~~Inventor:~~Filed: March 11, 1998 Applicant: The General Hospital Corporation Licensed to Prana Biotechnology Limited	~~Patent~~	Patents have been granted in Australia and ~~in Japan. Examination is pending~~United States. Applications are under examination in Japan, Europe and Canada. ~~A United States application awaits expected allowance.~~	The invention is directed to the use of specified metal binding agents to reduce ~~Β-amyloid~~beta-amyloid mediated neurotoxicity and assays to identify agents capable of modifying neurotoxic properties of ~~Β-amyloid. The accepted case in Australia is under opposition.~~beta-amyloid.

~~Clioquinol for treatment of Alzheimer’s disease, entitled,~~ “Use of Clioquinol for the therapy of Alzheimer’s ~~Disease~~”Disease” ~~Inventor:~~Filed: April 6, 2005 Applicant: The General Hospital ~~Corporation/~~Corporation Licensed to Prana Biotechnology Limited		A U.S. continuation application is currently under examination.	The invention includes claims directed to the use of ~~Clioquinol~~clioquinol for the treatment of Alzheimer’s disease and ~~Clioquinol~~clioquinol pharmaceutical compositions.


~~Clioquinol and known metal binding agents for use in Amyloidosis, entitled,~~ “Agents for use in the treatment of Alzheimer’s ~~Disease~~”Disease” ~~Inventor:~~Filed: March 11, 1999 Applicant: The General Hospital Corporation Licensed to Prana Biotechnology Limited	~~Granted patents~~	Patents granted in Australia and the ~~US.~~United States. A further U.S. continuation application is under examination. Examination is pending in Canada and Japan. ~~The case~~Patent has been allowed in ~~Europe.~~Europe and is entering national phases in the United Kingdom, Ireland, Germany, France, Italy and Belgium.	The invention is directed to compositions containing ~~Clioquinol~~clioquinol and known metal binding agents and their use in the treatment of amyloid related diseases. ~~The accepted case in Australia is under opposition.~~

~~Screen for agents which alter Β-amyloid neurotoxic properties, entitled,~~ “Method for Screening drugs useful for treating Alzheimer’s ~~Disease~~”Disease” ~~Inventor:~~Filed: April 29, 1999 Applicant: The General Hospital Corporation Licensed to Prana Biotechnology Limited	~~A continuation-in-part application~~	Continuation-in-part patent has been granted in the United States and a further U.S. divisional ~~case has been filed.~~patent application is under examination.	The invention is primarily directed to specified assays that identify agents capable of modifying the neurotoxic properties of ~~Β-amyloid.~~beta-amyloid.

~~Immunotherapy, entitled,~~ “Neurotoxic ~~Oligomers~~”Oligomers” ~~Inventor:~~Filed: June 28, 2000 Applicants: Prana Biotechnology Limited and The General Hospital Corporation ~~and Prana~~	~~The~~	International (PCT) ~~Application~~application has entered national ~~phase~~phase. Patent has been granted in ~~Australia, Canada, Europe, Japan, NZ, China and~~Australia. An application is under examination in the United States, New Zealand and China. Applications in Canada and Japan await request for examination. An application in Europe is pending examination.	The invention is directed to an immunotherapy strategy using tyrosine cross-linked protein aggregates. The ~~immunotherapeutic~~ approach may be used in the treatment of Alzheimer’s disease and other amyloid related conditions.

~~Cataracts, entitled,~~ “Methods for the Identification of Agents that Inhibit or Promote Cataracts and Uses ~~thereof~~”thereof” ~~Inventor:~~Filed: August 18, 2000 Applicant: The General Hospital ~~Corporation~~Corporation. Licensed to Prana Biotechnology Limited	~~The~~	International (PCT) ~~Application~~application has entered national ~~phase~~phase. Applications in ~~Australia, Europe, Japan and~~ the United States, Australia and ~~is pending~~Europe are under examination. Applications in Japan and Canada await request for examination.	The invention is directed to assays for the detection of agents useful in the treatment of ~~cataract~~age-related cataracts and a method of treatment utilizing specified metal chelators.

~~APP Copper Binding Domain agonists, entitled,~~ “Methods of screening for inhibitors of Alzheimer’s ~~Disease~~”disease” ~~Inventor:~~Filed: December 12, 2000 Applicant: The General Hospital Corporation Licensed to Prana Biotechnology Limited	~~This case~~	Application has entered national phase in the United States and ~~is pending examination.~~claims for examination have been elected.	The invention encompasses claims to the identification of agents functioning as copper agonists and the use of the agents in the treatment of amyloid related conditions including Alzheimer’s disease.

~~8-OHq role in cognition, entitled,~~ “Treatment of Neurodegenerative ~~Conditions~~”Conditions” ~~Inventor:~~Filed: April 3, 2003 Applicant: Prana Biotechnology Limited	~~Filed as a provisional application~~	Applications have entered national phase in the United States, ~~continued as an International (PCT) Application pending national phase entry.~~China and Australia. Each await request for examination.	The invention encompasses the utility of the 8-hydroxyquinoline MPAC class in the treatment of neurodegenerative cognitive changes.

~~8-OHq MPAC class, entitled,~~ “8-Hydroxyquinoline ~~derivatives~~”derivatives” ~~Inventor:~~Filed: July 16, 2003 Applicant: Prana Biotechnology Limited		International (PCT) ~~Application that~~application has entered national phase in 14the United States, Europe, China, Japan, Australia, Canada and eight other global jurisdictions.	The invention is directed to chemical structures of the 8-hydroxyquinoline MPAC class and their utility in the treatment of neurological conditions.


~~‘F4’ MPAC compounds, entitled, ‘~~“Neurologically- Active ~~Compounds’~~Compounds” ~~Inventor:~~Filed: April 1, 2005 Applicant: Prana Biotechnology Limited		International (PCT) ~~Application that is in international phase.~~application designating, United States, Europe, China, Japan, Australia, Canada and eight other global jurisdictions.	The invention is directed to ‘F4’ MPAC chemical structures and their utility in the treatment of neurological conditions.
~~‘F4 Grp 1’ MPAC compounds~~ ‘~~Neurologically- Active Compounds’~~ ~~Inventor: Prana~~	~~Australian provisional application~~	~~The invention is directed to ‘F4’ MPAC chemical structures and their utility in the treatment of neurological conditions.~~
~~MPAC compounds, entitled, ‘~~~~Compound V’~~. ~~Inventor: Prana~~	~~Australian provisional application~~	~~The invention is directed to ‘compound V’ MPAC chemical structures and their utility in the treatment of neurological conditions.~~
~~MPAC compounds, entitled, ‘~~~~Compound VI’~~. ~~Inventor: Prana~~	~~Australian provisional application~~	~~The invention is directed to ‘Compound VI’ MPAC chemical structures and their utility in the treatment of neurological conditions.~~
~~‘F2’ MPAC compounds, entitled,~~ ~~‘Neurologically-Active Compounds’~~ ~~Inventor: Prana~~	~~Australian provisional application~~	~~The invention is directed to ‘F2’ MPAC chemical structures and their utility in the treatment of neurological conditions.~~
~~An agent for metal binding in Alzheimer’s Disease, entitled, ‘~~“Use of Phanquinone for the treatment of Alzheimer’s ~~Disease~~’Disease”. ~~Inventor:~~Filed: October 19, 2000 Applicant: Prana Biotechnology Limited	~~A U.S.~~	Patent has been granted ~~patent and pending Japanese application.~~in the United States. An application in Japan is under examination.	This invention is directed to the use of Phanquinone for the treatment of Alzheimer’s disease.

~~An agent for metal binding to reduce memory impairment, entitled,~~ ‘Use of Phanquinone for the treatment of memory ~~impairment~~’impairment”. ~~Inventor:~~Filed: April 3, 2003 Applicant: Prana Biotechnology Limited	~~Pending Japanese and U.S. applications.~~	Patent has been granted in the United States. An application in Japan is under examination.	This invention is directed to the use of Phanquinone for the treatment of memory impairment.

~~An agent for metal binding in Alzheimer’s Disease, entitled, ‘~~“Use of Clioquinol for the treatment of Alzheimer’s ~~Disease~~’Disease”. ~~Inventor:~~Filed: February 13, 1998 Applicant: Prana Biotechnology Limited	~~A U.S.~~	Patent has been granted ~~patent and pending Japanese application.~~in the United States. An application in Japan is under examination.	This invention is directed to the use of ~~Clioquinol~~clioquinol for the treatment of Alzheimer’s disease.

~~Pharmaceutical compositions, entitled, ‘~~“Pharmaceutical compositions of Clioquinol with B12 for therapeutic ~~use’~~use”. ~~Inventor:~~Filed: February 13, 1998 Applicant: Prana Biotechnology Limited.	~~A U.S.~~	Patent has been granted ~~patent.~~in the United States. An application in Japan is under examination.	This invention is directed to clioquinol pharmaceutical compositions ~~for the treatment of neurological disease.~~comprising B12.

~~An agent for metal binding in Parkinson’s disease, entitled, ‘~~“Use of Clioquinol for the treatment of Parkinson’s ~~Disease~~’Disease”. ~~Inventor:~~Filed: 13 February 1998 Applicant: Prana Biotechnology Limited.	~~A U.S. granted patent.~~	Patent in the United States has been granted. An application in Japan is under examination.	This invention is directed to the use of ~~Clioquinol~~clioquinol for the treatment of Parkinson’s disease.

“A method of prophylaxis or treatment of cardiovascular indications” Filed: 24 August 2005 Applicant: Prana Biotechnology Limited		Australian Provisional application has been filed.	This invention is directed to MPAC compounds for the treatment of cardiovascular disease.

“A method of prophylaxis or treatment and agents for same”. Filed: 22 June 2006 Applicant: Prana Biotechnology Limited		Australian Provisional application has been filed.	This invention is directed to MPAC compounds for treating selected cancers.

Furniture and fittings	5-33	%
Computer equipment	33	%
Laboratory equipment	10-33	%
Leasehold improvements	33	%

		Page
Index to Consolidated Financial Statements		F-0
Report of Independent Registered Public Accounting Firm		F-1
Consolidated ~~Statements of Financial Position~~Balance Sheets		F-2
Consolidated Statements of ~~Financial Performance~~Operations		F-3
Consolidated ~~Statements of~~ Cash ~~Flows~~Flow Statements		F-4
Consolidated Statements of Changes in Stockholders’ Equity		F-5
Notes to Consolidated Financial Statements	~~F-7~~	F-6


2.1		Deposit Agreement dated March 23, 2001, among the Registrant and the Bank of New York, as Depositary, and owners and holders of American Depositary Receipts issued thereunder, including the Form of American Depositary Receipts (2)


4.1	~~Research Funding and Intellectual Property Assignment Agreement dated December 1, 2000, between the Registrant and the University of Melbourne(1)~~

	~~4.4~~
4.2		License Agreement dated January 1, 2001, between the Registrant and The General Hospital Corporation (1)

	~~4.5~~
4.3		Variation Agreement dated August 8, 2001, between the Registrant and The General Hospital Corporation, which amends the License Agreement dated January 1, 2001, between the parties (1)

	~~4.6~~
4.4		Second Amendment to Exclusive License Agreement dated January 1, 2001, between the Registrant and The General Hospital Corporation, dated March 15, 2004, between the between the Registrant and The General Hospital Corporation (6)

	~~4.7~~
4.5		Agreement for Services dated February 7, 2000, between the Registrant and Prof. Colin Masters (1)

	~~4.8~~
4.6		Agreement to Provide Accounting, Administration, Corporate Advice and Company Secretarial Services dated February 23, 2000, between the Registrant and Malvern Administrative Services (now named The CFO solution) (1)


~~4.13~~4.8		Letter agreement dated January 6, 2004, between the Registrant and Kendle Pty Ltd. regarding strategic alliance ~~(9)~~(7)


~~4.15~~4.9	~~Project Agreement dated March 11, 2004, between the Registrant and Neurosciences Victoria Ltd. (11)~~

	~~4.18~~
4.10		Registration Rights Agreement dated April 27, 2004, among the Registrant and the investors signatory thereto (4)


~~4.21~~4.12		Settlement Agreement dated July 28, 2004, among the Registrant, P.N. Gerolymatos S.A, or PNG, Mr. Gerolymatos, The General Hospital Corporation of Massachusetts, or The GHC, Professor Ashley Bush, Dr. Rudolph Tanzi and Dr. Robert Cherny and the ancillary agreements of even date therewith exhibited thereto, including the Patent Assignment and Settlement Agreement among the Registrant and PNG, Patent Rights Security Agreement among the Registrant and PNG and the Derivatives Agreement among the Registrant and PNG ~~(13)~~(8)

	~~4.22~~
4.13		Prana Biotechnology Limited, Employees and Consultants Option Plan 2000 (1)

	~~4.23~~
4.14		Prana Biotechnology Limited, 2004 American Depository Share (ADS) Option Plan ~~(14)~~(9)

	~~4.24~~
4.15		Prana Biotechnology Limited, 2004 Employees’, Directors’ and Consultants’ Share and Option Plan ~~(15)~~(10)

	~~4.25~~
4.16		Employment Agreement dated June 15, 2005, among the Registrant and Mr. Kempler (11)


4.17		Employment Agreement effective as of August 7, 2006 among the Registrant and Dr. Ross Murdoch

8.1		List of Subsidiaries of the Registrant


12.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as ~~amended.~~amended


12.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as ~~amended.~~amended


13.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002


13.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

15.1		Consent of Deloitte Touche Tohmatsu, Independent Registered Public Accounting Firm

		Page Number

Report of Independent Registered Public Accounting Firm			F-1

Consolidated Balance Sheets			F-2

Consolidated Statements of ~~Financial Position~~Operations	~~F-2~~		F-3

Consolidated Cash Flow Statements ~~of Financial Performance~~	~~F-3~~		F-4

~~Consolidated Statements of Cash Flows~~	~~F-4~~

Consolidated Statements of Changes in Stockholders’ Equity			F-5

Notes to Consolidated Financial Statements	~~F-7~~		F-6

			Years ended June 30,									Period from
												Inception (November 11, 1997)
			2005			2004			2003			to June 30, 2005
	Notes
Revenue from ordinary activities		2		2,653,113			2,321,227			1,816,478			8,179,728

Depreciation and amortization expense		3		(1,165,227	)		(1,195,006	)		(1,185,973	)		(6,502,436	)
Patents, research and development expense		3		(7,109,839	)		(4,853,536	)		(1,386,006	)		(17,797,596	)
Patents, research and development expense - related parties		3, 21		(577,757	)		(=(379,045	)		(475,289	)		(2,280,699	)
Legal expense				(1,047,448	)		(1,650,467	)		(848,660	)		(4,736,148	)
Employee benefits expense				(2,438,303	)		(1,060,730	)		(760,980	)		(4,684,831	)
Consulting fee expense				(1,607,892	)		(1,706,809	)		(567,730	)		(4,973,832	)
Corporate compliance expense				(562,123	)		(419,708	)		(395,604	)		(1,989,446	)
Foreign exchange loss				(1,362,572	)		(182,768	)		(12,481	)		(1,557,821	)
Impairment of intangible assets				(10,388,339	)		-			-			(10,388,339	)
Other expenses from ordinary activities - related parties		21		-			(81,470	)		(114,247	)		(268,217	)
Other expenses from ordinary activities				(1,402,210	)		(677,302	)		(654,346	)		(3,473,836	)

Loss from ordinary activities before income tax expense				(25,008,597	)		(9,885,614	)		(4,584,838	)		(50,473,473	)

Income tax expense relating to ordinary activities		4		-			-			-			-

Net loss		12(b)		(25,008,597	)		(9,885,614	)		(4,584,838	)		(50,473,473	)

Loss per share (basic and diluted)		18		(0.20	)		(0.13	)		(0.08	)		N/A