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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

**(Mark One)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF  1934**                             |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                        |
| **OR**     |
| ** ** | ** **                                                                                                                                        |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended June  30, 2008** |
| ** ** | ** **                                                                                                                                        |
| **OR**     |
| ** ** | ** **                                                                                                                                        |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                           |
| ** ** | ** **                                                                                                                                        |
| **OR**     |
| ** ** | ** **                                                                                                                                        |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                        |

 

Date of event requiringthis shell company report . . . . . . . . . . . . . . . . . . .

 

**For thetransition period from                      to                        **

 

Commission file number 000-29228

 
| **PROGEN  PHARMACEUTICALS LIMITED**                                                                                                                                                    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of  Registrant as specified in its charter)                                                                                                                                |
|                                                                                                                                                                                   |
| **Not  Applicable**                                                                                                                                                                    |
| (Translation of  Registrant’s name into English)                                                                                                                                  |
|                                                                                                                                                                                   |
| **Australia**                                                                                                                                                                          |
| (Jurisdiction of  incorporation or organization)                                                                                                                                       |
|                                                                                                                                                                                   |
| **16  Benson St, Toowong, Queensland 4066, Australia**                                                                                                                                 |
| (Address of  principal executive office)                                                                                                                                               |
|                                                                                                                                                                                   |
| **Mr.  Linton Burns, Chief Financial Officer,  Progen Pharmaceuticals Limited, 16 Benson St, Toowong, Queensland 4066,  Australia  Tel: +61 7 3842 3333,  Fax: +61 7 3720  9624** |
| (Name,  Telephone, E-mail and/or Facsimile number and Address of Company Contact  Person)                                                                                              |

 

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                                       |
|                 |   |                                       |

 

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

 
| **Ordinary  Shares**

**Warrants** |
|------------------------------------|
| (Title of Class)                   |
|                               |
| ** **                         |
| (Title of Class)                   |

 

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Securities for whichthere is a reporting obligation pursuant to Section 15(d) of the Act.

 
| **None**         |
|------------------|
| (Title of Class) |

 

Indicate the number ofoutstanding shares of each of the Registrant’s classes of capital or commonstock as of the close of the period covered by this annual report.
|   | Ordinary Shares: 60,393,891  (as of June 30, 2008) |
|--------|----------------------------------------------------|
|   | Warrants: 2,970,538 (as  of June 30, 2008)         |

 

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

o Yes   xNo

 

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.

o Yes   x No

 

Note — Checking the boxabove will not relieve any registrant required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 from their obligationsunder those Sections.

 

Indicate by check markwhether 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.

x Yes   oNo

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See 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 basis of accounting the registrant has used to prepare the financialstatements included in this filing:

 

| U.S. GAAP o |   | International  Financial Reporting Standards as issued  by the International Accounting Standards Board x |   | Other o |
|-------------|--------|-----------------------------------------------------------------------------------------------------------|--------|---------|

 

If “Other” has beenchecked in response to the previous question, indicate by check mark whichfinancial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

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).

o Yes   x No

 

(APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.

o Yes   x No

 

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**TABLE OF CONTENTS**

 
| ** **     | ** **                                                                        | ** ** | **Page**   |
|----------------|-----------------------------------------------------------------------------------|------------|------------|
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 1.**    | **IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISERS**                        | ** ** | **6**      |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 2.**    | **OFFER STATISTICS AND EXPECTED  TIMETABLE**                                      | ** ** | **6**      |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM  3.**   | **KEY  INFORMATION**                                                              | ** ** | **7**      |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 3.A**   | **SELECTED FINANCIAL DATA**                                                       | ** ** | **7**      |
| **ITEM 3.D.**  | **RISK FACTORS**                                                                  | ** ** | **9**      |
|           |                                                                              |       |       |
| **ITEM 4.**    | **INFORMATION  ON THE COMPANY**                                                   | ** ** | **26**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 4.A.**  | **HISTORY AND  DEVELOPMENT OF THE COMPANY**                                       | ** ** | **26**     |
| **ITEM 4.B.**  | **BUSINESS OVERVIEW**                                                             | ** ** | **27**     |
| **ITEM 4.D.**  | **PROPERTY,  PLANTS AND EQUIPMENT**                                               | ** ** | **41**     |
|           |                                                                              |       |       |
| **ITEM 5.**    | **OPERATING  AND FINANCIAL REVIEW AND PROSPECTS**                                 | ** ** | **42**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 5.A.**  | **OPERATING RESULTS**                                                             | ** ** | **43**     |
| **ITEM 5.B.**  | **LIQUIDITY  AND CAPITAL RESOURCES**                                              | ** ** | **49**     |
| **ITEM 5.C.**  | **RESEARCH AND  DEVELOPMENT, PATENTS AND LICENSES, ETC.**                         | ** ** | **51**     |
| **ITEM 5.D.**  | **TREND INFORMATION**                                                             | ** ** | **51**     |
| **ITEM 5.E.**  | **OFF-BALANCE  SHEET ARRANGEMENTS**                                               | ** ** | **53**     |
| **ITEM 5.F.**  | **TABULAR  DISCLOSURE OF AGGREGATE CONTRACTUAL OBLIGATIONS**                      | ** ** | **53**     |
|           |                                                                              |       |       |
| **ITEM 6.**    | **DIRECTORS,  SENIOR MANAGMENT AND EMPLOYEES**                                    | ** ** | **54**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 6.A.**  | **DIRECTORS  AND SENIOR MANAGEMENT**                                              | ** ** | **54**     |
| **ITEM 6.B.**  | **COMPENSATION**                                                                  | ** ** | **58**     |
| **ITEM 6.C.**  | **BOARD PRACTICES**                                                               | ** ** | **59**     |
| **ITEM 6.D.**  | **EMPLOYEES**                                                                     | ** ** | **62**     |
| **ITEM 6.E.**  | **SHARE OWNERSHIP**                                                               | ** ** | **62**     |
|           |                                                                              |       |       |
| **ITEM 7.**    | **MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**                             | ** ** | **64**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 7.A.**  | **MAJOR SHAREHOLDERS**                                                            | ** ** | **64**     |
| **ITEM 7.B.**  | **RELATED PARTY TRANSACTIONS**                                                    | ** ** | **65**     |
|           |                                                                              |       |       |
| **ITEM 8.**    | **FINANCIAL  INFORMATION**                                                        | ** ** | **66**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 8.A.**  | **FINANCIAL  STATEMENTS AND OTHER FINANCIAL INFORMATION**                         | ** ** | **66**     |
| **ITEM 8.B.**  | **SIGNIFICANT CHANGES**                                                           | ** ** | **66**     |
|           |                                                                              |       |       |
| **ITEM 9.**    | **THE  OFFER AND LISTING**                                                        | ** ** | **67**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 9.C.**  | **MARKETS**                                                                       | ** ** | **67**     |
|           |                                                                              |       |       |
| **ITEM 10.**   | **ADDITIONAL  INFORMATION**                                                       | ** ** | **70**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 10.B.** | **MEMORANDUM  AND ARTICLES OF ASSOCIATION**                                       | ** ** | **70**     |
| **ITEM 10.C.** | **MATERIAL CONTRACTS**                                                            | ** ** | **71**     |
| **ITEM 10.D.** | **EXCHANGE CONTROLS**                                                             | ** ** | **72**     |
| **ITEM 10.E.** | **TAXATION**                                                                      | ** ** | **72**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM  11.**  | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                   | ** ** | **85**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 12.**   | **DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES**                       | ** ** | **88**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 13.**   | **DEFAULTS,  DIVIDEND ARREARAGES AND DELIQUENCIES**                               | ** ** | **89**     |
| ** **     | ** **                                                                        | ** ** | ** ** |
| **ITEM 14.**   | **MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS** | ** ** | **89**     |
| ** **     | ** **                                                                        | ** ** |
|                |                                                                                   |            |            |  |  |

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| **ITEM 15.**  | **CONTROLS AND  PROCEDURES**                                                | ** ** | **89**     |
|---------------|-----------------------------------------------------------------------------|------------|------------|
| ** **    | ** **                                                                  | ** ** | ** ** |
| **ITEM  16.** | **[RESERVED]**                                                              | ** ** | **91**     |
| ** **    | ** **                                                                  | ** ** | ** ** |
| **ITEM 16A.** | **AUDIT  COMMITTEE FINANCIAL EXPERT**                                       | ** ** | **91**     |
| ** **    | ** **                                                                  | ** ** | ** ** |
| **ITEM 16B.** | **CODE OF ETHICS**                                                          | ** ** | **91**     |
| ** **    | ** **                                                                  | ** ** | ** ** |
| **ITEM 16C.** | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES**                                 | ** ** | **91**     |
| ** **    | ** **                                                                  | ** ** | ** ** |
| **ITEM 16D.** | **EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**             | ** ** | **92**     |
| ** **    | ** **                                                                  | ** ** | ** ** |
| **ITEM 16E.** | **PURCHASES OF  EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS** | ** ** | **92**     |
| ** **    | ** **                                                                  | ** ** |
| **ITEM 17.**  | **FINANCIAL  STATEMENTS**                                                   | ** ** | **93**     |
| ** **    | ** **                                                                  | ** ** | ** ** |
| **ITEM 18.**  | **FINANCIAL  STATEMENTS**                                                   | ** ** | **93**     |
| ** **    | ** **                                                                  | ** ** | ** ** |
| **ITEM  19.** | **EXHIBITS**                                                                | ** ** | **93**     |

 

Referencesin this annual report to “Progen,” “we,” “our”, “us” and “the Company” refer toProgen Pharmaceuticals Limited.

 

All references to dollars or $ are to the currency of the Australiandollars (AUDs).

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS {tc “”}**

 

This annual report contains forward-looking statementsthat involve risks and uncertainties.   Forward-looking statements relate to future events or our futurefinancial performance and include information concerning our possible orassumed future results of operations, business strategies, financing plans,competitive position, industry environment, potential growth opportunities, theeffect of future regulation and the effects of competition. These statementsare based on our current expectations, beliefs and assumptions, and oninformation currently available to our management. In some cases, you canidentify forward-looking statements by the use of words such as  “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.

 

Certainstatements contained in this report may not be based on historical facts andare “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. In particular, certain statements includedherein under “Item 3. Key Information” and “Item 5. Operating and FinancialReview and Prospects,” including without limitation, those concerning theCompany’s strategy and competitive strengths, the Company’s expectations andplans, the Company’s collaborative revenues, research and development andgeneral and administrative expenses, contain certain forward-looking statementsconcerning the Company’s operations, performance and financial condition. Suchstatements may generally, but not always, be identified by their use of wordssuch as “anticipates,” “expects,” or “believes.” Although the Company believesthat the expectations reflected in such forward-looking statements arereasonable, no assurance can be given that such expectations will prove inhindsight to be correct. Many important factors could cause actual results todiffer materially from such expectations including, among others, those setforth in “Item 3. Key Information—Risk Factors” and “Item 4. Information on theCompany—Australian Government Regulation and U.S. Government Regulation”(collectively, the “Risk Factors”). All subsequent written and oralforward-looking statements attributable to the Company or persons acting on itsbehalf are expressly qualified by the Risk Factors. Other relevant risks may bedetailed from time to time in the Company’s press releases and filings with theSecurities and Exchange Commission. We undertake no obligation to update theseforward-looking statements to reflect events or circumstances that occur afterthe date of this report.

 

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**PART I**

 

# **ITEM 1.                  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT ANDADVISERS{TC “”}**

#  

Not applicable.

 

# **ITEM 2.                  OFFER STATISTICS AND EXPECTED TIMETABLE{TC “”}**

#  

Not applicable.

 

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# **ITEM 3.****                                                     KEYINFORMATION{TC “”}**

#  

## **Item 3.A****                                                  SelectedFinancial Data{tc “”}**

##  

The followingselected consolidated financial data for the four years ended June 30,2008 should be read in conjunction with “Item 5. Operating and Financial Reviewand Prospects” below and our financial statements and related notes containedelsewhere in this Annual Report. Our financial statements and related noteshave been prepared in accordance with International Financial ReportingStandards (IFRS).

 

The consolidatedbalance sheet information as at June 30, 2007 and 2008 and theconsolidated income statement data for fiscal 2006, 2007 and 2008 are derivedfrom our audited financial statements included in this annual report.Consolidated balance sheet information as of June 30, 2005 and 2006 andconsolidated income statement information for fiscal 2005 are derived from ouraudited financial statements which are not included in this annual report.

 
| ** **                                                          | ** ** | **For the years ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| **Consolidated  Income Statement Data:**                            |       |                                                      |       |   |   |   |   |   |   |
| Revenue                                                             |       | $                                                         | 2,248,287  |   | $ | 2,007,904 |   | $ | 2,665,947 |   | $ | 6,477,931 |   |
| Other income  from ordinary activities                              |       | 805,964                                                   |       | 814,943 |   | 1,113,245 |   | 1,369,534 |   |
| Research and  development expenses                                  |       | 4,080,939                                                 |       | 3,895,745 |   | 6,991,757 |   | 16,143,407 |   |
| Manufacturing facility  expenses                                    |       | 1,707,299                                                 |       | 2,075,324 |   | 2,372,679 |   | 2,721,370 |   |
| Administration  and corporate expenses                              |       | 3,219,338                                                 |       | 3,816,781 |   | 5,438,437 |   | 11,081,469 |   |
| Finance costs                                                       |       | 26,908                                                    |       | 24,799 |   | 15,355 |   | 19,490 |   |
| Impairment loss                                                     |       | —                                                    |       | 618,818 |   | 1,769,198 |   | — |   |
| Other expenses                                                      |       | —                                                    |       | — |   | 9,645,903 |   | 4,029,302 |   |
| Net loss from  operations                                           |       | $                                                         | (5,980,233 | ) | $ | (7,608,620 | ) | $ | (22,454,137 | ) | $ | (26,147,573 | ) |
| Net loss before  income tax expense                                 |       | $                                                         | (5,980,233 | ) | $ | (7,608,620 | ) | $ | (22,454,137 | ) | $ | (26,147,573 | ) |
| Income tax  expense                                                 |       | —                                                    |       | — |   | — |   | — |   |
| Net loss  attributable to members of Progen Pharmaceuticals Limited |       | $                                                         | (5,980,233 | ) | $ | (7,608,620 | ) | $ | (22,454,137 | ) | $ | (26,147,573 | ) |
| Basic and  diluted loss per share (cents per share)                 |       | $                                                         | (16.7      | ) | $ | (18.6 | ) | $ | (50.2 | ) | $ | (43.3 | ) |

 

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| ** **                            | ** ** | **For the years ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| **Consolidated  Balance Sheet Data:** |       |                                                      |       |   |   |   |   |   |   |
| Cash and Cash  Equivalents            |       | $                                                         | 23,427,684 |   | $ | 15,872,443 |   | $ | 98,222,758 |   | $ | 76,747,878 |   |
| Working Capital                       |       | 22,297,388                                                |       | 14,960,325 |   | 96,928,384 |   | 70,864,837 |   |
| Total Assets                          |       | 27,018,257                                                |       | 19,793,864 |   | 100,639,229 |   | 82,592,581 |   |
| Long Term Debt                        |       | —                                                    |       | — |   | — |   | — |   |
| Capital Stock                         |       | 88,432,740                                                |       | 88,579,339 |   | 191,089,162 |   | 194,519,063 |   |
| Accumulated  Deficit                  |       | (63,048,587                                               | )          | (70,658,399 | ) | (93,112,536 | ) | (119,258,442 | ) |
| Net Assets                            |       | $                                                         | 25,384,153 |   | $ | 17,920,940 |   | $ | 97,976,626 |   | $ | 75,260,621 |   |

 

**Currencies and Exchange Rates**

 

The Company publishes its consolidated financialstatements in Australian dollars.  Inthis Annual Report, references to $ are to Australian dollars currency andreferences to “U.S. dollars” or “US$” are to U.S. currency. Solely forinformational purposes, this Annual Report contains translations of certainAustralian dollars into or from U.S. dollars at specified rates. Thesetranslations should not be construed as representations that the Australiandollars amounts actually represent such U.S. dollar amounts or could be convertedinto or from U.S. dollars at the rate indicated or at any other rate. Unlessotherwise stated herein, the translations of Australian dollars into or fromU.S. dollars have been made at $1.00 to US$0.9615, the Buying Rate on June 30,2008.

 

The following table sets forth, for the periods anddates indicated, certain information concerning the Buying Rate for Australiandollars expressed in U.S. dollars per $1.00. The period average data set forthbelow is the average of the Buying Rate on the last day of each full monthduring the period. On June 30, 2008, the Buying Rate was $1.00 toUS$0.96150.

 
| **2008 Month End** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------|------------|----------|------------|---------|------------|
| July 31, 2008           |       | 0.97760  |       | 0.94760 |       |
| August 31, 2008         |       | 0.94390  |       | 0.85710 |       |
| September 30, 2008      |       | 0.85840  |       | 0.79380 |       |
| October 31, 2008        |       | 0.80000  |       | 0.61270 |       |
| November 30, 2008       |       | 0.69330  |       | 0.61940 |       |
| December 31, 2008       |       | 0.70390  |       | 0.64080 |       |

 
| **Year end June 30,** | ** ** | **Average** | ** ** |   |   |
|--------------------------------------|------------|-------------|------------|--------|--------|
| 2004                                 |       | 0.71385     |       |   |   |
| 2005                                 |       | 0.75352     |       |   |   |
| 2006                                 |       | 0.74783     |       |   |   |
| 2007                                 |       | 0.78592     |       |   |   |
| 2008                                 |       | 0.89599     |       |   |   |

 

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## ** **

## **Item 3.D.                RiskFactors{tc “”}**

##  

*The risks and uncertainties described below are notthe only ones that we face. Additional risks and uncertainties not presentlyknown to us or that we currently believe to be immaterial may also adverselyaffect our business. If any of the following risks and uncertainties developsinto actual events, our business, financial condition and results of operationscould be materially and adversely affected, and the trading price of ourordinary shares could decline.*

 

**RISKSRELATED TO OUR BUSINESS**

 

***We are primarily engaged with activities at a stage in the developmentof pharmaceutical products where success is uncertain***

 

Although we****are presentlygenerating revenues from the sale of contract manufacturing services, we havenot sufficiently advanced the development of our lead product candidates, PI-88and PG-11047, to enable their registration, and, accordingly, have not begun tomarket or generate revenues from their commercialization. PI-88, PG-11047 andfuture pharmaceutical product candidates will require significant additionalinvestment in research and development, preclinical testing and clinical trials,drug manufacture and supply, regulatory and sales and marketing activities, andregulatory approval prior to any commercial sales.  We cannot make any assurances that PI-88,PG-11047 or any other product candidates, if successfully developed, willgenerate sufficient or sustainable revenues to enable us to be profitable.

 

***There is a significant risk that we may not be able to complete thedevelopment of PI-88 or PG-11047, or develop other pharmaceutical products***

 

We cannot make any assurances that we will be able todevelop PI-88, PG-11047 or any future pharmaceutical product candidatesadequately to successful commercialization, the development of one or moresuitable collaborative partners, or a combination thereof, or that our researchwill lead to the discovery of additional product candidates, or that any of ourcurrent and future product candidates will be successfully developed, will beproven to be safe and efficacious in clinical trials, meet applicableregulatory standards and receive regulatory approval, will be capable of beingproduced in commercial quantities at reasonable costs, or will be successfullyor profitably 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, PG-11047, or any ofour other pharmaceutical products under development will be commercialized.

 

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***The results of on-going andfuture clinical trials of PI-88 and PG-11047 are uncertain and we will not beable to commercialize PI-88, PG-11047 or any of our other product candidates ifwe fail to adequately demonstrate their safety, efficacy and superiority overexisting 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.

 

Until the July 2008termination of the Phase 3 PATHWAY trial of PI-88 we were embarking on theglobal registration of PI-88. With the termination of this trial, we are nowassessing regional commercialization opportunities for PI-88.

 

We are currently conducting one Phase 2 clinical trialof PI-88 in Melanoma cancer patients in the United States and Australia. Wealso are conducting a Phase 1 clinical trial of PG-11047 in the United Statesand, depending on the results of this trial, may conduct additional clinicaltrials. We plan to pursue a range of commercialization approaches for our leadproducts PI-88 and PG-11047, amongst them entering into collaborativearrangements with one or more suitable pharmaceutical or biotechnologycompany(ies). We cannot make any assurances that we will be able either tocomplete the current clinical trials of PI-88 and PG-11047 successfully,commence additional clinical trials of PI-88 or PG-11047 as anticipated, or atall, or to demonstrate the safety and efficacy or superiority of PI-88 orPG-11047 over existing therapies or enter into any collaborative arrangement tocommercialize PI-88 and PG-11047 on terms acceptable to us, or at all. Clinicaltrial results that show insufficient safety and efficacy could have a materialadverse effect on our business, financial condition and results of operations.

 

Clinical trials may take up to several years tocomplete. The length of time varies substantially according to the type,complexity, novelty, patient recruitment into and intended use of the productcandidate. We cannot make any assurances that, when clinical trials arecompleted, we will be able to pursue further clinical development, executemarket development efforts, enter into a collaborative arrangement with asuitable pharmaceutical or biotechnology company to complete the developmentof, or commercialize PI-88 or PG-11047. Nor can we make any assurances thatonce clinical trials are completed by us or a collaborative partner, we will beable to submit as scheduled a marketing approval request to the AustralianTherapeutic Good Administration’s (TGA) Drug Safety and Evaluation Branch, theU.S. Food and Drug Administration (FDA) or any other authority, or, that suchrequest and application will be reviewed and cleared by any of theseauthorities, as applicable, in a timely manner, or at all.

 

During the course of clinical trials and toxicologystudies, PI-88, PG-11047 and our other product candidates may exhibitunforeseen and unacceptable drug-related toxicities or side effects. If anyunacceptable toxicities or side effects were to occur, we may, or regulatoryauthorities may 

 

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require us to, interrupt,limit, delay or abort the development of our potential products. In addition,unacceptable toxicities could ultimately prevent the clearance of our product candidatesby the 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, PG-11047 or any of our other product candidates will be safe oreffective when administered to patients.

 

***We may experience delays in our clinical trials that could adverselyaffect our business and operations***

 

We do not know whether planned clinical trials willbegin on time or whether we will complete any of our clinical trials onschedule or at all. Our ability to commence and complete clinical trials may bedelayed by many factors, including:

 

·                                          Governmentor regulatory delays, including delays in obtaining approvals from applicablehospital ethics committees and internal review boards;

 

·                                          Slowerthan expected patient recruitment;

 

·                                          Ourinability to manufacture or prepare, as applicable, sufficient quantities ofPI-88, PG-11047 or any of our other product candidates;

 

·                                          Unforeseensafety issues; and

 

·                                          Lackof efficacy during the clinical trials.

 

Patient enrollment is a function of, amongst otherthings, the nature of the clinical trial protocol, the existence of competingprotocols, the size and longevity of the target patient population, and theavailability of patients who meet the eligibility criteria for the clinicaltrial. Delays in planned patient enrollment may result in increased costs,delays in trial completion or termination of clinical trials. Moreover, we havelimited experience in conducting and managing clinical trials and may rely onthird parties to assist us in managing and monitoring clinical trials. Anyfailure by these third parties to perform under their agreements with us maycause the trials to be delayed or result in a failure to complete the trials.

 

Product development costs to our collaborators and uswill increase if we have delays in testing or approvals or if we need toperform more or larger clinical trials than planned. Significant delays couldhave a material adverse effect on the commercial prospects of our productcandidates and our business, financial condition and results of operations.

 

***We may be unable to enroll a sufficient number of patients to completeour clinical trials***

 

Our clinical trials may be suspended at any time for avariety of reasons. Completion of clinical trials depends on, among otherthings, our ability to enroll a sufficient number of patients, which is afunction of many factors, including:

 

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·                                          thetherapeutic endpoints chosen for evaluation;

 

·                                          proximityof patients to clinical sites;

 

·                                          theeligibility criteria for participation in the clinical trials;

 

·                                          thesize of the patient population required for meaningful analysis of the trialresults;

 

·                                          ourability to recruit clinical trial investigators with the appropriatecompetencies and experience;

 

·                                          ourability to obtain and maintain patient consents;

 

·                                          therisk that patients enrolled in clinical trials will drop out of the trialsbefore completion; and

 

·                                          competitionfor patients by clinical trial programs for other treatments.

 

We have in thepast experienced, and may again experience difficulties in enrolling patientsin our clinical trials, particularly due to the rate of incidence for ourtarget indications in certain populations, as well as the geographicallocations we have selected for conducting our clinical trials.  Any such difficulties could increase thecosts or affect the timing or outcome of these trials and could prevent us fromcompleting these trials.

 

***We may not be successful in performing additional clinical trials inother indications***

 

If our productcandidates are approved for one or more initial indications and aresuccessfully commercialized, our strategy calls for the execution of additionalclinical trials in other indications. We may not be able to initiate suchadditional trials due to a number of factors, including the following:

 

·                                          wemay not have sufficient financial or other resources to undertake such trials;

 

·                                          wemay be unable to secure sufficient support from leading authorities orinfluential parties to build trial protocols and support for conduct of a newtrial;

 

·                                          theremay not be sufficient market size to warrant product development in other newindications; and

 

·                                          thehealth care community may believe that our products are limited in use to thealready-approved indications.

 

     Any failure to initiate additional clinical trials in other indications couldhave a material adverse effect on our business.

 

***We have limited manufacturing experience, and delays in manufacturingsufficient quantities of PI-88 and PG-11047 for preclinical and clinical trialsmay negatively impact our business and operations***

 

We believe we have sufficient supply of PI-88 tocomplete the remaining ongoing Phase 2 trial of PI-88 in Melanoma. We cannotmake any assurances that we will be able to manufacture sufficient quantitiesof PG-11047 or any of our other product candidates in a cost-effective ortimely

 

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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.

 

We will be required to enter into contractingarrangements with third parties to manufacture PG-11047 and our other productcandidates for large-scale, later-stage clinical trials. We may need to enterinto collaborative arrangements with other parties who have establishedmanufacturing capabilities, or have third parties manufacture or prepare ourproducts on a contract basis. We cannot make any assurances that we will haveaccess on acceptable terms to the necessary and substantial financing thatwould be required to scale-up production and develop effective commercialmanufacturing processes and technologies. We also cannot make any assurancesthat we will be able to enter into collaborative or contracting arrangements onacceptable terms with parties that will meet our requirements for quality,quantity and timeliness.

 

***If we are unable to independently commercialize or establish and managestrategic collaborations to develop PI-88, PG-11047 or any of our other productcandidates, we may have to reduce or delay product development and/or increaseour expenditures***

 

Our strategy for developing and commercializing ourproduct candidates includes entering into various relationships withpharmaceutical or biotechnology companies to provide us with funding and/or toperform research, clinical development, regulatory clearance, commercial scalemanufacturing, sales, marketing or distribution activities relating to PI-88,PG-11047 or some or all of our current or future product candidates. To date,we have not entered into any agreements with third parties capable of providingthose services. Establishing strategic collaborations is difficult andtime-consuming. Our discussions with potential collaborators may not lead tothe establishment of collaborations on favorable terms, if at all. If we areunable to establish collaborative arrangements, we may have to reduce or delay furtherdevelopment of PI-88, PG-11047 and our other product candidates and/or increaseour expenditures and undertake the development and commercialization activitiesat our own expense. If we elect to fund our research and development programson our own, we will need to obtain additional financing which may not beavailable on acceptable terms, or at all.

 

If we successfully establish strategic collaborations,the management of our relationship with collaborators will require significanttime and effort from our management team, coordination of our research anddevelopment programs with the research and development priorities of ourcollaborators, and effective allocation of our resources to multiple projects.We cannot be certain that these relationships will result in the successfuldevelopment or commercialization of our product candidates or the generation ofsales revenue. If we enter into strategic collaborations at an early phase ofproduct development, our success will in part depend on the performance of ourcorporate collaborators. Factors that could harm a successful collaborationinclude:

 

·                                          Collaboratorsmay delay clinical trials, underfund a clinical trial program, stop a clinicaltrial or abandon a product candidate, repeat or conduct new clinical trials orrequire a new formulation of a product candidate for clinical testing;

 

·                                          Collaboratorscould independently develop, or develop with third parties, products that couldcompete with our current and future product candidates;

 

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·                                          Collaboratorsmay not commit adequate resources to the marketing and distribution of ourproduct candidates, limiting potential revenues from the commercialization of aproduct;

 

·                                          Collaboratorsmay not pursue further development and commercialization of compounds resultingfrom collaborations or may elect not to continue or renew research anddevelopment programs;

 

·                                          Theterms of our agreements with collaborators may not be favorable to us;

 

·                                          Disputesmay arise delaying or terminating the research, development orcommercialization of our product candidates, resulting in significantlitigation or arbitration, or causing collaborators to act in their ownself-interest and not in the interest of our shareholders; and

 

·                                          Collaboratorsmay terminate their agreements with us if, for example, we fail to meet arequired milestone or observe other obligations in those agreements.

 

***Our limited oversight of contract research organizations may not besufficient to avoid significant problems with the protocols and conduct of theclinical trials.***

 

We engage third partycontract research organizations to help us with the conduct of our clinicaltrials. These organizations may not perform all of their obligations underarrangements with us. If contract research organizations and other thirdparties do not perform clinical trials in a satisfactory manner or breach theirobligations to us, the development and commercialization of our productcandidates may be delayed or precluded. We cannot control the amount and timingof resources these contract research organizations devote to our programs orproduct candidates. The failure of any of these contract research organizationsto comply with any governmental regulations would substantially harm ourdevelopment and marketing efforts and delay or prevent regulatory approval ofour product candidates. If we are unable to rely on clinical data collected byothers, we could be required to repeat, extend the duration of, or increase thesize of our clinical trials and this could significantly delaycommercialization and require significantly greater expenditures.

 

***Our efforts to discover, develop and commercialize new productcandidates beyond PI-88 and PG-11047 are at a very early stage and, therefore,these efforts are subject to a high risk of failure***

 

The process of successfully developing productcandidates is very time consuming, expensive and unpredictable. Although wehave a dedicated drug discovery group focused on identifying and developingmolecule(s) that, among others, inhibit angiogenesis by disrupting heparansulfate protein interactions as product candidates, we may not be successful inidentifying, developing or commercializing any additional new productcandidates.

 

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***If we cannot enter into new licensing arrangements, our ability todevelop a broad product portfolio could be limited***

 

A component of our business strategy is in-licensingdrug compounds developed by other commercial or academic entities. Competitionfor promising compounds is intense. If we are not able to identify additionallicensing opportunities or enter into licensing arrangements on acceptableterms, if at all, our ability to develop a diverse portfolio of productcandidates is restricted.

 

***We may require substantial additional financing in the future tosufficiently fund our operations, development efforts and research***

 

We have been unprofitable to date and expect to incurlosses over the next several years as we expand our drug discovery anddevelopment programs and preclinical testing and as we conduct clinical trialsof PI-88, PG-11047 and our other product candidates. Although our futurecapital requirements will depend on many factors, we believe that our existingcash and cash equivalents will be adequate to satisfy the requirements of ourcurrent and planned operations beyond June 2010. We cannot, however, makeany assurances that such funds will be sufficient to meet our actual operatingexpenses and capital requirements during this period. Our actual cashrequirements may vary materially from those now planned and will depend uponnumerous factors, including:

 

·                                          Thecontinued progress of our research and development programs;

 

·                                          Thetiming, scope, results and costs of preclinical studies and clinical trials;

 

·                                          Theprogress of licensing efforts;

 

·                                          Thecost, timing and outcome of regulatory submissions and approvals;

 

·                                          Determinationsas to the commercial potential of our product candidates;

 

·                                          Ourability to successfully expand our contract manufacturing services, if wechoose to do so;

 

·                                          Ourability to establish and maintain collaborative arrangements;

 

·                                          Thestatus and timing of competitive developments; and

 

·                                          Otherfactors.

 

Whilst we currently believe we have sufficient fundsto conduct all current and planned clinical trials as well as complete theresearch and development of our pharmaceutical product candidates we mayrequire additional funds to pursue regulatory clearances, prosecute and defendour intellectual property rights, establish commercial scale manufacturingfacilities, develop marketing and sales capabilities and fund operatingexpenses. We have no established bank financing arrangements, and we cannot becertain that we will be able to establish such arrangements on satisfactoryterms, or at all. We may seek such additional funding through public or privatefinancings and/or through strategic alliances or other arrangements withcorporate partners. We cannot, however, be certain that such additionalfinancing will be available from any sources on acceptable terms, or at all, orthat we will be able to establish strategic alliances or other arrangementswith corporate partners on acceptable terms, or at all. Any shortfall infunding could

 

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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.

 

***We have a history of operatinglosses and may not achieve profitability in the near future***

 

We have incurred net operating losses in each yearsince we began operations in 1989. As of June 30, 2008, we had anaccumulated deficit of approximately $119.3 million, primarily attributable toour research and development activities. We expect to incur additionaloperating losses and to increase our cumulative losses substantially as weexpand our research and development and preclinical activities and commenceadditional clinical trials of PG-11047.

 

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

 

We are a company with 41full-time employees as of June 30, 2008. Our success is highly dependenton the continued contributions of our principal management and scientificpersonnel and on our ability to develop and maintain important relationshipswith leading academic institutions and scientists. Competition amongbiotechnology and pharmaceutical companies for qualified employees is intense,and we cannot be certain that we will be able to continue to attract and retainqualified scientific and management personnel critical to our success. We alsohave relationships with leading academic and scientific collaborators whoconduct research at our request or assist us in formulating our research anddevelopment strategies. These academic and scientific collaborators are not our****employees and may have commitments to, or consulting oradvisory contracts with, other entities that may limit their availability tous.

 

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

 

We cannot make anyassurances that our products will achieve market acceptance even if they areapproved by the TGA, the FDA, and the regulatory agencies of other countries.The degree of market acceptance of our products will depend on a number offactors, including:

 

·                                          Thereceipt and timing of regulatory approvals for the uses that we are studying;

 

·                                          Theestablishment and demonstration in the medical community of the safety,clinical efficacy and cost-effectiveness of our product candidates and theirpotential advantages over existing therapeutics and technologies; and

 

·                                          Thepricing and reimbursement policies of governments and third-party payers.

 

Physicians, patients,payers or the medical community in general may be unwilling to accept, use orrecommend any of our products.

 

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

 

As a company, wecurrently have no experience in marketing, sales or distribution ofpharmaceutical products. If we develop any commercially marketablepharmaceutical products and

 

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decide to perform our****own sales and marketing activities**,**wewill require additional management, will need to hire sales and marketingpersonnel, and will require additional capital. We cannot make any assurancesthat qualified personnel will be available in adequate numbers or at areasonable cost, that additional financing will be available on acceptableterms, or at all, or that our sales staff will achieve success in theirmarketing efforts. Alternatively, we may be required to enter into marketingarrangements with other parties who have established appropriate marketing,sales and distribution capabilities. We cannot make any assurances that we willbe able to enter into marketing arrangements with any marketing partner or thatif such arrangements 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.

 

***Healthcare insurers and otherorganizations may not pay for our products, or may impose limits onreimbursement***

 

The drugs we hope todevelop may be rejected by the marketplace due to many factors, including cost.The continuing efforts of governments, insurance companies, health maintenanceorganizations and other payers of healthcare costs to contain or reducehealthcare costs may affect our future revenues and profitability and those ofour potential customers, suppliers and collaborative partners, as well as theavailability of capital. In Australia and certain foreign markets, the pricingor profitability of prescription pharmaceuticals is already subject togovernment control. We expect initiatives for similar government control atboth the state and federal level to continue in the United States. The adoptionof any such legislative or regulatory proposals could have a material adverseeffect on our potential revenues and results of operations.

 

Our ability tocommercially exploit our products successfully will depend in part on theextent 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,such as government and private health insurers, are increasingly challengingthe price 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 PG-11047, 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.

 

***Exchangerate fluctuations will continue to affect our reported results of operations***

 

Substantially all of ourrevenues are realized, and a significant portion of our operating costs areincurred, in Australian dollars. Movement in currency exchange rates willaffect cash denominated in U.S. dollars and therefore will affect our reportedresults of operations.

 

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**RISKS ASSOCIATED WITH OUR TECHNOLOGY ANDINTELLECTUAL PROPERTY**

 

***Potential technologicalchanges in our field of business create considerable uncertainty***

 

Weare engaged in the biopharmaceutical field, which is characterized by extensiveresearch efforts and rapid technological progress. New developments in researchare expected to continue at a rapid pace in both industry and academia.Research and discoveries by others may render some or all of our programs orproduct candidates uncompetitive or obsolete.

 

Our business strategy is based in part uponnew and unproven technologies to the development of pharmaceutical products forthe treatment of cancer and other serious diseases. Unforeseen problems maydevelop with these technologies or applications and it is possible thatcommercially feasible products will not ultimately be developed by us.

 

***We may not be able to keep pacewith technological change or with the advances of our competitors***

 

The biotechnology andpharmaceutical industries are subject to rapid and significant technologicalchange. Our competitors in Australia and elsewhere are numerous and include,among others, major pharmaceutical companies, large biotechnology firms,universities and other research institutions. These competitors may developtechnologies and products that are more effective than any that we aredeveloping, or which would render our technology and products obsolete ornon-competitive. Many of these competitors have greater financial and technicalresources and manufacturing and marketing capabilities than we do. In addition,many of our competitors have much more experience than we do in preclinicaltesting and human clinical trials of new or improved drugs, as well as inobtaining FDA, TGA and other regulatory approvals.

 

We know that competitorsare developing or manufacturing various technologies or products for thetreatment of diseases that we have targeted for product development. Some ofthese competitive products use therapeutic approaches that compete directlywith some of our product candidates. Our ability to further develop ourproducts may be adversely affected if any of our competitors were to succeed inobtaining regulatory approval for their competitive products sooner than wewould.

 

***Our success depends upon ourability to protect our intellectual property and our proprietary technology***

 

Our success willdepend in large part on whether we can:

 

·                                          Obtain andmaintain patents to protect our own products;

 

·                                          Obtainlicenses to relevant patented technologies of third parties;

 

·                                          Operatewithout infringing on the proprietary rights of third parties; and

 

·                                          Protect ourtrade secrets and know-how.

 

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Patent matters in biotechnology are highly uncertainand involve complex legal and factual questions. Accordingly, the availabilityand breadth of claims allowed in biotechnology and pharmaceutical patentscannot be predicted. Statutory differences in patentable subject matter maylimit the protection we can obtain on some or all of our inventions outsideAustralia or prevent us from obtaining patent protection outside Australia,either of which could have a material adverse effect on our business, financialcondition and results of operations. For example, methods of treating humansare not patentable in many countries outside Australia and the United States.Moreover, since patent applications in Australia and the United States aremaintained in secrecy until the patent is issued, and since publication ofdiscoveries in the scientific or patent literature often lags behind actualdiscoveries, we cannot be certain that we or any of our licensors were thefirst creator of inventions covered by pending patent applications or that weor our licensors were the first to file patent applications for suchinventions. Additionally, the enforceability of a patent depends on a number offactors that may vary amongst jurisdictions. These factors may include thenovelty of the invention, the requirement that the invention not be obvious inlight of prior art (including prior use or publication of the invention), theutility of the invention, and the extent to which the patent clearly describesthe best method of working the invention.

 

While we intend to seekpatent protection for our therapeutic products and technologies, we cannot becertain that any of the pending or future patent applications filed by us or onour behalf will be approved, or that we will develop additional proprietaryproducts or processes that are patentable or that we will be able to licenseany other patentable products or processes. We also cannot be certain thatothers will not independently develop similar products or processes, duplicateany of the products or processes developed or being developed by us or licensedto us, or design around the patents owned or licensed by us, or that anypatents owned or licensed by us will provide us with competitive advantages.Furthermore, we cannot be certain that patents held by third parties will notprevent the commercialization of products incorporating the technologydeveloped by us or licensed to us, or that third parties will not challenge orseek to narrow, invalidate or circumvent any of the issued, pending or futurepatents owned or licensed by us.

 

Our commercial successwill also depend, in part, on our ability to avoid infringement of patentsissued to others. If a court determines that we were infringing any third partypatents, we could be required to pay damages, alter our products or processes,obtain licenses or cease certain activities. We cannot be certain that thelicenses required under patents held by third parties would be made availableon terms acceptable to us or at all. To the extent that we are unable to obtainsuch licenses, 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, and anyof these circumstances could have a material adverse effect on our business,financial condition and results of operations.

 

We may have to resort tolitigation to enforce any patents issued or licensed to us or to determine thescope and validity of third party proprietary rights. Such litigation couldresult in substantial costs to be incurred by us and the diversion of ourefforts. We may have to participate in opposition proceedings before theAustralian Patent and Trademark Office or another foreign patent office, or ininterference proceedings declared by the United States Patent and TrademarkOffice, to determine the priority of invention for patent applications filed bycompetitors. Any such litigation, interference or opposition proceeding,regardless of outcome, could be expensive and time 

 

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consuming, and adversedeterminations in any such proceedings could prevent us from developing,manufacturing or commercializing our products and could have a material adverseeffect on our business, financial condition and results of operations.

 

In addition to patentprotection, we rely on unpatented trade secrets and know-how and proprietarytechnological innovation and expertise that are protected in part byconfidentiality 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 we are not able to protect andcontrol unpatented trade secrets, know-how and other technological innovation,we may suffer competitive harm.***

 

Inaddition to patented intellectual property, we also rely on unpatentedtechnology, trade secrets, confidential information and know-how to protect ourtechnology and maintain our competitive position. Trade secrets are difficultto protect. In order to protect proprietary technology and processes, we relyin part on confidentiality and intellectual property assignment agreements withour employees, consultants and others. These agreements may not effectivelyprevent disclosure of confidential information or result in the effectiveassignment to us of intellectual property, and may not provide an adequateremedy in the event of unauthorized disclosure of confidential information orother breaches of the agreements. In addition, others may independently discovertrade secrets and proprietary information that have been licensed to us or thatwe own, and in such case we could not assert any trade secret rights againstsuch party. Enforcing a claim that a party illegally obtained and is usingtrade secrets that have been licensed to us or that we own is difficult,expensive and time-consuming, and the outcome is unpredictable. In addition,courts outside the United States may be less willing to protect trade secrets.Costly and time-consuming litigation could be necessary to seek to enforce anddetermine the scope of our proprietary rights, and failure to obtain ormaintain trade secret protection could have a material adverse effect on ourbusiness.

 

***We do not have patentprotection in certain countries and we may not be able to effectively enforceour intellectual property rights in certain countries, which couldsignificantly erode the market for our product candidates.***

 

Weintend to seek regulatory approval to market our product candidates in a numberof foreign countries. Our product candidates are not protected by patents incertain countries, which means that competitors may be free to sell productsthat incorporate the same technology that is used in our products in thosecountries. In addition, the laws and practices in some foreign countries maynot protect intellectual property rights to the same extent as in the UnitedStates. We, or our licensors, may not be able to effectively obtain, maintainor enforce rights with respect to the intellectual property relating to ourproduct candidates in those countries. Our lack of patent protection in one ormore countries, or the inability to obtain, maintain or enforce intellectualproperty rights in one or more countries, could adversely affect our ability tocommercialize our products in those countries and could otherwise have amaterial adverse effect on our business.

 

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**RISKS ASSOCIATED WITH GOVERNMENT REGULATION**

 

***We may not be able to obtain theextensive government approvals required to bring our pharmaceutical products tomarket***

 

Our ongoing research anddevelopment activities are, and the production and marketing of our pharmaceuticalproduct candidates derived there from will be, subject to regulation bynumerous governmental authorities in Australia, principally the TGA, and by theFDA in the United States, the European Medicines Evaluation Agency (EMEA) ofthe European Union and the regulatory agencies of other countries. Prior tomarketing, any therapeutic product developed must undergo rigorous preclinicaltesting and clinical trials, as well as an extensive regulatory approvalprocess mandated by the TGA and, to the extent that any of our pharmaceuticalproducts under development are marketed abroad, by foreign regulatory agenciesincluding the FDA in the United States and the EMEA in Europe. These processescan take many years and require the expenditure of substantial resources.Delays in obtaining regulatory approvals could adversely affect the developmentand commercialization of our pharmaceutical product candidates and could have amaterial adverse impact on our business, financial condition and results ofoperations. Although we intend to make use of fast-track and abbreviatedregulatory approval programs when possible, we cannot be certain that we willbe able to obtain the clearances and approvals necessary for clinical testingor for manufacturing and marketing our pharmaceutical products candidates.

 

***Our business and operations maybe negatively impacted if we fail to comply with government regulationsapplicable to our current revenue generating business.***

 

Todate, we have derived revenues from contract manufacturing services. Ourcontract manufacturing operations include some manufacturing processes that arerequired to comply with the applicable cGMP requirements of the TGA, theAustralian Office of Gene Technology Regulator and the Australian NationalRegistration Authority (agricultural and veterinary chemicals), which governthe methods, controls, facilities and quality assurance procedures used inmanufacturing, packing and storing biological and pharmaceutical products. Inaddition, certain international markets have quality assurance andmanufacturing requirements that may be more or less rigorous than those inAustralia. Our manufacturing facilities are also subject to periodicinspections by the TGA and the Australian National Registration Authority. Anypotential failure to comply with cGMP requirements or with any otherinternational requirements could have a material adverse impact on ourbusiness, financial condition and results of operations.

 

***Changesin government legislation and policy may adversely affect us***

 

While we do notanticipate in the near future any specific material changes in governmentlegislation that may adversely affect us, any material changes in interestrate, exchange rate, relevant taxation and other legal regimes and governmentpolicies may adversely affect our operations, the use of our financialresources and the market price of our ordinary shares.

 

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**RISKS ASSOCIATED WITH OUR SHARES**

 

***Our stock price may be volatileand the U.S. trading market for our ordinary shares is limited***

 

The market price for ourordinary shares, like that of the securities of many other biotechnologycompanies, has fluctuated substantially and may continue to be highly volatilein the future. We believe that the following factors, in addition to other riskfactors described above and elsewhere in this annual report, will continue tosignificantly affect the market price of our ordinary shares:

 

·                                          The resultsof preclinical testing and clinical trials by us and our competitors;

 

·                                          Developmentsconcerning research and development, manufacturing, and marketing alliances orcollaborations by us and our competitors;

 

·                                          Announcementsof technological innovations or new commercial products by us and ourcompetitors;

 

·                                          Determinationsregarding our patent applications and those of others;

 

·                                          Publicityregarding actual or potential results relating to medicinal products underdevelopment by us and our competitors;

 

·                                          Proposedgovernmental regulations and developments in Australia, the U.S. and elsewhere;

 

·                                          Litigation;

 

·                                          Economic andother external factors; and

 

·                                          Period-to-periodfluctuations in our operating results.

 

In addition, stockmarkets have experienced extreme price and volume fluctuations. Thesefluctuations 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.

 

From time to time, therehas been limited trading volume with respect to our ordinary shares quoted onthe NASDAQ Capital Market, but we cannot make any assurances that there willcontinue to be a trading market in our ordinary shares.

 

On September 4, 2008we received a letter from the Nasdaq Stock Market notifying the Company thatfor the last 30 consecutive business days prior to September 4, the bidprice for the Company’s ordinary shares has closed below the minimum US$1.00per share requirement for continued inclusion under Nasdaq Marketplace Rule 4320(e)(2)(E)(ii) (The“Rule”).

 

The letter stated that inaccordance with the Rule the Company has 180 calendar days, or until March 3,2009 to regain compliance. To regain compliance with the minimum bid pricerequirement, Progen’s ordinary shares must meet or exceed the US$1.00 shareprice for 10 consecutive business days. If the Company does not regain compliance with the Rule by March 3,

 

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2009, Nasdaq will determine whether the company meets The NasdaqCapital Market initial listing criteria as set forth in Marketplace Rule 4310(c)3,except for the bid price requirement. If it meets the initial listing criteria,Nasdaq will notify the Company that it has been granted an additional 180calendar days compliance period. If the Company is not eligible for anadditional compliance period, Nasdaq will provide written confirmation that theCompany’s securities will be delisted from The Nasdaq Capital Market.

 

Wecannot make any assurance that the Company’s securities will continue to belisted on The Nasdaq Capital Market.

 

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

 

A number of our directorsand executive officers are non-residents of the United States, and all or asubstantial portion of the assets of such persons are located outside theUnited States. As a result, it may not be possible for investors to affectservice of process withinthe United States upon such persons or to enforce against them judgmentsobtained in U.S. courts predicated upon the civil liability provisions of thefederal securities laws of the United States. There is doubt as to theenforceability in Australia in original actions, or in actions for enforcementof judgments of U.S. courts, of civil liabilities to the extent predicated uponthe 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 willbe classified as a passive foreign investment company, or “PFIC”, for U.S.federal income tax purposes. Our status as a PFIC could result in a reductionin the after-tax return to U.S. holders of our ordinary shares and warrants andmay cause a reduction in the value of such shares. We will be classified as aPFIC for any taxable year in which (i) 75% or more of our gross income ispassive income or (ii) at least 50% of the average value of all our assetsproduce, or are held for the production of passive income. For this purpose,passive income includes interest, gains from the sale of stock, and royaltiesthat are not derived in the active conduct of a trade or business. Because wereceive interest and may recognize gains from the sale of appreciated stock,there is a risk that we will be considered a PFIC under the income testdescribed above. In addition, because of our cash position, there is a riskthat we will be considered a PFIC under the asset test described above. Whilewe believe that the PFIC rules were not intended to apply to companiessuch as us that focus on research, development and 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 the composition of our income and assets,we are not a PFIC currently or in the future. If we were classified as a PFIC,U.S. holders of our ordinary shares could be subject to greater U.S. income taxliability than might otherwise apply, imposition of U.S. income tax in advanceof when tax would otherwise apply, and detailed tax filing requirements thatwould not otherwise apply. The PFIC rules are complex and you are urged toconsult your own tax advisors regarding the possible application of the PFIC rules toyou in your particular circumstances.

 

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***As a foreign private issuer we do not have to provide you with the sameinformation as an issuer of securities based in the U.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 respectof a 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 Australian International Financial Reporting Standards withthe SEC on Form 20-F. Subject to certain exceptions, we are also requiredto immediately disclose to the Australian Securities Exchange any informationconcerning us that a reasonable person would expect to have a material effecton the price or value of our shares. This would include matters such as (i) anymajor new developments relating to our business which are not public knowledgeand may lead to a substantial movement in our share price; (ii) anychanges in our board of directors; (iii) any purchase or redemption by usof our own equity securities; (iv) interests of directors in our shares ordebentures; and (v) changes in our capital structure. We are required toprovide our semi-annual results and other material information that we disclosein Australia in the U.S. under the cover of Form 6-K. Nevertheless, thisinformation is not the same and may not be as much information as would be madeavailable to you were you investing in a U.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, under Section 404 of the Sarbanes-Oxley Act and the relatedregulations, we are required to perform an evaluation of our internal controlsover financial reporting, including management’s annual report on itsassessment of the effectiveness of internal controls over financial reportingbeginning in the 

 

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year ending June 30, 2008. Combined withour testing of key internal controls and the subsequent evaluation and testingby our independent registered public accounting firm, we expect compliance withthese requirements to be time-consuming and expensive. If we fail to completethe evaluation of our internal controls over financial reporting in time, if weidentify material weaknesses in these internal controls, we could be subject toregulatory scrutiny and decreased public confidence in our internal controls,which may adversely affect the market price of our stock.

 

***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 weare subject to different corporate requirements than a corporation organizedunder the laws of the United States. Our constituent document, or Constitution,as well as the Corporations Act 2001 set forth various rights and obligationsthat are unique to us as an Australian company. These requirements may limit orotherwise adversely affect our ability to take actions that could be beneficialto our shareholders.

 

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**ITEM 4.****                          ****INFORMATION ON THE COMPANY {tc****“”****}{tc****“****”}**

#  

## **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 ProgenPharmaceuticals Limited to better reflect the Company’s focus on the discoveryand development of 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.

 

In February 2008,the Company acquired CellGate, Inc., a Californian based oncology drugdevelopment Company. This acquisition provided the Company with a productcandidate in Phase 1 and multiple preclinical compounds.

 

For many years PI-88 hasbeen the lead product candidate in Progen’s drug development pipeline. In March 2008the Company commenced a Phase 3 human clinical trial of PI-88 in patients withpost-resection liver cancer (the PATHWAY trial). In July 2008 the Companyterminated this Phase 3 trial for commercial reasons.

 

We have incurredsignificant losses since our inception and as of June 30, 2008, ouraccumulated deficit was approximately $119.3 million. We expect to incur additionaloperating losses for the year ending June 30, 2009 on the development ofour clinical product candidate PG-11047, and preclinical activities associatedwith our preclinical product candidates. Whether we incur operating lossesbeyond June 30, 2009, and if so the extent of those losses depends uponthe outcome of the strategy announced on November 24, 2008 (see below).

 

Following thetermination of the PATHWAY trial the Company appointed independent corporateadvisory firm Beerworth and Partners Limited to assess Progen’s business andoperations and develop strategic options for review by the Board. Amongst otherthings this review suggested a significant capital return to shareholders of$50c per share amounting to $30.23 million, or 43% of Progen’s estimated cashreserves at February 2009.

 

Subsequent, on November 24,2008 the following strategy was announced:

 

·                            Thatwe will announce, within 45 days, terms of an M&A transaction able todeliver a value to shareholders in excess of a $1.10 per share. At this point,we envisage that part of 

 

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any deal would involve acapital return to shareholders.

 

·                            Shouldthis not occur, the Board will recommend that the entire capital of the Company(less liabilities and allowances for the continuing statutory and other costs)be returned to shareholders. This is a sum we currently estimate by February tobe approximately $70 million, or about $1.10 per share.

 

On December 22, 2008the Company announced the signing of an exclusive and binding MergerImplementation Agreement with Avexa Limited an Australian publicly listedbiotechnology company. Progen will propose to its shareholders a $20 millionshare buy-back option. The combined entity will have over $60 million cash attransaction closing (assuming the $20 million buy-back is fully subscribed).Shareholders from both companies will vote on the proposed merger in the first quarterof 2009. The combined entity creates a well-funded, small molecule drugdevelopment company with a balanced portfolio of oncology and infectiousdisease programs in various stages of development.

 

A copy of this announcementcan be found on Form 6-K dated December 22, 2008.

 

To date, we have fundedour operations primarily through sales of equity securities.

 

The Company’sordinary shares are listed on the Australian Securities Exchange (ASX: PGL) andon the NASDAQ Capital Market (NASDAQ: PGLA).

 

**CorporateInformation**

 

Our principalexecutive offices are located at 16 Benson Street, Toowong, Queensland 4066,Australia. Our telephone number is + 61 7 3842 3310. The address of the Company’sagent in the U.S. is Mr. Ross Kaufman, Greenberg Traurig LLP, 200 ParkAvenue, New York, New York, 10166.

 

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 {tc****“****”}**

##  

We are a globally focusedbiotechnology company committed to the discovery, development and commercializationof small molecule therapeutics primarily for the treatment of cancer.

 

The Group operates theResearch and Development business in Australia and the U.S.A. As the risks andreturns associated with the operations of each geographical segment are notmaterially different, the Group does not report separately by geographicalsegment. For segment revenue 

 

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breakout, please refer to Item 5.

 

Progen’s three cancer platforms target different aspects ofthe biology of cancer: epigenetics, angiogenesis and cell proliferation.

 

**Epigenetics**

 

Epigenetics is an exciting new area of drug research and withProgen’s strong and established epigenetics research efforts and early stagecompounds we are at the forefront of this new area of research.

 

Much of the focus in epigenetics (the process of changinggene expression) is on a group of enzymes that help control how tightly DNA iscoiled around a group of proteins called histones. Genes can only be activatedwhen key pieces of DNA are unwrapped, allowing the data to be accessed tomanufacture proteins. In cancer, the coiling of DNA can be deregulatedresulting in the silencing of important tumor suppressor genes, and the goalwith most epigenetic research is the use of drugs to control the way DNA iscoiled so that those tumor suppressor genes can be switched back on.

 

Progen and its collaborators have developed the firstpublished anti-cancer compounds that inhibit a newly identified enzyme thatplays a part in the above process, lysine specific demethylase (LSD1). Theprimary goal of our current studies is to determine if inhibition of LSD1 withour new compounds offers potential therapeutic advantages over existingstrategies targeting aberrant epigenetic gene silencing.

 

**Angiogenesis**

 

Progen’s angiogenesis products have been developed to targeta number of proteins, including VEGF and FGF-2, which bind to a complex sugarcalled heparan sulfate. PI-88 is our lead product candidate from thistechnology platform and is currently in Phase 2 clinical development. The PG500program capitalises upon Progen’s longstanding expertise in the area of heparansulfate mimetics. This program is aimed toward providing a product for clinicaldevelopment with significant enhancements to the first generation products (egPI-88) in efficacy, manufacturability and pharmacokinetic properties. Our leadcandidate, PG545, is now progressing through preclinical studies towardsubmission of an IND package with the U.S. FDA, thus allowing the commencementof human clinical trials.

 

In addition, we are currently in the early stages of aheparanase discovery research program which is aimed at the design ofselective, small molecule inhibitors of heparanase.

 

**Cell Proliferation**

 

Uncontrolledcell reproduction begins when a cell accumulates enough mutations to activatecertain growth promoting genes (oncogenes) and de-activate certain protectiongenes (suppressor genes) that are built into the genetic fingerprint of aperson. The mutated cell seems to ignore the instructions to limit its selfreplication and soon it becomes many cells and continues to grow.

 

Cellproliferation is at the crux of cancer and Progen’s cell proliferationcandidates target hyper-proliferating cells. Treatment with thesecompounds results in cessation of the natural cascade 

 

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of events involved in cell division and canpotentially induce cell death.

 

Progen’s cellproliferation platform is centered around the role of polyamines in cellularfunction. The requirement for adequate polyamine levels for cell proliferationmakes polyamine function and metabolism attractive targets for therapeuticintervention. PG-11047 is our lead product from this technology platform and iscurrently in Phase 1 clinical development. PG-11047 is a polyamine analoguethat competes with natural polyamines, and treatment with PG-11047 results inalterations to the natural cascade of events involved in cell division and maybe able to induce cell death in tumors. Although this mechanism is unique, ithas been the focus of considerable scientific interest for several years.  To date PG-11047 has shown anti-tumoractivity in animal models along with a good safety profile in human trials.Progen is progressing PG-11047 through early clinical development in parallelto conducting additional translational studies to determine the most promisingindications for PG-11047.

 

In addition to PG-11047,Progen has a large portfolio of polyamine analogues that have been testedextensively against a variety of human tumor cells. In vivo testing, which hasincluded macular degeneration, inflammatory, and vascular hyperplasia modelsand nude mouse xenografts (cancer models), has demonstrated excellent activityand minimal toxicity. It is clear that each individual polyamine analog hasunique characteristics associated with it in regard to spectrum of activity,potential toxicities, metabolism, and selectivity. Analogs that are extremelywell tolerated and have a broad spectrum of activity have been identified.

 

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**Products**

 

The followingtable lists the Company’s products currently under development:

 
| **Product**                   | ** ** | **Principal uses** | ** ** | **Status**                   | ** ** | **Next Significant Milestone**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-------------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| PI-88                         |       | Cancer                  |       | Phase 2 clinical development |       | ·                  Regional  license agreement(s)

 

·     Completion of Phase 2  Melanoma trial, expected in 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| PG-11047                      |       | Cancer                  |       | Phase 1 clinical development |       | ·     Completion of the Phase 1 mono-therapy trial and completion of the  Phase 1 combination trial of PG11047 with 7 other anti-cancer therapies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| PG500 Series                  |       | Cancer and inflammation |       | Preclinical                  |       | ·                  Conduct IND enabling  studies including:

-                 safety studies to determine the safety  profile and future human dosing of PG545

-                 scale-up manufacture

-                 bioassay development

·                  Progress back-up compounds  to PG545. |
| Epigenetics Discovery Program |       | Cancer                  |       | Discovery                    |       | ·     Continue to screen new compounds against LSD1 and expand the chemical  series in development.

·     Progress representative compounds through early animal studies to  determine their anti-tumor activity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Heparanase Discovery Program  |       | Cancer and inflammation |       | Discovery                    |       | Progress screening program of small  molecules against the target heparanase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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**PI-88**

 

Untilthe termination in July 2008 of the PATHWAY trial PI-88 was our leadproduct candidate. PI-88, is a carbohydrate-based small-molecule which iscurrently undergoing Phase 2 clinical development in patients with advancedMelanoma. PI-88 is believed to work via two mechanisms. First, it inhibits theenzyme heparanase, which plays an important role in tumor spread and invasionthrough surrounding tissues. Tumors must ordinarily degrade the basementmembrane and extracellular matrix of surrounding tissues in order to grow andheparanase is an enzyme that facilitates this process. By inhibiting thisdegradation process, PI-88 reduces the ability of tumors to expand and spread.Second, PI-88 exerts an anti-angiogenic effect by inhibiting the interactionbetween growth factors, heparan sulfate and cellular receptors. As tumors grow,they require additional blood supply to provide oxygen and nutrients. Thegeneration of these new blood vessels to supply additional blood supply is aprocess known as angiogenesis, and it is controlled in part by proteins such asVascular Endothelial Growth Factor, or VEGF, and Fibroblast Growth Factor, orFGF-1 and FGF-2, binding to their receptors. PI-88 competitively links to thebinding domain of these growth factors, limiting their ability to bind toheparan sulfate and their receptors. Angiogenesis has been widely validated asan important target in the development of novel anti-cancer therapies; however,PI-88, a First-in-Class heparanase inhibitor, employs a unique mechanismto target angiogenesis.

 

Followingthe termination of the PATHWAY trial the Company’s goal is to commercializePI-88 through one or more regional license agreements, whereby the licenseetakes on the further development and commercialization of PI-88 in that region.

 

*PI-88 Clinical Development Program*

 

All clinical trialsof PI-88 have been conducted under an active Investigational New DrugApplication or IND with the FDA. In the preclinical and clinical studiesexecuted to date, PI-88 has shown an acceptable safety and tolerability profilein clinical trials. PI-88 is also showing signs of clinical efficacy in PI-88’smultinational clinical development program. Most oncology drugs are designed tobe toxic to the cancer, as their name – cytotoxics – indicates. These drugs aredesigned to eradicate tumor cells, often with adverse consequences fornon-cancerous cells as well. Historically, the efficacy of cytotoxic compoundswas measured by assessments such as the degree to which tumors shrink. PI-88belongs to the relatively new class of cytostatic drugs. As the name implies,cytostatic drugs are designed to keep the disease stable, so the efficacy ofthese cytostatic drugs is measured by assessments such as time to diseaserecurrence, disease progression, time of stable disease, disease free survival,and overall survival.

 

A Phase 3 trial of PI-88 in post resection liver cancer was commenced inMarch 2008. The Company subsequently terminated this trial in July 2008for commercial reasons. We continue to run a Phase 2 trial of PI-88 in patients with advancedMelanoma in Australia and the U.S., under an active IND with the FDA.

 

*Ongoing Phase 2 clinical trial of PI-88*

 

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 

 

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combination with DTIC (dacarbazine) is being investigated. DTIC is achemotherapy drug used as standard first-line treatment for patients with newlydiagnosed metastatic melanoma and the goal of the study is to determine whetherPI-88 can increase efficacy in combination with DTIC. The approvedanti-angiogenic drug, Avastin® (bevacizumab), has been shown to enhanceefficacy in combination with chemotherapy in patients with various solidtumors, including bowel cancer, lung cancer and breast cancer. The PI-88 Phase2 trial in combination with DTIC is being conducted at seven sites in Australiaand at three sites in U.S. 114 evaluable patients with metastatic melanoma areplanned for recruitment into the study. The recruitment for the lead-in stage of this trial has been completed.The lead-in stage was to assess safety of the combination while the randomizedstage will assess the benefit of the addition of PI-88 to DTIC. We anticipatereporting on this trial in 2009.

 

*CommercializationStrategy for PI-88*

 

We have retainedworldwide commercial rights to PI-88. Following the termination of the PATHWAYtrial we continue to seek regional licensing opportunities. It is currentlyenvisaged that regional licensees will be responsible for the ongoingdevelopment and commercialization of PI-88 in the specific region pertaining totheir license.

 

Progen has determined that the current phase 2 PI-88 melanoma trial,will be completed but no further development in melanoma by Progen isanticipated at this stage.

 

**PG-11047**

 

PG-11047is the most advanced compound acquired through the acquisition of CellGate, Inc.in February 2008.

 

PG-11047, which is currently in Phase 1 clinicaltrials, is our first produced candidate from the Company’s cell proliferationresearch platform. It is hoped treatment with PG11047 resultsin alterations to the natural cascade of events involved in celldivision and induces cell death in tumors.

 

*PG-11047Clinical Development Program*

 

Progen is taking PG-11047 through early clinicaldevelopment in parallel to conducting additional translational studies todetermine the most promising cancer indications for Phase 2 developmentand beyond.

 

Two Phase I studiesinvolving PG-11047 are being conducted simultaneously. Both trials wereoriginally instigated by CellGate, Inc. Following the acquisition ofCellGate, Inc. Progen has re-initiated both trials. The first trial at theUniversity of Chicago is designed to evaluate the safety PG-11047 in advancedcancer patients that have failed all other treatment options or that have fewtreatment options open to them. To date the trial has enrolled approximately 40patients and has shown little evidence of toxicity. The doses used to date inthis study are significantly higher than previous studies with other polyamineanalogues, which may imply that PG-11047 will be better tolerated than previouscompounds. Progen expects that this trial will be completed within 12 months.

 

The second trial Phase Itrial is assessing the safety and efficacy of treating patients with PG-11047in combination with other approved cancer therapies: Gemzar, Taxotere, Avastin,Tarceva, 

 

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cisplatin, Sutent and 5-fluoracil. This trial will provide us withsafety and dosing data to support a Phase 2 clinical program. To date thistrial has enrolled approximately 80 patients.

 

Prior to the acquisition ofCellGate by Progen CellGate had conducted the following clinical trials ofPG-11047 (CGC-11047):

 
| **Study** | ** ** | **Phase & Indication** | ** ** | **Number of Patients** | ** ** |
|-----------|------------|--------------------------------------|------------|----------------------------------|------------|
| 47-02-001 |       | Phase 2 Prostate cancer              |       | 23                               |       |
| SL-002    |       | Phase 1 Lymphoma                     |       | 14                               |       |
| 47-MD-001 |       | Phase 1 AMD                          |       | 16                               |       |
| 47-MD-002 |       | Phase 2 AMD                          |       | 43                               |       |

 

Patient recruitment on allthe above studies was either completed or halted by CellGate. Progen continuesto collect and analyse the available data from these clinical trials.

 

**PI-166**

 

Aspart of the same strategic review that resulted in the termination of the PI-88PATHWAY trial, the Company has also decided to terminate further development ofits phase 1 compound PI-166, based on a recent commercial assessment of themarket and the approval of Nexavar® in this indication.

 

PI-166,a novel combination of an active small organic chemical molecule and a deliveryvehicle that directs the active drug constituent at the tumor site, was beingdeveloped for potential application in the treatment of advanced hepatocellularcarcinoma (primary liver cancer).

 

*PI-166Clinical Development Program*

 

A Phase 1 clinical trial with PI-166 was commenced inAustralia in 2003. The primary objective of this trial was to investigate thesafety and tolerability of escalating doses of PI-166 in patients with advancedstage primary liver cancer where surgical intervention is no longer an option(unresectable). Based on interim data to date, no drug-related side effects ofPI-166 have been observed in patients enrolled in the trial. This trial wasterminated as a result of the strategic review conducted in July 2008.

 

**PG500Series *{tc “”}***

 

Through the Company’sinternal drug discovery research program we have identified a portfolio oftherapeutic targets that play key roles in cancer, and potentially in otherserious diseases.

 

This series of compoundshave been shown to inhibitnew blood vessel formation in several *in vitro*modelsof angiogenesis. Data from these models show that multiple PG500 compounds,decrease or prevent human endothelial cell (HUVEC) proliferative responses togrowth factors including fibroblast growth factors 1 and 2 (FGF-1, FGF-2) andto vascular endothelial cell growth factor (VEGF). Blocking these interactionsinhibits the angiogenesis and metastasis processes critical in tumor growth andprogression.

 

These compounds have also been shown to prevent newblood vessel formation in the rat 

 

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aortic assay. In animal models of melanoma (B16F1 syngeneic mousemodel) and human colorectal cancer (HT29 xenograft model), these compounds havebeen shown to inhibit tumor progression.

 

Through a target productprofile approach incorporating aspects such as efficacy, pharmacokinetics,toxicology and ease of manufacture we have identified PG545 as the leadcompound. Further preclinical efficacy and toxicity development work continueswith PG545 and two backup compounds prior to commencing formal toxicity studiesand pursue an IND with the U.S. FDA leading to clinical development.

 

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.

 

**DiscoveryPrograms**

 

We****maintainefforts in two drug discovery programs:

 

1.                  Heparanasediscovery program. This program is targeted towards the identification ofmolecules that selectively inhibit the enzyme heparanase.

2.                  Epigenetics discoveryprogram. The primary goal of ourcurrent studies is to determine if inhibition of LSD1 with our new compoundsoffers potential therapeutic advantages over existing strategies targetingaberrant epigenetic gene silencing.

 

Theobjective of these programs is to replenish and to diversify the Company’sproduct development portfolio by creating a robust drug pipeline.

 

**Manufacturing**

 

PharmaSynth Pty Ltd, asubsidiary of the Company, operates a current good manufacturing practice, orcGMP, certified pilot manufacturing facility that provides contractmanufacturing services to the biotechnology industry, earning revenues on a feefor service basis. Contract and consulting services revenues constituted 100%of our consolidated sales revenue in each of the fiscal years ended June 30,2006, 2007, and 2008, respectively.

 

On July 2, 2008, thisdivision was transferred into a wholly-owned subsidiary, PharmaSynth Pty Ltd(PharmaSynth). PharmaSynth’s business is the provision of contractpharmaceutical manufacturing development services and manufacture of materialfor phase 1 to phase 3 clinical trials.

 

OnNovember 17, 2008 Progen announced that PharmaSynth is for sale. Thesale process is ongoing.

 

**GovernmentRegulation**

 

**General**

 

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

 

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whichsuch regulation applies to us will vary depending on the nature of any productswhich may be developed by us. We anticipate that many, if not all, of our proposedproducts will require regulatory approval by governmental agencies prior tocommercialization. In particular, human therapeutic products are subject torigorous preclinical and clinical testing and other approval procedures of theFDA and similar regulatory authorities in European and other countries. Variousgovernmental statutes and regulations also govern or influence testing,manufacturing, safety, labeling, storage and recordkeeping related to suchproducts and their marketing. The process of obtaining these approvals and thesubsequent compliance with appropriate statutes and regulations require theexpenditure of substantial time and money, and there can be no guarantee thatapprovals will be 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.{**tc “”}**

 

**Manufacturing**

 

The manufacturingfacility, run by our wholly-owned subsidiary PharmaSynth Pty Ltd, is licensedby the Australian Therapeutic Goods Administration for the manufacture ofbiological-based starting materials for human therapeutics to cGMP and by theAustralian Office of Gene Technology Regulator for the manufacture of largescale genetically modified organisms. In addition, certain international marketshave quality assurance and manufacturing requirements that may be more or lessrigorous than those in Australia. Our manufacturing facilities are also subjectto regular inspections by the TGA. We cannot make any assurances that we willcontinue to be in compliance with cGMP requirements. Failure to comply withcGMP requirements or with any other international requirements could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**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 the expenditureof substantial resources. Any failure to obtain regulatory approval or anydelay in obtaining such approvals could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

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*AustralianGovernment Regulation*

 

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

 

·                                          Preclinicallaboratory and animal testing;

 

·                                          Submission tothe TGA of a clinical trial notification, or CTN, or a clinical trialexemption, or CTX, application for human trials;

 

·                                          Submission ofan investigators’ brochure and clinical protocols to the independent ethicscommittee, or IEC, of each institution at which the trial is to be conducted;

 

·                                          Adequate andwell-controlled clinical trials to demonstrate the safety and efficacy of theproduct;

 

·                                          Developmentof a Drug Master File, which demonstrates that the manufacture of the productconforms to GMP guidelines;

 

·                                          Submission ofthe manufacturing, preclinical and clinical data to the TGA; and

 

·                                          Approval bythe TGA for inclusion in the Australian Register 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 by the TGA is necessary beforeclinical trials can commence. An IEC is a review committee at each institutionat which a study is conducted and is set up under guidelines of the AustralianNational Health and Medical Research Council. The role of an IEC is to reviewproposals for clinical trials, and approve and subsequently monitor theclinical trials.  The IEC will consider,among other things, ethical factors and the safety of human subjects. We cannotmake any assurances that submission to the applicable IECs and the TGA willresult in authorization to commence clinical trials.

 

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

 

·                                          Phase1 clinical trials that involve the initial introduction of the drug into humansubjects and the exploration of its safety (adverse effects), dosage tolerance,absorption, metabolism, excretion and pharmacodynamics;

 

·                                          Phase2 clinical trials that (i) evaluate the efficacy of the drug for specific,targeted indications, (ii) determine dosage tolerance and optimal dosage,and (iii) identify 

 

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possibleadverse effects and safety risks. Phase 2 trials usually involve studies in alimited patient population; and

 

·                                          Phase3 clinical trials that generally further evaluate clinical efficacy and furthertest for safety within an expanded patient population sufficient to providestatistically significant data.

 

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.

 

All ongoing PG-11047 patient clinical trials are beingconducted under an active IND application with the FDA.

 

The Phase 1clinical trial with PI-166 in patients with unresectable primary liver cancerwas being conducted under a separate CTN application with the TGA.

 

In order to obtainAustralian marketing approval for a drug, the results of the preclinicalstudies and clinical trials, together with detailed information on themanufacture and composition of the product, are submitted to the TGA with arequest for registration of the product in the Australian Register of TherapeuticGoods. The TGA may delay approval if applicable regulatory criteria are notsatisfied, require additional testing or information, and/or requirepost-marketing testing and surveillance to monitor the safety or efficacy of aproduct. We cannot make any assurances that approval by the TGA will be grantedon a timely basis, if at all. Also, if regulatory approval of a product isgranted, such approval may entail limitations on the indicated uses for whichsuch 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 some 

 

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cases,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 themanufacturing facility is in GMP compliance. The FDA may delay an NDA ifapplicable regulatory 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 FDA approvalof any NDA submitted by us will be granted on a timely basis, if at all. Also,if regulatory approval of a product is granted, such approval may entaillimitations 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 a meaningfultherapeutic benefit to patients over existing treatments. Sponsors of suchproducts may request to meet with the FDA-reviewing officials early in the drugdevelopment process to review and reach agreement on the design of necessarypreclinical and clinical studies. This designation is commonly known as FastTrack. The FDA has awarded PI-88 Fast Track designation for the treatment ofpost-resection liver cancer.

 

**Patents**

 

Our success will depend in large part on whether wecan:

 

·                                          Obtainpatents to protect our own products;

 

·                                          Obtainlicenses to the patented technologies of third parties;

 

·                                          Operatewithout infringing on the proprietary rights of third parties; and

 

·                                          Protect ourtrade 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.”

 

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 

 

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applicationsfor discoveries made by our scientists, as well as those that we make inconjunction with our scientific collaborators and strategic partners.

 

The most materialof these patents and patent applications being:

 

1.               PI-88 – Compositionof matter and method of use patent families have been granted in countriesincluding the U.S., Australia, Korea, Taiwan, China, South Africa and NewZealand. Further, the PI-88 composition of matter patent application has beenaccepted in Canada and filed in countries including Europe and Japan. The PI-88composition of matter patent expires in 2016. Under laws such as the U.S.Waxman Hatch law, extensions for PI-88 patents are possible in some countriesand we intend to maximize the opportunities to pursue such patent extensions.

 

2.               PG-11047**–**There are two granted US composition ofmatter and method of use patents claiming compounds within a family ofpolyamines with defined formulae, including PG-11047. These patents have alsobeen issued in Europe and are pending in other jurisdictions.

 

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 opposition proceeding, regardless of outcome, could beexpensive and time consuming, and adverse 

 

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determinationsin any such proceedings could have a material adverse effect on our business,financial condition and results of operations.

 

**Licenses**

 

*PI-88.*We have an exclusiveworldwide license from the Australian National University in Canberra,Australia, to five families of patents and patent applications relating toPI-88, our sulfated oligosaccharide heparanase inhibitor. Our license rightsterminate on March 10, 2028. Our license with the Australian National Universityrequires us to pay the University a portion of PI-88 related payments that wereceive including royalties on sales of PI-88 as well as on any fees we receivefrom sublicensing this technology. In addition we are the assignee to a sixthpatent application.

 

*PG-11047.*We acquiredPG-11047 through the acquisition of CellGate, Inc. We have ongoingmilestone payments to make to CellGate, Inc. shareholders upon theachievement of certain clinical and regulatory milestones in respect of theCellGate acquired intellectual property. These milestone payments are one-offpayments that become due on the first occurrence of the milestone by any of theCellGate acquired intellectual property. As PG-11047 is the lead compoundacquired in the acquisition of CellGate, Inc. and it is likely to be theon-going development of this compound that triggers these milestone payments.

 

*PI-166*.We had an exclusive worldwide license from the University of New South Wales inSydney, Australia, to PI-166, a novel drug and delivery technology that is apotential new therapy for the treatment of hepatocellular carcinoma (primaryliver cancer). We terminated these license rights following the Company’sdecision in July 2008 to terminate the further development of PI-166.

 

**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 our employees,advisors and consultants. We cannot make any assurances that these agreementswill not be breached, that we will have adequate remedies for any breach, orthat our unpatented proprietary intellectual property will not otherwise becomeknown or independently discovered by competitors. We also cannot make anyassurances that persons not bound by an invention assignment agreement will notdevelop relevant inventions.

 

**Competition{tc“”}**

** **

*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 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.

 

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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 a considerabledegree on the continuing availability of capital to us, as well as our abilityto recruit and retain highly qualified scientific personnel and consultants,and to compete with the established manufacturing and marketing capabilities ofour competitors.  Competition amongproducts will be determined by, among other things, efficacy, safety,convenience, reliability, price and patent position.

 

*ContractManufacturing*

 

The clients of ourcontract manufacturing business, PharmaSynth Pty Ltd, are mostly from theAustralasia region with a limited number also from the United States. Ourability to compete with our competitors will depend on our ability to remaincost competitive and to recruit and retain qualified personnel.

 

## **Item 4.C.        Organizational Structure**

##  

## Progen PharmaceuticalsLimited acts as a operating holding company of a group consisting of itsdirectly held subsidiaries. Progen Pharmaceuticals Limited has the followingsubsidiaries:

 
| ** **                         | ** ** | **% Held** | ** ** | **Status** | ** ** | **Country of   Incorporation** | ** ** |
|------------------------------------|------------|-----------------|------------|------------|------------|------------------------------------------|------------|
| PharmaSynth Pty  Ltd               |       | 100             |       | trading    |       | Australia                                |       |
| Progen  Pharmaceuticals, Inc. |       | 100             |       | trading    |       | U.S.A. (Delaware)                        |       |

##  

## On July 2, 2008 theGroup’s manufacturing division was transferred into a wholly owned subsidiary,PharmaSynth Pty Ltd (PharmaSynth). PharmaSynth will focus on the provision ofcontract pharmaceutical manufacturing services.

##  

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

##  

The Company leasesits principal offices at Toowong, a suburb of Brisbane, Queensland, Australia.

 

ProgenPharmaceuticals, Inc, a subsidiary of the Company, leases offices at 3 TwinDolphin Drive, Redwood City, California, U.S.A.

 

 PharmaSynth Pty Ltd, a subsidiary of theCompany, leases an 11,200 square foot fully-integrated pharmaceutical rawmaterial manufacturing facility in Darra, also a suburb of Brisbane,Queensland, Australia. This manufacturing facility has the capability todevelop and manufacture 

 

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therapeuticproducts for worldwide markets and consists of 15 modular laboratories, eachwith a designated function.

 

This facility isused to manufacture a range of biological products, including until recentlythe PI-88 active ingredient and preparation of PI-166 for preclinical andclinical trials. It is equipped for the genetic manipulation ofmicro-organisms, cell culture, small and large-scale fermentation ofmicro-organisms, purification and downstream processing, freeze-drying, andsterile packing and filling.

 

This 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 leaseagreement on our corporate offices is for a five year period beginning December 15,2008 with an option to lease for a further five years. Rental is approximately$236,000 per annum, subject to an annual increase based on the movement in theconsumer price index or 4%, whichever is higher.

 

The lease agreementon Progen Pharmaceutical, Inc.’s offices expires on 31 March 2009. Wecurrently pay rental of US$12,588 per month for these premises.

 

The leaseagreement on PharmaSynth Pty Ltd’s manufacturing facility expires in March 2009,we pay a current rental of approximately $129,000 per annum, subject to annualreview, based on the movement in the consumer price index. We have an option toextend this lease for a further two years.

 

**ITEM 4A.       UNRESOLVED STAFF COMMENTS**

 

None.{tc “”}

 

**ITEM 5.          OPERATING AND FINANCIAL REVIEW ANDPROSPECTS{tc “”}**

#  

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 

 

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annualreport.

 

With the Companycurrently assessing merger and acquisition opportunities the operating resultsare expected to change significantly from those reported in prior years and asdescribed below.

 

**Overview**

** **

We have incurredsignificant losses since our inception and as of June 30, 2008, ouraccumulated deficit was approximately $119.3 million. We devote a substantialportion of our financial resources to fund the development of our two cancerproduct candidates and our drug discovery research efforts. Whether we incuroperating losses for the financial year June 30, 2009 and beyond, and ifso the extent of those losses depends upon the outcome of the strategyannounced on November 24, 2008 (see below).

 

Our operations have historically been financed by theissuance of capital stock because it is generally difficult to fundpharmaceutical research via borrowings due to the lack of revenues to servicedebt and the significant inherent uncertainty as to results of this researchand the timing of those results.

 

**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 International Financial Reporting Standards. 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 accountingpolicies do not require difficult, subjective or highly complex judgments andtherefore our reported amounts are not subject to material variation based onchanges in assumptions. Our significant accounting policies are described inNote 2 to the financial statements.

 

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

##  

***Yearsended June 30, 2008, 2007 and 2006***

 

The functionalcurrency for the Company’s operations is the Australian dollar.

 

The consolidated operatingresult for the year ended June 30, 2008 was a loss of $26.1 million, beingan increase of 16.5% over the prior year loss of $22.5 million. The overall operating result for the yearended June 30, 2007 was a loss of $22.5 million, being an increase of195.1% over the 2006 fiscal year loss of $7.6 million.

 

*Revenue from Operations*

 

Our consolidated revenuefrom continuing operations for fiscal 2006, 2007 and 2008 is as follows (in AUDthousands):

 

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| ** **                                    | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenue from  manufacturing services          |       | 905                                     |       | 920 |   | 1,086 |   |
| Interest income                               |       | 1,103                                   |       | 1,746 |   | 5,392 |   |
| **Total  revenue from continuing operations** | ** ** | **$**                                   | **2,008**  | ** ** | **$** | **2,666** | ** ** | **$** | **6,478** | ** ** |
|                                               |            |                                         |            |  |  |  |  |  |  |  |

 

For the fiscalyear ended June 30, 2008 revenues from manufacturing services increased18.0% to $1.1 million due to a manufacturing contract awarded in the 2007fiscal year being mostly invoiced in the 2008 fiscal year.

 

For the fiscalyear ended June 30, 2007 revenues from manufacturing services increased$15,000 to $920,000 an increase of 1.7% from the prior year. This is primarilydue to several new manufacturing contracts being undertaken during the courseof the year.

 

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 a net $92.2 million from the sale of its equity during fiscal 2007. Thissignificantly increased the total funds available to invest in fiscal year2008. As a result of these higher average cash balances during the year and anincrease in interest rates, interest income received increased 208.8% to $5.4million.

 

*Researchand Development Expenses*

 

Our consolidatedresearch and development expenses for compounds under development and discoveryprograms are as follows (in AUD thousands):

 
| ** **                                                  | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                | ** ** | **2007** | ** ** | **2008** | ** ** |
| PI-88                                                       |       | $                                       | 1,547      |   | $ | 4,125 |   | $ | 11,263 |   |
| PI-166                                                      |       | 63                                      |       | 42 |   | 127 |   |
| PG-11047                                                    |       | —                                  |       | — |   | 475 |   |
| PG500  Series and Heparanase discovery programPG 11047 |       | 1,672                                   |       | 2,100 |   | 2,850 |   |
| Epigenetics  discovery program                              |       | —                                  |       | — |   | 814 |   |
| General research  and development expenses                  |       | 932                                     |       | 725 |   | 616 |   |
| **Total  research and development expenses**                | ** ** | **$**                                   | **4,214**  | ** ** | **$** | **6,992** | ** ** | **$** | **16,145** | ** ** |

 

In fiscal year 2008 expenditure on our research and developmentinitiatives increased year on year by 130.9% to $16.1 million due mainly to thefollowing:

 

·                                          Expenditurestotaling $9.8 million (2007: $921,000) being incurred on the PI-88 PATHWAYtrial.

 

·                                          Expenditures incurred on the CellGate, Inc.acquired technologies including $475,000 on the PG-11047 phase 1 clinicalprogram and $814,000 on the epigenetics discovery program.

 

In fiscal year 2008 we expended $1.0 million on the ongoing PI-88 Phase2 Melanoma trial (2007: $1.0 million).

 

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In fiscal 2007 theinvestment in our research and development initiatives increased 66% from theprior year to $7.0 million primarily due to a 166.6% 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 completionof long-term PI-88 animal toxicity studies. These studies commenced in theprior year, the incremental expenditure incurred in the 2007 fiscal yeartotaled $903,000.

 

·                  Expenditurestotaling $921,000 being incurred in planning for the Phase 3 development ofPI-88 in post-resection liver cancer including payments to consultants advisingon study protocol and the transfer of the later stages of PI-88’s manufacturingprocess to a FDA cGMP facility.

 

·                  Expenditureincurred on the Phase 2 trial of PI-88 with and without combination therapydacarbazine in patients with advanced melanoma increased $567,000 as a resultof increased patient recruitment and the $300,000 reimbursement to Medigen ofexpenditures made by Medigen in relation to this trial.

 

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

 

·                  Expenditure onour PI-88 Phase 2 mono-therapy trial with patients with advance melanomadecreasing $362,000 as this trial completed during the prior reporting period;

 

·                  Expenditure onthe PI-88 Phase 2 mono-therapy trial with patients with advanced melanomadecreasing $183,000 as patient recruitment concluded in February 2006.

 

As announced on July 23,2008 the Company has terminated the further development of PI-88 beyond thecompletion of the PI-88 Phase 2 Melanoma trial and also announced the terminationof further development of the phase 1 compound, PI-166.

 

Our lead drugcandidates, PI-88 and PG-11047 are currently in Phase 2 and Phase 1 clinicaltrials respectively. Many drugs in human clinical trials fail to demonstratethe desired safety and efficacy characteristics. Even if our drugs progresssuccessfully through initial human testing, they may fail in later stages ofdevelopment. Regulatory agencies, including the FDA and TGA, regulate manyaspects of a product candidate’s life cycle, including research and developmentand pre-clinical and clinical testing. We or the regulatory authorities maysuspend clinical trials at any time on the basis that the participants arebeing exposed to unacceptable health risks. Completion of clinical trials dependson, among other things, the number of patients available for enrollment in aparticular trial, which is a function of many factors, including theavailability and proximity of patients with the relevant condition. We rely onthird parties to conduct clinical trials, which may result in delays andfailure to complete trials if the third parties fail to perform or meetapplicable standards. Our drug discovery efforts are still in the researchphase and have not yet commenced pre-clinical development, which means theyhave not yet been tested on humans. We will need to commit significant time andresources to develop these product candidates.

 

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Our products will only be successful if:

 

·                  our product candidates are developed to a stage that will enable us tocommercialize them or sell related marketing rights to pharmaceuticalcompanies;

 

·                  we are able to commercialize product candidates in clinical developmentor sell the marketing rights to third parties; and

 

·                  our product candidates, if developed, are approved.

 

We depend on the successful completion of these goalsin order to generate significant revenues. We also enter into collaborationagreements for the development and commercialization of our product candidates.We cannot control the amount and timing of resources our collaborators devoteto product candidates, which may also result in delays in the development ormarketing of our products.

 

Because of these risks and uncertainties, we cannotaccurately predict when or whether we will successfully complete thedevelopment of our product candidates or the ultimate product development cost.

 

Without revenue generated from commercial sales, weanticipate that funding to support our ongoing research, development andgeneral operations will primarily come from public equity financings,collaborations, milestones and licensing opportunities from futurecollaborations.

 

*Rentals on Operating Leases*

 

Rentals on operating leases increased $47,000 or 16%in fiscal 2008 over 2007 to $342,000. This is due to CPI increase on both theProgen Pharmaceuticals Limited corporate office and Darra manufacturingfacility and the taking over of the Redwood City, California office lease byProgen Pharmaceuticals, Inc. on the acquisition of CellGate, Inc. in February 2008.

 

Rentals on operating leases increased $73,000 or 33%in fiscal 2007 over 2006 to $295,000. This is due to CPI increase in bothcorporate office and Darra manufacturing facility and a full year lease forcorporate office in fiscal 2007. We entered the lease on the corporate officepart way through fiscal 2006.

 

Rental costs on the corporate offices of ProgenPharmaceuticals Limited and Progen Pharmaceuticals, Inc. are included in *Administrative and corporate expenses*, whilst rental costsof the Darra manufacturing facility are included in *Manufacturingfacility expenses*.

 

*Administrative and corporate expenses*

 

Consolidated administrative and corporate expensesincreased $5.6 million or 103.6% in fiscal year 2008 over fiscal year 2007 to$11.1 million. This increase was primarily due to an unrealized foreign exchangeloss of $3.8 million as the Company continued to hold significant cash reservesin U.S. dollars and the Australian dollar strengthened considerably against theU.S. dollar during the 2008 fiscal year. In addition we expensed an incremental$1,328,000 during fiscal 2008 in relation to share based payments following thegrant of option to employees in September 2007. 

 

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With the acquisition ofCellGate, Inc. in February 2008 our U.S. subsidiary incurred $456,000during fiscal 2008 on corporate and administrative expenses.

 

Administrative and corporate expenses increased $1.6million or 42.0% in fiscal 2007 to $5.4 million compared with $3.8 million forfiscal 2006. This increase was primarily due to the following factors: anincrease of $96,000 in fees paid to investor relations consultants andadvisors; an increase of $373,000 in share-based payment expenses in relationto expenses share options granted to employees; an increase of $233,000 intravel and accommodation expenditure incurred primarily on activitiesassociated with planning for the PATHWAY trial and fundraising activities and$683,000 in foreign exchange loss due to appreciation of the AU dollar againstU.S. dollar.

 

*Other Expenses - Medigen Termination AgreementObligation*

 

For fiscal years 2008 and 2007 other expenses relatesolely to the payments made to Medigen Biotechnology Corporation (Medigen)under the terms of an agreement executed terminating the Medigen strategicalliance.

 

Under the terms of the strategic alliance Medigen wererequired to undertake and complete certain clinical trial of PI-88. Oncompletion of these PI-88 clinical trials, Medigen was entitled to a 15%royalty on PI-88 proceeds of commercialization received by Progen.  Both parties agreed to end the strategicalliance to allow Progen to develop and commercialize PI-88 as rapidly as possibleand with maximum flexibility.

 

In consideration for Medigen agreeing to end thestrategic alliance, and thereby foregoing their entitlement to the 15% royalty,and to compensate Medigen for their contribution to the development of PI-88,Progen agreed to make certain cash and equity based payments to Medigen and toreturn the equity investment we had in Medigen. The 2008 financial impact ofthis termination agreement amounted to $4.0 million (2007: $11.7 million).

 

There remains $2.0 million to be paid on a definedPI-88 commercialization milestone or transaction event being achieved. Thiswill be booked in a future reporting period if and when incurred.

 

*Manufacturing facility expenses*

 

The cost of running the manufacturing facility, whichon July 2, 2008 was transferred into the wholly-owned subsidiaryPharmaSynth Pty Ltd, increased $348,000 to $2.7 million in fiscal 2008following an increase of $298,000 in fiscal 2007 over fiscal 2006.

 

The fiscal year 2008 increase over fiscal year 2007was due to the payment of $87,000 in redundancy payments and $85,000 paid toconsultants in assessing our PI-88 manufacturing operations.

 

The increase in fiscal year 2007 over fiscal year 2006was due to large quantity of PI-88 consumables purchased in order tomanufacture the Phase 3 bulk-active material.

 

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Withthe launch of PharmaSynth the manufacturing business will focus on theprovision of contract pharmaceutical development services by leveraging theskills developed through PI-88 development and manufacture of material forphase 1 to phase 3 clinical trials.

 

The costs are primarily salaries and wages,manufacturing consumables and overheads associated with our Darra manufacturingfacility.

 

*Depreciation expense*

 

Depreciation expense decreased $78,000 in fiscal 2008to $423,000. Depreciation expense decreased $31,000 in fiscal 2007 from fiscal2006 to $501,000. These decreases in depreciation are due primarily to assetsbecoming fully depreciated. Depreciation expense is expected to decline furtherin fiscal 2008 as assets continue to be fully depreciated.

 

*Other Income (Expenses)*

 

We realized total net other income of $1.4 million infiscal 2008 compared with $1.1 million in fiscal 2007 and $814,000 in fiscal2006. The components of Other Income (Expenses) as shown in our statements ofincome included elsewhere in this annual report are (in AUD thousands):

 
| ** **              | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **2006**                                | ** ** | **2007** | ** ** | **2008** | ** ** |
| Grant income            |       | $                                       | 760        |   | $ | 1,073 |   | $ | 1,316 |   |
| Other income            |       | 54                                      |       | 40 |   | 54 |   |
| **Total  other income** | ** ** | **$**                                   | **814**    | ** ** | **$** | **1,113** | ** ** | **$** | **1,370** | ** ** |

 

Grant income relates to the funding we receive for ourdrug discovery program under the AusIndustry START and Commercial Ready grants.The AusIndustry START grant expired on June 30, 2005. We applied, and weregranted, another AusIndustry grant known as a Commercial Ready grant that willcontinue to partially fund our PG500 Series and Heparanase drug discoveryprograms for the three years beginning August 2005. Grant income in the2005 financial years was received under the START grant, whereas the 2006 and2007 grant income was received under the Commercial Ready grant. Both grantsare based on a 50% re-imbursement of eligible expenditure, and therefore aredirectly related to level of expenditure incurred on this program. Grant incomeincreased $243,000 in fiscal 2008 as there was an increase in eligible, orclaimable, expenditure as described above under *PG500 Series andHeparanase discovery program expenses*under the above analysis of*Research and Development Expenses*.

 

We expect grant income to decrease  in the 2009 fiscal year as the CommercialReady grant expired in August 2008 and this grant program has beendiscontinued by the Australian Federal government pending a review of allR&D incentive programs.

 

*Income Taxes*

 

As at June 30, 2008, we had net tax lossesarising in Australia of $127.8 million (2007: $100.4 million) and U.S. federaland state net operating loss carry-forwards of approximately $1.5 

 

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million and $257,000respectively. As a result as at June 30, 2008 we had a deferred tax asset(before valuation allowances) of approximately $41.8 million. The tax lossesare indefinite as to use unless it is unable to comply with the recognitioncriteria for carrying forward tax losses under Australian taxation laws. Sincerecoupment of the carried forward tax loss is uncertain, a valuation allowancehas been established to offset in full the deferred tax asset resulting in anet deferred asset of $nil.

 

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

##  

Cash and cash equivalentsheld as at June 30, 2008, 2007 and 2006 amounted to $76.7 million, $98.2million and $15.9 million respectively.

 

*Sources of Liquidity*

 

Since inception, we have financed our operationsprimarily through public and private sales of equity securities totalingapproximately $191.3 million in net proceeds. As at June 30, 2008, cashand cash equivalents totaled approximately $76.7 million and consistedprimarily of highly liquid interest bearing investments, typically bank billswith maturities of three months or less. Investments are made in accordancewith a Board approved Investment Policy. We believe that these investments donot constitute any material market risk exposure. All cash and cash equivalentsheld at June 30, 2008 were in Australian dollars and U.S. dollars.

 

We continue to hold significant cash reserves in U.S.dollars as, prior to the termination of the PATHWAY trial, we had significantU.S. dollar contracts and have a U.S. operating subsidiary, ProgenPharmaceuticals, Inc. At June 30, 2008 we held U.S. dollar denominatedcash and cash equivalents totaling US$27.5 million (2007: US$23.5 million). Inaddition we had a forward contract to purchase US$5.0 million that wasoutstanding as at June 30, 2008.

 

*Cash Flows from OperatingActivities*

 

We expended approximately$15.7 million in cash and cash equivalents during the twelve months ended June 30,2008 to finance our net operating activities. This compares to $9.1 million and$6.5 million fiscal 2007 and 2006, respectively.

 

Theincrease in cash expended in fiscal 2008 of $6.6 million is commensurate withthe $9.1 million increase in Research and Development expenditures and $1.8million in Administration expenditure (excluding the unrealized foreignexchange loss of $3.8 million) referred to above of which $4.4 million remainedunpaid and included in consolidated trade and other payables as of June 30,2008.

 

The increase of $3.3million in net cash expended on operating activities in fiscal 2007 over fiscal2006 was primarily due to receipts from customers declining $1.1 million. Thiswas the case even with an increase in revenues from operations, as $646,000 incustomer invoices were outstanding at June 30, 2007. These amounts havesince been collected in full. In addition there was a $2.8 million increase inpayments to suppliers (due to an increase in expenditures associated withplanning for our phase 3 PI-88 trial) and employees, off-set by an increase ininterest receipts of $363,000.

 

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*Cash Flows from InvestingActivities*

 

Cashoutflows from investing activities included $354,000 on the purchase of plantand equipment (2007: $254,000) and $1.1 million on costs related to the acquisitionof CellGate, Inc. The acquisition consideration was funded by cash of$360,000 and by the issue of 806,224 shares at $1.85 per share. The net cashacquired with this acquisition amounted to $930,000, of which $803,000 wasimmediately used to repay an outstanding loan.

 

*Cash Flows from FinancingActivities*

 

Net cash used infinancing activities in 2008 of $1.1 million relates to:

 

·                  transaction costs relating to an issue of shares madeprior to June 30, 2007 amounting to $275,000.

 

·                  the repayment of an outstanding loan of $803,000 heldby CellGate, Inc. immediately following the consummation of thisacquisition.

 

Net cash provided byfinancing activities in 2007 of $92.4 million relates to proceeds from thefollowing share issues:

 

·                  a private placement in December 2006 raising$18.8 million,

 

·                  a share purchase plan in January 2007 toAustralian and New Zealand resident shareholders raising $5.3 million,

 

·                  a U.S. equity offering in May 2007 raising $36.5million,

 

·                  a rights entitlement offering in June 2007raising $31.6 million, and

 

·                  the exercise of employee options raising $227,000.

 

*FundingRequirements*

 

Currentlythere are no materialcommitments for capital expenditures.

 

## As of June 30, 2008 we had outstanding expenditure commitments of$619,000, $358,000 of which are expected to be incurred in the next fiscal yearin relation to the Phase 1 clinical trial assessing the safety of PG11047 aloneand $248,000 in outstanding expenditure commitments to conclude the PI-88 Phase2 melanoma trial all of which is expected to be incurred in the next fiscalyear.

##  

Ourheparan sulfate mimetic drug discovery program is partially funded by a $3.4million AusIndustry Commercial Ready grant. As at June 30, 2008 $245,000of the Commercial Ready grant remained un-spent. This grant is due to expire inAugust 2008 and as recently announced by the Australian Federal governmentthis funding scheme has been axed. As from this date our heparan sulfatemimetic drug discovery program and preclinical development of the 500 serieswill be funded 

 

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entirelyby the Company.

 

Ourepigenetics preclinical and drug discovery efforts will be a major focus of theCompany in the coming years so as to remain competitive within this burgeoningarea of cancer drug development. We expect to invest significant time andresources in developing this technology further. However, because of theuncertainties inherent in early stage drug development we are unable toaccurately predict what these costs of development are likely to be.

 

Underthe terms of the agreement terminating the strategic alliance with MedigenBiotechnology Corporation we are obligated to pay a further $2.0 million onPI-88 achieving a specified commercial milestone or a transaction event beingachieved.

 

Futurecash requirements will depend on a number of factors, including: the scope andresults of preclinical studies and clinical trials, continued progress of ourresearch and development programs, including our in-licensing activities, ourability to generate revenues from our contract manufacture services, ourability to generate revenues from the commercialization of drug developmentefforts and the availability of other funding. Based on our current commitmentsour working capital is sufficient to meet our present requirements.

 

## As detailed belowin *Item 5.D. Trend Information*our futuredirection and operations are uncertain. Our future fundingrequirements depend upon the outcome of the November 24, 2008 announcedstrategy assessing M&A proposals which are likely to involve a capitalreturn to shareholders against returning the entire capital of the Company (less liabilities and allowances for thecontinuing statutory and other costs) to shareholders. This is a sum wecurrently estimate by February 1, 2009 to be approximately $70 million, orabout $1.10 per share.

##  

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

 

Referto *Research and Development Expenses* underItem 5.A.

 

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

##  

Whilstthe Company significantly increased its research and development expendituresduring the fiscal year 2008 a significant portion of this increase wasassociated with the PI-88 PATHWAY trial. There will be a significant decreasein PI-88 expenditures in fiscal year 2009 following the termination in July 2008of the PATHWAY trial.

 

Following the termination of the PATHWAY trial theCompany appointed independent corporate advisory firm Beerworth and PartnersLimited to assess Progen’s business and operations and develop strategicoptions for review by the Board. Amongst other things this review suggested asignificant capital return to shareholders of $50c per share amounting to$30.23 million, or 43% of Progen’s estimated cash reserves at February 2009.

 

Subsequent to this announcement at the 2008 AnnualGeneral Meeting of the Company held on November 24, 2008 the Chairmanannounced the following strategy:

 

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·                                          That we will announce, within 45 days,terms of an M&A transaction able to deliver a value to shareholders inexcess of a $1.10 per share. This will be prior to the January 14, 2009.At this point, we envisage that part of any deal would involve a capital returnto shareholders.

 

·                                          Should this not occur, the Board willrecommend that the entire capital of the Company (less liabilities andallowances for the continuing statutory and other costs) be returned toshareholders. This is a sum we currently estimate by February 1, 2009 tobe approximately $70 million, or about $1.10 per share.

 

On December 22, 2008 the Company announced the signing of anexclusive and binding Merger Implementation Agreement with Avexa Limited andAustralian publicly listed biotechnology company. Progen will propose to itsshareholders a $20 million share buy-back option. The combined entity will haveover $60 million cash at transaction closing (assuming the A$20 millionbuy-back is fully subscribed). Shareholders from both companies will vote onthe proposed merger in the first quarter of 2009. The combined entity creates awell-funded, small molecule drug development company with a balanced portfolioof oncology and infectious disease programs in various stages of development.

 

A copy of this announcement can be found on Form 6-K dated December 22,2008.

 

On November 14, 2008 the Company announced that it had received anotice requisitioning a general meeting of shareholders from shareholdersrepresenting, in total, 5.65% of the votes that may be cast at a generalmeeting. Under Australian law shareholders who in total own at least 5% of thetotal voting rights are able to requisition a meeting of members.

 

The shareholders that have requisitioned this meeting have proposed theremoval of the current directors, excluding Mr. John Lee, and theappointment of three additional board members. This group are proposing analternative strategy for the Company from that which is outlined above.

 

A copy of this notice of meeting can be found on Form 6-K dated December 10,2008.

 

**AS A RESULT OF THE ABOVE THERE IS SIGNIFICANTUNCERTAINTY AS TO THE FUTURE DIRECTION AND OPERATIONS OF THE COMPANY.**

 

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

 

We have not entered into any off-balance sheet transactions, agreementsor other contractual arrangements (including contingent obligations) with anyunconsolidated entity that have or are reasonably likely to have a current orfuture effect on our financial condition, changes in financial conditions,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

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

##  

As of June 30, 2008, we had known contractualobligations and commitments of $6.9 million. Of this amount $5.8 millionrelates to sponsored research commitments and estimates to fund the ongoingtrial of PG11047 and to complete current trials of PI-88 and PG-11047 and anestimate of costs to be incurred in winding down the PATHWAY trial. Theremaining $1.1 million relates to the following: payment of our insurancepremium ($510,000), our current operating lease obligations including the leaseof our premises ($197,000), and other commitments ($385,000) most of whichrelates to payment obligations under various consulting and advisoryagreements.

 

Under the terms of the agreement terminating thestrategic alliance with Medigen Biotechnology Corporation we are required topay Medigen $2.0 million upon PI-88 achieving a specified commercial milestone.

 

The following table sets forth our aggregatecontractual obligations for the three years following June 30, 2008 (in AUDthousands):

 
| ** **                                                         | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **Total**                                 | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** |
| **Contractual  obligations**                                       | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases                                                   |       | 197                                       |       | 197 |   | — |   |
| Sponsored  research and clinical trial obligations and commitments |       | 5,759                                     |       | 5,494 |   | 265 |   |
| Insurance  premium funding                                         |       | 510                                       |       | 510 |   | — |   |
| Other  commitments                                                 |       | 385                                       |       | 385 |   | — |   |
| **Total**                                                          | ** ** | **$**                                     | **6,851**  | ** ** | **$** | **6,586** | ** ** | **$** | **265** | ** ** |
|                                                                    |            |                                           |            |  |  |  |  |  |  |  |

 

We do not have any contractual obligations that extendbeyond the next three years.

 

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

#  

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

##  

The following table sets forth certain information asof June 30, 2008 about our directors and executive officers:

 
| **Name**                   | ** ** | **Age** | ** ** | **Position**                                                                     |
|----------------------------|------------|---------|------------|----------------------------------------------------------------------------------|
| Dr. Malvin L.  Eutick |       | 59      |       | Non-Executive Chairman  (1)                                                      |
| T. Justus Homburg          |       | 52      |       | Managing Director                                                                |
| Prof. John R. Zalcberg     |       | 56      |       | Non-Executive Director,  resigned September 4, 2008                         |
| Patrick O. Burns           |       | 71      |       | Non-Executive Director  (1), (2)                                                 |
| Stephen Chang              |       | 59      |       | Non-Executive Director  (2)                                                      |
| John Lee                   |       | 60      |       | Non-Executive Director  (1)                                                      |
| Robert Williamson          |       | 42      |       | Non-Executive Director  (2)                                                      |
| Sarah J. Meibusch          |       | 31      |       | Vice President,  Business Development                                            |
| Dr. James Garner      |       | 35      |       | Vice President, Medical  and Clinical Affairs, resigned November 12, 2008   |
| Dr. John Devlin       |       | 48      |       | Vice President,  Manufacturing Operations, made redundant September 4, 2008 |
| Linton W. P. Burns         |       | 43      |       | Chief Financial Officer  and Company Secretary, resigned December 10, 2008  |
| Dr. Laurence  Marton  |       | 64      |       | Chief Scientific  Officer                                                        |

 

----

(1)  Member of AuditCommittee

(2)  Member ofRemuneration Committee

 

**Dr. MalvinL. Eutick, Ph.D., OAM**joined Progen’s board on 10 March 1999. He was appointed Chairmanof the Board on March 4, 2008. Dr. Eutick has 25 years experience inthe medical and pharmaceutical industry including with companies such as Pfizerand Pharmacia.

 

In 1993, Dr. Eutickfounded and developed the pharmaceutical company,Phebra (formerly Pharmalab Pty Ltd), which supplies primarily hospitals inAustralia and worldwide with critical drugs used in  accident andemergency situations and the ICU. In 2000, he acquired the sterile medicaldevice company, TUTA Laboratories Pty Ltd, from a Japanese multinationaland recently coordinated its sale to  the  safety medicaland collections solutions company BMDI International (ASX:BMI).

 

Dr. Eutick wasawarded the Medal of the Order of Australia for services to the industry in1995. He has previously served as Chairman of the Australian biotechnologycompany, BioQuest Ltd and was Deputy Chairman of the Australian MuseumTrust.

 

Dr. Eutick is alsocurrently a Director of BMDi-TUTA Ltd (ASX:BMI) (appointed in March 2008)and a number of private companies involved with drug innovation and development.

 

**Mr. JustusHomburg** wasappointed Managing Director and CEO in March 2006 having joined Progen asCOO in January 2006. Mr. Homburg has had an international careerworking in the 

 

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pharmaceutical and lifesciences industries in the U.S., Australia, Europe and Asia. His experienceranges from the multi-national biotechnology giant Monsanto Company through tostart up organizations such as Chirogen.

 

Mr. Homburg spentmore than a decade at Monsanto Company (1990 – 2001) and during his seniormanagement time there he focused on new technology and businesscommercialization, technology in and out-licensing, mergers and acquisitions,joint ventures, capital raisings, and the development of international markets.His roles included Regional Business Management (Monsanto Chemicals), DivisionManagement (Growth Enterprises), and Strategic Planning (Monsanto AgriculturalProducts).

 

Prior to his businesscareer, Mr. Homburg held a faculty position at the University of Michiganand was a Fulbright Scholar. He holds an MBA from the University of Washingtonand degrees from Iowa State University, Southern Illinois University and TheUniversity of Utrecht.

 

**ProfessorJohn Zalcberg****OAM** joined Progen as a non-executive director in May 1995and resigned on September 4, 2008. In 1986, he was appointed Director ofMedical Oncology at the Heidelberg Repatriation Hospital (HRH) in Melbourne,Australia. In 1996, he became the Director for Cancer Services at the Austinand Repatriation Medical Centre. Since 1997, Professor Zalcberg has been theDirector of the Division of Haematology and Medical Oncology at the PeterMacCallum Cancer Centre and was also appointed as Chief Medical Officer in2007. He continues to practice in GI oncology and has been a Principal andClinical Investigator of numerous clinical studies.

 

In 1987, ProfessorZalcberg helped found the Lorne Cancer Conference, now recognized as one ofAustralia’s major cancer research conferences. He is also a founding member andis the current Chair of the Board of the Australasian Gastrointestinal TrialsGroup (AGITG). He is a Member of Cancer Trials Australia and past Board Memberof the NSW Cancer Institute (2003-2005). From 2000-2002 he was also Presidentof the Clinical Oncological Society of Australia.  In 2007 Professor Zalcberg was also appointedas a Member of the Victorian Policy Advisory Committee on Clinical Practice andTechnology (VPACT) and Member of the Consultative Council of the VictorianCancer Agency (VCA).

 

In 2007 received a Medalof the Order of Australia Award (OAM), for service to medicine in the field ofoncology through initiatives to assist cancer patients and their families andthrough the promotion of clinical research.

 

**Mr. PatrickBurns** wasappointed a non-executive director of Progen in March 1999. At the time hewas also a Senior Consultant to Early Stage Enterprises, a New Jersey venturecapital fund investing primarily in developing technology growth companies.

 

From 1997, Mr. Burnshas been a member of the Board of Directors of Synbiotics Corp, whichspecializes in animal health care, and Annovis Inc., a specialty chemicalscompany, and a Senior Advisor to Across Frontiers International, Inc.

 

From 1986 – 1997 he was aVice President/Principal of R&D Funding Corp, the General Partner of fourresearch and development funds of Prudential Securities, Inc., from 1991 –1997 he served as the Senior Vice President of Prudential Securities, Inc. andfrom 2005 – 2007 he was a 

 

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non-executive director ofChemGenex Pharmaceuticals Ltd (ASX: CXS).

 

In 1971, Mr. Burnsarranged Minority Equity Capital Company, Inc., a multi-million dollarVenture Capital Fund, where he was President, Chief Executive Officer and aDirector until 1985. Mr. Burns also previously practiced law in New Yorkwith Milbank, Tweed, Hadley & McCloy. He holds a BA from DartmouthCollege and an LLB (Honors) from Harvard Law School.

 

He is currently vicechairman of Euclid Systems Corp, an eye care company; chairman of StablEyes, Inc.a biotechnology company also in the eye care field; and an advisor to a numberof early stage biotechnology companies.

 

**Mr. StephenChang** is afounding director of Progen Pharmaceuticals Limited and has served as chairmanin the period from 1990 to 1994 and again since 1999 until March 2008 whenhe resigned as a Chairman and continued his service as a non-executivedirector. He served as chairman of Taiwan-based Medigen BiotechnologyCorporation during its inauguration. Mr Chang was general manager and directorof Australia Pacific Electric Cables Pty Ltd and is currently director of CapacInternational Pty Ltd. Prior to 1987 he was Technical Manager and SeniorEngineer with Taiwan Pacific Group, a large Taiwanese conglomerate specializingin the IT industry.

 

**Mr. JohnLee** joined Progenas a non-executive director in March 2008. In 1987, Mr. Lee foundedStockholder Relations, an Australian-based management consultancy specializingin corporate advisory, investor relations and corporate governance. Currently, Mr. Lee is a non-executive chairman of Portland OrthopedicsLimited (ASX: PLD) (appointed in October 2005), a non-executive chairmanof Milvella Limited (appointed in October 2007) and a non-executivedirector of TMG International Pty Ltd (appointed in May 2008).

 

Prior to foundingStockholder Relations, Mr. Lee served Woolworths Limited (ASX: WOW), asChief General Manager Corporate Services and was a member of Woolworth’sexecutive committee.

 

Mr. Lee received hisMBA from the University of Melbourne, in addition to a B Comm. andpost-graduate degree in Education. He is a Senior Associate of theFinancial Services Institute of Australia (FINSIA) and a Foundation Fellowof the Australian Institute of Company Directors.

 

**Mr. RobertWilliamson** joinedProgen’s board as a non-executive director in March 2008. Mr. Williamsonis the founder of LaSalle Venture Advisors, a consultancy servingventure-backed and public life science companies and their investors onstrategic and operational issues. He currently serves as a non-executivedirector of Pharmasset, Inc., an anti-viral therapeutics company(NASDAQ:VRUS) (appointed in August 2004).

 

Prior to founding LaSalleVenture Advisors, Mr. Williamson served as President and CEO of ArrivaPharmaceuticals, Inc., and helped the company raise $27 million in venturecapital.  Previously, Mr. Williamson was President and ChiefOperating Officer of EOS Biotechnology, Inc., (purchased by PDL BioPharma(NASDAQ: PDLI)).  Prior to this, Mr. Williamson was President andChief Operating Officer of Double Twist, Inc. (formerly Pangea Systems), agenomics start-up. Mr. Williamson began his career at The BostonConsulting Group, Inc., a global business consulting firm, where he wasnamed a Partner, and led the firm’s west coast health care practice.

 

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Mr. Williamsonreceived an MBA from the Stanford Graduate School of Business in Stanford,CA.  He obtained a B.A. in Economics from Pomona College in Claremont, CA.

 

**Sarah J.Meibusch**joinedProgen in 2003 as Business Development Manager following a similar role atPyxis Genomics, Inc., a private USA based biotechnology company. Ms. Meibuschwas promoted to Director, Business Development in June 2005 and to Vice President,Business Development in 2006. She holds a Bachelor degree in Agriculturalscience from the University of Queensland and a Master of Professional Studiesdegree from Cornell University, USA.

 

**Linton W.P. Burns**wasappointed Chief Financial Officer and Company Secretary in August 2004 andresigned on December 10, 2008 and as at the date of this report continuesto serve out his notice period. Prior to joining us, Mr. Burns spent 5years 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 and an affiliate of theChartered Secretaries of Australia.

 

**Dr. JamesGarner MA, MBA, MBBS, BSc (Hons), SAFin.**joined Progen in January 2007as Vice President, Medical and Clinical Affairs and resigned on November 12,2008.  Prior to joining us Dr. Garnerspent several yearsat Biogen Idec (NASDAQ: BIIB) as a Medical Affairs Manager for the Asia-Pacificregion. He holds a Bachelor of Sciences (with First Class Honors) fromUniversity College, London, and a Master of Arts and a Master of BusinessAdministration from the University of Queensland and a Graduate Certificate inApplied Finance and Investment from the Financial Services Institute ofAustralasia. He is a Young Fellow of the Royal Society of Medicine (UK) and amember of the Australian Pharmaceutical Physicians Association.

 

**JohnDevlin BSc Ph.D.**joined Progen in May 2007 as Vice President,Manufacturing Operations and was made redundant on September 4, 2008.Prior to joining us, Dr. Devlin ran his own consultancy company, DevchemPty Ltd, providing small Australian biotech companies with advice ondevelopment, scale up and manufacturing operation. He received both his bachelor’s degree andPh.D. in Organic chemistry from Queens University in Belfast, Northern Ireland.

 

**Dr. LaurenceMarton MD** joined Progen in February 2008 as ChiefScientific Officer. Prior to joining Progen, Dr. Marton was the ChiefScientifice Officer of CellGate and before that Chief Scientific and MedicalOfficer of SLIL Biomedical Corporation, both companies focused on the discoveryand development of novel polyamine analogs and other compounds for the treatmentof cancer and other serious diseases. Dr. Marton was previously Dean ofthe University of Wisconsin-Madison Medical School and before that Chaired theDepartment of Laboratory Medicine at the University of California, SanFrancisco. He is a leading expert with extensive experience in the fields ofcell growth and drug development. His work is focused on the use of polyaminesin treating human diseases related to aberrant cell growth, including cancerand infectious diseases.  His research has resulted in more than180 original publications, 60 scientific reviews and chapters, fourbooks, and numerous patents, and his work has been acknowledgedinternationally. Dr. Marton serves as a consultant for industry and forgovernmental and academic institutions.  He serves on the 

 

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Boardof the Foundation for Cardiovascular and Transplant Research and was appointedby the Governor of Wisconsin to the Wisconsin Technology Council.  Dr. Martonreceived his BA from Yeshiva University and his MD from the Albert EinsteinCollege of Medicine.

 

Our executive officers are appointed by, and serve atthe pleasure of, our board of directors. There are no family relationshipsamong our directors or executive officers. No director has a contractual rightto serve as a member of our board of directors.

 

A group of Progen shareholders, who in total hold morethe 5% of the Company’s voting shares, have requisitioned a general meeting ofshareholders. This meeting is scheduled to take place on January 9, 2009.The resolutions, as proposed by this group of shareholders, include the removalof all current directors, with the exception of Mr. John Lee, and theappointment of three new Board members.

 

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

##  

The following table sets forth certain informationconcerning the compensation that we paid to our directors and our five mosthighly compensated executive officers, both individually and as a group, duringthe fiscal year ended June 30, 2008:

 
| ** **                          | ** ** | ** **          | ** ** | ** **     | ** ** | ** **   | ** ** | **Share-**    | ** ** | ** **      | ** ** |
|-------------------------------------|------------|---------------------|------------|----------------|------------|--------------|------------|---------------|------------|-----------------|------------|
| ** **                          | ** ** | ** **          | ** ** | **Post**       | ** ** | ** **   | ** ** | **based**     | ** ** | ** **      | ** ** |
| ** **                          | ** ** | **Short term** | ** ** | **employment** | ** ** | ** **   | ** ** | **payment**   | ** ** | ** **      | ** ** |
| ** **                          | ** ** | ** **          | ** ** | ** **     | ** ** | **Non**      | ** ** | ** **    | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Salary**          | ** ** | **Cash**       | ** ** | **monetary** | ** ** | **Super-**    | ** ** | **Termination** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Directors**                       | ** ** | **and fees**   | ** ** | **bonus**      | ** ** | **benefits** | ** ** | **annuation** | ** ** | **payment**     | ** ** | **Options** | ** ** | **Total** | ** ** |
| ** **                          | ** ** | **$**               | ** ** | **$**          | ** ** | **$**        | ** ** | **$**         | ** ** | **$**           | ** ** | **$** | ** ** | **$** | ** ** |
| Dr. Malvin L. Eutick           |       | 67,043              |       | —         |       | —       |       | 6,034         |       | —          |       | — |   | 73,077 |   |
| Stephen Chang(1)                    |       | 258,495             |       | —         |       | —       |       | 32,167        |       | 145,000         |       | — |   | 435,662 |   |
| John Zalcberg                       |       | 55,046              |       | —         |       | —       |       | 4,954         |       | —          |       | — |   | 60,000 |   |
| Patrick O. Burns                    |       | 60,000              |       | —         |       | —       |       | —        |       | —          |       | — |   | 60,000 |   |
| John Lee                            |       | 19,450              |       | —         |       | —       |       | —        |       | —          |       | — |   | 19,450 |   |
| Robert Williamson                   |       | 19,450              |       | —         |       | —       |       | —        |       | —          |       | — |   | 19,450 |   |
| Total – Non-executive director | ** ** | **479,484**         | ** ** | **—**     | ** ** | **—**   | ** ** | **43,155**    | ** ** | **145,000**     | ** ** | **—** | ** ** | **667,639** | ** ** |

 

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(1) Resigned asexecutive chairman on March 3, 2008 but continued as a non-executivedirector.

 

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| ** **                              | ** ** | ** **          | ** ** | ** **     | ** ** | ** **   | ** ** | **Share-**    | ** ** | ** **      | ** ** |
|-----------------------------------------|------------|---------------------|------------|----------------|------------|--------------|------------|---------------|------------|-----------------|------------|
| ** **                              | ** ** | ** **          | ** ** | **Post**       | ** ** | ** **   | ** ** | **based**     | ** ** | ** **      | ** ** |
| ** **                              | ** ** | **Short term** | ** ** | **employment** | ** ** | ** **   | ** ** | **payment**   | ** ** | ** **      | ** ** |
| ** **                              | ** ** | ** **          | ** ** | ** **     | ** ** | **Non**      | ** ** | ** **    | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other key**                      | ** ** | **Salary**          | ** ** | **Cash**       | ** ** | **monetary** | ** ** | **Super-**    | ** ** | **Termination** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **management personnel**           | ** ** | **and fees**   | ** ** | **bonus**      | ** ** | **benefits** | ** ** | **annuation** | ** ** | **payment**     | ** ** | **Options** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **$**               | ** ** | **$**          | ** ** | **$**        | ** ** | **$**         | ** ** | **$**           | ** ** | **$** | ** ** | **$** | ** ** |
| T Justus Homburg                        |       | 287,703             |       | 138,608        |       | 7,386        | (1)        | 28,889        |       | —          |       | 135,259 |   | 597,845 |   |
| Linton W. P.  Burns                     |       | 190,000             |       | 68,807         |       | —       |       | 23,293        |       | —          |       | 109,609 |   | 391,709 |   |
| Dr. Anand  Gautam(2)               |       | 150,744             |       | —         |       | —       |       | 13,200        |       | 100,000         |       | 54,304 |   | 318,248 |   |
| Sarah J. Meibusch                       |       | 117,546             |       | —         |       | —       |       | 10,579        |       | —          |       | 109,609 |   | 237,734 |   |
| Dr. James  Garner                  |       | 175,000             |       | —         |       | —       |       | 15,750        |       | —          |       | 55,305 |   | 246,055 |   |
| Dr. John  Devlin                   |       | 150,000             |       | —         |       | —       |       | 13,500        |       | —          |       | 55,305 |   | 218,805 |   |
| Dr. Laurence  Marton               |       | 133,268             |       | —         |       | —       |       | 11,711        |       | —          |       | 36,073 |   | 181,052 |   |
| Total - Other  key management personnel | ** ** | **1,204,261**       | ** ** | **207,415**    | ** ** | **7,386**    | ** ** | **116,922**   | ** ** | **100,000**     | ** ** | **555,464** | ** ** | **2,191,448** | ** ** |

 

----

(1) Includes thereimbursement of motor vehicle expenses.

(2) Resigned June 2,2008.

 

(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 not established any superannuationplans.

 

(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 one fully paid ordinary share in the Company. Theestimated value of these options is calculated at the date of grant using theHull-White binomial option pricing model. The terms and conditions of theoptions are discussed in Note 13 of the financial statements.

 

## **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.

 

Further,our constitution provides that directors appointed either to fill a casualvacancy or as an addition to the existing directors hold office until the nextannual general meeting and are not to be taken into account in determining thedirectors who are to retire by rotation.

 

Mr. PBurns were re-elected at our 2006 annual general meeting of shareholders. Mr. SChang was re-elected at our 2007 annual general meeting of shareholders. Dr. M.Eutick was 

 

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re-elected at our 2008 annual general meeting ofshareholders. Mr. J. Lee and Mr. R. Williamson both being appointeddirectors since the date of our 2007 annual general meeting were electeddirectors at our 2008 annual general meeting of shareholders.

 

Notermination benefits are provided to directors other than statutorysuperannuation.

 

***Audit Committee.*** Our audit committee currently consists of Mr. P. Burns (Chair), Dr. M.Eutick, and Mr. John Lee, 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 ofthe independent auditors who report directly to the audit committee;

 

·                  The approval of all audit and non-audit engagements and fees with theindependent auditors;

 

·                  The authority to engage, without board approval, independent legalcounsel and other advisors, at the Company’s expense, as deemed necessary tocarry out its duties;

 

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

 

·                  Oversight of the adequacy and effectiveness of the Company’s internalcontrols over financial reporting and disclosure controls and procedures;

 

·                  Reviewing, prior to filing, our unaudited interim or audited annualfinancial statements and discussing the statements and reports with ourmanagement and the independent auditors, including any significant adjustments,management judgments and estimates, new accounting policies and disagreementwith management;

 

·                  Reviewing and discussing with management the Company’s interim andyear-end earnings press releases prior to the release being issued; and

 

·                  Establishing and reviewing procedures for complaints received by usregarding accounting matters.

 

***Remuneration Committee.*** Our remuneration committee currently consists of Mr. S Chang(Chair), Mr. R Williamson and Mr. P Burns, who are non-managementmembers of our board of directors. The function of our remuneration committeeincludes:

 

·                  Reviewing and, as it deems appropriate, recommending to our board ofdirectors, policies, practices and procedures relating to the compensationarrangements for management and other personnel, including the granting ofoptions under our option plans;

 

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·                  Establishing and reviewing general compensation policies with theobjective to attract and retain superior talent, reward individual performanceand achieve our financial goals; and

 

·                  Advising and consulting with our executive officers regarding managerialpersonnel and development.

 

***Service Agreements.*** With the exception of Dr. LaurenceMarton’s agreement the Company’s policy is to enter into service contracts withexecutive directors and senior executives on appointment that are unlimited interm but capable of termination on specified notice periods and that theCompany has the right to terminate the contract immediately by making paymentequal to the specified notice period as pay in lieu of notice other than formisconduct when termination is immediate. The executive directors and seniorexecutives are also entitled to receive on termination of employment theirstatutory entitlements of accrued annual leave and long service leave.

 

The service contractoutlines the components of remuneration paid to the executive directors and keymanagement personnel but does not prescribe how remuneration levels aremodified year to year.

 

The current terminationnotice periods included in the service agreements with key management personnelare detailed below.

 

·                                         **T J Homburg, Chief ExecutiveOfficer and Managing Director.** Term of agreement – unlimited, capable of terminationon 6 months notice. Payment of termination benefit, on another company orentity acquiring control of Progen if the acquiring company or entityterminates employment within 12 months of acquisition, equal to 6 months basesalary.

 

·                                         **L Burns, Chief Operating Officerand Company Secretary.** Term of agreement – unlimited, capable of termination on 12 weeksnotice. Payment of termination benefit, on another company or entity acquiringcontrol of Progen if the acquiring company or entity terminates employmentwithin 12 months of acquisition, equal to 6 months base salary. Mr. LBurns resigned from the Company on December 10, 2008 and as at the date ofthis Form 20-F he continues to serve out his notice period as ChiefOperating Officer but has resigned as Company Secretary.

 

·                                         **S Meibusch, Vice President,Business Development**.Term of agreement – unlimited, capable of termination on 12 weeks notice.Payment of termination benefit, on another company or entity acquiring controlof Progen if the acquiring company or entity terminates employment within 12months of acquisition, equal to 6 months base salary.

 

·                                         **Dr. J Garner, VicePresident, Medical & Clinical Affairs.** Term of agreement – unlimited, capable of terminationon 4 weeks notice. Payment of termination benefit on termination by theCompany, other than for misconduct, equal to 4 weeks base salary. Dr. Garnerresigned from the Company on November 12, 2008.

 

·                                         **Dr. L Marton, US-based ChiefScientific Officer.**Term of agreement – 1 year commencing February 6, 2008.

 

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

##  

Thenumber of persons, including executive directors, employed by the Company, asof June 30, 2008, 2007 and 2006, broken down by activity is shown below.

 
| ** **                     | ** ** | **As of June 30,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2008** | ** ** |
| Management and  administration |       | 13                                |       | 13 |   | 13 |   |
| Research and  development      |       | 17                                |       | 20 |   | 18 |   |
| Manufacturing                  |       | 14                                |       | 17 |   | 10 |   |
| **Total**                      | ** ** | **44**                            | ** ** | **50** | ** ** | **41** | ** ** |

 

Duringfiscal 2008 we restructured our manufacturing and drug discovery divisions(part of research and development). The restructure involved 8 redundancies inmanufacturing and 4 in drug discovery.

 

We had4 employees based in the U.S. (3 in research and development and one inmanagement and administration) as at June 30, 2008. All remainingemployees are based at either our corporate offices in Toowong, Queensland orat our research and manufacturing facility at Darra, Queensland.

 

Noneof our employees are represented by a labor union, nor have we experienced workstoppages. We believe that our relations with our employees are good.

 

Since June 30,2008 and following the wind-down of the PATHWAY trial we made a further 7.5full time equivalent staff redundant. In addition several staff have resignedsince June 30, 2008 without being replaced. Our current headcount is 27.8full time equivalents.

 

## **Item 6.E.****                                                ****Share Ownership{tc “”}**

##  

The following table sets forth, for each director orsenior executive of the Company, their interest in the ordinary shares of theCompany (including the interests of their immediate families and personsconnected with them) and the percentage of the Company’s outstanding sharecapital represented by such ownership interests as of January 9, 2009.

 
| **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                                                |       | 52,778                                               |       | *                                                             |       | 531,389                                                                       |       |
| Patrick O. Burns                                                  |       | 556                                                  |       | *                                                             |       | 28                                                                            |       |
| Dr. Malvin  L. Eutick                                        |       | 17,693                                               |       | *                                                             |       | 885                                                                           |       |
| Robert  Williamson                                                |       | 25,000                                               |       | *                                                             |       | —                                                                        |       |
| John Lee                                                          |       | —                                               |       | —                                                        |       | —                                                                        |       |
| Sarah J.  Meibusch                                                |       | —                                               |       | —                                                        |       | 100,000                                                                       |       |
| Linton W. P.  Burns                                               |       | 14,359                                               |       | *                                                             |       | 100,218                                                                       |       |
| Dr. James  Garner                                            |       | —                                               |       | —                                                        |       | 50,000                                                                        |       |
| Dr. Laurence  Marton                                         |       | —                                               |       | —                                                        |       | 100,000                                                                       |       |
| **All  directors and executive officers As a group (10 persons)** | ** ** | **930,686**                                          | ** ** | **1.4**                                                       | **%**      | **923,534**                                                                   | ** ** |

 

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***             **Represents less than 1%.

 

(1)           Based on 60,469,511 issued ordinaryshares as of January 9, 2009.

 

**Option Plans{tc “”}**

 

The following director and employee option plans werein existence during the fiscal year ending June 30, 2008. The plans areoverseen by the Remuneration Committee which determines the terms under whicheligible individuals may participate.

 

In accordance with Australian law, we will not grantany option if, after such issuance, the number of options issued tonon-executive employees during the previous five years whether or not exercisedand which have not yet terminated or expired would exceed 5% of the then totalnumber of outstanding ordinary shares. In accordance with Australian SecuritiesExchange Listing Rules all grants of options to directors require theprior approval from our shareholders.

 

In November 2004, our shareholders approved thedirectors and employee option incentive plan. All our directors and allemployees, whether full time or part time, are eligible to participate in thisplan. The minimum exercise price of options granted under this plan shall notbe less than the average closing share price as recorded on the AustralianSecurities Exchange in the five business days preceding the grant of thoseoptions. The expiry date of options issued under this plan cannot exceed 10years from the date of grant. During the fiscal year ended June 30, 2007options to purchase a total of 147,000 ordinary shares were issued under thisplan. These options were issued free of charge and had a weighted averageexercise price of $2.79. Since July 1, 2007 a further 1,317,250 optionswere issued under this plan at a weighted average exercise price of $3.46. Asof December 12, 2008 there were outstanding options to purchase anaggregate of 773,750 ordinary shares 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 1,2007 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 $7.80 (included in the table above);

·              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 was $2.59 and

·              166,667 options vesting on March 1,2009 at an exercise price to be determined equal to a 30% premium to the 60 dayshare price VWAP prior to this date.

 

Theseoptions are exercisable from the date they vest and expire on March 1,2011. The grant 

 

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date of these options is March 1, 2007, 2008, and2009; however since the service inception date precedes the grant datecompensation expense is recognized over the period beginning November 30,2006, the date of approval. The estimated fair value of the options wascalculated as at the date of grant using a binomial model taking into accountthe terms and condition upon which the options were granted. The weightedaverage grant date fair value for each option was $0.97.

 

# **ITEM 7.****                                                    ****MAJOR SHAREHOLDERS AND RELATEDPARTY TRANSACTIONS{TC “”}**

#  

## **Item 7.A.****                                              ****Major Shareholders{tc “”}**

##  

Thetable below shows all holders who, to the Company’s knowledge, own, directly orindirectly, 5% or more of the Company’s ordinary shares, as of December 6,2006, December 11, 2007 and January 9, 2009 each being the mostrecent practicable date before reporting for the last three fiscal years.

 
| ** **                                                                             | ** ** | **2006**              | ** ** | **2007**                      | ** ** | **2008**              | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|-----------------------|------------|
| **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     |       | 2,802,828             |       | 6.90                          |       | N/A                   |       | N/A |   |
|                                                                                   |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |
| Manifest Capital Management Pty Ltd   Level 7, 139 Macquarie Street,   Sydney NSW 2000 |       | 3,538,260             |       | 8.72                          |       | 3,538,260             |       | 5.96 |   | 3,538,260 |   | 5.86 |   |
|                                                                                   |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |
| Northcape Capital Pty Ltd   Level 17, 15-19 Bent Street   Sydney NSW 2000              |       | N/A                   |       | 3,575,289                     |       | 6.02                  |       | 4,979,043 |   | 8.23 |   |
|                                                                                   |       |                  |       |                          |       |                  |       |   |   |   |   |
| AMP Limited   Level 24, 33 Alfred Street, Sydney   NSW 2000                            |       | 2,975,268             |       | 7.33                          |       | N/A                   |       | N/A |   |

 

As of January 6, 2009, a total of 5,321,156ordinary shares (or 8.80% of the total number of our ordinary shares thenoutstanding) were held by six registered holders with registered addresses inthe United States. Because certain of these ordinary shares were held bybrokers or other nominees, the number of record or registered holders in the USis not representative of the number of beneficial holders in the US or of theresidence of the beneficial holders. There are no different voting rights formajor shareholders.

 

To the best of our knowledge, we are not owned orcontrolled, directly or indirectly, by another corporation, by any foreigngovernment or by any other natural or legal persons severally or jointly, andwe disclaim control by the companies, entities or individuals listed in thetable above. 

 

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We do not know of any arrangementsin place that could result in a change in control of our company.

 

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

##  

Except as disclosed herein and elsewhere in thisannual report, there were no material transactions to which we were a party andin which any of our directors, executive officers or major shareholders (or anyof their affiliates, associates or enterprises) were involved since July 1,2007.

 

None of our directors, executive officers or majorshareholders (or any of their affiliates, associates or enterprises) wasindebted to us at any time since July 1, 2007.

 

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

#  

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

##  

Ouraudited financial statements and related notes for our fiscal years ended June 30,2006, 2007 and 2008 are contained on pages F-1 through F-46 of this annualreport.

 

**Export Sales**

 

The following table indicates the percent of revenuesderived from export.

 
| ** **                               | ** ** | **For the Years Ended June 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2008** | ** ** |
| Contract  manufacture export revenues    |       | $                                                         | 70,000     |   | $ | 25,000 |   | $ | 380,000 |   |
| % of total  revenues derived from export |       | 7.7%                                                      |       | 2.7 | % | 35.0 | % |
|                                          |            |                                                           |            |  |  |  |  |  |  |  |

 

The percentage of contract manufacturing revenuesderived from customers outside Australia fluctuates as these contracts aretypically ad-hoc in nature.

 

In fiscal 2008 we derived 65.0% of our total revenuesfrom one Australian based customer. In fiscal 2007 we derived 97.3% of ourtotal revenues from this same customer. In fiscal year 2006, we derived 76.2%of our total revenues from two Australian based customers.

 

**Legal Proceedings**

 

None.

 

**Dividend Policy**

 

**{tc “”}**We have never declared cash dividends on our ordinaryshares and have no present intention of declaring such cash dividends in theforeseeable future. Our board of directors will not be able to recommend thepayment of any dividends until we make a profit. Future profitability willdepend on future earnings and our working capital requirements. Our board ofdirectors currently intends to reinvest income in the continued development andoperations of our business. We expect to continue to generate operating losseson our research and development projects until products arising from ourresearch and development activities are successfully commercialized. Factorsbeyond our control, such as market competition, exchange rate fluctuations andchanging government policy may also affect profitability and our capacity topay dividends.

 

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

##  

Except as disclosed elsewhere in this annual report,no significant change has occurred since the date of the annual financialstatements included in this annual report.

 

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# **ITEM 9.****                                                    ****THE OFFER AND LISTING{tc“”}**

#  

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

##  

The principal non-United States trading market for ourordinary shares and warrants is the Australian Securities Exchange, or the ASX,under the codes “PGL” and “PGLO” respectively. Our ordinary shares and warrantsare also quoted on the Nasdaq Capital Market under the symbol “PGLA” and “PGLAW”respectively.

 

**Price Range of Ordinary Shares**

 

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

 

The following table sets forth the high and lowclosing sales prices in Australian dollars and the trading volume of ourordinary shares as reported on the ASX during the periods indicated:

 
| ** **           | ** ** | **High** | ** ** | **Low** | ** ** | **Trading  Volume** | ** ** |
|----------------------|------------|----------|------------|---------|------------|---------------------|------------|
| Yearly Data:         |       |     |       |    |       |                |       |
| 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          |       |
| Fiscal year 2008     |       | 4.54     |       | 1.20    |       | 47,820,800          |       |
| Quarterly Data:      |       |     |       |    |       |                |       |
| 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          |       |
| Fourth Quarter  2007 |       | 3.45     |       | 2.40    |       | 13,898,400          |       |
| First Quarter  2008  |       | 2.55     |       | 1.28    |       | 7,653,400           |       |
| Second Quarter  2008 |       | 2.13     |       | 1.20    |       | 8,920,400           |       |
| Third Quarter  2008  |       | 1.28     |       | 0.58    |       | 13,846,600          |       |
| Fourth Quarter  2008 |       | 0.92     |       | 0.60    |       | 14,951,100          |       |
| Monthly Data:        |       |     |       |    |       |                |       |
| July 2008       |       | 1.28     |       | 0.58    |       | 9,065,600           |       |
| August 2008     |       | 0.68     |       | 0.61    |       | 2,721,600           |       |
| September 2008  |       | 0.72     |       | 0.63    |       | 2,059,400           |       |
| October 2008    |       | 0.73     |       | 0.61    |       | 3,053,200           |       |
| November 2008   |       | 0.80     |       | 0.60    |       | 6,988,600           |       |
| December 2008   |       | 0.92     |       | 0.70    |       | 4,909,300           |       |

 

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***NASDAQCapital Market***

 

The following table sets forth the high and lowclosing sales prices in United States dollars and the trading volume of ourordinary shares as reported on the NASDAQ Capital Market during the periodsindicated:

 
| ** **           | ** ** | **High** | ** ** | **Low** | ** ** | **Trading  Volume** | ** ** |
|----------------------|------------|----------|------------|---------|------------|---------------------|------------|
| Yearly Data:         |       |     |       |    |       |                |       |
| 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          |       |
| Fiscal year 2008     |       | 4.01     |       | 1.12    |       | 5,652,400           |       |
| Quarterly Data:      |       |     |       |    |       |                |       |
| 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           |       |
| Fourth Quarter  2007 |       | 3.06     |       | 1.90    |       | 1,330,800           |       |
| First Quarter  2008  |       | 2.23     |       | 1.22    |       | 805,500             |       |
| Second Quarter  2008 |       | 1.92     |       | 1.12    |       | 832,800             |       |
| Third Quarter  2008  |       | 1.26     |       | 0.45    |       | 2,378,400           |       |
| Fourth Quarter  2008 |       | 0.67     |       | 0.30    |       | 1,601,900           |       |
| Monthly Data:        |       |     |       |    |       |                |       |
| July 2008       |       | 1.26     |       | 0.56    |       | 2,056,400           |       |
| August 2008     |       | 0.61     |       | 0.57    |       | 173,200             |       |
| September 2008  |       | 0.61     |       | 0.45    |       | 148,800             |       |
| October 2008    |       | 0.54     |       | 0.35    |       | 243,500             |       |
| November 2008   |       | 0.56     |       | 0.30    |       | 1,223,000           |       |
| December 2008   |       | 0.67     |       | 0.47    |       | 135,400             |       |

 

On December 31,2008, the closing sales price of the ordinary shares as reported on the ASX andthe NASDAQ Capital Market was $0.77 and US$0.47, respectively.

 

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**Price Range of Warrants**

 

***AustralianSecurities 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:      |       |     |       |    |       |                |       |
| Third Quarter  2007  |       | 1.40     |       | 0.48    |       | 275,600             |       |
| Fourth Quarter  2007 |       | 0.93     |       | 0.35    |       | 264,800             |       |
| First Quarter  2008  |       | 0.60     |       | 0.05    |       | 474,100             |       |
| Second Quarter  2008 |       | 0.31     |       | 0.10    |       | 85,700              |       |
| Third Quarter  2008  |       | 0.25     |       | 0.01    |       | 102,500             |       |
| Fourth Quarter  2008 |       | 0.01     |       | 0.01    |       | —              |       |
| Monthly Data:        |       |     |       |    |       |                |       |
| July 2008       |       | 0.25     |       | 0.01    |       | 10,800              |       |
| August 2008     |       | 0.10     |       | 0.01    |       | 91,700              |       |
| September 2008  |       | 0.01     |       | 0.01    |       | —              |       |
| October 2008    |       | 0.01     |       | 0.01    |       | —              |       |
| November 2008   |       | 0.01     |       | 0.01    |       | —              |       |
| December 2008   |       | 0.01     |       | 0.01    |       | —              |       |

 

***NASDAQCapital Market***

 

Therehas been no trading in our warrants on the NASDAQ Capital Market to date.

 

On December 31,2008, the closing sales price in U.S. Dollars of the warrants as reported onthe ASX and the NASDAQ Capital Market was $0.01 and N/A, respectively.

 

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| **ITEM 10.**   | ** ** | **ADDITIONAL INFORMATION{TC “”}** |
|----------------|------------|---------------------------------------------|
| ** **     |       |                                        |
| **Item 10.B.** | ** ** | **Memorandum and Articles of Association**  |

##  

##  

A description of our ordinary shares and warrants,including brief summaries of the rights of our shareholders and warrant holdersas conferred by our constitution and Australian law is incorporated byreference to the description of our securities contained in our RegistrationStatement on Form F-3 filed with the SEC on March 22, 2007 and anyamendment or report filed for the purposes of updating that description. Ourconstitution may be inspected and copied at the Public Reference Section ofthe Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,D.C. 20549.

 

***Compliancewith NASDAQ Rules***

 

NASDAQ corporategovernance rules require that we disclose the exemptions that we haveobtained, and rely on, from compliance with existing NASDAQ corporategovernance rules. Under our Constitution and consistent with the AustralianCorporations Act, the quorum required for an ordinary meeting of shareholdersconsists of at least three shareholders, represented in person or by proxy.Under the NASDAQ Marketplace Rules, a NASDAQ listed-company must provide for aquorum that in no case shall be less than 33 1/3% of the outstanding shares ofthe company’s common voting stock. Pursuant to a letter from NASDAQ in 1997,NASDAQ granted us an exemption from such NASDAQ rule. Our quorum requirement isin accordance with Australian law and generally accepted business practices inAustralia. We also obtained from NASDAQ 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. Since January 2007we are in compliance with the NASDAQ Marketplace Rule 4350(c)(1).

 

The Principles ofGood Corporate Governance and Best Practice Recommendations (BPRs) released bythe Australian Securities Exchange (ASX). Current practice in Australiarecognizes that the BPRs are guidelines only. If a company considers that arecommendation is not appropriate to its particular circumstances, it has theflexibility not to adopt it but is required to provide a statement in theannual report for not following it (ASX Listing Rule 4.10). As stated inour 2008 Annual Report the Company’s corporate governance practices are largelyconsistent with the BPR’s.

 

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## **Item 10.C.****                MaterialContracts**

##  

*Termination of Collaboration with MedigenBiotechnology 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 thatcomprised part of the consideration under the Alliance Agreement, to MBC.

 

·                  Issue 500,000 Progen shares to MBC onexecution of the termination agreement;

 

·                  Reimburse to MBC $300,000 being the fundsthey contributed to the costs of the PI-88 Phase 2 Melanoma clinical trial onexecution of the agreement;

 

·                  Issue a further 732,600 Progen shares and pay$2,000,000 in cash or shares, at Progen’s discretion, to MBC on MBC completingtwo clinical milestones in relation to the current PI-88 Phase 2 HCC Trial;

 

·                  Pay MBC up to $4,000,000 on PI-88 achievingspecified clinical and commercial milestones; and

 

·                  Issue 1,000,000 options to MBC upon MBCproviding to Progen the HCC Phase 2 Trial Final Study Report.

 

The financial statements for the period ended June 30,2007 included the financial impact of the return of the 15,176,525 MBC sharesto MBC, that being an impairment loss of $1,769,198, the reimbursement of the$300,000, the value of 1,232,600 Progen shares and the 1,000,000 options onProgen shares. The fair value at the measurement date of the 1,232,600 Progenshares was $8,325,000 and 1,000,000 options over Progen shares was $1,321,000.The total 2007 financial impact was an increase in the operating loss from continuingoperations of $11,715,198.

 

The financial statements forthe period ended June 30, 2008 include the financial impact $2,029,000 onMBC completing the second clinical milestone in relation to the PI-88 phase 2HCC trial (this obligation was satisfied via the issue of 732,600 shares ofwhich 171,240 were newly issued shares and 561,360 were acquired on-market andre-issued to MBC) and $2,000,000 paid to MBC on PI-88 achieving a specifiedclinical milestone.

 

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There remains $2,000,000 to be paid on a defined PI-88commercialization milestone or transaction event being achieved. This will bebooked in a future reporting period if and when incurred.

 
| **Items 10.D.** | ** ** | **Exchange Controls** |
|-----------------|------------|-----------------------|

##  

In the early 1980s, the Australian Government began aprogram of deregulation of the Australian financial sector. This led to theintroduction of competition from foreign banks and, perhaps more notably, thederegulation of foreign exchange controls. Deregulation has been at theforefront of Australian Government policy since the early 1980’s and, except asdiscussed below, there are no laws or regulations in Australia that restrictthe export or import of capital or affect the remittance of dividends or otherpayments to holders of our ordinary shares who are non-residents of Australia,subject to withholding taxes under Australian law with respect to remittancesof dividends (to the extent the taxes on the dividends are not paid by us) andinterest payments. See “Taxation” below.

 

***The Foreign Acquisitions and Takeovers Act 1975***

 

The Foreign Acquisitions and Takeovers Act 1975 is anact of the Parliament of the Commonwealth of Australia which seeks to regulateoverseas investment in Australia. By and large, the Government’s policy is toencourage foreign investment provided that it is consistent with the needs ofthe Australian community. Although restrictions are applied in certain areas,in the majority of industry sectors, proposals are approved unless they arejudged contrary to the national interest. The Act requires compulsory notification of certain proposedacquisitions of Australian assets and makes other proposed acquisitions andarrangements subject to prohibition or divestiture after they have beenexamined and found to be contrary to the national interest.

 

***The Financial Transactions Reports Act 1988***

 

The Financial Transactions Reports Act 1988 is an actof the Parliament of the Commonwealth of Australia, designed to facilitate theadministration and enforcement of Australia’s revenue laws. It provides for thereporting of certain financial transactions and transfers, including the exportor import of currency exceeding $10,000 to the Cash Transactions ReportingAgency.

 

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

 

The Tax Act is the principal law of the Commonwealthof Australia, concerning the collection and administration of taxes (exceptgoods and services tax). Under the Tax Act, overseas residents are obliged topay income tax in Australia on income derived from Australian sources.

 
| **Item 10.E.** | ** ** | **Taxation** |
|----------------|------------|--------------|

##  

The following is a summary of the current tax laws ofthe US (including the Internal Revenue Code of 1986, as amended, itslegislative history, existing and proposed regulations thereunder, publishedrulings and court decisions) and Australia as they relate to us and ourshareholders, including United States and other non-Australian shareholders.The summary is based upon laws and 

 

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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 US taxation other than federal income taxation or anyaspects of Australian taxation other than federal income taxation, inheritancetaxation, stamp duty and goods and services tax.

 

Prospective purchasers of ordinary shares are advisedto consult their own tax advisors with respect to the specific tax consequencesto them of the purchase, ownership and disposition of ordinary shares,including, in particular, the effect of any foreign, state or local taxes.

 

***Australian Tax Consequences***

 

Non-Australian residents are liable to pay tax onincome derived from Australian sources. The mechanism by which that tax is paid (for non-residents who have nopermanent establishment in Australia or where the income is not connected witha permanent establishment) is known as withholding tax. Dividends paid by aresident Australian company to a resident of the United States of America aresubject to withholding tax at the rate of 15%. The rate of withholding tax ondividends is normally 30%, but since the United States has concluded a doubletax treaty agreement with Australia, the rate is reduced to 15%. It should benoted, however, that under Section 128B(3) of the Tax Act, to theextent that dividends paid to non-residents have been franked (generally wherea company pays tax itself), such dividends are exempt from withholding tax.Franked dividends is the expression given to dividends when the profits out ofwhich those dividends are paid have been taxed in our hands. Accordingly, anAustralian company paying fully franked dividends to a non-resident is notrequired to deduct any withholding tax. Dividends on which withholding tax hasbeen paid are not subject to any further Australian tax. In other words, thewithholding tax represents the final Australian tax liability in relation tothose dividends.

 

The pertinent provisions of the double tax treatybetween Australia and the United States provide that dividends are primarilyliable for tax in the country of residence of the beneficial owner. However,the source country, in this case Australia, may also tax them, but in such casethe tax will be limited to 15%. Where the beneficial owner is a United Statesresident company that holds at least 10% of us, the tax will be limited to 5%.The 15% limit does not apply to dividends derived by a resident of the UnitedStates of America who has a permanent establishment or fixed base in Australia,if the holding giving rise to the dividends is effectively connected with thatestablishment or base. Such dividends are taxed in the normal way as businessprofits or independent personal services income as the case may be.

 

We have not paid any cash dividends since ourinception and we do not anticipate the payment of cash dividends in theforeseeable future. Additionally, we expect to incur additional operatinglosses until products arising from our research and development programs aresuccessfully commercialized. See “Item 8.A. Financial Statements and OtherFinancial Information—Dividend Policy.”

 

Capital gains tax in Australia is payable on realgains over the period in which the shares have been held, that is, thedifference between the selling price and the original cost price. The costprice is indexed for inflation if the shares have been held for more than oneyear, and individual taxpayers can, with respect to shares held for more thanone year, elect to forego indexation of the 

 

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cost base in exchange forbeing taxed on 50% of the realized gain. Capital losses are available as deductionsbut only against other capital gains.

 

#### ***StampDuty***

####  

Any transfer of shares through trading on the ASX andNASDAQ, whether by Australian residents or foreign residents, are not besubject to stamp duty.

 

***Australian Death Duty***

 

Australia does not have estate or death duties. Nocapital gains tax liability is realized upon the inheritance of a deceasedperson’s shares. The disposal of inherited shares by beneficiaries, may,however, give rise to a capital gains tax liability.

 

***Goods and Services Tax***

 

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

 

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

 

The following discussionsummarizes the principal U.S. federal income tax considerations relating to thepurchase, ownership and disposition of our ordinary shares or warrants by aU.S. holder (as defined below) holding such shares or warrants as capitalassets (generally, property held for investment). This summary is based on theInternal Revenue Code of 1986, as amended (the “Code”), Treasury regulations,administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”)and judicial decisions, all as in effect on the date hereof, and all of whichare subject to change (possibly with retroactive effect) and to differinginterpretations. This summary does not describe any state, local or non-U.S.tax law considerations, or any aspect of U.S. federal tax law other than incometaxation; U.S. holders are urged to consult their own tax advisors regardingsuch matters.

 

This summary does not purportto address all material federal income tax consequences that may be relevant toa holder of ordinary shares or warrants. This summary does not take intoaccount the specific circumstances of any particular investors, some of which(such as tax-exempt entities, banks or other financial institutions, insurancecompanies, broker-dealers, traders in securities that elect to use amark-to-market method of accounting for their securities holdings, regulatedinvestment companies, real estate investment trusts, U.S. expatriates,investors liable for the alternative minimum tax, partnerships and otherpass-through entities, investors that own or are treated as owning 10% or moreof our voting stock, investors that hold the ordinary shares or warrants aspart of a straddle, hedge, conversion or constructive sale transaction or otherintegrated transaction, and U.S. holders whose functional currency is not theU.S. dollar) may be subject to special tax rules.

 

As used below, a “U.S. Holder”is a beneficial owner of an ordinary share or warrant that is, for U.S. federalincome tax purposes, (i) a citizen or resident alien individual of theUnited States, (ii) a corporation (or an entity taxable as a corporation)created or organized under the law of the United States, any State thereof orthe District of Columbia, (iii) an estate, the income of which is 

 

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subject to U.S. federal income tax withoutregard to its source, or (iv) a trust if (1) a court within theUnited States is able to exercise primary supervision over the administrationof the trust, and one or more U.S. persons have the authority to control allsubstantial decisions of the trust, or (2) the trust has a valid electionin effect under applicable U.S. Treasury Regulations to be treated as a U.S.person. For purposes of this discussion, a “Non-US Holder” is a beneficialowner of an ordinary share or warrant that is (i) a non-resident alienindividual, (ii) a corporation (or an entity taxable as a corporation)created or organized in or under the law of a country other than the UnitedStates or a political subdivision thereof or (iii) an estate or trust thatis not a U.S. holder. This discussion does not address any aspect of U.S.federal gift or estate tax, or state, local or non-U.S. tax laws. Additionally,the discussion does not consider the tax treatment of partnerships or otherpass-through entities or persons who hold ordinary shares through suchentities. If a partnership (including for this purpose any entity treated as apartnership for U.S. federal tax purposes) is a beneficial owner of ordinaryshares or warrants, the U.S. federal tax treatment of a partner in thepartnership 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 rulingfrom the IRS or an opinion of counsel as to any U.S. federal income taxconsequence described herein. The IRS may disagree with 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 PriceBetween Ordinary Shares and Warrants**

 

A U.S. Holder that purchasedour ordinary shares and warrants as a unit on their initial issuance generallywill be required to allocate the purchase price of such unit between eachordinary share and each warrant that comprise the unit based on the relativefair market value of each. Of the purchase price for any unit that we offered,we allocated a portion to each ordinary share and to each warrant comprisingpart of such unit, as described in the prospectus supplement relating thereto.For U.S. Holders that purchased our ordinary shares and warrants as a unit ontheir initial issuance, the 

 

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price allocated to each ordinary share andeach warrant generally will be such U.S. Holder’s tax basis in such share orwarrant, as the case may be. While uncertain, the IRS, by analogy to the rules relatingto the allocation of the purchase price to components of a unit consisting ofdebt and equity, may take the position that our allocation of the purchaseprice will be binding on a U.S. Holder of a unit, unless the U.S. Holderexplicitly discloses in a statement attached to the U.S. Holder’s timely filedU.S. federal income tax return for the taxable year that includes the acquisitiondate of the unit that the U.S. Holder’s allocation of the purchase pricebetween each ordinary share and each warrant that comprise the unit isdifferent than our allocation. Our allocation would not, however, be binding onthe IRS.

 

Each U.S. Holder that purchasedour ordinary shares and warrants as a unit on their initial issuance is urgedto consult their own tax advisor with respect to the risks associated with anallocation of the purchase price between the ordinary shares and each warrantthat comprise a unit that is inconsistent with our allocation of the purchaseprice.

 

***Taxationof Distributions***

 

*U.S. Holders.*In general, subject to the passiveforeign investment company (“PFIC”) rules discussed below, a distributionon an ordinary share will constitute a dividend for U.S. federal income taxpurposes to the extent that it is made from our current or accumulated earningsand profits as determined under U.S. federal income tax principles. If adistribution exceeds the amount of our current and accumulated earnings andprofits, it will be treated as a non-taxable reduction of basis to the extentof the U.S. Holder’s tax basis in the ordinary share on which it is paid, andto the extent it exceeds that basis it will be treated as a capital gain. Forpurposes of this discussion, the term “dividend” means a distribution thatconstitutes a dividend for U.S. federal income tax purposes.

 

The gross amount of anydividend on an ordinary share (which will include the amount of any Australiantaxes withheld) generally will be subject to U.S. federal income tax as foreignsource dividend income and will not be eligible for the corporate dividendsreceived deduction. The amount of a dividend paid in Australian currency willbe its value in U.S. dollars based on the prevailing spot market exchange ratein effect on the day that the U.S. Holder receives the dividend, whether or notthe dividend is converted into U.S. dollars. A U.S. holder will have a taxbasis in any distributed Australian currency equal to its U.S. dollar amount onthe date of receipt, and any gain or loss realized on a subsequent conversionor other disposition of the Australian currency generally will be treated asU.S. source ordinary income or loss. If dividends paid in Australian currencyare converted into U.S. dollars on the date they are received by a U.S. Holder,the U.S. Holder generally should not be required to recognize foreign currencygain or loss in respect of the dividend income. U.S. Holders are urged toconsult their own tax advisers regarding the treatment of any foreign currencygain or loss if any Australian currency received by the U.S. Holder is notconverted into U.S. dollars on the date of receipt.

 

Subject to certain exceptionsfor short-term and hedged positions, any dividend that a non-corporate holderreceives on an ordinary share in a taxable year beginning before January 1,2011 will be subject to a maximum tax rate of 15% if the dividend is a “qualifieddividend.” A dividend on an ordinary share will be a qualified dividend if (i) either(a) the ordinary shares are readily tradable on an established securitiesmarket in the U.S. or (b) we are eligible for the benefits of a 

 

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comprehensive income tax treaty with the U.S.that the U.S. Secretary of the Treasury determines is satisfactory for purposesof these rules and that includes an exchange of information program, and (ii) wewere not, in the year prior to the year the dividend was paid, and are not, inthe year the dividend is paid, a PFIC. The ordinary shares are listed on theNasdaq Capital Market, which should qualify them as readily tradable on anestablished securities market in the United States. In any event, the doubletax treaty between Australia and the U.S. (the “Treaty”) satisfies therequirements of clause (i)(b), and, although the matter is not free from doubt,we believe that we should be a resident of Australia entitled to the benefitsof the Treaty. However, because the facts relating to our entitlement to thebenefits of the Treaty can change over time, there can be no assurance that wewill be entitled to the benefits of the Treaty for any taxable year. Based onour audited financial statements and relevant market and shareholder data, webelieve we were a PFIC for U.S. federal income tax purposes for our June 30,2008 taxable year. Based on our audited financial statements and our currentexpectations regarding the value and nature of our assets, the sources andnature of our income, and relevant market and shareholder data, it is possiblethat we could be classified as a PFIC for our June 30, 2009 taxableyear.  Given that the determination ofPFIC status involves the application of complex tax rules, and that its isbased on the nature of our income and assets from time to time, no assurancescan be provided that we will not be considered a PFIC for the current (or anypast or future) taxable year. In addition, as described in the section belowentitled “Passive Foreign Investment Company Rules,” if we were a PFIC in ayear while a U.S. Holder held an ordinary share, and if the U.S. Holder has notmade a qualified electing fund election effective for the first year the U.S.Holder held the ordinary share, the ordinary share remains an interest in aPFIC for all future years or until such an election is made. The IRS takes theposition that that rule will apply for purposes of determining whether anordinary share is an interest in a PFIC in the year a dividend is paid or inthe prior year, even if the Company does not satisfy the tests to be a PFIC ineither of those years.

 

Even if dividends on theordinary shares would otherwise be eligible for qualified dividend treatment,in order to qualify for the reduced qualified dividend tax rates, anon-corporate holder must hold the ordinary share on which a dividend is paidfor more than 60 days during the 120-day period beginning 60 days before theex-dividend date, disregarding for this purpose any period during which thenon-corporate holder has an option to sell, is under a contractual obligationto sell or has made (and not closed) a short sale of substantially identicalstock or securities, is the grantor of an option to buy substantially identicalstock or securities or, pursuant to Treasury regulations, has diminished theirrisk of loss by holding one or more other positions with respect tosubstantially similar or related property. In addition, to qualify for thereduced qualified dividend tax rates, the non-corporate holder must not beobligated to make related payments with respect to positions in substantiallysimilar or related property. Payments in lieu of dividends from short sales orother similar transactions will not qualify for the reduced qualified dividendtax rates. A non-corporate holder that receives an extraordinary dividendeligible for the reduced qualified dividend rates must treat any loss on thesale of the stock as a long-term capital loss to the extent of the dividend.For purposes of determining the amount of a non-corporate holder’s deductibleinvestment interest expense, a dividend is treated as investment income only ifthe non-corporate holder elects to treat the dividend as not eligible for thereduced qualified dividend tax rates. Special limitations on foreign taxcredits with respect to dividends subject to the reduced qualified dividend taxrates apply to reflect the reduced rates of tax.

 

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The U.S. Treasury has announcedits intention to promulgate rules pursuant to which non-corporate holdersof stock of non-U.S. corporations, and intermediaries though whom the stock isheld, will be permitted to rely on certifications from issuers to establishthat dividends are treated as qualified dividends. Because those procedureshave not yet been issued, it is not clear whether we will be able to complywith them.

 

Non-corporate holders ofordinary shares are urged to consult their own tax advisers regarding theavailability of the reduced qualified dividend tax rates in the light of theirown particular circumstances.

 

Any Australian withholding taxwill be treated as a foreign income tax eligible for credit against a U.S.Holder’s U.S. federal income tax liability, subject to generally applicablelimitations under U.S. federal income tax law. For purposes of computing thoselimitations separately under current law for specific categories of income, adividend generally will constitute foreign source “passive income” or, in thecase of certain holders, “financial services income” for purposes of taxableyears 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 services income” generally will be treated as “general categoryincome.” A U.S. Holder will be denied a foreign tax credit with respect toAustralian income tax withheld from dividends received with respect to theordinary shares to the extent the U.S. Holder has not held the ordinary sharesfor at least 16 days of the 30-day period beginning on the date which is 15days before the ex-dividend date or to the extent the U.S. Holder is under anobligation to make related payments with respect to substantially similar orrelated property. Any days during which a U.S. Holder has substantiallydiminished its risk of loss on the ordinary shares are not counted towardmeeting the 16-day holding period required by the statute. The rules relatingto the determination of the foreign tax credit are complex, and U.S. Holdersare urged to consult with their own tax advisers to determine whether and towhat extent they will be entitled to foreign tax credits as well as withrespect to the determination of the foreign tax credit limitation (includingchanges in the rules for taxable years beginning after December 31,2006). Alternatively, any Australian withholding tax may be taken as adeduction against taxable income, provided the U.S. Holder takes a deductionand not a credit for all foreign income taxes paid or accrued in the sametaxable year. In general, special rules will apply to the calculation offoreign tax credits in respect of dividend income that is subject topreferential rates of U.S. federal income tax.

 

*Non-U.S.Holders.*   A dividend paidto a Non-U.S. Holder on an ordinary share will not be subject to U.S. federalincome tax unless the dividend is effectively connected with the conduct oftrade or business by the non-U.S. Holder within the United States (and isattributable to a permanent establishment or fixed base the Non-U.S. Holdermaintains in the United States if an applicable income tax treaty so requiresas a condition for the Non-U.S. Holder to be subject to U.S. taxation on a netincome basis on income from the ordinary share). A Non-U.S. Holder generallywill be subject to tax on an effectively connected dividend in the same manneras a U.S. Holder. 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.

 

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** **

***Taxationof Capital Gains***

 

*U.S. Holders.*   Subject to the passive foreign investment company rules discussedbelow, 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 thedifference between the U.S. holder’s adjusted basis in the ordinary share orwarrant and the amount realized on the sale or other disposition, each determinedin U.S. dollars. See “Exercise or Lapse of a Warrant” below for a discussionregarding a U.S. Holder’s basis in an ordinary share acquired pursuant to theexercise of a warrant.

 

Such capital gain or loss willbe long-term capital gain or loss if at the time of the sale or other taxabledisposition the 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 yearbeginning before January 1, 2011 is subject to a maximum tax rate of 15%.In subsequent years, the maximum tax rate on the net capital gain of anindividual will be 20%. Capital gains recognized by corporate U.S. Holdersgenerally are subject to U.S. federal income tax at the same rate as ordinaryincome. The deductibility of capital losses is subject to various limitations.

 

Any gain a U.S. Holderrecognizes generally will be U.S. source income for U.S. foreign tax creditpurposes, and, subject to certain exceptions, any loss will generally be a U.S.source loss. If an Australian tax is withheld on a sale or other disposition ofan ordinary share or warrant, the amount realized will include the gross amountof the proceeds of that sale or disposition before deduction of the Australiantax. The generally applicable limitations under U.S. federal income tax law oncrediting foreign income taxes may preclude a U.S. Holder from obtaining aforeign tax credit for any Australian tax withheld on a sale of an ordinaryshare or warrant. The rules relating to the determination of the foreigntax credit are complex, and U.S. Holders are urged to consult with their owntax advisers regarding the application of such rules. 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.

 

*Non-U.S.Holders.*   A Non-U.S.Holder will not be subject to U.S. federal income tax on a gain recognized on asale or other disposition of an ordinary share or warrant unless (i) thegain is effectively connected with the conduct of a trade or business by theNon-U.S. Holder within the United States (and is attributable to a permanentestablishment or fixed base that the Non-U.S. Holder maintains in the UnitedStates if an applicable income tax treaty so requires as a condition for theNon-U.S. Holder to be subject to U.S. taxation on a net income basis on incomefrom the ordinary share or warrant), or (ii) in the case of a Non-U.S.Holder who is an individual, the Non-U.S. Holder is present in the UnitedStates for 183 or more days in the taxable year of the sale or otherdisposition and certain other conditions apply. Any effectively connected gainof a corporate Non-U.S. Holder may also be subject under certain circumstancesto an additional “branch profits tax”, the rate of which may be reducedpursuant to an applicable income tax treaty.

 

***Exercise or Lapse of a Warrant***

 

Subject to the discussion ofthe PFIC rules below, a U.S. Holder generally will not recognize gain orloss upon the exercise of a warrant. Ordinary shares acquired pursuant to theexercise of a warrant for cash generally will have a tax basis equal to theU.S. Holder’s tax basis in the warrant, increased by the amount paid toexercise the warrant. The holding period of such ordinary shares

 

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generally would begin on the day after thedate of exercise of the warrant. If the terms of a warrant provide for anyadjustment to the number of shares of ordinary shares for which the warrant maybe exercised or to the exercise price of the warrant, such adjustment may,under certain circumstances, result in constructive distributions that could betaxable to a U.S. Holder of the warrant. Conversely, the absence of anappropriate adjustment similarly may result in a constructive distribution thatcould be taxable to a U.S. Holder of the warrant. A constructive distributionto a U.S. Holder of a warrant generally will be taxed in the manner describedabove under “U.S. Federal Income Tax Considerations-Taxation of Distributions,”although it is unclear whether a constructive distribution on a warrant that istaxed as a dividend to a non-corporate holder of the warrant would be eligiblefor the reduced qualified dividend tax rates. If a warrant is allowed to lapseunexercised, a U.S. Holder generally will recognize a capital loss equal tosuch holder’s tax basis in the warrant. U.S. Holders who exercise a warrantother than by paying the exercise price in cash are urged to consult their owntax advisors regarding the tax treatment of such an exercise, which may varyfrom that described above.

 

***PassiveForeign Investment Company Rules***

 

A special set of U.S. federalincome tax rules applies to a foreign corporation that is a PFIC for U.S.federal income tax purposes. As noted above, based on our audited financialstatements and relevant market and shareholder data, we believe we were a PFICfor U.S. federal income tax purposes for our June 30, 2008 taxable year.Moreover, given that the determination of PFIC status involves the applicationof complex tax rules, and that it is based on the nature of our income andassets from time to time, no assurances can be provided that we will not beconsidered a PFIC for the current (or any past or future) taxable year.

 

In general, a foreigncorporation is a PFIC if at least 75% of its gross income for the taxable yearis passive income or if at least 50% of its assets for the taxable year producepassive income or are held for the production of passive income. In general,passive income for this purpose means, with certain designated exceptions,dividends, interest, rents, royalties (other than certain rents and royaltiesderived in the active conduct of trade or business), annuities, net gains fromdispositions of certain assets, net foreign currency gains, income equivalentto interest, income from notional principal contracts and payments in lieu ofdividends. The determination of whether a foreign corporation is a PFIC is afactual determination made annually and is therefore subject to change. Subjectto exceptions pursuant to certain elections that generally require the paymentof tax, once stock or a warrant in a foreign corporation is classified as stockin a 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 consequencesfor a U.S. Holder can occur if we are treated as a PFIC for any year while aU.S. Holder owns ordinary shares or warrants. These tax consequences can bemitigated with respect to a U.S. Holder’s ordinary shares (but not a U.S.Holder’s warrants) if the U.S. Holder makes, or has made, a timely qualifiedelecting fund election or election to mark to market the holder’s ordinaryshares, and such election is in effect for the first taxable year during whichthe U.S. Holder owns ordinary shares that we are a PFIC. If we are treated as aPFIC, and neither election is made, then contrary to the tax consequencesdescribed in “U.S. Federal Income Tax Considerations-Taxation of Distributions”and “U.S. Federal Income Tax Considerations-Taxation of Capital Gains” above,in any year in which the U.S. Holder either disposes of an ordinary share or awarrant at a

 

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gain or receives one or more “excessdistributions” in respect of our ordinary shares, special rules apply tothe taxation of the gain or the excess distributions. For purposes of theserules, a U.S. Holder will be treated as receiving an “excess distribution” tothe extent that actual or constructive distributions received in the currenttaxable year exceed 125% of the average distributions (whether actual orconstructive and whether or not out of earnings and profits) received by suchU.S. Holder in respect of our ordinary shares during the three preceding yearsor, if shorter, the U.S. Holder’s holding period. A disposition of an ordinaryshare or a warrant, for purposes of these rules, includes many transactions onwhich gain or loss is not realized under general U.S. federal income tax rules (butgenerally should not include the exercise of a warrant, as discussed below).The gain or the excess distributions must be allocated ratably to each day theU.S. Holder has held the ordinary share or the warrant, as the case may be.Amounts allocated to each year are taxable as ordinary income in their entirety(and are not eligible for the reduced qualified dividend rates) and not ascapital gain, and amounts allocable to prior years may not be offset by anydeductions or losses. Amounts allocated to each such prior year are taxable atthe highest rate in effect for that year and are subject to an interest chargeat the rates applicable to deficiencies for income tax for those periods. Inaddition, a U.S. Holder’s tax basis in an ordinary share or a warrant that isacquired from a decedent would not receive a step-up to fair market value as ofthe date of the decedent’s death but instead would be equal to the decedent’sbasis, if lower.

 

The special PFIC rules describedabove will not apply to a U.S. Holder’s ordinary shares if the U.S. Holdermakes a timely election, which remains in effect, to treat us as a qualifiedelecting fund, or QEF, for the first taxable year in which the U.S. Holder ownsan ordinary share and in which we are classified as a PFIC, provided that wecomply with certain reporting requirements. Instead, a U.S. Holder that hasmade a QEF election is required for each taxable year to include in income apro rata share of our ordinary earnings as ordinary income and a pro rata shareof its net capital gain as long-term capital gain, subject to a separateelection to defer payment of taxes, which deferral is subject to an interestcharge. In order for such a QEF election to be valid, we must provide U.S.Holders either (1) a statement showing such U.S. Holder’s pro rata shareof our ordinary earnings and net capital gain (calculated for U.S. taxpurposes) for the Company’s taxable year, (2) sufficient information toenable the U.S. Holder to calculate its pro rata share for such year, or (3) astatement that the Company has permitted the U.S. Holder to inspect and copyits permanent books of account, records, and such other documents as may bemaintained by us that are necessary to establish that PFIC ordinary earningsand net capital gain are computed in accordance with U.S. income taxprinciples. We have not yet determined whether, in years in which we areclassified as a PFIC, we will make the computations necessary to supply U.S.Holders with the information needed to report income and gain pursuant to a QEFelection. It is, therefore, possible that U.S. Holders would not be able tomake or retain that election in any year we are a PFIC. The QEF election ismade on a shareholder-by-shareholder basis and can be revoked only with theconsent of the IRS. A U.S. Holder generally makes a QEF election by attaching acompleted IRS Form 8621 (Return by a Shareholder of a Passive ForeignInvestment Company or Qualified Electing Fund), including the informationprovided in a PFIC annual information statement, to a timely filed U.S. federalincome tax return for the tax year to which the election relates. RetroactiveQEF elections may only be made by filing a protective statement with suchreturn or with the consent of the IRS. A U.S. Holder may make a separateelection to defer the payment of taxes on undistributed income inclusions underthe QEF rules, but if deferred, any such taxes will be subject to an interestcharge.

 

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If a U.S. Holder has electedthe application of the QEF rules to the U.S. Holder’s ordinary shares, andthe special tax and interest charge rules described in the secondpreceding paragraph do not apply to such shares (because of a timely QEFelection for the first tax year of the U.S. Holder’s holding period for suchshares, or, as described below, a purge of the PFIC taint pursuant to a specialpurging election), any gain realized on the disposition of an ordinary sharegenerally will be taxable as capital gain and no interest charge will beimposed. As discussed above, U.S. Holders of a QEF are currently taxed on theirpro rata shares of the QEF’s earnings and profits, whether or not distributed.In such case, a subsequent distribution of such earnings and profits that werepreviously included in income generally will not be taxable as a dividend. Thetax basis of a U.S. Holder’s shares in a QEF will be increased by amounts thatare included in income, and decreased by amounts distributed but not taxed asdividends, under the above rules. Similar basis adjustments apply to propertyif by reason of holding such property the U.S. Holder is treated underapplicable attribution rules as owning shares in a QEF.

 

A U.S. Holder may not make aQEF election with respect to a warrant. As a result, if a U.S. Holder sells orotherwise disposes of a warrant (other than upon exercise of a warrant), anygain recognized generally will be subject to the special tax and interestcharge rules applicable to gains and excess distributions, as described inthe third preceding paragraph, if we were classified as a PFIC at any timeduring the period the U.S. Holder held the warrants. If a U.S. Holder thatexercises such warrants properly makes a QEF election with respect to the newlyacquired ordinary shares (or has previously made a QEF election with respect toany ordinary shares already held), the QEF election will apply to the newlyacquired shares, but the adverse tax consequences of the PFIC rules describedin the third preceding paragraph will continue to apply to such shares (whichgenerally will be deemed to have a holding period for the purposes of such PFICrules that includes the period the U.S. Holder held the warrants), unlessthe holder makes a purging election. The purging election creates a deemed saleof such shares at their fair market value. The gain recognized by the purgingelection will be subject to the special tax and interest charge rules describedin the third preceding paragraph. As a result of the purging election, the U.S.Holder will have a new basis and holding period in the ordinary shares acquiredupon the exercise of the warrants for purposes of the PFIC rules.

 

If a QEF election is not madefor the first taxable year in which the U.S. Holder owns an ordinary share andin which we are a PFIC, certain elections can be made while we continue tosatisfy the definition of a PFIC that, combined with a QEF election, can causethe QEF election to be treated as having been made for that first taxable year.Those elections 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 has thediscretion to invalidate or terminate a QEF election if the U.S. Holder or we,or an intermediary, fails to satisfy the requirements for the QEF election.

 

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The special PFIC rules describedin the fifth preceding paragraph will not apply to a U.S. Holder’s ordinaryshares if the U.S. Holder elects to mark the U.S. Holder’s ordinary shares tomarket each year, provided that the ordinary shares are considered “marketablestock” within the meaning of the applicable Treasury regulations. A U.S. Holderthat makes 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 ordinaryshares during a year in which we are classified as a PFIC generally will remainsubject to the rules set forth in the sixth preceding paragraph for alltaxable years if the U.S. Holder has not made a QEF election or amark-to-market election for the first taxable year in which the U.S. Holderowns an ordinary share and in which we are classified as a PFIC. In that event,those rules will apply to any gains on dispositions of ordinary shares andto any “excess distributions.”  It is, however, possible for a U.S. Holderto avoid this “once a PFIC, always a PFIC” result by electing to treat all ofthe U.S. Holder’s ordinary shares as sold for their fair market value as of thelast day of the last taxable year we satisfy the tests to be a PFIC, providedthe statute of limitations has not run for that year. If a gain is recognizedon that constructive sale, the rules set forth in the sixth precedingparagraph would apply to that gain.

 

If we are classified as a PFICfor a taxable year, and, at any time during such taxable year, has a non-U.S.subsidiary that is classified as a PFIC, U.S. Holders generally would be deemedto own a portion of the shares of such lower-tier PFIC, and generally couldincur liability for the deferred tax and interest charge described in theseventh preceding paragraph, if we receive a distribution from, or dispose ofall or part of its interest in, the lower-tier PFIC. We have not yet determinedwhether, if we are classified as a PFIC, we would make the computationsnecessary to supply U.S. Holders with the information needed to make ormaintain a QEF election with respect to the lower-tier PFIC. It is, therefore,possible that U.S. Holders would not be able to make or retain that election inany taxable year that we are classified as a PFIC and has a non-U.S. subsidiarythat is also classified as a PFIC.

 

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U.S. Holders are urged to consult their owntax advisors regarding the tax issues raised by lower-tier PFICs.

 

A dividend from a foreigncorporation that otherwise would qualify for reduced qualified dividend ratesdoes not qualify for that rate if the foreign corporation is a PFIC in eitherthe taxable year of the dividend or the preceding taxable year.

 

A U.S. Holder who owns (or isdeemed to own) shares in a PFIC during any taxable year, such U.S. Holder mayhave to file an IRS Form 8621 (whether or not a QEF or mark-to-marketelection is made).

 

**GIVEN THE COMPLEXITIES OF THEPFIC RULES AND THEIR POTENTIALLY ADVERSE TAX CONSEQUENCES, U.S. HOLDERS OFORDINARY SHARES OR WARRANTS ARE URGED TO CONSULT THEIR TAX ADVISERS ABOUT THEPFIC RULES, 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 BackupWithholding**

 

*U.S. Holders.*   Dividends paid on, and proceeds from the sale or otherdisposition of, an ordinary share or warrant generally may be subject toinformation reporting requirements and may be subject to backup withholding atthe rate of 28% unless a U.S. Holder provides an accurate taxpayeridentification number or otherwise demonstrates that they are exempt. Theamount of any backup withholding collected from a payment to a U.S. Holder willbe allowed as a credit against the U.S. Holder’s U.S. federal income taxliability and may entitle the U.S. Holder to a refund, provided that certainrequired information is submitted to the Internal Revenue Service.

 

*Non-U.S.Holders.  *Non-U.S. Holdersgenerally will be exempt from these information reporting requirements andbackup withholding tax but may be required to comply with certain certificationand identification procedures in order to establish their eligibility forexemption.

 

**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 QUALITATIVE DISCLOSURES ABOUT  MARKET RISK{tc “”}** |
|--------------|--------|----------------------------------------------------------------------------------|

#  

The primaryobjective of our investment activities is to preserve principal and, at the sametime, maximize income without significantly increasing risk. At June 30,2008, our cash and cash equivalents consisted primarily of highly liquidinvestments with maturities of three months or less. We believe that theseinvestments do not constitute any material market risk exposure.

 

In fiscal 2008 the majority of our operating expenseswere denominated in Australian dollars, however there were significant expensesincurred in U.S. dollars in relation to the Phase 3 trial of PI-88 and fundingour U.S. subsidiary Progen Pharmaceuticals, Inc. From time to time, inorder to reduce our exposure to foreign currency exchange rate risks, we buyand hold foreign currencies to cover our operating expenses denominated inthose currencies. We also, from time to time, attempt to hedge our currencyexchange risk. At June 30, 2008, we held a foreign currency forwardcontract of $5.0 million in U.S. dollar. As at June 30, 2008 we held $27.5million in U.S. dollars and a forward contract of $5.0 million in U.S. dollars.

 

The Group enters into derivative transactions,principally forward currency contracts from time to time. The purpose is tomanage the currency risk arising from the Group’s operation and its sources offinance. The main risks arising from the Group’s financial instruments are cashflow interest rate risk, foreign currency risk and credit risk. The Group usesdifferent methods to measure and manage different types of risks to which it isexposed. These include monitoring levels of exposure to interest rate andforeign exchange rates and assessments of market forecasts for interest rateand foreign exchange. Ageing analyses is undertaken to manage credit risk.

 

The Board reviews and agrees policies formanaging each of these risks which are summarized below.

 

**Credit risk**

 

The Group trades only with recognized, creditworthythird parties. All receivables, including other receivables and intercompanyreceivable, are current (i.e. none are contractually overdue).

 

Receivable balances are monitored on an ongoingbasis with the result that the Group’s exposure to bad debts is notsignificant. All the Group’s material cash balances are with a large nationalAustralian bank and are not exposed to the US banking market risks. There areno significant concentrations of credit risk.

 

**Liquidity risk**

 

The Group’s objective is to maintain a balancebetween continuity of project research utilizing an optimal combination ofequity funding and available credit lines. Prudent liquidity risk managementimplies maintaining sufficient cash and marketable securities. The Group has nofinancial assets/liabilities due after twelve months.

 

The table below reflects all payables andderivative financial instruments as of June 30, 2008 and 2007. Forderivative financial instruments the market value is presented, whereas for theother obligations the respective undiscounted cash flows for the respectiveupcoming fiscal years are

 

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presented. Cash flows for financial assets andliabilities without fixed amount or timing are based on the conditions existingat June 30, 2008.

 

The remaining contractual maturities of theGroup’s and parent entity’s financial liabilities are (in AUD thousands):

 
| ** **       | ** ** | **June 30,** | ** ** |
|------------------|------------|-------------------|------------|
| ** **       | ** ** | **2008**          | ** ** | **2007** | ** ** |
| 6 months or less |       | 12,043            |       | 2,096 |   |

 

**Foreign currency risk**

 

As a result of significant USD contracts with PATHWAYservice providers and significant operations in the United States, the Group’sincome statement can be affected significantly by movements in the US$/AU$exchangerates. The Group seeks to mitigate the effect of its foreign currency exposureby holding US dollars.

 

As a result of a US capital rising in May 2007and further purchases of US dollars at spot rates, the Group currently holdsUS$27,500,000 (2007: US$23,500,000).

 

At June 30, 2008 and 2007, the Group had thefollowing exposure to US$currency that is not designated in cash flow hedges(in AUD thousands):

 
| ** **                 | ** ** | **June 30,** | ** ** |
|----------------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2008**          | ** ** | **2007** | ** ** |
| **Financial  assets**      |       |              |       |   |   |
| Cash and cash  equivalents |       | 29,441            |       | 28,655 |   |
|                       |       | 29,441            |       | 28,655 | ** ** |
| **Financial  liabilities** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Trade and other  payables  |       | 4,655             |       | 267 |   |
|                       |       | 4,655             |       | 267 | ** ** |
| Net exposure               |       | 24,786            |       | 28,388 |   |

 

At June 30, 2008 and 2007, had the AustralianDollar moved, as illustrated in the table below, with all other variables heldconstant, post tax profit and equity would have been affected as follows (inAUD thousands):

 

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| ** **       | ** ** | **Post tax loss  (Higher)/Lower** | ** ** | **Equity  Higher/(Lower)** | ** ** |
|------------------|------------|---------------------------------------------|------------|----------------------------|------------|
| ** **       | ** ** | **2008**                                    | ** ** | **2007**                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Consolidated** |       |                                        |       |                       |       |   |   |   |   |
| AUD/USD + 5%     |       | (1,180                                      | )          | (1,352                     | )          | (3 | ) | — |   |
| AUD/USD -10%     |       | 2,754                                       |       | 3,154                      |       | 6 |   | — |   |
|             |       |                                        |       |                       |       |   |   |   |   |
| **Parent**       |       |                                        |       |                       |       |   |   |   |   |
| AUD/USD + 5%     |       | (1,171                                      | )          | (1,352                     | )          | — | ** ** | **—** | ** ** |
| AUD/USD -10%     |       | 2,734                                       |       | 3,154                      |       | — | ** ** | **—** | ** ** |

 

The sensitivity is lower in 2008 than 2007 due tonet exposure to USDs being higher in 2007. The sensitivity analysis in theforeign currency exposure was determined based on historical movements over thepast two years.

 

**Interest rate risk**

 

The Group’s exposure to market interest ratesrelates primarily to the Group’s cash and short-term deposits. These depositsare held to fund the Group’s ongoing and future drug development activities.Refer note 8 for details on the Groups cash and cash equivalents at 30 June 2008.

 

The following sensitivity analysis is based on theweighted average interest rates applicable to the Group’s cash and short-termdeposits in existence at the balance sheet date.

 

At June 30, 2008 and 2007, if interest rateshad moved, as illustrated in the table below, with all other variables heldconstant, post tax loss and equity would have been affected as follows (in AUDthousands):

 
| ** **              | ** ** | **Post tax loss  (Higher)/Lower** | ** ** | **Equity  Higher/(Lower)** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **2008**                                    | ** ** | **2007**                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Consolidated**        |       |                                        |       |                       |       |   |   |   |   |
| + .5% (50 basis points) |       | 384                                         |       | 491                        |       | — |   | — |   |
| - 1% (100 basis points) |       | (767                                        | )          | (982                       | )          | — |   | — |   |
|                    |       |                                        |       |                       |       |   |   |   |   |
| **Parent**              |       |                                        |       |                       |       |   |   |   |   |
| + .5% (50 basis points) |       | 382                                         |       | 491                        |       | — |   | — |   |
| - 1% (100 basis points) |       | (765                                        | )          | (982                       | )          | — |   | — |   |

 

The sensitivity is lower in 2008 than 2007 becauseof a reduction in cash and cash equivalents that occurred during the 2008financial year. The sensitivity analysis in interest rates was determined basedon historical movements over the past two years.

 

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| **ITEM 12.** |   | **DESCRIPTION OF SECURITIES OTHER THAN EQUITY  SECURITIES{TC “”}** |
|--------------|--------|------------------------------------------------------------------------------|

 

Not applicable.

 

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**PART II**

 
| **ITEM 13.** |   | **DEFAULTS, DIVIDEND ARREARAGES AND DELIQUENCIES{TC “”}** |
|--------------|--------|---------------------------------------------------------------------|

#  

None.

 
| **ITEM 14.** |   | **MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY  HOLDERS AND USE OF PROCEEDS{TC  “”}** |
|--------------|--------|-----------------------------------------------------------------------------------------------------|

 

None.

# ** **

| **ITEM 15.** |   | **CONTROLS AND PROCEDURES** |
|--------------|--------|-----------------------------|

#  

{TC “”}**Disclosure Controls andProcedures**

 

An evaluation asof June 30, 2008 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 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’s Annual Report on Internal Controlover Financial Reporting**

 

Managementof the Company is responsible for establishing and maintaining adequateinternal control over financial reporting for the Company, as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended. TheCompany’s internal control over financial reporting is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A Company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (2) providereasonable assurance that transactions are recorded as necessary to permit thepreparation of financial statements in accordance with generally acceptedaccounting principles and that receipts and expenditures of the company arebeing made only in accordance with authorizations of our Board of Directors;and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition of the Company’s assetsthat could have a material effect on the financial statements.

 

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A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Inparticular, the design of a control system must be considered relative to theircosts. Additionally, the design of a control system is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated objectives underall potential future conditions. Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect all misstatements tothe financial statements. 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.

 

TheCompany’s management has assessed the effectiveness of the Company’s internalcontrol over financial reporting as of June 30, 2008 based on the criteriaestablished in Internal Control-Integrated Framework, issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).

 

Basedon this assessment, management concluded that the Company’s internal controlover financial reporting was effective as of June 30, 2008.

 

**Attestation Report of the Registered PublicAccounting Firm**

 

Ernst & Young, which has audited theCompany’s consolidated financial statements for the fiscal year June 30,2008, has also audited the effectiveness of the Company’s internal control overfinancial reporting. The report of Ernst & Young is included underItem 18 of this Form 20-F.

 

**Changesin Internal Control over Financial Reporting{TC “”}**

 

Therehave been no significant changes in the Company’s internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect internal control over financial reporting during the fiscalyear ended June 30, 2008.

 

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# **ITEM 16.****               [RESERVED]{TC “”}**

#  

# **ITEM 16A.****            AUDITCOMMITTEE FINANCIAL EXPERT{TC“”}**

#  

TheCompany’s board of directors has determined that audit committee member Mr. P.Burns is an independent audit committee financial expert as defined under the rules andregulations of the Securities and Exchange Commission.

 

# **ITEM 16B.****            CODE OFETHICS{TC “”}**

#  

Wehave adopted a code of ethics that applies to our executive directors and chieffinancial officer. A copy of this Code of Ethics is available on the Company’swebsite at www.progen-pharma.com.

 

Nowaivers to this Code of Ethics were granted to our executive directors or chieffinancial officer during the fiscal year ended June 30, 2008.

 

# **ITEM 16C.****            PRINCIPALACCOUNTANT FEES AND SERVICES{TC“”}**

#  

The aggregate fees and expenses for professionalservices rendered by our independent registered public accounting firm Ernst &Young, for the audit of our annual financial statements for the years ended June 30,2007 and 2008 and for other listed services rendered in those years are setforth in the following table:

 
| ** **              | ** ** | **2007** | ** **  | **2008**   | ** ** |
|-------------------------|------------|----------|-------------|------------|------------|
| Audit Fees              |       | $        | 185,500     |       | $          | 315,500 |   |
| Audit-Related  Fees (1) |       | —   |        | —     |       |
| Tax Fees (2)            |       | —   |        | —     |       |
| All Other Fees  (3)     |       | 146,929  |        | 40,105     |       |
| **Total  Fees**         | ** ** | **$**    | **332,429** | ** ** | **$**      | **355,605** | ** ** |

 

----

(1)                                  Therewere no audit-related services rendered by our principal accountant.

 

(2)                                  Therewere no professional services rendered by our principal accountant for taxcompliance, tax advice or tax planning.

 

(3)                                  Otherprofessional services rendered by our principal accountant were agreed uponprocedures related services provided by Ernst & Young Palo Alto,U.S.A, in relation to the Group’s acquisition of CellGate, Inc. (2007:Assurance services in relation to the Group’s capital raising efforts).

 

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

 

All audit and non-audit services performed by ourindependent auditors must be specifically pre-approved by our audit committee.Consistent with this policy, for the year ended June 30, 2008, all auditand non-audit services initiated by Ernst & Young were pre-approved byour audit committee.

 

# **ITEM 16D.****            EXEMPTIONSFROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

#  

Not applicable.

 

# **ITEM 16E.****             PURCHASESOF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS**

#  

Not applicable.

 

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**PART III**

 

# **ITEM 17.****               FINANCIALSTATEMENTS{TC “”}**

#  

Not Applicable.

 

# **ITEM 18.****               FINANCIALSTATEMENTS{TC “”}**

#  

| **Financial  Statements - Index to Financial Statements**                             |   |              |
|---------------------------------------------------------------------------------------|--------|-------------------|
|                                                                                  |   |              |
| Report of  Independent Registered Public Accounting Firm                              |   | F-1               |
| Statements of Income for the  years ended June 30, 2006, 2007 and 2008           |   | F-3               |
| Balance Sheets as of  June 30, 2007 and 2008                                     |   | F-4               |
| Statements of  Change in Equity for the years ended June 30, 2006, 2007 and 2008 |   | F-5               |
| Statements of Cash Flow for  the years ended June 30, 2006, 2007 and 2008        |   | F-7               |
| Notes to  Financial Statements                                                        |   | F-8 through F- 46 |

 

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

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                   |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                              |
| 4(a)(1)                 |       | Agreement and Plan of Merger dated as of February 8, 2008 by and  among Progen Pharmaceuticals Limited, Progen Pharmaceuticals, Inc.,  CellGate, Inc. and Sprout Capital, L.P., as Representative (1)(+)                                      |
| 4(a)(2)                 |       | Merger Implementation Agreement dated as of December 22, 2008  between Avexa Limited and Progen Pharmaceuticals Limited^                                                                                                                                     |
| 4(b)(iv)(2)             |       | 2005 Lease 16  Benson Street Toowong*                                                                                                                                                                                                                             |
|                    |       | 2008 Lease 16  Benson Street Toowong (1)                                                                                                                                                                                                                          |
|                    |       | ASA Termination  Agreement#                                                                                                                                                                                                                                       |
|                    |       | Quintiles Master  Service Agreement#                                                                                                                                                                                                                              |
| 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                                                                                                                                                                                                         |

 

----

*              Incorporated byreference to exhibits filed with the Annual Report on Form 20-F, filed on December 20,2004.

+              Portions of this exhibit have been omittedpursuant to a request for confidential treatment and have been filed separatelywith the Commission.

 

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#              Incorporated byreference to exhibits filed with the Annual Report on Form 20-F, filed on December 18,2007.

^              Incorporated byreference to the exhibit filed with on Form 6-K dated December 22,2008.

(1)           Filedherewith.

 

**SIGNATURES**

 

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

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

 

Dated:  January 13, 2009

 

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**Report of Independent RegisteredPublic Accounting Firm**

 

**The Board of Directors and Shareholders of Progen PharmaceuticalsLimited**

 

We have audited the accompanying consolidated balance sheets of ProgenPharmaceuticals Limited and subsidaries (the Company) as of June 30, 2008and 2007, and the related consolidated statements of income, shareholders’equity, and cash flows for each of the three years in the period ended June 30,2008. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of ProgenPharmaceuticals Limited and subsidiaries at June 30, 2008 and 2007 and theconsolidated results of their operations and their cash flows for each of thethree years in the period ended June 30, 2008, in conformity withInternational Financial Reporting Standards as issued by the InternationalAccounting Standard Boards.

 

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Progen Pharmaceuticals Limited’s internalcontrol over financial reporting as of June 30, 2008, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated August 28,2008 expressed an unqualified opinion thereon.

 

 
| /s/ Ernst & Young |   |
|----------------------------|--------|
| Brisbane, Australia        |   |
| August 28, 2008       |   |

 

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**Report of Independent Registered Public Accounting Firm**

 

**The Board of Directors and Shareholders of Progen PharmaceuticalsLimited**

 

We have audited Progen PharmaceuticalsLimited’s internal control over financial reporting as of June 30, 2008,based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). ProgenPharmaceuticals Limited’s management is responsible for maintaining effectiveinternal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

 

A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In ouropinion, Progen Pharmaceuticals Limited maintained, in all material respects,effective internal control over financial reporting as of June 30, 2008,based on the COSO criteria.

 

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidatedbalance sheets of Progen Pharmaceuticals****Limitedas of June 30, 2008 and 2007, and the related consolidated statements ofincome, shareholders’ equity, and cash flows for each of the three years in theperiod ended June 30, 2008 of Progen Pharmaceuticals Limited andour report dated August 28, 2008 expressed an unqualified opinion thereon.

 

 
| /s/ Ernst & Young |   |
|----------------------------|--------|
| Brisbane, Australia        |   |
| August 28, 2008       |   |

 

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**ProgenPharmaceuticals Limited**

**Income Statement**

**Forthe year ended 30 June 2008**

 
| ** **                                                              | ** ** | **Note**   | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|-------------|------------|----------|------------|----------|------------|
| ** **                                                              | ** ** | ** ** | ** ** | **$000**    | ** ** | **$000** | ** ** | **$000** | ** ** |
| ** **                                                              |       |       |       | ** **  |       |     |       |     |       |
| **REVENUE**                                                             |       | 4 (a)      |       | **6,478**   |       | 2,666    |       | 2,008    |       |
|                                                                    |       |       |       |        |       |     |       |     |       |
| Other income from  ordinary activities                                  |       | 4 (b)      |       | **1,370**   |       | 1,113    |       | 814      |       |
|                                                                    |       |       |       |        |       |     |       |     |       |
| Research and development  expenses                                      | ** ** | ** ** |       | **16,145**  |       | 6,992    |       | 3,896    |       |
| Manufacturing facility  expenses                                        | ** ** | ** ** |       | **2,721**   |       | 2,373    |       | 2,075    |       |
| Administrative and  corporate expenses                                  | ** ** | ** ** |       | **11,082**  |       | 5,438    |       | 3,816    |       |
| Finance costs                                                           |       | 4 (c)      |       | **19**      |       | 15       |       | 25       |       |
| Impairment loss                                                         |       | 10         |       | **—**  |       | 1,769    |       | 619      |       |
| Other expenses                                                          |       | 4 (h),10   |       | **4,029**   |       | 9,646    |       | —   |       |
|                                                                    |       |       |       |        |       |     |       |     |       |
| **LOSS BEFORE INCOME TAX  EXPENSE**                                     | ** ** | ** ** |       | **(26,148** | **)**      | (22,454  | )          | (7,609   | )          |
|                                                                    |       |       |       |        | ** ** |     |       |     |       |
| **INCOME TAX EXPENSE**                                                  |       | 5          |       | —      |       | —   |       | —   |       |
|                                                                    |       |       |       |        |       |     |       |     |       |
| **NET LOSS ATTRIBUTABLE TO  MEMBERS OF PROGEN PHARMACEUTICALS LIMITED** | ** ** | ** ** | ** ** | **(26,148** | **)**      | (22,454  | )          | (7,609   | )          |
|                                                                    |       |       |       |        |       |     |       |     |       |
| Basic and diluted loss  per share (cents per share)                     |       | 6          |       | (43.3       | )          | (50.2    | )          | (18.6    | )          |
|                                                                    |       |       |       |        |       |     |       |     |       |
| Dividends per share  (cents per share)                                  |       |       |       | **—**  |       | —   |       | —   |       |

 

Theabove income statement should be read in conjunction with the accompanyingnotes

 

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**ProgenPharmaceuticals Limited**

**Balance Sheet**

**Asat 30 June 2008**

 
| ** **                         | ** ** | **Note**   | ** ** | **2008**     | ** ** | **2007** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|----------|------------|
| ** **                         | ** ** | ** ** | ** ** | **$000**     | ** ** | **$000** | ** ** |
| **ASSETS**                         |       |       |       |         |       |     |       |
| **Current Assets**                 |       |       |       |         |       |     |       |
| Cash and cash equivalents          |       | 8          | ** ** | **76,748**   |       | 98,223   |       |
| Trade and other  receivables       |       | 9          | ** ** | **722**      |       | 1,025    |       |
| Prepayments                        |       |       | ** ** | **187**      |       | 92       |       |
| Government grants                  |       |       | ** ** | **302**      |       | —   |       |
| **Total Current Assets**           | ** ** | ** ** | ** ** | **77,959**   |       | 99,340   |       |
|                               |       |       |       |         |       |     |       |
| **Non-current Assets**             |       |       |       |         |       |     |       |
| Short-term deposits                |       |       | ** ** | **98**       |       | 87       |       |
| Plant and equipment                |       | 11         | ** ** | **1,170**    |       | 1,213    |       |
| Intangible assets                  |       | 12         | ** ** | **3,364**    |       | —   |       |
| **Total Non-current Assets**       | ** ** | ** ** | ** ** | **4,632**    |       | 1,300    |       |
|                               |       |       |       |         |       |     |       |
| **TOTAL ASSETS**                   | ** ** | ** ** | ** ** | **82,591**   |       | 100,640  |       |
|                               |       |       |       |         |       |     |       |
| **LIABILITIES**                    |       |       |       |         |       |     |       |
| **Current Liabilities**            |       |       |       |         |       |     |       |
| Trade and other payables           |       | 14         | ** ** | **6,525**    |       | 2,096    |       |
| Provisions                         |       | 15         | ** ** | **312**      |       | 266      |       |
| Derivative financial  instruments  |       | 16         | ** ** | **249**      |       | —   |       |
| Government grants                  |       |       | ** ** | **9**        |       | 49       |       |
| **Total Current Liabilities**      | ** ** | ** ** | ** ** | **7,095**    |       | 2,411    |       |
|                               |       |       |       |         |       |     |       |
| **Non-current Liabilities**        |       |       |       |         |       |     |       |
| Provisions                         |       | 15         | ** ** | **237**      |       | 252      |       |
| **Total Non-current  Liabilities** | ** ** | ** ** | ** ** | **237**      |       | 252      |       |
|                               |       |       |       |         |       |     |       |
| **TOTAL LIABILITIES**              | ** ** | ** ** | ** ** | **7,332**    |       | 2,663    |       |
|                               |       |       |       |         |       |     |       |
| **NET ASSETS**                     | ** ** | ** ** | ** ** | **75,259**   |       | 97,977   |       |
|                               |       |       |       |         |       |     |       |
| **EQUITY**                         |       |       |       |         |       |     |       |
| Contributed equity                 |       | 17         | ** ** | **191,357**  |       | 189,194  |       |
| Reserves                           |       | 18         | ** ** | **3,162**    |       | 1,895    |       |
| Accumulated losses                 |       | 18         | ** ** | **(119,260** | **)**      | (93,112  | )          |
| ** **                         | ** ** | ** ** | ** ** | ** **   |       |     |       |
| **TOTAL EQUITY**                   | ** ** | ** ** | ** ** | **75,259**   |       | 97,977   |       |

 

Theabove balance sheet should be read in conjunction with the accompanying notes

 

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**ProgenPharmaceuticals Limited**

**Statement ofChanges in Equity**

**For the year ended 30 June 2008**

 
| ** **                                                               | ** ** | **Number of  ordinary  shares** | ** ** | **Amount**  | ** ** | **Accumulated  losses** | ** ** | **Reserves** | ** ** | **Total**   | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------|------------|-------------------------|------------|--------------|------------|-------------|------------|
| ** **                                                               | ** ** | ** **                           | ** ** | **$000**    | ** ** | **$000**                | ** ** | **$000**     | ** ** | **$000**    | ** ** |
| ** **                                                               | ** ** | ** **                           | ** ** | ** **  | ** ** | ** **              | ** ** | ** **   | ** ** | ** **  | ** ** |
| **At 1 July 2005**                                                  | ** ** | **40,556,793**                       | ** ** | **88,376**  | ** ** | **(63,049**             | **)**      | **56**       | ** ** | **25,383**  | ** ** |
| Income and expense recognised directly in equity                         |       | —                               |       | —      |       | —                  |       | —       |       | —      |       |
| Loss of the period                                                       |       | —                               |       | —      |       | (7,609                  | )          | —       |       | (7,609      | )          |
| **Total income/expense for the period**                                  | ** ** | **—**                           | ** ** | **—**  | ** ** | **(7,609**              | **)**      | **—**   | ** ** | **(7,609**  | **)**      |
| Exercise of options                                                      |       | 33,000                               |       | 100         |       | —                  |       | —       |       | 100         |       |
| Cost of share-based payments to employees                                |       | —                               |       | —      |       | —                  |       | 46           |       | 46          |       |
| **At 30 June 2006**                                                 | ** ** | **40,589,793**                       | ** ** | **88,476**  | ** ** | **(70,658**             | **)**      | **102**      | ** ** | **17,920**  | ** ** |
| Income and expense recognised directly in equity                         |       | —                               |       | —      |       | —                  |       | —       |       | —      |       |
| Loss of the period                                                       |       | —                               |       | —      |       | (22,454                 | )          | —       |       | (22,454     | )          |
| **Total income/expense for the period**                                  | ** ** | **—**                           | ** ** | **—**  | ** ** | **(22,454**             | **)**      | **—**   | ** ** | **(22,454** | **)**      |
| Exercise of options – employee                                      |       | 60,000                               |       | 167         |       | —                  |       | —       |       | 167         |       |
| Exercise of options – consultant                                    |       | 13,498                               |       | 60          |       | —                  |       | —       |       | 60          |       |
| Private placements                                                       |       | 3,690,037                            |       | 20,000      |       | —                  |       | —       |       | 20,000      |       |
| less transaction costs                                                   |       | —                               |       | (1,208      | )          | —                  |       | —       |       | (1,208      | )          |
| Share purchase plan                                                      |       | 989,156                              |       | 5,362       |       | —                  |       | —       |       | 5,362       |       |
| less transaction costs                                                   |       | —                               |       | (60         | )          | —                  |       | —       |       | (60         | )          |
| US placement                                                             |       | 6,900,000                            |       | 39,591      |       | —                  |       | —       |       | 39,591      |       |
| less transaction costs                                                   |       | —                               |       | (3,108      | )          | —                  |       | —       |       | (3,108      | )          |
| Rights entitlements offer                                                |       | 5,941,343                            |       | 34,101      |       | —                  |       | —       |       | 34,101      |       |
| less transaction costs                                                   |       | —                               |       | (2,502      | )          | —                  |       | —       |       | (2,502      | )          |
| Equity-settled transactions:                                             |       |                                 |       |        |       |                    |       |         |       |        |       |
| Ordinary shares issued as part of termination  agreement (refer note 10) |       | 1,232,600                            |       | 8,325       |       | —                  |       | —       |       | 8,325       |       |
| less transaction costs                                                   |       | —                               |       | (10         | )          | —                  |       | —       |       | (10         | )          |
| Options issued as part of termination agreement  (refer note 10)         |       | —                               |       | —      |       | —                  |       | 1,322        |       | 1,322       |       |
| Share-based payments to employees                                        |       | —                               |       | —      |       | —                  |       | 419          |       | 419         |       |
| Share-based payments to consultants                                      |       | —                               |       | —      |       | —                  |       | 52           |       | 52          |       |
| **At 30 June 2007**                                                 | ** ** | **59,416,427**                       | ** ** | **189,194** | ** ** | **(93,112**             | **)**      | **1,895**    | ** ** | **97,977**  | ** ** |

 

Theabove statement of changes in equity should be read in conjunction with theaccompanying notes

 

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**ProgenPharmaceuticals Limited**

**Statement of Changes inEquity**

**For the year ended 30 June 2008**

 
| ** **                                                               | ** ** | **Number of  ordinary  shares** | ** ** | **Amount**  | ** ** | **Accumulated  losses** | ** ** | **Reserves** | ** ** | **Total**   | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------|------------|-------------------------|------------|--------------|------------|-------------|------------|
| ** **                                                               | ** ** | ** **                           | ** ** | **$000**    | ** ** | **$000**                | ** ** | **$000**     | ** ** | **$000**    | ** ** |
|                                                                     |       |                                 |       |        |       |                    |       |         |       |        |       |
| **At 30 June 2007**                                                 | ** ** | **59,416,427**                       | ** ** | **189,194** | ** ** | **(93,112**             | **)**      | **1,895**    | ** ** | **97,977**  | ** ** |
| Income and expense recognised directly in equity                         |       | —                               |       | —      |       | —                  |       | —       |       | —      |       |
| Loss of the period                                                       |       | —                               |       | —      |       | (26,148                 | )          | —       |       | (26,148     | )          |
| Foreign currency translation reserve                                     |       | —                               |       | —      |       | —                  |       | (61          | )          | (61         | )          |
| **Total income/expense for the period**                                  |       | —                               |       | —      | ** ** | **(26,148**             | **)**      | **(61**      | **)**      | **(26,209** | **)**      |
| Transaction costs related to shares issued prior to  30 June 2007   |       | —                               |       | (265        | )          | —                  |       | —       |       | (265        | )          |
| Ordinary shares issued as part of acquisition  agreement (refer note 20) |       | 604,959                              |       | 1,119       |       | —                  |       | —       |       | 1,119       |       |
| less transaction costs                                                   |       | —                               |       | (5          | )          | —                  |       | —       |       | (5          | )          |
| Ordinary shares issued as part of acquisition  agreement (refer note 20) |       | 201,265                              |       | 372         |       | —                  |       | —       |       | 372         |       |
| less transaction costs                                                   |       | —                               |       | (3          | )          | —                  |       | —       |       | (3          | )          |
| Ordinary shares issued as part of termination  agreement (refer note 10) |       | 171,240                              |       | 947         |       | —                  |       | —       |       | 947         |       |
| less transaction costs                                                   |       | —                               |       | (2          | )          | —                  |       | —       |       | (2          | )          |
| Share-based payments to employees                                        |       | —                               |       | —      |       | —                  |       | 1,328        |       | 1,328       |       |
| **At 30 June 2008**                                                 | ** ** | **60,393,891**                       | ** ** | **191,357** | ** ** | **(119,260**            | **)**      | **3,162**    | ** ** | **75,259**  | ** ** |

 

The abovestatement of changes in equity should be read in conjunction with the accompanyingnotes

 

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**ProgenPharmaceuticals Limited**

**Cash Flow Statement**

**For the year ended 30 June 2008**

 
| ** **                                          | ** ** | **Note**   | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006**     | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------|------------|----------|------------|--------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **$000**    | ** ** | **$000** | ** ** | **$****000** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**           | ** ** | ** ** | ** ** |        | ** ** |     |       |         |       |
| Receipts from customers                             |       |       |       | **1,629**   | ** ** | 179      |       | 1,250        |       |
| Payments to suppliers,  employees and others        |       |       |       | **(23,315** | **)**      | (11,806  | )          | (9,668       | )          |
| Receipt of government  grants                       |       |       |       | **973**     | ** ** | 1,097    |       | 838          |       |
| Interest received                                   |       |       |       | **5,048**   | ** ** | 1,447    |       | 1,084        |       |
| Finance costs                                       |       |       |       | **(19**     | **)**      | (15      | )          | (25          | )          |
| NET CASH FLOWS (USED IN)  OPERATING ACTIVITIES      |       | 8          |       | **(15,684** | **)**      | (9,098   | )          | (6,521       | )          |
|                                                |       |       |       |        | ** ** |     |       |         |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**           | ** ** | ** ** |       |        | ** ** |     |       |         |       |
| Purchase of property,  plant & equipment   |       | 11         |       | **(354**    | **)**      | (254     | )          | (1,061       | )          |
| Payments for short-term  deposits                   |       |       |       | **—**  | ** ** | —   |       | (74          | )          |
| Acquisition of net assets                           |       | 20         |       | **570**     | ** ** | —   |       | —       |       |
| Costs incurred on  acquisition of net assets        |       | 20         |       | **(1,148**  | **)**      | —   |       | —       |       |
| NET CASH FLOWS (USED IN)  INVESTING ACTIVITIES      |       |       |       | **(932**    | **)**      | (254     | )          | (1,135       | )          |
|                                                |       |       |       |        | ** ** |     |       |         |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**           | ** ** | ** ** |       |        | ** ** |     |       |         |       |
| Exercise of options                                 |       |       |       | **—**  | ** ** | 227      |       | 100          |       |
| Share placement                                     |       |       |       | **—**  | ** ** | 99,054   |       | —       |       |
| Transaction costs on  issue of shares               |       | 17(b)      |       | **(275**    | **)**      | (6,878   | )          | —       |       |
| Repayment of loan                                   |       | 20         |       | **(803**    | **)**      | —   |       | —       |       |
| NET CASH FLOWS FROM  FINANCING ACTIVITIES           |       |       |       | **(1,078**  | **)**      | 92,403   |       | 100          |       |
| NET INCREASE/(DECREASE)  IN CASH HELD               |       |       |       | **(17,694** | **)**      | 83,051   |       | (7,556       | )          |
| Net foreign exchange  differences                   |       | 4(d)       |       | **(3,781**  | **)**      | (700     | )          | —       |       |
| Cash and cash equivalents  at beginning of period   |       |       |       | **98,223**  | ** ** | 15,872   |       | 23,428       |       |
| **CASH AND CASH EQUIVALENTS  AT END OF THE PERIOD** |       | 8          |       | **76,748**  | ** ** | 98,223   |       | 15,872       |       |

 

Theabove cash flow statement should be read in conjunction with the accompanyingnotes

 

F-7

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Tableof Contents

 

**ProgenPharmaceuticals Limited**

**Notes to the Financial Statements**

**Forthe year ended 30 June 2008**

 

**1. CORPORATE INFORMATION**

 

The consolidated financial report of Progen Pharmaceuticals Limited (theGroup) for the year ended 30 June 2008 was authorised for issue inaccordance with a resolution of the directors on 27 August 2008.

 

ProgenPharmaceuticals Limited (the parent) is a company limited by sharesincorporated in Australia whose shares are publicly traded on the AustralianSecurities Exchange (ASX) and the NASDAQ Capital Market.

 

The nature ofthe operations and principal activities of the Group are described in Note 3.

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**Basis of preparation**

 

The financial report complies with Australian Accounting Standards asissued by the Australian Accounting Standards Boards and InternationalFinancial Reporting Standards (IFRS) as issued by the International AccountingStandards Board.

 

The financial report has been prepared on a historical cost basis.

 

The financial report is presented in Australian dollars and all values arerounded to the nearest thousand dollars ($000) unless otherwise stated underthe option available to the Group under ASIC Class Order 98/100. The Groupis an entity to which the class order applies.

 

**New accounting standards**

 

AustralianAccounting Standards that have recently been issued or amended but are not yeteffective have not been adopted for the annual reporting period ended 30 June 2008.  The Group’s assessment of the impact of thenew standards and interpretations considered relevant to it is set out below:

 

i.                      AASB 8 (IFRS 8) *Operating Segments*and related consequential amending standard AASB 2007-3 *Amendmentsto Australian Accounting Standards*

 

AASB 8 (IFRS 8) is applicable to reporting periodscommencing on or after 1 January 2009. AASB 8 (IFRS 8) is a new standard replacing AASB 114 *Segment Reporting*(IAS 14), which adopts a managementapproach to segment reporting. AASB 8 (IFRS 8) is a disclosure standard so willhave no direct impact on the amounts included in the Group’s financialstatements, although it may indirectly impact the level at which goodwill istested for impairment. In addition, the amendments may have an impact on theGroup’s segment disclosure.

 

ii.                   AASB 2008-1 *Amendment to AustralianAccounting Standard – Share-based Payments: Vesting Conditions andCancellations* [AASB 2 (IFRS 2)]

 

The amendment of AASB 2 (IFRS 2) is applicable toreporting periods commencing on or after 1 January 2009.  The amendment to AASB 2 (IFRS 2) requiresinstances where a failure to satisfy a non-vesting condition that is within thecontrol of either the entity or the counterparty to be accounted for as acancellation.

 

iii.                AASB3 (IFRS 3) *Business Combinations* and AASB 127 (IAS27) *Consolidated and Separate Financial Statements*and AASB 2008-3 Amendment to Australian Accounting Standards arising from AASB3 (IFRS 3) and AASB 127 (IAS 27)

 

These amendments are applicable to reporting periodscommencing on or after 1 July 2009. The Group has not yet assessed the impact they may have on futurefinancial reports.

 

F-8

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Table of Contents

 

**Progen Pharmaceuticals Limited**

**Notes to the Financial Statements**

**Forthe year ended 30 June 2008**

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)**

 

**Newaccounting standards (cont’d)**

 

iv.           AASB101 (IAS 1) and related consequential amending standard AASB 2007-8 *Presentation of Financial Statements and consequential amendments toother Australian Accounting Standards.*Introduces a statement ofcomprehensive income. Other revisions include impacts on the presentation ofitems in the statement of changes in equity, new presentation requirements forrestatements or reclassifications of items in the financial statements, changesin the presentation requirements for dividends and changes to the titles of thefinancial statements.

 

These amendments are applicable toreporting periods commencing on or after 1 January 2009.  The Group has not yet assessed the impactthis may have on future financial reports.

 

v.              AASB2008-7 *Amendments to Australian Accounting Standards*-Cost of an Investment in a Subsidiary, Jointly Controlled *Entity*or Associate. The main amendments of relevance to Australian entities are thosemade to AASB 127 (IAS 27) deleting the ‘cost method’ and requiring alldividends from a subsidiary, jointly controlled entity or associate to berecognised in profit or loss in an entity’s separate financial statements(i.e., parent company accounts). The distinction between pre- andpost-acquisition profits is no longer required. However, the payment of suchdividends requires the entity to consider whether there is an indicator ofimpairment.

 

AASB 2008-7 is applicable to reportingperiods commencing on or after 1 January 2009. The Group has not yetassessed the impact this may have on future financial reports.

 

**Adoption of newaccounting standards**

 

Since 1 July 2007 the Group and the Company haveadopted the following standards and Interpretations, mandatory for annualperiods beginning on or after 1 January 2007. Adoption of these Standardsand Interpretations did not have any effect on the financial position orperformance of the Group or the Company.

 

·                  AASB 7 (IFRS 7) *FinancialInstruments: Disclosures* and related consequential amending standardAASB 2005-10 *Amendments to Australian AccountingStandards.*

·                  AASB Interpretation 11(IFRIC 11) *Group and Treasury ShareTransactions*

·                  AASB 2007-4 *Amendments to AustralianAccounting Standards arising from ED 151 and Other Amendments*

·                  AASB 2007-7 *Amendments to AustralianAccounting Standards*

 

**Basis of consolidation**

 

The consolidated financial statements comprise thefinancial statements of Progen Pharmaceuticals Limited and its subsidiaries asat 30 June each year (the Group).

 

Subsidiaries are all those entities over which theGroup has the power to govern the financial and operating policies so as toobtain benefits from their activities. The existence and effect of potentialvoting rights that are currently exercisable are considered when assessingwhether a group controls another entity.

 

In preparing the consolidated financial statements,all intercompany balances and transactions, income and expenses and profit andlosses resulting from intra-group transactions have been eliminated in full.

 

Subsidiaries are fully consolidated from the date onwhich control is obtained by the Group and cease to be consolidated from thedate on which control is transferred out of the Group.

 

F-9

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Table ofContents

 

**Progen Pharmaceuticals Limited**

**Notes to the Financial Statements**

**For the year ended 30 June2008**

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d)**

** **

**Basis of consolidation (cont’d)**

 

Investments in subsidiaries held by ProgenPharmaceuticals Limited are accounted for at cost in the separate financialstatements of the parent entity.

 

The acquisition of subsidiaries is accounted for usingthe purchase method of accounting. The purchase method of accounting involvesallocating the cost of the business combination to the fair value of the assetsacquired and the liabilities and contingent liabilities assumed at the date ofacquisition.

 

**Business combinations and asset acquisitions –refer note 20**

 

The purchase method of accounting is used to accountfor all business combinations regardless of whether equity instruments or otherassets are acquired. Cost is measured as the fair value of the assets given,shares issued or liabilities incurred or assumed at the date of exchange pluscosts directly attributable to the combination. Where equity instruments areissued in a business combination, the fair value of the instruments is theirpublished market price as at the date of exchange. Transaction costs arising onthe issue of equity instruments are recognised directly in equity.

 

All identifiable assets acquired and liabilities andcontingent liabilities assumed in a business combination are measured initiallyat their fair values at the acquisition date. The excess of the cost of thebusiness combination over the net fair value of the Group’s share of theidentifiable net assets acquired is recognised as goodwill. If the cost ofacquisition is less than the Group’s share of the net fair value of the identifiablenet assets of the subsidiary, the difference is recognised as a gain in theincome statement, but only after a reassessment of the identification andmeasurement of the net assets acquired.

 

Acquisitions of entities that do not meet thedefinition of a business contained in AASB 3 *BusinessCombinations*(IFRS 3) are not accounted for as businesscombinations. In such cases the Group identifies and recognises the individualidentifiable assets acquired (including those assets that meet the definitionof, and recognition criteria for, intangible assets in AASB 138 *Intangible Assets*(IAS 38)) and liabilities assumed. Thecost of the group of net assets is then allocated to the individualidentifiable assets and liabilities on the basis of their relative fair valuesat the date of purchase. Such a transaction or event does not give rise togoodwill.

 

**Significantaccounting judgements, estimates and assumptions**

 

Thecarrying amounts of certain assets and liabilities are often determined basedon estimates and assumptions of future events. The key estimates andassumptions that have a significant risk of causing a material adjustment tothe carrying amounts of certain assets and liabilities within the next annualreporting period are:

* *

*(i) Sharebased payments*

 

Thecosts of equity-settled transactions are measured by reference to the fairvalue of the equity instruments at the date at which they are granted. The fairvalue of rights over shares is determined using a binomial model, furtherdetails of which are given in note 13. The accounting estimates and assumptions relating to equity-settledshare-based payments would have no impact on the carrying amounts of assets andliabilities within the next annual reporting period but may impact expenses andequity.

 

**Revenuerecognition – refer note 4**

 

Revenueis recognised to the extent that it is probable that the economic benefits willflow to the Group and the revenue can be reliably measured. The followingspecific recognition criteria must also be met before revenue is recognised:

 

*(i) Renderingof services*

 

Revenuefrom the provision of contract manufacturing services is recognised byreference to the stage of completion. Stage of completion is measured byreference to the outcome achieved to date as a percentage of the total outcomerequired for each contract.

 

*(ii) Interestincome*

 

Revenueis recognised as interest accrues using the effective interest method. This isa method of calculating the amortised cost of a financial asset and allocatingthe interest income over the relevant period using the effective interest rate,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.

 

F-10

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Table ofContents

 

**Progen Pharmaceuticals Limited**

**Notes to the Financial Statements**

**Forthe year ended 30 June 2008**

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cont’d)**

** **

**Governmentgrants – refer note 4 and 23**

 

Governmentgrants are recognised as revenue when there is reasonable assurance that thegrant will be received and all attaching conditions will be complied with. Whengrants are received prior to being earned, they are recognised as a liabilityin the balance sheet.

 

Whenthe grant relates to an expense item, it is recognised as income over theperiods necessary to match the grant on a systematic basis to the costs that itis intended to compensate.

* *

Whenthe grant relates to an asset, the fair value is credited to a deferred incomeaccount and is released to the income statement over the expected useful lifeof the relevant asset by equal annual instalments.

* *

**Borrowingcosts – refer note 4**

 

Borrowingcosts are recognised as an expense when incurred.

* *

**Leases– refer note 21**

 

Thedetermination of whether an arrangement is or contains a lease is based on thesubstance of the arrangement and requires an assessment of whether thefulfilment of the arrangement is dependent on the use of a specific asset orassets and the arrangement conveys a right to use the asset.

 

Operatinglease payments are recognised as an expense in the income statement on astraight-line basis over the lease term. Lease incentives are recognised in theincome statement as an integral part of the total lease expense. There are nofinance leases.

 

**Cashand cash equivalents – refer note 8**

 

Cashand short-term deposits in the balance sheet comprise cash at bank and in handand short term deposits with an original maturity of three months or less.

 

For thepurposes of the Cash Flow Statement, cash and cash equivalents consist of cashand cash equivalents as defined above.

 

**Restrictedshort-term deposits**

 

As at30 June 2008 restricted term deposits totalling $98,000 (2007: $87,000)were held under bank guarantees relating to the Group’s leased premises.

 

**Tradeand other receivables – refer note 9**

 

Tradereceivables, which generally have 30-90 day terms, are recognised and carriedat original invoice amount less an allowance for any uncollectible amounts.

 

Anallowance for doubtful debts is made when there is objective evidence that theGroup will not be able to collect the debts. Bad debts are written off whenidentified.

 

**Derivativefinancial instruments – refer note 16**

 

TheGroup uses derivative financial instruments (forward currency contract) tomanage the risks associated with foreign currency fluctuation. Such derivativefinancial instruments are initially recognised at fair value on the date onwhich a derivative contract is entered into and are subsequently remeasured tofair value using current forward exchange rates for contracts with similarmaturity profiles.

 

Derivativesare carried as assets when their fair value is positive and as liabilities whentheir fair value is negative.

 

As thederivative instrument does not qualify for hedge accounting, any gains orlosses arising from changes in the fair value of derivatives are taken directlyto profit or loss for the year.

 

**Investmentand other financial assets**

 

Investmentsand financial assets in the scope of AASB 139 (IAS 39) *Financialinstruments: Recognition and Measurement* and AASB 7 *Financial instruments: Disclosure* are categorised as eitherfinancial assets at fair value through profit or loss, loans and receivables,held-to-maturity investments, or available-for-sale financial assets. Theclassification depends on the purpose for which the investments were acquired.Designation is re-evaluated at each financial year end, but there arerestrictions on reclassifying to other categories.

 

F-11

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Table ofContents

 

**Progen Pharmaceuticals Limited**

**Notes to the Financial Statements**

**For the year ended 30 June2008**

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cont’d)**

 

**Investmentand other financial assets (cont’d)**

 

Whenfinancial assets are recognised initially, they are measured at fair value,plus, in the case of assets not at fair value through profit or loss, directlyattributable transaction costs. The only financial assets are receivables,which are subsequently  measured atamortised cost, and derivatives, which are subsequently measured at fair valuethrough profit or loss.

 

*Recognitionand Derecognition*

 

Allregular way purchases and sales of financial assets are recognised on the tradedate i.e. the date that the Group commits to purchase the asset. Regular waypurchases or sales are purchases or sales of financial assets under contractsthat require delivery of the assets within the period established generally byregulation or convention in the market place. Financial assets are derecognisedwhen the right to receive cash flows from the financial assets have expired orbeen transferred.

 

**Foreigncurrency translation**

* *

*(i) Functionaland presentation currency*

 

Thefunctional and presentation currency of Progen Pharmaceuticals Limited isAustralian dollars ($). The United States subsidiaries’ functional currency isUnited States dollars which is translated to presentation currency (see below).

* *

*(ii) Transactions &balances*

 

Transactionsin foreign currencies are initially recorded in the functional currency byapplying the exchange rates ruling at the date of the transaction. Monetaryassets and liabilities denominated in foreign currencies are retranslated atthe rate of exchange ruling at the balance sheet date.

 

Non-monetaryitems that are measured in terms of historical cost in a foreign currency are translatedusing the exchange rate as at the date of the initial transaction. Non-monetaryitems measured at fair value in a foreign currency are translated using theexchange rates at the date when the fair value was determined.

 

*(iii) Translationof Group Companies functional currency to presentation currency*

 

Theresults of the United States subsidiary are translated into Australian dollarsas at the date of each transaction. Assets and liabilities are translated atexchange rates prevailing at balance date.

 

Exchangevariations resulting from the translation are recognised in the foreigncurrency translation reserve in equity.

 

**Incometax – refer note 5**

 

Currenttax assets and liabilities for the current and prior periods are measured atthe amount expected to be recovered from or paid to the taxation authorities.The tax rates and tax laws used to compute the amount are those that areenacted or substantively enacted by the balance sheet date.

 

Deferredincome tax is provided on all temporary differences at the balance sheet datebetween the tax bases of assets and liabilities and their carrying amounts forfinancial reporting purposes.

 

Deferredincome tax liabilities are recognised for all taxable temporary differencesexcept:

 

·                  when the deferred income tax liability arises from the initialrecognition of goodwill or an asset or liability in a transaction that is not abusiness combination and that, at the time of the transaction, affects neitherthe accounting profit or loss nor taxable profit or loss; or

·                  when the taxable temporary difference is associated with investmentsin subsidiaries, and the timing or the reversal of the temporary difference canbe controlled and it is probably that the temporary difference will not reversein the foreseeable future.

 

F-12

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Table ofContents

 

**Progen Pharmaceuticals Limited**

**Notes to the Financial Statements**

**For the year ended 30 June2008**

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cont’d)**

** **

**Incometax – refer note 5 (cont’d)**

* *

Deferredincome tax assets are recognised for all deductible temporary differences,carry-forward of unused tax assets and unused tax losses, to the extent that itis probable that taxable profit will be available against which the deductibletemporary differences and the carry-forward of unused tax credits and unusedtax losses can be utilised, except:

 

·                  when the deferred income tax asset relating to the deductible temporarydifference arises from the initial recognition of an asset or liability in atransaction that is not a business combination and, at the time of thetransaction, affects neither the accounting profit nor taxable profit or loss;or

·                  when the deductible temporary difference is associated withinvestments in subsidiaries, in which case a deferred tax asset is onlyrecognised to the extent that it is probable that the temporary difference willreverse in the foreseeable future and taxable profit will be available againstwhich the temporary difference can be utilised.

 

Thecarrying amount of deferred income tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the deferred incometax asset to be utilised.

 

Unrecogniseddeferred income tax assets are reassessed at each balance sheet date and arerecognised to the extent that it has become probable that future taxable profitwill allow the deferred tax asset to be recovered.

* *

Deferredincome tax assets and liabilities are measured at the tax rates that areexpected to apply to the year when the asset is realised or the liability issettled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted at the balance sheet date.

** **

Deferredtax assets and deferred tax liabilities are offset only if a legallyenforceable right exists to set off current tax assets against current taxliabilities and the deferred tax assets and liabilities relate to the sametaxable entity and the same taxation authority.

 

**Othertaxes**

 

Revenues,expenses and assets are recognised net of the amount of GST except:

 

·                  when the GST incurred on a purchase of goods and services is notrecoverable from the taxation authority, in which case the GST is recognised aspart of the cost of acquisition of the asset or as part of the expense item asapplicable; and

·                  receivables and payables, which are stated with the amount of GSTincluded.

* *

The netamount of GST recoverable from, or payable to, the taxation authority isincluded as part of receivables or payables in the balance sheet.

* *

Cashflows are included in the Cash Flow Statement on a gross basis and the GSTcomponent of cash flows arising from investing and financing activities, whichis recoverable from, or payable to, the taxation authority are classified asoperating cash flows.

 

Commitmentsand contingencies are disclosed net of the amount of GST recoverable from, orpayable to, the taxation authority.

 

**Plantand equipment – refer note 11**

 

Plantand equipment is stated at cost less accumulated depreciation and anyaccumulated impairment losses.

Depreciationis calculated on a straight-line basis over the estimated useful life of theassets as follows:

* *
| Plant  and equipment            | 5 to  10 years |   |   |
|---------------------------------|----------------|--------|--------|
| Office  furniture and equipment | 3 to  10 years |   |   |
| Leasehold  improvements         | 3 to  6 years  |   |   |

 

Theassets’ residual values, useful lives and amortisation methods are reviewed,and adjusted if appropriate, at each financial year end.

 

F-13

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June 2008**

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cont’d)**

 

**Plantand equipment – refer note 11 (cont’d)**

* *

*(i) Impairment*

 

Thecarrying values of plant and equipment are reviewed for impairment at eachreporting date, with recoverable amount being estimated when events or changesin circumstances indicate that the carrying value may be impaired.

* *

Therecoverable amount of plant and equipment is the higher of fair value lesscosts to sell and value in use. In assessing value in use, the estimated futurecash flows are discounted to their present value using a pre-tax discount ratethat reflects current market assessments of the time value of money and therisks specific to the asset.

* *

For anasset that does not generate largely independent cash inflows, recoverableamount is determined for the cash-generating unit to which the asset belongs,unless the asset’s value in use can be estimated to be close to its fair value.

* *

Animpairment exists when the carrying value of an asset or cash-generating unitsexceeds its estimated recoverable amount. The asset or cash-generating unit isthen written down to its recoverable amount.

 

*(ii) Derecognitionand disposal*

 

An itemof property, plant and equipment is derecognised upon disposal or when nofurther future economic benefits are expected from its use or disposal.

 

Anygain or loss arising on derecognition of the asset (calculated as thedifference between the net disposal proceeds and the carrying amount of theasset) is included in profit or loss in the year the asset is derecognised.

 

**Intangibleassets – refer note 12**

 

Intangibleassets acquired separately or in a business combinations are initially measuredat cost. The cost of an intangible asset acquired in a business combination oras an asset acquisition is its fair value as at the date of acquisition.Following initial recognition, intangible assets are carried at cost less anyaccumulated amortisation and any accumulated impairment losses. Internallygenerated intangible assets, excluding capitalised development costs, are notcapitalised and expenditure is recognised in profit or loss in the year inwhich the expenditure is incurred.

 

Theuseful lives of intangible assets are assessed to be either finite orindefinite. Intangible assets with finite lives are amortised over the usefullife and tested for impairment whenever there is an indication that theintangible asset may be impaired. The amortisation period and the amortisation methodfor an intangible assets with a finite useful life is reviewed at least eachfinancial year-end. Changes in the expected useful life of the expected patternof consumption of future economic benefits embodied in the asset are accountedfor prospectively by changing the amortisation period or method, asappropriate, which is a change in accounting estimate. The amortisation expenseon intangible assets with finite lives is recognised in profit or loss in theexpense category consistent with the function of the intangible asset.

* *

A summary of the policy applies to the Group’sintangible assets is as follows:

 
| **Intellectual Property Rights**                                                                         |
|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                               |
| *Useful life*                                                                                            |
| Finite                                                                                                   |
| *Amortisation method used*                                                                               |
| Amortised  over the period of expected future benefit from the related project on a  straight line basis |
| *Internally generated or acquired*                                                                       |
| Acquired                                                                                                 |
| *Impairment testing*                                                                                     |
| Annually as  at 30 June. The amortisation method is reviewed at each financial year-end.                 |

 

F-14

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June 2008**

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cont’d)**

 

**Tradeand other payables – refer note 14**

 

Tradepayables and other payables are carried at amortised costs and their fair valueapproximates their carrying value due to their short term nature. Theyrepresent liabilities for goods and services provided to the Group prior to theend of the financial year that are unpaid and arise when the Group becomesobliged to make future payments in respect of the purchase of these goods andservices.

 

**Provisions– refer note 15**

 

Provisionsare recognised when the Group has a present obligation (legal or constructive)as a result of a past event, it is probable that an outflow of resourcesembodying economic benefits will be required to settle the obligation and areliable estimate can be made of the amount of the obligation.

 

Whenthe Group expects some or all of a provision to be reimbursed, for exampleunder an insurance contract, the reimbursement is recognised as a separateasset but only when the reimbursement is virtually certain. The expenserelating to any provision is presented in the income statement net of anyreimbursement.

* *

If theeffect of the time value of money is material, provisions are discounted usinga current pre-tax rate that reflects the risks specific to the liability.

* *

Whendiscounting is used, the increase in the provision due to the passage of timeis recognised as a borrowing cost.

* *

**Makegood provision**

 

Provisionis made for the anticipated costs of future restoration of our leasedmanufacturing and corporate premises. The provision includes future cost estimates associated with therestoration of these premises to their original condition at the end of thelease term.  These future cost estimatesare discounted to their present value.

 

**Employeeleave benefits**

* *

*(i) Wages,salaries, annual leave and sick leave*

 

Liabilitiesfor wages and salaries, including non-monetary benefits expected to be settledwithin 12 months of the reporting date are recognised in other payables inrespect of employees’ services up to the reporting date. Annual leave accruedand expected to be settled within 12 months of the reporting date is recognisedin current provisions. They are measured at the amounts expected to be paidwhen the liabilities are settled. Liabilities for non accumulating sick leaveare recognised when the leave is taken and are measured at the rates paid orpayable.

* *

*(ii) Longservice leave*

 

Theliability for long service leave is recognised in the provision for employeebenefits and measured as the present value of expected future payments to bemade in respect of services provided by employees up to the reporting dateusing the projected unit credit method. Consideration is given to expectedfuture wage and salary levels, experience of employee departures, and periodsof service. Expected future payments are discounted using market yields at thereporting date on national government bonds with terms to maturity andcurrencies that match, as closely as possible, the estimated future cashoutflows.

** **

**Share-basedpayment transactions – refer note 13**

* *

*(i) Equity-settledtransactions:*

 

TheGroup provides benefits to employees (including senior executives) andconsultants of the Group in the form of share-based payments, whereby employeesand consultants render services in exchange for shares or rights over shares(equity-settled transactions). In addition, the Group has made share-basedpayments to Medigen Biotechnology Corporation under the terms of an agreement(refer note 11).

 

Thecost of these equity-settled transactions are measured by reference to the fairvalue of the equity instruments at the date at which they are granted. The fairvalue of rights over shares is determined using a binomial model, furtherdetails of which are given in note 14. The fair value of shares is determinedby the market value of the Group’s shares at grant date.

 

Invaluing equity-settled transactions, no account is taken of any performanceconditions, other than conditions linked to the price of the shares of theGroup (market conditions) if applicable.

 

F-15

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cont’d)**

 

**Share-basedpayment transactions – refer note 13 (cont’d)**

 

Thecost of equity-settled transactions is recognised, together with acorresponding increase in equity, over the period in which the performanceand/or service conditions are fulfilled, ending on the date on which therelevant employees become fully entitled to the award (the vesting period).

* *

Thecumulative expense recognised for equity-settled transactions at each reportingdate until vesting date reflects

 

(i) theextent to which the vesting period has expired; and

(ii) theGroup’s best estimate of the number of equity instruments that will ultimatelyvest.

 

Noadjustment is made for the likelihood of market performance conditions beingmet as the effect of these conditions is included in the determination of fairvalue at grant date. The income statement charge or credit for a periodrepresents the movement in cumulative expense recognised as at the beginningand end of that period.

* *

Noexpense is recognised for awards that do not ultimately vest, except for awardswhere vesting is only conditional upon a market condition.

* *

If theterms of an equity-settled award are modified, as a minimum an expense isrecognised as if the terms had not been modified. In addition, an expense isrecognised for any modification that increases the total fair value of theshare-based payment arrangement, or is otherwise beneficial to the employee, asmeasured at the date of modification.

* *

If anequity-settled award is cancelled, it is treated as if it had vested on thedate of cancellation, and any expense not yet recognised for the award isrecognised immediately. However, if a new award is substituted for thecancelled award and designated as a replacement award on the date that it isgranted, the cancelled and new award are treated as if they were a modificationof the original award, as described in the previous paragraph.

 

Thedilutive effect, if any, of outstanding options is reflected as additionalshare dilution in the computation of earnings per share.

* *

**Contributedequity – refer note 17**

 

Ordinaryshares are classified as equity. Incremental costs directly attributable to theissue of new shares or options are shown in equity as a deduction, net of tax,from the proceeds.

* *

**Earningsper share – refer note 6**

 

Basicearnings per share is calculated as net profit attributable to members of theGroup, adjusted to exclude any costs of servicing equity, divided by theweighted average number of ordinary shares, adjusted for any bonus element.

 

Dilutedearnings per share is calculated as net profit attributable to members of theGroup, adjusted for:

 

·        costs of servicing equity;

·        the after tax effect of dividends and interest associated withdilutive potential ordinary shares that have been recognised as expenses; and

·        other non-discretionary changes in revenues or expenses during theperiod that would result from the dilution of potential ordinary shares dividedby the weighted average number of ordinary shares and dilutive potentialordinary shares, adjusted for any bonus element.

 

**Segmentreporting – refer note 3**

 

Abusiness segment is a distinguishable component of the entity that is engagedin providing products or services that are subject to risks and returns thatare different to those of other operating business segments.

 

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Table of Contents

 

**Progen Pharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June 2008**

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cont’d)**

 

**Research and developmentcosts**

 

Research costsare expensed as incurred. An intangible asset arising from developmentexpenditure on an internal project is recognised only when the Group candemonstrate the technical feasibility of completing the intangible asset sothat it will be available for use or sale, its intention to complete and itsability to use or sell the asset, how the asset will generate future economicbenefits, the availability or resources to complete the development and theability to measure reliably the expenditure attributable to the intangibleasset during its development. Following the initial recognition of thedevelopment expenditure, the cost model is applied requiring the asset to becarried at cost less any accumulated amortisation and accumulated impairmentlosses. Any expenditure so capitalised is amortised over the period of expectedbenefit from the related project. There are no capitalised development costs.

 

**3. SEGMENT INFORMATION**

 

TheGroup operates predominantly in the biotechnology industry.  The Group’s primary segment reporting formatis business segments as the Group’s risks and rates of return are affectedpredominantly by differences in the products and services produced. The Group’sactivities comprise the research, development, and manufacture ofbiopharmaceuticals.

 

The operatingbusinesses are organised and managed separately according to the nature of theproducts and services provided, with each segment representing a strategicbusiness unit that offers different products and serves different markets.There are no intersegment transactions.

 
| ** **                               | ** ** | **Research &  Development** | ** ** | **Manufacturing** | ** ** | **Total**    | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                               | ** ** | **$****000**                         | ** ** | **$****000**      | ** ** | **$****000** | ** ** |
| **Business segments**               | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **   | ** ** |
| **2008**                                 | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **   | ** ** |
| ** **                               |       |                                 |       |              |       |         |       |
| **Operating revenue**                    |       |                                 |       |              |       |         |       |
| Sales to external customers              |       | —                               |       | 1,086             |       | 1,086        |       |
| Government grants                        |       | 1,316                                |       | —            |       | 1,316        |       |
| Total segment revenue                    |       | 1,316                                |       | 1,086             |       | 2,402        |       |
|                                     |       |                                 |       |              |       |         |       |
| Unallocated revenue                      |       |                                 |       |              |       | 5,446        |       |
| Total revenue                            |       |                                 |       |              |       | 7,848        |       |
|                                     |       |                                 |       |              |       |         |       |
| **Segment result**                       |       | (14,828                              | )          | (1,635            | )          | (16,463      | )          |
|                                     |       |                                 |       |              |       |         |       |
| Unallocated revenues & expenses |       |                                 |       |              |       | (9,685       | )          |
| **Operating loss**                       |       |                                 |       |              |       | (26,148      | )          |
|                                     |       |                                 |       |              |       |         |       |
| **2008**                                 | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **   | ** ** |
| **Assets**                               |       |                                 |       |              |       |         |       |
| Segment assets                           |       | 4,057                                |       | 639               |       | 4,696        |       |
| Unallocated assets                       |       |                                 |       |              |       | 77,895       |       |
| Total assets                             |       |                                 |       |              |       | 82,591       |       |
|                                     |       |                                 |       |              |       |         |       |
| **Liabilities**                          |       |                                 |       |              |       |         |       |
| Segment liabilities                      |       | 5,498                                |       | 208               |       | 5,706        |       |
| Unallocated liabilities                  |       |                                 |       |              |       | 1,626        |       |
| Total liabilities                        |       |                                 |       |              |       | 7,332        |       |

 

F-17

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**Forthe year ended 30 June 2008**

 

**3. SEGMENT INFORMATION(cont’d)**

 
| ** **                                                                                     | ** ** | **Research &  Development** | ** ** | **Manufacturing** | ** ** | **Total**    | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                                                                                     | ** ** | **$****000**                         | ** ** | **$****000**      | ** ** | **$****000** | ** ** |
| **Other segment information**                                                                  |       |                                 |       |              |       |         |       |
| Acquisition of property, plant & equipment,  and other non-current assets        |       | 42                                   |       | 168               |       | 210          |       |
| Unallocated acquisition of property,  plant & equipment, and other non-current assets |       |                                 |       |              |       | 3,660        |       |
| Depreciation                                                                                   |       | 78                                   |       | 264               |       | 342          |       |
| Unallocated depreciation and amortisation                                                      |       |                                 |       |              |       | 231          |       |
| ** **                                                                                     | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **   | ** ** |
| **Business segments**                                                                     | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **   | ** ** |
| **2007**                                                                                       | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **   | ** ** |
|                                                                                           |       |                                 |       |              |       |         |       |
| **Operating revenue**                                                                          |       |                                 |       |              |       |         |       |
| Sales to external customers                                                                    |       | —                               |       | 920               |       | 920          |       |
| Government grants                                                                              |       | 1,073                                |       | —            |       | 1,073        |       |
| Total segment revenue                                                                          |       | 1,073                                |       | 920               |       | 1,993        |       |
|                                                                                           |       |                                 |       |              |       |         |       |
| Unallocated revenue                                                                            |       |                                 |       |              |       | 1,786        |       |
| Total revenue                                                                                  |       |                                 |       |              |       | 3,779        |       |
|                                                                                           |       |                                 |       |              |       |         |       |
| **Segment result**                                                                             |       | (5,919                               | )          | (1,453            | )          | (7,372       | )          |
|                                                                                           |       |                                 |       |              |       |         |       |
| Unallocated revenues & expenses                                                       |       |                                 |       |              |       | (15,082      | )          |
| **Operating loss**                                                                             |       |                                 |       |              |       | (22,454      | )          |
|                                                                                           |       |                                 |       |              |       |         |       |
| **2007**                                                                                       | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **   | ** ** |
| **Assets**                                                                                     |       |                                 |       |              |       |         |       |
| Segment assets                                                                                 |       | 342                                  |       | 721               |       | 1,063        |       |
| Unallocated assets                                                                             |       |                                 |       |              |       | 99,577       |       |
| Total assets                                                                                   |       |                                 |       |              |       | 100,640      |       |
|                                                                                           |       |                                 |       |              |       |         |       |
| **Liabilities**                                                                                |       |                                 |       |              |       |         |       |
| Segment liabilities                                                                            |       | 1,310                                |       | 244               |       | 1,554        |       |
| Unallocated liabilities                                                                        |       |                                 |       |              |       | 1,109        |       |
| Total liabilities                                                                              |       |                                 |       |              |       | 2,663        |       |
| ** **                                                                                     |       |                                 |       |              |       |         |       |
| **Other segment information**                                                                  |       |                                 |       |              |       |         |       |
| Acquisition of property, plant & equipment,  and other non-current assets             |       | 46                                   |       | 170               |       | 216          |       |
| Unallocated acquisition of property,  plant & equipment, and other non-current assets |       |                                 |       |              |       | 38           |       |
| Depreciation                                                                                   |       | 127                                  |       | 320               |       | 447          |       |
| Unallocated depreciation                                                                       |       |                                 |       |              |       | 54           |       |

 

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June 2008**

 

**3.SEGMENT INFORMATION (cont’d)**

 
| ** **                                                                                     | ** ** | **Research &  Development** | ** ** | **Manufacturing**  | ** ** | **Total**          | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                     | ** ** | **$****’000**                   | ** ** | **$****’000** | ** ** | **$****’000** | ** ** |
| **Business segments**                                                                          |       |                                 |       |               |       |               |       |
| **2006**                                                                                       |       |                                 |       |               |       |               |       |
|                                                                                           |       |                                 |       |               |       |               |       |
| **Operating revenue**                                                                          |       |                                 |       |               |       |               |       |
| Sales to external customers                                                                    |       | —                               |       | 905                |       | 905                |       |
| Government grants                                                                              |       | 760                                  |       | —             |       | 760                |       |
| Total segment revenue                                                                          |       | 760                                  |       | 905                |       | 1,665              |       |
|                                                                                           |       |                                 |       |               |       |               |       |
| Unallocated revenue                                                                            |       |                                 |       |               |       | 1,157              |       |
| Total revenue                                                                                  |       |                                 |       |               |       | 2,822              |       |
|                                                                                           |       |                                 |       |               |       |               |       |
| **Segment result**                                                                             |       | (3,135                               | )          | (1,170             | )          | (4,305             | )          |
|                                                                                           |       |                                 |       |               |       |               |       |
| Unallocated revenues & expenses                                                       |       |                                 |       |               |       | (3,304             | )          |
| **Operating loss**                                                                             |       |                                 |       |               |       | (7,609             | )          |
| ** **                                                                                     | ** ** | ** **                           | ** ** | ** **         | ** ** | ** **         | ** ** |
| **2006**                                                                                       | ** ** | ** **                           | ** ** | ** **         | ** ** | ** **         | ** ** |
| **Assets**                                                                                     |       |                                 |       |               |       |               |       |
| Segment assets                                                                                 |       | 783                                  |       | 898                |       | 1,681              |       |
| Unallocated assets                                                                             |       |                                 |       |               |       | 18,112             |       |
| Total assets                                                                                   |       |                                 |       |               |       | 19,793             |       |
|                                                                                           |       |                                 |       |               |       |               |       |
| **Liabilities**                                                                                |       |                                 |       |               |       |               |       |
| Segment liabilities                                                                            |       | 854                                  |       | 193                |       | 1,047              |       |
| Unallocated liabilities                                                                        |       |                                 |       |               |       | 826                |       |
| Total liabilities                                                                              |       |                                 |       |               |       | 1,873              |       |
| ** **                                                                                     |       |                                 |       |               |       |               |       |
| **Other segment information**                                                                  |       |                                 |       |               |       |               |       |
| Acquisition of property, plant & equipment,  and other non-current assets             |       | 330                                  |       | 545                |       | 875                |       |
| Unallocated acquisition of property,  plant & equipment, and other non-current assets |       |                                 |       |               |       | 186                |       |
| Depreciation                                                                                   |       | 220                                  |       | 274                |       | 494                |       |
| Unallocated depreciation                                                                       |       |                                 |       |               |       | 38                 |       |

 

**Geographicalsegments**

 

The Group operates the Research and Development business in Australiaand the U.S.A. As the risks and returns associated with the operations of eachgeographical segment are not materially different, the Group does not reportseparately by geographical segment.

 

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**4.  REVENUE AND EXPENSES**

 
| ** **                                                                                                                                                    | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                                    | ** ** | **$000**   | ** ** | **$000** | ** ** | **$000** | ** ** |
| **(a) Revenue**                                                                                                                                          |       |       |       |     |       |     |       |
| Manufacturing services  revenue                                                                                                                               | ** ** | **1,086**  |       | 920      |       | 905      |       |
| Interest revenue                                                                                                                                              | ** ** | **5,392**  |       | 1,746    |       | 1,103    |       |
| Total revenue                                                                                                                                                 | ** ** | **6,478**  |       | 2,666    |       | 2,008    |       |
|                                                                                                                                                          |       |       |       |     |       |     |       |
| **(b) Other income**                                                                                                                                     |       |       |       |     |       |     |       |
| Government grants                                                                                                                                             | ** ** | **1,316**  |       | 1,073    |       | 760      |       |
| Other                                                                                                                                                         | ** ** | **54**     |       | 40       |       | 54       |       |
| Total other income                                                                                                                                            | ** ** | **1,370**  |       | 1,113    |       | 814      |       |
|                                                                                                                                                          |       |       |       |     |       |     |       |
| **(c) Finance cost**                                                                                                                                     |       |       |       |     |       |     |       |
| Other loans                                                                                                                                                   | ** ** | **17**     |       | 15       |       | 15       |       |
| Make good provision  discount adjustment                                                                                                                      | ** ** | **2**      |       | —   |       | 10       |       |
| Total finance costs                                                                                                                                           | ** ** | **19**     |       | 15       |       | 25       |       |
|                                                                                                                                                          |       |       |       |     |       |     |       |
| **(d) Depreciation,  amortisation and foreign exchange differences included in the income  statement**                                                   |       |       |       |     |       |     |       |
| Depreciation                                                                                                                                                  | ** ** | **423**    |       | 501      |       | 532      |       |
| Amortisation of  Intellectual Property rights                                                                                                                 | ** ** | **151**    |       | —   |       | —   |       |
| Net foreign exchange  loss/(gain) - realised                                                                                                                  | ** ** | **79**     |       | 17       |       | —   |       |
| Net foreign exchange  loss/(gain) - unrealised                                                                                                                | ** ** | **3,781**  |       | 700      |       | —   |       |
|                                                                                                                                                          |       |       |       |     |       |     |       |
| **(e) Lease payments  and other expenses included in the income statement**                                                                              |       |       |       |     |       |     |       |
| Minimum lease payments –  operating leases                                                                                                               | ** ** | **342**    |       | 295      |       | 222      |       |
|                                                                                                                                                          |       |       |       |     |       |     |       |
| **(f) Employee benefit  expenses**                                                                                                                       |       |       |       |     |       |     |       |
| Wages and salaries                                                                                                                                            | ** ** | **4,905**  |       | 4,170    |       | 3,729    |       |
| Long service leave  provision                                                                                                                                 | ** ** | **25**     |       | 20       |       | 18       |       |
| Share-based payments  expenses                                                                                                                                | ** ** | **1,328**  |       | 419      |       | 46       |       |
|                                                                                                                                                          |       |       |       |     |       |     |       |
| **(g) Write off  receivables due to un-collectability**                                                                                                  |       |       |       |     |       |     |       |
| Bad debt expense                                                                                                                                              | ** ** | **121**    |       | —   |       | —   |       |
|                                                                                                                                                          |       |       |       |     |       |     |       |
| **(h) Other expenses**                                                                                                                                   |       |       |       |     |       |     |       |
| Fair value of 171,240  Progen shares issued (2007: 1,232,600) and 561,360 Progen shares purchased  on-market as part of termination agreement (refer note 10) | ** ** | **2,029**  |       | 8,325    |       | —   |       |
| Issue of 1,000,000  options as part of termination agreement (refer note 10)                                                                                  | ** ** | **—** |       | 1,321    |       | —   |       |
| Cash paid to Medigen as  part of termination agreement (refer note 10)                                                                                        | ** ** | **2,000**  |       | —   |       | —   |       |
| ** **                                                                                                                                                    |       | **4,029**  |       | 9,646    |       | —   |       |

 

F-20

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June 2008**

 

**5.  INCOME TAX**

 
| ** **                                                                                                                                                                    | ** ** | **2008**    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                                                                    | ** ** | **$000**    | ** ** | **$000**   | ** ** | **$000**   | ** ** |
| The prima facie tax,  using tax rates applicable in the country of operation, on operating loss  differs from the income tax provided in the financial statements as follows: |       |        |       |       |       |       |       |
| Prima facie tax on loss  from operating activities @ 30%                                                                                                                      | ** ** | **(7,844**  | **)**      | (6,736     | )          | (2,283     | )          |
| Tax effect of amounts  which are not deductible (taxable) in calculating taxable income:                                                                                      |       |        | ** ** |       |       |       |       |
| - Impairment of  available-for-sale investment                                                                                                                                | ** ** | **—**  | ** ** | 531        |       | 186        |       |
| - Non deductible items                                                                                                                                                        | ** ** | **447**     | ** ** | 561        |       | 16         |       |
| - Temporary differences                                                                                                                                                       | ** ** | **291**     | ** ** | (265       | )          | 71         |       |
| - Additional deduction  for research and development expenditure                                                                                                              | ** ** | **(1,621**  | **)**      | (262       | )          | (218       | )          |
| Prior year R&D  true-up                                                                                                                                                   | ** ** | **(595**    | **)**      | —     |       | —     |       |
| Foreign tax rate adjustment                                                                                                                                                   | ** ** | **(193**    | **)**      | —     |       | —     |       |
| Income tax benefit  attributable to current year losses as reported in the Income Statement                                                                                   | ** ** | **(9,515**  | **)**      | (6,171     | )          | (2,228     | )          |
| Deferred tax asset not  brought to account as realisation of the asset is not regarded as probable                                                                            | ** ** | **9,515**   | ** ** | 6,171      |       | 2,228      |       |
| Income tax attributable  to operating loss                                                                                                                                    | ** ** | **—**  | ** ** | —     |       | —     |       |
|                                                                                                                                                                          |       |        | ** ** |       |       |       |       |
| ** **                                                                                                                                                                    | ** ** | **2008**    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
| ** **                                                                                                                                                                    | ** ** | **$000**    | ** ** | **$000**   | ** ** | **$000**   | ** ** |
| **Deferred income tax**                                                                                                                                                       |       |        | ** ** |       |       |       |       |
| Deferred income tax at 30  June relates to the following:                                                                                                                |       |        | ** ** |       |       |       |       |
| *Deferred tax liabilities*                                                                                                                                                    | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest on short-term  investments                                                                                                                                           | ** ** | **(193**    | **)**      | (90        | )          | (24        | )          |
| Grant income not yet  assessable                                                                                                                                              | ** ** | **(91**     | **)**      | —     |       | —     |       |
| Gain on  available-for-sale investment                                                                                                                                        | ** ** | **—**  | ** ** | —     |       | (531       | )          |
|                                                                                                                                                                          |       |        | ** ** |       |       |       |       |
| *Deferred tax assets*                                                                                                                                                         |       |        | ** ** |       |       |       |       |
| Unrealised foreign  currency loss                                                                                                                                             | ** ** | **1,134**   | ** ** | 210        |       | —     |       |
| Sundry creditors and  accruals                                                                                                                                                | ** ** | **67**      | ** ** | 63         |       | 87         |       |
| Depreciation                                                                                                                                                                  | ** ** | **181**     | ** ** | 202        |       | 239        |       |
| Employee entitlements                                                                                                                                                         | ** ** | **118**     | ** ** | 110        |       | 102        |       |
| Make good obligation                                                                                                                                                          | ** ** | **46**      | ** ** | 45         |       | 41         |       |
| Share issue transaction  costs                                                                                                                                                | ** ** | **1,330**   | ** ** | 1,709      |       | 93         |       |
| Patent costs                                                                                                                                                                  | ** ** | **146**     | ** ** | 143        |       | 96         |       |
| Losses available for  offset against future taxable income                                                                                                                    | ** ** | **39,043**  | ** ** | 29,528     |       | 23,357     |       |
| Deferred tax asset                                                                                                                                                            | ** ** | **41,781**  | ** ** | 31,920     |       | 23,460     |       |
| Net deferred tax asset  not recognised                                                                                                                                        | ** ** | **(41,781** | **)**      | (31,920    | )          | (23,460    | )          |
| Net deferred income tax  assets                                                                                                                                               | ** ** | **—**  | ** ** | —     |       | —     |       |

 

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**Forthe year ended 30 June 2008**

 

**5.  INCOME TAX (cont’d)**

 

Thedeferred tax asset will only be obtained if:

 

(i)                       future assessable income of a nature and of an amount sufficient toenable the benefit to be realised;

(ii)                    the conditions for deductibility imposed by tax legislation continueto be complied with;  and

(iii)                 nochanges in tax legislation adversely affect the Group in realising the benefit.

 

**TheGroup has tax losses arising in Australia of $127,756,000 (2007: $100,411,000,2006: $77,935,000) that are available indefinitely for offset against futuretaxable profits of the companies in which the losses arose, subject tosatisfying the relevant income tax loss carry forward rules. The Company has USfederal and state net operating loss carryforwards of approximately $1,488,000and $257,000.**

 

**6. EARNINGS/(LOSS) PERSHARE**

 

The followingreflects the income and share data used in the basic and diluted earnings pershare computations:

 
| ** **                                                                                                | ** ** | **2008**                   | ** ** | **2007**                   | ** ** | **2006**                   | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                | ** ** | **$****000**               | ** ** | **$****000**               | ** ** | **$000**                   | ** ** |
|                                                                                                      |       |                       |       |                       |       |                       |       |
| Loss used in calculating  basic earnings/(loss) per share                                                 | ** ** | **(26,148**                | **)**      | (22,454                    | )          | (7,609                     | )          |
| ** **                                                                                                | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| ** **                                                                                                | ** ** | **Number of  shares** | ** ** | **Number of  shares** | ** ** | **Number of  shares** | ** ** |
| Weighted average number  of ordinary shares on issue used in the calculation of basic earnings per  share | ** ** | **60,339,594**             |       | 44,768,450                 |       | 40,966,390                 |       |
|                                                                                                      |       |                       |       |                       |       |                       |       |
| Basic and diluted  earnings/(loss) per share (cents per share)                                            | ** ** | **(43.3**                  | **)**      | (50.2                      | )          | (18.6                      | )          |

 

Basic loss pershare amounts are calculated by dividing the net loss for the year attributableto ordinary equity holders of the parent by the weighted average number ofordinary shares outstanding during the year. Diluted loss per share amounts arecalculated by dividing the net loss attributable to ordinary equity holders ofthe parent by the weighted average number of ordinary shares outstanding duringthe year plus the weighted average number of ordinary share that would beissued on conversion of all dilutive potential ordinary shares into ordinaryshares.

 

Thereare 5,639,538 options that have been excluded because the loss position makesany potential ordinary share anti-dilutive**.**

 

**7. DIVIDENDS PAID AND PROPOSED**

 

The entity has not declared or paid dividends and does not anticipatedeclaring or paying any dividends in the immediate term.

 

**8.CURRENT ASSETS - CASH AND CASH EQUIVALENTS**

 
| ** **                | ** ** | **2008**   | ** ** | **2007** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|
| ** **                | ** ** | **$000**   | ** ** | **$000** | ** ** |
| Cash at bank and in hand  | ** ** | **1,247**  |       | 31,864   |       |
| Short-term deposits       | ** ** | **75,501** |       | 66,359   |       |
| Cash and cash equivalents | ** ** | **76,748** |       | 98,223   |       |

 

Cash at bankearns interest at floating rates based on daily bank deposit rates.

 

Short-termdeposits are made for varying periods of between one month and three months,depending on the immediate cash requirements of the Group, and earn interest atthe respective short-term deposit rates.

 

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Table of Contents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**8. CURRENT ASSETS - CASH AND CASH EQUIVALENTS(cont’d)**

 
| ** **                                                                                           | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| ** **                                                                                           | ** ** | **$000**    | ** ** | **$000** | ** ** | **$000** | ** ** |
| ** **                                                                                           |       |        | ** ** |     |       |     |       |
| **Reconciliation  of net loss after tax to net cash flows from operations**                          |       |        | ** ** |     |       |     |       |
| Net loss                                                                                             | ** ** | **(26,148** | **)**      | (22,454  | )          | (7,609   | )          |
| Adjustments  for:                                                                                    |       |        | ** ** |     |       |     |       |
| Depreciation                                                                                         | ** ** | **423**     | ** ** | 501      |       | 532      |       |
| Impairment of  available-for-sale financial assets                                                   | ** ** | **—**  | ** ** | 1,769    |       | 619      |       |
| Make good  provision                                                                                 | ** ** | **2**       | ** ** | —   |       | (23      | )          |
| Amortisation  of Intellectual Property rights                                                        | ** ** | **151**     | ** ** | —   |       | —   |       |
| Share options  expensed                                                                              | ** ** | **1,328**   | ** ** | 471      |       | 46       |       |
| Equity based  payments issued as part of termination agreement (refer note 10) – shares  issued | ** ** | **947**     | ** ** | 9,646    |       | —   |       |
| Net fair value  change on derivatives (loss)                                                         | ** ** | **249**     | ** ** | —   |       | —   |       |
| Net loss on  disposal of property, plant and equipment                                               | ** ** | **1**       | ** ** | —   |       | —   |       |
| Foreign  exchange loss – unrealised                                                             | ** ** | **3,781**   | ** ** | 700      |       | —   |       |
| Foreign  currency movement                                                                           | ** ** | **(61**     | **)**      | —   |       | —   |       |
|                                                                                                 |       |        | ** ** |     |       |     |       |
| **Changes  in assets and liabilities**                                                               |       |        | ** ** |     |       |     |       |
| (Increase)/decrease  in trade and other receivables                                                  | ** ** | **302**     | ** ** | (869     | )          | 87       |       |
| (Increase)/decrease  in prepayments                                                                  | ** ** | **(63**     | **)**      | 357      |       | (411     | )          |
| (Decrease)/increase  in trade and other payables                                                     | ** ** | **3,716**   | ** ** | 823      |       | 103      |       |
| (Decrease)/increase  in provisions                                                                   | ** ** | **31**      | ** ** | 35       |       | 9        |       |
| (Decrease)/increase  in government grants                                                            | ** ** | **(343**    | **)**      | (77      | )          | 126      |       |
| Net cash used  in operating activities                                                               | ** ** | **(15,684** | **)**      | (9,098   | )          | (6,521   | )          |

 

**9. TRADE AND OTHERRECEIVABLES**

 

**Current**

 
| ** **                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                | ** ** | **$000** | ** ** | **$000** | ** ** |
| Trade receivables                         | ** ** | **9**    |       | 602      |       |
| Other receivables (i)                     | ** ** | **713**  |       | 423      |       |
| Total current trade and other receivables | ** ** | **722**  |       | 1,025    |       |

 

----

(i) Other receivablesare non-interest bearing and are generally on 30-90 day terms.

 

F-23

----

Table of Contents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**10.MEDIGEN ALLIANCE AGREEMENT TERMINATION**

 

On 31 May 2000, Progen entered into an agreement withMedigen (“MBC”), a company incorporated in Taiwan, in relation to theco-development of PI-88 (the ‘Alliance Agreement’). Under the AllianceAgreement, MBC was to fund and conduct, at no cost to Progen, several Phase IIclinical trials in respect of PI-88. These trials were in addition to thoseundertaken by Progen. In return MBC was entitled to receive a 15% royalty onPI-88 proceeds of commercialisation received by Progen.

 

On 28 April 2005, Progen, and MBC agreed to amendthe terms of the Alliance Agreement in that Progen agreed to waive therequirement for MBC to conduct one of the Phase II trials outlined in theAlliance Agreement. In return, MBC agreed to fund 50% of Phase 2 melanomaclinical trial (PI-88 in combination with Dacarbazine) up to $1 million.

 

Under the Alliance Agreement, Progen was issued 19.9%of MBC ́s issued ordinary equity with certain anti-dilution rights. As at 30 June 2006,Progen held 15,176,525 ordinary shares in MBC.

 

On 16 January 2007, Progen announced that it hadagreed terms with MBC to conclude the Alliance Agreement. In consideration forMBC agreeing to end the Alliance Agreement, and foregoing their entitlement tothe 15% royalty, and to compensate MBC for their contribution to thedevelopment of PI-88, Progen agreed to:

 

·                  Return the15,176,525 MBC ordinary shares to MBC.

·                  Issue 500,000 Progenshares to MBC on execution of the termination agreement;

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

·                  Issue a further732,600 Progen shares and pay $2,000,000 in cash or shares, at Progen’sdiscretion, to MBC on MBC completing two clinical milestones in relation to thePI-88 Phase 2 HCC Trial;

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

·                  Issue 1,000,000options to MBC upon MBC providing to Progen the HCC Phase 2 Trial Final StudyReport.

 

The financial statements for the period ended 30 June 2007included the financial impact of the return of the 15,176,525 MBC shares toMBC, that being an impairment loss of $1,769,198, the reimbursement of the$300,000, the value of 1,232,600 Progen shares and 1,000,000 options on Progenshares.  The fair value at themeasurement date of the 1,232,600 Progen shares was $8,325,000 and 1,000,000options over Progen shares was $1,321,000. The total financial impact was anincrease in the 2007 net loss from continuing operations of $11,715,198.

 

The fair value of the shares and options issued to Medigenwas calculated using a binomial model rather than estimating the fair value ofthe 15% royalty stream being bought back as we were unable to reliably estimatethe future cash flows of PI-88 as we were still in development.

 

In accordance with the Accounting Standard AASB 138(IAS 38) *Intangible Assets* the 15% royalty streambeing bought back by Progen has been valued at $nil.  As a result, the fair value of the shares andoptions issued to Medigen have been expensed.

 

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 1,000,000options issued to Medigen has been calculated using a binomial model takinginto account the terms and conditions upon which the options were granted. Theassumptions used as inputs to the model were:

 
| Expected volatility              |   | 71   | %      |
|----------------------------------|--------|------|--------|
| Risk-free interest rate          |   | 6.22 | %      |
| Expected life of options (years) |   | 2    |   |
| Option exercise price            |   | $    | 7.11   |   |
| Share price at grant date        |   | $    | 5.46   |   |
| Dividend yield                   |   | 0.0  | %      |

 

F-24

----

Table of Contents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**10.MEDIGEN ALLIANCE AGREEMENT TERMINATION (cont’d)**

 

The net loss for the year ended 30 June 2008include, an expense of $2,029,000 which represents MBC completing the secondclinical milestone in relation to the PI-88 phase 2 HCC trial (this obligationwas satisfied via the issue of 732,600 shares of which 171,240 were newlyissued shares and 561,360 were acquired on-market and re-issued to MBC) and$2,000,000 paid to MBC on PI-88 achieving a specified clinical milestone.

 

There remains $2,000,000 to be paid on a defined PI-88commercialisation milestone or transaction event being achieved. This will bebooked in a future reporting period if and when incurred.

 

**11. NON-CURRENT ASSETS - PLANT &EQUIPMENT**

 
| ** **                      | ** ** | **1 July 2007** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Depreciation** | ** ** | **30 June 2008** | ** ** |
|---------------------------------|------------|---------------------------|------------|---------------|------------|---------------|------------|------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **$000**                  | ** ** | **$000**      | ** ** | **$000**      | ** ** | **$000**         | ** ** | **$000**                   | ** ** |
| ** **                      |       |                      |       |          |       |          |       |             |       |                       |       |
| **Plant &  equipment** |       |                      |       |          |       |          |       |             |       |                       |       |
| At cost                         |       | 4,766                     |       | 165           |       | —        |       | —           |       | 4,931                      |       |
| Accumulated depreciation        |       | (3,805                    | )          | —        |       | —        |       | (305             | )          | (4,110                     | )          |
|                            |       | 961                       |       | 165           |       | —        |       | (305             | )          | 821                        |       |
| ** **                      | ** ** | ** **                | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **                 | ** ** |
| **Office equipment**            | ** ** | ** **                | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **                 | ** ** |
| At cost                         |       | 421                       |       | 148           |       | (2            | )          | —           |       | 567                        |       |
| Acquisition of assets           |       | —                    |       | 27            |       | —        |       | —           |       | 27                         |       |
| Accumulated depreciation        |       | (326                      | )          | —        |       | 1             |       | (79              | )          | (404                       | )          |
|                            |       | 95                        |       | 175           |       | (1            | )          | (79              | )          | 190                        |       |
|                            |       |                      |       |          |       |          |       |             |       |                       |       |
| **Leasehold improvements**      |       |                      |       |          |       |          |       |             |       |                       |       |
| At cost                         |       | 811                       |       | 41            |       | —        |       | —           |       | 852                        |       |
| Accumulated depreciation        |       | (654                      | )          | —        |       | —        |       | (39              | )          | (693                       | )          |
|                            |       | 157                       |       | 41            |       | —        |       | (39              | )          | 159                        |       |
|                            |       |                      |       |          |       |          |       |             |       |                       |       |
| **TOTAL**                       | ** ** | **1,213**                 | ** ** | **381**       |       | (1            | )          | **(423**         | **)**      | **1,170**                  | ** ** |
| ** **                      | ** ** | ** **                | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **                 | ** ** |
| ** **                      | ** ** | **1 July 2006** | ** ** | **Additions** | ** ** | **Disposals** | ** ** | **Depreciation** | ** ** | **30 June 2007** | ** ** |
| ** **                      | ** ** | **$000**                  | ** ** | **$000**      | ** ** | **$000**      | ** ** | **$000**         | ** ** | **$000**                   | ** ** |
| **Plant &  equipment** |       |                      |       |          |       |          |       |             |       |                       |       |
| At cost                         |       | 4,603                     |       | 163           |       | —        |       | —           |       | 4,766                      |       |
| Accumulated depreciation        |       | (3,408                    | )          | —        |       | —        |       | (397             | )          | (3,805                     | )          |
|                            |       | 1,195                     |       | 163           |       | —        |       | (397             | )          | 961                        |       |
| ** **                      | ** ** | ** **                | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **                 | ** ** |
| **Office equipment**            | ** ** | ** **                | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** | ** **                 | ** ** |
| At cost                         |       | 353                       |       | 68            |       | —        |       | —           |       | 421                        |       |
| Accumulated depreciation        |       | (286                      | )          | —        |       | —        |       | (40              | )          | (326                       | )          |
|                            |       | 67                        |       | 68            |       | —        |       | (40              | )          | 95                         |       |
|                            |       |                      |       |          |       |          |       |             |       |                       |       |
| **Leasehold improvements**      |       |                      |       |          |       |          |       |             |       |                       |       |
| At cost                         |       | 788                       |       | 23            |       | —        |       | —           |       | 811                        |       |
| Accumulated depreciation        |       | (590                      | )          | —        |       | —        |       | (64              | )          | (654                       | )          |
|                            |       | 198                       |       | 23            |       | —        |       | (64              | )          | 157                        |       |
|                            |       |                      |       |          |       |          |       |             |       |                       |       |
| **TOTAL**                       | ** ** | **1,460**                 | ** ** | **254**       |       | —        | ** ** | **(501**         | **)**      | **1,213**                  | ** ** |

 

F-25

----

Table of Contents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

### **12. NON-CURRENT ASSETS - INTANGIBLEASSETS**

### ** **

### **Intellectual property rights**

 

### **Reconciliationof carrying amount at the beginning and end of the period:**

 
| ** **                                            | ** ** | **$000**  | ** ** |
|-------------------------------------------------------|------------|-----------|------------|
| **Year end 30  June 2008**                       |       |      |       |
| At 1 July 2007 net  of accumulated amortisation  |       | —    |       |
| Acquisition of intangible  asset (note 20)            |       | 3,515     |       |
| Amortisation                                          |       | (151      | )          |
| At 30 June 2008 net  of accumulated amortisation | ** ** | **3,364** | ** ** |

 

Intellectual property rights were acquired through anacquisition of a company and are carried at cost less accumulated amortisation.This intangible asset has been determined to have a useful life until 15 October 2017,which is the patent expiry of the lead compound acquired through theacquisition of CellGate, Inc. (refer note 20) and is being amortised usingthe straight line method over this period. The amortisation has been recognisedin the income statement in the line item “administrative and corporate expenses”.If an impairment indication arises, the recoverable amount is estimated and animpairment loss is recognised to the extent that the recoverable amount islower than the carrying amount.

 

### **13. SHARE BASED PAYMENTS**

 

**(a) Employee option plan**

 

The Progen Directors and Employee Option IncentivePlan (“the Employee Plan”) was last approved by shareholders at the 2007 annualgeneral meeting.

 

Options granted to Company employees are issued underthe Employee Plan.  Options are grantedunder the Employee Plan for no consideration and once capable of exerciseentitle the holder to subscribe for one fully-paid ordinary share upon exerciseat the exercise price.  The exerciseprice, except for the 500,000 options granted to the CEO, is based on theweighted average closing price at which the Group’s shares are traded on theAustralian Securities Exchange during the five trading days immediately beforethey are granted.

 

Options granted under the Employee Plan that have notvested at the time an option holder becomes ineligible (ie. no longer anemployee), are forfeited and not capable of exercise.  Options must be exercised by the expiry datesor they lapse. The vesting period is 12 months of service from the grant date.

 

**(b) Consultant option plan**

 

On 16 February 2005 the Directors approved theProgen Consultants and Advisors Option Incentive Plan (‘the Consultant Plan”).  The Consultant Plan rules are consistentwith the Employee Plan rules, in that the consultants provide similar servicesto employees so the awards are accounted for in the same way as employee awardsand the options vest over 12 months.

 

At 30 June 2008 there were a total of 20,000(2007: 20,000) unlisted options over ordinary shares issued to a consultant.

 

**(c) Medigen options**

 

Under the terms of an agreement (refer note 10) Progenissued Medigen Biotechnology Corporation 1,000,000 options on 6 June 2007.These options were granted for nil consideration, are exercisable from the dateof issue and have an exercise price of $7.11. The expiry date for these optionsis 6 June 2009. The grant date fair value of each option was $1.32.

 

At 30 June 2008 there were a total of 1,000,000(2007: 1,000,000) unlisted options over shares issued to Medigen.

 

F-26

----

Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**13. SHARE BASED PAYMENTS (cont’d)**

 

Informationwith respect to the number of all options granted is as follows:

 
| ** **                      | ** ** | **2008**                    | ** ** | **2007**                               | ** ** | **2006**                    | ** ** |
|---------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Number of  options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number of  options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number of  options** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                      | ** ** | ** **                  | ** ** | **$**                                  | ** ** | ** **                  | ** ** | **$** | ** ** | ** ** | ** ** | **$** | ** ** |
| Beginning of the financial year |       | 1,637,000                   |       | 6.61                                   |       | 30,000                      |       | 3.09 |   | 567,820 |   | 4.00 |   |
| - granted (i)                   |       | 1,317,250                   |       | 3.46                                   |       | 1,667,000                   |       | 6.69 |   | 63,000 |   | 3.06 |   |
| - forfeited                     |       | (159,750                    | )          | 3.61                                   |       | —                      |       | — |   | (22,000 | ) | 4.00 |   |
| - expired                       |       | (125,500                    | )          | 3.30                                   |       | —                      |       | — |   | (545,820 |   | 4.00 |   |
| - exercised (ii)                |       | —                      |       | —                                 |       | (60,000                     | )          | 2.79 |   | (33,000 | ) | 3.03 |   |
| Balance at end of year          |       | 2,669,000                   |       | 5.39                                   |       | 1,637,000                   |       | 6.61 |   | 30,000 |   | 3.09 |   |
| Exercisable at end of year      |       | 1,864,834                   |       |                                   |       | 1,303,667                   |       |   |   | 30,000 |   |   |   |

 

----

### **(i) Theweighted average fair value at the grant date in the 2008 financial year was$1.17 (2007: $1.20).**

### **(ii) Theweighted average share price at the date of exercise for share optionsexercised in the 2008 financial year was $nil (2007; $6.50).**

 

The following table summarises information about optionsgranted during the course of the financial year and outstanding at 30 June 2008:

 
| ** **             | ** ** | ** **              | ** ** | **Balance beginning of year** | ** ** | **Balance end of year**   | ** ** |
|------------------------|------------|-------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
| **Grant date**    | ** ** | **Expiry date**    | ** ** | **Number of  options**                  | ** ** | **Average  option  exercise price** | ** ** | **Number of  options** | ** ** | **Average  option  exercise  price** | ** ** |
| ** **             | ** ** | ** **              | ** ** | ** **                                   | ** ** | **$**                                    | ** ** | ** ** | ** ** | **$** | ** ** |
| 8 April 2006      |       | 8  November 2008   |       | 30,000                                       |       | 3.09                                     |       | 30,000 |   | 3.09 |   |
| 29 August 2006    |       | 28  February 2008  |       | 33,000                                       |       | 2.79                                     |       | — |   | — |   |
| 29 August 2006    |       | 29  August 2011    |       | 54,000                                       |       | 2.79                                     |       | 39,000 |   | 2.79 |   |
| 30 November 2006  |       | 1  March 2011      |       | 166,667                                      |       | 7.80                                     |       | 166,667 |   | 7.80 |   |
| 30 November 2006  |       | 1  March 2011      |       | 166,667                                      |       | TBD                                      |       | 166,667 |   | 2.59 |   |
| 30 November 2006  |       | 1  March 2011      |       | 166,666                                      |       | TBD                                      |       | 166,666 |   | TBD | (1) |
| 25 January 2007   |       | 25  January 2010   |       | 20,000                                       |       | 5.42                                     |       | 20,000 |   | 5.42 |   |
| 6 June 2007       |       | 6  June 2009       |       | 1,000,000                                    |       | 7.11                                     |       | 1,000,000 |   | 7.11 |   |
| 14 September 2007 |       | 13  September 2012 |       | —                                       |       | —                                   |       | 955,000 |   | 3.61 |   |
| 1 February 2008   |       | 1  February 2013   |       | —                                       |       | —                                   |       | 100,000 |   | 2.22 |   |
| 10 March 2008     |       | 10  March 2013     |       | —                                       |       | —                                   |       | 25,000 |   | 1.42 |   |
|                   |       |                    |       | 1,637,000                                    |       |                                     |       | 2,669,000 |   |   |   |

 

----

TBD - To Be Determined

(1) price equal to a30% premium to the 60 day volume weighted average price (VWAP) prior to 1 March 2009

 

The fair value of the equity-settled share options grantedunder the option plans is estimated as at the date of grant using a binomialmodel taking into account the terms and conditions upon which the options weregranted.

 

Fair value of shares issued on exercise of options isestimated to be the market price of shares of Progen Pharmaceuticals Limited onthe ASX as at the close of trading on their respective issue dates.

 

F-27

----

Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**13. SHARE BASED PAYMENTS (cont’d)**

 

The following table lists the weighted average inputs tothe model used for the year ended 30 June 2006, 2007 and 2008:

 
| ** **                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected volatility           | ** ** | **65**   | **%**      | 63       | %          | 56       | %          |
| Risk-free rate average        | ** ** | **6.26** | **%**      | 6.12     | %          | 5.16     | %          |
| Expected life average (years) | ** ** | **2.50** |       | 1.57     |       | 2.28     |       |
| Dividend yield                | ** ** | **nil**  |       | nil      |       | Nil      |       |
| Option exercise price         | ** ** | **$**    | **3.46**   |     | $          | 6.79     |       | $ | 3.06 |   |
| Share price at grant date     | ** ** | **$**    | **3.39**   |     | $          | 6.69     |       | $ | 2.74 |   |

 

The expected life of the options is based on historicaldata and is not necessarily indicative of exercise patterns that may occur. Theexpected volatility reflects the assumption that the historical volatility isindicative of future trends, which may also not necessarily be the actualoutcome. No other features of options granted were incorporated into themeasurement of fair value.

 

The expense recognised for the above options issuedduring the course of the year is shown in the table below:

 
| **Option type**                                         | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                   | ** ** | **$000**   | ** ** | **$000** | ** ** | **$000** | ** ** |
| Employee  (refer note 4(f))                                  | ** ** | **1,328**  |       | 419      |       | 46       |       |
| Consultant                                                   | ** ** | **—** |       | 52       |       | —   |       |
| Medigen  (refer note 4(h))                                   | ** ** | **—** |       | 1,322    |       | —   |       |
| Total  expense arising from share-based payment transactions | ** ** | **1,328**  |       | 1,793    |       | 46       |       |

 

**14. CURRENT LIABILITIES - TRADE AND OTHERPAYABLES**

 
| ** **           | ** ** | **2008**  | ** ** | **2007** | ** ** |
|----------------------|------------|-----------|------------|----------|------------|
| ** **           | ** ** | **$000**  | ** ** | **$000** | ** ** |
| Trade creditors (i)  | ** ** | **621**   |       | 818      |       |
| Other creditors (ii) | ** ** | **5,904** |       | 1,278    |       |
| ** **           |       | **6,525** |       | 2,096    |       |

 

**Australian dollar equivalents**

 

Australian dollar equivalent of amounts payable in foreign currencies -US$4,365,533. Refer note 16.

 

**Terms and conditions**

 

Terms and conditions relating to theabove financial instruments:

(i)  Tradecreditors are non-interest bearing and are normally settled on 30 day terms.

(ii) Othercreditors are non-interest bearing and have a term between 30 days and 12months.

 

**15. PROVISIONS**

 

**Make good provision**

 

In accordance with the lease agreement terms, theparent must restore its leased premises situated at Darra, Brisbane andToowong, Brisbane to their original condition at the end of the leaseterm.  For the Darra premises the parentprovided nil in the year 2008 as the provision has reached the full estimatedcost to restore the facility, i.e. $128,668 (2007 provided: $7,788).  For the Toowong premises a provision of$2,153 was amortised during this financial year (2007: $2,496).

 

Because of the long-termnature of the liability, the greatest uncertainty in estimating the provisionis the costs that will ultimately be incurred. The provision has beencalculated using a discount rate of 10 per cent.

 

F-28

----

Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**15. PROVISIONS (cont’d)**

 

**Long service leave provision**

 

Refer to note 2 for the relevant accounting policy anda discussion of the significant estimations and assumptions applied in themeasurement of this provision.

 
| ** **                       | ** ** | **2008**   | ** ** | **2007** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|
| ** **                       | ** ** | **$000**   | ** ** | **$000** | ** ** |
| Make good provision              | ** ** | **154**    |       | 152      |       |
|                             | ** ** | ** ** |       |     |       |
| **Employee benefits  provision** |       |       |       |     |       |
| Long service leave               | ** ** | **134**    |       | 164      |       |
| Annual leave                     | ** ** | **261**    |       | 202      |       |
| ** **                       |       | **395**    |       | 366      |       |
| ** **                       |       | **549**    |       | 518      |       |

 

**Movement in provision**

 
| ** **              | ** ** | **Make good  provision** | ** ** | **Long service  leave** | ** ** | **Annual leave** | ** ** | **Total**  | ** ** |
|-------------------------|------------|-------------------------------|------------|------------------------------|------------|-----------------------|------------|------------|------------|
| ** **              | ** ** | **$000**                      | ** ** | **$000**                     | ** ** | **$000**              | ** ** | **$000**   | ** ** |
| ** **              | ** ** | ** **                    | ** ** | ** **                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| At 1 July 2007     |       | 152                           |       | 164                          |       | 202                   |       | 518        |       |
| Arising during the year |       | —                        |       | 191                          |       | 349                   |       | 540        |       |
| Amortised               |       | 2                             |       | —                       |       | —                |       | 2          |       |
| Utilised                |       | —                        |       | (221                         | )          | (290                  | )          | (511       | )          |
| At 30 June 2008    | ** ** | **154**                       | ** ** | **134**                      | ** ** | **261**               | ** ** | **549**    | ** ** |
|                    |       |                          |       |                         |       |                  |       |       |       |
| Current 2008            |       | —                        |       | 51                           |       | 261                   |       | 312        |       |
| Non-current 2008        |       | 154                           |       | 83                           |       | —                |       | 237        |       |
| ** **              | ** ** | **154**                       | ** ** | **134**                      | ** ** | **261**               | ** ** | **549**    | ** ** |
|                    |       |                          |       |                         |       |                  |       |       |       |
| Current 2007            |       | —                        |       | 64                           |       | 202                   |       | 266        |       |
| Non-current 2007        |       | 152                           |       | 100                          |       | —                |       | 252        |       |
|                    |       | 152                           |       | 164                          |       | 202                   |       | 518        |       |

 

**16. DERIVATIVE FINANCIALINSTRUMENTS**

 
| ** **                | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
| ** **                | ** ** | **$000**   | ** ** | **$000**   | ** ** |
| **Current Liabilities**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Forward currency contract | ** ** | **249**    | ** ** | **—** | ** ** |

 

The Group had a significant portion of futurefinancial commitments in United States Dollars (USD), including payments toservice providers in relation to the PI-88 PATHWAY trial and the funding of ourrecently acquired U.S. subsidiary.

 

F-29

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**16. DERIVATIVE FINANCIALINSTRUMENTS (cont’d)**

 

In order to minimise the effects against downwardmovements in the Australian dollar against the USD, the Group entered into aUS$5 million forward currency contract to purchase US$, therefore, mitigate thecurrency exposure associated with our USD commitments.

 
| ** **                                             | ** ** | **Notional amounts  $AUD** | ** ** | **Contracted  exchange rate** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2008**                        | ** ** | **2007**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **$000**                        | ** ** | **$000**                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Buy US$/Sell Australian $                              | ** ** | ** **                      | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Buy US$ Maturity 0-12  months – Consolidated | ** ** | **5,200**                       | ** ** | **—**                         | ** ** | **0.9062** | ** ** | **—** | ** ** |

 

This contract is fair valued by comparing thecontracted rate to the market rate for a contract with the same length ofmaturity.  All movements in fair valueare recognised in profit or loss in the period they occur. The net fair valueloss on foreign currency derivatives during the year was $249,000 for theGroup.

 

**17. CONTRIBUTED EQUITY**

 

**a) Issued and paid up capital**

 
| ** **                  | ** ** | **2008**    | ** ** | **2007** | ** ** |
|-----------------------------|------------|-------------|------------|----------|------------|
| ** **                  | ** ** | **$000**    | ** ** | **$000** | ** ** |
| Ordinary shares fully  paid | ** ** | **191,357** |       | 189,194  |       |

 

**b)****Movements in shares on issue**

 
| ** **                                                                                                     | ** ** | **2008**                   | ** ** | **2007**    | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------|------------|
| ** **                                                                                                     | ** ** | **Number of  shares** | ** ** | **$000**    | ** ** | **Number of  shares** | ** ** | **$000** | ** ** |
| Beginning of the financial year                                                                                | ** ** | **59,416,427**             | ** ** | **189,194** | ** ** | 40,589,793 |   | 88,476 |   |
| Issued during the year:                                                                                        |       |                       |       |        | ** ** |   |   |   |   |
| - equity raised through private placement                                                                      | ** ** | **—**                 | ** ** | **—**  | ** ** | 3,690,037 |   | 20,000 |   |
| less transaction costs                                                                                         | ** ** | **—**                 | ** ** | **—**  | ** ** | — |   | (1,208 | ) |
| - options exercised by consultant                                                                              | ** ** | **—**                 | ** ** | **—**  | ** ** | 13,498 |   | 60 |   |
| - options exercised by employees in terms of the  Employee Option Incentive Plan approved at the 2006 AGM held | ** ** | **—**                 | ** ** | **—**  | ** ** | 60,000 |   | 167 |   |
| - equity raised through share purchase plan                                                                    | ** ** | **—**                 | ** ** | **—**  | ** ** | 989,156 |   | 5,362 |   |
| less transaction costs                                                                                         | ** ** | **—**                 | ** ** | **—**  | ** ** |   |   | (60 | ) |
| - equity settled transactions (refer note 10)                                                                  | ** ** | **—**                 | ** ** | **—**  | ** ** | 1,232,600 |   | 8,325 |   |
| less transaction costs                                                                                         | ** ** | **—**                 | ** ** | **—**  | ** ** |   |   | (10 | ) |
| - equity raised through US placement                                                                           | ** ** | **—**                 | ** ** | **—**  | ** ** | 6,900,000 |   | 39,591 |   |
| less transaction costs                                                                                         | ** ** | **—**                 | ** ** | **—**  | ** ** |   |   | (3,108 | ) |
| - equity raised through rights entitlements offer                                                              | ** ** | **—**                 | ** ** | **—**  | ** ** | 5,941,343 |   | 34,101 |   |
| less transaction costs                                                                                         | ** ** | **—**                 | ** ** | **—**  | ** ** |   |   | (2,502 | ) |
| - transaction costs in relation to shares issued  prior to 30 June 2007                                   | ** ** | **—**                 | ** ** | **(265**    | **)**      | — |   | — |   |
| - equity issued as part of CellGate acquisition  (refer note 20)                                               | ** ** | **604,959**                | ** ** | **1,119**   | ** ** | — |   | — |   |
| less transaction costs                                                                                         | ** ** | **—**                 | ** ** | **(5**      | **)**      | — |   | — |   |
| - equity issued as part of CellGate acquisition  (refer note 20)                                               | ** ** | **201,265**                | ** ** | **372**     | ** ** | — |   | — |   |
| less transaction costs                                                                                         | ** ** | **—**                 | ** ** | **(3**      | **)**      | — |   | — |   |
| - equity settled transactions (refer note 10)(1)                                                               | ** ** | **171,240**                | ** ** | **947**     | ** ** | — |   | — |   |
| less transaction costs                                                                                         | ** ** | **—**                 | ** ** | **(2**      | **)**      | — |   | — |   |
|                                                                                                           | ** ** | ** **                 | ** ** | ** **  | ** ** |   |   |   |   |
| End of the financial year                                                                                      | ** ** | **60,393,891**             | ** ** | **191,357** | ** ** | 59,416,427 |   | 189,194 |   |

 

F-30

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**17. CONTRIBUTED EQUITY(cont’d)**

 

----

(1) This equity issue was made under theterms of the Medigen termination agreement (refer note 10). The totalobligation was the issue of 732,600 shares ($2,029,000), of which 561,360shares ($1,082,000) were acquired on-market and transferred to Medigen, and171,240 new shares were issued to Medigen.

 

**c)  Shareoptions**

 

At 30 June 2008 there were a total of 5,639,538 (2007: 4,607,538)unissued ordinary shares in respect of which options were outstanding,comprising of:

* *

*(i) Consultant options:*

 

At 30 June 2008 there were a total of 20,000 (2007: 20,000) unlistedoptions over ordinary shares issued to a consultant.

 

(ii) *Employee and executive share incentivescheme:*

 

During the 2008 financial year, 1,317,250 unlisted options over ordinaryshares were granted in terms of the Progen Directors and Employees OptionIncentive Plan (2007: 647,000).

 

In total 1,649,000 unlisted options over ordinary shares remainoutstanding as at 30 June 2008 (2007: 617,000) with varying exerciseprices and exercise dates. Of the total outstanding options, 844,834 optionsare exercisable, 166,666 options granted to the CEO and 637,500 options grantedto employees have not yet vested. Refer to note 13.

 

(iii) *Rights**entitlementsoffer*

 

In its prospectus dated 10 May 2007, Progeninvited applications by way of 1 for 9 non-renounceable entitlement offer for5,941,343 new shares at $5.74 per share with one free option for each two newshares. The exercise price of the options is $8.40. The options are exercisableat any time on or prior to the option expiry date of 28 May 2010. In total2,970,538 listed options were issued over ordinary shares and remainoutstanding as at 30 June 2008.

** **

(iv) Options issued to Medigen

 

Underthe terms of an agreement to conclude the Alliance Agreement Medigen was issued1,000,000 options.  The options wereissued on 6 June 2007, are exercisable from grant date, expire on 6 June 2009and have an exercise price of $7.11. Refer to note 10.

 

**18. ACCUMULATED LOSSES ANDRESERVES**

 

**Accumulated losses**

 

Movement in accumulated losses were as follows:

 
| ** **       | ** ** | **2008**     | ** ** | **2007** | ** ** |
|------------------|------------|--------------|------------|----------|------------|
| ** **       | ** ** | **$000**     | ** ** | **$000** | ** ** |
| Balance 1 July   | ** ** | **(93,112**  | **)**      | (70,658  | )          |
| Net loss         | ** ** | **(26,148**  | **)**      | (22,454  | )          |
| Balance 30  June | ** ** | **(119,260** | **)**      | (93,112  | )          |

** **

**Reserves**

** **

**Options reserve**

 

The options reserve is used to record the value ofshare based payments provided to employees, including key management personnel,as part of their remuneration. Also includes consultants and Medigen.

 

**Foreign currency translation reserve**

 

The foreign currency translation reserve is used torecord exchange differences arising from the translation of the financialstatements of foreign subsidiaries.

 

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Table of Contents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**18. ACCUMULATED LOSSES ANDRESERVES (cont’d)**

 
| ** **                    | ** ** | **Options reserve** | ** ** | **Foreign currency  translation** | ** ** | **Total**  | ** ** |
|-------------------------------|------------|--------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                    | ** ** | **$000**                 | ** ** | **$000**                               | ** ** | **$000**   | ** ** |
| Balance 1  July 2006     |       | 102                      |       | —                                 |       | 102        |       |
| Employee  option reserve      |       | 419                      |       | —                                 |       | 419        |       |
| Consultant  option reserve    |       | 52                       |       | —                                 |       | 52         |       |
| Medigen option  reserve       |       | 1,322                    |       | —                                 |       | 1,322      |       |
| Foreign  currency translation |       | —                   |       | —                                 |       | —     |       |
| Balance 30  June 2007    | ** ** | **1,895**                | ** ** | **—**                             | ** ** | **1,895**  | ** ** |
| ** **                    | ** ** | ** **               | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Balance 1  July 2007     |       | 1,895                    |       | —                                 |       | 1,895      |       |
| Employee  option reserve      |       | 1,328                    |       | —                                 |       | 1,328      |       |
| Consultant  option reserve    |       | —                   |       | —                                 |       | —     |       |
| Medigen option  reserve       |       | —                   |       | —                                 |       | —     |       |
| Foreign  currency translation |       | —                   |       | (61                                    | )          | (61        | )          |
| Balance 30  June 2008    | ** ** | **3,223**                | ** ** | **(61**                                | **)**      | **3,162**  | ** ** |

 

**19.  FINANCIAL RISK MANAGEMENT OBJECTIVES ANDPOLICIES**

** **

The Group’s principal financial instrumentscomprise cash, short-term deposits and derivatives.

 

The Group manages its exposure to key financialrisks, including interest rate and currency risk in accordance with the Group’sfinancial risk management policy. The objective of the policy is to support thedelivery of the Group’s financial targets whilst protecting future financialsecurity.

 

The Group enters into derivative transactions,principally forward currency contracts from time to time. The purpose is to managethe currency risk arising from the Group’s operation and its sources offinance. The main risks arising from the Group’s financial instruments are cashflow interest rate risk, foreign currency risk and credit risk. The Group usesdifferent methods to measure and manage different types of risks to which it isexposed. These include monitoring levels of exposure to interest rate andforeign exchange rates and assessments of market forecasts for interest rateand foreign exchange. Ageing analyses is undertaken to manage credit risk.

 

The Board reviews and agrees policies for managingeach of these risks which are summarised below.

 

Details of the significant accounting policies andmethods adopted, including the criteria for recognition, the basis of measurementand the basis on which income and expenses are recognised, in respect of eachclass of financial asset, financial liability and equity instrument aredisclosed in note 2 to the financial statements.

 

**Credit risk**

 

The Group trades only with recognised, creditworthythird parties. All receivables, including other receivables and intercompanyreceivable, are current (i.e. none are contractually overdue).

 

Receivable balances are monitored on an ongoingbasis with the result that the Group’s exposure to bad debts is notsignificant. All the Group’s material cash balances are with a large nationalAustralian bank and are not exposed to the US banking market risks. There areno significant concentrations of credit risk.

** **

**Liquidity risk**

 

The Group’s objective is to maintain a balancebetween continuity of project research utilising an optimal combination ofequity funding and available credit lines. Prudent liquidity risk managementimplies maintaining sufficient cash and marketable securities. The Group has nofinancial assets/liabilities due after twelve months.

 

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Table of Contents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**19.  FINANCIAL RISK MANAGEMENT OBJECTIVES ANDPOLICIES (cont’d)**

 

The table below reflects all payables andderivative financial instruments as of 30 June 2008. For derivativefinancial instruments the market value is presented, whereas for the otherobligations the respective undiscounted cash flows for the respective upcomingfiscal years are presented. Cash flows for financial assets and liabilitieswithout fixed amount or timing are based on the conditions existing at 30 June 2008.

 

The remaining contractual maturities of the Group’sand parent entity’s financial liabilities are:

 
| ** **        | ** ** | **2008**   | ** ** | **2007** | ** ** |
|-------------------|------------|------------|------------|----------|------------|
| ** **        | ** ** | **$000**   | ** ** | **$000** | ** ** |
| 6 months or  less | ** ** | **12,043** |       | 2,096    |       |

 

**Foreign currency risk**

 

As a result of significant USD contracts with PATHWAYservice providers and significant operations in the United States, the Group’sincome statement can be affected significantly by movements in the US$/AU$exchange rates. The Group seeks to mitigate the effect of its foreign currencyexposure by holding US dollars.

 

As a result of a US capital rising in May 2007and further purchases of US dollars at spot rates, the Group currently holdsUS$27,500,000 (2007: US$23,500,000).

 

At 30 June 2008, the Group had the followingexposure to US$ currency that is not designated in cash flow hedges:

 
| ** **                | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
| ** **                | ** ** | **$000**   | ** ** | **$000**   | ** ** |
| **Financial assets**      |       |       |       |       |       |
| Cash and cash equivalents | ** ** | **29,441** |       | 28,655     |       |
| ** **                |       | **29,441** |       | 28,655     | ** ** |
| **Financial liabilities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade and other payables  | ** ** | **4,655**  |       | 267        |       |
| ** **                |       | **4,655**  |       | 267        | ** ** |
| Net exposure              | ** ** | **24,786** |       | 28,388     |       |

 

The Group also has, as outlined in note 16, forwardcontracts in USD that are subject to fair value movements through profit andloss as foreign exchange rates move.

 

At 30 June 2008, had the Australian Dollarmoved, as illustrated in the table below, with all other variables heldconstant, post tax profit and equity would have been affected as follows:

 
| ** **   | ** ** | **Post tax loss  (Higher)/Lower** | ** ** | **Equity  Higher/(Lower)** | ** ** |
|--------------|------------|---------------------------------------------|------------|----------------------------|------------|
| ** **   | ** ** | **2008**                                    | ** ** | **2007**                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **   | ** ** | **$000**                                    | ** ** | **$000**                   | ** ** | **$000** | ** ** | **$000** | ** ** |
| AUD/USD + 5% | ** ** | **(1,180**                                  | **)**      | (1,352                     | )          | **(3** | **)** | — |   |
| AUD/USD -10% | ** ** | **2,754**                                   |       | 3,154                      | ** ** | **6** |   | — |   |

 

The sensitivity is lower in 2008 than 2007 due tonet exposure to USDs being higher in 2007. The sensitivity analysis in theforeign currency exposure was determined based on historical movements over thepast two years.

 

F-33

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Table of Contents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**19.  FINANCIAL RISK MANAGEMENT OBJECTIVES ANDPOLICIES (cont’d)**

** **

**Interest rate risk**

 

The Group’s exposure to market interest ratesrelates primarily to the Group’s cash and short-term deposits. These depositsare held to fund the Group’s ongoing and future drug development activities.Refer note 8 for details on the Groups cash and cash equivalents at 30 June 2008.

** **

The following sensitivity analysis is based on theweighted average interest rates applicable to the Group’s cash and short-termdeposits in existence at the balance sheet date.

 

At 30 June 2008, if interest rates had moved,as illustrated in the table below, with all other variables held constant, posttax loss and equity would have been affected as follows:

 
| ** **               | ** ** | **Post tax loss  (Higher)/Lower** | ** ** | **Equity  Higher/(Lower)** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **2008**                                    | ** ** | **2007**                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **               | ** ** | **$000**                                    | ** ** | **$000**                   | ** ** | **$000** | ** ** | **$000** | ** ** |
| + .5% (50  basis points) |       | 384                                         |       | 491                        |       | — |   | — |   |
| - 1% (100  basis points) |       | (767                                        | )          | (982                       | )          | — |   | — |   |

 

The sensitivity is lower in 2008 than 2007 becauseof a reduction in cash and cash equivalents that occurred during the 2008financial year. The sensitivity analysis in interest rates were determinedbased on historical movements over the past two years.

 

**Investments**

 

Investments are made inaccordance with a Board approved Investment Policy. Investments are typicallyin bank bills and investment grade commercial paper.

 

Policy stipulates the type of investment able to bemade.  The objective of the policy is tomaximise interest income within agreed upon credit worthiness criteria.

** **

**Maturity analysis of financial assets andliability based on management’s expectation**

 

The risk implied from the values shown in the tablebelow, reflects a balanced view of cash inflows and outflows. Trade payablesand receivables are considered in the Group’s overall liquidity risk.

 
| **Financial instruments 2008** | ** ** | **1 year or  less** | ** ** | **Over 1 to  5 years** | ** ** | **More  than 5  years** | ** ** | **Total carrying  amount as per  the balance  sheet** | ** ** | **Weighted  average  effective  interest  rates** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **$000**                      | ** ** | **$000**                              | ** ** | **$000**                     | ** ** | **$000**                                                                  | ** ** | **%**                                             | ** ** |
| **Consolidated financial assets**        | ** ** | ** **                    | ** ** | ** **                            | ** ** | ** **                   | ** ** | ** **                                                                | ** ** | ** **                                        | ** ** |
| Cash and cash equivalents                |       | 76,748                        | ** ** | **—**                            | ** ** | **—**                   |       | 76,748                                                                    |       | 5.8                                               |       |
| Trade and other receivables              |       | 722                           | ** ** | **—**                            | ** ** | **—**                   |       | 722                                                                       |       | —                                            |       |
| Security deposit                         |       | 98                            | ** ** | **—**                            | ** ** | **—**                   |       | 98                                                                        |       | 7.1                                               |       |
|                                     |       | 77,568                        | ** ** | **—**                            | ** ** | **—**                   |       | 77,568                                                                    | ** ** | ** **                                        | ** ** |
|                                     | ** ** | ** **                    | ** ** | ** **                            | ** ** | ** **                   | ** ** | ** **                                                                | ** ** | ** **                                        | ** ** |
| **Consolidated financial  liabilities**  | ** ** | ** **                    | ** ** | ** **                            | ** ** | ** **                   | ** ** | ** **                                                                | ** ** | ** **                                        | ** ** |
| Trade and other payables                 |       | 6,525                         |       | —                                | ** ** | **—**                   |       | 6,525                                                                     | ** ** | **—**                                        | ** ** |
| Derivatives financial instrument         |       | 249                           | ** ** | **—**                            | ** ** | **—**                   |       | 249                                                                       | ** ** | **—**                                        | ** ** |
|                                     |       | 6,774                         | ** ** | **—**                            | ** ** | **—**                   |       | 6,774                                                                     | ** ** | ** **                                        | ** ** |
| Net maturity                             |       | 70,794                        |       | —                                | ** ** | **—**                   |       | 70,794                                                                    | ** ** | ** **                                        | ** ** |

 

F-34

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**20. ASSET ACQUISITIONS**

 

**Acquisition of CellGate, Inc.**

 

On 4 February 2008, Progen executed a DefinitiveAgreement to acquire 100% of the voting shares of CellGate, Inc. (“CellGate”),a privately-held biotechnology company based in the U.S. with oncology assetsbased on epigenetic and polyamine inhibition. CellGate’s assets include a leadproduct candidate in Phase 1 and multiple pre-clinical compounds. Theacquisition of this entity is not considered to meet the definition of abusiness combination and accordingly has been accounted for as an acquisitionof net assets, without goodwill.

 

Under the terms of the agreement, the up-frontpurchase price comprised the issue of 756,199 Progen shares having a value ofapproximately US$1.5 million and the assumption by Progen of CellGate net liabilitiesup to US$1.0 million. The shares will be issued as follows: 604,959 Progenshares were issued on closing, 75,620 Progen shares on the date 6 months afterclosing and 75,620 Progen shares on the date 12 months after closing. The 6 and12 month deferred issues of shares have been accrued as at 30 June 2008,however they are subject to there having been no material breaches ofwarranties and representations given by CellGate. In the event CellGate’s netliabilities at closing are less than US$1.0 million Progen will issueadditional shares for the difference but the total number of shares to beissued (including the 604,959 shares of up-front consideration) will in noevent exceed 957,464 Progen shares.

** **

CellGate’s net liabilities at closing amounted toUS$279,000, therefore under the terms of the Definitive Agreement Progen issuedan additional 201,265 Progen shares and paid US$328,000 in cash.

 

Additional milestone payments of up to US$19.5million, payable to the CellGate shareholders in Progen shares (to the extentpermissible without shareholder approval) and/or cash, are to be made upon theachievement of certain clinical and regulatory milestones in respect of theassets of CellGate. To the extent the milestones are met and Progen shares arerequired to be issued, the number of shares to be issued will be calculated byreference to a volume weighted average price of Progen shares for the 30trading days immediately before the date on which the relevant milestones isreached. No provision has been recognised for the US$19.5 million milestonebecause the achievement of the milestone is not currently considered probable.

 

At the date of acquisition, Progen was involved in thediscovery, development and commercialisation of small molecule therapeutics primarilyfor the treatment of cancer. As a result of the combination, Progen will:

 

·       Expand itscancer-focused clinical development portfolio by adding a novel Phase 1compound;

·       Leverageits core capabilities in late pre-clinical and early clinical development ofoncology compounds;

·       Add morethan ten compounds in pre-clinical development; and

·       Gainplatform technologies in the areas of epigenetics and polyamines that will formthe foundation for new compound development.

 

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Table ofContents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**20. ASSET ACQUISITIONS (cont’d)**

 

The fair value of theidentifiable assets and liabilities of CellGate, Inc. as at the date ofacquisition were:

 
| ** **                                     | ** ** | **Fair value  on  acquisition** | ** ** | **Carrying  value** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **$000**                             | ** ** | **$000**            | ** ** |
| Cash and cash  equivalents                     |       | 930                                  |       | 930                 |       |
| Trade and  other receivables                   |       | 45                                   |       | 45                  |       |
| Property,  plant and equipment                 |       | 27                                   |       | 27                  |       |
| Intellectual  property rights                  |       | 3,515                                |       | —              |       |
|                                           |       | 4,517                                |       | 1,002               |       |
|                                           |       |                                 |       |                |       |
| Trade and  other payables                      |       | 436                                  |       | 436                 |       |
| Interest  bearing loans                        |       | 803                                  |       | 803                 |       |
|                                           |       | 1,239                                |       | 1,239               |       |
|                                           |       |                                 |       |                |       |
| Net assets  acquired                           |       | 3,278                                |       | (237                | )          |
|                                           |       |                                 |       |                |       |
| Cost of the  acquisition:                      |       |                                 |       |                |       |
| Shares issued,  at fair value                  |       | 1,491                                |       |                |       |
| Shares to be  issued, at fair value            |       | 279                                  |       |                |       |
| Cash paid                                      |       | 360                                  |       |                |       |
| Direct costs  relating to the acquisition      |       | 1,148                                |       |                |       |
| Total costs of  the acquisition                |       | 3,278                                |       |                |       |
|                                           |       |                                 |       |                |       |
| The cash inflow  on acquisition is as follows: |       |                                 |       |                |       |
| Cash acquired  with the net assets             |       | 930                                  |       |                |       |
| Cash paid                                      |       | (360                                 | )          |                |       |
| Net cash  inflow                               |       | 570                                  |       |                |       |

 

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Table of Contents

 

**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**21. EXPENDITURE COMMITMENTS**

 

**(a) Expenditure commitments**

 

The following expenditure commitments had beencontracted but not provided:

** **

*Preclinical research study agreements*

 

During the financial year 2008, the Group entered into various preclinicalresearch study agreements. The committed value of these agreements for the nextfinancial year is $770,505 (2007:$50,043, 2006: $nil).

** **

*Insurance premium*

 

In July 2008 the Group committed to paying the Group’s comprehensiveinsurance premium for the year ended 30 June 2009. The total value ofthese premiums is $509,628 (2007: $517,000, 2006: $435,000).

** **

*Consultant agreements*

 

During the financial year 2008 Progen entered into various consultantagreements with a committed value of $104,000 for the next financial year(2007: $381,200, 2006: $29,657).

 

*Purchases*

 

At the end of the financial year 2007 Progen ordered goodsand services with a total value of $171,333 which had not been delivered by 30 June 2008(2007: $416,580, 2006: $220,227).

 
| ** **                                                                                     | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                                                                     | ** ** | **$000**   | ** ** | **$000** | ** ** | **$000** | ** ** |
| Future  expenditure commitments not provided for in the financial statements and  payable:     |       |       |       |     |       |     |       |
| - not later  than one year:                                                                    |       |       |       |     |       |     |       |
| Research  agreements                                                                           | ** ** | **771**    |       | 50       |       | 152      |       |
| Consultant  agreements                                                                         | ** ** | **104**    |       | 381      |       | 30       |       |
| Insurance  premium                                                                             | ** ** | **510**    |       | 517      |       | 435      |       |
| Purchases                                                                                      | ** ** | **172**    |       | 417      |       | 220      |       |
| Remuneration  commitments                                                                      | ** ** | **213**    |       | —   |       | —   |       |
| Medigen  termination agreement (refer note 10)                                                 | ** ** | **—** |       | 2,000    |       | —   |       |
| Total not  later than one year                                                                 | ** ** | **1,770**  |       | 3,365    |       | 837      |       |
| - later than  one and not longer than five years:                                              | ** ** | **—** |       | —   |       | —   |       |
| Total  expenditure commitments                                                                 | ** ** | **1,770**  |       | 3,365    |       | 837      |       |
|                                                                                           |       |       |       |     |       |     |       |
| **(b) Non-cancellable  operating lease commitments**                                      |       |       |       |     |       |     |       |
| Future  operating lease commitments not provided for in the financial statements and  payable: |       |       |       |     |       |     |       |
| Minimum lease  payments                                                                        |       |       |       |     |       |     |       |
| - not later  than one year                                                                     | ** ** | **197**    |       | 248      |       | 237      |       |
| - later than  one and not longer than five years                                               | ** ** | **—** |       | 78       |       | 234      |       |
| - aggregate  lease expenditure contracted for at balance date                                  | ** ** | **197**    |       | 326      |       | 471      |       |

 

The operating lease commitments relate to the rental of theGroup’s corporate office premises and manufacturing facility which has anoption to extend the lease term for another 2 years, at the end of the leaseperiod.

 

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**ProgenPharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June2008**

 

**21. EXPENDITURE COMMITMENTS (cont’d)**

** **

**(c) Clinical trials**

 
| ** **                                         | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ** **                                         | ** ** | **$000**   | ** ** | **$000** | ** ** | **$000** | ** ** |
| Clinical  trials                                   |       |       |       |     |       |     |       |
| - not later  than one year:                        |       |       |       |     |       |     |       |
| PI-88 phase 2b  Melanoma trial                     | ** ** | **248**    |       | 643      |       | 1,003    |       |
| PI-88  Lung & Prostate trials             | ** ** | **—** |       | —   |       | 175      |       |
| PI-88 others                                       | ** ** | **—** |       | —   |       | 1,279    |       |
| PI-166 phase 1  trial                              | ** ** | **13**     |       | 30       |       | 155      |       |
| PG11047 phase  1 trial                             | ** ** | **358**    |       | —   |       | —   |       |
| PI-88 phase 3  trial (PATHWAY trial) - termination | ** ** | **4,000**  |       | —   |       | —   |       |
| ** **                                         |       | **4,619**  |       | 673      |       | 2,612    |       |
| - later than  one and not longer than five years:  |       |       |       |     |       |     |       |
| PI-88 phase 2b  Melanoma trial                     |       | —     |       | 143      |       | 762      |       |
| PG11047 phase  1 trial                             | ** ** | **265**    |       | —   |       | —   |       |
| ** **                                         |       | **265**    |       | 143      |       | 762      |       |

** **

**22. EMPLOYEE BENEFITS AND SUPERANNUATION COMMITMENTS**

### ** **

| ** **                                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                     | ** ** | **$000** | ** ** | **$000** | ** ** | **$000** | ** ** |
| The aggregate  employee entitlement liability is comprised of: |       |     |       |     |       |     |       |
| Accrued wages,  salaries and on-costs                          | ** ** | **292**  |       | 152      |       | 119      |       |
| Provisions  (current)                                          | ** ** | **312**  |       | 266      |       | 265      |       |
| Provisions  (non-current)                                      | ** ** | **237**  |       | 100      |       | 76       |       |
| ** **                                                     |       | **841**  |       | 518      |       | 460      |       |

### ** **

### **Superannuation**

 

The parent makes no superannuation contributions otherthan the statutory superannuation guarantee levy. The Group does not operate adefined benefit plan on behalf of its employees.

 

The parent contributed $396,210 on behalf of employeesto superannuation funds for the year ended 2008.      (2007: $311,449, 2006: $294,466).

 

**23. CONTINGENT LIABILITIES**

 

**Government grants**

 

The Group has received two separate AustralianGovernment research grants: a R&D Start Grant, which has been completed,and a R&D Commercial Ready Grant. The Government may require the Group to repay all or some of the amountof a particular grant together with interest in either of the followingcircumstances:

 

a)         TheGroup fails to use its best endeavours to commercialise the relevant grant projectwithin a reasonable time of completion of the project;

b)        Upontermination of a grant and/or at the Government’s discretion;

c)         Overpaymentby the government;

d)        The Groupspends the fund other than in accordance with the grant deed.

 

The Group continues the development andcommercialisation of projects funded by these grants. The total amount receivedunder the Start Program was $3.1 million. The total amount received under theCommercial Ready Program as at 30 June 2008 was $2,856,000 (2007:$1,883,000).

 

F-38

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Table of Contents

 

**Progen Pharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June 2008**

 

**24.  SUBSEQUENT EVENTS**

 

On 2 July 2008, the Group’s manufacturingdivision was transferred into a wholly owned subsidiary, PharmaSynth Pty Ltd(PharmaSynth). PharmaSynth will focus on the provision of contractpharmaceutical manufacturing services. The financial impact of this transferwas limited to the payment of stamp duty amounting to $43,639.

 

On 23 July 2008 the Group announced that it haddiscontinued the PI-88 phase 3 study in liver cancer (the PATHWAY trial). Thisdecision followed a strategic review assessing the impact a number of factorswould likely have on the commercial return of the PATHWAY trial. These factorsincluded the PATHWAY trial being not likely to meet the forecast patientrecruitment timetable and further significant delays were expected due to:

 

·                  slower than expected regulatory processes in China, Korea andVietnam;

·                  slower than expected initiation of clinical sites;

·                  slower than expected recruitment of patients into active sites; and

·                  the recent launch of a competitive phase 3 trial, assessingBayer/Onyx Nexavar® in the same indication.

 

Due to a lack of a global partner willing tomeaningfully develop and commercialise PI-88, the commercial opportunity wasassessed to be much less than previously expected. Without a significant globalpartner contributing, the Group will be less able to expand into additionalindications and exploit all potential PI-88 commercial opportunities.

 

The costs associated with discontinuing the PATHWAYtrial are currently estimated to be less than $4.0 million.

 

Progen is currently seeking expressions of interest inPI-88, at a regional level, initially from amongst those parties with whom wehave had previous discussions.

 

As part of the strategic review, the Group determinedthat the current PI-88 phase 2b Melanoma trial, will be completed but nofurther development in Melanoma by Progen is anticipated at this stage. Thistrial is expected to be finalised at an estimated additional cost of $300,000.

 

In addition, and as part of the strategic review, theGroup also decided to terminate further development of its phase 1 compoundPI-166, based on a recent commercial assessment of the market and the approvalof Nexavar® in this indication.

** **

**25. AUDITORS’ REMUNERATION**

 
| ** **                                                             | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| ** **                                                             | ** ** | **$**       | ** ** | **$**    | ** ** | **$**    | ** ** |
| Amounts received or due and receivable by  Ernst & Young for: |       |        |       |     |       |     |       |
| (a) Audit or review of the financial reports of  the entity       |       |        |       |     |       |     |       |
| -   The  Australian financial report of the entity           | ** ** | **135,000** |       | 119,500  |       | 89,500   |       |
| -   The US  financial report of the entity                   | ** ** | **60,000**  |       | 60,000   |       | 60,000   |       |
| -   Grant  audit                                             | ** ** | **15,500**  |       | 6,000    |       | 6,000    |       |
| (b) Other audit services in relation to the  entity               |       |        |       |     |       |     |       |
| -    Sarbanes-Oxley internal control audit                   | ** ** | **105,000** |       | —   |       | —   |       |
| ** **                                                             |       | **315,500** |       | 185,500  |       | 155,500  |       |
| (c) Other non-audit services in relation to the  entity           |       |        |       |     |       |     |       |
| -   other  non-audit services                                | ** ** | **—**  |       | 146,929  |       | —   |       |
| -   agreed  upon procedures related                          | ** ** | **40,105**  |       | —   |       | —   |       |
| ** **                                                             |       | **40,105**  |       | 146,929  |       | —   |       |
| ** **                                                             |       | **355,605** |       | 332,429  |       | 155,500  |       |

 

Other non-audit services were assurance services inrelation to the Group’s capital rising efforts.

 

Agreed upon procedures related services were providedby Ernst & Young Palo Alto, U.S.A, in relation to the Group’s  acquisition of CellGate, Inc.

 

F-39

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Table ofContents

 

**Progen Pharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June 2008**

 

**26. DIRECTOR AND EXECUTIVE AND RELATED PARTY DISCLOSURES**

 

**(a)****          Details of key management personnel**

* *

*(i)  Directors*

 
| Dr. M. Eutick |   | Chairman (non-executive) (Appointed as Chairman on 4  March 2008) |
|--------------------|--------|------------------------------------------------------------------------|
| T.J. Homburg       |   | Managing Director (Appointed 1 March 2006)                        |
| Prof. J. Zalcberg  |   | Director (non-executive)                                               |
| P.O. Burns    |   | Director (non-executive)                                               |
| S. Chang           |   | Director (non-executive) (Resigned as Chairman 3  March 2008)     |
| R. Williamson      |   | Director (non-executive) (Appointed 4  March 2008)                |
| J. Lee             |   | Director (non-executive) (Appointed 4  March 2008)                |

* *

*(ii)  Executives*

 
| L. Burns    |   | Chief Operating Officer & Company Secretary                                 |
|-------------|--------|--------------------------------------------------------------------------------------|
| S. Meibusch |   | Vice President Business Development                                                  |
| A. Gautam   |   | Vice President Drug Discovery (Resigned 2  June 2008)                           |
| J. Garner   |   | Vice President Medical & Clinical Affairs  (Appointed 29 January 2007) |
| J. Devlin   |   | Vice President Manufacturing Operations (Appointed  16 May 2007)                |
| L. Marton   |   | Chief Scientific Officer (Appointed 1  February 2008)                           |

 

**(b)  Remuneration of directors and keymanagement personnel**

 
| ** **                                      | ** ** | **2008**      | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|-----------|------------|
| ** **                                      | ** ** | **$**         | ** ** | **$**     | ** ** | **$**     | ** ** |
| Short term employee benefits                    | ** ** | **1,898,546** |       | 1,454,791 |       | 1,408,836 |       |
| Post-employment benefits                        | ** ** | **160,077**   |       | 112,479   |       | 113,788   |       |
| Share-based payments                            | ** ** | **555,464**   |       | 350,444   |       | 46,952    |       |
| Termination payment                             | ** ** | **245,000**   |       | —    |       | —    |       |
| **Total key management personnel compensation** | ** ** | **2,859,087** |       | 1,917,714 |       | 1,569,576 |       |

 

F-40

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Table of Contents

 

**Progen Pharmaceuticals Limited**

**Notesto the Financial Statements**

**For the year ended 30 June 2008**

 

**26.  DIRECTOR AND EXECUTIVE AND RELATED PARTYDISCLOSURES (cont’d)**

 

**(b)  Remuneration of directors and keymanagement personnel (cont’d)**

 

**Non-executive directors’ remuneration for theyear ended 30 June 2008.**

 
| ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** |
|------------------------|------------|------------|------------|---------------------|------------|------------|------------|--------------|------------|----------------|------------|
| ** **             | ** ** | ** ** | ** ** | **Short term** | ** ** | **Post**   | ** ** | ** **   | ** ** | **Share-**     | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | **Non**      | ** ** | **employment** | ** ** | ** ** | ** ** | **based** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** ** | ** ** | **Salary**          | ** ** | **Cash**   | ** ** | **monetary** | ** ** | **Super-**     | ** ** | **Termination** | ** ** | **payment** | ** ** | ** ** | ** ** |
| **Directors**          | ** ** | ** ** | ** ** | **and fees**   | ** ** | **bonus**  | ** ** | **benefits** | ** ** | **annuation**  | ** ** | **payment** | ** ** | **Options** | ** ** | **Total** | ** ** |
| ** **             | ** ** | ** ** | ** ** | **$**               | ** ** | **$**      | ** ** | **$**        | ** ** | **$**          | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| Dr M. Eutick           | ** ** | **2008**   | ** ** | **67,043**          | ** ** | **—** | ** ** | **—**   | ** ** | **6,034**      | ** ** | **—** | ** ** | **—** | ** ** | **73,077** | ** ** |
|                   |       | 2007       |       | 55,046              |       | —     |       | —       |       | 4,954          |       | — |   | — |   | 60,000 |   |
| S. Chang(1)            | ** ** | **2008**   | ** ** | **258,495**         | ** ** | **—** | ** ** | **—**   | ** ** | **32,167**     | ** ** | **145,000** | ** ** | **—** | ** ** | **435,662** | ** ** |
|                   |       | 2007       |       | 298,950             |       | —     |       | —       |       | 25,648         |       | — |   | — |   | 324,598 | ** ** |
| Prof J. Zalcberg       | ** ** | **2008**   | ** ** | **55,046**          | ** ** | **—** | ** ** | **—**   | ** ** | **4,954**      | ** ** | **—** | ** ** | **—** | ** ** | **60,000** | ** ** |
|                   |       | 2007       |       | 55,046              |       | —     |       | —       |       | 4,954          |       | — |   | — |   | 60,000 |   |
| P.O. Burns        | ** ** | **2008**   | ** ** | **60,000**          | ** ** | **—** | ** ** | **—**   | ** ** | **—**     | ** ** | **—** | ** ** | **—** | ** ** | **60,000** | ** ** |
|                   |       | 2007       |       | 60,000              |       | —     |       | —       |       | —         |       | — |   | — |   | 60,000 |   |
| J. Lee                 | ** ** | **2008**   | ** ** | **19,450**          | ** ** | **—** | ** ** | **—**   | ** ** | **—**     | ** ** | **—** | ** ** | **—** | ** ** | **19,450** | ** ** |
|                   |       | 2007       |       | —              |       | —     |       | —       |       | —         |       | — |   | — |   | — |   |
| R. Williamson          | ** ** | **2008**   | ** ** | **19,450**          | ** ** | **—** | ** ** | **—**   | ** ** | **—**     | ** ** | **—** | ** ** | **—** | ** ** | **19,450** | ** ** |
|                   |       | 2007       |       | —              |       | —     |       | —       |       | —         |       | — |   | — |   | — |   |
| Dr S.S.C Chang(2)      | ** ** | **2008**   | ** ** | **—**          | ** ** | **—** | ** ** | **—**   | ** ** | **—**     | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Non-executive director |       | 2007       |       | 32,630              |       | —     |       | —       |       | —         |       | — |   | — |   | 32,630 |   |
| Total - Non-executive  | ** ** | **2008**   | ** ** | **479,484**         | ** ** | **—** | ** ** | **—**   | ** ** | **43,155**     | ** ** | **145,000** | ** ** | **—** | ** ** | **667,639** | ** ** |
| Directors              |       | 2007       |       | 501,672             |       | —     |       | —       |       | 35,556         |       | — |   | — |   | 537,228 |   |

 

----

(1) Resigned as executive chairman on 3 March 2008but continued as a non-executive director.

(2) Resigned 16 January 2007.

 

F-41

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Table ofContents

 

**26.  DIRECTOR AND EXECUTIVE AND RELATED PARTYDISCLOSURES (cont’d)**

 

**(b)  Remuneration of directors and keymanagement personnel (cont’d)**

 

**Remuneration for the otherkey management personnel for the year ended 30 June 2008.**

 
| ** **                      | ** ** | ** ** | ** ** | **Short term** | ** ** | **Post**    | ** ** | ** **   | ** ** | **Share-**     | ** ** | ** **      | ** ** |
|---------------------------------|------------|------------|------------|---------------------|------------|-------------|------------|--------------|------------|----------------|------------|-----------------|------------|
| **Other key**              | ** ** | ** ** | ** ** | ** **          | ** ** | ** **  | ** ** | **Non**      | ** ** | **employment** | ** ** | ** **      | ** ** | **based** | ** ** | ** ** | ** ** |
| **management**                  | ** ** | ** ** | ** ** | **Salary**          | ** ** | **Cash**    | ** ** | **monetary** | ** ** | **Super-**     | ** ** | **Termination** | ** ** | **payment** | ** ** | ** ** | ** ** |
| **personnel**                   | ** ** | ** ** | ** ** | **and fees**   | ** ** | **bonus**   | ** ** | **benefits** | ** ** | **annuation**  | ** ** | **payment**     | ** ** | **Options** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | **$**               | ** ** | **$**       | ** ** | **$**        | ** ** | **$**          | ** ** | **$**           | ** ** | **$** | ** ** | **$** | ** ** |
| T.J. Homburg                    | ** ** | **2008**   | ** ** | **287,703**         | ** ** | **138,608** | ** ** | **7,386**    | **(1)**    | **28,889**     | ** ** | **—**      | ** ** | **135,259** | ** ** | **597,845** | ** ** |
|                            |       | 2007       |       | 288,132             |       | —      |       | 4,678        | (1)        | 17,068         |       | —          |       | 315,976 |   | 625,854 |   |
| L. Burns                        | ** ** | **2008**   | ** ** | **190,000**         | ** ** | **68,807**  | ** ** | **—**   | ** ** | **23,293**     | ** ** | **—**      | ** ** | **109,609** | ** ** | **391,709** | ** ** |
|                            |       | 2007       |       | 175,427             |       | —      |       | —       |       | 15,788         |       | —          |       | 34,468 |   | 225,683 |   |
| A. Gautam(2)                    | ** ** | **2008**   | ** ** | **150,744**         | ** ** | **—**  | ** ** | **—**   | ** ** | **13,200**     | ** ** | **100,000**     | ** ** | **54,304** | ** ** | **318,248** | ** ** |
|                            |       | 2007       |       | 153,453             |       | —      |       | —       |       | 13,960         |       | —          |       | — |   | 167,413 |   |
| S. Meibusch                     | ** ** | **2008**   | ** ** | **117,546**         | ** ** | **—**  | ** ** | **—**   | ** ** | **10,579**     | ** ** | **—**      | ** ** | **109,609** | ** ** | **237,734** | ** ** |
|                            |       | 2007       |       | 131,007             |       | —      |       | —       |       | 11,791         |       | —          |       | — |   | 142,798 |   |
| Dr J. Garner                    | ** ** | **2008**   | ** ** | **175,000**         | ** ** | **—**  | ** ** | **—**   | ** ** | **15,750**     | ** ** | **—**      | ** ** | **55,305** | ** ** | **246,055** | ** ** |
|                            |       | 2007       |       | 71,667              |       | —      |       | —       |       | 6,629          |       | —          |       | — |   | 78,296 |   |
| Dr J. Devlin                    | ** ** | **2008**   | ** ** | **150,000**         | ** ** | **—**  | ** ** | **—**   | ** ** | **13,500**     | ** ** | **—**      | ** ** | **55,305** | ** ** | **218,805** | ** ** |
|                            |       | 2007       |       | 19,423              |       | —      |       | —       |       | 1,748          |       | —          |       | — |   | 21,171 |   |
| Dr L. Marton                    | ** ** | **2008**   | ** ** | **133,268**         | ** ** | **—**  | ** ** | **—**   | ** ** | **11,711**     | ** ** | **—**      | ** ** | **36,073** | ** ** | **181,052** | ** ** |
|                            |       | 2007       |       | —              |       | —      |       | —       |       | —         |       | —          |       | — |   | — |   |
| G. Orders(3)                    | ** ** | **2008**   | ** ** | **—**          | ** ** | **—**  | ** ** | **—**   | ** ** | **—**     | ** ** | **—**      | ** ** | **—** | ** ** | **—** | ** ** |
| General  Manager, Manufacturing |       | 2007       |       | 109,332             |       | —      |       | —       |       | 9,939          |       | —          |       | — |   | 119,271 |   |
| Total - Other key               | ** ** | **2008**   | ** ** | **1,204,261**       | ** ** | **207,415** | ** ** | **7,386**    | ** ** | **116,922**    | ** ** | **100,000**     | ** ** | **555,464** | ** ** | **2,191,448** | ** ** |
| management personnel            |       | 2007       |       | 948,441             |       | —      |       | 4,678        |       | 76,923         |       | —          |       | 350,444 |   | 1,380,486 |   |

 

----

(1) Includes the reimbursement of motor vehicleexpenses.

(2) Resigned 2 June 2008.

(3) Resigned 13 July 2007. All remuneration paidin the 2007 financial year up to the date of his resignation.

 

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Table ofContents

 

**26. DIRECTOR AND EXECUTIVE AND RELATED PARTY DISCLOSURES (cont’d)**

 

**(c)****         ****Option holdings of keymanagement personnel**

 

During the course of the 2008 financial year thefollowing options were granted or vested to key management personnel of theCompany under the terms of The Progen Directors and Employee Option IncentivePlan. No options were granted to Directors during the 2008 financial year.

 

**Number of options granted and vested duringthe year**

 
| ** **  | ** ** | **Grant date** | ** ** | **Expiry date** | ** ** | **No. of   options   granted** | ** ** | **No. of   options   vested** | ** ** | **Exercise   price** | ** ** | **Fair Value   per option at   grant date** | ** ** | **Date   excercisable** | ** ** | **% of   grant   vested** | ** ** | **% of   grant   forfeited** | ** ** |
|-------------|------------|---------------------|------------|----------------------|------------|-------------------------------------|------------|------------------------------------|------------|----------------------|------------|-----------------------------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| T J Homburg |       | 30-Nov-2006         |       | 1-Mar-2011           |       | —                              |       | 166,667                            |       | $                    | 2.59       |                                                            | $          | 0.98                    |       | 1-Mar-2008                     |       | —                            |       | Nil |   |
| L Burns     |       | 14-Sep-2007         |       | 13-Sep-2012          |       | 100,000                             |       | 50,000                             |       | $                    | 3.61       |                                                            | $          | 1.23                    |       | 14-Sep-2008                    |       | 50                                | %          | Nil |   |
| A Gautam    |       | 14-Sep-2007         |       | 13-Sep-2012          |       | 100,000                             |       | 50,000                             |       | $                    | 3.61       |                                                            | $          | 1.23                    |       | From date of   grant           |       | 50                                | %          | 50 | % |
| S Meibusch  |       | 14-Sep-2007         |       | 13-Sep-2012          |       | 100,000                             |       | 50,000                             |       | $                    | 3.61       |                                                            | $          | 1.23                    |       | 14-Sep-2008                    |       | 50                                | %          | Nil |   |
| J Garner    |       | 14-Sep-2007         |       | 13-Sep-2012          |       | 50,000                              |       | Nil                                |       | $                    | 3.61       |                                                            | $          | 1.23                    |       | 14-Sep-2008                    |       | Nil                               |       | Nil |   |
| J Devlin    |       | 14-Sep-2007         |       | 13-Sep-2012          |       | 50,000                              |       | Nil                                |       | $                    | 3.61       |                                                            | $          | 1.23                    |       | 14-Sep-2008                    |       | Nil                               |       | Nil |   |
| L Marton    |       | 1-Feb-2008          |       | 1-Feb-2013           |       | 100,000                             |       | 25,000                             |       | $                    | 2.22       |                                                            | $          | 0.66                    |       | 1-Feb-2009                     |       | 25                                | %          | Nil |   |

 

The following table summarises the value of optionsgranted, exercised or lapsed during the 2008 financial year to directors andkey management personnel.

 
| ** **  | ** ** | **Value of options  granted during the  year ^** | ** ** | **Value of options  exercised during the  year** | ** ** | **Value of options  lapsed during the  year** | ** ** | **Remuneration  consisting of options  for the year** | ** ** |
|-------------|------------|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **  | ** ** | **$**                                                                     | ** ** | **$**                                                                | ** ** | **$**                                                             | ** ** | **%**                                                                     | ** ** |
| T J Homburg |       | —                                                                    |       | —                                                               |       | —                                                            |       | 22.6                                                                      |       |
| L Burns     |       | 109,609                                                                   |       | —                                                               |       | $                                                                 | Nil        |                                                                      | 28.0       |   |
| A Gautam    |       | 54,304                                                                    |       | —                                                               |       | —                                                            |       | 17.1                                                                      |       |
| S Meibusch  |       | 109,609                                                                   |       | —                                                               |       | —                                                            |       | 46.1                                                                      |       |
| J Garner    |       | 55,305                                                                    |       | —                                                               |       | —                                                            |       | 22.5                                                                      |       |
| J Devlin    |       | 55,305                                                                    |       | —                                                               |       | —                                                            |       | 25.3                                                                      |       |
| L Marton    |       | 36,073                                                                    |       | —                                                               |       | —                                                            |       | 19.9                                                                      |       |
|             |            |                                                                           |            |                                                                      |            |                                                                   |            |                                                                           |            |  |

 

----

^ For details on the valuation of options, includingmodels and assumptions used, please refer to note 13.

 

F-43

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Table ofContents

 

**26. DIRECTOR AND EXECUTIVE AND RELATED PARTY DISCLOSURES (cont’d)**

 

**(c)  Option holdings of key management personnel (cont’d)**

 
| ** **        | ** ** | **Balance at  beginning  of period** | ** ** | ** **                        | ** ** | ** **             | ** ** | **Net**           | ** ** | **Balance at  end of  period** | ** ** | **At 30 June 2008** | ** ** |
|-------------------|------------|------------------------------------------------|------------|-----------------------------------|------------|------------------------|------------|-------------------|------------|------------------------------------------|------------|------------------------------------|------------|
| ** **        | ** ** | **1 July  2007**                          | ** ** | **Granted as  remuneration** | ** ** | **Options  exercised** | ** ** | **change  other** | ** ** | **30 June  2008**                   | ** ** | **Total  Vested**                  | ** ** | **Total  Exercisable** | ** ** |
| **Directors**     |       |                                           |       |                              |       |                   |       |              |       |                                     |       |                               |       |   |   |
| S. Chang(1)       |       | 41,014                                         |       | —                            |       | —                 |       | —            |       | 41,014                                   |       | 41,014                             |       | 41,014 |   |
| T. J. Homburg     |       | 531,389                                        |       | —                            |       | —                 |       | —            |       | 531,389                                  |       | 364,723                            |       | 364,723 |   |
| Prof. J. Zalcberg |       | —                                         |       | —                            |       | —                 |       | —            |       | —                                   |       | —                             |       | — |   |
| Dr M. Eutick(2)   |       | 885                                            |       | —                            |       | —                 |       | —            |       | 885                                      |       | 885                                |       | 885 |   |
| P.O. Burns   |       | 28                                             |       | —                            |       | —                 |       | —            |       | 28                                       |       | 28                                 |       | 28 |   |
| R. Williamson(3)  |       | —                                         |       | —                            |       | —                 |       | —            |       | —                                   |       | —                             |       | — |   |
| J. Lee(3)         |       | —                                         |       | —                            |       | —                 |       | —            |       | —                                   |       | —                             |       | — |   |
| ** **        |       |                                           |       |                              |       |                   |       |              |       |                                     |       |                               |       |   |   |
| **Executives**    |       |                                           |       |                              |       |                   |       |              |       |                                     |       |                               |       |   |   |
| L. Burns          |       | 33,218                                         |       | 100,000                           |       | —                 |       | (33,000           | )          | 100,218                                  |       | 50,218                             |       | 50,218 |   |
| A. Gautam(4)      |       | —                                         |       | 100,000                           |       | —                 |       | (50,000           | )          | 50,000                                   |       | 50,000                             |       | 50,000 |   |
| S. Meibusch       |       | —                                         |       | 100,000                           |       | —                 |       | —            |       | 100,000                                  |       | 50,000                             |       | 50,000 |   |
| J. Garner         |       | —                                         |       | 50,000                            |       | —                 |       | —            |       | 50,000                                   |       | —                             |       | — |   |
| J. Devlin         |       | —                                         |       | 50,000                            |       | —                 |       | —            |       | 50,000                                   |       | —                             |       | — |   |
| L. Marton(5)      |       | —                                         |       | 100,000                           |       | —                 |       | —            |       | 100,000                                  |       | 25,000                             |       | 25,000 |   |
| Total             |       | 606,534                                        |       | 500,000                           |       | —                 |       | (83,000           | )          | 1,023,534                                |       | 581,868                            |       | 581,868 |   |

 

----

(1) Resigned as executive chairman 3March 2008

(2) Appointed as executive chairman 4March 2008

(3) Appointed 4 March 2008

(4) Resigned 2 June 2008

(5) Appointed 1 February 2008

 
| ** **         | ** ** | **Balance at  beginning  of period** | ** ** | ** **                        | ** ** | ** **             | ** ** | **Net**            | ** ** | **Balance at  end of  period** | ** ** | **At 30 June 2007** | ** ** |
|--------------------|------------|------------------------------------------------|------------|-----------------------------------|------------|------------------------|------------|--------------------|------------|------------------------------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **1 July  2006**                          | ** ** | **Granted as  remuneration** | ** ** | **Options  exercised** | ** ** | **change  other#** | ** ** | **30 June  2007**                   | ** ** | **Total  Vested**                  | ** ** | **Total  Exercisable** | ** ** |
| **Directors**      | ** ** | ** **                                     | ** ** | ** **                        | ** ** | ** **             | ** ** | ** **         | ** ** | ** **                               | ** ** | ** **                         | ** ** | ** ** | ** ** |
| S. Chang           |       | —                                         |       | —                            |       | —                 |       | 41,014             |       | 41,014                                   |       | 41,014                             |       | 41,014 |   |
| T. J. Homburg      |       | 30,000                                         |       | 500,000                           |       | —                 |       | 1,389              |       | 531,389                                  |       | 198,056                            |       | 198,056 |   |
| Prof. J. Zalcberg  |       | —                                         |       | —                            |       | —                 |       | —             |       | —                                   |       | —                             |       | — |   |
| Dr M. Eutick       |       | —                                         |       | —                            |       | —                 |       | 885                |       | 885                                      |       | 885                                |       | 885 |   |
| P.O. Burns    |       | —                                         |       | —                            |       | —                 |       | 28                 |       | 28                                       |       | 28                                 |       | 28 |   |
| Dr S.S.C. Chang(1) |       | —                                         |       | —                            |       | —                 |       | —             |       | —                                   |       | —                             |       | — |   |
| E. Cheng(1)        |       | —                                         |       | —                            |       | —                 |       | —             |       | —                                   |       | —                             |       | — |   |
| ** **         |       |                                           |       |                              |       |                   |       |               |       |                                     |       |                               |       |   |   |
| **Executives**     |       |                                           |       |                              |       |                   |       |               |       |                                     |       |                               |       |   |   |
| L. Burns           |       | —                                         |       | 33,000                            |       | —                 |       | 218                |       | 33,218                                   |       | 33,218                             |       | 33,218 |   |
| A. Gautam          |       | —                                         |       | —                            |       | —                 |       | —             |       | —                                   |       | —                             |       | — |   |
| G. Orders          |       |                                           |       |                              |       |                   |       |               |       |                                     |       |                               |       |   |   |
| S. Meibusch        |       | —                                         |       | —                            |       | —                 |       | —             |       | —                                   |       | —                             |       | — |   |
| J. Garner(2)       |       | —                                         |       | —                            |       | —                 |       | —             |       | —                                   |       | —                             |       | — |   |
| J. Devlin(3)       |       | —                                         |       | —                            |       | —                 |       | —             |       | —                                   |       | —                             |       | — |   |
| Total              |       | 30,000                                         |       | 533,000                           |       | —                 |       | 43,534             |       | 606,534                                  |       | 273,201                            |       | 273,201 |   |

 

----

| #   | Includes  options received from participation in the Rights Entitlements Offer under  the Prospectus dated 9 May 2007. |
|-----|-----------------------------------------------------------------------------------------------------------------------------|
| (1) | Resigned 16  January 2007                                                                                              |
| (2) | Appointed 29  January 2007                                                                                             |
| (3) | Appointed 16  May 2007                                                                                                 |

 

F-44

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Table ofContents

 

**26. DIRECTOR AND EXECUTIVE AND RELATED PARTY DISCLOSURES (cont’d)**

** **

**(d)  Shareholdings of key managementpersonnel**

 
| **Ordinary shares held in  Progen Pharmaceuticals  Limited** | ** ** | **Balance  1 July 07** | ** ** | **On exercise of  options** | ** ** | **Net change  other(****6)** | ** ** | **Balance  30 June 08** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                       |       |                             |       |                                  |       |                              |       |                              |       |
| **Directors**                                                                    |       |                             |       |                                  |       |                              |       |                              |       |
| S. Chang(1)                                                                      |       | 820,300                          |       | —                                |       | —                            |       | 820,300                           |       |
| T.J. Homburg                                                                     |       | 27,778                           |       | —                                |       | 25,000                            |       | 52,778                            |       |
| Prof. J. Zalcberg                                                                |       | 16,772                           |       | —                                |       | —                            |       | 16,772                            |       |
| Dr M. Eutick(2)                                                                  |       | 17,693                           |       | —                                |       | —                            |       | 17,693                            |       |
| P.O. Burns                                                                  |       | 556                              |       | —                                |       | —                            |       | 556                               |       |
| R. Williamson(3)                                                                 |       | —                           |       | —                                |       | 25,000                            |       | 25,000                            |       |
| J. Lee(3)                                                                        |       | —                           |       | —                                |       | —                            |       | —                            |       |
| ** **                                                                       |       |                             |       |                                  |       |                              |       |                              |       |
| **Executives**                                                                   |       |                             |       |                                  |       |                              |       |                              |       |
| L. Burns                                                                         |       | 4,359                            |       | —                                |       | 10,000                            |       | 14,359                            |       |
| A. Gautam(4)                                                                     |       | —                           |       | —                                |       | —                            |       | —                            |       |
| S. Meibusch                                                                      |       | —                           |       | —                                |       | —                            |       | —                            |       |
| J. Garner                                                                        |       | —                           |       | —                                |       | —                            |       | —                            |       |
| J. Devlin                                                                        |       | —                           |       | —                                |       | —                            |       | —                            |       |
| L. Marton(5)                                                                     |       | —                           |       | —                                |       | —                            |       | —                            |       |
| Total                                                                            |       | 887,458                          |       | —                                |       | 60,000                            |       | 947,458                           |       |

 

----

(1) Resigned as executive chairman 3 March 2008

(2) Appointed as executive chairman 4 March 2008

(3) Appointed 4 March 2008

(4) Resigned 2 June 2008

(5) Appointed 1 February 2008

(6) On-markettransactions

 

F-45

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Table ofContents

 

**26. DIRECTOR AND EXECUTIVE AND RELATED PARTY DISCLOSURES (cont’d)**

 

**(d)  Shareholdings of key managementpersonnel (cont’d)**

 
| **Ordinary shares held in** | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **          | ** ** | ** **               | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------------------------|------------|---------------------|------------|--------------------------|------------|
| **Progen Pharmaceuticals**            | ** ** | **Balance**             | ** ** | **On exercise of** | ** ** | **Net change** | ** ** | **Balance**              | ** ** |
| **Limited**                                | ** ** | **1 July 06** | ** ** | **options**                  | ** ** | **other****+**      | ** ** | **30 June 07** | ** ** |
|                                       |       |                    |       |                         |       |                |       |                     |       |
| **Directors**                              |       |                    |       |                         |       |                |       |                     |       |
| S. Chang                                   |       | 736,424                 |       | —                       |       | 83,876              |       | 820,300                  |       |
| T.J. Homburg                               |       | 25,000                  |       | —                       |       | 2,778               |       | 27,778                   |       |
| Prof. J. Zalcberg                          |       | 15,849                  |       | —                       |       | 923                 |       | 16,772                   |       |
| Dr M. Eutick                               |       | 15,000                  |       | —                       |       | 2,693               |       | 17,693                   |       |
| P.O. Burns                            |       | 500                     |       | —                       |       | 56                  |       | 556                      |       |
| Dr S.S.C. Chang(1)                         |       | —                  |       | —                       |       | —              |       | —                   |       |
| E. Cheng(1)                                |       | —                  |       | —                       |       | —              |       | —                   |       |
|                                       |       |                    |       |                         |       |                |       |                     |       |
| **Executives**                             |       |                    |       |                         |       |                |       |                     |       |
| L. Burns                                   |       | 3,000                   |       | —                       |       | 1,359               |       | 4,359                    |       |
| A. Gautam(4)                               |       | —                  |       | —                       |       | —              |       | —                   |       |
| G. Orders                                  |       | —                  |       | —                       |       | —              |       | —                   |       |
| S. Meibusch                                |       | —                  |       | —                       |       | —              |       | —                   |       |
| J. Garner(2)                               |       | —                  |       | —                       |       | —              |       | —                   |       |
| J. Devlin(3)                               |       | —                  |       | —                       |       | —              |       | —                   |       |
| Total                                      |       | 795,773                 |       | —                       |       | 91,685              |       | 887,458                  |       |

 

----

| #   | Includes shares purchased from participation in  the Company’s Share Purchase Plan and Rights Entitlement Offer |
|-----|----------------------------------------------------------------------------------------------------------------------|
| (1) | Resigned 16 January 2007                                                                                        |
| (2) | Appointed 29 January 2007                                                                                       |
| (3) | Appointed 16 May 2007                                                                                           |

** **

**(e)****          Subsidiaries**

 

The consolidated financial statements include thefinancial statements of Progen Pharmaceuticals Limited and the subsidiarylisted in the following table:

 
| ** **                   | ** ** | **Country of** | ** ** | **% Equity Interest** | ** ** | **Investment ($000)** | ** ** |
|------------------------------|------------|---------------------|------------|---------------------------------|------------|----------------------------|------------|
| **Name**                     | ** ** | **Incorporation**   | ** ** | **2008**                        | ** ** | **2007**                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|                         |       |                |       |                            |       |                       |       |   |   |   |   |
| Progen Pharmaceuticals  Inc. |       | United States       | ** ** | **100**                         |       | —                     | ** ** | **3,278** | ** ** | **—** | ** ** |

 

Term and conditions of transactions with subsidiary.

Intercompany receivable is a loan funding intercompanyoperations with no specific repayment terms and is therefore unlikely to berepaid in 12 months. The loan is an interest bearing loan with 8.05%p.a. interest.

 

F-46

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