**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 20-F**

 

**o****                                 REGISTRATIONSTATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**OR**

 

**x****                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the fiscal year ended June 30,2007**

 

**OR**

 

**o****                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**OR**

 

**o****                                 SHELLCOMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Commissionfile number 000-29228**

 

**PROGEN PHARMACEUTICALS LIMITED**

(Exact name ofRegistrant as specified in its charter)

 

**NotApplicable**

 (Translation of Registrant’s Name intoEnglish)

 

**Australia**

(Jurisdiction ofincorporation or organization)

 

**16 BensonStreet, Toowong, Queensland 4066, Australia**

(Address ofPrincipal Executive Offices)

 

**+61 73842 3333**

(Registrant’stelephone number including country and area code)

 

Securities registered orto be registered pursuant to Section 12(b) of the Act.

 

| **Title of each Class** | ** ** | **Name of each Exchange on which Registered** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|
| None                                   |       | None                                                                        |

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act,

 

**Title ofClass**

**OrdinaryShares**

** Warrants**

Securities forwhich there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 

**None**

(Title of Class)

 

| Indicate the number of outstanding shares of each of  the issuer’s classes of capital or common stock as of the close of the period  covered by the annual report:                               Ordinary Shares:  59,416,427 (as of  June 30, 2007) |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                      | Warrants:              2,970,538  (as of June 30, 2007) |

 

Indicate by checkmark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

Yes  o   No  x

 

If this report is anannual or transition report, indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.

Yes  o   No  x

 

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  x   No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, oran non-accelerated filer. See the definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check markwhich financial statement item the registrant has elected to follow.

Item 17  o    Item 18  x

 

If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

 

 

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**TABLE OF CONTENTS**

 
| ** **                                                                                                                           | ** **                                                      | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------|----------|
|                                                                                                                                 |                                                            |     |
| **ITEM 1.**                                                                                                                          | **IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISERS**      |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 2.**                                                                                                                          | **OFFER STATISTICS AND  EXPECTED TIMETABLE**                    |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 3.**                                                                                                                          | **KEY  INFORMATION**                                            |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM  3.A**                                                                                                                        | **SELECTED  FINANCIAL DATA**                                    |     |
| **ITEM 3.D.**                                                                                                                        | **RISK  FACTORS**                                               |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 4.**                                                                                                                          | **INFORMATION ON  THE COMPANY**                                 |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 4.A.**                                                                                                                        | **HISTORY AND  DEVELOPMENT OF THE COMPANY**                     |     |
| **ITEM 4.B.**                                                                                                                        | **BUSINESS OVERVIEW**                                           |     |
| **ITEM 4.D.**                                                                                                                        | **PROPERTY,  PLANTS AND EQUIPMENT**                             |     |
| **ITEM 5.A.**                                                                                                                        | **OPERATING RESULTS**                                           |     |
| **ITEM 5.B.**                                                                                                                        | **LIQUIDITY  AND CAPITAL RESOURCES**                            |     |
| **ITEM 5.C.**                                                                                                                        | **RESEARCH  AND DEVELOPMENT, PATENTS AND LICENSES, ETC.**       |     |
| **ITEM 5.D.**                                                                                                                        | **TREND INFORMATION**                                           |     |
| **ITEM 5.E.**                                                                                                                        | **OFF-BALANCE  SHEET ARRANGEMENTS**                             |     |
| **ITEM 5.F.**                                                                                                                        | **TABULAR  DISCLOSURE OF AGGREGATE CONTRACTUAL OBLIGATIONS**    |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 6.**                                                                                                                          | **DIRECTORS,  SENIOR MANAGMENT AND EMPLOYEES**                  |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 6.A.**                                                                                                                        | **DIRECTORS  AND SENIOR MANAGEMENT**                            |     |
| **ITEM 6.B.**                                                                                                                        | **COMPENSATION**                                                |     |
| **ITEM 6.C.**                                                                                                                        | **BOARD PRACTICES**                                             |     |
| **ITEM 6.D.**                                                                                                                        | **EMPLOYEES**                                                   |     |
| **ITEM 6.E.**                                                                                                                        | **SHARE OWNERSHIP**                                             |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 7.**                                                                                                                          | **MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**          |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEMS 7.A.**                                                                                                                       | **MAJOR SHAREHOLDERS**                                          |     |
| **ITEM 7.B.**                                                                                                                        | **RELATED  PARTY TRANSACTIONS**                                 |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 8.**                                                                                                                          | **FINANCIAL  INFORMATION**                                      |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 8.A.**                                                                                                                        | **FINANCIAL  STATEMENTS AND OTHER FINANCIAL INFORMATION**       |     |
| **ITEM 8.B.**                                                                                                                        | **SIGNIFICANT  CHANGES**                                        |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 9.**                                                                                                                          | **THE OFFER AND  LISTING**                                      |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 9.C.**                                                                                                                        | **MARKETS**                                                     |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 10.**                                                                                                                         | **ADDITIONAL  INFORMATION**                                     |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 10.B.**                                                                                                                       | **MEMORANDUM  AND ARTICLES OF ASSOCIATION**                     |     |
| **ITEM 10.C.**                                                                                                                       | **MATERIAL CONTRACTS**                                          |     |
| **ITEMS 10.D.**                                                                                                                      | **EXCHANGE CONTROLS**                                           |     |
| **ITEM 10.E.**                                                                                                                       | **TAXATION**                                                    |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 11.**                                                                                                                         | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 12.**                                                                                                                         | **DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES**     |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 13.**                                                                                                                         | **DEFAULTS,  DIVIDEND ARREARAGES AND DELIQUENCIES**             |     |
| ** **                                                                                                                           | ** **                                                      |     |
| **ITEM 14.        MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS** |                                                            |
|                                                                                                                                      |                                                                 |          |  |

 

2

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| **ITEM 15.**  | **CONTROLS AND  PROCEDURES**                                                |   |
|---------------|-----------------------------------------------------------------------------|--------|
| ** **    | ** **                                                                  |   |
| **ITEM 16.**  | **[RESERVED]**                                                              |   |
| ** **    | ** **                                                                  |   |
| **ITEM 16A.** | **AUDIT  COMMITTEE FINANCIAL EXPERT**                                       |   |
| ** **    | ** **                                                                  |   |
| **ITEM 16B.** | **CODE OF ETHICS**                                                          |   |
| ** **    | ** **                                                                  |   |
| **ITEM 16C.** | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES**                                 |   |
| ** **    | ** **                                                                  |   |
| **ITEM 16D.** | **EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**             |   |
| ** **    | ** **                                                                  |   |
| **ITEM 16E.** | **PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS** |   |
| ** **    | ** **                                                                  |   |
| **ITEM 17.**  | **FINANCIAL  STATEMENTS**                                                   |   |
| ** **    | ** **                                                                  |   |
| **ITEM 18.**  | **FINANCIAL  STATEMENTS**                                                   |   |
| ** **    | ** **                                                                  |   |
| **ITEM 19.**  | **EXHIBITS**                                                                |   |

 

References in thisannual report to “Progen,” “we,” “our”, “us” and “the Company” refer to ProgenPharmaceuticals Limited.

 

All references todollars or $ are to the currency of the United States of America; andreferences to Australian dollars or A$ are to the currency of Australia.

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

This annual reportcontains forward-looking statements that involve risks and uncertainties.    Forward-looking statements relate to futureevents or our future financial performance and include information concerningour possible or assumed future results of operations, business strategies,financing plans, competitive position, industry environment, potential growthopportunities, the effect of future regulation and the effects of competition.These statements are based on our current expectations, beliefs andassumptions, and on information currently available to our management. In somecases, you can identify forward-looking statements by the use of words suchas  “anticipate,” “expect,” “intend,” “plan,”“seek,” “may,” “will,” “should,” “could,” “would,” “believe,” “estimate,” “project,”“predict,” “potential,” “continue,” or the negative of such terms or similarexpressions.    These forward-lookingstatements are only predictions and involve known and unknown risks, uncertaintiesand other factors which may cause our actual results, levels of activities,performance and other factors to be materially different from those anticipatedin such forward-looking statements. Factors that might cause such differences include the risks discussed in“Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company”and “Item 5. Operating and Financial Review and Prospects,” as well as thosediscussed elsewhere in this annual report.

 

Certain statements contained inthis report may not be based on historical facts and are “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. In particular, certain statements included herein under “Item 3.Key Information” and “Item 5. Operating and Financial Review and Prospects,”including without limitation, those concerning the Company’s strategy andcompetitive strengths, the Company’s expectations and plans, the Company’scollaborative revenues, research and development and general and administrativeexpenses, contain certain forward-looking statements concerning the Company’soperations, performance and financial condition. Such statements may generally,but not always, be identified by their use of words such as “anticipates,” “expects,”or “believes.” Although the Company believes that the expectations reflected insuch forward-looking statements are reasonable, no assurance can be given thatsuch expectations will prove in hindsight to be correct. Many important factorscould cause actual results to differ materially from such expectationsincluding, among others, those set forth in “Item 3. Key Information—RiskFactors” and “Item 4. Information on the Company—Australian GovernmentRegulation and U.S. Government Regulation” (collectively, the “Risk Factors”).All subsequent written and oral forward-looking statements attributable to theCompany or persons acting on its behalf are expressly qualified by the RiskFactors. Other relevant risks may be detailed from time to time in the Company’spress releases and filings with the Securities and Exchange Commission. Weundertake no obligation to update these forward-looking statements to reflectevents or circumstances that occur after the date of this report.

 

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**PART I**

 

# **ITEM 1.****                                                    ****IDENTITY OF DIRECTORS, SENIORMANAGEMENT AND ADVISERS**

#  

Not applicable.

 

# **ITEM 2.****                                                    ****OFFER STATISTICS AND EXPECTEDTIMETABLE**

#  

Not applicable.

 

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# **ITEM 3.****                                                    ****KEY INFORMATION**

#  

# **Item 3.A****                                                 ****Selected Financial Data**

##  

The followingselected financial data for the five years ended June 30, 2007 should beread in conjunction with “Item 5. Operating and Financial Review and Prospects”below and our financial statements and related notes contained elsewhere inthis annual report. Our financial statements and related notes have beenprepared in accordance with U.S. GAAP.

 

The balance sheetinformation as at June 30, 2006 and 2007 and the statement of operationsdata for fiscal 2005, 2006 and 2007 are derived from our audited financialstatements included in this annual report. Balance sheet information as of June 30,2003, 2004 and 2005 and statement of operations information for fiscal 2003 and2004 are derived from our audited financial statements which are not includedin this annual report.

 
| ** **                                              | ** ** | **For the Years Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                              | ** ** | **2003**                                                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Statement  of Operations Data:**                      |       |                                                      |       |   |   |   |   |   |   |   |   |
| ** **                                              |       |                                                      |       |   |   |   |   |   |   |   |   |
| Revenue From Operations                                 |       | $                                                         | 1,051,695  |   | $ | 1,394,589 |   | $ | 1,076,308 |   | $ | 676,975 |   | $ | 722,944 |   |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Cost of  Operations:                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Research and  development                               |       | 2,371,704                                                 |       | 3,061,120 |   | 2,712,427 |   | 3,151,595 |   | 5,429,240 |   |
| Selling, general  and administrative costs              |       | 2,022,547                                                 |       | 2,616,728 |   | 2,953,886 |   | 2,879,906 |   | 4,745,591 |   |
| Medigen  termination                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| agreement  expense                                      |       | —                                                    |       | — |   | — |   | — |   | 7,747,376 |   |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Total Cost of  Operations                               |       | 5,018,983                                                 |       | 6,299,231 |   | 6,583,949 |   | 7,293,174 |   | 19,597,262 |   |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Loss from  Operation                                    |       | (4,391,353                                                | )          | (5,277,908 | ) | (5,760,917 | ) | (6,650,279 | ) | (18,958,439 | ) |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Total Other  Income (Expenses)                          |       | 537,991                                                   |       | 1,078,787 |   | 1,212,603 |   | 1,423,097 |   | 2,235,130 |   |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net Loss from  continuing operations                    |       | $                                                         | (3,853,362 | ) | $ | (4,199,121 | ) | $ | (4,548,314 | ) | $ | (5,227,182 | ) | $ | (16,723,309 | ) |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Discontinued  operations                                |       | 288,213                                                   |       | 654,666 |   | — |   | — |   | — |   |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net Loss                                                |       | $                                                         | (3,565,149 | ) | $ | (3,544,455 | ) | $ | (4,548,314 | ) | $ | (5,227,182 | ) | $ | (16,723,309 | ) |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Profit/(Loss)  Per Ordinary Share                       |       |                                                      |       |   |   |   |   |   |   |   |   |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                  |       | $                                                         | (0.16      | ) | $ | (0.13 | ) | $ | (0.13 | ) | $ | (0.13 | ) | $ | (0.37 | ) |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Discontinued  operations                                |       | $                                                         | 0.01       |   | $ | 0.02 |   | — |   | — |   | — |   |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net loss per  ordinary share                            |       | $                                                         | (0.15      | ) | $ | (0.11 | ) | $ | (0.13 | ) | $ | (0.13 | ) | $ | (0.37 | ) |
|                                                    |       |                                                      |       |   |   |   |   |   |   |   |   |
| Weighted Average  Number of Ordinary Shares Outstanding |       | 24,391,869                                                |       | 32,675,867 |   | 35,709,343 |   | 40,560,782 |   | 44,768,450 |   |

 

6

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| ** **                       | ** ** | **For the Years Ended June 30,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                       | ** ** | **2003**                                                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Balance  Sheet Data:**         |       |                                                      |       |   |   |   |   |   |   |   |   |
| ** **                       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Cash and Cash  Equivalents       |       | $                                                         | 8,001,842  |   | $ | 9,885,656 |   | $ | 17,851,895 |   | $ | 11,588,471 |   | $ | 83,351,832 |   |
|                             |       |                                                      |       |   |   |   |   |   |   |   |   |
| Working Capital                  |       | 7,379,033                                                 |       | 9,107,687 |   | 16,990,609 |   | 10,859,242 |   | 82,253,426 |   |
|                             |       |                                                      |       |   |   |   |   |   |   |   |   |
| Total Assets                     |       | 10,230,017                                                |       | 11,208,140 |   | 18,768,255 |   | 13,158,885 |   | 85,402,448 |   |
|                             |       |                                                      |       |   |   |   |   |   |   |   |   |
| Long-Term Debt                   |       | —                                                    |       | — |   | — |   | — |   | — |   |
|                             |       |                                                      |       |   |   |   |   |   |   |   |   |
| Capital Stock                    |       | 44,153,011                                                |       | 48,869,981 |   | 59,907,735 |   | 60,017,537 |   | 144,498,252 |   |
|                             |       |                                                      |       |   |   |   |   |   |   |   |   |
| Accumulated  Deficit             |       | (35,415,660                                               | )          | (38,960,115 | ) | (43,508,429 | ) | (48,735,611 | ) | (65,458,920 | ) |
|                             |       |                                                      |       |   |   |   |   |   |   |   |   |
| Total  Stockholders’ Equity |       | $                                                         | 8,504,942  |   | $ | 9,934,555 |   | $ | 17,522,624 |   | $ | 11,792,387 |   | $ | 83,142,963 |   |

##  

## **Item 3.D.****                                              ****Risk Factors**

##  

*The risksand uncertainties described below are not the only ones that we face.Additional risks and uncertainties not presently known to us or that wecurrently believe to be immaterial may also adversely affect our business. Ifany of the following risks and uncertainties develops into actual events, ourbusiness, financial condition and results of operations could be materially andadversely affected, and the trading price of our ordinary shares could decline.*

 

**RISKS RELATED TO OUR BUSINESS**

 

***Weare primarily engaged with activities at a stage in the development ofpharmaceutical products where success is uncertain***

 

Although we****are presently generating revenues from the sale of contractmanufacturing services, we have not sufficiently advanced the development ofour lead product candidates, PI-88 and PI-166, to enable their registration,and, accordingly, have not begun to market or generate revenues from theircommercialization. PI-88, PI-166 and future pharmaceutical product candidateswill require significant additional investment in research and development,preclinical testing and clinical trials, drug manufacture and supply,regulatory and sales and marketing activities, and regulatory approval prior toany commercial sales.  We cannot make anyassurances that PI-88, PI-166 or any other product candidates, if successfullydeveloped, will generate sufficient or sustainable revenues to enable us to beprofitable.

 

***Thereis a significant risk that we may not be able to complete the development ofPI-88 or PI-166, or develop other pharmaceutical products***

 

We cannot make anyassurances that we will be able to develop PI-88, PI-166 or any futurepharmaceutical product candidates adequately to successful commercialization,the development of one or more suitable collaborative partners, or acombination thereof, or that our research will lead to 

 

7

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thediscovery of additional product candidates, or that any of our current andfuture product candidates will be successfully developed, will be proven to besafe and efficacious in clinical trials, meet applicable regulatory standardsand receive regulatory approval, will be capable of being produced incommercial quantities at reasonable costs, or will be successfully orprofitably marketed, either by us or a collaborative partner. We****also cannot make any assurances that the products wedevelop will be able to penetrate the potential market for a particular therapyor indication or gain market acceptance among health care providers, patientsand third-party payers. We cannot predict if or when PI-88, PI-166, or any ofour other pharmaceutical products under development will be commercialized.

 

***Theresults of on-going and future clinical trials of PI-88 and PI-166 are uncertainand we will not be able to commercialize PI-88, PI-166 or any of our otherproduct candidates if we fail to adequately demonstrate their safety, efficacyand superiority over existing therapies***

 

Before obtainingregulatory approvals for the commercial sale of any of our pharmaceuticalproducts, we must demonstrate through preclinical testing and clinical studiesthat our product candidates are safe and effective for use in humans for eachtarget indication. Conducting preclinical testing and clinical studies is anexpensive, protracted and time-consuming process. Furthermore, the results ofpreclinical *in vitro* (within an artificialenvironment) and animal studies may not necessarily be predictive of resultsobtained in human clinical testing. Likewise, results from early clinicaltrials may not be predictive of results obtained in large-scale, later-stageclinical testing. In addition, even though a potential drug product showspromising results in clinical trials, regulatory authorities may not grant thenecessary approvals without sufficient safety and efficacy data.

 

We are currentlyconducting two Phase 2 clinical trials of PI-88 in cancer patients in theUnited States and Australia and anticipate commencing a Phase 3 clinical trialof PI-88 by the end of calendar year 2007 and may conduct further trials. Wealso are conducting a Phase 1 clinical trial of PI-166 in Australia and,depending on the results of this trial, may conduct additional clinical trials.We plan to pursue a range of commercialization approaches for our lead productsPI-88 and PI-166, amongst them entering into collaborative arrangements withone or more suitable pharmaceutical or biotechnology company(ies) . We cannotmake any assurances that we will be able either to complete the currentclinical trials of PI-88 and PI-166 successfully, commence additional clinicaltrials of PI-88 or PI-166 as anticipated, or at all, or to demonstrate thesafety and efficacy or superiority of PI-88 or PI-166 over existing therapiesor enter into any collaborative arrangement to commercialize PI-88 and PI-166on terms acceptable to us, or at all. Clinical trial results that showinsufficient safety and efficacy could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

Clinical trialsmay take up to several years to complete. The length of time variessubstantially according to the type, complexity, novelty, patient recruitmentinto and intended use of the product candidate. We cannot make any assurancesthat, when Phase 2 or Phase 3 clinical trials are completed, we will be able topursue further clinical development, execute market development efforts, enterinto a collaborative arrangement with a suitable pharmaceutical orbiotechnology company to complete the development of, or commercialize PI-88 orPI-166. Nor can we make any assurances that once clinical trials are completedby us or a collaborative partner, we will be able to 

 

8

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submitas scheduled a marketing approval request to the Australian Therapeutic GoodAdministration’s (TGA) Drug Safety and Evaluation Branch, the U.S. Food andDrug Administration (FDA) or any other authority, or, that such request andapplication will be reviewed and cleared by any of these authorities, asapplicable, in a timely manner, or at all.

 

During the courseof clinical trials and toxicology studies, PI-88, PI-166 and our other productcandidates may exhibit unforeseen and unacceptable drug-related toxicities orside effects. If any unacceptable toxicities or side effects were to occur, wemay, or regulatory authorities may require us to, interrupt, limit, delay orabort the development of our potential products. In addition, unacceptabletoxicities could ultimately prevent the clearance of our product candidates bythe TGA or the FDA for any or all targeted indications. Even after beingcleared by the TGA or the FDA, any of our products may later be shown to beunsafe or not to have its purported effect, thereby preventing widespread useor requiring withdrawal from the market. We cannot make any assurances thatPI-88, PI-166 or any of our other product candidates will be safe or effectivewhen administered to patients.

 

***Wemay experience delays in our clinical trials that could adversely affect ourbusiness and operations***

 

We do not knowwhether planned clinical trials will begin on time or whether we will completeany of our clinical trials on schedule or at all. Our ability to commence andcomplete clinical trials may be delayed by many factors, including:

 

·              Government or regulatory delays,including delays in obtaining approvals from applicable hospital ethicscommittees and internal review boards;

 

·              Slower than expected patient recruitment;

 

·              Our inability to manufacture or prepare,as applicable, sufficient quantities of PI-88, PI-166 or any of our otherproduct candidates;

 

·              Unforeseen safety issues; and

 

·              Lack of efficacy during the clinicaltrials.

 

Patient enrollmentis a function of, amongst other things, the nature of the clinical trialprotocol, the existence of competing protocols, the size and longevity of thetarget patient population, and the availability of patients who meet theeligibility criteria for the clinical trial. Delays in planned patientenrollment may result in increased costs, delays in trial completion ortermination of clinical trials. Moreover, we have limited experience in conducting and managing clinicaltrials and may rely on third parties to assist us in managing and monitoringclinical trials. Any failure by these third parties to perform under theiragreements with us may cause the trials to be delayed or result in a failure tocomplete the trials.

 

Productdevelopment costs to our collaborators and us will increase if we have delaysin testing or approvals or if we need to perform more or larger clinical trialsthan planned. Significant 

 

9

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delayscould have a material adverse effect on the commercial prospects of our productcandidates and our business, financial condition and results of operations.

 

***Wemay be unable to enroll a sufficient number of patients to complete ourclinical trials***

 

Our clinicaltrials may be suspended at any time for a variety of reasons. Completion ofclinical trials depends on, among other things, our ability to enroll asufficient number of patients, which is a function of many factors, including:

 

·                                          the therapeutic endpoints chosen forevaluation;

 

·                                          proximity of patients to clinical sites;

 

·                                          the eligibility criteria forparticipation in the clinical trials;

 

·                                          the size of the patient populationrequired for meaningful analysis of the trial results;

 

·                                          our ability to recruit clinical trialinvestigators with the appropriate competencies and experience;

 

·                                          our ability to obtain and maintainpatient consents;

 

·                                          the risk that patients enrolled inclinical trials will drop out of the trials before completion; and

 

·                                          competition for patients by clinicaltrial programs for other treatments.

 

We have in the past experienced, and may again experience difficultiesin enrolling patients in our clinical trials, particularly due to the rate ofincidence for our target indications in certain populations, as well as thegeographical locations we have selected for conducting our clinicaltrials.  Any such difficulties couldincrease the costs or affect the timing or outcome of these trials and couldprevent us from completing these trials.

 

***Wemay not be successful in performing additional PI-88 clinical trials in otherindications***

 

If our product candidates are approved for one or more initialindications and are successfully commercialized, our strategy calls for theexecution of additional clinical trials in other indications. We may not beable to initiate such additional trials due to a number of factors, includingthe following:

 

·                                          we may not have sufficient financial orother resources to undertake such trials;

 

·                                          we may be unable to secure sufficientsupport from leading authorities or influential parties to build trialprotocols and support for conduct of a new trial;

 

·                                         there may not be sufficient market sizeto warrant product development in other new indications; and

 

·                                          the health care community may believethat our products are limited in use to the already-approved indications.

 

Any failure to initiate additional clinical trials in other indicationscould have a material adverse 

 

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effect on our business.

 

***Wehave limited manufacturing experience, and delays in manufacturing sufficientquantities of PI-88 and PI-166 for preclinical and clinical trials maynegatively impact our business and operations***

 

We believe that wehave the capability to manufacture PI-88 and prepare PI-166 for preclinicalstudies and clinical trials, including for PI-88 Phase 3 clinical trials. Wecannot, however, make any assurances that we will be able to manufacture orprepare, as applicable, sufficient quantities of PI-88, PI-166 or any of ourother product candidates in a cost-effective or timely manner. Any delays inproduction would delay our preclinical and clinical trials which could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

Earlier in thefiscal year, we elected to enter into contracting arrangements with a thirdparty to assume the final steps in the manufacture of PI-88 in anticipation ofconducting Phase 3 clinical trials and we may be required to enter intocontracting arrangements with third parties to manufacture, or prepare, asapplicable, PI-166 and our other product candidates for large-scale,later-stage clinical trials. While we are currently evaluating alternativePI-88 commercial-scale production approaches, including contracting it out to athird party, we cannot make any assurances that we will be able to make thetransition to commercial production successfully. We may need to developadditional manufacturing resources, enter into collaborative arrangements withother parties who have established manufacturing capabilities, or have thirdparties manufacture or prepare our products on a contract basis. We cannot makeany assurances that we will have access on acceptable terms to the necessaryand substantial financing that would be required to scale-up production anddevelop effective commercial manufacturing processes and technologies. We alsocannot make any assurances that we will be able to enter into collaborative orcontracting arrangements on acceptable terms with parties that will meet ourrequirements for quality, quantity and timeliness.

 

***If weare unable to independently commercialize or establish and manage strategiccollaborations to develop PI-88, PI-166 or any of our other product candidates,we may have to reduce or delay product development and/or increase ourexpenditures***

 

Our strategy fordeveloping and commercializing our product candidates includes entering intovarious relationships with pharmaceutical or biotechnology companies to provideus with funding and/or to perform research, clinical development, regulatoryclearance, commercial scale manufacturing, sales, marketing or distributionactivities relating to PI-88, PI-166 or some or all of our current or futureproduct candidates. To date, we have not entered into any agreements with thirdparties capable of providing those services. Establishing strategiccollaborations is difficult and time-consuming. Our discussions with potentialcollaborators may not lead to the establishment of collaborations on favorableterms, if at all. If we are unable to establish collaborative arrangements, wemay have to reduce or delay further development of PI-88, PI-166 and our otherproduct candidates and/or increase our expenditures and undertake thedevelopment and commercialization activities at our own expense. If we elect tofund our research and development programs on our own, we will need to obtainadditional financing which may not be available on acceptable terms, or at all.

 

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If we successfullyestablish strategic collaborations, the management of our relationship withcollaborators will require significant time and effort from our managementteam, coordination of our research and development programs with the researchand development priorities of our collaborators, and effective allocation ofour resources to multiple projects. We cannot be certain that theserelationships will result in the successful development or commercialization ofour product candidates or the generation of sales revenue. If we enter intostrategic collaborations at an early phase of product development, our successwill in part depend on the performance of our corporate collaborators. Factorsthat could harm a successful collaboration include:

 

·                                          Collaborators may delay clinical trials,underfund a clinical trial program, stop a clinical trial or abandon a productcandidate, repeat or conduct new clinical trials or require a new formulationof a product candidate for clinical testing;

 

·                                          Collaborators could independentlydevelop, or develop with third parties, products that could compete with ourcurrent and future product candidates;

 

·                                          Collaborators may not commit adequateresources to the marketing and distribution of our product candidates, limitingpotential revenues from the commercialization of a product;

 

·                                          Collaborators may not pursue furtherdevelopment and commercialization of compounds resulting from collaborations ormay elect not to continue or renew research and development programs;

 

·                                          The terms of our agreements withcollaborators may not be favorable to us;

 

·                                          Disputes may arise delaying orterminating the research, development or commercialization of our productcandidates, resulting in significant litigation or arbitration, or causingcollaborators to act in their own self-interest and not in the interest of ourshareholders; and

 

·                                          Collaborators may terminate theiragreements with us if, for example, we fail to meet a required milestone orobserve other obligations in those agreements.

 

***Ourlimited oversight of contract research organizations may not be sufficient toavoid significant problems with the protocols and conduct of the clinicaltrials.***

 

Weare engaging third party contract research organizations to help us with theconduct of the Phase 3 trial of PI-88 in post-resection liver cancer. Theseorganizations may not perform all of their obligations under arrangements withus. If contract research organizations and other third parties do not performclinical trials in a satisfactory manner or breach their obligations to us, thedevelopment and commercialization of our product candidates may be delayed orprecluded. We cannot control the amount and timing of resources these contractresearch organizations devote to our programs or product candidates. Thefailure of any of these contract research organizations to comply with anygovernmental regulations would substantially harm our development and marketingefforts and delay or prevent regulatory approval of our product candidates. Ifwe are unable to rely on clinical data collected by others, we could berequired to repeat, extend the duration of, or increase the size of our 

 

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clinicaltrials and this could significantly delay commercialization and requiresignificantly greater expenditures.

 

***Ourefforts to discover, develop and commercialize new product candidates beyondPI-88 and PI-166 are at a very early stage and, therefore, these efforts aresubject to a high risk of failure***

 

The process ofsuccessfully developing product candidates is very time consuming, expensiveand unpredictable. Although we have a dedicated drug discovery group focused onidentifying and developing molecule(s) that, among others, inhibitangiogenesis by disrupting heparan sulfate protein interactions as productcandidates, we may not be successful in identifying, developing orcommercializing any additional new product candidates.

 

***If wecannot enter into new licensing arrangements, our ability to develop a broadproduct portfolio could be limited***

 

A component of ourbusiness strategy is in-licensing drug compounds developed by other commercialor academic entities. Competition for promising compounds is intense. If we arenot able to identify additional licensing opportunities or enter into licensingarrangements on acceptable terms, if at all, our ability to develop a diverseportfolio of product candidates is restricted.

 

***Wemay require substantial additional financing in the future to sufficiently fundour operations, development efforts and research***

 

We have beenunprofitable to date and expect to incur losses over the next several years aswe expand our drug discovery and development programs and preclinical testingand as we conduct clinical trials of PI-88, PI-166 and our other productcandidates. Although our future capital requirements will depend on manyfactors, we believe that our existing cash and cash equivalents will beadequate to satisfy the requirements of our current and planned operationsthrough to June 2010. We cannot, however, make any assurances that suchfunds will be sufficient to meet our actual operating expenses and capitalrequirements during this period. Our actual cash requirements may varymaterially from those now planned and will depend upon numerous factors,including:

 

·                                          The continued progress of our researchand development programs;

 

·                                          The timing, scope, results and costs ofpreclinical studies and clinical trials;

 

·                                          The progress of licensing efforts;

 

·                                          The cost, timing and outcome ofregulatory submissions and approvals;

 

·                                          Determinations as to the commercialpotential of our product candidates;

 

·                                          Our ability to successfully expand ourcontract manufacturing services, if we choose to do so;

 

·                                          Our ability to establish and maintaincollaborative arrangements;

 

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·                                          The status and timing of competitivedevelopments; and

 

·                                          Other factors.

 

We are currentlyplanning a phase 3 trial of PI-88 in patients with HCC (primary liver cancer).Whilst we currently believe we have sufficient funds to conduct this and otherclinical trials as well as complete the research and development of ourpharmaceutical product candidates we may require additional funds to pursueregulatory clearances, prosecute and defend our intellectual property rights,establish commercial scale manufacturing facilities, develop marketing andsales capabilities and fund operating expenses. We have no established bankfinancing arrangements, and we cannot be certain that we will be able toestablish such arrangements on satisfactory terms, or at all. We may seek suchadditional funding through public or private financings and/or throughstrategic alliances or other arrangements with corporate partners. We cannot,however, be certain that such additional financing will be available from anysources on acceptable terms, or at all, or that we will be able to establishstrategic alliances or other arrangements with corporate partners on acceptableterms, or at all. Any shortfall in funding could result in our having tocurtail our operations, including our research and development activities,which could have a material adverse effect on our business, financial conditionand results of operations.

 

***Wehave a history of operating losses and may not achieve profitability in thenear future***

 

We have incurrednet operating losses in each year since we began operations in 1989. As of June 30,2007, we had an accumulated deficit of approximately $65.5 million, primarilyattributable to our research and development activities. We expect to incuradditional operating losses over at least the next several years and toincrease our cumulative losses substantially as we expand our research anddevelopment and preclinical activities and commence additional clinical trialsof PI-88 and PI-166, including a Phase 3 trial of PI-88 in patients with HCC.

 

***Ourresearch and development efforts will be seriously jeopardized if we are unableto attract and retain key personnel and cultivate key academic and scientificcollaborations***

 

We area company with 50 full-time employees as of June 30, 2007. Our success ishighly dependent on the continued contributions of our principal management andscientific personnel and on our ability to develop and maintain importantrelationships with leading academic institutions and scientists. Competitionamong biotechnology and pharmaceutical companies for qualified employees isintense, and we cannot be certain that we will be able to continue to attractand retain qualified scientific and management personnel critical to oursuccess. We also have relationships with leading academic and scientificcollaborators who conduct research at our request or assist us in formulatingour research and development strategies. These academic and scientificcollaborators are not our****employees andmay have commitments to, or consulting or advisory contracts with, otherentities that may limit their availability to us.

 

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***Acceptanceof our products in the marketplace is uncertain, and failure to achieve marketacceptance will negatively impact our business and operations***

 

Wecannot make any assurances that our products will achieve market acceptanceeven if they are approved by the TGA, the FDA, and the regulatory agencies of othercountries. The degree of market acceptance of our products will depend on anumber of factors, including:

 

·              The receipt and timing of regulatoryapprovals for the uses that we are studying;

 

·              The establishment and demonstration inthe medical community of the safety, clinical efficacy and cost-effectivenessof our product candidates and their potential advantages over existingtherapeutics and technologies; and

 

·              The pricing and reimbursement policies ofgovernments and third-party payers.

 

Physicians,patients, payers or the medical community in general may be unwilling toaccept, use or recommend any of our products.

 

***We may need to establish our own sales, marketing and distributioncapability***

 

As acompany, we currently have no experience in marketing, sales or distribution ofpharmaceutical products. If we develop any commercially marketablepharmaceutical products and decide to perform our****ownsales and marketing activities**,**we willrequire additional management, will need to hire sales and marketing personnel,and will require additional capital. We cannot make any assurances thatqualified personnel will be available in adequate numbers or at a reasonablecost, that additional financing will be available on acceptable terms, or atall, or that our sales staff will achieve success in their marketing efforts.Alternatively, we may be required to enter into marketing arrangements withother parties who have established appropriate marketing, sales anddistribution capabilities. We cannot make any assurances that we will be ableto enter into marketing arrangements with any marketing partner or that if sucharrangements are established, our marketing partners will be able tocommercialize our products successfully. Other companies offering similar orsubstitute products may have well-established and well-funded marketing andsales operations in place that will allow them to market their products moresuccessfully. Failure to establish sufficient marketing capabilities may have amaterial adverse impact our potential revenues and results of operations.

 

***Healthcareinsurers and other organizations may not pay for our products, or may imposelimits on reimbursement***

 

Thedrugs we hope to develop may be rejected by the marketplace due to manyfactors, including cost. The continuing efforts of governments, insurancecompanies, health maintenance organizations and other payers of healthcarecosts to contain or reduce healthcare costs may affect our future revenues andprofitability and those of our potential customers, suppliers and collaborativepartners, as well as the availability of capital. In Australia and certainforeign markets, the pricing or profitability of prescription pharmaceuticalsis already subject to government control. We expect initiatives for similargovernment control at both the state and federal level to continue in theUnited 

 

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States. The adoption of any such legislative or regulatory proposalscould have a material adverse effect on our potential revenues and results ofoperations.

 

Ourability to commercially exploit our products successfully will depend in parton the extent to which reimbursement for the cost of our products and relatedtreatment will be available from government health administration authorities,private health coverage insurers and other organizations. Third-party payers, suchas government and private health insurers, are increasingly challenging theprice of medical products and services. Although the Australian governmentcontinues to provide a subsidy to certain prescribed prescriptionpharmaceutical products through the Pharmaceutical Benefits Scheme, which,pending development, could include PI-88 and PI-166, uncertainty exists as tothe reimbursement status of newly approved health care products and in foreignmarkets, including the United States. If third-party coverage is not availableto patients for any of the products we develop, alone or with collaborators,the market acceptance of these products may be reduced which may adverselyaffect our future revenues and profitability. In addition, cost containmentlegislation and reductions in government insurance programs may result in lowerprices for our products and could materially adversely affect our ability tooperate profitably.

 

***Exchange rate fluctuations will continue to affect our reported resultsof operations***

 

Substantiallyall of our revenues are realized, and a significant portion of our operatingcosts are incurred, in Australian dollars. Because our financial statementsincluded elsewhere in this annual report are presented in U.S. dollars, anysignificant fluctuation in the currency exchange rates between the Australiandollar and the U.S. dollar will affect other comprehensive income. Movement incurrency exchange rates will affect cash denominated in U.S. dollars andtherefore will affect our reported results of operations.

 

**RISKS ASSOCIATED WITH OURTECHNOLOGY AND INTELLECTUAL PROPERTY**

 

***Potential technological changes in our field ofbusiness create considerable uncertainty***

 

* *We are engaged in thebiopharmaceutical field, which is characterized by extensive research effortsand rapid technological progress. New developments in research are expected tocontinue at a rapid pace in both industry and academia. Research anddiscoveries by others may render some or all of our programs or productcandidates uncompetitive or obsolete.

 

                                                Our businessstrategy is based in part upon new and unproven technologies to the developmentof pharmaceutical products for the treatment of cancer and other seriousdiseases. Unforeseen problems may develop with these technologies orapplications and it is possible that commercially feasible products will notultimately be developed by us.

 

***Wemay not be able to keep pace with technological change or with the advances ofour competitors***

 

Thebiotechnology and pharmaceutical industries are subject to rapid andsignificant technological change. Our competitors in Australia and elsewhereare numerous and include, among others, major pharmaceutical companies, largebiotechnology firms, universities and other research 

 

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institutions. These competitors may develop technologies and productsthat are more effective than any that we are developing, or which would renderour technology and products obsolete or non-competitive. Many of these competitorshave greater financial and technical resources and manufacturing and marketingcapabilities than we do. In addition, many of our competitors have much moreexperience than we do in preclinical testing and human clinical trials of newor improved drugs, as well as in obtaining FDA, TGA and other regulatoryapprovals.

 

Weknow that competitors are developing or manufacturing various technologies orproducts for the treatment of diseases that we have targeted for productdevelopment. Some of these competitive products use therapeutic approaches thatcompete directly with some of our product candidates. Our ability to furtherdevelop our products may be adversely affected if any of our competitors wereto succeed in obtaining regulatory approval for their competitive productssooner than we would.

 

***Oursuccess depends upon our ability to protect our intellectual property and ourproprietary technology***

 

Our success willdepend in large part on whether we can:

 

·                                          Obtain and maintain patents to protect our ownproducts;

 

·                                          Obtain licenses to relevant patented technologies ofthird parties;

 

·                                          Operate without infringing on the proprietary rightsof third parties; and

 

·                                          Protect our trade secrets and know-how.

 

Patent matters inbiotechnology are highly uncertain and involve complex legal and factualquestions. Accordingly, the availability and breadth of claims allowed inbiotechnology and pharmaceutical patents cannot be predicted. Statutorydifferences in patentable subject matter may limit the protection we can obtainon some or all of our inventions outside Australia or prevent us from obtainingpatent protection outside Australia, either of which could have a materialadverse effect on our business, financial condition and results of operations.For example, methods of treating humans are not patentable in many countriesoutside Australia and the United States. Moreover, since patent applications inAustralia and the United States are maintained in secrecy until the patent isissued, and since publication of discoveries in the scientific or patentliterature often lags behind actual discoveries, we cannot be certain that weor any of our licensors were the first creator of inventions covered by pendingpatent applications or that we or our licensors were the first to file patentapplications for such inventions. Additionally, the enforceability of a patentdepends on a number of factors that may vary amongst jurisdictions. Thesefactors may include the novelty of the invention, the requirement that the inventionnot be obvious in light of prior art (including prior use or publication of theinvention), the utility of the invention, and the extent to which the patentclearly describes the best method of working the invention.

 

Whilewe intend to seek patent protection for our therapeutic products andtechnologies, we cannot be certain that any of the pending or future patentapplications filed by us or on our behalf will be approved, or that we willdevelop additional proprietary products or processes that are

 

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patentable or that we will be able to license any other patentableproducts or processes. We also cannot be certain that others will notindependently develop similar products or processes, duplicate any of theproducts or processes developed or being developed by us or licensed to us, ordesign around the patents owned or licensed by us, or that any patents owned orlicensed by us will provide us with competitive advantages. Furthermore, wecannot be certain that patents held by third parties will not prevent thecommercialization of products incorporating the technology developed by us orlicensed to us, or that third parties will not challenge or seek to narrow,invalidate or circumvent any of the issued, pending or future patents owned orlicensed by us.

 

Ourcommercial success will also depend, in part, on our ability to avoidinfringement of patents issued to others. If a court determines that we wereinfringing any third party patents, we could be required to pay damages, alterour products or processes, obtain licenses or cease certain activities. Wecannot be certain that the licenses required under patents held by thirdparties would be made available on terms acceptable to us or at all. To the extentthat we are unable to obtain such licenses, we could be foreclosed from thedevelopment, manufacture or commercialization of the product requiring suchlicense or encounter delays in product introductions while we attempt to designaround such patents, and any of these circumstances could have a materialadverse effect on our business, financial condition and results of operations.

 

We mayhave to resort to litigation to enforce any patents issued or licensed to us orto determine the scope and validity of third party proprietary rights. Suchlitigation could result in substantial costs to be incurred by us and thediversion of our efforts. We may have to participate in opposition proceedingsbefore the Australian Patent and Trademark Office or another foreign patentoffice, or in interference proceedings declared by the United States Patent andTrademark Office, to determine the priority of invention for patentapplications filed by competitors. Any such litigation, interference oropposition proceeding, regardless of outcome, could be expensive and timeconsuming, and adverse determinations in any such proceedings could prevent usfrom developing, manufacturing or commercializing our products and could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

Inaddition to patent protection, we rely on unpatented trade secrets and know-howand proprietary technological innovation and expertise that are protected inpart by confidentiality and invention assignment agreements with our employees,advisors and consultants. We cannot make any assurances that we will haveadequate remedies for any breach. In addition, third parties couldindependently develop the same or similar technologies.

 

***If weare not able to protect and control unpatented trade secrets, know-how andother technological innovation, we may suffer competitive harm.***

 

In addition to patented intellectual property, wealso rely on unpatented technology, trade secrets, confidential information andknow-how to protect our technology and maintain our competitive position. Tradesecrets are difficult to protect. In order to protect proprietary technologyand processes, we rely in part on confidentiality and intellectual propertyassignment agreements with our employees, consultants and others. Theseagreements may not effectively prevent disclosure of confidential informationor result in the effective assignment to us of intellectual property, and maynot provide an adequate remedy in the event of unauthorized disclosure ofconfidential information or other breaches of the agreements. In addition,others may independently discover

 

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trade secrets and proprietary informationthat have been licensed to us or that we own, and in such case we could notassert any trade secret rights against such party. Enforcing a claim that aparty illegally obtained and is using trade secrets that have been licensed tous or that we own is difficult, expensive and time-consuming, and the outcomeis unpredictable. In addition, courts outside the United States may be lesswilling to protect trade secrets. Costly and time-consuming litigation could benecessary to seek to enforce and determine the scope of our proprietary rights,and failure to obtain or maintain trade secret protection could have a materialadverse effect on our business.

 

***We do not have patent protection in certain countries and we may not beable to effectively enforce our intellectual property rights in certain countries,which could significantly erode the market for our product candidates.***

 

We intend to seek regulatory approval to market ourproduct candidates in a number of foreign countries. Our product candidates arenot protected by patents in certain countries, which means that competitors maybe free to sell products that incorporate the same technology that is used inour products in those countries. In addition, the laws and practices in someforeign countries may not protect intellectual property rights to the sameextent as in the United States. We, or our licensors, may not be able toeffectively obtain, maintain or enforce rights with respect to the intellectualproperty relating to our product candidates in those countries. Our lack ofpatent protection in one or more countries, or the inability to obtain,maintain or enforce intellectual property rights in one or more countries,could adversely affect our ability to commercialize our products in thosecountries and could otherwise have a material adverse effect on our business.

 

**RISKS ASSOCIATED WITH GOVERNMENTREGULATION**

 

***Wemay not be able to obtain the extensive government approvals required to bringour pharmaceutical products to market***

 

Ourongoing research and development activities are, and the production andmarketing of our pharmaceutical product candidates derived there from will be,subject to regulation by numerous governmental authorities in Australia,principally the TGA, and by the FDA in the United States, the EuropeanMedicines Evaluation Agency (EMEA) of the European Union and the regulatoryagencies of other countries. Prior to marketing, any therapeutic productdeveloped must undergo rigorous preclinical testing and clinical trials, aswell as an extensive regulatory approval process mandated by the TGA and, tothe extent that any of our pharmaceutical products under development aremarketed abroad, by foreign regulatory agencies including the FDA in the UnitedStates and the EMEA in Europe. These processes can take many years and require theexpenditure of substantial resources. Delays in obtaining regulatory approvalscould adversely affect the development and commercialization of ourpharmaceutical product candidates and could have a material adverse impact onour business, financial condition and results of operations. Although we intendto make use of fast-track and abbreviated regulatory approval programs whenpossible, we cannot be certain that we will be able to obtain the clearancesand approvals necessary for clinical testing or for manufacturing and marketingour pharmaceutical products candidates.

 

***Ourbusiness and operations may be negatively impacted if we fail to comply withgovernment regulations applicable to our current revenue generating business.***

 

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To date, we have derived revenues from contractmanufacturing services. Our contract manufacturing operations include somemanufacturing processes that are required to comply with the applicable cGMPrequirements of the TGA, the Australian Office of Gene Technology Regulator andthe Australian National Registration Authority (agricultural and veterinary chemicals), which govern the methods,controls, facilities and quality assurance procedures used in manufacturing,packing and storing biological and pharmaceutical products. In addition,certain international markets have quality assurance and manufacturingrequirements that may be more or less rigorous than those in Australia. Ourmanufacturing facilities are also subject to periodic inspections by the TGAand the Australian National Registration Authority. Any potential failure tocomply with cGMP requirements or with any other international requirementscould have a material adverse impact on our business, financial condition andresults of operations.

 

***Changes in government legislation and policy may adversely affect us***

 

Whilewe do not anticipate in the near future any specific material changes ingovernment legislation that may adversely affect us, any material changes ininterest rate, exchange rate, relevant taxation and other legal regimes andgovernment policies may adversely affect our operations, the use of ourfinancial resources and the market price of our ordinary shares.

 

**RISKS ASSOCIATED WITH OUR SHARES**

 

***Ourstock price may be volatile and the U.S. trading market for our ordinary sharesis limited***

 

Themarket price for our ordinary shares, like that of the securities of many otherbiotechnology companies, has fluctuated substantially and may continue to behighly volatile in the future. We believe that the following factors, inaddition to other risk factors described above and elsewhere in this annualreport, will continue to significantly affect the market price of our ordinaryshares:

 

·                                          The results of preclinical testing and clinical trialsby us and our competitors;

 

·                                          Developments concerning research and development,manufacturing, and marketing alliances or collaborations by us and ourcompetitors;

 

·                                          Announcements of technological innovations or newcommercial products by us and our competitors;

 

·                                          Determinations regarding our patent applications andthose of others;

 

·                                          Publicity regarding actual or potential resultsrelating to medicinal products under development by us and our competitors;

 

·                                          Proposed governmental regulations and developments inAustralia, the U.S. and elsewhere;

 

·                                          Litigation;

 

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·                                          Economic and other external factors; and

 

·                                          Period-to-period fluctuations in our operatingresults.

 

Inaddition, stock markets have experienced extreme price and volume fluctuations.These fluctuations have especially affected the stock market price of many hightechnology and healthcare-related companies, including biotechnology companies,and, in many cases, are unrelated to the operating performance of theparticular companies. We believe that these broad market fluctuations maycontinue to affect the market price of our ordinary shares.

 

Fromtime to time, there has been limited trading volume with respect to our ordinaryshares quoted on the NASDAQ Capital Market, but we cannot make any assurancesthat there will continue to be a trading market in our ordinary shares.

 

***U.S. shareholders may not be able to enforce civilliabilities against us***

 

A number of our directors and executive officers are non-residents ofthe United States, and all or a substantial portion of the assets of suchpersons are located outside the United States. As a result, it may not bepossible for investors to affect****service ofprocess within the United States upon such persons or to enforce against themjudgments obtained in U.S. courts predicated upon the civil liabilityprovisions of the federal securities laws of the United States. There is doubtas to the enforceability in Australia in original actions, or in actions forenforcement of judgments of U.S. courts, of civil liabilities to the extentpredicated upon the federal securities laws of the United States.

 

***U.S. holders of our ordinary shares could besubject to material adverse tax consequences if we are considered a PFIC forU.S. federal income tax purposes****.*

 

There is a risk that we will be classified as a passive foreigninvestment company, or “PFIC”, for U.S. federal income tax purposes. Our statusas a PFIC could result in a reduction in the after-tax return to U.S. holdersof our ordinary shares and warrants and may cause a reduction in the value ofsuch shares. We will be classified as a PFIC for any taxable year in which (i) 75%or more of our gross income is passive income or (ii) at least 50% of theaverage value of all our assets produce, or are held for the production ofpassive income. For this purpose, passive income includes interest, gains fromthe sale of stock, and royalties that are not derived in the active conduct ofa trade or business. Because we receive interest and may recognize gains fromthe sale of appreciated stock, there is a risk that we will be considered aPFIC under the income test described above. In addition, because of our cashposition, there is a risk that we will be considered a PFIC under the assettest described above. While we believe that the PFIC rules were notintended to apply to companies such as us that focus on research, developmentand commercialization of drugs, no assurance can be given that the U.S.Internal Revenue Service or a U.S. court would determine that, based on thecomposition of our income and assets, we are not a PFIC currently or in thefuture. If we were classified as a PFIC, U.S. holders of our ordinary sharescould be subject to greater U.S. income tax liability than might otherwiseapply, imposition of U.S. income tax in advance of when tax would otherwiseapply, and detailed tax filing requirements that would not otherwise apply. ThePFIC rules are complex and you are urged to consult your own tax advisorsregarding the possible application of the PFIC rules to you in yourparticular circumstances.

 

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***As a foreign private issuer we do not have toprovide you with the same information as an issuer of securities based in theU.S.***

 

Because we are a foreignprivate issuer within the meaning of the rules under the Exchange Act, weare exempt from certain provisions of that law that are applicable to U.S.public companies, including (i) the rules under the Exchange Actrequiring the filing with the US SEC of quarterly reports on Form 10-Q orcurrent reports on Form 8-K; (ii) the sections of the Exchange Actregulating the solicitation of proxies, consents or authorizations in respect ofa registered security; and (iii) the sections of the Exchange Actrequiring insiders to file public reports of their stock ownership and tradingactivities and liability for insiders who profit from trades made in a shortperiod of time. Thus, you are not afforded the same protections or informationwhich would be made available to you were you investing in a U.S. publiccorporation.

 

In accordance with therequirements of the Australian Securities Exchange and the Corporations Act2001, we disclose annual and semi-annual results. Our results are presented inaccordance with Australian International Financial Reporting Standards. Ourannual results are audited, and our semi-annual results undergo a limitedreview by our independent auditors. We lodge annual audited results presentedin accordance with U.S. GAAP with the SEC on Form 20-F. Subject to certainexceptions, we are also required to immediately disclose to the Australian SecuritiesExchange any information concerning us that a reasonable person would expect tohave a material effect on the price or value of our shares. This would includematters such as (i) any major new developments relating to our businesswhich are not public knowledge and may lead to a substantial movement in ourshare price; (ii) any changes in our board of directors; (iii) anypurchase or redemption by us of our own equity securities; (iv) interestsof directors in our shares or debentures; and (v) changes in our capitalstructure. We are required to provide our semi-annual results and othermaterial information that we disclose in Australia in the U.S. under the coverof Form 6-K. Nevertheless, this information is not the same and may not beas much information as would be made available to you were you investing in aU.S. public corporation.

 

***Future issuances and sales of our stock coulddilute your ownership and cause our stock price to decline***

 

We intend to continue to finance our operations through the issuance ofsecurities, if feasible, including by way of the public equity markets, privatefinancings and debt. If we raise additional capital through the issuance ofequity or securities convertible into equity, existing holders of oursecurities may experience dilution. Those securities may have rights,preferences or privileges senior to those of the holders of our ordinaryshares. Additional financing may not be available to us on favorable terms, andfinancing available at less favorable terms may lead to more substantialdilution of existing shareholders.

 

***If we fail to comply with internal controlsevaluations and attestation requirements our stock price could be adverselyaffected***

 

We are subject to UnitedStates securities laws, including the Sarbanes-Oxley Act of 2002 and the rules andregulations adopted by the SEC pursuant to such Act. As a foreign privateissuer,

 

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under Section 404 of the Sarbanes-OxleyAct and the related regulations, we are required to perform an evaluation ofour internal controls over financial reporting, including (1) management’sannual report on its assessment of the effectiveness of internal controls overfinancial reporting for the year ending June 30, 2007 and (2) ourindependent registered public accounting firm’s annual audit of management’sassessment beginning in the year ending June 30, 2008. We have identifieda material weakness in our internal control over the preparation of US-GAAPfinancial statements and related disclosures. See “Item 15—Controls andProcedures—Management’s Annual Report on Internal Control over FinancialReporting.” The requirements of Section 404 of the Sarbanes-Oxley Act areongoing and also apply to future years. We expect that our internal controlover financial reporting will continue to evolve as our business develops.Although we are committed to continue to improve our internal control processesand we will continue to diligently and vigorously review our internal controlover financial reporting in order to ensure compliance with the Section 404requirements, any control system, regardless of how well designed, operated andevaluated, can provide only reasonable, not absolute, assurance that itsobjectives will be met. Therefore, we cannot be certain that in the futureadditional material weakness or significant deficiencies will not exist orotherwise be discovered. If our efforts to remediate the weakness identifiedare not successful or if other deficiencies occur, these weaknesses ordeficiencies could result misstatements of our results of operations, restatementsof our financial statements, a decline in our stock price, or other materialeffects on our business, reputation, results of operations, financialconditions or liquidity.

 

***Our Constitution and other Australian laws andregulations applicable to us may adversely affect our ability to take actionsthat could be beneficial to our shareholders***

 

 As an Australian company we are subject todifferent corporate requirements than a corporation organized under the laws ofthe United States. Our constituent document, or Constitution, as well as theCorporations Act 2001 set forth various rights and obligations that are uniqueto us as an Australian company. These requirements may limit or otherwiseadversely affect our ability to take actions that could be beneficial to ourshareholders.

 

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#  

# **ITEM 4.****                                                    ****INFORMATION ON THE COMPANY**

#  

## **Item 4.A.****                                              ****History and Development of theCompany**

##  

We wereincorporated in September 1989 as Almagest Pty. Ltd. in the State ofQueensland, Australia, and changed our name to Progen Industries Pty. Ltd. in April 1990.  In 1991, we converted to a public limitedliability company under the name Progen Industries Limited and introduced ourfirst life sciences products to the Australian market for use in DNArecombinant research. In March 2007 we changed our name to Progen PharmaceuticalsLimited to better reflect the Company’s focus on the discovery and developmentof novel cancer therapies.

 

Since October 1993,we have been engaged in the research and development of small moleculepharmaceuticals, including heparanase inhibitors, that are potent and selectiveinhibitors of carbohydrate-protein interactions implicated in a range ofdisease states. Our research and development activities are conducted incollaboration with private industry and academic and research institutions inAustralia, the United States and elsewhere.

 

As part of ourfocused strategy towards drug discovery and development, we sold our LifeSciences division in November 2003 and intend to pursue selectivestrategic alliances to complete product development and move our productcandidates into the market place.

 

We have incurredsignificant losses since our inception and as of June 30, 2007, ouraccumulated deficit was approximately $65.5 million. We expect to incuradditional operating losses for at least the next several years as weaccelerate our drug discovery research, expand our development and preclinicalactivities, conduct additional clinical trials with PI-88 including Phase 3trials in post-resection liver cancer and PI-166, and advance into later stagesof development. We may need to raise additional funds in the future to continueour operations.

 

To date, we havefunded our operations primarily through sales of equity securities.

 

**CorporateInformation**

 

Our principalexecutive offices are located at 16 Benson Street, Toowong, Queensland 4066,Australia.

 

We make availablefree of charge on or through our web site our annual reports on Form 20-Fas soon as practicable after they are electronically filed with, or furnishedto, the Securities and Exchange Commission. Our web site is located atwww.progen-pharma.com.  Informationcontained on our web site is not incorporated by reference into and does notform a part of this annual report.

 

Progen is aregistered trademark of Progen Pharmaceuticals Limited. Trademarks, tradenamesor service marks of other companies appearing in this annual report are theproperty of their respective owners**.**

 

## **Item 4.B.****                                              ****Business Overview**

##  

We are a globally focusedbiotechnology company committed to the discovery, development andcommercialization of small molecule therapeutics primarily for the treatment ofcancer. Our lead

 

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pipeline product candidate, PI-88, is amulti-targeted cancer therapeutic which is currently in development for thetreatment of post-resection liver cancer, metastatic melanoma, and hormonerefractory prostate cancer. The lead indication for PI-88 is for the treatmentof post-resection liver cancer and has recently completed Phase 2 clinical developmentin that indication. According to the International Journal of Cancer, livercancer, or hepatocellular carcinoma is the third most common cause of cancerdeath in the world. There are currently no FDA-approved therapies in thepost-resection adjuvant setting. We believe that this post-resection group ofliver cancer patients exhibits a high unmet clinical need for which PI-88 mayoffer the first effective pharmacological therapy.

 

In addition to PI-88, we areactively engaged in other drug development efforts. Our second productcandidate, PI-166, is a targeted therapy currently in a Phase 1b clinical trialfor the treatment of inoperable primary liver cancer. PI-166 is a formulationwith a very high affinity for primary liver cancer cells. Based on interim datagathered to date, no drug-related side effects of PI-166 have been observed inpatients enrolled in the trial.

 

Complementing our clinicaldevelopment programs, we have an active discovery research program. The team’sefforts are primarily focused on the design and development of novel smallmolecules based on the inhibition of carbohydrate-protein interactions involvedin disease processes. We also operate a manufacturing facility that providescontract manufacturing and bioprocess technology development services toAustralian and overseas-based clients. This facility manufactures PI-88 andprepares PI-166 for all clinical trials that have been conducted to date.

 

**OurBusiness Strategy**

 

                                                We intend to develop and commercializetherapeutics for cancer and other serious diseases.  To achieve this objective, we areconcentrating on the following key initiatives:

 

·                                *Leveraging in-house expertise andcapabilities in Product Development.* We believe that our core scientific and managementteam has significant and demonstrated expertise in drug discovery and inselecting and advancing promising product candidates through human clinicaltrials to demonstrate proof of efficacy and move these product candidatestowards registration and commercialization.

 

·                                *Discovering and developing novelsmall molecule therapeutics using our proprietary drug discovery technologyplatform.*We willcontinue to focus our drug discovery research programs on the discovery anddevelopment of small molecule therapeutics for cancer and other seriousdiseases that will feed our product candidate pipeline and leverage our drugdevelopment infrastructure over time.

 

·                                *Expanding our product candidatepipeline through in-licensing and Mergers & Acquisitions.*In addition to our internal drugdevelopment efforts, we intend to selectively in-license or otherwise acquireor integrate lead compounds and new therapies for cancer and other seriousdiseases at early stages of development and other new therapies for cancer andother serious diseases and undertake early stage clinical development.

 

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·                                *Establishing strategic collaborationsfor the development and commercialization of our product candidates.*Where appropriate to optimizing clinicaldevelopment and maximizing value creation, we intend to complement our internalcapabilities by selectively entering into collaborations with pharmaceuticaland biotechnology companies to complete product development and move ourproduct candidates into the marketplace as well as to improve our ability tomove new compounds into the clinic.

 

·                                *Leveraging our in-housemanufacturing capabilities to support the development and commercialization ofour product candidates.*We manufacture PI-88 and formulate PI-166 for preclinical and clinicaltrials at our manufacturing facility. We intend to leverage our experience inbioprocess manufacturing technologies to support the development andcommercialization of our present and future product candidates.

 

·                                *Establishing and maintaining astrong intellectual property portfolio.* We plan to continue to aggressively pursue patentprotection in Australia, the United States and other significant markets, aswell as protect trade secrets and know-how, as our drug discovery technologiesuncover additional small molecule product candidates or as necessitated by ourin-licensed development programs.

 

**PI-88**

 

Our lead product candidate,PI-88, is a carbohydrate-based small-molecule which is currently undergoingclinical development in several different oncology indications. PI-88 isbelieved to work via two mechanisms. First, it inhibits the enzyme heparanase,which plays an important role in tumor spread and invasion through surroundingtissues. Tumors must ordinarily degrade the basement membrane and extracellularmatrix of surrounding tissues in order to grow and heparanase is an enzyme thatfacilitates this process. By inhibiting this degradation process, PI-88 reducesthe ability of tumors to expand and spread. Second, PI-88 exerts ananti-angiogenic effect by inhibiting the interaction between growth factors, heparansulfate and cellular receptors. As tumors grow, they require additional bloodsupply to provide oxygen and nutrients. The generation of these new bloodvessels to supply additional blood supply is a process known as angiogenesis,and it is controlled in part by proteins such as Vascular Endothelial GrowthFactor, or VEGF, and Fibroblast Growth Factor, or FGF-1 and FGF-2, binding totheir receptors. PI-88 competitively links to the binding domain of thesegrowth factors, limiting their ability to bind to heparan sulfate and theirreceptors. Angiogenesis has been widely validated as an important target in thedevelopment of novel anti-cancer therapies; however, PI-88, a First-in-Class heparanaseinhibitor, employs a unique mechanism to target angiogenesis.

 

Our goal is to commercializePI-88 as a cytostatic anti-cancer therapy, beginning with liver cancer andprogressing into a range of other types of cancer. Cytostatic drugs aredesigned to stop tumors from spreading or recurring, as compared to cytotoxic drugswhich are designed to destroy tumor cells, but which often have adverse effectsin normal cells, leading to toxicity.

 

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*PI-88 Clinical Development Program*

 

All clinical trialsof PI-88 are being conducted under an active IND with the FDA. In thepreclinical and clinical studies executed to date, PI-88 has shown anacceptable safety and tolerability profile in clinical trials. PI-88 is alsoshowing signs of clinical efficacy in PI-88’s multinational clinicaldevelopment program. To date more than 23,300 doses of PI-88 have beenadministered to over 470 patients and healthy volunteers for periods ranging upto between four and five years. Most oncology drugs are designed to be toxic tothe cancer, as their name – cytotoxics – indicates. These drugs are designed toeradicate tumor cells, often with adverse consequences for non-cancerous cellsas well. Historically, the efficacy of cytotoxic compounds was measured byassessments such as the degree to which tumors shrink. PI-88 belongs to therelatively new class of cytostatic drugs. As the name implies, cytostatic drugsare designed to keep the disease stable, so the efficacy of these cytostaticdrugs is measured by assessments such as time to disease recurrence, diseaseprogression, time of stable disease, disease free survival, and overallsurvival.

 

PI-88 is currently in Phase 2 clinical development with two Phase 2 clinical trials ongoingin Australia and the U.S., under an active Investigational New Drugapplication, or IND, with the FDA. We are planning to commence Phase 3 PI-88development in post-resection liver cancer by the end of calendar year 2007.This Phase 3 trial will also be under an active IND with the FDA.

 

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Thefollowing table summarizes the results of our completed, ongoing and plannedclinical trials for PI-88.

 

**PI-88 Completed Clinical Trials**

 
| **Study**                                                                                       | ** ** | **Ph**   | ** ** | **Treatment**                                                                                    | ** ** | **Status & Key Points**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Intravenous  infusion in healthy volunteers**                                                 |       | Phase Ia |       | Escalating  single dose as a 3-hour intravenous infusion                                         |       | ·                  18 healthy male adults  recruited

·                  Short term safety and  pharmacokinetic data obtained

·                  Doses of up to 180mg were  well tolerated                                                                                                                                                                                                                                                   |
| ** **                                                                                      |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Intravenous  infusion in cancer patients**                                                    |       | Phase Ib |       | Dose escalation  by continuous intravenous infusion                                              |       | ·                  14 patients recruited with  advanced malignancies

·                  2 cases of Grade 3  thrombocytopenia, platelets recovered following cessation of treatment                                                                                                                                                                                                                                                                                                                                                     |
| ** **                                                                                      |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Alternative  intravenous dosage regimen in cancer patients**                                  |       | Phase Ib |       | Dose escalation  by intravenous infusion for 4 days with 7 day follow up period                  |       | ·                  9 patients recruited with median age of 65 years

·                  Dose limiting toxicity – 1 case of Grade 3 serum  alanine aminotransferase

·                  Repeat cycles at 2 week intervals                                                                                                                                                                                                                 |
| ** **                                                                                      |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Subcutaneous  injection in healthy volunteers**                                               |       | Phase Ia |       | Dose escalation  by subcutaneous administration and comparison with intravenous infusion         |       | ·                  19 healthy male volunteers

·                  Comparison between intravenous infusion and  subcutaneous injection bioavailability via two-way crosser design

·                  Determined 95% bioavailability by  subcutaneous administration                                                                                                                                                                           |
| ** **                                                                                      |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Self  administered subcutaneous in advanced cancer patients**                                 |       | Phase Ib |       | Dose escalation  by 4/14 days and then 4/7 days                                                  |       | ·                  42 patients recruited with median age of 55 years

·                  Maximum tolerated dose of 250 mg/day 4 days in 7  days

·                  38 evaluable patients, 1 partial response, 14 stable  disease for 3 months or longer

·                  2 patients still on PI-88 treatment for 50 and 58  months respectively |
| ** **                                                                                      |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Self  administered subcutaneous with Taxotere® in patients with advanced  malignancies** |       | Phase Ib |       | Dose escalation  PI-88 and Taxotere®                                                        |       | ·                  16 patients recruited

·                  Established maximum tolerated dose for PI-88 in  combination with docetaxel 250 mg/day 4 days per week

·                  No dose limiting toxicities                                                                                                                                                                                                                           |
| ** **                                                                                      |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Self  administered subcutaneous in multiple myeloma patients**                                |       | Phase 2  |       | PI-88 dose  determined via doubling activated partial thromboplastin time levels (APTT)          |       | ·                  Paraprotein marker study – 19 patients recruited

·                  41% of evaluable patients had disease stabilisation  for 8 weeks or longer                                                                                                                                                                                                                                                                                                                                                                 |
| ** **                                                                                      |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Self  administered subcutaneous in advanced melanoma patients**                               |       | Phase 2  |       | Monotherapy of  250 mg/day 4 days in every 7days                                                 |       | ·                  44 patients recruited

·                  9 months median survival versus historical control  of 6.4 months in other studies of DTIC in first line.

·                  This lead to initiation of first line trial in  combination with DTIC                                                                                                                                                                              |
| **.**                                                                                           |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Primary  liver cancer (post-resection)**                                                      |       | Phase 2  |       | 3-arm study: 2  dose levels of PI-88 and a non treatment arm (control)                           |       | ·                  172 patients recruited

·                  Treatment with 160 mg of PI-88 increased the  disease-free rate at 48 weeks by approximately 25% from 50 to 63%

·                  Treatment with 160 mg of PI-88 increased the  time-to-recurrence of disease (disease-free survival) by approximately 78%,  from 27 to 48 weeks                                                                                              |
| ** **                                                                                      |       |     |       |                                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Advanced  non small cell lung cancer (NSCLC)**                                                |       | Phase 2  |       | 2-arm study:  Combination therapy Taxotere ® with and without  self-administration of PI-88 |       | ·                  99 patients recruited

·                  PI-88 did not meet its primary and secondary  endpoints                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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**PI-88 Ongoing Clinical Trials**

 
| **Study**                                                                                                 | ** ** | **Ph**  | ** ** | **Treatment**                                                                         | ** ** | **Status & Key Points**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----------------------------------------------------------------------------------------------------------|------------|---------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Advanced  prostate cancer (androgen-independent prostate cancer – Investigator  initiated trial)** |       | Phase 2 |       | 2-arm study:  Self-administration of PI-88 combined with Taxotere®               |       | ·                  Trial commenced  in August 2005

·                  Recruitment  completed for the lead in safety stage

·                  No longer  recruiting patients

·                  Randomised  stage will assess PI-88 at two different dose regimens in combination with  Taxotere®.                    |
| ** **                                                                                                |       |    |       |                                                                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Advanced  melanoma (first-line treatment)**                                                        |       | Phase 2 |       | 2-arm study:  Combination therapy DTIC, with and without self-administration of PI-88 |       | ·                  Trial commenced  in May 2005.

·                  114 evaluable  patients to be recruited

·                  Recruitment  completed for the lead in stage

·                  Lead in stage  assessed safety of combination. Randomised stage will assess the benefit of  the addition of PI-88 to DTIC. |

 

**PI-88 Planned Clinical Trials**

 
| **Study**                              | ** ** | **Ph**  | ** ** | **Treatment**                                                            | ** ** | **Status & Key Points**                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------------------------|------------|---------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Primary liver  cancer (post-resection) |       | Phase 3 |       | Double blinded  placebo controlled with a dose of 160 mg/4 days per week |       | ·                  Approx. 600  patients to be recruited

·                  Due to commence  Q4 CY07

·                  Patients  treated until disease recurs or study completed |

 

*Development Strategy for PI-88*

 

The clinical development plan for PI-88 isregistration focused with the lead PI-88 indication being post-resection livercancer.

 

In parallel, we continuewith other Phase 2 PI-88 clinical trial programs across multiple cancers.

 

**Post-resection liver cancer**

 

In April 2007 we announced the stage I results ofour Phase 2 trial of PI-88 in patients who had previously undergone surgicalremoval of liver cancer. The 160mg data demonstrated the potential of PI-88 toextend the disease-free survival time of the patients following post-curativeresection of the liver cancer, a patient population who have few, if any,treatment options and a high likelihood of disease recurrence.

 

The Phase 2 trial of PI-88 in post-resection livercancer was carried out on our behalf by our Taiwan based Medigen BiotechnologyCorporation under the terms of an Agreement struck in May 2000. Fordetails on this agreement refer to the next section.

 

The Phase 2 post-resectionliver cancer study was originally designed as a two-stage trial, with the firststage intended to determine optimal dosing and the second to demonstrateefficacy. In April 2006, we met with the FDA and discussed ourregistration path for PI-88. Following this 

 

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meeting we decided to proceed directly toPhase 3 development after completion of the first stage, thereby bringing PI-88into Phase 3 trial several years earlier than would otherwise have beenpossible.  In the April 2006meeting, the FDA also recommended that Progen submit Special PurposeAssessments (SPAs) for its Phase 3 trials. We are due to initiate a globalPhase 3 trial before the end of calendar year 2007 that is designed to supportregistration and marketing approval of PI-88 in this indication as swiftly andefficiently as possible.

 

Patients in the first stage of the Phase 2 trial wererandomly assigned to one of three groups to receive either the standard of care(with no PI-88 treatment), 160 mg of PI-88, or 250 mg of PI-88, over 36 weekswith a 12 week follow-up period.

 

In summary the results of the first stage Phase 2trial of PI-88 in post-resection HCC patients demonstrated that:

 

·                  Treatment with 160 mg of PI-88 increased thedisease-free rate at 48 weeks by approximately 25%, from 50 to 63%;

 

·                  Treatment with 160 mg of PI-88 increased thetime-to-recurrence of disease (disease-free survival) by approximately 78%,from 27 to 48 weeks;

 

·                  The 160 mg dose of PI-88 had an excellent safety andtolerability profile and there were few adverse events directly, or possibly,related to treatment;

 

·                  Treatment with the 250 mg dose resulted in thirteenpatients terminating treatment early. This was partly due to adverse events,possibly related to treatment at this dose level which impacted the results forthis treatment arm; and

 

·                  The 250 mg dose of PI-88 reduced the disease free rateby approximately 19 percent as compared to the control group, from 50 percentto 41 percent at 48 weeks, and was inseparable from the control group as todisease-free survival.

 

Liver cancer is a logical choice for Phase 3 clinicaldevelopment because the patients in this setting will have undergone curativeresection for liver cancer and many experience rapid recurrence of theirdisease.  This indication is also a goodbiological match with the way we believe PI-88 works by inhibiting the growthof new tumor blood vessel formation and restricting metastasis. Coupled withthe biological relevance, is the commercial potential of this indication, as we currently believe that there are currently no FDA approved therapies to reduce therisk of recurrence for primary liver cancer patients after resection. Our Phase3 trial should be the first large FDA registration directed trial initiated toassess new therapies for this patient group.

 

Subsequent to June 30, 2007 the FDA awarded PI-88fast track designation for the treatment of post-resection liver cancer underthe FDA Modernization Act of 1997. The fast track program is designed tofacilitate the development and expedite the regulatory review of new drugs thatdemonstrate the potential to treat serious life threatening disease where thereis an unmet medical need. The fast track designation will enable Progen to filea New Drug Application (NDA) on a rolling basis as data is available speedingthe registration process significantly. We also received 

 

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orphan medicinal product designation for PI-88 for the treatment ofprimary liver cancer in the European Union (EU).

 

To assist us with theexecution of the Phase 3 trial Progen, has appointed Quintiles, the world’slargest Contract Research Organization (CRO), to help with the execution of thestudy. Quintiles has over 18,000 employees world-wide and has managed over 520separate oncology studies, and has significant infrastructure in the regionswhere the trial will be conducted. They also operate directly in each of the 14North American, European and Asian countries where Progen will be conductingthe Phase 3 PI-88 trial.

 

**Other Phase 2 clinical trials of PI-88**

 

Since the end of fiscal 2007 we announced the resultsof the PI-88 Phase 2 trial in patients with advanced non small cell lung cancer(NSCLC). This trial was designed to test the efficacy and safety of PI-88 incombination with Taxotere® (docetaxel). The trial recruited 100 patients andwas conducted at 13 sites in Australia. The final results for this trial showedPI-88 did not improve patient outcomes in this setting and does not warrantfurther development in this particular patient population at this advanceddisease state.

 

Our metastatic melanoma trial is currently recruitingpatients that have not previously received chemotherapy (i.e. first linepatients). In this indication, the efficacy of PI-88 in combination with DTIC(dacarbazine) is being investigated. DTIC is a chemotherapy drug used asstandard first-line treatment for patients with newly diagnosed metastaticmelanoma and the goal of the study is to determine whether PI-88 can increaseefficacy in combination with DTIC. The approved anti-angiogenic drug, Avastin®(bevacizumab), has been shown to enhance efficacy in combination withchemotherapy in patients with various solid tumors, including bowel cancer,lung cancer and breast cancer. The PI-88 Phase 2 trial in combination with DTICis being conducted at seven sites in Australia and at three sites in U.S. 114evaluable patients with metastatic melanoma are planned for recruitment intothe study.  The recruitment for thelead-in stage of this trial has been completed. The lead-in stage was to assesssafety of the combination while the randomized stage will assess the benefit ofthe addition of PI-88 to DTIC. We anticipate reporting on this trial in thelatter half of 2008.

 

The hormone refractory prostate cancer trial, which isan investigator-initiated study, continues to assess the benefit of combiningPI-88 with chemotherapy agent Taxotere®. Sanofi-Aventis iscollaborating with Progen on the trial through a financial grant to theinvestigators and supply of Taxotere® for the trial. We anticipatereporting results of this trial in the first half of 2008.

 

*CommercializationStrategy for PI-88*

 

We have retainedworldwide commercial rights to PI-88. We continue to assess strategicpartnering opportunities in parallel with taking the product aggressivelytowards market commercialization. At the appropriate time, we intend to selectcollaborators for later-stage clinical development and commercialization ofPI-88 as a cancer therapeutic. It is important that if we partner the productit should be at the appropriate stage that will maximize the product’s value.

 

Our market development strategy is based on aregistration approach for PI-88 in post-

 

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resection liver cancer targeting firstly the U.S., Europe and Australiathen as soon as possible, Japan, China, Taiwan, Korea, and other South EastAsian countries. The registration plan is directly related to the economicopportunities available to Progen in this key indication. The Phase 3 clinicaldevelopment plan will be designed to effectively support the registration plan.We will be preparing the U.S. NDA in parallel to the Phase 3 trial so that assoon as the clinical data is available the application can be submitted withthe intention of minimizing the filing time of the NDA.

 

Hepatocellular Carcinoma (HCC), the mostcommon form of liver cancer, is an aggressive tumor that is currently the fifthmost common solid tumor worldwide and the fourth leading cause of cancerrelated death.  In 2005, it was predictedthat there would be more than 600,000 cases of liver cancer throughout theworld.  In Eastern Asia and Africa, theincidence of HCC ranges from 20.8 cases to 40.0 cases per 100,000 men.  The highest age standardized mortality rateis found in China where deaths from HCC are the second largest cause of cancermortality.  80,000 new cases of HCC areexpected to be diagnosed in the seven major markets (U.S., Japan, France,Germany, Italy, Spain, UK) in 2007.  Inthe U.S., the American Cancer Society estimates that 19,160 of primary livercancer will be diagnosed during 2007. Japan alone accounts for nearly a half ofall HCC cases in the seven major markets. However, the increasing prevalence ofhepatitis carriers in the West means that the incidence of HCC in the U.S. andEurope is expected to increase significantly over the coming years. Furthermore, given a latency period of 30-50 years between hepatitis exposure and thedevelopment of HCC, those infected with the virus decades ago may eventuallydevelop HCC.

 

Currently, surgical resection of the tumor is the principal therapeutic intervention in eligiblepatients, who comprise between 15 and 35% of patients diagnosed with livercancer. Recurrence rates of 75-100% at five years after such surgery are amongthe highest of any solid tumor and correspond to five-year survival rates inthe range of 26-50% and five-year disease-free survival of13-29%.

 

**Economic Impact of HCC**

 

The prevalence of primary liver cancer is highest in Asia and Africa,where chronic hepatitis B incidence rate is a key driver.  In Japan, Europe and the U.S., liver cancerincidence is attributed largely to underlying hepatitis C infection.  The *InternationalJournal of Cancer* estimates that 80% of new liver cancer cases willoccur in developing countries. Additionally, based on a 2005 Frost & Sullivan report, theannual incidence of liver cancer in China is approximately 350,000, in Europe50,000, in Japan 50,000, in South Korea 20,000, and over 50,000 elsewhere inSouth East Asia.

 

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***OtherProduct Candidates***

 

**PI-166**

 

PI-166, our secondoncology product candidate, is a novel combination of an active small organicchemical molecule and a delivery vehicle that directs the active drugconstituent at the tumor site. PI-166 is being developed for potential applicationin the treatment of advanced hepatocellular carcinoma (primary liver cancer).

 

*PI-166Clinical Development Program*

 

A Phase 1 clinical trial with PI-166 was initiated atthe St. George Hospital in Sydney, Australia in 2003. Due to slower than expectedrecruitment from this center two additional sites have been added (PrincessAlexandra Hospital, Brisbane and Monash Hospital, Melbourne). The primaryobjective of this trial is to investigate the safety and tolerability ofescalating doses of PI-166 in patients with advanced stage primary liver cancerwhere surgical intervention is no longer an option (unresectable). Based oninterim data to date, no drug-related side effects of PI-166 have been observedin patients enrolled in the trial.

 

*PreclinicalStudies of PI-166*

 

Preclinicalstudies of PI-166 indicate that this treatment modality has antiproliferativeactivity against hepatocellular carcinoma (liver cancer) cells *in vitro* (within an artificial environment) and anti-tumoractivity *in vivo*against the Novikoff hepatoma inrats, a model of primary liver cancer in humans that like human hepatoma, isknown to be highly resistant to standard chemotherapeutic agents.

 

*Development Strategy for PI-16*6

 

We have retainedworldwide commercial rights to PI-166. At the appropriate time, we will selectcollaborators to conduct later-stage clinical trials and commercialization ofPI-166 as a cancer therapeutic, depending on the outcome of current andpossible future clinical development efforts.

 

**ResearchPipeline**

 

We have an active drugdiscovery research program that has identified a portfolio of therapeutictargets that play key roles in cancer, and potentially in other seriousdiseases. Our discovery team is designing, synthesizing and screening smallmolecule compounds directed at these targets. This research program waspartially funded by an AusIndustry START grant until June 2005. In August 2005,we were successful in being awarded a further AusIndustry grant known as aCommercial Ready Grant that will continue to partially fund this program until August 2008.

 

The first class of novelcompounds emerged from this program in late 2005. These compounds have beenshown to inhibit newblood vessel formation in several *in vitro*modelsof angiogenesis. The investigators reported that multiple PG500 compounds,decreased or prevented human endothelial cell (HUVEC) proliferative responsesto growth factors including fibroblast growth factors 1 and 2 (FGF-1, FGF-2)and to vascular endothelial cell growth factor (VEGF). 

 

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Blocking these interactions inhibits the angiogenesis and metastasisprocesses critical in tumor growth and progression.

 

These compounds also prevented new blood vesselformation as determined in the rat aortic assay.  In animal models of melanoma (B16F1 syngeneicmouse model) and human colorectal cancer (HT29 xenograft model), the heparansulfate mimetic (HSM) compounds inhibited tumor progression.  Progen has recently filed a secondprovisional patent application to cover these newer, more potent compounds.

 

We plan to conduct furtherdevelopment work to select a compound or compounds for formal toxicity studiesand pursue an IND leading to clinical development.

 

**Manufacturing**

 

We operate a current goodmanufacturing practice, or cGMP, certified pilot manufacturing facility thatprovides contract manufacturing services to the biotechnology industry, earningrevenues on a fee for service basis. Contract and consulting services revenuesconstituted approximately 100% of our sales revenue in each of the fiscal yearsended June 30, 2005, 2006, and 2007, respectively. The facility alsomanufactures PI-88 and prepares PI-166 for all clinical trials that have beenconducted to date.

 

On November 29, 2006,we received notification from the FDA that the appropriate, chemistry,manufacturing and control, or CMC, procedures have been put in place toprogress PI-88 to Phase 3 clinical trials. This notification follows ourend-of-phase 2 CMC meeting with the FDA, held on October 24, 2006, andenables us to manufacture PI-88 for our upcoming Phase 3 clinical trial.

 

**Terminationof Collaboration with Medigen Biotechnology Corporation**

 

In May 2000,we entered into a strategic alliance agreement, the “Alliance Agreement”, withMedigen Biotechnology Corporation, or MBC, a biotechnology company based inTaiwan. The collaboration related to early stage clinical trials of PI-88. Thestrategic alliance required Medigen to undertake and complete certain clinicaltrials of PI-88. On completion of these PI-88 clinical trials, Medigen wasentitled to a 15% royalty on PI-88 proceeds of commercialization received byProgen. Both parties agreed to end the strategic alliance to allow Progen todevelop and commercialize PI-88 as rapidly as possible and with maximumflexibility.

 

In January 2007 theCompany announced that it had agreed terms with MBC to conclude the AllianceAgreement. In consideration for MBC agreeing to end the Alliance Agreement, andforegoing their entitlement to the 15% royalty, and to compensate MBC for theircontribution to the development of PI-88, Progen agreed to:

 

·                  Return 15,176,525 MBC ordinary shares (i.e. Progen’s 19.9% interest)that comprised part of the consideration under the Alliance Agreement, to MBC.

 

·                  Issue 500,000 Progen shares to MBC on execution of the terminationagreement;

 

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·                  Reimburse to MBC A$300,000 being the funds they contributed to the costsof the PI-88 Phase 2 Melanoma clinical trial on execution of the agreement;

 

·                  Issue a further 732,600 Progen shares and pay A$2,000,000 in cash orshares, at Progen’s discretion, to MBC on MBC completing two clinicalmilestones in relation to the current PI-88 Phase 2 HCC Trial;

 

·                  Pay MBC up to A$4,000,000 on PI-88 achieving specified clinical andcommercial milestones; and

 

·                  Issue 1,000,000 options to MBC upon MBC providing to Progen the HCCPhase 2 Trial Final Study Report.

 

To datewe have returned the 15,176,525 Medigen shares, reimbursed the A$300,000 andissued 1,232,600 Progen shares and 1,000,000 Progen options.

 

**GovernmentRegulation**

 

Regulation bygovernment authorities in the U.S., Australia and other countries in which theCompany operates is a significant factor in the development, manufacture andmarketing of our proposed products and in our ongoing research and developmentactivities. The nature an extent to which such regulation applies to us willvary depending on the nature of any products which may be developed by us. Weanticipate that many, if not all, of our proposed products will requireregulatory approval by governmental agencies prior to commercialization. Inparticular, human therapeutic products are subject to rigorous preclinical andclinical testing and other approval procedures of the FDA and similarregulatory authorities in European and other countries. Various governmentalstatutes and regulations also govern or influence testing, manufacturing,safety, labeling, storage and recordkeeping related to such products and theirmarketing. The process of obtaining these approvals and the subsequentcompliance with appropriate statutes and regulations require the expenditure ofsubstantial time and money, and there can be no guarantee that approvals willbe granted.

 

The Company isalso subject to various laws, regulations, policies, guidelines andrecommendations relating to such matters as safe working conditions, laboratoryand manufacturing practices, the experimental use of animals and the protectionof the environment. Furthermore, there has been a general trend towards greaterregulation of the pharmaceutical industry and its products.

 

**Manufacturing**

 

Our manufacturingfacility is licensed by the Australian Therapeutic Goods Administration for themanufacture of biological-based starting materials for human therapeutics tocGMP and by the Australian Office of Gene Technology Regulator for themanufacture of large scale genetically modified organisms. In addition, certaininternational markets have quality assurance and manufacturing requirementsthat may be more or less rigorous than those in Australia. Our manufacturingfacilities are also subject to regular inspections by the TGA. We cannot makeany assurances that we will continue to be in compliance with cGMP requirements.Failure to comply with cGMP requirements or with any other internationalrequirements could have a material adverse effect on our business, financialcondition and results of operations.

 

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**Researchand Development**

 

The research anddevelopment, manufacture and commercialization of our pharmaceutical productsare subject to regulation by governmental entities in Australia and othercountries including the United States. Pharmaceutical products are subject torigorous regulation by the TGA under the Australian Therapeutic Goods Act, bythe FDA in the United States, and by similar health authorities in foreigncountries under laws and regulations that govern, among other things, thetesting, clinical trials, manufacture, safety, efficacy, labeling, storage,record keeping, advertising, promotion, export, marketing and distribution ofsuch products. Product development and approval within this regulatoryframework is uncertain and can take a number of years and require theexpenditure of substantial resources. Any failure to obtain regulatory approvalor any delay in obtaining such approvals could have a material adverse effecton our business, financial condition and results of operations.

 

*AustralianGovernment Regulation*

 

The steps requiredbefore a drug may be approved for marketing in Australia generally include:

 

·                                          Preclinical laboratory and animal testing;

 

·                                          Submission to the TGA of a clinical trialnotification, or CTN, or a clinical trial exemption, or CTX, application forhuman trials;

 

·                                          Submission of an investigators’ brochure and clinicalprotocols to the independent ethics committee, or IEC, of each institution atwhich the trial is to be conducted;

 

·                                          Adequate and well-controlled clinical trials todemonstrate the safety and efficacy of the product;

 

·                                          Development of a Drug Master File, which demonstratesthat the manufacture of the product conforms to GMP guidelines;

 

·                                          Submission of the manufacturing, preclinical andclinical data to the TGA; and

 

·                                          Approval by the TGA for inclusion in the AustralianRegister of Therapeutic Goods.

 

The testing andapproval processes for a drug require substantial time, effort and financialresources. Furthermore, post-market surveillance must be carried out, and anyadverse reactions to the drug must be reported to the TGA. We cannot make anyassurances that any approval will be granted on a timely basis, if at all.

 

Preclinicalstudies include laboratory evaluation of the product as well as animal studiesto assess the potential safety and efficacy of the product. The results of thepreclinical studies are submitted to each investigator’s IEC and, in someinstances, to the TGA. Approval by each IEC and

 

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by theTGA is necessary before clinical trials can commence. An IEC is a reviewcommittee at each institution at which a study is conducted and is set up underguidelines of the Australian National Health and Medical Research Council. Therole of an IEC is to review proposals for clinical trials, and approve andsubsequently monitor the clinical trials. The IEC will consider, among other things, ethical factors and thesafety of human subjects. We cannot make any assurances that submission to theapplicable IECs and the TGA will result in authorization to commence clinicaltrials.

 

Clinical trialsare typically conducted in three sequential phases that may overlap:

 

·                                          Phase 1 clinical trials that involve theinitial introduction of the drug into human subjects and the exploration of itssafety (adverse effects), dosage tolerance, absorption, metabolism, excretionand pharmacodynamics;

 

·                                          Phase 2 clinical trials that (i) evaluatethe efficacy of the drug for specific, targeted indications, (ii) determinedosage tolerance and optimal dosage, and (iii) identify possible adverseeffects and safety risks. Phase 2 trials usually involve studies in a limitedpatient population; and

 

·                                          Phase 3 clinical trials that generallyfurther evaluate clinical efficacy and further test for safety within anexpanded patient population sufficient to provide statistically significantdata.

 

In the case ofproducts with a high risk of toxicity, the initial clinical trials aresometimes conducted in patients with the target disease rather than in healthyvolunteers. Since these patients are already afflicted with the target disease,it is possible that such clinical trials may provide evidence of efficacytraditionally obtained in Phase 2 clinical trials. We cannot make anyassurances that Phase 1, Phase 2 or Phase 3 testing will be completedsuccessfully within any specific time period, if at all, with respect to any ofour product candidates. Furthermore, the TGA and/or the applicable IEC maysuspend clinical trials at any time on various grounds, including a findingthat the subjects or patients are being exposed to an unacceptable health risk.

 

All completed and ongoing PI-88 patient clinicaltrials are/have been conducted under an active IND application with the FDA,under a CTN application with the TGA for Australian sites and other healthauthority jurisdictions where relevant.

 

In January 2003,a Phase 1 clinical trial with PI-166 in patients with unresectable primaryliver cancer, was initiated at the St. George Hospital in Sydney, Australia.This Phase 1 trial is being conducted under a separate CTN application with theTGA.

 

In order to obtainAustralian marketing approval for a drug, the results of the preclinicalstudies and clinical trials, together with detailed information on the manufactureand composition of the product, are submitted to the TGA with a request forregistration of the product in the Australian Register of Therapeutic Goods.The TGA may delay approval if applicable regulatory criteria are not satisfied,require additional testing or information, and/or require post-marketingtesting and surveillance to monitor the safety or efficacy of a product. Wecannot make any assurances that approval by the TGA will be granted on a timelybasis, if at all. Also, if regulatory approval of a

 

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productis granted, such approval may entail limitations on the indicated uses forwhich such product may be marketed.

 

*U.S.Government Regulation*

 

FDA approval tomarket our drug products in the U.S. is expected to be undertaken by us or inconjunction with a commercial partner. The approval process of the FDA and TGAare similar, with substantial requirements for preclinical research, conduct ofclinical trials, and manufacture of the product. Human clinical testing of anew drug requires the submission of an IND that must include the results ofpreclinical studies, together with manufacturing information and analyticaldata. We cannot make any assurances, however, that submission of an IND willallow us to commence clinical trials. Furthermore, once trials have commenced,the FDA may stop the trials, or particular types of trials, by placing a “clinicalhold” on such trials because of, for example, concerns regarding the safety ofthe product being tested. Such holds can cause substantial delay and, in somecases, may require abandonment of a product. In addition, in the U.S., Phase 4clinical trials are conducted after approval by the FDA to gain additionalexperience from the treatment of patients in the intended therapeuticindication and to document a clinical benefit in the case of drugs approvedunder accelerated approval regulations. If the FDA approves a product while acompany has ongoing clinical trials that were not necessary for approval, acompany may be able to use the data from these clinical trials to meet all orpart of any Phase 4 clinical trial requirement. These clinical trials are oftenreferred to as “Phase 3/4 post-approval clinical trials.”  Failure to promptly conduct Phase 4 clinicaltrials could result in withdrawal of product approval under acceleratedapproval regulations.

 

The results ofpreclinical studies and clinical trials, together with detailed information onthe manufacture and composition of the product, are submitted to the FDA in theform of a New Drug Application, or NDA, requesting approval to market theproduct. Before approving an NDA, the FDA will inspect the facilities at whichthe product is manufactured and will not approve the product unless the manufacturingfacility is in GMP compliance. The FDA may delay an NDA if applicableregulatory criteria are not satisfied, require additional testing orinformation, and/or require post-marketing testing and surveillance to monitorthe safety or efficacy of a product. We cannot make any assurances that FDAapproval of any NDA submitted by us will be granted on a timely basis, if atall. Also, if regulatory approval of a product is granted, such approval mayentail limitations on the indicated uses for which the product may be marketed.

 

Under the FDA Modernization Act of 1997, the FDA hasimplemented accelerated review and approval procedures for therapies that havebeen studied for their safety and effectiveness in treating seriouslife-threatening or severely debilitating diseases, and which provide ameaningful therapeutic benefit to patients over existing treatments. Sponsorsof such products may request to meet with the FDA-reviewing officials early inthe drug development process to review and reach agreement on the design ofnecessary preclinical and clinical studies. This designation is commonly knownas Fast Track. The FDA has awarded PI-88 Fast Track designation for thetreatment of post-resection liver cancer.

 

We are currentlyconducting several Phase 2 clinical trials of PI-88 under our IND with the FDAand separate CTN applications with the TGA. We have recently submitted thePhase 3 protocol for the upcoming PI-88 trial in post-resection liver cancer tothe FDA and TGA. We may seek FDA and TGA approval for independent Phase 2trials of PI-166 in the U.S. and Australia upon successful

 

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completionof the Phase 1 trial in Australia. We cannot make any assurances that oursubmissions to the FDA or the TGA will be successfully reviewed, that therequisite approvals will be granted, that accelerated approvals will apply, orthat later stage clinical trials will commence.

 

*OrphanDrug Status*

 

PI-88, our lead productcandidate, has been designated as an orphan drug by the FDA for the treatmentof high risk Stage II, Stage III and Stage IV melanoma and an orphan medicinaldrug status from the EMEA for the treatment of liver cancer. If our otherproduct candidates meet the relevant criteria, we may also apply for orphandrug status for such product candidates.

 

The FDA may grant orphandrug status to drugs intended to treat a rare disease or condition, which isgenerally a disease or condition that affects fewer than 200,000 individuals inthe United States. Orphan drug status does not convey any advantage in, orshorten the duration of, the regulatory review and approval process, and theFDA may grant orphan drug status to multiple competing product candidatestargeting the same indication. A product that has been designated as an orphandrug that subsequently receives the first FDA approval for the indication forwhich it has received such designation is entitled to orphan drug exclusivityand the FDA may not approve any other applications to market the same drug forthe same indication, except in very limited circumstances, for seven years fromthe date of FDA approval. An orphan product may also be eligible for a creditagainst United States tax of certain clinical testing expenses related to theuse of a drug for a rare disease or condition.

 

**Patent Rights; Licenses and Proprietary Technology**

 

**Generally**

 

Our success will depend in large part on whether wecan:

 

·                                          Obtain patents to protect our own products;

 

·                                          Obtain licenses to the patented technologies of thirdparties;

 

·                                          Operate without infringing on the proprietary rightsof third parties; and

 

·                                          Protect our trade secrets and know-how.

 

For a discussionof the risks and uncertainties associated with our intellectual propertyposition, see “Risk Factors – Our success depends upon our ability to protectour intellectual property and our proprietary technology.”

 

**Patents**

 

The Company’spolicy is to protect and defend the intellectual property associated with itstechnology and products, principally through patent protection. We achieve thisby filing patent applications for discoveries made by our scientists, as wellas those that we make in conjunction with our scientific collaborators andstrategic partners.

 

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We own or haveexclusive rights to 11 patent families, incorporating 24 granted patents and 29filed applications.

 

The most materialof these patents and patent applications being:

 

1.               PI-88 – Composition of matter and method of use patentfamilies have been granted in countries including the U.S., Australia, Korea,Taiwan, China, South Africa and New Zealand. Further, the PI-88 composition ofmatter patent application has been accepted in Canada and filed in countriesincluding Europe and Japan. The PI-88 composition of matter patent expires in2016. Under laws such as the U.S. Waxman Hatch law, extensions for PI-88patents are possible in some countries and we intend to maximize theopportunities to pursue such patent extensions.

 

2.**              **Angiogenesis Inhibitory antibodies**-**Thispatent describes an antibody and the use of this antibody for the inhibition ofangiogenesis. More specifically the antibody, being a monoclonal antibody isspecific to proliferating human endothelial cells. The specification also setsforth a method of producing the antibody by hybridoma culture.

 

The availabilityand breadth of claims allowed in biotechnology and pharmaceutical patents ishighly uncertain and generally involves complex legal and factual questions. Wecannot make any assurances that any of our pending or future patentapplications will be approved, or that we will develop additional proprietaryproducts or processes, or be able to license any other patentable products orprocesses. We also cannot make any assurances that others will notindependently develop similar products or processes, duplicate any of theproducts or processes developed or being developed by or licensed to us, ordesign around the patents owned or licensed by us, or that any patents owned orlicensed by us will provide us with competitive advantages. Furthermore,patents held by third parties may prevent the commercialization of productsincorporating the technology developed by or licensed to us, and third partiesmay challenge or seek to narrow, invalidate or circumvent any or all of theissued, pending or future patents owned or licensed by us.

 

If it weredetermined that we were infringing any third party patents, we could berequired to pay damages, alter our products or processes, obtain licenses orcease certain activities. We cannot make any assurances that the licensesrequired under patents held by third parties would be made available to us onacceptable terms, or at all. To the extent that we are unable to obtain suchlicenses, we could be foreclosed from the development, manufacture orcommercialization of the product requiring such license or encounter delays inproduct introductions while we attempt to design around such patents.

 

We also believethat because of the differences in patent laws, foreign patents, if obtained,and the protection afforded by such foreign patents and foreign intellectualproperty laws may be more limited than that provided under Australian or UnitedStates patents and intellectual property laws. Litigation, which could resultin substantial costs and diversion of effort on our part, may also be necessaryto enforce any patents issued or licensed to us or to determine the scope andvalidity of third party proprietary rights. We may have to participate inopposition proceedings before the Australian Patent and Trademark Office oranother foreign patent office, or in interference proceedings declared by theUnited States Patent and Trademark Office, to determine the priority of theinvention for patent applications filed by competitors. Any such litigation,interference or

 

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oppositionproceeding, regardless of outcome, could be expensive and time consuming, andadverse determinations in any such proceedings could have a material adverseeffect on our business, financial condition and results of operations.

 

**Licenses**

 

*PI-88**.*We have an exclusive worldwide license from theAustralian National University in Canberra, Australia, to five families ofpatents and patent applications relating to PI-88, our sulfated oligosaccharideheparanase inhibitor. Our license rights terminate on March 10, 2028. Ourlicense with the Australian National University requires us to pay theUniversity a portion of PI-88 related payments that we receive includingroyalties on sales of PI-88 as well as on any fees we receive from sublicensingthis technology. In addition we are the assignee to a sixth patent application.

 

*PI-166*. We also have an exclusive worldwidelicense from the University of New South Wales in Sydney, Australia, toPI-166, a novel drug and delivery technology that is a potential new therapyfor the treatment of hepatocellular carcinoma (primary liver cancer). Ourlicense rights terminate on expiration of the last patent forming part of thetechnology or, if no patent issues, in 2012 with an option to extend until2022. Our license with the University of New South Wales requires us to pay theUniversity a portion of PI-166 related payments that we receive includingroyalties on sales of PI-166 as well as on any fees we receive fromsublicensing this technology.

 

#### *Drug Discovery Technology*. We also have an exclusive worldwidelicense from the Australian National University to our patent applicationcovering the synthesis of potential drug intermediaries. Our license rightsterminate at the expiration of the last patent related to the synthesistechnology. Our license with the Australian National University requires us topay the University a portion of product related payments that we receiveincluding royalties on sales of products arising from the synthesis technologyas well as on any fees we receive from sublicensing this technology, and tomake periodic payments on the achievement of certain milestones.

####  

**ProprietaryTechnology**

 

In addition topatent protection, we rely on unpatented trade secrets and know-how andproprietary technological innovation and expertise, all of which are protectedin part by confidentiality and invention assignment agreements with ouremployees, advisors and consultants. We cannot make any assurances that theseagreements will not be breached, that we will have adequate remedies for anybreach, or that our unpatented proprietary intellectual property will nototherwise become known or independently discovered by competitors. We alsocannot make any assurances that persons not bound by an invention assignmentagreement will not develop relevant inventions.

 

**Competition**

** **

*DrugDevelopment*

 

We facecompetition in each of our target product markets. The pharmaceutical andbiotechnology industries are also intensely competitive. Our anti-cancerpharmaceutical product candidates would be subject to significant competitionfrom existing drugs and therapies, as well as from products and therapiesutilizing alternative or similar technologies. There are many

 

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pharmaceuticaland biotechnology companies, and public and private academic institutions andresearch organizations actively engaged in the research and development ofalternative products and therapies for the treatment of diseases that we havetargeted for product development. Many of these organizations have greaterfinancial, technical, manufacturing and marketing resources.

 

We are aware ofcertain products that are being developed by competitors that modulatetumor-related angiogenesis, including heparanase inhibitors, FGF-2, VEG-F andother signal protein inhibitors, and inhibitors of certain matrixmetalloproteases, a family of enzymes known to be involved in processes throughwhich tumors invade tissues, metastasize and grow. Other competitors aredeveloping technologies that interfere with cancer cells directly. Several ofthese product candidates are in advanced stages of clinical trials and beingmarketed. Competitors that are marketing products or developing technologiesthat compete with PI-88, our lead oncology product candidate, include Genentech, Inc.,Bayer Pharmaceuticals Corporation, Onyx Pharmaceuticals, Pfizer Inc., NovartisAG and Celgene Corporation. We are also aware of several agents that are beingdeveloped by others for the treatment of hepatocellular carcinoma therebycompeting with PI-166. These agents are in various stages of clinicaldevelopment and comprise small synthetic organic molecules and biologicals, aswell as targeted radiotherapy and hyperthermia treatments. These companiesinclude Onyx Pharmaceuticals and SIRTeX Medical Limited.

 

Some of ourcompetitors may succeed in developing products earlier than us, obtaingovernmental approvals more rapidly than us, or develop products that are saferand more effective than those under development by us. Other companies may alsodevelop products or therapies that render our technology and products obsoleteor non-competitive. We also cannot make any assurances that any therapydeveloped by us will be preferred to any existing or newly developedtechnologies. Some of our competitors may succeed in developing treatments thatare superior to any therapy or product developed by us. Our ability tosuccessfully compete with these and other companies will also depend to aconsiderable degree on the continuing availability of capital to us, as well asour ability to recruit and retain highly qualified scientific personnel andconsultants, and to compete with the established manufacturing and marketingcapabilities of our competitors.

 

*ContractManufacturing*

 

Our contractmanufacturing division’s clients are mostly from the Australasia region with alimited number also from the United States. Competitors offering a similarservice or facility to us within Australia include Hospira, Australia and CSLLtd. Our ability to compete with these and other companies located elsewhere inthe world will depend on our ability to remain cost competitive and to recruitand retain qualified personnel.

 

**Consultants**

 

Wehave consulting agreements with a number of leading academic scientists andclinicians. These individuals serve as key consultants or as members of ourScientific or Clinical Advisory Boards with respect to our drug discovery andclinical development programs and strategies respectively. They aredistinguished scientists and clinicians with expertise in numerous scientificfields, including liver surgery, developmental biology and molecular biology.

 

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Weuse consultants to provide us with expert advice and consultation on ourscientific programs and strategies. They also serve as important contacts forus throughout the broader scientific community.

 

Weretain each consultant according to the terms of a consulting agreement. Undersuch agreements, we pay them a consulting fee and reimburse them forout-of-pocket expenses incurred in performing their services for us. Inaddition, one consultant holds options to purchase our ordinary shares. Ourconsultants are employed by organizations other than ours, and therefore mayhave commitments to, or consulting or advisory agreements with, other entitiesor academic institutions that may limit their availability to us.

 

## **Item 4.D.****                                              ****Property, Plants and Equipment**

##  

Our principaloffices are located in Toowong, a suburb of Brisbane, Queensland, Australia. Wemaintain and operate an 11,200 square foot fully-integrated pharmaceutical rawmaterial manufacturing facility in Darra, also a suburb of Brisbane,Queensland, Australia. Our manufacturing facility has the capability to developand manufacture therapeutic products for worldwide markets and consists of 15modular laboratories, each with a designated function. There are twoindependent and eight integrated laboratory modules that comply with the Codeof Good Manufacturing Practice, or cGMP, and five non-cGMP laboratory modules.The cGMP laboratory modules have specific functions including mediapreparation, cell culture, fermentation, harvest, purification, pack and fill,and bioprocessing. The non-cGMP laboratories have functions in fermentation,research and development, and analytical services covering microbiology,biochemistry, protein and carbohydrate analysis and processing, and qualitycontrol testing.

 

The facility isused to manufacture a range of biological products, including the PI-88 activeingredient and preparation ofPI-166 for preclinical and clinical trials. It is equipped for the geneticmanipulation of micro-organisms, cell culture, small and large-scalefermentation of micro-organisms, purification and downstream processing,freeze-drying, and sterile packing and filling.

 

Our manufacturingfacility is licensed by the Australian Therapeutic Goods Administration, orTGA, for the manufacture of biological-based starting materials for humantherapeutics to cGMP standards and by the Australian Office of Gene TechnologyRegulator for the manufacture of large scale genetically modified organisms.The TGA regulates the manufacture of compounds intended as starting materialsfor human therapeutics. In addition, the facility is licensed by the AustralianNational Registration Authority for manufacture of sterile and immunobiologicalveterinary products to cGMP standards and by the Australian Quarantine andInspection Service as a quarantine facility.

 

The buildings inwhich our principal offices and manufacturing facilities are located are bothleased. The lease agreement on our corporate offices is for a three year periodbeginning December 15, 2005 with an option to lease for a further threeyears. Rental is approximately $132,000 per annum, subject to an annual increasebased on the movement in the consumer price index or 4%, whichever is higher.

 

The leaseagreement on our manufacturing facility expires in March 2009, we pay acurrent rental of approximately $104,000 per annum, subject to annual review,based on the movement in the consumer price index. We have an option to extendthis lease for a further two years.

 

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# **ITEM 5.****                                                    ****OPERATING AND FINANCIAL REVIEWAND PROSPECTS**

 

The following discussion and analysis should be readin conjunction with our financial statements and the related notes includedelsewhere in this annual report.

 

This discussionmay contain forward-looking statements based on current expectations thatinvolve risks and uncertainties. Our actual results and the timing of selectedevents could differ materially from those anticipated in these forward-lookingstatements as a result of several factors, including those set forth in “Item3. Key Information – Risk Factors” above and elsewhere in this annual report.

 

**Overview**

** **

We have incurred significant losses since ourinception and as of June 30, 2007, our accumulated deficit wasapproximately $65.5 million. We devote a substantial portion of our financialresources to fund the development of our two cancer product candidates and ourdrug discovery research efforts. We expect to incur additional operating lossesfor at least the next several years as we accelerate our drug discoveryresearch and conduct additional clinical trials with PI-88 and PI-166, andadvance into later stages of development. We may need to raise additional fundsin the future to continue our operations.

 

Ouroperations have historically been financed by the issuance of capital stockbecause it is generally difficult to fund pharmaceutical research viaborrowings due to the lack of revenues to service debt and the significantinherent uncertainty as to results of this research and the timing of thoseresults.

 

**CriticalAccounting Policies**

 

The followingdiscussion and analysis of our operating and financial review and prospects arebased upon our financial statements, which have been prepared in accordancewith U.S. generally accepted accounting principles. These accounting principlesrequire us to make certain estimates and assumptions that can affect thereported amounts of assets and liabilities as of the date of the financialstatements, as well as the reported amounts of revenue and expenses during theperiods presented. Based on the nature of our operations, our accounting policiesdo not require difficult, subjective or highly complex judgments and thereforeour reported amounts are not subject to material variation based on changes inassumptions. Our significant accounting policies are described in Note 1 to thefinancial statements.

 

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## **Item 5.A.****                                              ****Operating Results**

##  

***Yearsended June 30, 2007, 2006 and 2005***

 

The functionalcurrency for the Company’s operations is the Australian dollar. The translationfrom Australian dollars into U.S. dollars is performed for balance sheetaccounts using current exchange rates in effect at balance sheet date and forrevenue and expense accounts using the average exchange rate during the period.

 

The followingtable shows the movement in the average exchange rates between fiscal years2005, 2006, and 2007. These average exchange rates have been used to translateAustralian dollar revenue and expense amounts into U.S. dollars.

 
| ** **                                                      | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Average  Australian dollar to U.S. dollar exchange rate         |       | $                                       | 0.75352    |   | $ | 0.74783 |   | $ | 0.78592 |   |
| Movement in  exchange rate from prior year                      |       |                                    |       | $ | (0.00569 | ) | $ | 0.03809 |   |
| % movement in  exchange rate from prior year                    |       |                                    |       | (0.8 | )% | 5.1 | % |
| Australian  dollar to U.S. dollar exchange rate at June 30 |       | $                                       | 0.7620     |   | $ | 0.7301 |   | $ | 0.8486 |   |
| Movement in  exchange rate from prior year                      |       |                                    |       | $ | (0.0319 | ) | $ | 0.11 |   |
| % movement in  exchange rate from prior year                    |       |                                    |       | (4.2 | )% | 16 | % |

 

*Revenuefrom Operations*

 

Ourrevenue from sales and provision of services for fiscal 2005, 2006 and 2007 isas follows (in thousands):

 
| ** **                                                 | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenue from  provision of contract manufacturing services |       | 1,076                                   |       | 677 |   | 723 |   |
| **Total  revenue from sales and provision of services**    | ** ** | **$**                                   | **1,076**  | ** ** | **$** | **677** | ** ** | **$** | **723** | ** ** |
|                                                            |            |                                         |            |  |  |  |  |  |  |  |

 

For the fiscalyear ended June 30, 2007 revenues from contract manufacturing servicesincreased $46,000 to $723,000 an increase of 6.8% from the prior year. Theincrease is primarily due to several new manufacturing contracts beingundertaken during the course of the year.

 

For the fiscalyear ended June 30, 2006 revenues from contract manufacturing servicesdecreased $399,000 to $677,000 a decline of 37.1% from the prior year. This isprimarily due to the manufacturing division’s priority being the optimization andvalidating the PI-88 manufacturing process along with manufacturing sufficientquantities of PI-88 for our clinical trial needs. A manufacturing contract,from which we derived $425,000 in revenue for the year ended June 30,2005, was cancelled part way through the year. Due to the manufacturing division’s focus being on PI-88 this contractwas not replaced.

 

Weultimately expect to derive additional revenue from the out-licensing of ourproduct candidates currently under development in return for milestone paymentsand royalties on commercial sales.

 

45

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*Researchand Development Expenses*

 

Our research anddevelopment expenses for compounds under development and discovery are asfollows (in thousands):

 
| ** **                                   | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| PI-88                                        |       | $                                       | 1,029      |   | $ | 1,157 |   | $ | 3,569 |   |
| PI-166                                       |       | 63                                      |       | 47 |   | 33 |   |
| Drug discovery                               |       | 1,064                                   |       | 1,251 |   | 1,336 |   |
| General research  and development expenses   |       | 556                                     |       | 697 |   | 491 |   |
| **Total  research and development expenses** | ** ** | **$**                                   | **2,712**  | ** ** | **$** | **3,152** | ** ** | **$** | **5,429** | ** ** |

 

Costs for PI-88and PI-166, our two oncology compounds under development, include externaldirect costs in relation to the conduct of long-term animal toxicity studiesand Phase 1 and 2 clinical studies. Examples of such costs include principalinvestigators fees, patient recruitment fees, patient scans, data monitoringcharges as well as our personnel costs for preclinical, clinical and regulatoryactivities associated with preparing these compounds for registration with theFDA and TGA or similar agencies. Drug discovery costs include our personnel andassociated costs incurred in relation to this effort as well as externalsponsored research costs. General research and development expenses includeresearch and development management personnel costs and general laboratorycosts that cannot be allocated to a specific compound or our drug discoveryeffort. Prior to July 1, 2000, our accounting records did not recordresearch and development costs by project. Since July 1, 2000 cumulativedirect external costs incurred onPI-88, PI-166 and drug discovery are $9,474,000, $253,000 and $7,062,000respectively.

 

The current year’sinvestment in our research and development initiatives increased 72% from theprior year to $5,429,000 primarily due to a 208.5% increase in PI-88expenditures as we planned for the upcoming Phase 3 trial in post-resectionliver cancer and continued our Phase 2 PI-88 trials in melanoma, prostate andnon-small cell lung cancer. The following are significant incrementalexpenditures incurred this fiscal year:

 

·                  The completion of long-term PI-88 animal toxicitystudies. These studies commenced in the prior year, the incremental expenditureincurred in the current fiscal year totaled $710,000.

 

·                  Expenditures totaling $724,000 being incurred inplanning for the Phase 3 development of PI-88 in post-resection liver cancerincluding payments to consultants advising on study protocol and the transferof the later stages of PI-88’s manufacturing process to a FDA cGMP facility.

 

·                  Expenditure incurred on the Phase 2 trial of PI-88with and without combination therapy dacarbazine in patients with advancedmelanoma increased $448,000 as a result of increased patient recruitment andthe $236,000 reimbursement to Medigen of expenditures made by Medigen inrelation to this trial.

 

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In fiscal 2006 theinvestment in our research and development initiatives increased 16.2% from theprior year to $3,152,000 primarily due to the following:

 

·                  Expenditure incurred in preparing for potential PI-88Phase 3 development including, regulatory and additional animal studies($276,000), a project to put in place appropriate chemistry, manufacturing andcontrol procedures in relation to the Phase 3 manufacture of PI-88 ($199,000)and a project to scale-up and optimize the first step of the manufacturingprocess of PI-88 to enable the Company to manufacture sufficient Phase 3quantities of this material ($98,000).

 

·                  Net expenditure increasing $128,000 year-on-year onour PI-88 Phase 2 trial in combination with the chemotherapy agent dacarbazinein patients with metastatic melanoma. This trial commenced in May 2005 andduring the course of the year we completed recruitment into the lead-in phase.This trial is being co-funded by our strategic alliance partners, MedigenBiotechnology Corporation. During the course of the year they contributed$186,000 to the costs of running this trial;

 

·                  Net expenditure on our drug discovery programincreased $187,000 year on year primarily due to an increased head-countfollowing the award of the AusIndustry Commercial Ready grant. This grantcontributed $569,000 to the costs incurred in relation to this program duringthe financial year ended June 30, 2006.

 

Somewhatoff-setting the above increases in expenditures were the following decreases:

 

·                  Expenditure on our PI-88 Phase 2 mono-therapy trialwith patients with advance melanoma decreasing $286,000 as this trial completedduring the prior reporting period;

 

·                  Expenditure on the PI-88 Phase 2 mono-therapy trialwith patients with advanced melanoma decreasing $144,000 as patient recruitmentconcluded in February 2006.

 

We expect ourresearch and development expenses to increase in the next three years primarilydue to costs currently being incurred in the late stages of planning for aPhase 3 trial of PI-88 in post-resection HCC. This trial is currently expectedto commence during the fourth quarter of calendar year 2007. The additionalcosts being incurred include additional long-term animal toxicity studies,clinical research organization costs, increasing our head count and themanufacture of sufficient doses of PI-88 for our Phase 2 and 3 clinical trialneeds.

 

Our lead drugcandidates, PI-88 and PI-166 are currently in Phase 2 and Phase 1 clinicaltrials respectively with a Phase 3 trial of PI-88 in post-resection livercancer being planned to commence before the end of calendar year 2007. Manydrugs in human clinical trials fail to demonstrate the desired safety andefficacy characteristics. Even if our drugs progress successfully through initialhuman testing, they may fail in later stages of development. Regulatoryagencies, including the FDA and TGA, regulate many aspects of a productcandidate’s life cycle, including research and development and pre-clinical andclinical testing. We or the regulatory authorities may suspend clinical trialsat any time on the basis that the participants are being exposed tounacceptable health risks. Completion of clinical trials depends on, amongother things, the number of patients available for enrollment in a particulartrial, which is a function of many factors, including the availability and

 

47

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proximityof patients with the relevant condition. We rely on third parties to conductclinical trials, which may result in delays and failure to complete trials ifthe third parties fail to perform or meet applicable standards. Our drugdiscovery efforts are still in the research phase and have not yet commencedpre-clinical development, which means they have not yet been tested on humans.We will need to commit significant time and resources to develop these productcandidates.

 

Our products willonly be successful if:

 

·                  our product candidates are developed to a stage thatwill enable us to commercialize them or sell related marketing rights topharmaceutical companies;

 

·                  we are able to commercialize product candidates inclinical development or sell the marketing rights to third parties; and

 

·                  our product candidates, if developed, are approved.

 

We depend on thesuccessful completion of these goals in order to generate significant revenues.We also enter into collaboration agreements for the development andcommercialization of our product candidates. We cannot control the amount andtiming of resources our collaborators devote to product candidates, which mayalso result in delays in the development or marketing of our products.

 

Because of theserisks and uncertainties, we cannot accurately predict when or whether we willsuccessfully complete the development of our product candidates or the ultimateproduct development cost.

 

Without revenuegenerated from commercial sales, we anticipate that funding to support ourongoing research, development and general operations will primarily come frompublic equity financings, collaborations, milestones and licensingopportunities from future collaborations.

 

*Rentalson Operating Leases*

 

Rentals onoperating leases increased 40% over 2006 to $232,000 in fiscal 2007. This isdue to CPI increase in both corporate office and Darra manufacturing facilityand a full year lease for corporate office in fiscal 2007. We entered the leaseon the corporate offices part way through fiscal 2006.

 

*Selling,General and Administrative Costs*

 

Selling, generaland administrative expenses increased $1,866,000 or 64.8% in fiscal 2007 to$4,746,000 compared with $2,880,000 for fiscal 2006 and $2,954,000 for fiscal2005. In Australian dollars (the Company’s functional currency) the increase inselling, general and administrative expenses was 56.8%. This increase wasprimarily due to the following factors: an increase of $76,000 in fees paid toconsultants and advisors to assist with investor relations matter; an increaseof $612,000 in expenses for share options granted to employees; an increase of$79,000 in staff recruitment fees, an increase of $184,000 in travel andaccommodation expenditure incurred and an

 

48

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increaseof $526,000 in foreign exchange loss due to appreciation of the Australiandollar against U.S. dollar.

 

Selling, generaland administrative expenses decreased $74,000 or 2.5% in fiscal 2006 to$2,880,000 compared with $2,954,000 for fiscal 2005 and $2,617,000 for fiscal2004. In Australian dollars (the Company’s functional currency) the decrease inselling, general and administrative expenses was 3.9%.

 

We expect selling,general and administrative costs to increase in fiscal 2008 as we continue toexplore commercialization alternatives for PI-88, and continue to attendinternational conferences and conduct investor road-shows to increase theCompany’s profile. These efforts will involve additional travel andaccommodation costs. In addition we are actively pursuing growth opportunities.These efforts may involve an increase in advisor and consultant costs.

 

*MedigenTermination Agreement Obligation*

 

In January 2007we announced that we had agreed terms with Medigen Biotechnology Corporation(Medigen) to conclude the strategic alliance between the two companies.  The strategic alliance required Medigen toundertake and complete certain clinical trial of PI-88. On completion of thesePI-88 clinical trials, Medigen was entitled to a 15% royalty on PI-88 proceedsof commercialization received by Progen. Both parties agreed to end the strategic alliance to allow Progen todevelop and commercialize PI-88 as rapidly as possible and with maximumflexibility.

 

In considerationfor Medigen agreeing to end the strategic alliance, and thereby foregoing theirentitlement to the 15% royalty, and to compensate Medigen for theircontribution to the development of PI-88, Progen agreed to make certain cashand equity based payments to Medigen and to return the equity investment we hadin Medigen. The 2007 financial impact of the share based payments to Medigenamounted to $7,747,000.

 

*OtherCosts of Operations*

 

Other costs ofoperations increased $351,000 to $1,049,000 in fiscal 2007 following anincrease of $301,000 in fiscal 2006 over fiscal 2005.  These costs are the un-recovered overheads ofour Contract Manufacturing division that are not recovered against cost ofexternal sales and increased in fiscal 2007 and 2006, as contract manufacturingrevenues decreased with the division focusing on the optimization and scale-upof the PI-88 manufacturing process.

 

The costs areprimarily salaries and wages, and overheads of our Darra manufacturing facilitythat are not allocated to research and development costs or cost of sales.

 

*Depreciationexpense*

 

Depreciationexpense decreased $4,000 in fiscal 2007 to $394,000. Depreciation expensedecreased $31,000 in fiscal 2006 from fiscal 2005 to $398,000. These decreasesin depreciation are due primarily to assets becoming fully depreciated.Depreciation expense is expected to decline further in fiscal 2008 as assetscontinue to be fully depreciated and depreciation on our recently 

 

49

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acquiredplant and equipment and estimated future capital expenditure requirements willnot be sufficient to off-set that decline.

 

*OtherIncome (Expenses)*

 

We realized totalnet other income of $2,235,000 in fiscal 2007 compared with $1,423,000 infiscal 2006 and $1,213,000 in fiscal 2005. The components of Other Income(Expenses) as shown in our statements of income included elsewhere in thisannual report are (in thousands):

 
| ** **              | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Interest income         |       | 618                                     |       | 824 |   | 1,372 |   |
| Interest expense        |       | (13                                     | )          | (11 | ) | (12 | ) |
| Grant income            |       | 578                                     |       | 569 |   | 844 |   |
| Other income            |       | 30                                      |       | 41 |   | 31 |   |
| **Total  other income** | ** ** | **$**                                   | **1,213**  | ** ** | **$** | **1,423** | ** ** | **$** | **2,235** | ** ** |
|                         |            |                                         |            |  |  |  |  |  |  |  |

 

Interest incomereceived varies from year to year depending on the amount of cash we haveavailable to invest and the interest rate prevailing at that time. The Companyraised an additional net $76.0 million from the sale of equity during fiscal2007. This significantly increased the total funds available to invest infiscal year 2007. As a result of the above increase and also due toappreciation of the Australian dollar, interest income received increased 66.4%to $1,372,000.

 

Grant incomerelates to the funding we receive for our drug discovery program under theAusIndustry START and Commercial Ready grants. The AusIndustry START grantexpired on June 30, 2005. We applied, and were granted, anotherAusIndustry grant known as a Commercial Ready grant that will continue topartially fund our drug discovery program for the three years beginning August 2005.Grant income in the 2005 financial years was received under the START grant,whereas the 2006 and 2007 grant income was received under the Commercial Readygrant. Both grants are based on a 50% re-imbursement of eligible expenditure,and therefore are directly related to level of expenditure incurred on thisprogram. Grant income increased $275,000 in fiscal 2007 as the Commercial Readygrant was claimed for the full 12 months as compared to less than 11 months inthe previous corresponding reporting period as the Commercial Ready grant wasawarded in August 2005. In addition there was an increase in eligible, orclaimable, expenditure as described above under *Research andDevelopment Expenses*.

 

Grant incomedecreased $9,000 in fiscal 2006 as the START grant completed on June 30,2005 and the Commercial Ready grant commenced in August 2005 resulting inless than 11 months of eligible expenditures being claimable.

 

We expect grantincome to increase slightly over the levels of the last two fiscal years as weexpect expenditure on this program to increase. As with the START grant theCommercial Ready grant is based on a 50% re-imbursement of eligibleexpenditure. The amount of this grant is capped at A$3.39 million.

 

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*IncomeTaxes*

 

As at June 30,2007, we had net tax loss carry forwards of approximately $83.7 million,resulting in a deferred tax asset (before valuation allowances) ofapproximately $27.3 million. The tax losses are indefinite as to use unless itis unable to comply with the recognition criteria for carrying forward taxlosses under Australian taxation laws. We had net tax loss carry forwards of$57.4 million as at June 30, 2006. Since recoupment of the carried forwardtax loss is uncertain, a valuation allowance has been established to offset infull the deferred tax asset resulting in a net deferred asset of $nil.

 

## **Item 5.B.****                                              ****Liquidity and Capital Resources**

##  

Cashand cash equivalents held as at June 30, 2007, 2006 and 2005 amounted to$83.4 million, $11.6 million and $17.9 million respectively.

 

*Sourcesof Liquidity*

 

Since inception,we have financed our operations primarily through public and private sales ofequity securities totaling approximately $144.5 million in net proceeds. As at June 30,2007, cash and cash equivalents totaled approximately $83.4 million andconsisted primarily of highly liquid interest bearing investments, typicallybank bills and investment grade commercial paper with maturities of threemonths or less. Investments are made in accordance with a Board approvedInvestment Policy. We believe that these investments do not constitute anymaterial market risk exposure. All cash and cash equivalents held at June 30,2007 were in Australian dollars and US dollars.

 

*Cash Flows from Operating Activities*

 

Weexpended approximately $7.5 million in cash and cash equivalents during thetwelve months ended June 30, 2007 to finance our net operating activities.This compares to $4.9 million and $4.0 million fiscal 2006 and 2005,respectively. The increase in net cash expended on operating activities infiscal 2007 over fiscal 2006 was primarily due to receipts from customersdeclining $702,000. This was the case even with an increase in revenues fromoperations, as $510,000 in customer invoices were outstanding at June 30,2007. These amounts have since been collected in full. In addition there was a$2,324,000 increase in payments to suppliers (due to an increase inexpenditures associated with planning for our phase 3 trial) and employees,off-set by an increase in interest receipts of $327,000.

 

Theincrease of $875,000 in net cash expended on operating activities in fiscal2006 over fiscal 2005 was primarily due to receipts from customers declining $641,000with the decline in contract manufacturing revenues and a $600,000 increase inpayments to suppliers and employees, off-set by an increase in interestreceipts of $193,000.

 

*Cash Flows from Investing Activities*

 

Infiscal 2007 and 2006 cash out-flows from investing activities totaled $199,000and $849,000 respectively. The decrease in fiscal 2007 resulted from feweritems of plant & equipment 

 

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being purchased. Several major items of manufacturingequipment were purchased in fiscal 2006 to scale-up the PI-88 manufacturingprocess.

 

*Cash Flows from Financing Activities*

 

Netcash provided by financing activities in 2007 of $76,037,000 relates toproceeds from the following share issues:

 

·                  a private placement in December 2006raising $14,754,000,

 

·                  a share purchase plan in January 2007to Australian and New Zealand resident shareholders raising $4,112,000,

 

·                  a US equity offering in May 2007raising $30,213,000,

 

·                  a rights entitlement offering in June 2007raising $26,784,000, and

 

·                  the exercise of employee options raising$182,000.

 

Netcash provided by financing activities in 2006 of $75,000 reflected the proceedsfrom the exercise of employee options. Net cash provided by financing activitiesin 2005 of $11.0 million reflected the receipt of $4.9 million in net proceedsthrough the exercise of bonus options granted to our shareholders on a one foreight pro rata basis in November 2003, $1.9 million in net proceeds froman Australian placement to institutional investors being the shortfall ofoptions not exercised by the expiry date of May 31, 2005, and $4.2 millionfrom the exercise of options granted to directors, employees and advisors.

 

*Funding Requirements*

 

We currently have no material commitments for capitalexpenditures. However, we expect to incur substantial future commitments inlight of our oncology clinical programs and our drug discovery program. We arepresently funding two Phase 2 multi-center clinical trials of PI-88 and onePhase Ib clinical trial of PI-166, and are in the late stages of planning forthe Phase 3 clinical trial development of PI-88 in post-resection liver cancer.We currently anticipate the Phase 3 development of PI-88 in post-resectionliver cancer will commence during the fourth quarter of calendar year 2007.

 

Drug discovery is partially funded by a A$3.39 millionAusIndustry Commercial Ready grant. This grant is for three years commencing August 2005.Over this period the Company’s contribution to this program is expected to alsobe A$3.39 million.

 

We also received approval for funding under thePharmaceutical Partnership Program (P3), another AusIndustry grant, whoseagreement was signed on July 10, 2007. The funding is for three yearscommencing July 1, 2007 and has a maximum payment of A$4.63 million. Thisgrant will partially fund the drug discovery and drug development activitieswhich are performed in Australia.

 

Under the terms of the agreement terminating thestrategic alliance with Medigen

 

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BiotechnologyCorporation, Progen is required to make payment of A$2.0 million (US$1.7million) upon Medigen providing certain deliverables. Payment, in cash orequivalent Progen ordinary shares, is due by January 15, 2008 or 20business days after Phase 3 clinical trials commence, whichever is later. Inaddition, we are required to pay Medigen A$2.0 million (US$1.7 million) uponcommencement of Phase 3 clinical trials and another A$2.0 million uponachieving commercial milestones.

 

We are currently assessing our manufacturing optionsin relation to the commercial production of PI-88. Options currently underconsideration include the construction of a purpose built facility involving asignificant capital investment. This option is being assessed againstcontracting PI-88 production out to a third party supplier whereby we losecontrol over production and pay commercial rates.

 

Our future cash requirements will depend on a numberof factors, including: the scope and results of preclinical studies andclinical trials, continued progress of our research and development programs,including our in-licencing activities, our ability to generate revenues fromour contract manufacture services, our ability to generate revenue from thecommercialization of PI-88, PI-166 and the technologies that may result fromour drug discovery platform efforts, and the availability of other financing.

 

The Companyestimates that current cash reserves, the recently awarded A$4.63 million AusIndustryP3 grant, the remainder of the Commercial Ready grant and revenues frommanufacturing are sufficient to fully fund its on-going operations through tothe completion of PI-88 Phase 3 development which is expected to takeapproximately 36 months from June 30, 2007.

 

## **Item 5.C.****                                              ****Research and development, patentsand licenses, etc.**

##  

Refer to *Research and Development Expenses* under Item 5.A..

 

## **Item 5.D.****                                              ****Trend Information**

##  

We currentlyanticipate commencing the Phase 3 development of PI-88 in post-resection livercancer before the end of calendar year 2007. In order to conduct thismulti-center, multi-country trial in a timely and efficient manner we areengaging the services of third party vendors and increasing our head-count. Asa result we anticipate the investment in our development efforts will increasesignificantly over the next three years.

 

For further trendinformation refer to Item 5.A.

 

## **Item 5.E.****                                                ****Off-Balance Sheet Arrangements**

##  

We have not entered into any off-balance sheettransactions, agreements or other contractual arrangements (includingcontingent obligations) with any unconsolidated entity that have or arereasonably likely to have a current or future effect on our financialcondition, changes in financial conditions, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources.

 

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## **Item 5.F.****                                                ****Tabular Disclosure of AggregateContractual Obligations**

##  

Asof June 30, 2007, we had known contractual obligations and commitments of$3,824,000. Of this amount $735,000 relates to sponsored research commitmentsand estimates to complete current trials of PI-88 and PI-166. The remaining$3,089,000 relates to the following: Medigen termination agreement obligation ($1,697,000),repayment of our insurance premium funding ($439,000), our current operatinglease obligations including the lease of our premises ($276,000), and othercommitments ($677,000) most of which relates to payment obligations undervarious consulting and advisory agreements. The obligation to Medigen may bemade in cash or equivalent Company shares.

 

Thefollowing table sets forth our aggregate contractual obligations for the threeyears following June 30, 2007 (in thousands):

 
| ** **                                                         | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations**                                   | ** ** | **Total**                                 | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** |
| Operating leases                                                   |       | 276                                       |       | 210 |   | 66 |   |
| Sponsored  research and clinical trial obligations and commitments |       | 735                                       |       | 614 |   | 121 |   |
| Insurance  premium funding                                         |       | 439                                       |       | 439 |   | — |   |
| Medigen  termination obligation                                    |       | 1,697                                     |       | 1,697 |   | — |   |
| Other  commitments                                                 |       | 677                                       |       | 677 |   | — |   |
| **Total**                                                          | ** ** | **$**                                     | **3,824**  | ** ** | **$** | **3,637** | ** ** | **$** | **187** | ** ** |
|                                                                    |            |                                           |            |  |  |  |  |  |  |  |

 

Under the terms of the agreement terminating thestrategic alliance with Medigen Biotechnology Corporation we are required topay Medigen A$2.0 million upon commencement of PI-88 Phase 3 clinical trialsand another A$2.0 million upon PI-88 achieving a specified commercialmilestone. These amounts are not included in the above table as they are onlypayable on the relevant milestone being achieved.

 

We do not have anycontractual obligations that extend beyond the next three years.

 

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# **ITEM 6.****                                                    ****DIRECTORS, SENIOR MANAGMENT ANDEMPLOYEES**

#  

## **Item 6.A.****                                              ****Directors and Senior Management**

##  

The followingtable sets forth certain information about our directors and executiveofficers:

 
| **Name**                  | ** ** | **Age** | ** ** | **Position**                                  |
|---------------------------|------------|---------|------------|-----------------------------------------------|
| Stephen Chang             |       | 58      |       | Executive Chairman                            |
| T. Justus Homburg         |       | 51      |       | Managing Director                             |
| Prof. John R. Zalcberg    |       | 55      |       | Non-Executive Director (1)                    |
| Patrick O. Burns          |       | 70      |       | Non-Executive Director (1), (2)               |
| Dr. Malvin L. Eutick |       | 58      |       | Non-Executive Director (1), (2)               |
| Dr. Anand Gautam     |       | 47      |       | Vice President, Research and Development      |
| Sarah J. Meibusch         |       | 30      |       | Vice President, Business Development          |
| Dr. James Garner     |       | 34      |       | Vice President, Medical and Clinical Affairs  |
| Dr. John Devlin      |       | 47      |       | Vice President, Manufacturing Operations      |
| Linton W. P. Burns        |       | 42      |       | Chief Financial Officer and Company Secretary |

 

----

(1) Member of Audit Committee

(2) Member of Remuneration Committee

 

**Stephen Chang**is a founding Director and has served asChairman from 1989 to 1994 and again since 1999. From 2000 to 2001, Mr. Changserved as chairman of Medigen Biotechnology Corporation. Mr. Chang holds aB.Sc. in mechanical engineering from the National Taiwan College of MarineScience and Technology.

 

**T. Justus Homburg**has served as our Managing Director sinceMarch 2006. His background includes over a decade in new technologycommercialization, strategic planning, corporate development and generalmanagement with Monsanto. Prior to joining the Company in January 2006 Mr. Homburgspent three years as the CEO of the start-up biotechnology company, ChirogenPty Ltd, based in Melbourne. Mr. Homburg holds an MBA from the Universityof Washington with degrees from Iowa State University, Southern IllinoisUniversity, and The University of Utrecht.

 

**Professor John R. Zalcberg, M.D.,Ph.D., OAM**joinedas a Non-Executive Director in May 1995. He is Professor/Director of theDivision of Haematology and Medical Oncology at the Peter MacCallum Cancer Institutein Melbourne, Australia. Among his numerous professional positions, Prof.Zalcberg served as President of the Clinical Oncology Society of Australia; isthe Chairman of the Australasian Gatrointestinal Trials Group; and a member ofthe National Colorectal Cancer Care Surgery Working Party. Professor Zalcbergwas awarded the Medal of the Order of Australia in 2007 for his contributionsto oncology research.

 

**Patrick O. Burns**was appointed a Non-Executive Director inMarch 1999. From 1997, Burns has also been a member of the Board ofDirectors of Synbiotics, which specializes in animal health care, and Annovis,Inc a specialist chemicals company and a Senior Advisor to AcrossFrontiersInternational, Inc. He is currently a non-executive director of ChemGenexPharmaceuticals Ltd, an Australian listed biotechnology company; vice chairmanof Euclid Systems

 

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Corporation, a private eye care company; the chairman of Stable Eyes,Inc a biotechnology company in the eye care field and an advisor to a number ofearly stage technology companies. Mr. Burns holds an B.A. in Governmentfrom Dartmouth College and an L.L.B. from Harvard Law School. There is nofamily relationship between Mr. Burns and Mr. Linton W. P. Burns ourCompany Secretary and Chief Financial Officer.

 

**Dr. Malvin L. Eutick, Ph.D.,OAM**was appointeda Non-Executive Director in March 1999. He is a director of both TUTAHealthcare and Pharmalab. He has had a long association with the biotechnologyindustry and was awarded the Medal of the Order of Australia for services tothe industry in 1995. Dr. Eutick holds a B.Sc. and a Ph.D. in biochemistryfrom the University of Sydney, Australia.

 

**Dr. AnandGautam Ph.D.** was appointed Vice President, Research and Developmentin September 2005. Prior to joining us Dr Gautam has held severalpositions with biotechnology companies including Pharmexa, Denmark as SeniorVice President of Research, and Chief Scientific Officer of Coridon Pty Ltd anAustralian based biotechnology company. Dr. Gautam completed his Ph.D. atthe University of London in 1990 followed by post-doctoral training at StanfordUniversity, California, USA.

 

**SarahJ. Meibusch**joined us in 2003 as Business Development Managerfollowing a similar role at Pyxis Genomics, Inc, a private USA basedbiotechnology company. Ms. Meibusch was promoted to Director, BusinessDevelopment in June 2005 and to Vice President, Business Development in2006. She holds a Bachelor degree in Agricultural science from the Universityof Queensland and a Master of Professional Studies degree from CornellUniversity, USA.

 

**Linton W. P. Burns**was appointed Chief Financial Officer andCompany Secretary in August 2004. Prior to joining us, Mr. Burnsspent 5 years as chief financial officer and company secretary for ASX listedbiotechnology company BresaGen Limited. Preceding that role Mr. Burns wasthe New Zealand general manager for the information solutions company, EquifaxLtd. Prior to that he held senior financial positions with Equifax in Australiaand the United Kingdom. Mr. Burns holds a Bachelor of Arts in Accountancyfrom the University of South Australia, Adelaide, Australia and is a member ofthe Australian Institute of Chartered Accountants.

 

**Dr JamesGarner MA, MBA, MBBS, BSc (Hons), SAFin.**joined us in January 2007as Vice President, Medical and Clinical Affairs.  Prior to joining us Dr Garner spent several years at Biogen Idec (NASDAQ:BIIB) as a Medical Affairs Manager for the Asia-Pacific region. He holds aBachelor of Sciences (with First Class Honors) from University College,London, and a Master of Arts and a Master of Business Administration from theUniversity of Queensland and a Graduate Certificate in Applied Finance andInvestment from the Financial Services Institute of Australasia. He is a YoungFellow of the Royal Society of Medicine (UK) and a member of the AustralianPharmaceutical Physicians Association.

 

**JohnDevlin BSc Ph.D.**joined us in May 2007 as Vice President,Manufacturing Operations.  Prior to joiningus,  Mr. Devlin ran his ownconsultancy company, Devchem Pty Ltd, providing small Australian biotechcompanies with advice on development, scale up and manufacturing operation. He received both his bachelor’s degree andPh.D. in Organic chemistry from Queens University in Belfast, Northern Ireland.

 

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Our executiveofficers are appointed by, and serve at the pleasure of, our board ofdirectors. There are no family relationships among our directors or executiveofficers. No director has a contractual right to serve as a member of our boardof directors.

 

## **Item 6.B.****                                              ****Compensation**

##  

The followingtable sets forth certain information concerning the compensation that we paidto our directors and our five most highly compensated executive officers, bothindividually and as a group, during the fiscal year ended June 30, 2007:

 
| ** **                                                                     | ** ** | **Annual Compensation** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Name and Principal Position**                                 | ** ** | **Salary  (1)**              | ** ** | **Directors’  Fees** | ** ** | **Superannuation  Contributions  (2)** | ** ** | **Benefits &  Allowances** | ** ** | **Stock  Options  (3)** | ** ** | **TOTAL** | ** ** |
| Stephen Chang  Chairman and Executive Director                                 |       | 234,951                      |       | — |   | 20,157 |   | — |   | — |   | 255,108 |   |
| T. Justus  Homburg  Executive Director and Managing Director(4)                |       | 226,449                      |       | — |   | 13,414 |   | 3,676 |   | 569,519 |   | 813,058 |   |
|                                                                           |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Prof. John R.  Zalcberg  Non-Executive Director                                |       | —                       |       | 43,262 |   | 3,893 |   | — |   | — |   | 47,155 |   |
| Patrick O. Burns  Non-Executive Director                                       |       | —                       |       | 47,155 |   | — |   | — |   | — |   | 47,155 |   |
| Dr. Malvin  L. Eutick  Non-Executive Director                             |       | —                       |       | 43,262 |   | 3,893 |   | — |   | — |   | 47,155 |   |
| Dr. Stanley  S.C. Chang  Non-Executive Director(4)                        |       | —                       |       | 25,645 |   | — |   | — |   | — |   | 25,645 |   |
| Linton W. P.  Burns  Chief Financial Officer and Company Secretary             |       | 137,872                      |       | — |   | 12,408 |   | — |   | 27,089 |   | 177,369 |   |
| Gregory M.  Orders  General Manager Contract Manufacturing(5)                  |       | 85,926                       |       | — |   | 7,811 |   | — |   | — |   | 93,737 |   |
| Dr. Anand  Gautam  Vice President, Research and Development               |       | 120,602                      |       | — |   | 10,971 |   | — |   | — |   | 131,573 |   |
| Sarah Meibusch  Vice President, Business Development                           |       | 102,961                      |       | — |   | 9,267 |   | — |   | — |   | 112,228 |   |
| Dr. James  Garner  Vice President, Medical & Clinical Affairs(6) |       | 56,325                       |       | — |   | 5,210 |   | — |   | — |   | 61,535 |   |
| Dr. John  Devlin  Vice President, Manufacturing Operations(7)             |       | 15,265                       |       | — |   | 1,374 |   | — |   | — |   | 16,639 |   |
| All directors  and executive officers as a group (12 persons)                  |       | 980,351                      |       | 159,324 |   | 88,398 |   | 3,676 |   | 596,608 |   | 1,828,357 |   |

 

----

(1)                                  No part of the compensation shown waspaid pursuant to a material bonus or profit-sharing plan.

 

(2)                                  We are obligated to contribute to varioussuperannuation plans to provide pension, retirement or similar benefits underthe Australian Superannuation Guarantee Legislation. Contributions are at setpercentages of salaries and wages. We have no responsibility for theadministration or performance of the superannuation plans. We have notestablished any superannuation plans.

 

(3)                                  During the 2007 fiscal year stock optionswere granted to certain executive officers under the terms of their contractsof employment. The options were issued free of charge. Each option entitles theholder to subscribe for

 

57

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one fully paidordinary share in the Company. The estimated value of these options iscalculated at the date of grant using the Hull-White binomial option pricingmodel.

 

(4)                                  Dr. Chang resigned in January 2007.

 

(5)                                  Mr. Orders resigned in July 2007.

 

(6)                                  Dr. Garner was appointed in January 2007.

 

(7)                                  Dr. Devlin was appointed in May 2007.

 

## **Item 6.C.****                                              ****Board Practices**

##  

Wecurrently have five directors. Our constitution provides that at leastone-third of our directors (except our managing director) must retire at eachannual general meeting of shareholders. As a result, only a portion of ourboard of directors will be elected each year. Mr. Stephen Chang, and Mr. PBurns were re-elected at our 2004 annual general meeting of shareholders. Prof.J. Zalcberg and Dr. M. Eutick were re-elected at our 2005 annual generalmeeting of shareholders.

 

No terminationbenefits are provided to directors other than statutory superannuation.

 

***AuditCommittee.*** Ouraudit committee currently consists of Dr. M. Eutick (Chair), Mr. P.Burns, and Prof. J. Zalcberg, all of whom are non-management members of ourboard of directors. The authority and responsibilities of our audit committeeare set forth in its charter and includes:

 

·                                          The appointment, compensation, retention,and oversight of the work of the independent auditors who report directly tothe audit committee;

 

·                                          The approval of all audit and non-auditengagements and fees with the independent auditors;

 

·                                          The authority to engage, without boardapproval, independent legal counsel and other advisors, at the Company’sexpense, as deemed necessary to carry out its duties;

 

·                                          Reviewing and monitoring the framework ofour internal controls and the objectivity of our financial reporting;

 

·                                          Oversight of the adequacy andeffectiveness of the Company’s internal controls over financial reporting anddisclosure controls and procedures;

 

·                                          Reviewing, prior to filing, our unauditedinterim or audited annual financial statements and discussing the statementsand reports with our management and the independent auditors, including anysignificant adjustments, management judgments and estimates, new accountingpolicies and disagreement with management;

 

·                                          Reviewing and discussing with managementthe Company’s interim and year-end earnings press releases prior to the releasebeing issued; and

 

58

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·                                          Establishing and reviewing procedures forcomplaints received by us regarding accounting matters.

 

***RemunerationCommittee.*** Ourremuneration committee currently consists of Dr. M. Eutick and Mr. P.Burns, who are non-management members of our board of directors. The functionof our remuneration committee includes:

 

·                                          Reviewing and, as it deems appropriate,recommending to our board of directors, policies, practices and proceduresrelating to the compensation arrangements for management and other personnel,including the granting of options under our option plans;

 

·                                          Establishing and reviewing general compensationpolicies with the objective to attract and retain superior talent, rewardindividual performance and achieve our financial goals; and

 

·                                          Advising and consulting with ourexecutive officers regarding managerial personnel and development.

 

59

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## **Item 6.D.****                                              ****Employees**

##  

Thenumber of persons, including executive directors, employed by the Company, asof June 30, 2007, 2006 and 2005, broken down by activity is shown below.

 
| ** **                     | ** ** | **As of June 30,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2007** | ** ** |
| Management and  administration |       | 9                                 |       | 13 |   | 13 |   |
| Research and  development      |       | 17                                |       | 17 |   | 20 |   |
| Sales and  marketing           |       | —                            |       | — |   | — |   |
| Production and  operations     |       | 15                                |       | 14 |   | 17 |   |
| **Total**                      | ** ** | **41**                            | ** ** | **44** | ** ** | **50** | ** ** |

 

All our managementand administration and sales and marketing employees and 8 of our research anddevelopment employees are based at our corporate offices in Toowong,Queensland, Australia. The remaining employees are based at our facility inDarra, Queensland, Australia. None of our employees are represented by a laborunion, nor have we experienced work stoppages. We believe that our relationswith our employees are good.

 

## **Item 6.E.****                                                ****Share Ownership**

##  

Thefollowing table sets forth, for each director or senior executive of theCompany, their interest in the ordinary shares of the Company (including theinterests of their immediate families and persons connected with them) and thepercentage of the Company’s outstanding share capital represented by suchownership interests as of December 5, 2007.

 
| **Name**                                                      | ** ** | **Number of Issued  Ordinary Shares** | ** ** | **Percentage of  Issued Ordinary  Shares (1)** | ** ** | **Number of  Ordinary Shares  Issuable  Pursuant to  Options** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| Stephen Chang                                                 |       | 820,300                                              |       | 1.4                                                           | %          | 41,014                                                                        |       |
| T. Justus  Homburg                                            |       | 27,778                                               |       | *                                                             |       | 531,389                                                                       |       |
| Prof. John R.  Zalcberg                                       |       | 16,772                                               |       | *                                                             |       | —                                                                        |       |
| Patrick O. Burns                                              |       | 556                                                  |       | *                                                             |       | 28                                                                            |       |
| Dr. Malvin  L. Eutick                                    |       | 17,693                                               |       | *                                                             |       | 885                                                                           |       |
| Anand Gautam                                                  |       |                                                 |       | —                                                        |       | 100,000                                                                       |       |
| Sarah J.  Meibusch                                            |       | —                                               |       | —                                                        |       | 100,000                                                                       |       |
| Linton W. P.  Burns                                           |       | 4,359                                                |       | *                                                             |       | 133,218                                                                       |       |
| Dr. James  Garner                                        |       | —                                               |       | —                                                        |       | 50,000                                                                        |       |
| John Devlin                                                   |       | —                                               |       | —                                                        |       | 50,000                                                                        |       |
| All directors  and executive officers As a group (10 persons) |       | 887,458                                              |       | 1.4                                                           | %          | 1,006,534                                                                     |       |

 

----

*******                                        **Represents less than 1%.

 

(1)                                  Based on 59,416,427 issued ordinaryshares as of December 5, 2007.

 

60

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**OptionPlans**

 

The following directorand employee option plans were in existence during the fiscal year ending June 30,2007. The plans are overseen by the Remuneration Committee which determines theterms under which eligible individuals may participate.

 

In accordance withAustralian law, we will not grant any option if, after such issuance, thenumber of options issued to non-executive employees during the previous fiveyears whether or not exercised and which have not yet terminated or expiredwould exceed 5% of the then total number of outstanding ordinary shares. Inaccordance with Australian Securities Exchange Listing Rules all grants ofoptions to directors require the prior approval from our shareholders.

 

In November 2004,our shareholders approved the directors and employee option incentive plan. Allour directors and all employees, whether full time or part time, are eligibleto participate in this plan. The minimum exercise price of options grantedunder this plan shall not be less than the average closing share price as recordedon the Australian Securities Exchange in the five business days preceding thegrant of those options. The expiry date of options issued under this plan cannot exceed 10 years from the date of grant. During the fiscal year ended June 30,2007 options to purchase a total of 147,000 ordinary shares were issued underthis plan. These options were issued free of charge and had a weighted averageexercise price of $2.12. Since June 30, 2007 a further 1,192,250 optionswere issued under this plan at a weighted average exercise price of $3.03. Asof December 5, 2007 there were outstanding options to purchase anaggregate of 1,809,250 ordinary shares under this plan.

 

At the 2006Company’s annual general meeting the shareholders approved the issue of 500,000options to the CEO. The vesting terms and exercise price of these options is asfollows:

 

·                                         166,667 options vesting on March 1,2007 at an exercise price equal to a 20% premium to the 60 day share pricevolume weighted average price (VWAP) prior to this date of which the exerciseprice was $6.15 (included in the table below);

 

·                                         166,667 options vesting on March 1,2008 at an exercise price equal to a 25% premium to the 60 day share price VWAPprior to this date of which the exercise price is estimated to be $4.88; and

 

·                                         166,667 options vesting on March 1,2009 at an exercise price equal to a 30% premium to the 60 day share price VWAPprior to this date of which the exercise price is estimated to be $5.07.

 

These options areexercisable for the date they vest and expire on March 1, 2011. The grantdate of these options is March 1, 2007, 2008, and 2009; however since theservice inception date precedes the grant date compensation expense isrecognized over the period beginning November 30, 2006, the date ofapproval. For March 1, 2007 the weighted average grant date fair value was$2.13. The estimated fair value The weighted average grant date fair value for March 1,2007, 2008, and 2009 was $2.13, $1.73, $1.86, respectively. The totalcompensation cost not recognized as of June 30, 2007 is estimated to be$383,315 over the weighted average period of 1.2 years.

 

61

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# **ITEM 7.****                                                    ****MAJOR SHAREHOLDERS AND RELATEDPARTY TRANSACTIONS**

#  

# **Items 7.A.****                                        ****Major Shareholders**

##  

The table belowshows all holders who, to the Company’s knowledge, own, directly or indirectly,5% or more of the Company’s ordinary shares, as of December 13, 2005, December 6,2006, and December 11, 2007 each being the most recent practicable datebefore reporting for the last three fiscal years.

 
| ** **                                                                           | ** ** | **2005**              | ** ** | **2006**                      | ** ** | **2007**              | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|-----------------------|------------|
| **Name and Address**                                                       | ** ** | **# of  Shares** | ** ** | **% of  issued  shares** | ** ** | **# of  Shares** | ** ** | **% of  issued  shares** | ** ** | **# of  Shares** | ** ** | **% of  issued  shares** | ** ** |
| SAC Capital Associates LLC  PO Box 58 Victoria House, The  Valley, Anguilla, BW1     |       | N/A                   |       |                          |       | 2,802,828             |       | 6.90 |   | N/A |   |   |   |
|                                                                                 |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |
| Manifest Capital Management Pty Ltd  Level 7, 139 Macquarie Street,  Sydney NSW 2000 |       | 2,655,286             |       | 6.55                          |       | 3,538,260             |       | 8.72 |   | 3,538,260 |   | 5.96 |   |
|                                                                                 |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |
| Northcape Capital Pty Ltd  Level 17, 15-19 Bent Street  Sydney NSW 2000              |       | N/A                   |       |                          |       | N/A                   |       |   |   | 3,575,289 |   | 6.02 |   |
|                                                                                 |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |
| AMP Limited  Level 24, 33 Alfred Street, Sydney  NSW 2000                            |       | N/A                   |       |                          |       | 2,975,268             |       | 7.33 |   | N/A |   |   |   |

 

As of December 4,2007, a total of 6,025,436 ordinary shares (or 10.14% of the total number ofour ordinary shares then outstanding) were held by three holders withregistered addresses in the United States. Because certain of these ordinaryshares were held by brokers or other nominees, the number of record orregistered holders in the U.S. is not representative of the number ofbeneficial holders in the U.S. or of the residence of the beneficial holders.

 

To the best of ourknowledge, we are not owned or controlled, directly or indirectly, by anothercorporation, by any foreign government or by any other natural or legal personsseverally or jointly, and we disclaim control by the companies, entities orindividuals listed in the table above. We do not know of any arrangements inplace that could result in a change in control of our company.

 

## **Item 7.B.****                                              ****Related Party Transactions**

##  

Except asdisclosed herein and elsewhere in this annual report, there were no materialtransactions to which we were a party and in which any of our directors,executive officers or major shareholders (or any of their affiliates,associates or enterprises) were involved since July 1, 2006.

 

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None of ourdirectors, executive officers or major shareholders (or any of theiraffiliates, associates or enterprises) was indebted to us at any time since July 1,2006.

 

63

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# **ITEM 8.****                                                    ****FINANCIAL INFORMATION**

#  

## **Item 8.A.****                                              ****Financial Statements and OtherFinancial Information**

##  

                                                Our audited financial statements andrelated notes for our fiscal years ended June 30, 2005, 2006 and 2007 arecontained on pages F-1 through F-26 of this annual report.

 

**ExportSales**

 

**                                               **The following table indicates the percentof revenues derived from export.

 
| ** **            | ** ** | **For the Years Ended June 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------------------|------------|
| ** **            | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Contract  manufacture |       | 13.8                                                      | %          | 7.7 | % | 2.7 | % |

 

The percentage ofcontract manufacturing revenues derived from customers outside Australiafluctuates as these contracts are typically ad-hoc in nature.

 

In fiscal 2007 wederived 97.3% of our total revenues from one Australian based customer. Infiscal 2006 we derived 76.2% of our total revenues from this same customer. Infiscal year 2005, we derived 78.3% of our total revenues from two Australianbased customers.

 

**LegalProceedings**

 

None.

 

**DividendPolicy**

 

                                                We have never declared cash dividends onour ordinary shares and have no present intention of declaring such cashdividends in the foreseeable future. Our board of directors will not be able torecommend the payment of any dividends until we make a profit. Futureprofitability will depend on future earnings and our working capitalrequirements. Our board of directors currently intends to reinvest income inthe continued development and operations of our business. We expect to continueto generate operating losses on our research and development projects untilproducts arising from our research and development activities are successfullycommercialized. Factors beyond our control, such as market competition,exchange rate fluctuations and changing government policy may also affectprofitability and our capacity to pay dividends.

 

## **Item 8.B.****                                              ****Significant Changes**

##  

Exceptas disclosed elsewhere in this annual report, no significant change hasoccurred since the date of the annual financial statements included in thisannual report.

 

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# **ITEM 9.****                                                    ****THE OFFER AND LISTING**

#  

## **Item 9.C.****                                              ****Markets**

##  

The principalnon-United States trading market for our ordinary shares and warrants is theAustralian Securities Exchange, or the ASX, under the codes “PGL” and “PGLO”respectively. Our ordinary shares and warrants are also quoted on the NasdaqCapital Market under the symbol “PGLA” and “PGLAW” respectively.

 

**PriceRange of Ordinary Shares**

 

***Australian Securities Exchange (ASX)***

 

The followingtable sets forth the high and low closing sales prices in Australian dollarsand the trading volume of our ordinary shares as reported on the ASX during theperiods indicated:

 
| ** **           | ** ** | **High** | ** ** | **Low** | ** ** | **Trading  Volume** | ** ** |
|----------------------|------------|----------|------------|---------|------------|---------------------|------------|
| Yearly Data:         |       |     |       |    |       |                |       |
| Fiscal year 2003     |       | 1.25     |       | 0.50    |       | 3,310,777           |       |
| Fiscal year 2004     |       | 3.76     |       | 0.72    |       | 25,976,500          |       |
| Fiscal year 2005     |       | 6.22     |       | 2.04    |       | 23,242,125          |       |
| Fiscal year 2006     |       | 4.04     |       | 2.35    |       | 24,427,032          |       |
| Fiscal year 2007     |       | 9.49     |       | 2.52    |       | 53,491,809          |       |
| Quarterly Data:      |       |     |       |    |       |                |       |
| Third Quarter  2005  |       | 3.14     |       | 2.35    |       | 3,476,989           |       |
| Fourth Quarter  2005 |       | 3.34     |       | 2.58    |       | 5,536,055           |       |
| First Quarter  2006  |       | 3.64     |       | 2.65    |       | 6,525,938           |       |
| Second Quarter  2006 |       | 4.04     |       | 2.70    |       | 8,888,050           |       |
| Third Quarter  2006  |       | 3.00     |       | 2.52    |       | 3,336,609           |       |
| Fourth Quarter  2006 |       | 7.30     |       | 2.78    |       | 14,033,400          |       |
| First Quarter  2007  |       | 7.50     |       | 5.60    |       | 12,511,200          |       |
| Second Quarter  2007 |       | 9.49     |       | 4.50    |       | 23,610,600          |       |
| Third Quarter  2007  |       | 4.54     |       | 3.10    |       | 17,112,900          |       |
| Monthly Data:        |       |     |       |    |       |                |       |
| June 2007       |       | 5.63     |       | 4.50    |       | 6,278,800           |       |
| July 2007       |       | 4.54     |       | 3.84    |       | 6,708,200           |       |
| August 2007     |       | 4.00     |       | 3.10    |       | 6,164,800           |       |
| September 2007  |       | 3.90     |       | 3.24    |       | 4,239,900           |       |
| October 2007    |       | 3.45     |       | 2.60    |       | 5,022,700           |       |
| November 2007   |       | 2.95     |       | 2.55    |       | 6,238,200           |       |

 

65

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***NASDAQCapital Market***

 

The following table sets forth the high and low closing sales prices inUnited States dollars and the trading volume of our ordinary shares as reportedon the NASDAQ Capital Market during the periods indicated:

 
| ** **           | ** ** | **High** | ** ** | **Low** | ** ** | **Trading  Volume** | ** ** |
|----------------------|------------|----------|------------|---------|------------|---------------------|------------|
| Yearly Data:         |       |     |       |    |       |                |       |
| Fiscal year 2003     |       | 0.88     |       | 0.30    |       | 2,478,639           |       |
| Fiscal year 2004     |       | 3.24     |       | 0.51    |       | 18,534,500          |       |
| Fiscal year 2005     |       | 4.71     |       | 1.60    |       | 4,411,100           |       |
| Fiscal year 2006     |       | 3.15     |       | 1.71    |       | 1,628,400           |       |
| Fiscal year 2007     |       | 7.78     |       | 1.81    |       | 23,776,100          |       |
| Quarterly Data:      |       |     |       |    |       |                |       |
| Third Quarter  2005  |       | 2.35     |       | 1.71    |       | 454,400             |       |
| Fourth Quarter  2005 |       | 2.50     |       | 1.86    |       | 289,900             |       |
| First Quarter 2006   |       | 2.60     |       | 1.95    |       | 384,100             |       |
| Second Quarter  2006 |       | 3.15     |       | 2.05    |       | 500,000             |       |
| Third Quarter  2006  |       | 2.19     |       | 1.81    |       | 147,000             |       |
| Fourth Quarter  2006 |       | 6.48     |       | 1.91    |       | 13,638,200          |       |
| First Quarter  2007  |       | 6.08     |       | 4.30    |       | 2,467,100           |       |
| Second Quarter  2007 |       | 7.78     |       | 3.90    |       | 7,523,800           |       |
| Third Quarter  2007  |       | 4.01     |       | 2.57    |       | 2,683,300           |       |
| Monthly Data:        |       |     |       |    |       |                |       |
| June 2007       |       | 4.71     |       | 3.90    |       | 550,500             |       |
| July 2007       |       | 4.01     |       | 3.29    |       | 766,200             |       |
| August 2007     |       | 3.30     |       | 2.57    |       | 832,000             |       |
| September 2007  |       | 3.31     |       | 2.74    |       | 1,085,100           |       |
| October 2007    |       | 3.06     |       | 2.47    |       | 594,300             |       |
| November 2007   |       | 2.70     |       | 2.27    |       | 420,900             |       |

 

On December 12, 2007, the closing sales price in U.S. Dollars ofthe ordinary shares as reported on the ASX and the NASDAQ Capital Market was$2.22 and $2.19, respectively.

 

**PriceRange of Warrants**

 

***Australian Securities Exchange (ASX)***

 

The followingtable sets forth the high and low closing sales prices in Australian dollarsand the trading volume of our warrants as reported on the ASX during theperiods indicated:

 
| ** **           | ** ** | **High** | ** ** | **Low** | ** ** | **Trading  Volume** | ** ** |
|----------------------|------------|----------|------------|---------|------------|---------------------|------------|
| Quarterly Data:      |       |     |       |    |       |                |       |
| Second Quarter  2007 |       | 1.65     |       | 0.15    |       | 124,400             |       |
| Third Quarter  2007  |       | 1.40     |       | 0.48    |       | 275,600             |       |
| Monthly Data:        |       |     |       |    |       |                |       |
| June 2007       |       | 1.65     |       | 0.15    |       | 124,400             |       |
| July 2007       |       | 1.40     |       | 1.00    |       | 207,700             |       |
| August 2007     |       | 1.35     |       | 0.70    |       | 30,300              |       |
| September 2007  |       | 1.30     |       | 0.48    |       | 37,600              |       |
| October 2007    |       | 0.93     |       | 0.55    |       | 13,900              |       |
| November 2007   |       | 0.80     |       | 0.52    |       | 29,300              |       |

 

66

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***NASDAQCapital Market***

 

There has been notrading in our warrants on the NASDAQ Capital Market to date.

 

On December 12,2007, the closing sales price in U.S. Dollars of the warrants as reported onthe ASX and the NASDAQ Capital Market was $0.49 and N/A, respectively.

 

67

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# **ITEM 10.****                                             ****ADDITIONAL INFORMATION**

#  

## **Item 10.B.****                                       ****Memorandum and Articles ofAssociation**

##  

Adescription of our ordinary shares and warrants, including brief summaries ofthe rights of our shareholders and warrant holders as conferred by ourconstitution and Australian law is incorporated by reference to the descriptionof our securities contained in our Registration Statement on Form F-3filed with the SEC on March 22, 2007 and any amendment or report filed forthe purposes of updating that description. Our constitution may be inspectedand copied at the Public Reference Section of the Securities and ExchangeCommission at 450 Fifth Street, N.W., Washington, D.C. 20549.

 

***Compliancewith NASDAQ Rules***

 

NASDAQ corporate governance rules require that wedisclose the exemptions that we have obtained, and rely on, from compliancewith existing NASDAQ corporate governance rules. Under our Constitution andconsistent with the Australian Corporations Act, the quorum required for anordinary meeting of shareholders consists of at least three shareholders,represented in person or by proxy. Under the NASDAQ Marketplace Rules, a NASDAQlisted-company must provide for a quorum that in no case shall be less than 331/3% of the outstanding shares of the company’s common voting stock. Pursuantto a letter from NASDAQ in 1997, NASDAQ granted us an exemption from suchNASDAQ rule. Our quorum requirement is in accordance with Australian law andgenerally accepted business practices in Australia. We also obtained fromNASDAQ an exemption from NASDAQ Marketplace Rule 4350(i) concerningshareholder approval of certain share plans, although we have not to daterelied on such exemption.

 

In a letter toNASDAQ dated June 2005 from our home country (Australia) legal counsel weadvised that pursuant to NASDAQ Marketplace Rule 4350(a)(1), Progen wouldfollow certain governance practices of its home country in lieu of thecomparable NASDAQ requirement under NASDAQ Marketplace Rule 4350(c)(1) whichprovides that a majority of the Board of directors must be comprised ofindependent directors. Progen did not then comply with this requirement. Until Dr. StanleyChang resigned from the Board, we had six members on the Board, three of whomwere considered independent. The Principles of Good Corporate Governance andBest Practice Recommendations (BPRs) released by the Australian SecuritiesExchange (ASX) recommend that a majority of the board should be independent.However, current practice in Australia recognizes that the BPRs are guidelinesonly. If a company considers that a recommendation is not appropriate to itsparticular circumstances, it has the flexibility not to adopt it.

 

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## **Item 10.C.****                                       ****Material Contracts**

##  

Informationabout material contracts, other than contracts entered into in the ordinarycourse of business, to which we are a party and which we have entered intoduring the two immediately preceding fiscal years are disclosed above in “Item4. Information on the Company”.

 

## **Items 10.D.****                                 ****Exchange Controls**

##  

In the early1980s, the Australian Government began a program of deregulation of theAustralian financial sector. This led to the introduction of competition fromforeign banks and, perhaps more notably, the deregulation of foreign exchangecontrols. Deregulation has been at the forefront of Australian Governmentpolicy since the early 1980’s and, except as discussed below, there are no lawsor regulations in Australia that restrict the export or import of capital oraffect the remittance of dividends or other payments to holders of our ordinaryshares who are non-residents of Australia, subject to withholding taxes underAustralian law with respect to remittances of dividends (to the extent thetaxes on the dividends are not paid by us) and interest payments. See “Taxation”below.

 

***TheForeign Acquisitions and Takeovers Act 1975***

 

The ForeignAcquisitions and Takeovers Act 1975 is an act of the Parliament of theCommonwealth of Australia which seeks to regulate overseas investment inAustralia. By and large, the Government’s policy is to encourage foreigninvestment provided that it is consistent with the needs of the Australiancommunity. Although restrictions are applied in certain areas, in the majorityof industry sectors, proposals are approved unless they are judged contrary tothe national interest.  The Act requirescompulsory notification of certain proposed acquisitions of Australian assetsand makes other proposed acquisitions and arrangements subject to prohibitionor divestiture after they have been examined and found to be contrary to thenational interest.

 

***TheFinancial Transactions Reports Act 1988***

 

The FinancialTransactions Reports Act 1988 is an act of the Parliament of the Commonwealthof Australia, designed to facilitate the administration and enforcement ofAustralia’s revenue laws. It provides for the reporting of certain financialtransactions and transfers, including the export or import of currencyexceeding A$10,000 to the Cash Transactions Reporting Agency.

 

***TheIncome Tax Assessment Act of 1936 and the Income Tax Assessment Act of 1997(collectively, the “Tax Act”)***

 

The Tax Act is theprincipal law of the Commonwealth of Australia, concerning the collection andadministration of taxes (except goods and services tax). Under the Tax Act,overseas residents are obliged to pay income tax in Australia on income derivedfrom Australian sources.

 

## **Item 10.E.****                                         ****Taxation**

##  

The following is asummary of the current tax laws of the U.S. (including the Internal RevenueCode of 1986, as amended, its legislative history, existing and proposedregulations 

 

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thereunder,published rulings and court decisions) and Australia as they relate to us andour shareholders, including United States and other non-Australianshareholders. The summary is based upon laws and relevant interpretationsthereof in effect as of the date of this annual report, all of which aresubject to change, possibly on a retroactive basis. The discussion does notaddress any aspects of U.S. taxation other than federal income taxation or anyaspects of Australian taxation other than federal income taxation, inheritancetaxation, stamp duty and goods and services tax.

 

Prospectivepurchasers of ordinary shares are advised to consult their own tax advisorswith respect to the specific tax consequences to them of the purchase,ownership and disposition of ordinary shares, including, in particular, theeffect of any foreign, state or local taxes.

 

***AustralianTax Consequences***

 

Non-Australianresidents are liable to pay tax on income derived from Australian sources.  The mechanism by which that tax is paid (fornon-residents who have no permanent establishment in Australia or where theincome is not connected with a permanent establishment) is known as withholdingtax. Dividends paid by a resident Australian company to a resident of theUnited States of America are subject to withholding tax at the rate of 15%. Therate of withholding tax on dividends is normally 30%, but since the UnitedStates has concluded a double tax treaty agreement with Australia, the rate isreduced to 15%. It should be noted, however, that under Section 128B(3) ofthe Tax Act, to the extent that dividends paid to non-residents have beenfranked (generally where a company pays tax itself), such dividends are exemptfrom withholding tax. Franked dividends is the expression given to dividendswhen the profits out of which those dividends are paid have been taxed in ourhands. Accordingly, an Australian company paying fully franked dividends to anon-resident is not required to deduct any withholding tax. Dividends on whichwithholding tax has been paid are not subject to any further Australian tax. Inother words, the withholding tax represents the final Australian tax liabilityin relation to those dividends.

 

The pertinentprovisions of the double tax treaty between Australia and the United Statesprovide that dividends are primarily liable for tax in the country of residenceof the beneficial owner. However, the source country, in this case Australia,may also tax them, but in such case the tax will be limited to 15%. Where thebeneficial owner is a United States resident company that holds at least 10% ofus, the tax will be limited to 5%. The 15% limit does not apply to dividendsderived by a resident of the United States of America who has a permanentestablishment or fixed base in Australia, if the holding giving rise to thedividends is effectively connected with that establishment or base. Suchdividends are taxed in the normal way as business profits or independentpersonal services income as the case may be.

 

We have not paidany cash dividends since our inception and we do not anticipate the payment ofcash dividends in the foreseeable future. Additionally, we expect to incuradditional operating losses until products arising from our research anddevelopment programs are successfully commercialized. See “Item 8.A. FinancialStatements and Other Financial Information–Dividend Policy.”

 

Capital gains taxin Australia is payable on real gains over the period in which the shares havebeen held, that is, the difference between the selling price and the originalcost price. The cost price is indexed for inflation if the shares have beenheld for more than one year, and individual

 

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taxpayerscan, with respect to shares held for more than one year, elect to foregoindexation of the cost base in exchange for being taxed on 50% of the realizedgain. Capital losses are available as deductions but only against other capitalgains.

 

#### ***Stamp Duty***

####  

Any transfer ofshares through trading on the ASX and NASDAQ, whether by Australian residentsor foreign residents, are not be subject to stamp duty.

 

***AustralianDeath Duty***

 

Australia does nothave estate or death duties. No capital gains tax liability is realized uponthe inheritance of a deceased person’s shares. The disposal of inherited sharesby beneficiaries, may, however, give rise to a capital gains tax liability.

 

***Goodsand Services Tax***

 

The issue ortransfer of shares will not incur Australian goods and services tax and doesnot require a stockholder to register for Australian goods and services taxpurposes.

 

***U.S.Federal Income Tax Considerations***

 

The following discussion summarizes the principal U.S. federal incometax considerations relating to the purchase, ownership and disposition of ourordinary shares or warrants by a U.S. holder (as defined below) holding suchshares or warrants as capital assets (generally, property held for investment).This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),Treasury regulations, administrative pronouncements of the U.S. InternalRevenue Service (the “IRS”) and judicial decisions, all as in effect on thedate hereof, and all of which are subject to change (possibly with retroactiveeffect) and to differing interpretations. This summary does not describe anystate, local or non-U.S. tax law considerations, or any aspect of U.S. federaltax law other than income taxation; U.S. holders are urged to consult their owntax advisors regarding such matters.

 

This summary does not purport to address all material federal incometax consequences that may be relevant to a holder of ordinary shares orwarrants. This summary does not take into account the specific circumstances ofany particular investors, some of which (such as tax-exempt entities, banks orother financial institutions, insurance companies, broker-dealers, traders insecurities that elect to use a mark-to-market method of accounting for theirsecurities holdings, regulated investment companies, real estate investmenttrusts, U.S. expatriates, investors liable for the alternative minimum tax,partnerships and other pass-through entities, investors that own or are treatedas owning 10% or more of our voting stock, investors that hold the ordinaryshares or warrants as part of a straddle, hedge, conversion or constructivesale transaction or other integrated transaction, and U.S. holders whosefunctional currency is not the U.S. dollar) may be subject to special taxrules.

 

As used below, a “U.S. Holder” is a beneficial owner of an ordinaryshare or warrant that is, for U.S. federal income tax purposes, (i) acitizen or resident alien individual of the United States, (ii) acorporation (or an entity taxable as a corporation) created or organized underthe law of the United States, any State thereof or the District of Columbia, (iii) anestate, the income of which is subject to

 

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U.S. federalincome tax without regard to its source, or (iv) a trust if (1) acourt within the United States is able to exercise primary supervision over theadministration of the trust, and one or more U.S. persons have the authority tocontrol all substantial decisions of the trust, or (2) the trust has avalid election in effect under applicable U.S. Treasury Regulations to betreated as a U.S. person. For purposes of this discussion, a “Non-US Holder” isa beneficial owner of an ordinary share or warrant that is (i) anon-resident alien individual, (ii) a corporation (or an entity taxable asa corporation) created or organized in or under the law of a country other thanthe United States or a political subdivision thereof or (iii) an estate ortrust that is not a U.S. holder. This discussion does not address any aspect ofU.S. federal gift or estate tax, or state, local or non-U.S. tax laws.Additionally, the discussion does not consider the tax treatment ofpartnerships or other pass-through entities or persons who hold ordinary sharesthrough such entities. If a partnership (including for this purpose any entitytreated as a partnership for U.S. federal tax purposes) is a beneficial ownerof ordinary shares or warrants, the U.S. federal tax treatment of a partner inthe partnership generally will depend on the status of the partner and theactivities of the partnership. A holder of ordinary shares or warrants that isa partnership and partners in that partnership are urged to consult their owntax advisers regarding the U.S. federal income tax consequences of purchasing,holding and disposing of ordinary shares or warrants.

 

We have not sought a ruling from the IRS or an opinion of counsel as toany U.S. federal income tax consequence described herein. The IRS may disagreewith the description herein, and its determination may be upheld by a court.

 

**GIVEN THE COMPLEXITY OF THE TAXLAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR INVESTOR MAY BEAFFECTED BY MATTERS NOT DISCUSSED HEREIN, PROSPECTIVE INVESTORS ARE URGED TOCONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OFTHE ACQUISITION, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES OR WARRANTS,INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS,AS WELL AS U.S. FEDERAL TAX LAWS.**

 

**TO ENSURE COMPLIANCE WITHREQUIREMENTS IMPOSED BY THE IRS UNDER TREASURY CIRCULAR 230, WE INFORM YOUTHAT (1) ANY DISCUSSION OF U.S. FEDERAL INCOME TAX ISSUES CONTAINED HEREIN(INCLUDING ANY ATTACHMENTS), UNLESS OTHERWISE SPECIFICALLY STATED, WAS NOTINTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDINGPENALTIES UNDER THE UNITED STATES INTERNAL REVENUE CODE, AND (2) EACH U.S.HOLDER SHOULD SEEK ADVICE BASED UPON THEIR PARTICULAR CIRCUMSTANCES FROM ANINDEPENDENT TAX ADVISOR.**

 

**Allocation of Purchase Price Between Ordinary Sharesand Warrants**

 

A U.S. Holder that purchased our ordinary shares and warrants as a uniton their initial issuance generally will be required to allocate the purchaseprice of such unit between each ordinary share and each warrant that comprisethe unit based on the relative fair market value of each. Of the purchase pricefor any unit that we offered, we allocated a portion to each ordinary share andto each warrant comprising part of such unit, as described in the prospectussupplement relating thereto. For U.S. Holders that purchased our ordinaryshares and warrants as a unit on their initial issuance, the price

 

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allocated to eachordinary share and each warrant generally will be such U.S. Holder’s tax basisin such share or warrant, as the case may be. While uncertain, the IRS, byanalogy to the rules relating to the allocation of the purchase price tocomponents of a unit consisting of debt and equity, may take the position thatour allocation of the purchase price will be binding on a U.S. Holder of aunit, unless the U.S. Holder explicitly discloses in a statement attached tothe U.S. Holder’s timely filed U.S. federal income tax return for the taxableyear that includes the acquisition date of the unit that the U.S. Holder’sallocation of the purchase price between each ordinary share and each warrantthat comprise the unit is different than our allocation. Our allocation wouldnot, however, be binding on the IRS.

 

Each U.S. Holder that purchased our ordinary shares and warrants as aunit on their initial issuance is urged to consult their own tax advisor withrespect to the risks associated with an allocation of the purchase pricebetween the ordinary shares and each warrant that comprise a unit that isinconsistent with our allocation of the purchase price.

 

***Taxationof Distributions***

 

*U.S. Holders.*   Ingeneral, subject to the passive foreign investment company (“PFIC”) rules discussedbelow, a distribution on an ordinary share will constitute a dividend for U.S.federal income tax purposes to the extent that it is made from our current oraccumulated earnings and profits as determined under U.S. federal income taxprinciples. If a distribution exceeds the amount of our current and accumulatedearnings and profits, it will be treated as a non-taxable reduction of basis tothe extent of the U.S. Holder’s tax basis in the ordinary share on which it ispaid, and to the extent it exceeds that basis it will be treated as a capitalgain. For purposes of this discussion, the term “dividend” means a distributionthat constitutes a dividend for U.S. federal income tax purposes.

 

The gross amount of any dividend on an ordinary share (which willinclude the amount of any Australian taxes withheld) generally will be subjectto U.S. federal income tax as foreign source dividend income and will not beeligible for the corporate dividends received deduction. The amount of adividend paid in Australian currency will be its value in U.S. dollars based onthe prevailing spot market exchange rate in effect on the day that the U.S.Holder receives the dividend, whether or not the dividend is converted intoU.S. dollars. A U.S. holder will have a tax basis in any distributed Australiancurrency equal to its U.S. dollar amount on the date of receipt, and any gainor loss realized on a subsequent conversion or other disposition of theAustralian currency generally will be treated as U.S. source ordinary income orloss. If dividends paid in Australian currency are converted into U.S. dollarson the date they are received by a U.S. Holder, the U.S. Holder generallyshould not be required to recognize foreign currency gain or loss in respect ofthe dividend income. U.S. Holders are urged to consult their own tax advisersregarding the treatment of any foreign currency gain or loss if any Australiancurrency received by the U.S. Holder is not converted into U.S. dollars on thedate of receipt.

 

Subject to certain exceptions for short-term and hedged positions, anydividend that a non-corporate holder receives on an ordinary share in a taxableyear beginning before January 1, 2011 will be subject to a maximum taxrate of 15% if the dividend is a “qualified dividend.” A dividend on anordinary share will be a qualified dividend if (i) either (a) theordinary shares are readily tradable on an established securities market in theU.S. or (b) we are eligible for the benefits of a

 

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comprehensiveincome tax treaty with the U.S. that the U.S. Secretary of the Treasurydetermines is satisfactory for purposes of these rules and that includesan exchange of information program, and (ii) we were not, in the yearprior to the year the dividend was paid, and are not, in the year the dividendis paid, a PFIC. The ordinary shares are listed on the Nasdaq Capital Market,which should qualify them as readily tradable on an established securitiesmarket in the United States. In any event, the double tax treaty betweenAustralia and the U.S. (the “Treaty”) satisfies the requirements of clause(i)(b), and, although the matter is not free from doubt, we believe that weshould be a resident of Australia entitled to the benefits of the Treaty.However, because the facts relating to our entitlement to the benefits of theTreaty can change over time, there can be no assurance that we will be entitledto the benefits of the Treaty for any taxable year. Based on our auditedfinancial statements and relevant market and shareholder data, we believe wewere not a PFIC for U.S. federal income tax purposes for our June 30, 2007taxable year. However, based on our audited financial statements and ourcurrent expectations regarding the value and nature of our assets, the sourcesand nature of our income, and relevant market and shareholder data, it ispossible that we could be classified as a PFIC for our June 30, 2008taxable year. Moreover, given that the determination of PFIC status involvesthe application of complex tax rules, and that its is based on the nature ofour income and assets from time to time, no assurances can be provided that wewill not be considered a PFIC for the current (or any past or future) taxableyear. In addition, as described in the section below entitled “Passive ForeignInvestment Company Rules,” if we were a PFIC in a year while a U.S. Holder heldan ordinary share, and if the U.S. Holder has not made a qualified electingfund election effective for the first year the U.S. Holder held the ordinaryshare, the ordinary share remains an interest in a PFIC for all future years oruntil such an election is made. The IRS takes the position that that rule willapply for purposes of determining whether an ordinary share is an interest in aPFIC in the year a dividend is paid or in the prior year, even if the Companydoes not satisfy the tests to be a PFIC in either of those years.

 

Even if dividends on the ordinary shares would otherwise be eligiblefor qualified dividend treatment, in order to qualify for the reduced qualifieddividend tax rates, a non-corporate holder must hold the ordinary share onwhich a dividend is paid for more than 60 days during the 120-day periodbeginning 60 days before the ex-dividend date, disregarding for this purposeany period during which the non-corporate holder has an option to sell, isunder a contractual obligation to sell or has made (and not closed) a shortsale of substantially identical stock or securities, is the grantor of anoption to buy substantially identical stock or securities or, pursuant toTreasury regulations, has diminished their risk of loss by holding one or moreother positions with respect to substantially similar or related property. Inaddition, to qualify for the reduced qualified dividend tax rates, thenon-corporate holder must not be obligated to make related payments withrespect to positions in substantially similar or related property. Payments inlieu of dividends from short sales or other similar transactions will notqualify for the reduced qualified dividend tax rates. A non-corporate holderthat receives an extraordinary dividend eligible for the reduced qualifieddividend rates must treat any loss on the sale of the stock as a long-term capitalloss to the extent of the dividend. For purposes of determining the amount of anon-corporate holder’s deductible investment interest expense, a dividend istreated as investment income only if the non-corporate holder elects to treatthe dividend as not eligible for the reduced qualified dividend tax rates.Special limitations on foreign tax credits with respect to dividends subject tothe reduced qualified dividend tax rates apply to reflect the reduced rates oftax.

 

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The U.S. Treasury has announced its intention to promulgate rules pursuantto which non-corporate holders of stock of non-U.S. corporations, andintermediaries though whom the stock is held, will be permitted to rely oncertifications from issuers to establish that dividends are treated asqualified dividends. Because those procedures have not yet been issued, it isnot clear whether we will be able to comply with them.

 

Non-corporate holders of ordinary shares are urged to consult their owntax advisers regarding the availability of the reduced qualified dividend taxrates in the light of their own particular circumstances.

 

Any Australian withholding tax will be treated as a foreign income taxeligible for credit against a U.S. Holder’s U.S. federal income tax liability,subject to generally applicable limitations under U.S. federal income tax law.For purposes of computing those limitations separately under current law forspecific categories of income, a dividend generally will constitute foreignsource “passive income” or, in the case of certain holders, “financial servicesincome” for purposes of taxable years beginning before January 1, 2007.For taxable years beginning after December 31, 2006, “passive income”generally will be treated as “passive category income,” and “financial servicesincome” generally will be treated as “general category income.” A U.S. Holderwill be denied a foreign tax credit with respect to Australian income taxwithheld from dividends received with respect to the ordinary shares to theextent the U.S. Holder has not held the ordinary shares for at least 16 days ofthe 30-day period beginning on the date which is 15 days before the ex-dividenddate or to the extent the U.S. Holder is under an obligation to make relatedpayments with respect to substantially similar or related property. Any daysduring which a U.S. Holder has substantially diminished its risk of loss on theordinary shares are not counted toward meeting the 16-day holding periodrequired by the statute. The rules relating to the determination of theforeign tax credit are complex, and U.S. Holders are urged to consult withtheir own tax advisers to determine whether and to what extent they will beentitled to foreign tax credits as well as with respect to the determination ofthe foreign tax credit limitation (including changes in the rules fortaxable years beginning after December 31, 2006). Alternatively, anyAustralian withholding tax may be taken as a deduction against taxable income,provided the U.S. Holder takes a deduction and not a credit for all foreignincome taxes paid or accrued in the same taxable year. In general, special rules willapply to the calculation of foreign tax credits in respect of dividend incomethat is subject to preferential rates of U.S. federal income tax.

 

*Non-U.S. Holders.*   Adividend paid to a Non-U.S. Holder on an ordinary share will not be subject toU.S. federal income tax unless the dividend is effectively connected with theconduct of trade or business by the non-U.S. Holder within the United States(and is attributable to a permanent establishment or fixed base the Non-U.S.Holder maintains in the United States if an applicable income tax treaty sorequires as a condition for the Non-U.S. Holder to be subject to U.S. taxationon a net income basis on income from the ordinary share). A Non-U.S. Holdergenerally will be subject to tax on an effectively connected dividend in thesame manner as a U.S. Holder. A corporate Non-U.S. Holder may also be subjectunder certain circumstances to an additional “branch profits tax,” the rate ofwhich may be reduced pursuant to an applicable income tax treaty.

 

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***Taxationof Capital Gains***

 

*U.S. Holders.*  Subject to the passive foreign investment company rules discussed below,on a sale or other taxable disposition of an ordinary share or warrant, a U.S.Holder will recognize capital gain or loss in an amount equal to the differencebetween the U.S. holder’s adjusted basis in the ordinary share or warrant andthe amount realized on the sale or other disposition, each determined in U.S.dollars.  See “Exercise or Lapse of aWarrant” below for a discussion regarding a U.S. Holder’s basis in an ordinaryshare acquired pursuant to the exercise of a warrant.

 

Such capital gain or loss will be long-termcapital gain or loss if at the time of the sale or other taxable dispositionthe ordinary share or warrant has been held for more than one year. In general,any adjusted net capital gain of an individual for a taxable year beginningbefore January 1, 2011 is subject to a maximum tax rate of 15%. Insubsequent years, the maximum tax rate on the net capital gain of an individualwill be 20%. Capital gains recognized by corporate U.S. Holders generally aresubject to U.S. federal income tax at the same rate as ordinary income. Thedeductibility of capital losses is subject to various limitations.

 

Any gain a U.S. Holder recognizes generallywill be U.S. source income for U.S. foreign tax credit purposes, and, subjectto certain exceptions, any loss will generally be a U.S. source loss. If anAustralian tax is withheld on a sale or other disposition of an ordinary shareor warrant, the amount realized will include the gross amount of the proceedsof that sale or disposition before deduction of the Australian tax. Thegenerally applicable limitations under U.S. federal income tax law on creditingforeign income taxes may preclude a U.S. Holder from obtaining a foreign taxcredit for any Australian tax withheld on a sale of an ordinary share orwarrant. The rules relating to the determination of the foreign tax creditare complex, and U.S. Holders are urged to consult with their own tax advisersregarding the application of such rules. Alternatively, any Australianwithholding tax may be taken as a deduction against taxable income, providedthe U.S. Holder takes a deduction and not a credit for all foreign income taxespaid or accrued in the same taxable year.

 

*Non-U.S. Holders.*  A Non-U.S. Holder will not be subject to U.S. federal income tax on a gainrecognized on a sale or other disposition of an ordinary share or warrantunless (i) the gain is effectively connected with the conduct of a tradeor business by the Non-U.S. Holder within the United States (and isattributable to a permanent establishment or fixed base that the Non-U.S.Holder maintains in the United States if an applicable income tax treaty sorequires as a condition for the Non-U.S. Holder to be subject to U.S. taxationon a net income basis on income from the ordinary share or warrant), or (ii) inthe case of a Non-U.S. Holder who is an individual, the Non-U.S. Holder ispresent in the United States for 183 or more days in the taxable year of thesale or other disposition and certain other conditions apply. Any effectivelyconnected gain of a corporate Non-U.S. Holder may also be subject under certaincircumstances to an additional “branch profits tax”, the rate of which may bereduced pursuant to an applicable income tax treaty.

 

***Exerciseor Lapse of a Warrant***

 

Subject to the discussion of the PFIC rules below,a U.S. Holder generally will not recognize gain or loss upon the exercise of awarrant. Ordinary shares acquired pursuant to the exercise of a warrant forcash generally will have a tax basis equal to the U.S. Holder’s tax basis inthe warrant, increased by the amount paid to exercise the warrant. The holdingperiod of such ordinary shares

 

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generally would begin on the day after the date of exercise of thewarrant. If the terms of a warrant provide for any adjustment to the number ofshares of ordinary shares for which the warrant may be exercised or to theexercise price of the warrant, such adjustment may, under certain circumstances,result in constructive distributions that could be taxable to a U.S. Holder ofthe warrant. Conversely, the absence of an appropriate adjustment similarly mayresult in a constructive distribution that could be taxable to a U.S. Holder ofthe warrant. A constructive distribution to a U.S. Holder of a warrantgenerally will be taxed in the manner described above under “U.S. FederalIncome Tax Considerations-Taxation of Distributions,” although it is unclearwhether a constructive distribution on a warrant that is taxed as a dividend toa non-corporate holder of the warrant would be eligible for the reducedqualified dividend tax rates. If a warrant is allowed to lapse unexercised, aU.S. Holder generally will recognize a capital loss equal to such holder’s taxbasis in the warrant. U.S. Holders who exercise a warrant other than by payingthe exercise price in cash are urged to consult their own tax advisorsregarding the tax treatment of such an exercise, which may vary from thatdescribed above.

 

***PassiveForeign Investment Company Rules***

 

A special set of U.S. federal income tax rules applies to aforeign corporation that is a PFIC for U.S. federal income tax purposes. Asnoted above, based on our audited financial statements and relevant market andshareholder data, we believe we were not a PFIC for U.S. federal income taxpurposes for our June 30, 2007 taxable year. However, based on our auditedfinancial statements and our current expectations regarding the value andnature of our assets, the sources and nature of our income, and relevant marketand shareholder data, it is possible that we could be classified as a PFIC forour June 30, 2008 taxable year. Moreover, given that the determination ofPFIC status involves the application of complex tax rules, and that it is basedon the nature of our income and assets from time to time, no assurances can beprovided that we will not be considered a PFIC for the current (or any past orfuture) taxable year.

 

In general, a foreign corporation is a PFIC if at least 75% of itsgross income for the taxable year is passive income or if at least 50% of itsassets for the taxable year produce passive income or are held for theproduction of passive income. In general, passive income for this purposemeans, with certain designated exceptions, dividends, interest, rents,royalties (other than certain rents and royalties derived in the active conductof trade or business), annuities, net gains from dispositions of certainassets, net foreign currency gains, income equivalent to interest, income fromnotional principal contracts and payments in lieu of dividends. Thedetermination of whether a foreign corporation is a PFIC is a factualdetermination made annually and is therefore subject to change. Subject toexceptions pursuant to certain elections that generally require the payment oftax, once stock or a warrant in a foreign corporation is classified as stock ina PFIC in the hands of a particular shareholder that is a U.S. person, itremains stock or a warrant in a PFIC in the hands of that shareholder.

 

Unfavorable tax consequences for a U.S. Holder can occur if we aretreated as a PFIC for any year while a U.S. Holder owns ordinary shares orwarrants. These tax consequences can be mitigated with respect to a U.S. Holder’sordinary shares (but not a U.S. Holder’s warrants)  if the U.S. Holder makes, or has made, atimely qualified electing fund election or election to mark to market theholder’s ordinary shares, and such election is in effect for the first taxableyear during which the U.S. Holder owns ordinary shares that we are a PFIC. Ifwe are treated as a PFIC, and neither election is 

 

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made, then contrary to the tax consequences described in “U.S. FederalIncome Tax Considerations-Taxation of Distributions” and “U.S. Federal IncomeTax Considerations-Taxation of Capital Gains” above, in any year in which theU.S. Holder either disposes of an ordinary share or a warrant at a gain orreceives one or more “excess distributions” in respect of our ordinary shares,special rules apply to the taxation of the gain or the excessdistributions. For purposes of these rules, a U.S. Holder will be treated asreceiving an “excess distribution” to the extent that actual or constructivedistributions received in the current taxable year exceed 125% of the averagedistributions (whether actual or constructive and whether or not out ofearnings and profits) received by such U.S. Holder in respect of our ordinaryshares during the three preceding years or, if shorter, the U.S. Holder’sholding period. A disposition of an ordinary share or a warrant, for purposesof these rules, includes many transactions on which gain or loss is notrealized under general U.S. federal income tax rules (but generally shouldnot include the exercise of a warrant, as discussed below). The gain or theexcess distributions must be allocated rateably to each day the U.S. Holder hasheld the ordinary share or the warrant, as the case may be. Amounts allocatedto each year are taxable as ordinary income in their entirety (and are noteligible for the reduced qualified dividend rates) and not as capital gain, andamounts allocable to prior years may not be offset by any deductions or losses.Amounts allocated to each such prior year are taxable at the highest rate ineffect for that year and are subject to an interest charge at the ratesapplicable to deficiencies for income tax for those periods. In addition, aU.S. Holder’s tax basis in an ordinary share or a warrant that is acquired froma decedent would not receive a step-up to fair market value as of the date ofthe decedent’s death but instead would be equal to the decedent’s basis, iflower.

 

The special PFIC rules described above will not apply to a U.S. Holder’sordinary shares if the U.S. Holder makes a timely election, which remains ineffect, to treat us as a qualified electing fund, or QEF, for the first taxableyear in which the U.S. Holder owns an ordinary share and in which we areclassified as a PFIC, provided that we comply with certain reportingrequirements. Instead, a U.S. Holder that has made a QEF election is requiredfor each taxable year to include in income a pro rata share of our ordinaryearnings as ordinary income and a pro rata share of its net capital gain aslong-term capital gain, subject to a separate election to defer payment oftaxes, which deferral is subject to an interest charge. In order for such a QEFelection to be valid, we must provide U.S. Holders either (1) a statementshowing such U.S. Holder’s pro rata share of our ordinary earnings and netcapital gain (calculated for U.S. tax purposes) for the Company’s taxable year,(2) sufficient information to enable the U.S. Holder to calculate its prorata share for such year, or (3) a statement that the Company haspermitted the U.S. Holder to inspect and copy its permanent books of account,records, and such other documents as may be maintained by us that are necessaryto establish that PFIC ordinary earnings and net capital gain are computed inaccordance with U.S. income tax principles. We have not yet determined whether,if we are classified as a PFIC, we would make the computations necessary tosupply U.S. Holders with the information needed to report income and gainpursuant to a QEF election. It is, therefore, possible that U.S. Holders wouldnot be able to make or retain that election in any year we are a PFIC. The QEFelection is made on a shareholder-by-shareholder basis and can be revoked onlywith the consent of the IRS. A U.S. Holder generally makes a QEF election byattaching a completed IRS Form 8621 (Return by a Shareholder of a PassiveForeign Investment Company or Qualified Electing Fund), including theinformation provided in a PFIC annual information statement, to a timely filedU.S. federal income tax return for the tax year to which the election relates.Retroactive QEF elections may only be made by filing a protective statementwith such return or with the consent of the IRS. A U.S. Holder may make a

 

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separate electionto defer the payment of taxes on undistributed income inclusions under the QEFrules, but if deferred, any such taxes will be subject to an interest charge.

 

If a U.S. Holder has elected the applicationof the QEF rules to the U.S. Holder’s ordinary shares, and the special taxand interest charge rules described in the second preceding paragraph donot apply to such shares (because of a timely QEF election for the first taxyear of the U.S. Holder’s holding period for such shares, or, as describedbelow, a purge of the PFIC taint pursuant to a special purging election), anygain realized on the disposition of an ordinary share generally will be taxableas capital gain and no interest charge will be imposed. As discussed above,U.S. Holders of a QEF are currently taxed on their pro rata shares of the QEF’searnings and profits, whether or not distributed. In such case, a subsequentdistribution of such earnings and profits that were previously included inincome generally will not be taxable as a dividend. The tax basis of a U.S.Holder’s shares in a QEF will be increased by amounts that are included inincome, and decreased by amounts distributed but not taxed as dividends, underthe above rules. Similar basis adjustments apply to property if by reason ofholding such property the U.S. Holder is treated under applicable attribution rules asowning shares in a QEF.

 

A U.S. Holder may not make a QEF electionwith respect to a warrant. As a result, if a U.S. Holder sells or otherwisedisposes of a warrant (other than upon exercise of a warrant), any gainrecognized generally will be subject to the special tax and interest charge rules applicableto gains and excess distributions, as described in the third precedingparagraph, if we were classified as a PFIC at any time during the period theU.S. Holder held the warrants. If a U.S. Holder that exercises such warrantsproperly makes a QEF election with respect to the newly acquired ordinaryshares (or has previously made a QEF election with respect to any ordinaryshares already held), the QEF election will apply to the newly acquired shares,but the adverse tax consequences of the PFIC rules described in the thirdpreceding paragraph will continue to apply to such shares (which generally willbe deemed to have a holding period for the purposes of such PFIC rules thatincludes the period the U.S. Holder held the warrants), unless the holder makesa purging election. The purging election creates a deemed sale of such sharesat their fair market value. The gain recognized by the purging election will besubject to the special tax and interest charge rules described in thethird preceding paragraph. As a result of the purging election, the U.S. Holderwill have a new basis and holding period in the ordinary shares acquired uponthe exercise of the warrants for purposes of the PFIC rules.

 

If a QEF election is not made for the firsttaxable year in which the U.S. Holder owns an ordinary share and in which weare a PFIC, certain elections can be made while we continue to satisfy thedefinition of a PFIC that, combined with a QEF election, can cause the QEFelection to be treated as having been made for that first taxable year. Thoseelections may require the electing shareholder to recognize gain on aconstructive sale or to be taxable on the shareholder’s share of certainundistributed profits of the foreign corporation. If gain or income isrecognized pursuant to one of those elections, the special PFIC rules setforth in the fourth preceding paragraph would apply to that gain or income.Even if a QEF election ceases to apply because in a later taxable year we ceaseto satisfy the tests to be a PFIC, the QEF election will apply again in anysubsequent year in which the Company again satisfies the tests to be a PFIC.Moreover, if a U.S. Holder sells all of the ordinary shares they own and laterreacquires other ordinary shares, any QEF election the U.S. Holder has madethat remains in effect will apply to the ordinary shares acquired later. Theapplicable Treasury regulations provide that the Commissioner of the IRS hasthe discretion to

 

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invalidate or terminate a QEF election if the U.S. Holder or we, or anintermediary, fails to satisfy the requirements for the QEF election.

 

The special PFIC rules described in thefifth preceding paragraph will not apply to a U.S. Holder’s ordinary shares ifthe U.S. Holder elects to mark the U.S. Holder’s ordinary shares to market eachyear, provided that the ordinary shares are considered “marketable stock”within the meaning of the applicable Treasury regulations. A U.S. Holder thatmakes this election will recognize as ordinary income or loss each year anamount equal to the difference, if any, as of the close of the taxable yearbetween the fair market value of the U.S. Holder’s ordinary shares and the U.S.Holder’s adjusted tax basis in the ordinary shares. Losses would be allowedonly to the extent of net mark-to-market gain previously included in income bythe U.S. Holder under the election for prior taxable years, reduced by lossesallowed in prior taxable years. If the mark-to-market election were made, thenthe special PFIC rules set forth in the fifth preceding paragraph wouldnot apply for periods covered by the election. In general, the ordinary shareswill be marketable stock within the meaning of the applicable Treasuryregulations if they are traded, other than in de minimis quantities, on atleast 15 days during each calendar quarter on a “qualified exchange or othermarket” within the meaning of the applicable Treasury regulations and certainother requirements are met. Nasdaq (which should include the Nasdaq CapitalMarket) and the Australian Securities Exchange are each a qualified exchangewithin the meaning of the applicable Treasury regulations. Thus, the ordinaryshares should be “marketable stock” within the meaning of the applicableTreasury regulations. If a U.S. Holder makes a mark-to-market election, butdoes not make that election for the first taxable year in which the U.S. Holderowns an ordinary share and in which the Company is classified as a PFIC, and ifthe U.S. Holder had not made a QEF election for that first such taxable year,the rules set forth in the fifth preceding paragraph will apply to anydistributions on an ordinary share in the year of the mark-to-market election,to any gain recognized on an actual sale of an ordinary share in that year, andto any gain recognized in that year pursuant to the mark-to-market election.The mark-to-market rules generally continue to apply to a U.S. Holder whomakes the mark-to-market election, even in years we do not satisfy the tests tobe a PFIC. A mark-to-market election will not be available with respect to aU.S. Holder’s warrants.

 

A U.S. Holder who owns ordinary shares duringa year in which we are classified as a PFIC generally will remain subject tothe rules set forth in the sixth preceding paragraph for all taxable yearsif the U.S. Holder has not made a QEF election or a mark-to-market election forthe first taxable year in which the U.S. Holder owns an ordinary share and inwhich we are classified as a PFIC. In that event, those rules will applyto any gains on dispositions of ordinary shares and to any “excessdistributions.”  It is, however, possible for a U.S. Holder to avoid this “oncea PFIC, always a PFIC” result by electing to treat all of the U.S. Holder’sordinary shares as sold for their fair market value as of the last day of thelast taxable year we satisfy the tests to be a PFIC, provided the statute oflimitations has not run for that year. If a gain is recognized on thatconstructive sale, the rules set forth in the sixth preceding paragraphwould apply to that gain.

 

If we are classified as a PFIC for a taxableyear, and, at any time during such taxable year, has a non-U.S. subsidiary thatis classified as a PFIC, U.S. Holders generally would be deemed to own aportion of the shares of such lower-tier PFIC, and generally could incur liabilityfor the deferred tax and interest charge described in the seventh precedingparagraph, if we receive a distribution from, or dispose of all or part of itsinterest in, the lower-tier PFIC. We have not yet determined whether, if we areclassified as a PFIC, we would make the computations necessary to supply U.S.Holders with the information needed to make or maintain a QEF election withrespect to the lower-tier PFIC. It is,

 

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therefore, possible that U.S. Holders would not be able to make orretain that election in any taxable year that we are classified as a PFIC andhas a non-U.S. subsidiary that is also classified as a PFIC. U.S. Holders areurged to consult their own tax advisors regarding the tax issues raised bylower-tier PFICs.

 

A dividend from a foreign corporation that otherwise would qualify forreduced qualified dividend rates does not qualify for that rate if the foreigncorporation is a PFIC in either the taxable year of the dividend or thepreceding taxable year.

 

A U.S. Holder who owns (or is deemed to own) shares in a PFIC duringany taxable year, such U.S. Holder may have to file an IRS Form 8621(whether or not a QEF or mark-to-market election is made).

 

**GIVEN THE COMPLEXITIES OF THE PFICRULES AND THEIR POTENTIALLY ADVERSE TAX CONSEQUENCES, U.S. HOLDERS OF ORDINARYSHARES OR WARRANTS ARE URGED TO CONSULT THEIR TAX ADVISERS ABOUT THE PFICRULES, INCLUDING THE CONSEQUENCES TO THEM OF MAKING A QEF ELECTION OR AMARK-TO-MARKET ELECTION WITH RESPECT TO THE ORDINARY SHARES IN THE EVENT THATTHE COMPANY QUALIFIES AS A PFIC FOR ANY TAXABLE YEAR.**

 

**Information Reporting and Backup Withholding**

 

*U.S. Holders.*  Dividends paid on, and proceeds from the sale or other disposition of, anordinary share or warrant generally may be subject to information reportingrequirements and may be subject to backup withholding at the rate of 28% unlessa U.S. Holder provides an accurate taxpayer identification number or otherwisedemonstrates that they are exempt. The amount of any backup withholdingcollected from a payment to a U.S. Holder will be allowed as a credit againstthe U.S. Holder’s U.S. federal income tax liability and may entitle the U.S.Holder to a refund, provided that certain required information is submitted tothe Internal Revenue Service.

 

*Non-U.S. Holders.  *Non-U.S.Holders generally will be exempt from these information reporting requirementsand backup withholding tax but may be required to comply with certaincertification and identification procedures in order to establish theireligibility for exemption.

 

**THE DISCUSSION ABOVE IS NOTINTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSIDERATIONS APPLICABLETO AN INVESTMENT IN ORDINARY SHARES OR WARRANTS. HOLDERS AND POTENTIAL HOLDERSARE URGED TO CONSULT THEIR TAX ADVISER(S) CONCERNING THE TAX CONSEQUENCESRELEVANT TO THEM IN THEIR PARTICULAR SITUATION.**

 

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# **ITEM 11.****                                             ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

#  

The primary objectiveof our investment activities is to preserve principal and, at the same time,maximize income without significantly increasing risk. At June 30, 2007,our cash and cash equivalents consisted primarily of highly liquid investmentswith maturities of three months or less. We believe that these investments donot constitute any material market risk exposure.

 

In fiscal 2007 themajority of our operating expenses were denominated in Australian dollars..From time to time, in order to reduce our exposure to foreign currency exchangerate risks, we buy and hold foreign currencies to cover our operating expensesdenominated in those currencies. We also, from time to time, attempt to hedgeour currency exchange risk. At June 30, 2007, we were not a party to anyforeign currency hedging or other derivative financial instruments. We expectto engage third party vendors to assist with conducting our planned Phase 3trial of PI-88 in post-resection liver cancer. As some of these vendors haveindicated they require payment in U.S. dollars, we will consider whether tohedge some of this U.S. dollar currency exchange risk. As at June 30, 2007we held $24.3 million in U.S. dollars.

 

The Australiandollar is our functional currency. Our assets and liabilities are translatedinto U.S. dollars at the exchange rate prevailing on the balance sheet date,and our revenues, expenses, gains and losses are translated into U.S. dollarsat the average exchange rate for the relevant period. In general, fluctuationsbetween the U.S. dollar and the Australian dollar affect our results ofoperations and other comprehensive income presented in shareholders’ equity.For fiscal year 2007, we recognized foreign currency exchange losses in ourstatements of income of $537,038, of which $550,072 was unrealised (i.e.realised a gain of $13,034) and translation adjustment in other comprehensiveincome of $3,593,170.

 

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# **ITEM 12.****                                             ****DESCRIPTION OF SECURITIES OTHERTHAN EQUITY SECURITIES**

#  

Not applicable.

 

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**PART II**

 

# **ITEM 13.****                                             ****DEFAULTS, DIVIDEND ARREARAGES ANDDELIQUENCIES**

#  

None.

 

# **ITEM 14.****              ****MATERIAL MODIFICATIONS TO THERIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS**

#  

None.

 

# **ITEM 15.****                                             ****CONTROLS AND PROCEDURES**

#  

**DisclosureControls and Procedures**

 

An evaluation asof June 30, 2007 was carried out under the supervision and with theparticipation of the Company’s management, including its Chief ExecutiveOfficer and its Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934. Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of the Company’s disclosure controlsand procedures are not effective to ensure that information required to bedisclosed in the reports that the Company files and submits under the ExchangeAct is (i) recorded, processed, summarized and reported as and whenrequired and (ii) accumulated and communicated to management, includingthe Chief Executive Officer and Chief Financial Officer, to allow timelydecisions regarding required disclosure as of the end of the Company’s mostrecent fiscal year.

 

**Management’sAnnual Report on Internal Control over Financial Reporting**

 

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting for the Company. In order to evaluate the effectiveness ofinternal control over financial reporting, as required by Section 404 ofthe Sarbanes-Oxley Act, management has conducted an assessment, includingtesting, using the criteria in Internal Control-Integrated Framework, issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s system of internal control over financial reporting is designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

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Ourmanagement assessed the effectiveness of the Company’s internal control overfinancial reporting as of June 30, 2007. In making its assessment ofinternal control over financial reporting, management used the criteria issuedby the COSO.

 

Inperforming the assessment as of June 30, 2007, management identified thefollowing material weakness in internal control over financial reporting.

 

Thematerial weakness pertains to controls over the preparation of US-GAAPfinancial statements and related disclosures, specifically our accountingstaff, being Australian trained accountants, have a limited knowledge of theUS-GAAP.

 

Managementhas concluded that the above control deficiency represents a material weaknessin internal control over financial reporting. A material weakness is adeficiency or a combination of deficiencies in internal control over financialreporting, such that there is a reasonable possibility that a materialmisstatement of the Company’s annual or interim financial statements will not beprevented or detected on a timely basis. As a result of the material weaknessdescribe above, the management believes that, as of June 30, 2007, theCompany’s internal control over financial reporting was not effective based onthe criteria in Internal Control Integrated Framework. 

 

In order to address theweakness in our knowledge of US GAAP, and consistent with the programimplemented last year, our senior finance staff have attended, and willcontinue to attend, targeted US GAAP and SEC reporting courses and subscribe toadditional information publications and updates of SEC and US GAAP releases andrule changes and of information about the requirements of the Public CompanyAccounting Oversight Board. We will also consider mitigating this weakness byconferring and/or hiring outside accounting advisers with respect to thetechnical requirements applicable to our financial statements. 

 

Management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of June 30, 2007, has not been audited by Ernst &Young, an independent registered public accounting firm.

 

**AttestationReport of the Registered Public Accounting Firm**

 

Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of the Securitiesand Exchange Commission that permit the Company to provide only management’sreport in this annual report.

 

**Changesin Internal Control over Financial Reporting**

 

There have been nosignificant changes in Progen’s internal control over financial reporting thathave materially affected, or are reasonably likely to materially affectinternal control over financial reporting during the fiscal year ended June 30,2007.

 

**Limitationson the Effectiveness of Controls**

 

Our management,including our managing director and chief financial officer, does not expect thatour disclosure controls and procedures or our internal control over financialreporting will assure that all appropriate information will, in fact, becommunicated to management to allow timely decisions to be made or prevent allerror and fraud. A control system, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Additionally, the design of a control system mustreflect the fact that there are resource constraints, and the benefit ofcontrols must be considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, withinthe company have been detected or that our control system will operateeffectively under all circumstances. Moreover, the design of any system ofcontrols is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals

 

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underall potential future conditions.

 

# **ITEM 16.****                                             ****[RESERVED]**

#  

# **ITEM 16A.****                                    ****AUDIT COMMITTEE FINANCIAL EXPERT**

#  

The Company’sboard of directors has determined that audit committee member Mr. P. Burnsis an independent audit committee financial expert as defined under the rules andregulations of the Securities and Exchange Commission.

 

# **ITEM 16B.****                                    ****CODE OF ETHICS**

#  

We have adopted acode of ethics that applies to our executive directors and chief financialofficer. A copy of this Code of Ethics is available on the Company’s website atwww.progen-pharma.com.

 

No waivers to thisCode of Ethics were granted to our executive directors or chief financialofficer during the fiscal year ended June 30, 2007.

 

# **ITEM 16C.****                                    ****PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

#  

Theaggregate fees and expenses for professional services rendered by ourindependent registered public accounting firm Ernst & Young, for theaudit of our annual financial statements for the years ended June 30, 2006and 2007 and for other listed services rendered in those years are set forth inthe following table:

 

| ** **              | ** ** | **2006** | ** **  | **2007**   | ** ** |
|-------------------------|------------|----------|-------------|------------|------------|
| Audit Fees              |       | $        | 116,288     |       | $          | 141,661 |   |
| Audit-Related  Fees (1) |       | —   |        | 115,530    |       |
| Tax Fees (2)            |       | —   |        | —     |       |
| All Other Fees  (3)     |       | —   |        | —     |       |
| **Total  Fees**         | ** ** | **$**    | **116,288** | ** ** | **$**      | **257,191** | ** ** |

 

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(1)                                  Audit-related services rendered by ourprincipal accountant were assurance services in relation to the Company’scapital raising efforts.

 

(2)                                  There were no professional servicesrendered by our principal accountant for tax compliance, tax advice or taxplanning.

 

(3)                                  There were no other professional servicesrendered by our principal accountant.

 

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***AuditCommittee Pre-Approval Policies and Procedures***

 

All audit andnon-audit services performed by our independent auditors must be specificallypre-approved by our audit committee. Consistent with this policy, for the yearended June 30, 2007, all audit and non-audit services initiated by Ernst &Young were pre-approved by our audit committee.

 

# **ITEM 16D.****                                    ****EXEMPTIONS FROM THE LISTINGSTANDARDS FOR AUDIT COMMITTEES**

#  

Not applicable.

 

# **ITEM 16E.****                                      ****PURCHASES OF EQUITY SECURITIES BYTHE ISSUER AND AFFILIATED PURCHASERS**

#  

Notapplicable.

 

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**PART III**

 

# **ITEM 17.****                                             ****FINANCIAL STATEMENTS**

#  

Not Applicable.

 

# **ITEM 18.****                                             ****FINANCIAL STATEMENTS**

#  

**Financial Statements - Index to FinancialStatements**

 
| Report of Independent Registered Public Accounting  Firm                                                  |   |
|-----------------------------------------------------------------------------------------------------------|--------|
| Balance  Sheets as of June 30, 2006 and 2007                                                         |   |
| Statements  of Income for the years ended June 30, 2005, 2006 and 2007                               |   |
| Statements of Changes in Stockholders’ Equity for the  years ended June 30, 2005, 2006 and 2007 |   |
| Statements  of Cash Flow for the years ended June 30, 2005, 2006 and 2007                            |   |
| Notes to Financial Statements                                                                             |   |

 

# **ITEM 19.****                                             ****EXHIBITS**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                   |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4(a)(1)                 |       | ASA Termination Agreement (1)†                                                                                                                                                                                                                               |
| 4(a)(2)                 |       | Quintiles Master Service Agreement (1)                                                                                                                                                                                                                            |
| 4(b)(iv)(2)             |       | 2005 Lease 16 Benson Street Toowong *                                                                                                                                                                                                                             |
| 4(c)(2)                 |       | Employment agreement dated August 5, 2004  between Progen Pharmaceuticals Limited and Linton Burns *                                                                                                                                                         |
| 4(c)(3)                 |       | Progen Pharmaceuticals Limited Directors and  Employee Option Incentive Plan Rules for the directors and employees  incentive scheme approved by a resolution of shareholders at the annual  general meeting of the Company held on November 30, 2004 * |
| 12.1                    |       | Certification of T. Justus Homburg under  Rule 13a-14(a) (1)                                                                                                                                                                                            |
| 12.2                    |       | Certification of Linton W. P. Burns under  Rule 13a-14(a) (1)                                                                                                                                                                                           |
| 13                      |       | Certification of T. Justus Homburg and Linton W. P.  Burns under Section 1350 of Chapter 63 of Title 18 of the United States  Code (1)                                                                                                                       |
| 15.1                    |       | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                                         |

 

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*                                         Incorporated by reference to exhibitsfiled with the Annual Report on Form 20-F, filed on December 20,2004.

 

(1)                                  Filed herewith

 

†                                          Certain provisions of this exhibit havebeen omitted and filed separately with the Commission pursuant to anapplication for confidential treatment under Rule 24b-2 promulgated under theSecurities Exchange Act of 1934, as amended.

 

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**SIGNATURES**

 

The registranthereby certifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 
|   | **PROGEN PHARMACEUTICALS LIMITED** |
|--------|------------------------------------|
|   |                               |
|   | By:                                | /s/ T. Justus  Homburg |   |
|   |                               | T. Justus Homburg |
|   |                               | Managing Director |

 

Dated:  December  12, 2007

 

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**Report of Independent Registered Public Accounting Firm**

 

**The Boardof Directors and Shareholders of Progen Pharmaceuticals Limited**

 

Wehave audited the accompanying balance sheets of Progen Pharmaceuticals Limited(formerly Progen Industries Limited) as of June 30, 2007 and 2006, and therelated statements of income, stockholders’ equity, and cash flows for each ofthe three years in the period ended June 30, 2007. These financialstatements are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly,we express no such opinion. An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Progen Pharmaceuticals Limited at June 30,2007 and 2006, and the results of its operations and its cash flows for each ofthe three years in the period ended June 30, 2007, in conformity with U.S.generally accepted accounting principles.

 

 
| /s/  Ernst & Young |   |
|-----------------------------|--------|
| Brisbane,  Australia        |
| December 12, 2007      |

 

F-1

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**PROGEN PHARMACEUTICALS LIMITED**

 
| **BALANCE SHEETS** | ** ** | **(U.S. DOLLARS)** |
|--------------------|------------|--------------------|

 
| ** **                                                                                                                   | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**          | ** ** | **2007** | ** ** |
|                                                                                                                         |       |              |       |   |   |
| ***Assets:***                                                                                                                |       |              |       |   |   |
| **Current assets:**                                                                                                          |       |              |       |   |   |
| Cash and cash equivalents                                                                                                    |       | $                 | 11,588,471 |   | $ | 83,351,832 |   |
| Accounts receivable                                                                                                          |       | 112,781           |       | 869,444 |   |
| Prepaid expenses                                                                                                             |       | 327,860           |       | 78,145 |   |
|                                                                                                                         |       |              |       |   |   |
| **Total current assets**                                                                                                     |       | 12,029,112        |       | 84,299,421 |   |
|                                                                                                                         |       |              |       |   |   |
| **Non-current assets:**                                                                                                      |       |              |       |   |   |
| Restricted term deposits                                                                                                     |       | 63,291            |       | 73,563 |   |
| Property and equipment - net                                                                                                 |       | 1,066,482         |       | 1,029,464 |   |
|                                                                                                                         |       |              |       |   |   |
| **Total non-current assets**                                                                                                 |       | 1,129,773         |       | 1,103,027 |   |
|                                                                                                                         |       |              |       |   |   |
| **Total assets**                                                                                                             |       | $                 | 13,158,885 |   | $ | 85,402,448 |   |
|                                                                                                                         |       |              |       |   |   |
| ***Liabilities and stockholders’ equity:***                                                                             |       |              |       |   |   |
| **Current liabilities:**                                                                                                     |       |              |       |   |   |
| Accounts payable                                                                                                             |       | $                 | 922,748    |   | $ | 1,778,349 |   |
| Accrued employee benefits                                                                                                    |       | 193,661           |       | 225,910 |   |
| Deferred grant income                                                                                                        |       | 53,461            |       | 41,736 |   |
|                                                                                                                         |       |              |       |   |   |
| **Total current liabilities**                                                                                                |       | 1,169,870         |       | 2,045,995 |   |
|                                                                                                                         |       |              |       |   |   |
| **Non-current liabilities:**                                                                                                 |       |              |       |   |   |
| Accrued employee benefits                                                                                                    |       | 55,579            |       | 84,947 |   |
| Deferred grant income                                                                                                        |       | 37,965            |       | — |   |
| Asset retirement obligation                                                                                                  |       | 103,084           |       | 128,543 |   |
|                                                                                                                         |       |              |       |   |   |
| **Total non-current liabilities**                                                                                            |       | 196,628           |       | 213,490 |   |
|                                                                                                                         |       |              |       |   |   |
| **Total liabilities**                                                                                                        |       | $                 | 1,366,498  |   | $ | 2,259,485 |   |
|                                                                                                                         |       |              |       |   |   |
| **Commitments and contingencies (Note 10)**                                                                                  |       |              |       |   |   |
|                                                                                                                         |       |              |       |   |   |
| ***Stockholders’ equity:***                                                                                             |       |              |       |   |   |
| Capital stock, ordinary shares, no par value; 40,589,793 and  59,416,427 issued and outstandingin 2006 and 2007 respectively |       | $                 | 60,017,537 |   | $ | 144,498,252 |   |
|                                                                                                                         |
|                                                                                                                         |       |              |       |   |   |
| Accumulated deficit                                                                                                          |       | (48,735,611       | )          | (65,458,920 | ) |
|                                                                                                                         |       |              |       |   |   |
| Accumulated other comprehensive income                                                                                       |       | 510,461           |       | 4,103,631 |   |
|                                                                                                                         |       |              |       |   |   |
| **Total stockholders’ equity**                                                                                          |       | 11,792,387        |       | 83,142,963 |   |
|                                                                                                                         |       |              |       |   |   |
| **Total liabilities and stockholders’ equity**                                                                          |       | $                 | 13,158,885 |   | $ | 85,402,448 |   |

 

See accompanying notes tofinancial statements.

 

F-2

----

 
| **STATEMENTS  OF INCOME** | ** ** | **(U.S.  DOLLARS)** |
|---------------------------|------------|---------------------|

** **
| ** **                                                                                      | ** ** | **Years ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                      | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Revenue from services**                                                                       |       | $                                       | 1,076,308  |   | $ | 676,975 |   | $ | 722,944 |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Cost of services**                                                                            |       | 253,276                                 |       | 34,080 |   | 84,121 |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Cost of operations:**                                                                         |       |                                    |       |   |   |   |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| Research and development                                                                        |       | 2,712,427                               |       | 3,151,595 |   | 5,429,240 |   |
| Selling, general and administrative expenses                                                    |       | 2,953,886                               |       | 2,879,906 |   | 4,745,591 |   |
| Depreciation and amortization                                                                   |       | 428,891                                 |       | 398,043 |   | 393,914 |   |
| Other costs of operations                                                                       |       | 397,416                                 |       | 697,915 |   | 1,049,084 |   |
| Rentals on operating leases                                                                     |       | 91,329                                  |       | 165,715 |   | 232,057 |   |
| Medigen termination agreement expenses                                                          |       | —                                  |       | — |   | 7,747,376 |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Total cost of operations**                                                                    |       | 6,583,949                               |       | 7,293,174 |   | 19,597,262 |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Loss from operations**                                                                        |       | (5,760,917                              | )          | (6,650,279 | ) | (18,958,439 | ) |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Other income (expenses):**                                                                    |       |                                    |       |   |   |   |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| Interest income                                                                                 |       | 617,822                                 |       | 824,596 |   | 1,372,277 |   |
| Interest expense                                                                                |       | (12,923                                 | )          | (10,938 | ) | (12,069 | ) |
| Grant income                                                                                    |       | 577,756                                 |       | 568,665 |   | 843,541 |   |
| Other income                                                                                    |       | 29,948                                  |       | 40,774 |   | 31,381 |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Total other income**                                                                          |       | 1,212,603                               |       | 1,423,097 |   | 2,235,130 |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Net loss from continuing operations**                                                         |       | (4,548,314                              | )          | (5,227,182 | ) | (16,723,309 | ) |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Net loss**                                                                                    |       | $                                       | (4,548,314 | ) | $ | (5,227,182 | ) | $ | (16,723,309 | ) |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Net loss per ordinary share (basic and diluted)**                                             |       |                                    |       |   |   |   |   |
|                                                                                            |       |                                    |       |   |   |   |   |
| Continuing operations                                                                           |       | $                                       | (0.13      | ) | $ | (0.13 | ) | $ | (0.37 | ) |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Net loss per ordinary share (basic and diluted)**                                             |       | $                                       | (0.13      | ) | $ | (0.13 | ) | $ | (0.37 | ) |
|                                                                                            |       |                                    |       |   |   |   |   |
| **Weighted average ordinary shares outstanding used in the calculation  of net loss per share** |       | 35,709,343                              |       | 40,560,782 |   | 44,768,450 |   |

 

See accompanying notes tofinancial statements.

 

F-3

----

 
| **STATEMENTS OF CHANGES IN  STOCKHOLDERS’ EQUITY** | ** ** | **(U.S. DOLLARS)** |
|---------------------------------------------------------|------------|--------------------|

 
| ** **                                                                                                         | ** ** | **Number of  ordinary  shares** | ** ** | **Amount** | ** ** | **Accumulated********Deficit** | ** ** | **Accumulated  other  comprehensive********income/(loss)** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|--------------------------------|------------|------------------------------------------------------------|------------|------------|------------|
|                                                                                                               |       |                                 |       |       |       |                           |       |                                                       |       |       |       |
| **Balance – June 30, 2004**                                                                              |       | 34,521,065                           |       | $          | 48,869,981 |                           | $          | (38,960,115                                                | )          | $          | 24,689     |   | $ | 9,934,555 |   |
|                                                                                                               |       |                                 |       |       |       |                           |       |                                                       |       |       |       |
| Other comprehensive income:                                                                                        |       |                                 |       |       |       |                           |       |                                                       |       |       |       |
| Translation adjustment                                                                                             |       | —                               |       | —     |       | —                         |       | 1,098,629                                                  |       | 1,098,629  |       |
| Net loss                                                                                                           |       | —                               |       | —     |       | (4,548,314                     | )          | —                                                     |       | (4,548,314 | )          |
| Comprehensive loss                                                                                                 |       |                                 |       |       |       |                           |       |                                                       |       | (3,449,685 | )     |
| Issuance of ordinary shares                                                                                        |       | 1,219,015                            |       | 2,296,380  |       | —                         |       | —                                                     |       | 2,296,380  |       |
| Share issue costs                                                                                                  |       | —                               |       | (349,259   | )          | —                         |       | —                                                     |       | (349,259   | )          |
| Options issued under the Directors and Employees Incentive Scheme  (2003) and exercised by directors and employees |       | 1,528,211                            |       | 2,878,844  |       | —                         |       | —                                                     |       | 2,878,844  |       |
| Options issued under the 2003 Prospectus and exercised by shareholders                                             |       | 2,588,502                            |       | 4,876,220  |       | —                         |       | —                                                     |       | 4,876,220  |       |
| Options issued to an advisor and exercised                                                                         |       | 700,000                              |       | 1,318,660  |       | —                         |       | —                                                     |       | 1,318,660  |       |
| Fair value of options issued to a consultant                                                                       |       | —                               |       | 16,909     |       | —                         |       | —                                                     |       | 16,909     |       |
|                                                                                                               |       |                                 |       |       |       |                           |       |                                                       |       |       |       |
| **Balance – June 30, 2005**                                                                              |       | 40,556,793                           |       | $          | 59,907,735 |                           | $          | (43,508,429                                                | )          | $          | 1,123,318  |   | $ | 17,522,624 |   |
| Other comprehensive income:                                                                                        |       |                                 |       |       |       |                           |       |                                                       |       |       |       |
| Translation adjustment                                                                                             |       | —                               |       | —     |       | —                         |       | (612,857                                                   | )          | (612,857   | )          |
| Net loss                                                                                                           |       | —                               |       | —     |       | (5,227,182                     | )          | —                                                     |       | (5,227,182 |       |
| Comprehensive loss                                                                                                 |       |                                 |       |       |       |                           |       |                                                       |       | (5,840,039 | )     |
| Options issued under the Directors and Employees Incentive Scheme  (2004) and exercised by employees               |       | 33,000                               |       | 74,776     |       | —                         |       | —                                                     |       | 74,776     |       |
| Fair value of options issued to employees                                                                          |       | —                               |       | 35,026     |       | —                         |       | —                                                     |       | 35,026     |       |

 

Seeaccompanying notes to financial statements.

 

F-4

----

 
| ** **                                                                                           | ** ** | **Number of  ordinary  shares** | ** ** | **Amount**  | ** ** | **Accumulated********Deficit** | ** ** | **Accumulated  other  comprehensive********income/(loss)** | ** ** | **Total**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------|------------|--------------------------------|------------|------------------------------------------------------------|------------|-------------|------------|
| **Balance – June 30, 2006**                                                                |       | 40,589,793                           |       | 60,017,537  |       | (48,735,611                    | )          | 510,461                                                    |       | 11,792,387  |       |
| Other comprehensive income:                                                                          |       |                                 |       |        |       |                           |       |                                                       |       |        |       |
| Translation adjustment                                                                               |       | —                               |       | —      |       | —                         |       | 3,593,170                                                  |       | 3,593,170   |       |
| Net loss                                                                                             |       | —                               |       | —      |       | (16,723,309                    | )          | —                                                     |       | (16,723,309 | )          |
| Comprehensive loss                                                                                   |       |                                 |       |        |       |                           |       |                                                       |       | (13,130,139 | )          |
| Options issued under the Directors and Employees Incentive Scheme  (2004) and exercised by employees |       | 60,000                               |       | 134,799     |       | —                         |       | —                                                     |       | 134,799     |       |
| Options issued to an advisor and exercised                                                           |       | 13,498                               |       | 46,758      |       | —                         |       | —                                                     |       | 46,758      |       |
| Options issued to employees                                                                          |       | —                               |       | 647,520     |       | —                         |       | —                                                     |       | 647,520     |       |
| Options issued to an advisor                                                                         |       | —                               |       | 40,935      |       | —                         |       | —                                                     |       | 40,935      |       |
| Options issued as part of Medigen termination agreement                                              |       | —                               |       | 1,104,958   |       | —                         |       | —                                                     |       | 1,104,958   |       |
| Private placements                                                                                   |       | 3,690,037                            |       | 15,703,000  |       | —                         |       | —                                                     |       | 15,703,000  |       |
| Transaction costs                                                                                    |       |                                 |       | (948,645    | )          | —                         |       | —                                                     |       | (948,645    | )          |
| Share purchase plan                                                                                  |       | 989,156                              |       | 4,158,146   |       | —                         |       | —                                                     |       | 4,158,146   |       |
| Transaction costs                                                                                    |       |                                 |       | (46,333     | )          | —                         |       | —                                                     |       | (46,333     | )          |
| US placement                                                                                         |       | 6,900,000                            |       | 32,787,400  |       | —                         |       | —                                                     |       | 32,787,400  |       |
| Transaction costs                                                                                    |       |                                 |       | (2,574,135  | )          | —                         |       | —                                                     |       | (2,574,135  | )          |
| Rights entitlements offer                                                                            |       | 5,941,343                            |       | 28,904,349  |       | —                         |       | —                                                     |       | 28,904,349  |       |
| Transaction costs                                                                                    |       |                                 |       | (2,120,455  | )          | —                         |       | —                                                     |       | (2,120,455  | )          |
| Ordinary shares issued as part of Medigen termination agreement                                      |       | 1,232,600                            |       | 6,650,455   |       | —                         |       | —                                                     |       | 6,650,455   |       |
| Transaction costs                                                                                    |       |                                 |       | (8,037      | )          | —                         |       | —                                                     |       | (8,037      | )          |
|                                                                                                 |       |                                 |       |        |       |                           |       |                                                       |       |        |       |
| **Balance – June 30, 2007**                                                                |       | 59,416,427                           |       | 144,498,252 |       | (65,458,920                    | )          | 4,103,631                                                  |       | 83,142,963  |       |

 

The functional currency forthe Company’s operations is Australian dollars. The translation from Australian dollars into U.S. dollars is performedfor balance sheet accounts using current exchange rates in effect at balancesheet date and for revenue and expense accounts using the average exchange rateduring the period.  The gains or lossesresulting from such translation are included in stockholders’ equity as othercomprehensive income.

 

See accompanying notes tofinancial statements.

 

F-5

----

 
| **STATEMENTS OF CASH FLOWS** | ** ** | **(U.S. DOLLARS)** |
|------------------------------|------------|--------------------|

 
| ** **                                               | ** ** | **Years ended********June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                     |       |                                      |       |   |   |   |   |
| **Operating activities:**                                |       |                                      |       |   |   |   |   |
| Receipts from customers                                  |       | $                                         | 1,575,552  |   | $ | 934,679 |   | $ | 232,573 |   |
| Payments to suppliers and employees                      |       | (6,637,662                                | )          | (7,237,475 | ) | (9,727,550 | ) |
| Receipt of government grant                              |       | 455,905                                   |       | 626,878 |   | 862,156 |   |
| Interest received                                        |       | 617,822                                   |       | 810,799 |   | 1,137,365 |   |
| Interest paid                                            |       | (12,923                                   | )          | (10,963 | ) | (12,069 | ) |
|                                                     |       |                                      |       |   |   |   |   |
| **Net cash – operating activities**                 |       | (4,001,306                                | )          | (4,876,082 | ) | (7,507,525 | ) |
|                                                     |       |                                      |       |   |   |   |   |
| **Investing activities:**                                |       |                                      |       |   |   |   |   |
| Proceeds from sale of property and equipment             |       | 6,029                                     |       | — |   | — |   |
| Purchase of restricted term deposits                     |       | —                                    |       | (55,106 | ) | — |   |
| Purchase of property and equipment                       |       | (163,357                                  | )          | (793,623 | ) | (199,318 | ) |
|                                                     |       |                                      |       |   |   |   |   |
| **Net cash - investing activities**                      |       | (157,328                                  | )          | (848,729 | ) | (199,318 | ) |
|                                                     |       |                                      |       |   |   |   |   |
| **Financing activities:**                                |       |                                      |       |   |   |   |   |
| Proceeds from share issues                               |       | 2,296,380                                 |       | — |   | 81,552,895 |   |
| Share issue costs                                        |       | (349,259                                  | )          | — |   | (5,697,605 | ) |
| Proceeds from exercise of options                        |       | 9,073,724                                 |       | 74,776 |   | 181,557 |   |
|                                                     |       |                                      |       |   |   |   |   |
| **Net cash - financing activities**                      |       | 11,020,845                                |       | 74,776 |   | 76,036,847 |   |
|                                                     |       |                                      |       |   |   |   |   |
| **Effect of exchange rate on cash and cash equivalents** |       | 1,104,028                                 |       | (613,389 | ) | 3,433,357 |   |
|                                                     |       |                                      |       |   |   |   |   |
| **Net increase/(decrease) in cash and cash Equivalents** |       | 7,966,239                                 |       | (6,263,424 |  ) | 71,763,361 |   |
|                                                     |       |                                      |       |   |   |   |   |
| **Cash and cash equivalents at beginning of Year**       |       | $                                         | 9,885,656  |   | $ | 17,851,895 |   | $ |  11,588,471 |   |
|                                                     |       |                                      |       |   |   |   |   |
| **Cash and cash equivalents at end of year**             |       | $                                         | 17,851,895 |   | $ | 11,588,471 |   | $ | 83,351,832 |   |

 

See accompanying notes to financial statements.

 

F-6

----

 
| ** **                                                                                       | ** ** | **Years ended********June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                                                             |       |                                      |       |   |   |   |   |
| **Reconciliation of operating loss after income tax to net cash used in  operating activities:** |       |                                      |       |   |   |   |   |
|                                                                                             |       |                                      |       |   |   |   |   |
| Operating loss after income tax                                                                  |       | $                                         | (4,548,314 | ) | $ | (5,227,182 | ) | $ | (16,723,309 | ) |
|                                                                                             |       |                                      |       |   |   |   |   |
| Non-cash items:                                                                                  |       |                                      |       |   |   |   |   |
| Depreciation and amortization                                                                    |       | 428,891                                   |       | 398,043 |   | 393,914 |   |
| (Gain) / loss on sale of property and equipment                                                  |       | 9,852                                     |       | — |   | — |   |
| Fair value of share options                                                                      |       | —                                    |       | 34,878 |   | 688,455 |   |
| Other non cash items                                                                             |       | 11,335                                    |       | (18,079 | ) | — |   |
| Fair value of ordinary shares and options issued to Medigen                                      |       | —                                    |       | — |   | 7,747,376 |   |
|                                                                                             |       |                                      |       |   |   |   |   |
| Net change in operating assets and liabilities:                                                  |       |                                      |       |   |   |   |   |
|                                                                                             |       |                                      |       |   |   |   |   |
| (Increase)/decrease in operating assets:                                                         |       |                                      |       |   |   |   |   |
| Accounts receivable                                                                              |       | 162,000                                   |       | 65,954 |   | (756,663 | ) |
| Prepaid expenses                                                                                 |       | 92,475                                    |       | (306,911 | ) | 249,715 |   |
|                                                                                             |       |                                      |       |   |   |   |   |
| Increase/(decrease) in operating liabilities:                                                    |       |                                      |       |   |   |   |   |
| Accounts payable                                                                                 |       | (261,152                                  | )          | 76,268 |   | 855,601 |   |
| Accrued employee benefits                                                                        |       | 21,810                                    |       | (18,011 | ) | 61,617 |   |
| Deferred grant income                                                                            |       | —                                    |       | 93,646 |   | (49,690 | ) |
| Asset retirement obligation                                                                      |       | 81,797                                    |       | 25,312 |   | 25,459 |   |
|                                                                                             |       |                                      |       |   |   |   |   |
| **Net cash used in operating activities**                                                        |       | $                                         | (4,001,306 | ) | $ | (4,876,082 | ) | $ | (7,507,525 | ) |

 

See accompanying notes to financial statements.

 

F-7

----

 

**PROGENPHARMACEUTICALS LIMITED**

 

***1.             Summaryof significant accounting policies***

 

***Organization and nature of operations***

 

Progen Pharmaceuticals Limited (“Progen” or the“Company”) was incorporated in Queensland, Australia on September 26, 1989and became an Australian public company on March 8, 1991.

 

Previously known as Progen Industries Limited,the Company changed its name to Progen Pharmaceuticals Limited on March 26,2007.

 

Progenis a biotechnology company committed to the discovery, development and commercializationof small molecule therapeutics for the treatment of cancer and other seriousdiseases.  The Company’s lead productcandidate, PI-88, is one of a new class of multi-functional, multi-targetedcancer therapeutics inhibiting both angiogenesis, or tumor promoting factorssuch as Vascular Endothelial Growth Factor, Fibroblast Growth Factor 1,Fibroblast Growth Factor 2, and also heparanase, an enzyme implicated inmetastasis (tumor spread). PI-88 is currently in Phase III clinical developmentwith four Phase II clinical trials ongoing in the U.S., Australia and Taiwanunder an active Investigational New Drug application, or IND, with the UnitedStates Food and Drug Administration, or FDA.

 

Progen’s second oncologyproduct candidate, PI-166, is undergoing a Phase I clinical trial in patientswith inoperable primary liver cancer (hepatocellular carcinoma or HCC). PI-166is a novel combination of an active small organic chemical molecule and adelivery vehicle that directs the active drug constituent at the tumor site.PI-166 is being developed for potential application in the treatment ofadvanced hepatocellular carcinoma (primary liver cancer).

 

Throughthe Company’s internal drug discovery research program and academiccollaborations, Progen is developing small molecule drug candidates thatmodulate the interaction between carbohydrates (sugars) and disease-relatedprotein targets as potential therapeutics for cancer and other seriousdiseases.  The Company’s research teamand academic collaborators have identified a portfolio of heparan sulfatebinding proteins that are involved in different diseases, and Progen is nowdesigning, synthesizing and screening small molecule compounds that disruptheparan sulfate binding.

 

Wehave no therapeutic products currently available for sale and do not expect tohave any therapeutic products commercially available for sale for a period ofyears, if at all. These factors indicate that our ability to continue researchand development activities is dependent upon the ability of our management toobtain additional financing as required.

 

Ourprincipal executive offices are located at 16 Benson Street, Toowong,Queensland 4066, Australia. The Company also maintains and operates anapproximate 11,200 square foot fully-integrated pharmaceutical raw materialmanufacturing facility in leased premises at Darra, a suburb of Brisbane,Australia.  The facility has thecapability to develop and manufacture therapeutic products for worldwide marketsand consists of 15 modular laboratories.

 

***Basis of presentation***

 

These financial statements have been prepared in accordance with UnitedStates generally accepted accounting principles (“U.S. GAAP”) and are presentedin U.S. dollars.

 

***Cash and cash equivalents***

 

Cashand cash equivalents comprise cash at bank and in hand and short-term depositswith an original maturity of three months or less.

 

***Restricted term deposits***

 

Asat June 30, 2007, we held restricted term deposits amounting to $73,563(2006: $63,291) under bank guarantees relating to the Company’s leasedpremises.

 

***Accounts receivable***

 

Tradedebtors are carried at amounts due. The collectibility of debts is assessed atbalance date and specific provision is made for any doubtful accounts.

 

F-8

----

 

***Property and equipment and depreciation***

 

Property and equipment are stated at cost, net of accumulated amortization and depreciation. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated life of the asset or the term of the lease.

 

Classesof property and equipment and related useful lives are as follows:

 
| **Asset**               | ** ** | **Estimated  useful life  (Years)** | ** ** |
|-------------------------|------------|------------------------------------------|------------|
| Machinery and equipment |       | 5-10                                     |       |
| Furniture and fixtures  |       | 3-10                                     |       |
| Leasehold improvements  |       | 3-6                                      |       |

 

***Leases***

 

All of the Company’s leases for the years ended June 30, 2005,2006, and 2007 are considered operating leases. Some lease agreements containrent escalation clauses based on the consumer price index. The costs ofoperating leases are charged to the consolidated statement of operations on astraight line basis over the lease term. For purposes of recognizing incentives and minimum rental expenses on astraight-line basis over the original terms of the leases, the Company uses thedate of initial possession to begin amortization, which is generally when theCompany enters the space. The Company does not assume renewals in itsdetermination of the lease term unless the renewals are deemed by management tobe reasonably assured at lease inception.

 

***Revenue recognition***

 

TheCompany generates revenue principally from the provision of contractmanufacturing services.

 

Revenueis recognized when the four basic criteria of revenue recognition are met: (1) acontractual agreement exists; (2) services have been rendered; (3) thefee is fixed or determinable; and (4) collectibility is reasonablyassured. For each source of revenue Progen complies with the above revenuerecognition criteria in the following manner:

 

·                  A sale is recorded when goodshave been delivered to and accepted by the customer pursuant to a fixed pricesales order, collectibility of the selling price is reasonably assured and theassociated risks have passed to the customer. The Company grants no refund orreturn rights.

 

·                  Revenues from servicesrendered are recognized as the service is performed, and no additional servicesor products are required to be provided.

 

***Government grant income***

 

Governmentgrants, which support the Company’s research efforts in specific projects,generally provide for reimbursement of approved costs incurred.  Grant receipts are recognized as income whenresearch and development expenditure to which the particular grant relates hasbeen incurred.  Advance payments receivedare classified as deferred income until earned.

 

***Interest******income***

 

Interestincome is recognized as interest accrues using the effective interest method,which is the rate that exactly discounts estimated future cash receipts throughthe expected life of the financial asset to the net carrying amount of thefinancial asset.

 

***Research and development expenditure***

 

Researchand development costs are charged as an expense when incurred. Such costsinclude direct salaries, patient recruitment fees, contract research costs,laboratory expenses, rent, utilities and certain related administrativeexpenses.

 

***Patents***

 

Costsassociated with filing, maintaining, defending and protecting patents for whichno future benefit is reasonably assured are expensed as selling, general andadministrative costs when incurred.

 

F-9

----

 

***Stock-based compensation***

 

TheCompany currently sponsors stock option plans. Prior to July 1, 2005 theCompany accounted for its stock option plans in accordance with AccountingPrinciples Board Opinion No. 25: “*Accounting for StockIssued to Employees”*and related interpretations (“APB 25”) andadopted the disclosure-only provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123 “*Accounting for Stock-BasedCompensation”*(“SFAS 123”). Under APB 25, the Company recognizedcompensation expense for stock option grants on the date of the grant only ifthe current market price of the underlying stock exceeded the exercise price.Unearned compensation expense was charged against operations rateably over thevesting period of the options. For disclosure purposes under SFAS 123, stockoptions were valued at the measurement date using the Hull-White binomialoption valuation model and compensation costs were recognized rateably over thevesting period.

 

EffectiveJuly 1, 2005, the Company adopted the requirements of SFAS 123 (revised2004), Share-Based Payments (“SFAS 123R”) using the modified prospective methodthereby recognizing the compensation cost in the financial statements for allshare-based payments granted after that date, and based on the requirements ofSFAS 123, for all unvested awards granted prior to the effective date of SFAS123R

 

Optionsgranted to consultants and other non-employees are accounted for in accordancewith Emerging Issues Task Force consensus No 98-18, “*Accountingfor Equity Instruments that are issued to Other than Employees for Acquiring,or in Connection with Selling Goods or Services”,*and valuedusing the Hull-White binomial option valuation model.

 

Compensationcost for stock options granted to non-employees is measured at the fair valueof stock options as calculated using a standard option valuation model and areexpensed over the period in which the options vest.

 

The followingtable illustrates the effect on net loss and net loss per share if the Companyhad applied the fair value recognition provisions of SFAS No. 123 to stockbased employee compensation for the years ended June 30, 2005:

 
| ** **                                                                                                     | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------|------------|
|                                                                                                           |       |     |       |
| Net  Loss, as reported                                                                                         |       | $        | (4,548,314 | ) |
|                                                                                                           |       |     |       |
| Add:  Total stock-based employee compensation expense determined under fair value  based method for all awards |       | (53,086  | )          |
|                                                                                                           |       |     |       |
| Pro  forma net loss                                                                                            |       | $        | (4,601,400 | ) |
|                                                                                                           |       |     |       |
| Net  loss per share                                                                                            |       |     |       |
| Basic  – as reported                                                                                      |       | $        | (0.13      | ) |
| Basic  – pro forma                                                                                        |       | $        | (0.13      | ) |
|                                                                                                           |       |     |       |
| Diluted  – as reported                                                                                    |       | $        | (0.13      | ) |
| Diluted  – pro forma                                                                                      |       | $        | (0.13      | ) |

 

Actual stockcompensation expense included in net loss as reported and determined under APB 25was nil for  2005.

 

***Net loss per share***

 

Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average ordinary shares outstanding during the periods.

 

Stock options have not been included in the computation of net loss per share in the periods presented as their effect is anti-dilutive. For additional disclosures regarding stock options see Note 11.

 

F-10

----

 

***Foreign currency transactions***

 

Foreign currency transactions are initiallyremeasured to Australian currency at the rate of exchange at the date of thetransaction. At the balance sheet date amounts payable and receivable inforeign currencies are remeasured to Australian currency at rates of exchangecurrent at that date. Resulting exchange loss difference of $537,038 as of June 30,2007 (2006: nil, 2005: nil) are included in earnings.

 

***Foreign currency translation***

 

The Australian dollar is the functionalcurrency for the Company. Balance sheet amounts (other than equity accounts)denominated in Australian dollars have been translated into United Statesdollars using the year end rate of exchange. Operating results denominated inAustralian dollars have been translated into U.S. dollars using the averagerate of exchange. Equity accounts are translated at historic rates. Gains orlosses resulting from such translation are recognized as other comprehensiveincome.

 

##### ***Accounting estimates***

##### *** ***

Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported results of operationsduring the reporting period.  Actualresults could differ from those estimates. Accounting estimates have beenapplied to calculate accruals for employee entitlements, asset retirementobligations, and expenses for stock-based compensation.

 

***Financial instruments***

 

Thefair values of financial instruments, including cash and cash equivalents,accounts receivable, and accounts payable, approximate their carrying value dueto their short term nature. Refer to Note 13 for further details.

 

***Accruals for Employee Entitlements***

 

The Company accrues compensated absences and related benefits as currentcharges to earnings when the following criteria are met: (i) the employee’sright to receive compensation for the future absences is attributable toservices already performed by the employee; (ii) the employee’s right toreceive the compensation for the future absences is vested, or accumulates; (iii) itis probable that the compensation will be paid; and (iv) the amount ofcompensation is reasonably estimable.

 

##### ***Impairment***

##### *** ***

Pursuantto guidance established in SFAS 144, “*Accounting for theImpairment or Disposal of Long-Lived Assets*”, the Companyevaluates if long lived assets are impaired whenever indicators of impairmentare present. Management considers assets to be impaired if the carrying valueexceeds the future projected cash flows from related operations (undiscountedand without interest charges). If impairment is deemed to exist, the assetswill be written down to fair value. Management also re-evaluates the periods ofdepreciation and amortization to determine whether subsequent events andcircumstances warrant revised estimates of useful lives.

 

TheCompany did not deem any of its long-lived assets to be impaired, and for theyears ended June 30, 2007, 2006 and 2005 no impaired adjustment wasrecorded.

 

##### ***Asset Retirement Obligations***

##### *** ***

The Company accounts for its contractual obligation to restore certain of its leased facilities under the provisions of SFAS 143, “*Accounting for Asset Retirement Obligations*”. SFAS 143 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of a liability, the costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. Changes in asset retirement estimates are capitalized as part of the long-lived asset and expensed prospectively over the useful life of the asset. The discount rate used when estimating the fair value of the asset retirement obligation is a credit-adjusted risk-free interest rate with the same expected maturity as the removal obligation.

 

F-11

----

 

##### ***Income Taxes***

##### *** ***

TheCompany accounts for income taxes under the provisions of SFAS 109:  “*Accounting for IncomeTaxes”* (“SFAS 109”).  SFAS109 requires recognition of deferred tax assets and liabilities for theestimated future tax consequences of events attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases as well as operating loss and tax credit carryforwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect ofdeferred tax assets and liabilities of a change in tax rates is recognized inthe income statement in the period that it includes the enactment date.Valuation allowances are established when it is more likely than not that someor all of the deferred tax assets will be not realized.

 

***Recent Accounting Policies***

 

In July 2006, the FASBissued FASB Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”*(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes byprescribing the recognition threshold a tax position is required to meet beforebeing recognized in the financial statements. It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The Company will adopt FIN 48 as of July 1, 2007, as required.   The Company believes that the cumulativeeffect of applying the provisions of FIN 48 will not result in materialadjustment to the opening balance of deferred tax asset and the associatedvaluation allowance and will not have a material impact on the results ofoperations.

 

In September 2006, theFASB issued SFAS No. 157, “*FairValue Measurements”*, which provides guidance for using fairvalue to measure assets and liabilities. It also responds to investors’requests for expanded information about the extent to which companies measureassets and liabilities at fair value, the information used to measure fairvalue, and the effect of fair value measurements on earnings. SFAS No. 157applies whenever other standards require (or permit) assets or liabilities tobe measured at fair value, and does not expand the use of fair value in any newcircumstances. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007.   The Company will adopt SFAS 157 in fiscalyear beginning July 1, 2008 and does not believe the adoption will have amaterial impact on the Company’s financial statements.

 

In February 2007, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115”.*  SFAS No. 159 expands the use of fairvalue accounting but does not affect existing standards, which require assetsor liabilities to be carried at fair value.  This statement gives entities the option torecord certain financial assets and liabilities at fair value with the changesin fair value recorded in earnings.  SFASNo. 159 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. The Company will adopt SFAS 159 in fiscal year beginning July 1,2008 and does not believe the adoption will have a material impact on theCompany’s financial statements..

 

In March 2007, the FASBratified EITF Issue No. 07-03, “*Accountingfor Nonrefundable Advance Payments for Goods or Services to be used in FutureResearch and Development Activities”*. EITF 07-03 clarifies thatnon-refundable advance payments for future research and development activitiesshould be deferred and capitalized. It provides guidance that amounts should berecognized as an expense as the goods are delivered or the related services areperformed. The issue notes if an entity does not expect the goods to bedelivered or services to be rendered, the capitalized advance payment should becharged to expense. EITF 07-03 is effective for fiscal years beginning after December 15,2007. The Company is currently evaluating the impact of EITF 07-03 on theCompany’s consolidated financial statements which will be adopted in fiscalyear beginning July 1, 2008.

 

F-12

----

 

***2.******                                     ******Concentrationsof credit risk***

 

Financial instruments which potentially subject the Company toconcentrations of credit risk consist principally of cash and cash equivalentsand accounts receivable. The Company invests cash and cash equivalents whichare not required for immediate operating needs, and for its investment tradingprogram with various high credit quality financial institutions located inAustralia. The Company extends credit to its customers which results inaccounts receivable arising from its normal business activities. The Companydoes not require collateral from its customers or investees, but routinelyassesses the financial strength of its customers and, based upon factors surroundingthe credit risk of its customers, believes that its receivable credit riskexposure is limited given there is no concentration of customers.

 

***3.******                                     ******Accounts receivable***

 

Accounts receivable consists of the following:

 
| ** **                              | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2006**          | ** ** | **2007** | ** ** |
|                                    |       |              |       |   |   |
| Amounts receivable from trade customers |       | $                 | 1,100      |   | $ | 510,330 |   |
| Interest receivable                     |       | 58,504            |       | 253,646 |   |
| Amounts receivable from related parties |       | 35,405            |       | — |   |
| GST receivable                          |       | —            |       | 86,974 |   |
| Accrued other receivables               |       | 17,772            |       | 18,494 |   |
|                                    |       | $                 | 112,781    |   | $ | 869,444 |   |

 

Amounts receivable from related parties havethe same terms and conditions as amounts receivable from trade customers, whichare non-interest bearing and generally on 30 day terms (see Note 8).

 

***4.******                                     ******Investmentsaccounted for using the equity method***

 

Effective May 31, 2000, Progen entered into an agreement withMedigen Biotechnology Corporation (‘MBC’ or “Medigen”), a company incorporatedin Taiwan, in relation to the co-development and commercialization of PI-88(the ‘Alliance Agreement’). Under the Alliance Agreement, MBC will fund andconduct, at no cost to Progen, several Phase II clinical trials in respect ofPI-88. These trials are in addition to the trials to be undertaken by Progen.In return MBC is entitled to receive 15% of Progen’s future PI-88 revenuesgenerated from cancer and cardiovascular diseases. In addition, MBC has theright to negotiate the funding and conduct of several Phase III clinicaltrials. In accordance with the Alliance Agreement, Progen is to supply PI-88 toMBC free of charge for the designated trials and provide technical know-how toassist MBC with the conduct of the trials.

 

In connection with the Alliance Agreement under a separate ShareSubscription Agreement on November 6, 2000, the Company issued 2.75million fully paid ordinary shares to MBC at an issue price of $2.09 per share.In addition, under the Alliance Agreement Progen was issued 19.9% of MBC’sissued ordinary shares at no cost and with certain anti-dilution rights.

 

On April 28, 2005, Progen and MBC agreed to amend the terms of theAlliance Agreement in that Progen agreed to waive the requirement for MBC toconduct one of the Phase II trials outlined in the Alliance Agreement. Inreturn MBC agreed to fund 50%, up to A$1 million, of the recently initiatedPhase II melanoma clinical trial (PI-88 in combination with dacarbazine). Referto the related party disclosure at note 8 for further detail on the effect ofthese transactions.

 

F-13

----

 

On January 16, 2007, the Company announced thatit had agreed terms with MBC to conclude the Alliance Agreement. Inconsideration for MBC agreeing to end the Alliance Agreement, and foregoingtheir entitlement to the 15% royalty, and to compensate MBC for theircontribution to the development of PI-88, Progen agreed to:

 

·                  Returnthe 15,176,525 MBC ordinary shares to MBC (i.e. Progen’s 19.9% interest).

 

·                  Issue500,000 Progen shares to MBC on execution of the termination agreement;

 

·                  Reimburseto MBC A$300,000 being the funds they contributed to the costs of the PI-88Phase 2 Melanoma clinical trial on execution of the agreement;

 

·                  Issue afurther 732,600 Progen shares and pay A$2,000,000 in cash or shares, at Progen’sdiscretion, to MBC on MBC completing two clinical milestones in relation to thecurrent PI-88 Phase 2 HCC Trial;

 

·                  Pay MBCup to A$4,000,000 on PI-88 achieving specified clinical and commercialmilestones; and

 

·                  Issue1,000,000 options to MBC upon MBC providing to Progen the HCC Phase 2 TrialFinal Study Report.

 

As at June 30, 2006 the Company accounted for theinvestment in MBC under the equity method of accounting. Due to recurringlosses subsequent to our initial investment in MBC in 2000, the carrying valueof this investment as of June 30, 2006 was $nil.  Progen held no shares in MBC as of June 30,2007.

 

The financial statements for the period ended June 30,2007 include the financial impact of reimbursement of $235,776 (A$300,000)(included in research and development cost), and the value of 1,232,600 Progenshares and 1,000,000 options on Progen shares, both issued to MBC during fiscalyear 2007.  The fair value at the date ofgrant of the 1,232,600 Progen shares was $6,642,418 and 1,000,000 options overProgen shares was $1,104,958. The total financial impact is an increase in theoperating loss from continuing operations of $7,983,152.

 

The fair value of the shares and options issued toMedigen was used rather than estimating the fair value of the 15% royaltystream being bought back as we are unable to reliably estimate the future cashflows of PI-88 as we are still in development.

 

The fair value of the 1,232,600 shares issued toMedigen has been calculated using the market value of the shares as at date ofissue. The fair value of the 1,000,000 options issued to Medigen has beencalculated using a binomial model taking into account the terms and conditionsupon which the options were granted. The options vest immediately upon issuanceand the expiry term is two years.  Theassumptions used as inputs to the model were:

 
| Expected volatility              |   | 71   | %      |
|----------------------------------|--------|------|--------|
| Risk-free interest rate          |   | 6.22 | %      |
| Expected life of options (years) |   | 1.5  |   |
| Option exercise price            |   | $    | 5.95   |   |
| Share price at grant date        |   | $    | 4.57   |   |
| Dividend yield                   |   | 0.0  | %      |

 

The financial impact of the remaining transactionswill be booked in future reporting periods as and when MBC completes remainingclinical milestone and PI-88 achieves specified clinical and commercialmilestones.

 

***5.******                                     ******Propertyand equipment***

 

Propertyand equipment consists of the following:

 
| ** **                                | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2006**          | ** ** | **2007** | ** ** |
|                                      |       |              |       |   |   |
| Machinery and equipment                   |       | $                 | 3,361,475  |   | $ | 4,044,794 |   |
| Furniture and fixtures                    |       | 257,523           |       | 355,084 |   |
| Leasehold improvements                    |       | 574,544           |       | 687,622 |   |
|                                      |       | 4,193,542         |       | 5,087,500 |   |
| Accumulated depreciation and amortization |       | (3,127,060        | )          | (4,058,036 | ) |
| **Property and equipment, net**           |       | $                 | 1,066,482  |   | $ | 1,029,464 |   |

 

Depreciationand amortization expenses related to property and equipment amounted to$428,891, $398,043 and $393,914 for the years ended June 30, 2005, 2006,and 2007 respectively.

 

F-14

----

 

***6.             Income taxes***

 

AtJune 30, 2007 the Company had net operating tax loss carry-forwards ofapproximately $83,666,145 (2006: $57,360,000) which are indefinite as to useunless it is unable to comply with the recognition criteria for carryingforward tax losses under Australian taxation laws.  The Company also has capital losses inAustralia of $611,840 (2006: $526,402) and are available indefinitely foroffset against future capital gains of a similar nature subject to continuingto meet relevant statutory tests. As a result of these tax loss carry-forwards,the Company has significant deferred tax assets, however due the Company’s lackof earnings history, realization of these deferred tax assets is not morelikely than not, therefore the deferred tax assets have been fully offset by avaluation allowance.

 

Thechange in the valuation allowance and the corresponding change in the deferredtax asset amounted to $9,697,685, $1,026,921 and $3,093,777 for the years endedJune 30, 2007, 2006 and 2005 respectively.

 

**Deferredincome tax**

 

Deferredincome tax at June 30 relates to the following:

 
| ** **                                                | ** ** | **2006**    | ** ** | **2007**    | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|-------------|------------|
| * *                                                  |       |        |       |        |       |
| *Deferred tax liabilities*                                |       |        |       |        |       |
| *Current deferred tax liabilities*                        |       |        |       |        |       |
| Interest on short-term investments                        |       | (17,551     | )          | (76,094     | )          |
| Deferred tax liabilities                                  |       | (17,551     | )          | (76,094     | )          |
|                                                      |       |        |       |        |       |
| *Deferred tax assets*                                     |       |        |       |        |       |
| *Current deferred tax asset*                              |       |        |       |        |       |
| Unrealized foreign exchange difference                    |       | —      |       | 178,183     |       |
| Sundry creditors and accruals                             |       | 63,545      |       | 53,515      |       |
| Employee benefits                                         |       | 60,085      |       | 67,545      |       |
| *Noncurrent deferred tax asset*                           |       |        |       |        |       |
| Depreciation and amortization                             |       | 172,066     |       | 171,275     |       |
| Employee benefits                                         |       | 15,021      |       | 25,713      |       |
| Asset retirement obligation                               |       | 29,934      |       | 38,563      |       |
| Sec 40-880 costs                                          |       | 67,712      |       | 1,449,886   |       |
| Patent costs                                              |       | 69,888      |       | 129,881     |       |
| Losses available for offset against future taxable income |       | 17,121,123  |       | 25,241,041  |       |
| Gross deferred tax asset                                  |       | 17,599,374  |       | 27,355,602  |       |
| Valuation allowance                                       |       | (17,581,823 | )          | (27,279,508 | )          |
| Deferred tax asset                                        |       | 17,551      |       | 76,094      |       |
|                                                      |       |        |       |        |       |
| Net deferred income tax assets                            |       | $           | 0          |        | $          | 0 |   |
|                                                           |            |             |            |             |            |  |  |

 

Reconciliationof income tax expense attributable to continuing operations and income taxexpense resulted from applying the statutory tax rate to pre-tax income fromcontinuing operations:

 
| ** **                              | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Tax  benefit at 30% Australian tax rate |       | $          | 1,364,494  |       | $          | 1,568,155  |       | $ | 5,016,993 |   |
| Non  deductible items                   |       | (6,097     | )          | (30,200    | )          | (4,155     | )          |
| Share  based payments                   |       | (25,092    | )          | (34,878    | )          | (524,108   | )          |
| R&D  concessions                    |       | 237,064    |       | 162,918    |       | 205,643    |       |
| Effect  of foreign exchange translation |       | 1,418,631  |       | (639,074   | )          | 3,621,138  |       |
| Net  tax loss                           |       | 2,989,000  |       | 1,026,921  |       | 8,315,511  |       |
| Change  in valuation allowance          |       | (2,989,000 | )          | (1,026,921 | )          | (8,315,511 | )          |
| Tax  benefit                            |       | $          | 0          |       | $          | 0          |       | $ | 0 |   |

 

The Company’sdeferred income tax balance and the difference between income tax computed atthe Australian statutory rate and income tax expense is primarily the result oftax losses carry-forward.

 

F-15

----

 

The change inthe valuation allowance and the corresponding change in the deferred tax assetfor the years ended June 30, 2005, 2006, 2007 is as follows:

 
| ** **                               | ** ** | **Additions**                                  | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|
| **Description at**                  | ** ** | **Balance at  beginning of  period** | ** ** | **Charges to  costs and  expenses** | ** ** | **Changed to  other accounts  (1)** | ** ** | **Balance at end  of period** | ** ** |
| Year  ended June 30, 2005           |       |                                           |       |   |   |   |   |   |   |
| Deferred  income tax valuation allowance |       | 13,461,125                                     |       | 2,989,000 |   | 104,777 |   | 16,554,902 |   |
| Year  ended June 30, 2006           |       |                                           |       |   |   |   |   |   |   |
| Deferred  income tax valuation allowance |       | 16,554,902                                     |       | 1,026,921 |   | — |   | 17,581,823 |   |
| Year  ended June 30, 2007           |       |                                           |       |   |   |   |   |   |   |
| Deferred  income tax valuation allowance |       | 17,581,823                                     |       | 8,315,511 |   | 1,382,174 |   | 27,279,508 |   |

 

----

(1) Recognisedthrough equity as a result of share issue costs.

 

***7.             Accountspayable***

 

Accounts payable consists of the following:

 
| ** **             | ** ** | **June 30,** | ** ** |
|------------------------|------------|-------------------|------------|
| ** **             | ** ** | **2006**          | ** ** | **2007** | ** ** |
|                   |       |              |       |   |   |
| Trade accounts payable |       | $                 | 745,275    |   | $ | 1,626,970 |   |
| Other payables         |       | 177,473           |       | 151,379 |   |
|                   |       | $                 | 922,748    |   | $ | 1,778,349 |   |

 

Trade accounts payable is non interest bearing and generally on 30 dayterms.

 

***8.             Relatedparty disclosures***

 

Stanley Chang was a director of Progen, as wellas the Chairman and CEO of Medigen Biotechnology Company (MBC) during the yearsended June 30, 2005 and 2006.  Heresigned from the Board of Progen on January 16, 2007.

 

During the 2005 and 2006 financial years, Progentransacted with MBC under the terms of the Alliance Agreement (refer note 4).Progen charged MBC $185,838 (2005: $44,654) in relation to its 50% contributionto the costs of PI-88 Phase II trial in combination with dacarbazine. At June 30,2006 $35,405 (2005: $32,424) is included in trade and other receivables. During the 2006 year, Progen provided 5,911vials of PI-88 to Medigen at a total cost to the Company of $98,000 (2005:nil).

 

During the 2005, 2006 and 2007 financial yearsProgen purchased goods totaling $nil, $nil and $63,302 respectively fromcompanies associated with Dr Malvin Eutick, a director of ProgenPharmaceuticals Limited. There were no outstanding payables at the end of the year.

 

F-16

----

 

***9.******                                     ******Assetretirement obligation***

 

In accordance with the lease agreement terms, the Company must restoreits leased premises situated at Darra, Brisbane and Toowong, Brisbane to theiroriginal condition at the end of the lease term. Accretion expense of $8,728related to 2007 (2006: $7,427, 2005: $7,353) is recorded in Other costs ofoperations within the Statements of Income.

 

Because of the long-term nature of the liability, the greatest uncertaintyin estimating the provision is the costs that will ultimately be incurred. Theobligation has been calculated using a discount rate of 10%.

 
| ** **                                     | ** **   | **June 30,** | ** **   |
|------------------------------------------------|--------------|-------------------|--------------|
| ** **                                     | ** **   | **2006**          | ** **   | **2007** | ** ** |
| *** ***                                   | *** *** | *** ***      | *** *** | *** *** | *** *** |
| ***Asset retirement obligation***              | *** *** | *** ***      | *** *** | *** *** | *** *** |
| Balance at the beginning of the financial year |         | $                 | 81,797       |   | $ | 103,084 |   |
| Liabilities incurred during the financial year |         | 17,417            |         | — |   |
| Accretion expense                              |         | 7,427             |         | 8,247 |   |
| Effect of foreign exchange translation         |         | (3,557            | )            | 17,212 |   |
| Balance at the end of the financial year       |         | $                 | 103,084      |   | $ | 128,543 |   |

 

***10.******                              ******Commitmentsand contingencies***

 

**(a) Expenditure commitments**

 

The following expenditure commitments had beencontracted but not provided:

 

*Lead optimization collaborative study agreement*

 

In 2007 the Company extended a services agreement for lead optimizationstudies with the Victorian College of Pharmacy - Monash University. The termsof this agreement state that the Company is to fund research in quarterlyamounts of $15,925 until 25 February 2008. The committed value of thisagreement for the next financial year is $42,466.

 

*Insurance premium*

 

In July 2007 the Company committed to paying the Company’sinsurance premium for the year ended 30 June 2008. The total value ofthese premiums is $438,726 (2006: $317,436).

 

*Consultantagreements*

 

During the 2007 financial year Progen entered into various consultantagreements with a committed value of $323,486 for the next financial year(2006: $21,653).

 

*Purchases*

 

Atthe end of the 2007 financial year Progen ordered goods and services with atotal value of $353,510 which had not been delivered by June 30, 2007(2006: $160,788).

 

*Terminationof Alliance Agreement*

 

Aspart of  the considerations related tothe termination of the Alliance Agreement dated January 16, 2007 betweenProgen and MBC (see Note 4), Progen is required to make payment of $1,697,200upon MBC providing certain deliverables. Payment, in cash or equivalent Progenordinary shares, is due January 15, 2008 or 20 business days after thePhase III clinical trials commence, whichever is later.

 

F-17

----

 

Thetotal remaining commitment payable in respect of the above agreements at June 30,2007 and 2006 are as follows:

 
| ** **                                             | ** ** | **2006** | ** ** | **2007**  | ** ** |
|--------------------------------------------------------|------------|----------|------------|-----------|------------|
|                                                   |       |     |       |      |       |
| Payable not later than one year:                       |       |     |       |      |       |
| Research Agreement                                     |       | $        | 111,172    |      | $          | 42,466 |   |
| Consultant Agreements                                  |       | 21,653   |       | 323,486   |       |
| Insurance Premium                                      |       | 317,436  |       | 438,726   |       |
| Purchases                                              |       | 160,788  |       | 353,510   |       |
| Termination of Medigen Alliance Agrement               |       | —   |       | 1,697,200 |       |
| Total not later than one year                          |       | 611,049  |       | 2,855,388 |       |
| Payable later than one and not longer than five years: |       | —   |       | —    |       |
| Total expenditure commitments                          |       | $        | 611,049    |      | $          | 2,855,388 |   |

 

Inaddition, the Company is required to pay Medigen $1,697,200 within 20 businessdays upon commencement of PI-88 Phase 3 clinical trials and another $1,697,200upon PI-88 commercial milestone being met.

 

**(b) Lease expenditure commitments**

 

##### ***Operating leases***

##### *** ***

The operating lease commitments include leases of the buildings of theCompany’s principal offices in Toowong, a suburb of Brisbane, Queensland,Australia, and of manufacturing facilities in Darra, also a suburb in Brisbane.The lease agreement in Toowong is for a three-year period beginning December 15,2005, with an option to renew for an additional three years. Under the terms ofthe Toowong lease agreement, the rental payments are subject to annual reviewbased on the movement in the consumer price index or 4%, whichever is greater.The Darra lease agreement expires in March 2009, with an option to renewfor an additional two years. Under the terms of the Darra lease agreement,rental payments are subject to annual review based on the movement in theconsumer price index.

 

During the fiscal years ended June 30, 2005, 2006 and 2007, rentexpense was $91,329, $165,715 and $232,057 respectively.

 

The total minimum annual rentals under non-cancellable operating leasessubsequent to June 30, 2007 are as follows:

 
| **Year ending********June 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| 2008                                      |       | $          | 210,453    |   |
| 2009                                      |       | 66,191     |       |
| Total                                     |       | $          | 276,644    |   |

### ** **

### **(c) Clinicaltrials**

### ** **

AtJune 30, 2007 the Company had anticipated expenditure commitments of$692,458 (2006: $2,463,357) in relation to the clinical trials currently beingundertaken for PI-88 and PI-166. These commitments are forecast to become dueand payable as follows: $571,390 not later than one year, and $121,068 laterthan one and not longer than five years; however that could vary depending uponthe rate of patient recruitment.

 

Theabove does not include Phase 3 trial commitments as contracts had not beenexecuted at June 30, 2007.

 

F-18

----

 

***11.******                              ******Stockoption plans***

 

All options are granted in stock trading on the Australian SecuritiesExchange (‘ASX’), have an Australian exercise price and are exercisable only inAustralian dollars.

 

**Employee compensation plans**

 

***Directors and employees option incentive scheme***

 

In 2004 the Company’s shareholders approved thedirectors and employees option incentive scheme (“2004 Plan”). All our directors and all employees, whetherfull time or part time, are eligible to participate in this plan. The minimumexercise price of options granted under this plan shall not be less than theaverage closing share price as recorded on the Australian Securities Exchangein the five business days preceding the grant of those options. The expiry dateof options issued under this plan can not exceed 10 years from the date ofgrant.

 

During 2007, 313,667 options, including the166,667 options to the CEO (see discussion below) (2006: 63,000, 2005: 65,000)were granted under the terms of this plan. These options were issued for nilconsideration and have a weighted average exercise price of $4.26 (2006: $2.28,2005: $2.97).

 

As at June 30, 2007, there were 283,667 options outstanding thatwere issued under this plan.

 

At the 2006 Company’s annual general meeting the shareholders approvedthe issue of 500,000 options to the CEO. The vesting terms and exercise priceof these options is as follows:

 

·                  166,667 options vesting on March 1, 2007at an exercise price equal to a 20% premium to the 60 day share price volumeweighted average price (VWAP) prior to this date of which the exercise pricewas $6.15 (included in the table below);

 

·                  166,667 options vesting on March 1, 2008at an exercise price equal to a 25% premium to the 60 day share price VWAPprior to this date of which the exercise price is estimated to be $4.88; and

 

·                  166,667 options vesting on March 1, 2009at an exercise price equal to a 30% premium to the 60 day share price VWAPprior to this date of which the exercise price is estimated to be $5.07.

 

These options are exercisable for the date they vest and expire on March 1,2011. The grant date of these options is March 1, 2007, 2008, and 2009;however since the service inception date precedes the grant date compensationexpense is recognized over the period beginning November 30, 2006, thedate of approval. For March 1, 2007 the weighted average grant date fairvalue was $2.13. The estimated fair value The weighted average grant date fairvalue for March 1, 2007, 2008, and 2009 was $2.13, $1.73, $1.86,respectively. The total compensation cost not recognized as of June 30,2007 is estimated to be $383,315 over the weighted average period of 1.2 years.

 

F-19

----

 

The following table summarizes the movements in options outstanding todirectors and employees as of June 30, 2007, 2006 and 2005:

 
| ** **                              | ** ** | **Number of  options  outstanding** | ** ** | **Weighted  average  exercise price** | ** ** | **Number of********options  exercisable** | ** ** | **Weighted  average  exercise price** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------|------------|
| Options outstanding, June 30, 2004 |       | 2,529,064                                |       | $                                          | 2.23       |                                           | 2,529,064  |                                       | $          | 2.23 |   |
| - granted                               |       | 65,000                                   |       | $                                          | 2.97       |                                           |       |                                       |       |   |
| - forfeited                             |       | (26,000                                  | )          | $                                          | 2.10       |                                           |       |                                       |       |   |
| - expired                               |       | (472,033                                 | )          | $                                          | 3.75       |                                           |       |                                       |       |   |
| - exercised                             |       | (1,528,211                               | )          | $                                          | 1.77       |                                           |       |                                       |       |   |
| Options outstanding, June 30, 2005 |       | 567,820                                  |       | $                                          | 2.27       |                                           | 567,820    |                                       | $          | 2.27 |   |
| - granted                               |       | 63,000                                   |       | $                                          | 2.28       |                                           |       |                                       |       |   |
| - forfeited                             |       | (22,000                                  | )          | $                                          | 2.78       |                                           |       |                                       |       |   |
| - expired                               |       | (545,820                                 | )          | $                                          | 2.25       |                                           |       |                                       |       |   |
| - exercised                             |       | (33,000                                  | )          | $                                          | 2.31       |                                           |       |                                       |       |   |
| Options outstanding, June 30, 2006 |       | 30,000                                   |       | $                                          | 2.26       |                                           | 30,000     |                                       | $          | 2.26 |   |
| - granted                               |       | 313,667                                  |       | $                                          | 4.26       |                                           |       |                                       |       |   |
| - forfeited                             |       | —                                   |       | —                                     |       |                                           |       |                                       |       |
| - expired                               |       | —                                   |       | —                                     |       |                                           |       |                                       |       |
| - exercised                             |       | (60,000                                  | )          | $                                          | 2.25       |                                           |       |                                       |       |   |
| Options outstanding, June 30, 2007 |       | 283,667                                  |       | $                                          | 4.47       |                                           | 241,667    |                                       | $          | 4.51 |   |

 

The weighted average grant-date fair value of each option granted duringthe year      was $1.47 (2006: $0.56, 2005: $0.82). Theweighted average grant-date fair value of each option vested during 2007 was$1.47 (2006: $0.56, 2005: $0.80) and forfeited during 2007 was nil (2006: $0.81,2005:$0.80). The total intrinsic value at grant date of options exercisedduring the years ended June 30, 2005, 2006 and 2007, was nil. Thetotal fair value of the options vested during 2007 was $688,455 (2006: $35,026,2005: $53,086).

 

The following table summarizes information about director and employeeoptions outstanding at June 30, 2007:

 
| **Outstanding**         | ** ** | **Exercisable**                   | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| **Exercise price** | ** ** | **Number of********options** | ** ** | **Weighted average  remaining  contractual life** | ** ** | **Weighted  average  exercise price** | ** ** | **Number of********options** | ** ** | **Weighted  average  exercise price** | ** ** |
| $                       | 2.26       |                              | 30,000     |   | 1.4  years |   | $ | 2.26 |   | 30,000 |   | $ | 2.26 |   |
| $                       | 2.12       |                              | 54,000     |   | 4.2  years |   | $ | 2.12 |   | 12,000 |   | $ | 2.12 |   |
| $                       | 2.12       |                              | 33,000     |   | 0.7  years |   | $ | 2.12 |   | 33,000 |   | $ | 2.12 |   |
| $                       | 6.15       |                              | 166,667    |   | 3.7  years |   | $ | 6.15 |   | 166,667 |   | $ | 6.15 |   |

 

The aggregate intrinsic value of options outstanding and exercisable at June 30,2007 is nil.

 

F-20

----

 

**Options issued to non-employees**

 

Compensation cost for stock options granted to non-employees is measuredat the fair value of stock options as calculated usingHull-White binominal model and is expensed over the period in which the optionsvest.

 

In November 2003, the Company’s corporate advisors to the November 2003private placement of 3.8 million shares were granted stock options to purchaseup to 700,000 shares of Progen’s common stock at an exercise price of $1.77 peroption. These options vested on grant date and were exercised during fiscalyear 2005. The grant date fair value per option was estimated to be $0.23 andthe total intrinsic value at grant date of options exercised was nil.

 

The fair value of these options was estimated to be $163,555 using anoption pricing model with the following assumptions: dividend yield of 0%;expected volatility of 70.9%; risk free interest rate of 5.39%; and an expectedlife of 1.6 years. Accordingly, a non-cash amount of $163,555 has been recordedagainst contributed equity which was offset by the cost to raise capital whichwas also recorded to equity.

 

As at June 30, 2007, there were nil options outstanding that wereissued under this plan.

 

**Consultants and AdvisorsOption Incentive Plan**

** **

In February 2005, the directors’ of Progen Pharmaceuticals Limitedapproved the Progen Consultants and Advisors Option Incentive Plan. During 2007, 13,498 options were exercised , 9,002options were expired unexercised and 20,000 options were issued under the termsof this plan (2006: nil, 2005: 22,500). These options were issued for nilconsideration, are fully vested 12 months after the grant date (January 25,2008) and have an exercise price of $4.25. The grant date fair value for eachoption was $2.05. An amount of $40,935 was recorded in selling, general andadministrative expenses in relation to these options. The expiry date for theseoptions is January 25, 2010. The intrinsic value of the 20,000non-employee options outstanding and exercisable at June 30, 2007 is nil.

 

**Options issued to Medigen**

 

Under the term of an agreement to conclude the Alliance Agreement (seeNote 4), Medigen was issued 1,000,000 options. The options were issued on June 6, 2007 are exercisable from grantdate, expire on June 6, 2009 and have an exercise price of $5.95. Refer tonote 4 for fair value assumptions.

 

At June 30, 2007, the Company has reserved shares of new ordinaryshares for future issuance as follows:

 

| Directors and employees incentive plan 2004 |   | 283,667   |   |
|---------------------------------------------|--------|-----------|--------|
| Non-employee options                        |   | 20,000    |   |
| Medigen                                     |   | 1,000,000 |   |
| Total                                       |   | 1,303,667 |   |

 

**Other information**

 

EffectiveJuly 1, 2005, the Company adopted the requirements of SFAS 123R using the “modifiedprospective” method thereby recognizing the compensation cost in the financialstatements for all share-based payments granted after that date, and based onthe requirements of SFAS 123 for all unvested awards granted prior to theeffective date of SFAS 123R. In accordance with the provisions of SFAS 123R,$688,455 was recorded in selling, general and administrative expenses for totalstock-based compensation expense in 2007 (2006: $35,026).

 

Asa result of adopting SFAS 123(R) on July 1, 2005 the Company’s lossbefore income taxes and net loss for the year ended June 30, 2006 are both$35,026 higher than if it had continued to account for share-based compensationunder APB 25. Basic and diluted loss per share for the year ended June 30,2006 was $0.001 higher than if the Company had continued to account for theshare-based compensation under APB 25. The adoption of SFAS 123R had no effecton the cash flow statement.

 

F-21

----

 

Priorto July 1, 2005, the Company adopted the disclosure only alternative ofSFAS 123 for employee options granted which requires that proforma results bepresented as if stock based compensation were recorded at the fair value ofoptions granted. This compensation, determined using an option pricing model,is expensed over the vesting periods of each option grant. The pro formacompensation expense was calculated to be $53,086 for the year ended June 30,2005.

 

The fair value of all options granted to employees, directors andconsultants in 2005, 2006 and 2007 were computed at the date of grant using anoption pricing model with the following weighted average assumptions:

 
| ** **              | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk Free Interest Rate |       | 5.29     | %          | 5.16     | %          | 6.12     | %          |
| Expected Dividend Yield |       | 0.00     | %          | 0.00     | %          | 0.00     | %          |
| Expected Lives (years)  |       | 1.04     |       | 2.30     |       | 2.47     |       |
| Expected Volatility     |       | 51.9     | %          | 56.0     | %          | 63.0     | %          |

 

The option pricing model was developed for use in estimating the fairvalue of non-traded options, which have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. Becausethe Company’s employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models may not necessarily provide a reliable singlemeasure of the fair value of its employee stock options.

 

Using the option pricing model, the weighted-average fair value ofoptions granted was $1.20 in 2007, $0.55 in 2006 and $0.80 in 2005.

 

When the stock options are exercised, new ordinary shares will be issued.

 

***12.******                              ******Segment disclosures***

 

TheCompany is organized based on the products and services that it offers. Underthis organizational structure, there are two reportable segments: (i) researchand development and (ii) manufacturing. The research and developmentsegment is focused on the development of PI-88 and PI-166 as well as a drugdiscovery effort that is partially funded by an AusIndustry Commercial ReadyGrant. This grant is for three years commencing August 2005.

 

Themanufacturing segment is involved with the provision of contract manufacturingservices to cGMP standards for various human clinical, therapeutic product, andveterinary pharmaceutical trials, as well as non-cGMP bioproduct contractmanufacturing services. The manufacturing segment also provides bioprocesstechnology development services.  Fromthis facility we have manufactured PI-88 for all our clinical trials that havebeen conducted to date.

 

TheCompany views certain other revenues and expenses, particularly selling,general and administration costs, as not belonging to any one reportablesegment. As a result, the Company has aggregated these items into an “Other”non-segment line, as permitted by SFAS 131 “*Disclosuresabout Segments of an Enterprise and Related Information.*”

 

TheCompany also views certain other assets, particularly cash and cashequivalents, and investments as not belonging to any one reportable segment. Asa result, the Company has aggregated these items into an “Other” non-segmentline, as permitted by SFAS 131.

 

The accounting policies of the Company’s reportable segments are thesame as those described in Note 1 “Summary of Significant AccountingPolicies”. The Company evaluates the performance of its segments based on eachsegment’s loss from continuing operations.

 

F-22

----

 

### **Year ended June 30, 2007**

 
| ** **                                                  | ** ** | **Research &  Development** | ** ** | **Manufacturing** | ** ** | **Total**   | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|-------------|------------|
| Sales to external customers                                 |       | $                                    | —     |              | $          | 722,944     |       | $ | 722,944 |   |
| Grant income                                                |       | 843,541                              |       | —            |       | 843,541     |       |
| Depreciation and amortization                               |       | 99,925                               |       | 251,579           |       | 351,504     |       |
|                                                        |       |                                 |       |              |       |        |       |
| Net loss                                                    |       | (4,762,618                           | )          | (723,470          | )          | $           | (5,486,088 | ) |
| Interest income                                             |       |                                 |       |              |       | 1,372,277   |       |
| Interest expense                                            |       |                                 |       |              |       | (12,069     | )          |
| Other non-segment other income                              |       |                                 |       |              |       | 31,381      |       |
| Other non-segment expenses                                  |       |                                 |       |              |       | (12,628,810 | )          |
| Consolidated net loss before tax from continuing operations |       |                                 |       |              |       | $           | 16,723,309 |   |
|                                                        |       |                                 |       |              |       |        |       |
| Total assets for reportable segments                        |       | 289,878                              |       | 612,197           |       | 902,075     |       |
| Other assets                                                |       |                                 |       |              |       | 84,500,373  |       |
| Consolidated assets                                         |       |                                 |       |              |       | $           | 85,402,448 |   |
|                                                        |       |                                 |       |              |       |        |       |
| Purchase of long lived assetsfor reportable segments        |       | 39,121                               |       | 143,899           |       | 183,020     |       |
| Other purchases                                             |       |                                 |       |              |       | 32,194      |       |
| Total purchases                                             |       |                                 |       |              |       | $           | 215,214    |   |
|                                                             |            |                                      |            |                   |            |             |            |  |  |  |

### ** **

### **Year ended June 30, 2006**

 
| ** **                                                  | ** ** | **Research &  Development** | ** ** | **Manufacturing** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|------------|------------|
| Sales to external customers                                 |       | $                                    | —     |              | $          | 676,975    |       | $ | 676,975 |   |
| Grant income                                                |       | 568,665                              |       | —            |       | 568,665    |       |
| Depreciation and amortization                               |       | 164,297                              |       | 204,643           |       | 368,940    |       |
|                                                        |       |                                 |       |              |       |       |       |
| Net loss                                                    |       | (2,791,378                           | )          | (312,772          | )          | (3,104,150 | )          |
| Interest income                                             |       |                                 |       |              |       | 824,596    |       |
| Interest expense                                            |       |                                 |       |              |       | (10,938    | )          |
| Other non-segment other income                              |       |                                 |       |              |       | 40,774     |       |
| Other non-segment expenses                                  |       |                                 |       |              |       | (2,977,464 | )          |
| Consolidated net loss before tax from continuing operations |       |                                 |       |              |       | $          | (5,227,182 | ) |
|                                                        |       |                                 |       |              |       |       |       |
| Total assets for reportable segments                        |       | 571,863                              |       | 655,430           |       | 1,227,293  |       |
| Other assets                                                |       |                                 |       |              |       | 11,931,592 |       |
| Consolidated assets                                         |       |                                 |       |              |       | $          | 13,158,885 |   |
|                                                        |       |                                 |       |              |       |       |       |
| Purchase of long lived assetsfor reportable segments        |       | 241,267                              |       | 397,922           |       | 639,189    |       |
| Other purchases                                             |       |                                 |       |              |       | 136,529    |       |
| Total purchases                                             |       |                                 |       |              |       | $          | 775,718    |   |
|                                                             |            |                                      |            |                   |            |            |            |  |  |  |

 

F-23

----

 

### **Year ended June 30, 2005**

 
| ** **                                                            | ** ** | **Research &  Development** | ** ** | **Manufacturing** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|------------|------------|
| Sales to external customers                                           |       | $                                    | —     |              | $          | 1,076,308  |       | $ | 1,076,308 |   |
| Grant income                                                          |       | 577,756                              |       | —            |       | 577,756    |       |
| Depreciation and amortization                                         |       | 168,380                              |       | 242,687           |       | 411,067    |       |
|                                                                  |       |                                 |       |              |       |       |       |
| Net income/(loss)                                                     |       | (2,333,081                           | )          | 133,766           |       | (2,199,315 | )          |
| Interest income                                                       |       |                                 |       |              |       | 617,822    |       |
| Interest expense                                                      |       |                                 |       |              |       | (12,923    | )          |
| Other non-segment other income                                        |       |                                 |       |              |       | 29,948     |       |
| Other non-segment expenses                                            |       |                                 |       |              |       | (2,983,846 | )          |
| Consolidated net income/ (loss) before tax from continuing operations |       |                                 |       |              |       | $          | (4,548,314 | ) |
|                                                                  |       |                                 |       |              |       |       |       |
| Total assets for reportable segments                                  |       | 140,490                              |       | 537,935           |       | 678,425    |       |
| Other assets                                                          |       |                                 |       |              |       | 18,089,830 |       |
| Consolidated assets                                                   |       |                                 |       |              |       | $          | 18,768,255 |   |
|                                                                  |       |                                 |       |              |       |       |       |
| Purchase of long lived assetsfor reportable segments                  |       | 26,567                               |       | 129,403           |       | 155,970    |       |
| Other purchases                                                       |       |                                 |       |              |       | 7,387      |       |
| Total purchases                                                       |       |                                 |       |              |       | $          | 163,357    |   |
|                                                                       |            |                                      |            |                   |            |            |            |  |  |  |

 

There were no inter-segment sales.

 

In 2005, 2006 and 2007, the Company operated inone geographical segment with all of its assets and operations located inAustralia.

 

The percentage of revenues derived fromcustomers outside of Australia represented 2.7% in 2007, 7.7% in 2006 and 13.8%in 2005.

 

Revenues from one Australian customer of theCompany’s Manufacturing segment represents approximately $703,000 of theCompany’s sales to external customers in 2007, $516,000 in 2006 and $425,000 in2005.

 

**Reconciliation to Reportedresults**

** **
| **Depreciation and amortization**         | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total reportable segments                           |       | $        | 411,067    |     | $          | 368,940  |       | $ | 351,504 |   |
| Unallocated corporate depreciation and amortization |       | 17,824   |       | 29,103   |       | 42,410   |       |
| Total reported depreciation and amortization        |       | $        | 428,891    |     | $          | 398,043  |       | $ | 393,914 |   |

 
| **Share based payments**         | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total reportable segments                  |       | —   |       | —   |       | —   |       |
| Unallocated corporate share based payments |       | $        | 25,092     |     | $          | 34,878   |       | $ | 422,578 |   |
| Total reported share based payments        |       | $        | 25,092     |     | $          | 34,878   |       | $ | 422,578 |   |

 

F-24

----

 

***13.******                              ******Fair value of financial instruments***

 

The Company’s principal financial instrumentsare cash and short-term deposits. The various other financial assets andliabilities are trade receivables and trade payables, which arise directly fromits operations. The main risks arising from the Company’s financial instrumentsare cash flow interest rate risk, liquidity risk and credit risk. The Boardreviews and agrees policies for managing each of these risks which aresummarized below.

 

**Credit risk**

 

The Company trades only with recognized,creditworthy third parties.

Receivables balances are monitored on anon-going basis with the result that the Company’s exposure to bad debts is notsignificant. There are no significant concentrations of credit risk.

 

**Cash equivalents**

 

Investments are made in accordance with a Boardapproved Investment Policy. Investments are typically in bank bills andinvestment grade commercial paper.

 
| ** **                | ** ** | **June 30,**    | ** ** |
|---------------------------|------------|----------------------|------------|
| ** **                | ** ** | **2006**             | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                | ** ** | **Carrying  amount** | ** ** | **Estimated fair  value** | ** ** | **Carrying  amount** | ** ** | **Estimated fair  value** | ** ** |
| ASSETS                    |       |                 |       |   |   |   |   |   |   |
| Cash and cash equivalents |       | $                    | 11,588,471 |   | $ | 11,588,471 |   | $ | 83,351,832 |   | $ | 83,351,832 |   |
| Accounts receivable       |       | 112,781              |       | 112,781 |   | 869,444 |   | 869,444 |   |
|                      |       |                 |       |   |   |   |   |   |   |
| LIABILITIES               |       |                 |       |   |   |   |   |   |   |
| Accounts payable          |       | 922,748              |       | 922,748 |   | 1,778,349 |   | 1,778,349 |   |
|                           |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

The carrying amounts approximate fair value in view ofthe short-term nature of these balances.

 

***14.******                              ******Employee benefit plan***

 

As required by Australian superannuation legislation, the Companycontributes a defined contribution of 9% of all Australian employee’s salary toan approved superannuation fund for their retirement benefit. The Companycontributed, on behalf of employees, $244,774 to superannuation funds for theyear ended June 30, 2007 (2006: $220,211, 2005: $210,672).

 

***15.******                              ******Foreign currency translation***

 

Thefunctional currency for the Company’s operations is Australian dollars. As at June 30,2007, A$1 equated to $0.8486. As at December 12, 2007, A$1 equated to$0.88631.

 

F-25

----

 

***16.******                              ******Stockholders’ equity***

 

On June 15, 2005, the Company issued 1,219,015ordinary shares to institutional investors at approximately $1.88 (A$2.50) pershare raising $2,296,380 cash. The total capital raising costs attributable tothis issue was $349,259.

 

On December 18, 2006, the Company issued 3,690,037 ordinary sharesto institutional investors at approximately $4.26 (A$5.42) per share raising$15,703,000 cash. The total capital raising costs attributable to this issuewas $948,645.

 

 On February 5,2007, the Company issued 989,156 ordinary shares under a share purchase planwith existing shareholders at approximately $4.20 (A$5.42) per share raising$4,158,146 cash. The total capital raising costs attributable to this issue was$46,333.

 

On May 8, 2007, the Company closed on a registered direct offeringof 6,900,000 ordinary shares at a sale price of $4.75 (A$5.74) per share toinstitutional and other investors in the United States. The offering raised$32,787,400 with transaction costs of $2,574,135.

 

In a prospectus dated May 9, 2007, the Company invited applicationsby way of 1 for 9 non-renounceable entitlement offer for 5,941,343 new sharesat an offer price of A$5.74 to ASX listed shareholders and $4.75 to Nasdaqlisted shareholders. The offer closed on June 18, 2007 raising $28,904,349at a cost of $2,120,455. One free option was given for each two new sharespurchased for an exercise price of the options is $6.95 (A$8.40). The optionsare exercisable at any time on or prior to the option expiry date of May 28,2010. In total 2,970,538 listed options were issued over ordinary shares andremain outstanding as at June 30, 2007.

 

***17.******                              ******Subsequent events***

 

On September 14, 2007, the Company granted 1,192,250 employee stockoptions, of which 495,000 vested immediately and 697,250 vest over the next 2years, with a weighted average exercise price of $3.03. The options expire September 13,2012.

 

F-26

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