**SECURITIES AND EXCHANGECOMMISSIONWashington, 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 1934For the fiscal year  ended June 30, 2007****Commission file number: 0-51373**                                                                                                                                                                                  | ** ** |
|           | **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 requiring this shell company  report        For the transition period from              to         ** | ** ** |

 

**Commission file number 0-51373**

 

**CHEMGENEX PHARMACEUTICALS LIMITED**

(Exact name of Registrant as specified in itscharter)

**Australia**(Jurisdiction of incorporation or organization)

 

**Pigdons Road**

**Waurn Ponds**

**P.O. Box 1069, Grovedale**

**Victoria 3216 Australia**

**Telephone number: 011-613-5227-2752**(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) ofthe Act:

**None**

 

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:

**Ordinary shares without par value (“ordinaryshares”)**

**American Depositary Shares each representingthe right to receive 15 ordinary shares**

 

Securities for which there is a reporting obligation pursuant toSection 15(d) of the Act:

**None**

 

Indicate the number of outstanding shares of each of the issuer’s classof capital or common stock as of June 30, 2007:

**185,847,331 ordinary shares without par value**

 

Indicate if the registrant is a well-known seasoned issuer, as definedin Rule 405 of the Securities Act
|   |   | Yes /No | **NO** | ** ** |   |
|--------|--------|---------|--------|------------|--------|

 

If this report is an annual or transition report, indicate  if the registrant is not required to filereport pursuant  to Section 13 or 15(d)of the Securities Exchange Act of 1934

 
|   |   | Yes /No | **NO** | ** ** |   |
|--------|--------|---------|--------|------------|--------|

 

Note- Checking the above will not relieve any registrant required tofile reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 from their obligations under those sections.

 

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

 
|   |   | Yes /No | **NO** | ** ** |   |
|--------|--------|---------|--------|------------|--------|

 

Indicate whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone)

 
|   |   | Large accelerated filer | **No**  |   | ** ** |
|--------|--------|-------------------------|---------|--------|------------|
|   |   |                    |    |   |       |
|   |   | Accelerated filer       | **No**  |   | ** ** |
|   |   |                    |    |   |       |
|   |   | Non-accelerated filer   | **Yes** |   | ** ** |

 

Indicate by which financial statement item the registrant has electedto follow.

 
|   |   | Item 17 x | Item 18 o | ** ** |   |
|--------|--------|-----------|-----------|------------|--------|

 

If this is an annual report indicate whether the registrant is a shellcompany (as defined by Rule 12b-2 of the Exchange Act

 
|   |   | Yes /No | **NO** | ** ** |   |
|--------|--------|---------|--------|------------|--------|

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURINGTHE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.

o Yes   o No

 

Please send copies of notice andcommunications from the Securities and Exchange Commission to:

 

Ross Kaufman

Greenberg Traurig, LLP

200 Park Avenue

New York, New York 10166

 

 

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**TABLE OF CONTENTS**

 
| ***GLOSSARY*** | *** *** | *** ***                                                                                    | *** *** | *** *** |
|----------------|--------------|-------------------------------------------------------------------------------------------------|--------------|--------------|
| *** ***   | *** *** | *** ***                                                                                    | *** *** | *** *** |
| ***PART I***   | *** *** | *** ***                                                                                    | *** *** | *** *** |
| *** ***   | *** *** | *** ***                                                                                    | *** *** | *** *** |
| **ITEM 1.**    | ** **   | **IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISORS**                                      | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                                      | ** **   | ** **   |
| **ITEM 2.**    | ** **   | **OFFER STATISTICS AND  EXPECTED TIMETABLE**                                                    | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                                      | ** **   | ** **   |
| **ITEM 3.**    | ** **   | **KEY INFORMATION**                                                                             | ** **   | ** **   |
| A.             |         | Selected  consolidated financial data                                                           |         |         |
| B.             |         | Capitalization and  indebtedness                                                                |         |         |
| C.             |         | Reasons for the  offer and use of proceeds                                                      |         |         |
| D.             |         | Risk factors                                                                                    |         |         |
|           |         |                                                                                            |         |         |
| **ITEM 4.**    | ** **   | **INFORMATION ON THE COMPANY**                                                                  | ** **   | ** **   |
| A.             |         | History and  development of the Company                                                         |         |         |
| B.             |         | Business overview                                                                               |         |         |
| C.             |         | Organizational  structure                                                                       |         |         |
| D.             |         | Property,  plant and equipment                                                                  |         |         |
|           |         |                                                                                            |         |         |
| **ITEM 5.**    | ** **   | **OPERATING AND  FINANCIAL REVIEW AND PROSPECTS**                                               | ** **   | ** **   |
| A.             |         | Operating results                                                                               |         |         |
| B.             |         | Liquidity  and capital resources                                                                |         |         |
| C.             |         | Research  and product development programs                                                      |         |         |
| D.             |         | Trend information                                                                               |         |         |
| E.             |         | Off-balance  Sheet Arrangements                                                                 |         |         |
| F.             |         | Tabular  Disclosure of Contractual Obligations                                                  |         |         |
| G.             |         | Assets  Acquired in a Business Combination to be used in Research & Development  Activities |         |         |
|           |         |                                                                                            |         |         |
| **ITEM 6.**    | ** **   | **DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES**                                                 | ** **   | ** **   |
| A.             |         | Directors  and senior management.                                                               |         |         |
| B.             |         | Compensation                                                                                    |         |         |
| C.             |         | Board practices                                                                                 |         |         |
| D.             |         | Employees                                                                                       |         |         |
| E.             |         | Share  ownership and options                                                                    |         |         |
|           |         |                                                                                            |         |         |
| **ITEM 7.**    | ** **   | **MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**                                          | ** **   | ** **   |
| A.             |         | Major shareholders                                                                              |         |         |
| B.             |         | Related party  transactions                                                                     |         |         |
| C.             |         | Interests  of experts and counsel                                                               |         |         |
|           |         |                                                                                            |         |         |
| **ITEM 8.**    | ** **   | **FINANCIAL INFORMATION**                                                                       | ** **   | ** **   |
| A.             |         | Consolidated  statements and other financial information                                        |         |         |
| B.             |         | Significant changes                                                                             |         |         |
|           |         |                                                                                            |         |         |
| **ITEM 9.**    | ** **   | **THE OFFER AND LISTING**                                                                       | ** **   | ** **   |
| A.             |         | Offer and  listing details                                                                      |         |         |
| B.             |         | Plan of  distribution                                                                           |         |         |
| C.             |         | Markets                                                                                         |         |         |
| D.             |         | Selling  shareholders                                                                           |         |         |
| E.             |         | Dilution                                                                                        |         |         |
| F.             |         | Expenses of the  issue                                                                          |         |         |

 

3

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| **ITEM 10.**   | ** **   | **ADDITIONAL  INFORMATION**                                                      | ** **   | ** **   |
|----------------|--------------|----------------------------------------------------------------------------------|--------------|--------------|
| A.             |         | Share capital                                                                    |         |         |
| B.             |         | Memorandum  and articles of incorporation                                        |         |         |
| C.             |         | Material contracts                                                               |         |         |
| D.             |         | Exchange  controls and other limitations affecting security holders              |         |         |
| E.             |         | Taxation                                                                         |         |         |
| F.             |         | Dividends and  paying agents                                                     |         |         |
| G.             |         | Statement by  experts                                                            |         |         |
| H.             |         | Documents on  display                                                            |         |         |
| I.             |         | Subsidiary  information                                                          |         |         |
|           |         |                                                                             |         |         |
| **ITEM 11.**   | ** **   | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                  | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 12.**   | ** **   | **DESCRIPTION OF  SECURITIES OTHER THAN EQUITY SECURITIES**                      | ** **   | ** **   |
| A              |         | Debt Securities                                                                  |         |         |
| B              |         | Warrants and Rights                                                              |         |         |
| C              |         | Other Securities                                                                 |         |         |
| D              |         | American  Depositary Shares                                                      |         |         |
|           |         |                                                                             |         |         |
| ***PART II***  | *** *** | *** ***                                                                     | *** *** | *** *** |
| *** ***   | *** *** | *** ***                                                                     | *** *** | *** *** |
| **ITEM 13.**   | ** **   | **DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES**                             | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 14.**   | ** **   | **MATERIAL  MODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS** | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 15.**   | ** **   | **CONTROLS AND  PROCEDURES**                                                     | ** **   | ** **   |
| A.             |         | Controls and  Procedures                                                         |         |         |
| B.             |         | Management’s  annual report on internal control over financial reporting    |         |         |
| C.             |         | Attestation  report of the registered public accounting firm                     |         |         |
| D.             |         | Changes  in internal control over financial reporting                            |         |         |
|           |         |                                                                             |         |         |
| **ITEM 16A.**  | ** **   | **AUDIT  COMMITTEE FINANCIAL EXPERT**                                            | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 16B.**  | ** **   | **CODE OF ETHICS**                                                               | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 16C.**  | ** **   | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES**                                      | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 16D.**  | ** **   | **EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**                  | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 16E.**  | ** **   | **PURCHASES OF  EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS**      | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| ***PART III*** | *** *** | *** ***                                                                     | *** *** | *** *** |
| *** ***   | *** *** | *** ***                                                                     | *** *** | *** *** |
| **ITEM 17.**   | ** **   | **FINANCIAL STATEMENTS**                                                         | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 18.**   | ** **   | **FINANCIAL STATEMENTS**                                                         | ** **   | ** **   |
| ** **     | ** **   | ** **                                                                       | ** **   | ** **   |
| **ITEM 19.**   | ** **   | **EXHIBITS**                                                                     | ** **   | ** **   |

 

4

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# **GLOSSARY**

# ** **

| **CML**                 |       | Chronic Myelogenous Leukemia is a malignant cancer of the bone marrow  that causes rapid growth of the blood-forming cells (known as myeloid  precursors) in the bone marrow, peripheral blood, and body tissues. CML can  occur in adults (usually middle-aged) and children. CML affects 1 to 2 people  per 100,000 and accounts for 7-20% cases of leukemia.                                                                                                                |
|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **DACH-Ac-Pt**          | ** ** | **(**1R,2R-diaminocyclohexane) –  (trans-diacetato) – (dichloro) – platinum(IV) is a novel platinum analogue  that has potential to treat several cancer types. The molecule has been  licensed by the M. D. Anderson Cancer Center in Houston, Texas to ChemGenex  Pharmaceuticals (CXS299). DACH-Ac-Pt was developed with the goal of  overcoming the limitations of existing platinum-based anti-cancer  therapeutics currently on the market.               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **GAD**                 |       | Glutamic Acid Decarboxylase is an enzyme found on the surface of beta  cells in the pancreas. Levels of GAD in the blood are associated with an  autoimmune process that leads to inflammation and destruction of beta cells,  usually resulting in the development of type 1 diabetes. Diagnostic tests for  GAD can be used to indicate an increased risk of type 1 diabetes.                                                                                                |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **HHT**                 |       | Homoharringtonine is a natural compound isolated from the Chinese  evergreen tree *Cephalotaxus harringtonia*. HHT  has a broad antitumor activity in rodents and antileukemic effects in humans.  HHT is used in China for the treatment of leukemia.                                                                                                                                                                                                                         |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **MDS**                 |       | Myelodysplastic Syndrome is a group of conditions caused by abnormal  blood-forming cells of the bone marrow. In MDS, the bone marrow cannot  produce blood cells effectively, and many abnormal cells are destroyed before  they leave the bone marrow or shortly after entering the bloodstream. This  results in low blood counts causing anemia and other complications. It is  estimated that there are between 10,000 and 15,000 new cases of MDS in the  USA each year. |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **NAT-2**               |       | N-Acetyltransferase 2 is an enzyme that metabolizes aromatic amines  and hydrazines in the body. Variations in the NAT-2 genes of humans (the  NAT-2 genotype) are associated with NAT-2 activity, and individuals can be  classified as being fast or slow acetylators. Variation in NAT-2 activity  causes different rates of metabolic conversion of molecules ranging from  caffeine to various therapeutics.                                                              |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ***Psammomys obesus***  |       | A species of gerbil also known as the sand rat or the Israeli sand  rat. The animal is a well-defined model for dietary induced type 2 diabetes.                                                                                                                                                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **PSARL**               |       | Presenilin-Associated Rhomboid-like protein is a protein located  within the mitochondria that appears to be involved in the regulation of  mitochondrial function and energy balance. The mitochondria are sub-cellular  organelles that covert energy stored in molecules such as glucose to forms  that can be directly used by the cell.                                                                                                                                   |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ***Rattus norvegicus*** |       | A common species of laboratory rat also known as the brown rat or the  Norway rat.                                                                                                                                                                                                                                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **SGIP1**               |       | SH3-Domain GRB2-Like Interacting Protein 1 is a protein that appears  to be involved in the regulation of the internalization of neurotransmitter  receptors in the brain. Specifically, it appears that SGIP1 is a novel  brain-specific component of the neuronal molecular machinery that regulates  energy balance in mammals.                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **TKI**                 |       | Tyrosine inhibitor. A class of drugs that can be used to alleviate  the symptoms of CML by blocking the activity of the causative protein,  BCR-ABL.                                                                                                                                                                                                                                                                                                                           |

 

5

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**USE OF CERTAIN DEFINED TERMS**

 

As used herein the terms “ChemGenex” and the “Company” refer toChemGenex Pharmaceuticals Limited and its consolidated subsidiaries as at thedate of filing.

 

**PRESENTATION OF FINANCIAL INFORMATION;AVAILABLE INFORMATION**

 

The Company’s fiscal year ends on June 30 of each year. References inthis document to a particular year are to the fiscal year unless otherwiseindicated. The Company prepares annual reports containing consolidatedfinancial statements and an opinion thereon by an independent registered publicaccounting firm. Such financial statements comply with Australian AccountingStandards which include Australian equivalents to International FinancialReporting Standards (“AIFRS”). This Annual Report on Form 20-F contains areconciliation to accounting principles generally accepted in the United Statesof America (“U.S. GAAP”) of net loss and shareholders’ equity. The Company alsoprepares half-yearly reports prepared in conformity with AIFRS, which containinterim condensed consolidated financial information that are subjected to areview by an independent registered public accounting firm.

 

The Company’s consolidated financial statements are reported inAustralian dollars. In this Annual Report on Form 20-F, references to “U.S.dollars”, US$ or “$” are to U.S. currency and references to “Australian dollars”or “A$” are to Australian currency.

 

**ENFORCEMENT OF LIABILITIES AND SERVICE OFPROCESS**

 

The Company isincorporated under the laws of New South Wales, Commonwealth of Australia. Themajority of its directors and executive officers, and the experts named in thisAnnual Report, reside outside the U.S. A substantial part of the Company’sassets, its directors’ and officers’ assets and such experts’ assets arelocated outside the U.S. As a result, it may not be possible for investors toeffect service of process within the U.S. upon the Company or its directors,executive officers or such experts, or to enforce against them or the Company,judgments obtained in U.S. courts based upon the civil liability provisions ofthe federal securities laws of the U.S. In addition, the Company has beenadvised by its Australian lawyers, McCullough Robertson, that there is doubtthat the courts of Australia will enforce against the Company, its officers,directors and experts named herein, judgments obtained in the U.S. based uponthe civil liability provisions of the federal securities laws of the U.S. orwill enter judgments in original actions brought in Australian courts basedupon the federal securities laws of the U.S.

 

**FORWARD-LOOKING STATEMENTS**

 

Except forhistorical information contained herein, the matters discussed in this AnnualReport are “forward-looking statements.” These forward-looking statementsinclude, but are not limited to, statements about the Company’s and itsstrategic partners’ respective plans, objectives, expectations, estimates,strategies, product approvals and development plans, and anticipated financialresults. These statements are typically identified by the use of terms such as “anticipates,”“believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “could,” “should,”“seeks,” “will,” “would” and similar words. These statements are based on theCompany’s current expectations and beliefs concerning future events but aresubject to risks and uncertainties, including but not limited to economic,competitive, governmental and technological factors affecting the Company’soperations, results of operations, markets, products, prices and prospects, andother factors discussed below and elsewhere in this Annual Report. Thesefactors may cause the Company’s results to differ materially from thestatements made in this Annual Report or otherwise made by or on behalf of theCompany. Item 3.D. “Risk Factors”is a summary (not listed in order of priority) of some of the risk factors thatcould adversely affect the Company’s results. The risks and uncertaintiesdescribed are not the only ones the Company faces. Additional risks notpresently known to the Company or other factors not perceived by the Company topresent significant risks to its business at this time also may impair itsbusiness operation. The Company does not undertake to update any of theseforward-looking statements or to announce the results of any revisions to theseforward-looking statements except as required by law.

 

6

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# **PART I**

# ** **

## **ITEM1.  IDENTITYOF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS**

## ** **

Not applicable.

 

## **ITEM2.  OFFERSTATISTICS AND EXPECTED TIMETABLE**

## ** **

Not applicable.

 

## **ITEM3.  KEYINFORMATION**

## ** **

### **A**.            Selected consolidated financial data

### ** **

The following table presentsselected financial data of the Company as of the dates and for each of theperiods indicated. You should read the selected financial data set forth belowtogether with Item 5. “Operating and Financial Review and Prospects” as well asthe Company’s audited consolidated financial statements and notes theretoappearing elsewhere in this Annual Report.

 

The selected consolidatedfinancial data as of June 30, 2007, 2006 and 2005 and for each of the threeyears in the period ended June 30, 2007 have been derived from, and arequalified in its entirety by reference to, the Company’s audited consolidated financial statements and notesthereto included elsewhere in this Annual Report.

 

Theselected consolidated financial data as of and for the years ended June 30, 2005,2004 and 2003 have been derived from the Company’s audited consolidatedfinancial statements not included in this Annual Report.

 

The Company prepares its consolidated financial statements inaccordance with current Australian Accounting Standards, which differ incertain significant respects from U.S. GAAP. A description of the significantdifferences and reconciliations of net loss and shareholders’ equity forthe periods and as of the dates therein indicated are set forth in Note26 to the Company’s consolidated financial statements included elsewhereherein.

 

Selected consolidated financial data as of and for the years ended June30, 2007, 2006, 2005, 2004 and 2003 is set out below.

 
| **Consolidated Income Statement Data****in  Accordance with AIFRS****:** | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                     | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| **A$’000, except per share data**                                   |       |        |       |        |       |        |       |
| Revenues from ordinary activities                                        |       | 2,288       |       | 2,297       |       | 4,095       |       |
|                                                                     |       |        |       |        |       |        |       |
| Research expenditure                                                     |       | (7,732      | )          | (7,186      | )          | (4,621      | )          |
| Employee costs                                                           |       | (2,518      | )          | (2,710      | )          | (2,631      | )          |
| Patent costs                                                             |       | (565        | )          | (576        | )          | (447        | )          |
| Legal costs                                                              |       | (66         | )          | (114        | )          | (106        | )          |
| Depreciation                                                             |       | (271        | )          | (272        | )          | (270        | )          |
| Other expenses from ordinary activities(a)                               |       | (2,837      | )          | (1,809      | )          | (2,255      | )          |
| Operating loss                                                           |       | (11,701     | )          | (10,370     | )          | (6,235      | )          |
| Profit on sale of subsidiary                                             |       | —      |       | —      |       | —      |       |
| Net loss                                                                 |       | (11,701     | )          | (10,370     | )          | (6,235      | )          |
|                                                                     |       |        |       |        |       |        |       |
| Basic and diluted loss per share (A$)                                    |       | (0.07       | )          | (0.09       | )          | (0.06       | )          |
| Basic and diluted weighted average number  of shares(b)                  |       | 162,281,115 |       | 117,647,158 |       | 105,707,630 |       |

 

7

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| **Consolidated Income Statement Data in Accordance with U.S. GAAP** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Revenues from ordinary activities                                   |       | 1,266    |       | 2,055    |       | 3,828    |       | 3,490    |       | 4,997    |       |
| Net loss                                                            |       | (11,701  | )          | (10,444  | )          | (6,189   | )          | (20,060  | )          | (1,943   | )          |
| Basic and diluted loss per share (A$)                               |       | (0.07    | )          | (0.09    | )          | (0.06    | )          | (0.35    | )          | (0.04    | )          |

 
| **Consolidated Balance Sheet Data in Accordance with AIFRS:** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **A$’000**                                               |       |     |       |     |       |     |       |
| Cash assets                                                   |       | 25,367   |       | 15,554   |       | 8,512    |       |
| Plant and equipment, net                                      |       | 82       |       | 329      |       | 587      |       |
| Total assets                                                  |       | 42,761   |       | 32,965   |       | 26,575   |       |
| Long-term debt                                                |       | —   |       | —   |       |     |       |
| Total liabilities                                             |       | 2,891    |       | 1,960    |       | 1,340    |       |
| Net assets                                                    |       | 39,870   |       | 31,005   |       | 25,235   |       |
| Accumulated deficit                                           |       | (92,723  | )          | (81,023  | )          | (70,633  | )          |
| Contributed equity                                            |       | 120,773  |       | 99,893   |       | 84,592   |       |
| Reserves                                                      |       | 11,820   |       | 12,135   |       | 11,296   |       |

 
| **Consolidated Balance Sheet Data in Accordance with U.S. GAAP** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **A$’000**                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Total assets                                                     |       | 25,829   |       | 16,034   |       | 9,718    |       | 2,252    |       | 4,495    |       |
| Net assets                                                       |       | 22,938   |       | 14,073   |       | 8,378    |       | 131      |       | 4,048    |       |
| Contributed equity                                               |       | 120,381  |       | 99,501   |       | 84,201   |       | 69,865   |       | 54,236   |       |

 

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(a)     Other expenses from ordinary activities compriseconsulting and advisory costs, scientific advisory board costs, accounting andauditing costs, travel expenses and outsourced employee costs.

 

(b)    Basic loss per share is determined by dividing theloss after income tax by the weighted average number of ordinary shares,outstanding during the period. The computation of diluted loss per share issimilar to basic loss per share, except that it assumes the potentiallydilutive securities, such as options, were converted to shares at the beginningof the period. For all periods presented, diluted loss per share is equivalentto basic loss per share as the potentially dilutive securities are excluded fromthe computation of diluted loss per share because the effect is anti-dilutive.

 

**Dividends**

 

No dividend has been paid by the Company in the five fiscal years up toand including fiscal 2007.

 

**Exchange rates**

 

The consolidated financial statements of the Company which form part ofthis Annual Report are presented in Australian dollars (A$).

 

8

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The following table sets forth, for the periods and dates indicated,certain information concerning the noon buying rate in New York City forAustralian dollars expressed in U.S. dollars per A$1.00 as certified forcustoms purposes by the Federal Reserve Bank of New York.

 
| **Month**      | ** ** | **Month’s highest exchange rate** | ** ** | **Month’s lowest exchange rate** | ** ** |
|----------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| October 2007   |       | 0.8847                                 |       | 0.9223                                |       |
| September 2007 |       | 0.8884                                 |       | 0.8190                                |       |
| August 2007    |       | 0.8589                                 |       | 0.7873                                |       |
| July 2007      |       | 0.8845                                 |       | 0.8498                                |       |
| June 2007      |       | 0.8485                                 |       | 0.8252                                |       |
| May 2007       |       | 0.8332                                 |       | 0.8184                                |       |
| April 2007     |       | 0.8381                                 |       | 0.8091                                |       |

 
| **Years ended June 30,** | ** ** | **Average** | ** ** |
|--------------------------|------------|-------------|------------|
| ** **               |       |        |       |
| 2007                     |       | 0.7865      |       |
| 2006                     |       | 0.7475      |       |
| 2005                     |       | 0.7535      |       |
| 2004                     |       | 0.7134      |       |
| 2003                     |       | 0.5847      |       |

 

As at November 2, 2007 the Australian dollar closed at US$0.9180

 

### **B**.            Capitalization and indebtedness

### ** **

Not applicable.

 

### **C.            Reasonsfor the offer and use of proceeds**

### ** **

Not applicable.

 

### **D.            Riskfactors**

### ** **

Prospective investors and shareholders should be aware that anyinvestment in the Company involves a degree of risk and should be made only bythose with the necessary expertise to appraise the investment. In addition tothe other information in this document, the following risk factors should beconsidered in evaluating whether to make or hold an investment in the Company.Any or all of these factors could have a material and adverse effect on theCompany’s operational results, financial condition and prospects. Furthermore,the trading price of ChemGenex shares could decline resulting in the loss ofall or part of any investment therein.

 

**The Company has a history of operating losses and negative cash flowand may never become profitable**

 

ChemGenex is a company that has a history of operating losses. Theselosses have arisen mainly from the costs incurred in research and developmentof its products and general administrative costs. For the year ended June 30,2007, the Company’s net loss was A$11,700,919 and its accumulated deficit as ofJune 30, 2007 was A$92,723,921. 

 

9

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The Company expects to continue to incur operating losses over the nexttwo years and may never be profitable. To date, the Company has generatedrevenues through research and development funding from its partners, milestonepayments and contract research. In order to support the research anddevelopment of the Company’s business, the Company plans to incur expenses inexcess of revenue. The Company’s strategy is to utilize its understanding ofthe genetics of complex diseases and its expertise in medicinal chemistry toidentify novel targets for therapeutic intervention and to develop personalizedmedicines particularly in the field of cancer. The discovery of novel gene andprotein targets and the subsequent development of therapeutic products based onthese targets is an expensive process and the Company has in the past partneredits discovery programs in diabetes and obesity and in depression withinternational pharmaceutical companies. The Company’s cancer program has led tothe development of two therapeutic agents that are currently in clinical trialin the U.S. The Company may not develop any products and any other products itmay develop may not generate revenues.

 

**Additional funding is likely to be required to give the Company time toreach profitability. Raising such additional funding could entail restrictionson the rights of holders of ordinary shares. If the Company is unable to raiseadditional funds it may have to curtail its operations.**

 

The Company’s need for capital at any given time depends on a number offactors, including:

 

•                  the ability toenter collaborations to support its research and development programs;

 

•                  the rate of progressand cost of the Company’s research activities;

 

•                  the costs ofpreparing, filing, prosecuting, maintaining and enforcing patent claims andother intellectual property rights;

 

•                  thecosts and timing of obtaining regulatory approvals for the Company’s products;

 

•                  the emergence ofcompeting products and other adverse market development; and

 

•                  changes in, ortermination of, the Company’s existing collaboration and licensingarrangements.

 

The Company may not receive further revenues from collaboration andlicensing agreements or changes in the development of the Company’s drugcandidates may cause available capital resources to be used more quickly thanexpected.

 

The Company is likely in the future to require additional funds, inaddition to funds received from licensing and collaboration agreements, tocontinue research and development. It is likely that the Company will seekfunds through further licensing and collaboration agreements and throughadditional sale of the Company’s securities. The Company may not be able tosecure licensing and collaboration agreements on satisfactory terms, if at all.Also, the public markets for issues of biotechnology company securities arevolatile and competitive. The Company may not be able to attract additional fundson acceptable terms, if at all. The Company also may decide to access thepublic equity markets whenever conditions are favorable, even if the Companydoes not have an immediate need for additional capital at that time. If theCompany raises additional funds by issuing equity securities, dilution toshareholders may result. This might be the case, for example, because U.S.investors may not be able to participate in certain fund raising, such asrights offerings, under applicable securities laws and may therefore bediluted. Other shareholders may not have the means to exercise their rights insuch an offering, and will see their interests diluted, and the price at whichany further capital raising is made also may be below the price at which otherinvestors acquired their shares.

 

Ifadequate funds are not available, the Company may have to significantly reduceits research and development programs or obtain funds through licensing andcollaboration agreements at an earlier stage in the drugs’ development than theCompany envisaged. If adequate funds are not available on acceptable terms, itsability to invest in the progress of its development programs and productportfolio will be materially and adversely affected, with the result that itsprospects are less favorable. Following the issue of 33,948,293 shares atA$0.62 cents each on Feb/April of 2007 ChemGenex had working capital ofapproximately A$23 million as at June 30, 2007. Based on the anticipated cashflow requirements of the Company’s existing research and developmentactivities, the Board has concluded that these funds should be sufficient tosupport operations into the second half of calendar 2008. The Board remainsconfident that adequate funds to continue the Company’s operations will beraised from partnership agreements and/or equity placements as required in thefuture.

 

The Company anticipates a net loss in fiscal 2008.

 

10

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**If the Company is unable to retain and attract key employees, its scientificand management capabilities could be reduced.**

 

The loss of key employees could weaken the Company’s scientific andmanagement capabilities, resulting in delays in the development of its cancerclinical trials and broader research programs thus impacting negatively on theCompany’s business. ChemGenex is significantly dependent on certain scientificand management personnel, including Dr. Gregory R. Collier, Dr. Dennis M.Brown, Dr. James A. Campbell, Eric P. Merrigan, Tina Herbert, and EricHumphriss. Although the Company has entered into employment or consultancyarrangements with each of the Company’s key personnel with the aim of securingtheir services, the retention of such services cannot be guaranteed. Companiessuch as ChemGenex are highly dependent on employees who have an in-depth andlong-term understanding of their companies’ technologies, products, programs,collaborative relationships and strategic goals. The loss of these keyemployees and the Company’s inability to recruit new employees to replace themcould have a negative impact on the business and prospects of the Companybecause the Company’s scientific and management capabilities would be reduced.

 

**The Company is dependent on its academic collaborators, consultants andscientific advisors and their confidentiality.**

 

The Company has relationships withcollaborators and consultants at academic and other scientific institutions whoconduct trials under contractually defined terms at the Company’s request. Itis the Company’s policy that all of its employees, academic collaborators,consultants and scientific advisors enter into confidentiality agreements thatcontrol the dissemination of all intellectual property produced that resultsfrom their work for the Company. It is possible; however, that unauthorizeddissemination of such confidential information could materially adverselyaffect the Company’s business, financial condition and results of operations. Suchcollaborators also could enter into employment agreements or consulting arrangementswith competitors.

 

**The Company may not be successful in its clinical trials programs. Theseprograms are costly, time consuming and of uncertain outcome. If such programsare not successful, the Company may invest substantial amounts of time and moneywithout developing revenue-producing products.**

 

Clinical trials of promising products can take years, the durationdepending among other factors on type, complexity, novelty and intended use ofthe product candidate. The Company may fail to successfully complete clinicaltrials and bring products to market for a number of reasons, including:

 

•                  as the Companyenters a more extensive clinical program in several different diseases, thedata generated in these studies may not be as compelling as the earlierresults;

 

•                  unforeseensafety issues or side effects;

 

•                  variability inthe number and types of patients available for each study, and difficulty inmaintaining contact with patients after treatment, resulting in incompletedata;

 

•                  delaysresulting from review board action at institutions assisting the Company withits clinical trials; and

 

•                  the failure toobtain required regulatory approvals.

 

**If the products that the Company brings to market are not commerciallysuccessful, the Company’s liquidity may be adversely affected.**

 

The Company’s success depends on acceptance of the Company’s productsby the market, including physicians and third-party payers, and consequentlythe Company’s liquidity and viability as a going concern may be adverselyaffected if it is unable to achieve market acceptance of its products. Factorsthat may affect the rate and level of market acceptance of any of the Company’sproducts include:

 

•                  the existence orentry onto the market of superior competing products or therapies;

 

•                  the price of theCompany’s products compared to competing products;

 

11

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•                  publicperception regarding the safety, efficacy and benefits of the Company’sproducts compared to competing products or therapies;

 

•                  theeffectiveness of the Company’s sales and marketing efforts and those of theCompany’s marketing partners;

 

•                  regulatorydevelopments related to manufacturing or use of the Company’s products;

 

•                  the willingnessof physicians to adopt a new treatment regimen; and

 

•                  publicityconcerning the product type in general.

 

**Even if the Company’s products are approved, they may still face laterregulatory difficulties, which could impair its ability to market its productsor force it to incur substantial additional expenses.**

 

Even if the Company receives regulatory approval to sell any of itsproducts, the U.S. Food and Drug Administration (“FDA”), the AustralianTherapeutics Goods Administration or comparable foreign regulatory agenciescould require the Company to conduct post-marketing trials to further evaluatesafety and efficacy or could prevent the Company from using the labeling claimswhich the Company would like to use to promote its products. Regulators willundertake periodic reviews and inspections. If they discover previously unknownproblems with a product or its manufacturing facility or if the Company failsto comply with regulatory requirements, regulators could:

 

•                  impose finesagainst the Company;

 

•                  imposerestrictions on the product, its manufacturer, or the Company;

 

•                  require theCompany to recall or remove a product from the market;

 

•                  suspend orwithdraw its regulatory approvals;

 

•                  require theCompany to conduct additional clinical trials;

 

•                  require theCompany to change its product labeling; or

 

•                  require theCompany to submit additional marketing applications.

 

If any of these events occur, the Company’s ability to sell itsproducts will be impaired and the Company may incur substantial additionalexpense to comply with the regulatory requirements. In addition, in certaincountries, even after regulatory approval, the Company is still required toobtain price reimbursement approval. This may delay the marketing of theCompany’s products or, when approval cannot be obtained, mean that the productcannot be sold at all.

 

**If the Company is unable to keep pace with technological change or withthe advances of its competitors, its technology and products may becomeobsolete or non-competitive.**

 

The biotechnology and pharmaceutical industries are subject to rapidtechnological change which could affect the success of the Company’s drugs ormake them obsolete. The field of biotechnology is characterized by significantand rapid technological change. Research and discoveries by others may resultin medical insights or breakthroughs which render the Company’s drug candidatesless competitive or even obsolete before they generate revenue.

 

12

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**The Company’s business faces intense competition from majorpharmaceutical companies and specialized biotechnology companies engaged in thedevelopment of drugs directed at the conditions and disorders that are thefocus of the Company’s therapeutics programs. As a result its competitors maybe able to establish superior proprietary positions.**

 

The Company’s competitors in the biotechnology and pharmaceuticalindustries may have superior research and development capabilities, drugs,manufacturing capability or marketing expertise. Many of the Company’scompetitors have significantly greater financial and human resources and mayhave more experience in research and development. As a result, the Company’scompetitors may develop safer or more effective drugs, or implement moreeffective sales and marketing programs or be able to establish superiorproprietary positions. In addition, the Company anticipates that it will faceincreased competition in the future as new companies enter the Company’smarkets and alternative drugs become available.

 

The Company’s products under development are expected to address abroad range of markets including, but not limited to anti-cancer drugs for thetreatment of chronic myelogenous leukemia (“CML”) and other forms of leukemia,prostate cancer and other solid tumors. The Company’s competitive position willbe determined in part by the potential indications for which the Company’sproducts are developed and ultimately approved by regulatory authorities. Therelative speed with which the Company or its collaborative partners can developproducts, complete the clinical trials and approval processes and supplycommercial quantities of the products to the market, are expected to beimportant competitive factors.

 

The Company’s competitors may be developing products that could competewith the products the Company is developing. The Company and its collaboratorswill need to persuade patients and physicians to adopt its products over itscompetitors’ products.

 

In the field of cancer therapeutics the Company faces intensecompetition from major pharmaceutical companies and specialized biotechnologycompanies engaged in the development of product candidates and othertherapeutic products. Several of these companies have products in the sameindications or utilize similar technologies and/or personalized medicinetechniques. The FDA has approved two drugs for Gleevec®-resistantCML; Sprycel® (dasatinib), a drug developed and commercialized byBristol-Myers Squibb was approved in June 2006, and Nilotinib® (nilotinib)a drug developed and commercialized by Novartis was approved in October 2007.Significantly, neither Sprycel® nor Nilotinib® havedemonstrated efficacy against the T315I bcr-abl mutation, and it is thissub-set of resistant CML patients that are being targeted by the Company forinitial approval. Several biotechnology and pharmaceutical companies areseeking to develop effective therapeutics specifically for CML patients withthe T315I mutation. Vertex Pharmaceuticals and its partner Merck are developingan aurora kinase inhibitor referred to as MK-0457 or VX-680. This agent iscurrently in phase 2 clinical trials. Astex Therapeutics is developing AT9283,an inhibitor of several targets including bcr-abl. This agent is currently inphase 1/2 clinical trials. Several companies have agents in phase 1 clinicaltrials, including Exelixis (XL228), Kyowa Hakko (KW2449) and Medimmune/InfinityPharmaceuticals (IPI504). XanthusPharmaceuticals is currentlyconducting a phase 3 study with amonafide malate (listed as an example productcandidate — Refer Item 4B. Business Overview — ChemGenex’s developmentpipeline) in acute myeloid leukemia. The previous list is indicative only, andthere may be other competitive trials or technologies elsewhere in the world.Additionally, many of the Company’s competitors, including large pharmaceuticalcompanies, have greater financial and human resources and more experience thanthe Company does.

 

**If the healthcare industry limits coverage orreimbursement levels, the acceptance of the Company’s products could suffer. Itmay not be able to sell its drug profitably.**

 

The healthcare industry is subject to changing political, economic andregulatory influences that may affect the procurement practices and operationsof healthcare facilities. During the past several years, the healthcareindustry has been subject to increased government regulation of reimbursementrates and capital expenditures. Among other things, third party payers areincreasingly attempting to contain or reduce healthcare costs by limiting bothcoverage and levels of reimbursement for healthcare products and procedures.Cost control policies of third party payers, including government agencies, mayadversely affect acceptance and use of the Company’s product line.

 

13

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**If the Company is unable to successfully establish and protect itsintellectual property, which is significant to the Company’s competitiveposition, its competitors may be able to take advantage of its research anddevelopment efforts.**

 

The Company’s success depends in part on its ability to obtain andmaintain protection for its inventions and proprietary information, so that itcan stop others from making, using or selling its inventions or proprietaryrights. The Company owns a portfolio of patents and patent applications. Thereis a significant delay between the time of filing of a patent application andthe time its contents are made public, and others may have filed patentapplications for subject matter covered by the Company’s pending patentapplications without the Company being aware of those applications. The Company’spatent applications may not have priority over patent applications of othersand its pending patent applications may not result in issued patents. Even ifthe Company obtains patents, they may not be valid or enforceable againstothers. Moreover, even if the Company receives patent protection for some orall of its products, those patents may not give the Company an advantage overcompetitors with similar products.

 

To develop and maintain its competitive position, the Company alsorelies on unpatented trade secrets and improvements, unpatented know-how andcontinuing technological innovation, which it protects with security measuresit considers to be reasonable, including confidentiality agreements with itscollaborators, consultants and employees. The Company may not have adequateremedies if these agreements are breached and the Company’s competitors mayindependently develop any of this proprietary information.

 

If the Company fails to obtain adequate protection for its intellectualproperty, the Company’s competitors may be able to take advantage of theCompany’s research and development efforts. The Company’s success will depend,in large part, on its ability to obtain and maintain patent or otherproprietary protection for its technologies in general and, in particular,drugs and processes. The Company may not be able to obtain patent protectionfor the use of certain drug compounds, processes developed by its employees ormedical uses of compounds discovered through its technology. Legal standardsrelating to patents covering pharmaceutical or biotechnological inventions andthe scope of claims made under these patents are still developing. There is noconsistent policy regarding the breadth of claims allowed in biotechnologypatents. The Company’s patent position is therefore uncertain and involvescomplex legal and factual issues. This risk factor is one that faces manycompanies in the biotechnology industry and the Company is not aware of anyCompany-specific risks.

 

**The Company may incur substantial costs as a result of disputesrelating to intellectual property.**

 

The Company may have to initiate litigation to enforce its patent andlicense rights. If the Company’s competitors file patent applications thatclaim technology also claimed by the Company, the Company may have toparticipate in interference or opposition proceedings to determine the priorityof invention. An adverse outcome could subject the Company to significantliabilities and require the Company either to cease using a technology or topay license fees.

 

The Company could incur substantial costs in any litigation or otherproceeding relating to patent rights, even if it is resolved in the Company’sfavor. Some of the Company’s competitors may be able to sustain the costs ofcomplex litigation more effectively or for a longer time than the Company canbecause of their substantially greater resources. In addition, uncertaintiesrelating to any patent, pending patent or intellectual property litigationcould have a material adverse effect on the Company’s ability to bring atechnology to market, enter into collaborations in respect of the disputed orother technologies, or raise additional funds.

 

**The Company may not be able to bring any of the drug candidates it isdeveloping to market.**

 

Development of drug candidates involves a lengthy and complex process.Any drug candidate that the Company seeks to offer commercially to the publicmust be put through extensive research, development and pre-clinical andclinical testing which will be costly to the Company. This development processtakes several years. In addition, the Company or its partners will need toobtain regulatory approvals to conduct clinical trials and manufacture drugsbefore they can be marketed. Results of pre-clinical studies are notnecessarily indicative of results that may be obtained in clinical trials andresults in early clinical trials may be different from those obtained in long-termtesting or in general use. Adverse or inconclusive results from pre-clinicaltesting or clinical trials may substantially delay, or halt entirely, thedevelopment of products.

 

The Company may fail to successfully develop a drug candidate for manyreasons, including:

 

•                  the failure toestablish any collaborative third party agreements to support drug development;

 

14

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•                  the failure toproduce a promising compound in sufficient quantities to conduct clinicaltrials or to manufacture the compound at commercially acceptable quantities andprices;

 

•                  the failure ofthe drug in pre-clinical studies;

 

•                  the inability ofclinical trials to demonstrate that the drug is safe and effective in humans;or

 

•                  the failure toobtain required regulatory approvals.

 

**ChemGenex Pharmaceuticals Limited shares may fluctuate in value.**

 

The market price for ChemGenex Pharmaceuticals Limited shares and thesecurities of other similar companies have been volatile. Factors that couldsignificantly impact the market price of ChemGenex Pharmaceuticals Limitedshares in the future other than those described elsewhere in this Annual Reportinclude:

 

•                  announcementsconcerning research activities, technological innovations, clinical trials orfinancial results by the Company or its competitors;

 

•                  termination ofcollaborations by the Company or its partners;

 

•                  governmentalregulatory initiatives;

 

•                  the FDA, theAustralian Therapeutic Goods Administration or European Medicines EvaluationAgency approving or denying new applications;

 

•                  patent orproprietary rights developments;

 

•                  public concernas to the safety or ethical implications of biotechnology products;

 

•                  sales ofsubstantial amounts of the Company’s shares by existing shareholders;

 

•                  price and volumefluctuations in the stock market at large that do not relate to the Company’soperating performance;

 

•                  changes infinancial estimates by securities analysts, comments by securities analysts, orthe Company’s failure to meet analysts’ expectation;

 

•                  actual oranticipated variations in periodic operating results;

 

•                  new products orservices introduced or announced by the Company or its competitors;

 

•                  changes in themarket valuations of other similar companies;

 

•                  announcements bythe Company of significant acquisitions, strategic partnerships, joint venturesor capital commitments; and

 

•                  additions ordepartures of key personnel.

 

**The Company’s products may not receive and maintain regulatoryapproval. The complexity and multi-jurisdictional nature of the applicableregulatory processes could result in delays in achieving such regulatoryapproval, which would have an adverse effect on the Company’s financialconditions, its programs and projected revenues.**

 

The international pharmaceutical industry is highly regulated bynumerous governmental authorities in the U.S., Australia and Europe and byregulatory agencies in other countries where the Company intends to marketproducts it may develop. National regulatory authorities administer a widerange of laws and regulations governing the testing, approval, manufacturing,labeling and marketing of drugs and also review the quality, safety andeffectiveness of such products. These regulatory requirements are a majorfactor in determining whether a technology can be developed into a marketableclinical application or a specific product and the amount of time and expenseassociated with such development.

 

Government regulation imposes significant costs and restrictions on thedevelopment of pharmaceutical products for human use, including those theCompany is developing. The development, clinical evaluation, manufacture and 

 

15

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marketing of the Company’s products and ongoing research and developmentactivities are subject to regulation by governments and regulatory agencies inall territories within which the Company intends to manufacture and market itsproducts (whether themselves or through a partner). The Company’s products maynot successfully complete the clinical trial process. Similarly, regulatoryapprovals to manufacture and market the Company’s products may not ultimatelybe obtained.

 

The time taken to obtain regulatory approval varies between countries.The Company’s products may not be approved in any country within the timescaleenvisaged, or at all. This may result in a delay, or make impossible, thecommercialization of its products. Furthermore, each regulatory authority mayimpose its own requirements (for instance, by restricting the product’sindicated uses) and may refuse to grant, or may require additional data beforegranting, an approval, even though the relevant product candidate may have beenapproved by another country’s authority.

 

If regulatoryapproval is obtained, the product and its manufacture will be subject tocontinual review and this approval may be withdrawn or restricted. Changes inapplicable legislation or regulatory policies, or discovery of problems withthe product, or its production process, site or manufacturer, may result in theimposition of restrictions on the product, its sale, manufacture or use,including withdrawal of the product from the market, or may otherwise have anadverse effect on the Company’s liquidity and financial condition.

 

The Company has not had any of its product candidates receive approvalfor commercialization in Australia, the U.S. or elsewhere.

 

**The Company may be unable to secure adequate insurance at an acceptablecost. Failure to secure such insurance may expose the Company to liability inthe event of a claim.**

 

The Company’s business exposes it to potential product liability,professional indemnity and other risks which are inherent in the research anddevelopment, pre-clinical studies, clinical trials, manufacturing, marketingand use of pharmaceutical products. The Company in carrying out its activitieswill potentially face contractual and statutory claims, or other types ofclaims. Consumers, healthcare producers or persons selling products based onthe Company’s technology may be able to bring claims against the Company basedon the use of such products in clinical trials and the sale of products basedon the Company’s technology. The Company is insured for product liability witha policy covering US$5,000,000 that covers bodily injury or property damagearising out of the Company’s products used in the regular course of theclinical trials. The policy was recently renewed for the period from May 1,2007 to April 30, 2008. The Company also carries directors’ and officers’ liabilitypolicies in the U.S. and Australia, with coverage of US$10,000,000, andcustomary employer’s liability, fiduciary liability and property insurancecoverages in amounts that are considered usual for similarly situatedcompanies. Product liability or any future necessary insurance cover may not beavailable to the Company at an acceptable cost, if at all, and if there is anyclaim, the level of the insurance the Company carries now or in the future maynot be adequate. Similarly, a product liability, professional indemnity orother claim may materially and adversely affect the Company’s liquidity or itsability to continue to progress its product development. In addition, it may benecessary for the Company to secure certain levels of insurance as a conditionto the conduct of clinical trials. In the event of any claim, the Company’sinsurance coverage may not be adequate.

 

**The Company may face product liability claims.**

 

The testing, marketing and sale of human health care products entailsan inherent risk of product liability. The Company in carrying out itsactivities will potentially face contractual and statutory claims, or othertypes of claim. In addition, the Company is exposed to potential productliability risks that are inherent in the research and development, pre-clinicalstudy, clinical trials, manufacturing, marketing and use of medical devices anddrug products. Consumers, healthcare producers or persons selling productsbased on the Company’s technology may be able to bring claims against theCompany based on the use of such products in clinical trials and the sale ofproducts based on the Company’s technology.

 

**The Company may be subject to special interest groups and adversepublic opinion.**

 

Government bodies and regulatory agencies require that potentialpharmaceutical products are subject to pre-clinical studies, including animaltesting, prior to conducting human trials. ChemGenex arranges for such workeither directly or through its collaborators. While the Company has not beensubject to the attention of special interest 

 

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groups, or any adverse public opinion of which it is aware, such workentails the risk of adverse public opinion and the attention of specialinterest groups, including those of animal rights activists. These groups mayin the future focus on the Company’s activities or those of its licensees orcollaborators, and this might adversely affect the Company’s operations, byrequiring it to curtail its activities or to change its testing procedures.

 

The pharmaceutical and biotechnology industries are frequently subjectto adverse publicity on many topics, including corporate governance oraccounting issues, product recalls and research and discovery methods, as wellas political controversy over the impact of novel techniques and therapies onhumans, animals and the environment. While there has to date been no adversepublicity about the Company, its collaborators, or its products, such adversepublicity in the future, should it arise, may hurt the Company’s public image,which could harm its operations, cause its share price to decrease or impairits ability to gain market acceptance for its products. The Company has adoptedan ethics policy for genetic research.

 

## **ITEM4.  INFORMATIONON THE COMPANY**

## ** **

### **A**.            History and development of theCompany

### ** **

The Company was founded in September 1958 as N & B Finance andDevelopment Corporation. It was renamed the Kingsway Finance Group in August1964 and then became Australia Wide Industries Limited in May 1986. AustraliaWide Industries Limited listed on the Australian Stock Exchange (“ASX”) in July1986 and operated for ten years as a listed mining and exploration company(ASX: AWI). The Company commenced biotechnology activities in July 1996 andchanged its name to Autogen Limited (ASX: AGT) in May 1999. Autogen Limited, inturn, changed its name to AGT Biosciences Limited in March 2003 and then toChemGenex Pharmaceuticals Limited (ASX: CXS) in June 2004. Biotechnologyremains the focus of the Company’s activities. The Company’s AustralianBusiness Number (ABN) is 79 000 248 304. It operates pursuant to itsconstitution, the Australian Corporations Act 2001, other legislation inAustralia and the U.S., and the rules of the ASX. The Company’s representativein the U.S. is Dr. Dennis M Brown, President — U.S. Operations, 3715 HavenAvenue, Suite 100, Menlo Park, CA 94025 U.S.A. The Company’s registered officeis Edmondson Turner & Co., 439 Bay Street, Brighton, Melbourne, Victoria3186 Australia. Its principal administration office is Pigdons Road, WaurnPonds, Victoria 3217 Australia. Its telephone number is +613-5227-2752. TheCompany’s website address is www.chemgenex.com. Information on the Company’swebsite and websites linked to it does not constitute part of this AnnualReport.

 

The Company in its present form is the result of the merger of AGTBiosciences Limited and ChemGenex Therapeutics, Inc. which was approved byshareholders in the General Meeting on June 21, 2004 and concluded on the samedate. ChemGenex is a genomics-driven pharmaceutical development companydedicated to improving the lives of patients by developing novel personalizedtherapeutics in the areas of cancer, obesity, diabetes and depression. TheCompany has two molecules in Phase 2 clinical trials in the U.S. and has apipeline of pre-clinical anti-cancer compounds in development. The Company hasassembled a comprehensive technology platform that enables the identificationof novel targets for complex diseases. These discoveries are then validatedwith a range of systems biology approaches and evaluated in terms of “drugability”.The target discovery and validation approach is based on:

 

•                  A collection of tissue and DNA samples from worldwidepopulation groups (>44,000 samples);

 

•                  Validated animalmodel systems for diabetes/obesity and depression/anxiety;

 

•                  A 1400 CentralProcessing Unit parallel Linux cluster supercomputer for statistical analysisof genetic data;

 

•                  The eXpressTechnology Platform, a proprietary research engine for rapid target discoveryand validation for any disease.

 

The Company’s development platform is more fully discussed at Items 4B.“Business Overview” and 4C “Research and Product Development Programs.”

 

The Company’s research commitments (not including fees payable toscientific consultants and advisors to the Company) as of June 30, 2007 are asfollows:

 

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A twelve month, A$2,400,000 extension to a research agreement firstsigned on 2 June, 2005 with Deakin University (Geelong, Australia) to conductgene discovery, small molecule screening and validation research according toinstruction from the Company in the fields of obesity, diabetes and depression.This agreement is called “Research, License and Commercialisation Agreement (“ResearchServices Provision)”. The extension covers the period from January 1, 2007 toDecember 31, 2007.

 

A twelve month, A$150,000 extension to a research agreement firstsigned on January 14, 1998 with the International Diabetes Institute(Melbourne, Australia) to conduct gene discovery and validation researchaccording to instruction from the Company in the fields of obesity anddiabetes. This agreement is called “Research Agreement for Human Diabetes /Obesity Discovery”. The extension covers the period from January 1, 2007 toDecember 31, 2007.

 

An agreement signed in June 16, 2006 with Premier Research Group plc toprovide clinical study services which ChemGenex may submit to the FDA insupport of clinical studies being conducted with Ceflatonin®. The agreement iscalled “the Master Clinical Service Agreement”. The services to be provided bythis agreement cover a period of approximately 24 months but may be terminated,by either party, during that time within the terms provided in the agreement.

 

The Company has no fixed asset commitments as at June 30, 2007, and hasincurred no significant fixed asset expenditure since that date. Expenditure onplant and equipment is usually minimal due to the Company’s outsourcingarrangements. Recent capital expenditure on plant and equipment is as follows:

 
| ** **               | ** ** | **Plant and equipment expenditure (A$000)** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| Year ended June 30, 2007 |       | 24                                          |       |
| Year ended June 30, 2006 |       | 14                                          |       |
| Year ended June 30,2005  |       | 15                                          |       |

 

**Important events since June 30, 2007**

 

On October 26, 2007ChemGenex Pharmaceuticals Limited announced astrategic restructuring based upon the spinoff of its metabolic diseases assetsby early December, pending shareholder approval. ChemGenex’s metabolic diseasesassets currently reside within the company’s wholly-owned subsidiary AutogenResearch, which is to be renamed Verva Pharmaceuticals. Pending shareholderapproval at the Annual General Meeting, scheduled to take place in Melbourne onNovember 28, Verva Pharmaceuticals will be demerged from ChemGenex. VervaPharmaceuticals then intends to merge with Adipogen Pharmaceuticals, pursuantto a merger implementation agreement signed on October 29, 2007. Uponshareholder approval, ChemGenex shareholders will receive one share in VervaPharmaceuticals for every five ChemGenex Pharmaceuticals shares held at therecord date. In accordance with ASX listing rules and the option agreements,existing ChemGenex option holders will not be allocated shares in VervaPharmaceuticals unless options are exercised prior to the record date. TheVerva Pharmaceuticals shares will not be registered under the U.S. SecuritiesAct for distribution to holders of the Company’s ADRs. After the record datethe exercise price for each remaining ChemGenex option will be reduced byapproximately 7 cents.

 

### **B.            Businessoverview**

### ** **

The Company focuses on the development of novel therapeutic agents intwo diseases: cancer and metabolic syndrome (which includes diabetes andobesity). Product development in the two disease areas is supported by fourproduct development platforms: Gene-Based Target Discovery, Target Validation,Drug Discovery and Drug Development. The combination of these platforms iscollectively known as the eXpress Technology Platform. In the field of cancer,ChemGenex currently has two small molecule drug candidates in Phase 2 humantrials (Ceflatonin® and Quinamed®) and a broad pipeline of compounds andvalidated targets, including four pre-clinical cancer compounds (CXS299,CXS2101, CXS6001 and CXS273) and two early-stage discoveries identified in theTarget Discovery program. In the field of metabolic syndrome, the Company haspreviously partnered its Target Discovery and Target Validation capabilitieswith Merck Santé, has discovered and protected by patent more than 50 othergene and protein targets and has established two new unencumbered programs; (i)a small molecule discovery program, and (ii) a predictive biomarker program.

 

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**ChemGenex’s competitive advantage**

 

The Company’s competitive advantage can be considered in terms ofprotected intellectual property (IP), the research and development platformsthat support the development of existing IP and the creation of new IP and theorganizational ability to realize the commercial value of the Company’s IP andother assets.

 

The Company has approximately 50 patent families in various states ofprotection ranging from provisional applications through to granted patents ina number of jurisdictions. In addition to IP that is protected by patents thereis significant know how and expertise within the senior research staff of theCompany.

 

The research and development infrastructure of the Company is describedbelow and consists of skills in medicinal chemistry and product development forcancer therapeutics, gene discovery using animal models and human samples fromknown populations, high-powered statistical analysis capabilities to determinelinkages between gene variations and disease states and a suite of validationtechnologies to characterize the biological roles of given genes (and theirprotein products) by altering their expression levels in cell culture and inanimals. Specific competitive advantage is realized through (a) ChemGenex’sproduct development pipeline (b) exclusive commercial access to DeakinUniversity’s out-bred colony of *Psammomys obesus*,a species of gerbil also known as the sand rat, a well-defined model fordietary induced Type 2 diabetes, (c) exclusive access to the InternationalDiabetes Institute’s substantial collection of phenotyped human tissue and DNAsamples for the purpose of discovery of novel metabolic syndrome targets and(d) access to the experience of Dr. J. Blangero and supercomputinginfrastructure at the Southwest Foundation for Biomedical Research.

 

**Business strategy**

 

The Company’s business strategy for growth and profitability is todiscover, develop and commercialize novel therapeutics that address significantunmet needs in the pharmaceutical industry, based on the Company’sunderstanding of the genetic basis of disease. The Company keeps its corecompetencies in-house (such as laboratory research management, pre-clinicalwork, clinical strategy and management), outsourcing the majority of laboratoryresearch and all clinical testing to specialists, to minimize itsinfrastructure and fixed overhead costs. In the fields of diabetes and obesitythe Company seeks early partnering of discovery programs in order to sharedevelopment costs and risks with partners and to ensure that programs arecommercially and scientifically focused. In the field of cancer, the Companyintends to seek out joint venture or licensing partners for further developmentand commercialization of its products following Phase 2 clinical evaluation. Thiswill allow ChemGenex to license its products before full regulatory approval isrequired to place the product in the market. The goal in each case is to seekmultinational partners with drug development milestones payable to the Companyon completion of agreed targets and submission of regulatory documents and,eventually, payment or royalties on sales of commercialized products. Theexpectation is that the size of the payments to the Company will vary dependingon the size of the eventual market, the stage of development of the productconcerned and the strength of the data that is generated prior to partnering.

 

**Components of ChemGenex’s discovery, validation and drug developmentplatforms**

 

Target discovery and Biomarkers

 

The target discovery, validation and drugdevelopment platforms utilize infrastructure located at Deakin University(Geelong, Australia), the International Diabetes Institute (Melbourne,Australia) and the Southwest Foundation for Biomedical Research (San Antonio,Texas). Key features of the Target Discovery platform include:

 

•                  Deakin University’s out-bred colony of *Psammomys obesus*, a well-characterized animal model ofdiabetes and obesity. The Company has exclusive access to this colony for bothdiscovery and validation activities;

 

•                  a library of extensive family pedigrees ofmore than 44,000 human tissue and DNA samples and a dedicated human genotypingfacility that is used for sequencing target genes to identify variationsassociated with disease states; and

 

•                  access to the computing facilities at theSouthwest Foundation for Biomedical Research for statistical analysis of genevariations as relating to disease state.

 

The Company’s research scientists have foundthe animal model to be useful in studying metabolic disorders, such as diabetesand obesity. *Psammomys obesus* populationsdevelop a range of body weight, blood glucose, and insulin 

 

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levels with distributions similar to thosefound in human populations. This animal model is used to discover candidategenes (and the proteins they encode) with altered levels of expression that areassociated with each disease. For example, specific genes are up- ordown-regulated in diabetic animals compared to normal healthy animals. Thecandidate genes identified in this way are then analyzed and compared withhuman population data using the Company’s Human Gene Discovery facility at theInternational Diabetes Institute (Melbourne) and in the U.S., at the Center forHuman Statistical Genetics at the Southwest Foundation for Biomedical Research.The Company has contractual agreements with both institutions. Candidate genesthat are found to exist in the human genome and be associated with the diseasesin question are then subject to further rigorous analysis. As an example thePSARL (Presenilin-Associated Rhomboid-like protein) gene was discovered by theCompany in *Psammomys obesus* and subsequentlyidentified in humans. This gene identified originally in the animal model wasfound to have a human analogue and detailed genetic analysis of samples frommore than 1,000 humans confirmed that variation in the gene in humans wassignificantly associated with increased risk of diabetes.

 

Some of thegenes that were discovered using the Target Discovery platform have potentialutility as biomarkers. That is, gene variants or differences in levels of geneexpression, and thus protein levels, may predict disease state or propensity todevelop certain diseases. The Company has recently expanded its efforts inbiomarker discovery and is screening for novel genes and proteins that mighthave commercial utility.

 

Target validation

 

The Target validation platform utilizesinfrastructure located at Deakin University in Geelong, Australia. Itencompasses a comprehensive set of proprietary and non-proprietary technologiesfrom gene discovery, gene structure and function analysis to the validation ofgene and protein products that may be potential therapeutic or diagnostictargets. The validation platform is used to characterize the biological role oftargets that have been discovered and found to be related to disease stateusing the combined resources of the discovery platform.

 

Examples of the technologies employed inTarget Validation include in vitro (cell culture) experiments to determine theeffect of up- or down-regulation of genes on quantifiable end-points, in vivoexperiments to manipulate the levels of target genes or expressed proteins inanimals and tracking of physiological and behavioral responses, andclarification of the nature of any protein-protein interactions, which canreveal potential drug targets.

 

An example of the role of validation is theblocking of expression of the gene target SGIP1 (SH3-Domain GRB2-Like InteractingProtein 1) in *Psammomys obesus* and *Rattus norvegicus*. In the Company’s laboratory experimentsSGIP1 was identified as having increased expression in thehypothalamus of obese compared to lean *Psammomys obesus*.The candidate gene was confirmed as being associated with disease using theCompany’s human genetics group in theSouthwest Foundation for Biomedical Research. To examine the role ofSGIP1 in the development of obesity, antisense oligonucleotides of the geneswere infused into a specific region of the brain (the lateral cerebralventricle) in both *Psammomys obesus*and *Rattus norvegicus*.The procedure has the effect of blocking the expression of the SGIP1 genes inthe brain and the Company believes this is a proxy of what could occur iftherapeutic agents could be used to affect the level of the protein. Whentreated with antisense SGIP1, both species showed approximately 40% reductionin food intake and 5-8% loss of body weight compared with control animals.

 

Drug discovery

 

The Company’sdiabetes and obesity program based at Deakin University has expanded its scopeto include chemical screening and the discovery of small molecules that arepotential insulin sensitizers. This new chemogenomics-based program integratessystems biology with drug discovery and development, and has already identifieda range of lead compounds that are progressing into preclinical studies.

 

The Company’sdiabetes screen is based on Gene Expression Signatures, which are accuratemeasurements of gene expression in model systems of diabetes reflecting changesin the complex control mechanisms and pathways that are involved in thetreatment of the disease. By understanding the ‘signature’ of cells recoveringfrom diabetes it is possible to quickly and accurately determine the effects ofany given compound’s actions across multiple pathways within a cell, andascertain if it has potential as a treatment. As lead molecules progressthrough preclinical development the signatures are used to accelerate medicinalchemistry programs, allowing rapid assessment of compounds based on thesignatures of different molecular iterations.

 

The Company’s anti-cancer therapeutic development platform focuses ondeveloping novel small molecule therapeutics for the treatment of cancer andrelated conditions. The major strategy has been to screen agents studied by theU.S. National Cancer Institute that have confirmed human clinicalactivity but were not fully developed. Among these agents the Companyidentifies compounds suitable for development based on its assessment of 

 

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mechanism of action, molecular targets affected, potential formulationimprovements and genetic differences between patients that can be exploited inclinical development. It utilizes chemical genomics and drug screening systemsto identify agents affecting novel targets and evaluates a compound’ssuitability as a drug and formulation technology to maximize delivery andbioavailability, meaning the extent to which a chemical is absorbed anddistributed in the blood in an unchanged form following administration to aliving organism.

 

Drug development

 

TheCompany’s pre-clinical and clinical development efforts are based in MenloPark, California. In vitro and in vivo screening models are used to evaluatelead compounds. Data from these models is fed back into extensive in-housedatabases for iterative analysis. A parallel series of profiling assays isperformed to determine the potential pharmaceutical attributes andvulnerabilities of a compound.

 

Compoundsthat merit further development proceed through pre-formulation and advancedpre-clinical in support of regulatory filings for human clinical evaluation.These include non- Good Laboratory Practice (GLP) and GLP pharmacology, efficacyand toxicology studies in laboratory animal models. Additionally, compoundmanufacturing, scale-up considerations and dosage form stability studies arealso performed.

 

Thoseagents with acceptable pharmacological and toxicological profiles may become thesubject of evaluation in humans. This requires submission to the U.S. FDA of anInvestigational New Drug (IND) application for permission to begin Phase I doseescalation studies. After the Maximum Tolerated Dose is identified at theschedule contemplated for therapeutic use, Phase 2 studies evaluating potentialdisease indications are performed. If significant activity is identified, thenlarger Phase 3 studies are conducted in support of a New Drug Application(NDA). If approved the product can then be commercialized.

 

**ChemGenex’s development pipeline**

 

In the field of cancer the Company has two clinical stage productcandidates, four pre-clinical stage product candidates and two discovery stagetargets that have recently been identified.

 

*Clinical stage product candidates*

 

The Company has applied its genomic and clinical development expertisewith its knowledge of cancer to identify small molecule therapeutic targets inoncology. By focusing on compounds with confirmed clinical activity and usinggenomic tools to optimize their development, the Company has been able tocreate a pipeline of product candidates described below:

 

Ceflatonin® (homoharringtonine)

 

Homoharringtonine (“HHT)” is a small molecule with established clinicalactivity as a single agent in hematological malignancies. The Company’sscientists have discovered that it affects a number of critical cellularpathways, including the regulation of genes associated with programmed celldeath (apoptosis) and the inhibition of formation of new blood vessels in solidtumors (angiogenesis). The Company has received Orphan Drug Status protectionfor HHT in CML in both the U.S.A. and Europe, as well as Fast Track Status fromthe U.S. F.D.A. In previous published Phase 2 clinical trials, 70% of patientsshowed complete hematological remission (CHR) in chronic myeloid leukemia (“CML”)after interferon-α failure. In more recent pilot studies in CML patientswho had failed Gleevec®, 100% of chronic-phasepatients and 70% of accelerated-phase patients achieved a CHR. The Company iscurrently conducting Phase 2/3 trials in the U.S.A. and Europe for CML patientswho have the T315I bcr-abl mutation that confers resistance to Gleevec® and other TKIs. Data publishedin 2007 indicated that Ceflatonin had positive clinical activity againstGleevec®-resistant, chronic myeloid leukemia (CML) associated withthe T315I Bcr-Abl mutation. The Company is conducting a complementary phase 2clinical trial in the U.S.A. for CML patients who have failed multiple TKIsregardless of mutation status. At the M.D. Anderson Cancer Center the Companyis conducting a combination (with Gleevec®) therapy Phase 2 trial in CML patients who had failedGleevec®. Preliminarydata presented at the American Society of Hematology (ASH) Annual Meeting inDecember 2006 reported that 42% of patients on the combination therapy regimeachieved a hematologic response (reduction of leukemic cells in the blood).TheCompany is also conducting Phase 2 trials in patients with the bone marrowdisease called myelodysplastic syndrome (“MDS”) in collaboration at the M.D.Anderson Cancer Center. The Company has one issued patent and has four activepatent applications covering Ceflatonin® formulations, 

 

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purification, synthesis and uses. The Company has licensed from StragenPharma S.A. three issued patents and has four active patent applicationscovering the preparation of homoharringtonine derivates, purification, and theuse of homoharringtonine resistant to Gleevec®.

 

Quinamed® (amonafide dihydrochloride)

 

Amonafide dihydrochloride(amonafide) is a synthetic organic compound with established anti-cancerclinical activity. The Company has recently discovered that amonafide effects anumber of targets in the epidermal growth factor receptor pathway, whichcontrols the growth of a number of tumor types, in addition to affects on anenzyme that is critical for normal cell replication, topoisomerase II. InNational Cancer Institute (“NCI”)-sponsored clinical studies with amonafidemonohydrochloride, 25% of breast cancer patients and 15% of prostate cancerpatients showed either partial (>50% reduction in tumor volume) or complete(no measurable disease) responses. However, researchers also noted someunpredictable side effects. It was later discovered that differences in howpatients metabolize the drug has a significant impact on toxicities. Thesemetabolic differences can now be determined by testing a patient’s NAT-2genotype. The Company’s development strategy is to determine a patient’s NAT-2genotype and then treat them with a more precise and personal dose needed toproduce the optimal result. At the American Association of Clinical Oncologists(ASCO Annual Meeting in June 2007, data was presented from the phase 1/2adose-escalation study of Quinamed. The key outcomes from this study were (i)demonstration that dose level could be optimised according to patient genotype,(ii) the drug was well tolerated, with predictable and manageable side effects,and (iii) there was evidence of anticancer activity in several solid tumortypes. The Company has two issued patents and has three active patentapplications covering amonafide salts, formulations, synthesis and uses.

 

*Pre-clinicalstage product candidates*

* *

In addition to Ceflatonin® and Quinamed® the Company is developingseveral other pre-clinical oncology compounds, including the following:

 

CXS299: This is a new platinum (IV) compound recently licensed from theM.D. Anderson Cancer Center in Houston, Texas. CXS299 is a first in classplatinum IV agent that is active against cancer cells resistant to the effectsof commercially available platinum-based therapies. Currently approved platinumII agents have generated sales of greater than US$1 billion. However, somepatients develop resistance to platinum II therapy resulting in a need foradditional therapies. CXS299 is currently in pre-clinical development and couldenter Phase I in 2009.

 

CXS2101:  This compound inhibitsNF-Kappa B and has been shown to increase the anti-cancer activity of otheragents in animal models.

 

CXS6001:  This compound affectslevels of the structural protein tubulin in cancer cells and has shownanti-tumor efficacy in mouse models.

 

CXS273:  This compound affectsthe integrity of DNA and has been shown to increase the anti-cancer activity ofcisplatin in a mouse model.

 

*Validatedtargets*

* *

The SEPS 1 gene (formerly called Tanis) wasidentified by the Company following the observation of increased hepatic geneexpression in diabetes in *Psammomys obesus*.The Company has since determined the gene’s sequence and location on the humanchromosome and the characteristics of the gene’s protein product. Evidenceindicates that the SEPS 1 gene represents an important target not only indiabetes but potentially in other diseases, such as cancer and inflammatorydiseases and the Company’s patent protection has been broadened accordingly.

 

It has been determined that the PSARL gene islinked to signaling pathways within a cell that are thought to be associatedwith insulin resistance, which is the cause of Type 2 diabetes. Evidenceindicates that the PSARL gene represents an important target not only indiabetes but potentially in other diseases, such as cancer and age-relateddegenerative diseases and the Company’s patent protection has been  broadened accordingly.

 

Beacon was isolated in *Psammomysobesus* as a gene expressed in direct proportion to body fat content.The protein product of the Beacon gene is expressed as a small peptide in thehypothalamus, a part of the brain that regulates energy intake and expenditure,and is understood to play a role in energy balance. The Company’s research has 

 

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demonstrated that the expression of theBeacon gene is proportional to the amount of body fat, and that giving theBeacon peptide to lean animals significantly increased their feeding rate andbody weight in direct proportion to the quantity of Beacon peptide. Thissuggests that blocking the action of the Beacon peptide by biological orchemical means could provide a means of treating obesity.

 

SGIP1 is a protein involved in the regulationof satiation at the neurological level. The Company has determined thatsuppression of SGIP1 expression reduced the feeding rate of *Psammomys obesus* significantly over a period of four days. Whilethe SGIP1 gene has been identified in humans, additional work on the expressionand function of the gene in humans is still needed.

 

*Discoverystage targets*

* *

The Company has more than 50 discovery stage candidates, in differentstages of patent protection.

 

**Additional opportunities**

 

The Company has generated revenue through the use of the capacity inits technology platform for fee-for-service contract research. Many drugdevelopment companies do not have proprietary technology to validate genetictargets with demonstrable links to a disease state. These companies are theprospective clients for use of the Company’s technology. In 2002 the Companyhad a significant contract with Sequenom for this purpose and from 2003 to 2007the service has been utilized by several Australian biotechnology companies. TheCompany continues to seek fee-for-service revenue although no further contractshave yet been arranged.

 

**Research and product development programs**

 

The Company currently contracts its targetdiscovery research programs to three organizations; Deakin University inGeelong, Victoria, Australia, the International Diabetes Institute inMelbourne, Victoria, Australia and the Southwest Foundation for BiomedicalResearch in San Antonio, Texas. The discovery and validation programs areinvolved in the previously described collaborative programs with Merck Santé(diabetes and obesity targets) and Vernalis (depression targets). Cancerresearch is carried out at the Company’s laboratory in Menlo Park, California,and clinical trials conducted at leading US and European hospitals.

 

The Company has been accepted into the inaugural PharmaceuticalPartnership Program (P3) of the Australian Federal government, through whichthe Company has the ability to earn grant revenue based on the growth of theCompany’s research in Australia over the next three years. Admission into theAustralian government’s P3 scheme involved a peer review process and theCompany was one of only seven Australian-owned biotechnology companies admittedinto the first round of the scheme. The scheme will subsidize incrementalincreases in research and development activities by means of a 30% cash grantfor every dollar spent on eligible research by the Company at the end of eachfiscal year.

 

**Commercial and research and development collaborations**

 

The followingsection describes the Company’s existing commercial collaborators and thecommercial agreements with respect to the Company’s principal research anddevelopment programs and commercialization agreement:

 

General Research Agreement: Chemgenex Pharmaceuticals entered into a General Research Agreement onDecember 20, 2005 with Merck Santé (a subsidiary of Merck KGaA) pursuant towhich Merck Santé agrees to fund a minimum of €210,000 per annum for theCompany to undertake preclinical research on its behalf. The term of theagreement is to December 31, 2008. Additional fees are payable if additionalstaff resources are required to complete specific research programs.

 

Patent andTechnology License Agreement: On February 7, 2005 ChemGenex PharmaceuticalsLimited entered into a technology licensing agreement with The University ofTexas M. D. Anderson Cancer Center to develop information or discoveriesrelating to the anti-cancer activities of DACH-Ac-Pt[(1R,2R-diaminocyclohexane)-(trans-diacetato)-(dichloro)-platinum(IV)] a novelcisplatin analog now referred to by the Company as CXS299. The royalty-bearing,exclusive license is for certain IP rights defined in United States Patent No.5,434,256, and foresees the pre-clinical and clinical development of CXS299.ChemGenex Pharmaceuticals Limited has incurred expenses of US$50,000 (paid bycash and issue of shares) in March 2005. Further fees payable under thisagreement will be dependent upon the commencement of various stages of clinicaltrials required, the results of those trials and the 

 

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licensing ofproduct associated with the trials. Unless terminated by either party theagreement will remain in effect until patent rights or technology rightsassociated with the agreement expire.

 

Research,License and Commercialization Agreement (Research Services Provision):  A contract dated April 21, 2005 betweenChemGenex Pharmaceuticals Limited and Deakin University consolidated theprovision of research services by Deakin University previously defined in theagreements of June 26, 2000 (Research Services (Subcontracting), August 16,2000 (Research, License and Commercialization Agreement (Gene Discovery inDepression) and February 28, 1997 (Research Agreement). Under the consolidatedagreement ChemGenex undertakes to fund research and development programs withDeakin University in the fields of diabetes, obesity, cancer, respiratorydiseases, inflammatory diseases, osteoporosis, allergy, asthma, depression andautoimmunity. All intellectual property developed under the terms of theagreement belongs to the Company. If ChemGenex commercializes or licensesproducts resulting from the research program conducted under the contract, itis obligated to pay Deakin University a royalty on net sales. The contract maybe terminated if the University does not timely commence its work, if it failsto achieve milestones or use appropriate professional standards or if theprogram is not producing results in the opinion of the Company, among otherconditions. It may also be terminated by Deakin University if ChemGenex failsto provide the agreed funding. Under certain circumstances the Company isobligated to pay the royalties to Deakin University even in the event of earlytermination. The original term of this agreement from January 1, 2005 toDecember 31, 2005 was twice extended by 12 months to December 31, 2006 andDecember 30, 2007 (on December 18, 2006). ChemGenex incurred expenses ofA$2,420,000 in fiscal 2006, and A$2,410,000 in fiscal 2007 for servicesprovided under the agreement. Further expenses of $1,200,000 will be incurreduntil expiry date.

 

Research, License and Commercialization Agreement:  Autogen Research Pty Ltd. entered into thisagreement with the SFBR, based in San Antonio, Texas, on December 31, 2002. Underthe terms of this agreement Autogen Research Pty Ltd undertakes to collaboratewith SFBR and to provide funding for a project in return for the jointownership and an exclusive license to use and commercialize the intellectualproperty resulting from the funded project on the terms set forth in theagreement. Among the conditions for termination are failure to timely commenceand progress the agreed work plan, insolvency, change in control and othersimilar conditions. The agreement also is terminable if Autogen Research PtyLtd does not provide the agreed funding. The term of this agreement wasextended to December 31, 2007 on January 11, 2007. Autogen Research PtyLtd incurred expenses of A$490,929 in fiscal 2005, A$895,138 in fiscal 2006 andA$711,824 in fiscal 2007 under this agreement. No further expenses will beincurred until expiry date.

 

Research Agreement:  On January14, 1998 Autogen Pty Ltd. entered into a research agreement with theInternational Diabetes Institute (IDI) to conduct gene discovery and validationresearch according to instruction from the Company in the fields of obesity anddiabetes pursuant to which Autogen Research Pty Ltd undertakes to collaboratewith the IDI and to provide the funding for a project in return for jointownership and a license to the intellectual property resulting from theproject. If Autogen Research Pty Ltd commercializes or licenses productsresulting from the research program conducted under the contract, it isobligated to pay the IDI a royalty on net sales. The contract may be terminatedif the IDI does not timely commence its work, if it fails to achieve milestonesor use appropriate professional standards or if the program is not producingresults in the opinion of Autogen Research Pty Ltd, among other conditions. Itmay also be terminated by the IDI if Autogen Research Pty Ltd fails to providethe agreed funding. Under certain circumstances Autogen Research Pty Ltd isobligated to pay the royalties to the IDI even in the event of earlytermination. The term of this agreement was extended to December 31, 2007 onDecember 22, 2006. Autogen Research Pty Ltd incurred expenses ofA$1,104,190 in fiscal 2005, A$501,838 in fiscal 2006 and A$221,662 in fiscal2007 under this agreement. Further expenses of A$75,000 will be incurred untilexpiry date.

 

Sole License Agreement:  On March1, 1999: Autogen Pty Ltd and Kyokuto Pharmaceutical Industrial Co. Ltd.,licensed certain intellectual property for use in Kyokuto’s diagnostic productsin Japan. The contract relates to the use of an engineered hybrid of certainforms of glutamic acid decarboxylase in the diagnostic and presymptomatic detectionof insulin dependent (type 1) diabetes. Under the agreement Kyokuto isobligated to pay a net royalty on sales, at certain minimum levels. If lessthan the minimum net royalty is paid, the Company can terminate the license onthree months’ notice or convert it to a non-exclusive license. The licenseagreement, which is for a term of 15 years or so long as there is patentcoverage over the licensed property, whichever is longer, can be terminated byeither party for an uncured breach upon 60 days’ notice; for a payment default;upon certain insolvency events and in the event of a change of control ofeither party, by the non-defaulting party.

 

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**Patents, licenses and proprietary rights**

 

The Company pursues a policy of seeking to obtain patent protection forits inventions in Australia, the U.S., Europe, Japan and in selected othercountries. The Company also relies upon trade secrets, know-how, continuingtechnological innovations and licensing opportunities to develop and maintainits competitive position. To date, the Company has not threatened or institutedproceedings against any third party on patent or other proprietary rights norhas any third party threatened or instituted proceedings against the Company.

 

Certain products and processes currently being developed or consideredfor development by the Company are in the area of biotechnology. The number ofpatent filings by biotechnology firms in major jurisdictions is particularlyhigh and the outcome of such applications is generally uncertain and involvescomplex legal and factual questions. To date, no consistent internationalpolicy has emerged regarding the breadth of claims allowed in biotechnologypatents. Accordingly, there can be no assurance that the Company will developproducts or processes that are patentable, that patent applications made by theCompany, or made by parties who have agreed to license their inventions to theCompany, will result in patents being issued or that, if issued, the claimsallowed will be sufficiently broad to protect what the Company believes to beits proprietary rights or that such patents will prevent others from developingsimilar or functionally equivalent products or processes. In addition, productsor processes covered by such patents, or any other products or processesdeveloped by the Company or licensed to the Company, may infringe patents ownedby third parties or be subject to claims of patent infringement by theseparties. In such a situation, the Company may have to obtain a license, defendan infringement action in court or challenge the scope or validity of anyinfringed or allegedly infringed patents. Such required licenses may not beavailable to the Company at all, or if available, such licenses may not be onterms acceptable to the Company or that the Company will prevail in any patentlitigation. Failure to obtain a license or prevail in any patent litigationrelating to any technology that the Company may require to commercialize itsproducts or processes may have a material adverse impact on the Company.

 

Litigation may also be necessary to enforce any patents granted to theCompany or to determine the scope and validity of third party patents. Patentlitigation is time consuming and expensive. The Company may not have, or beable to devote the necessary resources to conduct patent litigation. Patentapplications made by or licensed to the Company may not result in patents beingissued or, if issued, the patents may not provide the right to excludecompetitors with similar technology.

 

The Company maintains an active policy of filing patent applications. Itis possible that patents may not be granted on pending applications made by theCompany or parties that have licensed their inventions to the Company.Similarly, issued patents may not provide significant proprietary protection orcommercial advantage or may be infringed or designed around by others. Sincepublication of inventions or discoveries in scientific or patent literatureoften lags behind actual invention or discovery, it is possible that theinventions covered by each of the Company’s pending patent applications may nothave dominant status in terms of date of invention. The Company’s patents orpatent applications may become involved in opposition proceedings instituted bythird parties. If such proceedings were initiated against the Company’s rights,the defense of such rights could involve substantial costs and the outcomecannot be anticipated. If patents are issued to other parties that containvalid claims that are interpreted to cover any of the Company’s products, it ispossible that the Company may not be able to obtain licenses to such patents ata reasonable cost, if at all, or may not be able to develop or obtain alternativetechnology. Competitors or potential competitors may have filed applicationsfor, may have received patents covering, or may obtain additional patents andproprietary rights that may relate to, compounds or processes competitive withthose of the Company.

 

The Company also relies upon unpatented proprietary technology, and noassurance can be given that others will not independently develop substantiallyequivalent proprietary technology and techniques, or otherwise gain access tothe Company’s proprietary technology or disclose such technology, or that theCompany can meaningfully protect its rights to its unpatented proprietarytechnology, secrets and know-how.

 

It is the Company’s policy generally to require its consultants,outside scientific collaborators, sponsored researchers and other advisors toexecute confidentiality agreements prior to the commencement of consulting orother relationships with the Company. Employees have a similar confidentialityprovision in their employment contracts. These agreements provide that allconfidential information developed or made known to the individual during thecourse of the individual’s relationship with the Company is to be keptconfidential and not disclosed to third parties except in specific, limitedcircumstances. The Company also requires signed confidentiality or materialtransfer agreements from any person who is to receive confidential data orproprietary material from the Company. In the case of consultants, theagreements generally provide that all inventions conceived by the individualwhile rendering services to the Company shall be assigned to the Company as theexclusive property of the Company. Similar provisions are contained in theCompany’s employment contracts, and provisions of many national laws, including

 

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Australia, provide that intellectual property rights created during thecourse of employment belong to the employer. There can be no assurance,however, that these agreements and provisions will provide meaningfulprotection or adequate remedies for the Company’s intellectual property rights,trade secrets or other confidential information in the event of unauthorizeduse or disclosure.

 

Patentprotection is being sought in major markets through the filing of U.S. andInternational Patent Cooperation Treaty (“PCT”) applications. The portfolioincludes 22 PCT applications and currently derived from these applications areover 96 national and regional patent applications in 12 different jurisdictions,including the U.S., Europe and Japan. The portfolio also includes 20provisional patent applications not listed above that have been submitted inthe past year.

 

Underthe PCT, a single patent application is filed which designates various countriesor regions. The application is referred to as an Internationalapplication. All major countries and regions (e.g. Europe) can be designatedand this effectively reserves the right to lodge patent applications in thosecountries and regions up to 18 months following the filing of the PCTapplication. During that period, an International Search Report and anInternational Preliminary Examination Report are issued by the relevantnational patent office (e.g. the United States Patent and Trademark Office (“USPTO”),or Australian Patent Office) and there are opportunities to amend the claimsand specification although new matters cannot be added. At the end of the 18month period (i.e. generally 30 months after filing of the initial provisionalapplication), the applicant decides in which countries to pursue national orregional applications.

 

**Competition**

 

TheCompany faces, and will continue to face, intense competition from one or moreof the following entities:

 

•                  biotechnology companies;

 

•                  pharmaceutical companies;

 

•                  academic and research institutions; and

 

•                  government agencies.

 

TheCompany is also subject to significant competition from organizations that arepursuing approaches, technologies and products that are the same as, or similarto, its technology and products. Any products that are developed through theCompany’s technologies will compete in highly competitive markets. Further, theCompany’s competitors may be more effective at using their technologies todevelop commercial products. Many of the organizations competing with theCompany have greater capital resources, larger research and development staffsand facilities, more experience in obtaining regulatory approvals and moreextensive product manufacturing and marketing capabilities. As a result, theCompany’s competitors may be able to more easily develop technologies andproducts that would render the Company’s technologies and products, and thoseof its collaborators, obsolete and noncompetitive. In addition, there may beproduct candidates of which the Company is not aware at an earlier stage ofdevelopment that may compete with the Company’s product candidates.

 

Specificcompetition risk according to disease class is summarized below.

 

Cancer

 

In the field of cancer therapeutics the Company faces intensecompetition from major pharmaceutical companies and specialized biotechnologycompanies engaged in the development of product candidates and othertherapeutic products. Several of these companies have products in the sameindications or utilize similar technologies and/or personalized medicinetechniques. The FDA has approved two drugs for Gleevec®-resistantCML; Sprycel® (dasatinib), a drug developed and commercialized byBristol-Myers Squibb was approved in June 2006, and Nilotinib® (nilotinib)a drug developed and commercialized by Novartis was approved in October 2007.Significantly, neither Sprycel® nor Nilotinib® havedemonstrated efficacy against the T315I bcr-abl mutation, and it is thissub-set of resistant CML patients that are being targeted by the Company forinitial approval. Several biotechnology and pharmaceutical companies areseeking to develop effective therapeutics specifically for CML patients withthe T315I mutation. Vertex Pharmaceuticals and its partner Merck are developingan aurora kinase inhibitor referred to as MK-0457 or VX-680. This agent iscurrently in phase 2 clinical trials. Astex Therapeutics is developing AT9283,an inhibitor of several targets including bcr-abl. This agent is currently inphase 1/2 clinical trials. Several companies have agents in phase 1 clinicaltrials, including Exelixis (XL228), Kyowa Hakko (KW2449) and Medimmune/InfinityPharmaceuticals (IPI504). XanthusPharmaceuticals is currentlyconducting a 

 

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phase3 study with amonafide malate in acute myeloid leukemia. There are alsoa number of other competitive trials or technologies elsewhere in the world.

 

MetabolicSyndrome and Depression

 

Thereare numerous internationally-regarded genomics and target discovery companiesthat are active in the search for new potent therapeutics against thesediseases. Some of the Company’s competitors have entered into collaborationswith leading companies within the Company’s target markets. Companies that areapplying different proprietary technologies to the search for novel targetsinclude:

 

•                  Amgen, Inc.

 

•                  Curagen Corporation, Inc.

 

•                  DeCode Genetics.

 

•                  Excelixis, Inc.

 

•                  Genentech, Inc.

 

•                  Human Genome Sciences, Inc.

 

•                  Incyte Pharmaceuticals, Inc.

 

•                  ZymoGenetics, Inc.

 

Anumber of organizations are attempting to rapidly identify and patent genes andgene fragments sequenced at random, typically without specific knowledge of thefunction of such genes or gene fragments. If the Company’s competitors discoveror characterize important genes or gene fragments before it does, it couldadversely affect the Company’s ability to commercialize its products. TheCompany expects that competition in genomics research will intensify astechnical advances are made and become more widely known. In addition, a numberof competitors are claiming patent protection without having cellular, animal,or human data to support their claims. In many cases generic claims are beingissued by the USPTO, and these claims may make it difficult to commercializeproducts, or, if licenses are made available, may make the royalty burden onthese products so high as to prevent commercial success.

 

Materialeffects of government regulation

 

Theinternational pharmaceutical industry is highly regulated by numerousgovernmental authorities in Australia, the U.S., the U.K., Europe and byregulatory agencies in other countries where the Company intends to test ormarket products it may develop. National regulatory authorities administer a widerange of laws and regulations governing the testing, approval, manufacturing,labeling and marketing of drugs and devices and also review the quality, safetyand effectiveness of pharmaceutical products and devices. These regulatoryrequirements are a major factor in determining whether a substance can bedeveloped into a marketable product and the amount of time and expenseassociated with such development.

 

Thenational regulatory authorities have high standards of technical appraisal.Consequently, the introduction of new pharmaceutical products generally entailsa lengthy development and approval process. Of particular importance is therequirement that products be authorized or registered prior to marketing andsuch authorization or registration be maintained. Of particular significance inthe U.S. are the U.S. FDA requirements covering research and development,testing, manufacturing, quality control, labeling and marketing of drugs forhuman use. A pharmaceutical product cannot be marketed in the U.S. until it hasbeen approved by the FDA, and then can only be marketed for the indications andclaims approved by the FDA. As a result of these requirements, the length oftime, the level of expenditure and the laboratory and clinical informationrequired for approval of a New Drug Application (“NDA”) or a product licenseapplication are substantial and can require a number of years, althoughrecently revised regulations are designed to reduce the time for approval ofnew products. In Europe, two systems for the registration of pharmaceuticalproducts are in operation, the centralized procedure and the mutual recognitionprocedure. In the centralized system, review of the proposed new product isco-coordinated by the European Medicines Evaluation Agency (“EMEA”) located inLondon and, if the product is found to meet the criteria for marketingauthorization, a European Marketing Authorization is granted which is validthroughout the EU. In the mutual recognition procedure, the initial review isundertaken by the national health authority of one of the EU member states and,if this country considers the product acceptable for marketing authorization,the other EU member states are asked to recognize this approval and issue theirown authorization. The mutual recognition procedure thus results in a nationalauthorization in each member state. However, irrespective of the procedurefollowed, the technical requirements for marketing authorization are the same.For European countries that are outside the EU, national marketingauthorization procedures with similar technical standards exist. The Company

 

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anticipatesthat the introduction of new products will continue to require substantialeffort, time and expense in order to comply with regulatory requirements.

 

Nonew drug is permitted to be sold in developed countries without extensive dataon its quality, safety and efficacy first being obtained, organized andsubmitted to governmental regulatory authorities. The development stage of thisprocess may be divided into two parts: (i) pre-clinical; and (ii) clinicaldevelopment. Included in pre-clinical development are the development ofprocesses for manufacturing the product candidate, toxicology studies and otheractivities such as pharmacology and drug metabolism studies. Clinical trialsrun until, and in some cases after, the product is marketed and covers several,sometimes overlapping, phases.

 

InPhase I trials, a small number of healthy human volunteers are exposed to aproduct candidate. Typically, the volunteers are administered single ormultiple doses, following which the effects of the candidate drug are closelymonitored. The way the body deals with the product candidate fromadministration to elimination (pharmacokinetics) is also studied. Phase 2trials involve the first studies on patients and explore the doses required toproduce the desired benefits. Safety and pharmacokinetic information is alsocollected. Phase 3 trials typically involve larger numbers of patients andgeographically dispersed test sites. The trials in this Phase may compare thenew agent with other available treatments. In Phase 3 trials, costs aresignificantly higher than in earlier Phases due to the larger number ofpatients and longer duration of trial.

 

Inaddition to the forms of regulation referred to above, the prices ofpharmaceutical products in many countries are controlled by law. In somecountries, such as France and Japan, the prices of individual products areregulated. By contrast, in the U.K., prices are controlled by reference tolimits upon the overall profitability, measured by the rate of return oncapital employed, of sales of products supplied under the U.K. National HealthService. The permitted rate of return on capital employed for eachpharmaceutical company is determined through negotiations with the U.K.Department of Health under the 1999 Pharmaceutical Price Regulation Scheme. Ifa company’s actual rate of return exceeds the agreed rate, it is required to negotiateeither a repayment of past profits which the Department of Health considers tobe excessive or future price reductions. There is no assurance that the currentarrangements will continue in the future.

 

Governmentsmay also influence the price of pharmaceutical products through their controlof national healthcare organizations which may bear a large part of the cost ofsupply of such products to consumers. In the U.S. and Germany, indirectpressure can be exerted on prices by government funded or private medical careplans. The Company is unable to predict whether, or to what extent, itsbusiness may be affected by legislative and regulatory developments relating tospecific pharmaceutical products or the pricing of such products, or to itsoverall business. The uncertainties involved, or any adverse regulatorydevelopments, could significantly affect the Company’s operational results andits ability to achieve profitability.

 

### **C.            Organizational structure**

### ** **

ChemGenex Pharmaceuticals Limited is a limited liability corporationlisted on the ASX. Its subsidiaries are set forth below:

 
| **Name of entity**                                                                               | ** ** | **Country of incorporation** | ** ** | **Ownership interest (%)** | ** ** | **Business**             |
|--------------------------------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|--------------------------|
|                                                                                             | ** ** | ** **                   | ** ** | ** **                 | ** ** | ** **               |
| Autogen Research Pty Ltd                                                                         |       | Australia                    |       | 100                        |       | Research and development |
|                                                                                             |       |                         |       |                       |       |                     |
| ChemGenex Pharmaceuticals, Inc. (formerly     ChemGenex  Therapeutics, Inc.) |       | U.S. (Delaware)              |       | 100                        |       | Research and development |

### ** **

### **D.            Property, plant and equipment**

### ** **

The Company’s headquarters are in Geelong, Victoria, Australia. Itsheadquarters, comprising leased premises of approximately 80 square meters,contains office space and storage space. The property plant and equipmentrecorded includes leasehold improvements, furniture and fittings, computerequipment, and equipment used in research and development by external providers.

 

These properties are in good condition.

 

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The headquarters premises are leased from Deakin University under anannual lease agreement which expires on December 31, 2007. Designated researchprojects are subcontracted to third party laboratories including DeakinUniversity.

 

ChemGenex Pharmaceuticals, Inc. leases approximately 2,400 square feetof corporate office space in Menlo Park, California, under a lease agreementthat terminates on December 31, 2007. The U.S. subsidiary also subleasesapproximately 500 square feet of laboratory space to conduct *in vitro* experiments to support oncology discovery anddevelopment programs in Menlo Park, California under a sublease that terminateson December 31, 2007. On August 1, 2007 the Company moved into new premises ofapproximately 5,000 square feet in Menlo Park under a 38 month lease agreementwhich expires on October 31, 2010. This lease allows for an option for afurther 2 years to October 31, 2012.

 

Environmental

 

The Company’s operations are not subject to any significantenvironmental regulations under either Australian Commonwealth or Statelegislation. The Company uses hazardous materials that could be dangerous tohuman health, safety or the environment. As appropriate, the Company storesthese materials and various wastes resulting from their use at its facilitiespending ultimate use and disposal. The Company is subject to a variety offederal, state and local laws in both Australia and the U.S. and regulationsgoverning the use, generation, manufacture, storage, handling and disposal ofthese materials and wastes resulting from the use of such materials. While thecosts for compliance, including costs related to the disposal of hazardousmaterials, to date have been nominal, the Company may incur significant costscomplying with both existing and future environmental laws and regulations.ChemGenex Pharmaceuticals, Inc. is subject to regulation by the OccupationalSafety and Health Administration, or OSHA, the California and federalenvironmental protection agencies and to regulation under the Toxic SubstancesControl Act. OSHA or the California or federal EPA may adopt regulations thatmay affect the U.S. subsidiary’s research and development programs. The Companyis unable to predict whether any agency will adopt any regulations that couldhave a material adverse effect on its operations.

 

## **ITEM5.  OPERATING AND FINANCIAL REVIEW ANDPROSPECTS**

## ** **

The following discussion and analysis should be read in conjunctionwith Item 3A. “Selected consolidated financial data” and the Company’s auditedconsolidated financial statements, the notes thereto and other financialinformation appearing elsewhere in this Annual Report. In addition tohistorical information, the following discussion and other parts of this AnnualReport contain forward-looking statements that reflect the Company’s plans,estimates, intentions, expectations and beliefs. Actual results could differmaterially from those discussed in the forward-looking statements. See the “RiskFactors” section of Item 3D and other forward-looking statements in this AnnualReport for a discussion of some, but not all factors that could cause orcontribute to such differences.

 

The following review is based on the Company’s audited consolidatedfinancial statements prepared in accordance with Australian AccountingStandards, which include Australian equivalents to International FinancialReporting Standards (“AIFRS”).  A summary of the significant differencesbetween these standards and U.S. GAAP is given below and more detailedinformation is provided in the Company’s audited consolidated financialstatements included elsewhere in this Annual Report.

 

For all periods up to and including the year ended June 30, 2005, theCompany prepared its financial statements in accordance with Australiangenerally accepted accounting practice (“AGAAP”).  The financialstatements for the years ended June 30, 2007 and 2006 are prepared inaccordance with AIFRS.  In preparing these consolidated financialstatements, the Company has started from an opening balance sheet date as atJuly 1, 2004, the Company’s date of transition to AIFRS.

 

**Recently issued but not yet adopted accounting pronouncementsapplicable to ChemGenex**

 

***Australian pronouncements***

 

Certain AustralianAccounting Standards and Urgent Issues Group (‘UIG’) interpretations haverecently been issued or amended but are not yet effective and have not beenadopted by the Group for the annual reporting period ended 30 June 2007. Thedirectors have assessed the impact of these new or amended standards (to theextent relevant to the group) and interpretations as follows:

 

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| **Reference** | ** ** | **Title**                                                                                                                                                                         | ** ** | **Summary**                                                                                                        | ** ** | **Application  date of   standard*** | ** ** | **Impact on Group financial report**                                                                                                                                                                                                                                     |
|---------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| AASB2005-10   |       | Amendments to Australian  Accounting Standards [AASB 132, AASB 101, AASB 114, AASB 117, AASB 133, AASB  139, AASB 1, AASB 4, AASB 1023 & AASB 1038]                           |       | Amendments arise from the  release in August 2005 of AASB 7 Financial Instruments: Disclosures.                    |       | 1 January 2007                       |       | AASB 7 is a disclosure  standard so will have no direct impact on the amounts included in the Group’s  financial statements. However, the amendments will result in changes to the  financial instrument disclosures included in the Group’s financial report. |
| AASB2007-1    |       | Amendments to Australian  Accounting Standards arising from AASB Interpretation 11 [AASB 2]                                                                                       |       | Amending standard issued  as a consequence of AASB Interpretation 11 Interim Financial Reporting and Impairment.   |       | 1 March 2007                         |       | This is consistent with  the Group’s existing accounting policies for share-based payments so will  have no impact.                                                                                                                                                 |
| AASB2007-3    |       | Amendments to Australian  Accounting Standards arising from AASB 8 [AASB 5, AASB, AASB 6, AASB 102, AASB  107, AASB 119, AASB 127, AASB 134, AASB 136, AASB 1023 & AASB 1038] |       | Amending standard issued  as a consequence of AASB 8 Operating Segments.                                           |       | 1 January 2009                       |       | AASB 8 is a disclosure  standard so will have no direct impact on the amounts included in the Groups  financial statements. The impact of the new standard is yet to be determined.                                                                                      |
| AASB 7        |       | Financial Instruments:  Disclosures                                                                                                                                               |       | New standard replacing  disclosure requirements of AASB 132.                                                       |       | 1 January 2007                       |       | Refer to AASB 2005-10  above.                                                                                                                                                                                                                                            |
| AASB 8        |       | Operating Segments                                                                                                                                                                |       | This new standard will  replace AASB 114 Segment Reporting and adopts a management approach to  segment reporting. |       | 1 January 2009                       |       | Refer to AASB 2007-3  above.                                                                                                                                                                                                                                             |

 

***U.S. pronouncements***

 

*Uncertainty in Income Taxes*

 

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income Taxes,* aninterpretation of FASB No. 109, *Accounting for IncomeTaxes* (“FIN 48”). FIN 48 creates a single model to addressuncertainty in tax positions and clarifies the accounting for income taxes byprescribing the minimum recognition threshold      a tax position is required to meet beforebeing recognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure, and transition. In addition, FIN 48 clearlyscopes out income taxes from SFAS No. 5, *Accounting forContingencies*. FIN 48 applies to all    tax positions related to income taxessubject to SFAS No. 109. This includes tax positions considered to be “routine”as      well as those with a high degreeof uncertainty. The guidance contained in FIN 48 is also applicable topass-through entities,      non-taxableentities, and entities whose tax liability is subject to 100% credit fordividends paid. FIN 48 utilizes the following two-step approach for evaluatingtax positions: recognition (step one) and measurement (step two). Step oneoccurs when an enterprise concludes that a tax position, based solely on itstechnical merits, is more-likely-than-not to be sustained on examination. Steptwo is only addressed if step one has been satisfied. Under step two, the taxbenefit is measured as the largest amount of benefit, determined on acumulative probability basis, which is more-likely-than-not to be realized onultimate settlement. Derecognition of a tax position that was previouslyrecognized would occur when a company subsequently determines that a taxposition no longer meets the more-likely-than-not threshold of being 

 

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sustained. FIN 48 specifically prohibits the use of a valuationallowance as a substitute for derecognition of tax positions. FIN 48 requiresexpanded disclosures, including a tabular roll forward of the beginning andending aggregate unrecognized tax benefits as well as specific detail relatedto tax uncertainties for which it is reasonably possible the amount ofunrecognized tax benefit will significantly increase or decrease within twelvemonths. These disclosures are required at each annual reporting period, unlessa significant change occurs in an interim period. FIN 48 is effective forfiscal years beginning after December 15, 2006. The Company plans to adopt thispronouncement in fiscal year beginning July 1, 2007 and does not believe theadoption of FIN 48 will have a material effect on the consolidated financialstatements.

 

*Fair Value Measurements*

 

In September 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements* (“SFAS 157”). SFAS 157 provides enhanced guidance forusing fair value to measure assets and liabilities and also responds toinvestors’ requests for expanded information about the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFAS157 applies whenever other standards require (or permit) assets or liabilitiesto be measured at fair value and does not expand the use of fair value in anynew circumstances. Under SFAS 157, fair value refers to the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants in the market in which the reportingentity transacts. SFAS 157 clarifies the principle that fair value should bebased on the assumptions market participants would use when pricing the assetor liability. In support of this principle, SFAS 157 establishes a fair valuehierarchy that prioritizes the information used to develop those assumptions. Thefair value hierarchy gives the highest priority to quoted prices in activemarkets and the lowest priority to unobservable data. Under SFAS 157, fairvalue measurements would be separately disclosed by level within the fair valuehierarchy. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007. The Company plans to adopt thispronouncement in fiscal years beginning July 1, 2008 and does not believe theadoption of SFAS 157 will have a material effect on the consolidated financialstatements.

 

*Accounting for Research and Development Costs*

 

In June 2007, the Financial Accounting Standards Board (“FASB”)considered the Emerging Issues Task Force (“EITF”) review of FASB Statement No.2 Accounting for Research and development Costs. The Task Force reached aconsensus that nonrefundable advance payments for future research anddevelopment activities should be deferred and capitalized.  Such amountsshould be recognized as an expense as the related goods are delivered or therelated services are performed.  Entities should continue to evaluatewhether they expect the goods to be delivered or services to be rendered. If an entity does not expect the goods to be delivered or services to berendered, the capitalized advance payment should be charged to expense. Theconsensus in this Issue should be effective for fiscal years beginning afterDecember 15, 2007, including interim periods within those fiscal years. Entities should report the effects of applying the [consensus] in this Issue asa change in accounting principle through a cumulative-effect adjustment toretained earnings or to other components of equity or net assets in thestatement of financial position as of the beginning of the year ofadoption.  An entity should disclose the cumulative effect of the changeon retained earnings or on other components of equity or net assets in thestatement of financial position.  Earlier application is not permitted.The Company plans to adopt this pronouncement in fiscal years beginning July 1,2008 and does not believe the adoption of EITF 07-3 will have a material effecton the consolidated financial statements.

 

*Fair Value Measurements*

 

In February 2007, the FASB issued FAS 159, The Fair Value Option forFinancial Assets and Financial Liabilities (“FAS 159”). FAS 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. FAS 159 is expected toexpand the use of fair value measurement, which is consistent with the FASB’slong-term measurement objectives for accounting for financial instruments. FAS159 also establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. FAS 159 does not affectany existing accounting literature that requires certain assets and liabilitiesto be carried at fair value. This Statement does not establish requirements forrecognizing and measuring dividend income, interest income, or interestexpense. This Statement does not eliminate disclosure 

 

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requirements included in other accounting standards, includingrequirements for disclosures about fair value measurements included in FASBStatements No. 157, Fair Value Measurements, and No. 107, Disclosuresabout Fair Value of Financial Instruments. FAS 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007. TheCompany plans to adopt this pronouncement in fiscal years beginning July 1,2008 and does not believe the adoption of FAS 159 will have a material effecton the consolidated financial statements.

 

**Differencesbetween Australian accounting standards and U.S. accounting standards**

 

The Company prepares itsaudited consolidated financial statements in accordance with AIFRS, whichdiffer in certain significant respects from U.S. GAAP. The following table setsforth a comparison of the Company’s net loss and total equity in accordancewith AIFRS and U.S. GAAP as of the dates and for the periods indicated:

 
| **Period**                            | ** ** | **Year to June 30, 2007  A$’000** | ** ** | **Year to June 30, 2006  A$’000** | ** ** | **Year to June 30, 2005  A$’000** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
|                                  |       |                                   |       |                                   |       |                                   |       |
| Net loss in accordance with A IFRS    |       | (11,701                                | )          | (10,370                                | )          | (6,235                                 | )          |
| Net loss in accordance with U.S. GAAP |       | (11,701                                | )          | (10,444                                | )          | (6,189                                 | )          |

 
| **As at**                                 | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|-------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
|                                      |       |              |       |              |       |              |       |
| Total equity in accordance with AIFRS     |       | 39,870            |       | 31,005            |       | 25,235            |       |
| Total equity in accordance with U.S. GAAP |       | 22,938            |       | 14,073            |       | 8,378             |       |

 

See Note 26 to the auditedconsolidated financial statements included elsewhere herein for a descriptionof the differences between AIFRS and U. S. GAAP as they relate to the Company,and a reconciliation to U.S. GAAP of net loss and total equity for the datesand periods indicated therein. Differences between AIFRS and U.S. GAAP thathave a material effect on net loss and total equity relate to share-basedcompensation, purchase accounting and marketable securities.

 

**Application of critical accounting policies**

 

The Company prepares its financial statementsin accordance with generally accepted accounting principles. As such, it isrequired to make estimates, judgments, and assumptions that management believesare reasonable based upon the information available. The estimates, judgmentsand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. The significant accounting policieslisted in Note 2 of the Company’s audited consolidated financial statementsthat management believes are the most critical to aid in fully understandingand evaluating its financial condition and results of operations are discussedbelow.

 

***AIFRS  andU.S. GAAP***

 

*Revenue Recognition*

 

Research revenue comprises amounts received for certain research anddevelopment activities under the Company’s collaborations with Merck Santé andVernalis

 

For these contracts revenues are recognized as earned on a straightline basis over the lives of the respective agreements as this reflects thelevel of effort required over the performance period. Such agreements areperformed on a “best efforts” basis with no guarantee of either technologicalor commercial success. Project funding received in advance of the period inwhich the associated research efforts are performed is included in deferredrevenue.

 

Revenue from government grants is recognised when received and allattaching conditions have been complied with.

 

When the grant relates to an expense item, it is recognised as incomeover the periods necessary to match the grant on a systematic basis to thecosts that it is intended to compensate.

 

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***U.S. GAAP***

 

*In-Process Research and Development*

 

In connection with the June 21, 2004 merger with ChemGenexTherapeutics, Inc. (accounted for under the purchase method of accounting), forU.S. GAAP purposes the Company allocated A$16.6 million of the purchase priceto in-process research and development projects that had not yet reachedtechnological feasibility and are reasonablybelieved to have no alternative future use. Under US GAAP this inprocessresearch and development expenditure was written off in the financialstatements for that year. The value assigned to in-process research anddevelopment was determined by estimating the cost to develop the purchasedin-process research and development into commercially feasible products, thepercentage of completion at the acquisition date and the resulting netrisk-adjusted cash flows from the projects, and discounting the net cash flowsto their present value. The discount rate of 43.5% used in determining thein-process research and development expenditures reflects a higher risk ofinvestment because of the higher level of uncertainty due in part to the nature of the Company and the industry toconstantly develop new technology for future product releases. The forecastsused by the Company in valuing in-process research and development were basedon assumptions the Company believed at the time to be reasonable, but which areinherently uncertain and unpredictable. Given the uncertainties of thedevelopment process, no assurance can be given that deviations from the Company’sestimates will occur and no assurance can be given that the in-process researchand development projects identified will ever reach either technological orcommercial success.

 

*Share-based Compensation*

 

Under U.S. GAAP, the Company had elected, to June 30, 2005, to accountfor share-based compensation attributable to the issuance of share options todirectors and employees using the intrinsic value method as prescribed by APBNo. 25. Accordingly, share-based compensation expense is only recorded if thequoted market price of the Company’s stock, as at the measurement date, exceedsthe amount that the director or employee must pay. The intrinsic valueattributable to unvested options is amortized over the remaining vesting periodof the options. For options that vest upon the achievement of a target stockprice, compensation expense is recognized when the target is achieved.

 

Since July 1, 2005 the Company has accounted for share-basedcompensation attributable to share options granted to employees in accordancewith FAS No. 123R (as for share-based compensation attributable to shareoptions granted to non-employees as detailed below).

 

Under U.S.GAAP, the Company accounts for share-based compensation attributable to shareoptions granted to non-employees in accordance with FAS No. 123, *Accounting for Stock-Based Compensation*, as amended by FASNo. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure*(collectively,**“FAS No. 123”),**and Emerging Issues Task Force Issue No. 96-18*, Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services*(“EITFNo. 96-18”). Share-based compensation for stock options granted to employeesand non-employees is equal to the fair value of the share options as of themeasurement date. The Company determines the fair value of optionsgranted to employees and  non-employeesusing the Black-Scholes option valuation model, which requires the input ofhighly subjective assumptions, including the estimated fair value of theCompany’s common stock and expected stock price volatility.

 

### **A**.            Operating results

### ** **

The Company’s principal activity since July 1996 has been research anddevelopment of novel targets and therapeutics for human diseases includingobesity, diabetes, depression and cancer. The Company has made losses sincecommencing its current principal activities. As at June 30, 2007, the Company’saccumulated deficit was A$92,723,921 compared to A$81,023,002 as at June 30,2006.

 

The Company’s losses fluctuate from year to year principally due to thecommencement or termination of collaborative research and developmentagreements, the timing of milestone payments, government grants, the level ofinterest income and variations in the level of expenditures relating toresearch and clinical development programs. The Company expects to incurcontinued losses in coming years. The Company continues to incur the greaterpart of its costs on personnel and external contract costs needed to supportthe research and development of its platforms, including expenses related tothe protection of patent and other intellectual property rights.

 

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**Overview**

 

The Company is abiopharmaceutical company committed to advancing patient care by discovering,developing and commercializing novel medicines for cancer, diabetes, obesity,depression and anxiety. ChemGenex Pharmaceuticals Limited was formed throughthe merger of AGT Biosciences Limited and ChemGenex Therapeutics, Inc. on June21, 2004. AGT Biosciences Limited was a publicly-listed company thatspecialized in the use of genomics tools to identify and validate novel targetsfor therapeutic intervention in diabetes, obesity, depression and anxiety. AGTBiosciences Limited, which had previously been called Autogen Limited (from May1999 to March 2003) and Australia Wide Industries Limited (from July 1986 toMay 1999), commenced biotechnology activities on July 10, 1996. On June 28,2002, a 20% shareholding in Autogen Limited held by the then Executive Chairmanwas sold to the publicly-listed Australian investment company, Charter PacificCorporation Limited. This led to a significant restructure of the managementteam and significantly improved financial performance of the Company. ChemGenexTherapeutics, Inc. was a private company incorporated in the state of Delawareon September 14, 1999 to use genomic tools and medicinal chemistry toaccelerate the development of anti-cancer therapeutics. The merged entitycommenced trading on the ASX as ChemGenex Pharmaceuticals Limited on June 29,2004. At June 30, 2007 the merged entity has an aggregate of 185,847,331 shares of ordinary stock outstanding.

 

To date, theCompany has devoted substantially all of its resources to the development ofits target discovery and validation technologies, research and development andpreclinical and early stage clinical testing of Ceflatonin® (homoharringtonine)and Quinamed® (amonafide dichloride) and other product candidates. It hasincurred net losses since the commencement of biotechnology operations andexpects to incur substantial and increasing losses for the next several yearsas it expands its research and development activities and moves its productcandidates into later stages of development. To date, the Company has noproduct revenue and has funded its operations primarily through the paymentsfrom pharmaceutical industry partners, issue of equity securities and interestincome. It has established an ongoing partnership agreement in diabetes andobesity with Merck Santé. Planned core activities over the next several yearsare to:

 

•                  continue the development ofCeflatonin®, currently in Phase 2/3 clinical trial for the treatment of CML;

 

•                  continue the development ofQuinamed®, currently in Phase 2 clinical trial for the treatment of solid tumors including prostate, breastand ovarian cancer;

 

•                  continue the development ofits other cancer-treating product candidates;

 

•                  expand the Company’s research,discovery and development programs in the fields of diabetes and obesity;

 

•                  advance the Company’spreclinical cancer-treating candidates into clinical development;

 

•                  establish and maintain salesand marketing operations;

 

•                  commercialize any productcandidates that receive regulatory approval; and

 

•                  in-license technology andacquire or invest in businesses, products or technologies that are synergisticwith the Company’s own.

 

ChemGenex hasa limited history of operations with its current management team and businessfocus.

 

The Company’sbusiness is subject to significant risks, including but not limited to therisks inherent in its ongoing clinical trials and the regulatory approvalprocess, the results of its research and development efforts, competition fromother products and technologies and uncertainties associated with obtaining andenforcing patent rights.

 

**Results of operations – fiscal years**

 

The following tables are intended to illustrate a tabular analysis ofthe consolidated statements of income for the 2007, 2006 and 2005 fiscal years.

 

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The table below shows contribution of different revenue and otherincome types to total revenue and other income for fiscal 2007, 2006 and 2005.All revenue was earned in Australia and is expressed in A$.

** **
| ** **                     | ** ** | **2007**   | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|--------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| ** **                     | ** ** | ** ** | ** ** | **A$**    | ** ** | **A$**    | ** ** |
| Research revenue               |       | 536,111    |       | 1,676,297 |       | 3,527,312 |       |
| Interest revenue               |       | 862,096    |       | 241,634   |       | 266,987   |       |
| Other revenue                  |       |       |       |      |       |      |       |
| -Patent reimbursement          |       | —     |       | 230,223   |       | 104,085   |       |
| -Exchange rate benefit         |       | 157,917    |       | —    |       | —    |       |
| -Government grants             |       | 730,099    |       | 148,868   |       | 196,902   |       |
| -Other revenue                 |       | 1,911      |       | —    |       | —    |       |
| Total revenue and other income |       | 2,288,134  |       | 2,297,022 |       | 4,095,286 |       |

 

The table below shows percentage revenue and other income changes forfiscal 2007, 2006 and 2005:

 
| ** **                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues and other income from ordinary  activities |       | -0.3     | %          | -43.9    | %          | 13.9     | %          |

 

The table below shows the proportion of individual expenses items tototal operating costs for fiscal 2007, 2006 and 2005. 

 
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Research expenditure                    |       | 55.3     | %          | 56.7     | %          | 44.7     | %          |
| Employee costs                          |       | 18.0     | %          | 21.5     | %          | 25.5     | %          |
| Patent costs                            |       | 4.0      | %          | 4.5      | %          | 4.3      | %          |
| Legal costs                             |       | 0.5      | %          | 0.9      | %          | 1.0      | %          |
| Depreciation                            |       | 1.9      | %          | 2.1      | %          | 2.7      | %          |
| Other expenses from ordinary activities |       | 20.3     | %          | 14.3     | %          | 21.8     | %          |
|                                    |       |     |       |     |       |     |       |
| TOTAL EXPENSES                          |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |

 

While the level of research and development expenditure has remainedrelatively constant for the past two fiscal years, the relativity to otherexpenses altered significantly in 2005 reflecting the increase in the Company’soperating base following the merger with ChemGenex Therapeutics Inc. in June2004.

 

**Comparison of fiscal year 2007 with fiscal year 2006**

 

*Revenue*

 

The Company’s total revenue decreased by A$9thousand or 0.3% from A$2.3 million in fiscal 2006 to A$2.3 million in fiscal2007. The decrease reflects a reduction in research revenue following thecompletion a Research Agreement with Merck Sante and an increase in interestand government grants during the year.

 

*Costs and expenses*

 

The Company’scosts and expenses are detailed in the consolidated statements of income.

 

*Researchexpenditure*

 

Researchexpenditure increased by 8% from A$7.2 million in fiscal 2006 to A$7.7 millionin fiscal 2007. This reflects continued increased expenses associated with clinical trials for Ceflatoninincurred during the year.

 

35

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*Employeecosts*

 

Employeeexpenses decreased by A$0.2 million or 7% to A$2.5 million in fiscal 2007,

 

*Patentcosts*

 

**Patent costsinclude regulatory charges involved in applying for, and maintaining, patentprotection together with charges from patent attorneys for specialist advice onthese matters. Patent costs are expensed as incurred. Patent costs decreased by2% to A$0.5million in fiscal 2007.**

** **

*Legalcosts*

 

Legal costsreduced by 42% to A$66 thousand in fiscal 2007.

 

*Depreciation*

 

No substantivechange from previous year.

 

*Otherexpenses from ordinary activities*

 

Other expensesfrom ordinary activities increased by 57% from A$1.8 million in fiscal 2006 toA$2.8 million in fiscal 2007. The major increases incurred in travel andconsulting costs associated with increased clinical trials and capital raisingactivities.

 

*Net loss*

 

The Company’snet loss increased by A$1.3 million or 13% from A$10.4 million in fiscal2005 to A$11.7 million in fiscal 2007 for the reasons described above.

 

**Comparison of fiscal year 2006 with fiscal year 2005**

 

*Revenue*

 

The Company’s total revenue decreased by A$1.8million or 43.9% from A$4.1 million in fiscal 2005 to A$2.3 million in fiscal2006. The decrease primarily reflects the completion Research Agreements withMerck Sante Vernalis (R&D) Limited during the year which have not beenreplaced at the same agreements with similar revenue values.

 

*Costs and expenses*

 

The Company’scosts and expenses are detailed in the consolidated statements of income.

 

*Researchexpenditure*

 

Researchexpenditure increased by 55% from A$4.6 million in fiscal 2005 to A$7.2 millionin fiscal 2006. This reflects increased expenses associated with clinicaltrials for Ceflatonin incurred during the year.

 

*Employeecosts*

 

Employeeexpenses increased by A$0.07 million or 3% to A$2.7 million in fiscal 2006,

 

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* *

*Patentcosts*

 

**Patent costsinclude regulatory charges involved in applying for, and maintaining, patentprotection together with charges from patent attorneys for specialist advice onthese matters. Patent costs are expensed as incurred. Patent costs increased by29% in fiscal 2006 due to different timing of various patent activities.**

** **

*Legalcosts*

 

Legal costsdid not alter significantly from fiscal year 2005 to 2006.

 

*Depreciation*

 

No substantivechange from previous year.

 

*Amortization*

 

With theintroduction of AIFRS Accounting Standards from July 1, 2004 there were noAmortization costs recognised in fiscal 2006 or 2005.

 

*Otherexpenses from ordinary activities*

 

Other expensesfrom ordinary activities decreased by 20% from A$2.3 million in fiscal 2005 toA$1.8 million in fiscal 2006. This decrease primarily reflects the “one off”costs associated with the initial SEC registration and NASDAQ listing incurredfiscal June 2005.

 

*Net loss*

 

The Company’snet loss increased by A$4.1 million or 66% from A$6.2 million in fiscal2005 to A$10.4 million in fiscal 2006 for the reasons described above.

 

### **B**.            Liquidity and capital resources

### ** **

The Company’s future revenues, liquidity and capital requirements aredependent upon several factors, including, but not limited to, its success ingenerating significant revenues from partnerships and/or sales; the time andcost required to manufacture and find partners for its products; the time andcost required for clinically developed products to obtain regulatory approvals;competitive technological developments; additional government-imposedregulation and control; and changes in healthcare systems which affectreimbursement, pricing or availability of drugs and market acceptance of drugsand drug technologies.

 

Todate, the Company has funded its operations primarily through the payments frompharmaceutical industry partners and the issue of equity securities. From July1, 1996, when the Company’s biotechnology activities commenced, it has receivedapproximately A$80.9 million (including A$50.5 million since 1 July 2004) fromthe issue of equity securities. In addition, during this period, the Companyhas received A$26.5 million from its pharmaceutical partners for depression,diabetes and obesity research.

 

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Overthe past five years the Company has been able to obtain approximately 66% ofthe funding required for the combined diabetes, obesity, depression and anxietycontracts research spending via collaborative research agreements -

 
| **Period**               | ** ** | **Contract Research Spending** | ** ** | **Collaborative Funding** | ** ** |
|--------------------------|------------|--------------------------------|------------|---------------------------|------------|
| ** **               | ** ** | **A$**                         | ** ** | ** **                | ** ** |
| Fiscal year 2007         |       | 3,411,386                      |       | 524,377                   |       |
| Fiscal year 2006         |       | 3,859,875                      |       | 1,641,855                 |       |
| Fiscal year 2005         |       | 4,065,119                      |       | 3,760,142                 |       |
| Fiscal year 2004         |       | 4,308,627                      |       | 2,875,401                 |       |
| Fiscal year 2003         |       | 4,476,305                      |       | 4,501,101                 |       |
| Total since July 1, 2002 |       | 20,121,312                     |       | 13,302,876                |       |

 

Netcash used in operating activities of A$11,905,605 in fiscal 2007, A$8,485,618in fiscal 2006 and $6,944,186 in fiscal 2005 was primarily a result of the cashshortfall associated with our research activities (detailed in Item 4B –Business Overview - commercial and research and development collaborations) andexpenses incurred for administration infrastructure.

 

Asof June 30, 2007, the Company had A$25.4 million in available cash and cashequivalents. The Company’s existing cash reserves and revenues received fromexisting pharmaceutical partners will be utilized to support companyadministration costs, research costs and the ongoing cancer development andclinical trial programs. Based on existing cash and cash equivalents, theCompany anticipates that it has adequate funds to operate at current levels andmeet its contractual obligations, described further in Item 5F. “TabularDisclosure of Contractual Obligations,” until the second half of calendar 2008without obtaining further partnership agreements for the cancer clinical trialprograms. The Company continues to monitor this situation and is constantlyreviewing its relationships to ensure adequate funding will be available tosupport current projects.

 

Minimalcash (apart from interest on cash assets) has been provided by, or used for,investing activities during each of the three years in the period ended June30, 2007.

 

Whilethe Company’s cash resources are currently held in Australian dollars (A$), asignificant part of its cash flow burden over the next year is committed tofunding clinical trial programs in the U.S. The Company monitors the potentialforeign currency exposure from this situation and utilizes forward exchangecontracts when appropriate to manage this risk.

 

### **C.            Research and product developmentprograms**

### ** **

Included within research and development expenditure is the followingexternal expenditure on research and development projects.

 

Over the last three years total expenditure on research and developmenthas resulted in the consumption of significant cash resources, totalingA$19,538,372. The principal expenditures have been as follows:

 
| **Program**          | ** ** | **Annual Expenditure   Fiscal 2007** | ** ** | **Annual Expenditure   Fiscal 2006** | ** ** | **Annual Expenditure   Fiscal 2005** | ** ** |
|----------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| Diabetes and obesity |       | A$                                   | 3,221,386  |                                 | A$         | 3,479,875                            |       | A$ | 3,685,119 |   |
| Depression           |       | A$                                   | 190,000    |                                 | A$         | 380,000                              |       | A$ | 380,000 |   |
| Cancer               |       | A$                                   | 4,320,602  |                                 | A$         | 3,325,103                            |       | A$ | 556,287 |   |

 

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Whilst the Company made no expenditure in cancer research until fiscal2005, ChemGenex Therapeutics, Inc. had expended US$5,955,000 (A$9,353,000) incancer related research. This expenditure is reflected in the purchase pricepaid by the Company for ChemGenex Therapeutics, Inc.

 

The major expenditure during the last three years by specific researchundertaking is as follows:

 
| **Collaborator**                                                                                                     | ** ** | **Agreement and commencement date**                                                                                                                                                                                | ** ** | **Commitment at  June 30, 2007** | ** ** | **Expiry   date**  | ** ** | **Expenditure**                                   |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------|------------|---------------------------------------------------|
| ** **                                                                                                           | ** ** | ** **                                                                                                                                                                                                         | ** ** | ** **                       | ** ** | ** **         | ** ** | ** **                                        |
| Deakin  University                                                                                                   |       | “Research,  License and Commercialization Agreement” (April 21, 2005)                                                                                                                                    |       | A$1,200,000                      |       | December  31, 2007 |       | 2007:A$2,410,0002006:A$2,420,000 2005:A$2,470,000 |
|                                                                                                                 |       |                                                                                                                                                                                                               |       |                             |       |               |       |                                              |
| International  Diabetes    Institute                                                                  |       | “Research  Agreement for Human Diabetes / Obesity Discovery”Gene discovery and validation  research according to instruction from the Company in the fields of obesity  and diabetes. (January 14, 1998) |       | A$75,000                         |       | December  31, 2007 |       | 2007:A$221,6622006:A$501,838 2005:A$1,104,190     |
|                                                                                                                 |       |                                                                                                                                                                                                               |       |                             |       |               |       |                                              |
| Southwest  Foundation for    Biomedical Research                                                      |       | “the  Research Agreement”Human genomics research  according to instruction from the Company. (December 31, 2002)                                                                                         |       | US$0(A$0)                        |       | June  30, 2006     |       | 2007:A$711,8242006:A$895,138 2005:A$490,929       |
|                                                                                                                 |       |                                                                                                                                                                                                               |       |                             |       |               |       |                                              |
| Various  contracts    managed by    ChemGenex    Pharmaceuticals,  Inc. |       | Ongoing  preclinical and clinical development of cancer therapeutics (June 30, 2007  commitments based on Premier Research CRO Agreement)                                                                          |       | US$ 4,083,420(A$4,805,598)  |       | Trial  dependent   |       | 2007:A$4,320,60272006:A$3,325,103 2005:A$556,287  |

 

These research and development expenses have been financed principallythrough working capital raised by equity placements and through ongoing fundingfrom commercial collaborators. Since its commencement of biotechnologyactivities in 1996 the Company has raised A$80.9 million, of which a net totalof A$51.2 million has been invested in direct research expenditure by theCompany through June 30, 2007.

 

See Item 4B. “Business overview - Components of the ChemGenexDiscovery, Development and Validation Platforms” for further information on thecurrent status of the development programs.

 

See Item 4B. “Business overview - Commercial Collaborations” forfurther information on the status of research and development and commercialcollaborations.

 

See Item 3D. “Risk Factors” for the risks associated with developingand bringing drug candidates to market.

 

**Researchand Development**

 

TheCompany has two programs; (i) cancer and (ii) diabetes and obesity. The cancerprogram has two molecules in clinical trials and a suite of earlier-stagemolecules in pre-clinical development. The latter two programs are preclinical,focusing on the discovery and validation of novel gene and protein targets andscreening for small molecules that may have potential as new drugs to treatthese diseases. The status of these two programs is discussed below.

 

*Cancer*

 

Thecancer program has two therapeutic agents in Phase 2 clinical trials for threeindications in the USA and several molecules in pre-clinical development.

 

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Ceflatoninis currently in a Phase 2/3 trial in the U.S.A. and Europe for CMLpatients who have the T315I bcr-abl mutation that confers resistance to Gleevec® and other tyrosine kinaseinhibitors (“TKIs”). The company is also conducting a complementary phase 2trial in CML patients who have failed Gleevec® and one other TKI. At the M.D. Anderson Cancer Centerthe Company is conducting a combination (with Gleevec®) therapy Phase 2 trial in CMLpatients who had failed Gleevec®.The Company is also conducting Phase 2 trials in patients with the bone marrowdisease called myelodysplastic syndrome (“MDS”) in collaboration at the M.D.Anderson Cancer Center.

 

APhase I clinical trial of Quinamed was completed successfully in early 2004,and the Company initiated a Phase 2 trial in prostate cancer patients in late2004. The trial is being performed at the Sarah Cannon Cancer Center inNashville, Tennessee. The most advanced pre-clinical therapeutic is CXS299,which was recently licensed from the MD Anderson Cancer Center.

 

Completionof the project as pertaining to the three clinical trials for the twotherapeutic agents is defined as the completion of the Phase 2 studies. Phase 2trials are clinical trials conducted on a limited number of patients to,(i) determine the efficacy of the compound for specific indications,(ii) determine dosage tolerance and optimal dosage and (iii) identifypossible adverse effects and safety risks. The trials also seek to establish themost effective route of administration. Trials are conducted on a larger, butstill limited number of carefully monitored patients. Phase 2 trials may lastup to two and one-half years.

 

Theregulatory authorities in each country may impose their own requirements and mayrefuse to grant, or may require additional data before granting approval eventhough the relevant product has been approved by another authority. The US,Australia and European Union countries have very high standards of technicalappraisal and, consequently, in most cases, a lengthy approval process forpharmaceutical products. The time required to obtain such approval inparticular countries varies, but if obtained generally takes from six months toseveral years, if approval is received at all, from the date of application,depending upon the degree of control exercised by the regulatory authority, theduration of its review procedures, and the nature of the product. The trend inrecent years has been towards stricter regulation and higher standards.

 

Inthe US, the primary regulatory authority is the FDA. In addition to regulatingclinical procedures and processes, the FDA investigates and approves marketapplications for new pharmaceutical products and is responsible for regulatingthe labeling, marketing and monitoring of all pharmaceutical products, whethercurrently marketed or under investigation. Upon approval in the US, a drug maybe marketed only for the approved indications in the approved dosage forms anddosages. In addition to obtaining FDA approval for each indication to betreated with each product, each domestic drug manufacturing firm must registerwith the FDA, list its drug products with the FDA, comply with current GoodManufacturing Practice (cGMP) requirements and be subject to inspection bythe FDA. In Australia, a similar role is played by the Therapeutic GoodsAdministration, and in Europe, the European Committee for Proprietary MedicinalProducts provides a mechanism for European Union-member states to exchangeinformation on all aspects of product licensing and assesses licenseapplications submitted under two different procedures (the multistate and thehigh-tech concentration procedures).

 

TheCompany has launched an international Phase 2/3 study in CML patients with theT315I bcr-abl point mutation, which confers resistance to TKI therapy. Thefirst patients were dosed in September 2006, and enrollment under FDA approvedprotocols in  is ongoing. The Company wasawarded Fast Track status from the FDA for this trial on November 15, 2006. TheFast Track designation will enable the Company to file a New DrugApplication  (“NDA”) on a  rolling basis as data becomes available. Thispermits the FDA to review the filing as it is received, rather than waiting foran entire document prior to commencing the review process.

 

TheCompany has an additional Phase 2 study in CML patients who have failed Gleevecand an additional TKI. This study is currently enrolling patients in the U.S.A.

 

Ceflatoninis currently in a Phase 2 clinical trial to treat MDS patients at the MDAnderson Cancer Center in Houston, Texas. To date the study has completedtreatments on nine patients, and approximately eleven more patients will betreated to complete the Phase 2 trial. Expected completion of this trial is duringthe first half of 2008.

 

APhase 2a clinical trial of Quinamed in solid cancer patients was completed inearly 2007 and data was presented at the ASCO meeting in June 2007. The trialwas performed at the Sarah Cannon Cancer Center in Nashville, Tennessee. Thekey outcomes from this study were (i) demonstration that dose level could beoptimised according to 

 

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patient genotype, (ii) the drug was well tolerated, with predictableand manageable side effects, and (iii) there was evidence of anticanceractivity in several solid tumor types.

 

Dueto the high level of funds required to support clinical trials the Company hasdecided to concentrate its activities on the trial involving Ceflatonin on CMLpatients with the T315I mutation, as this has been deemed to provide the bestprospects for an early product approval at this time.

 

Duringthese studies, the Company may seek to license the compounds to apharmaceutical industry partner who would support appropriateregistration-directed trials.

 

Actualand estimated direct expenditures associated with the progression of the cancerprograms since June 21, 2004 (the merger with ChemGenex Therapeutics, Inc) tothe end of fiscal 2008 are shown below.

 
| ** **                  | ** ** | **Fiscal 2008  (Estimated)** | ** ** | **Fiscal 2007  (Actual)** | ** ** | **Fiscal 2006  (Actual)** | ** ** | **Fiscal 2005   (Actual)** | ** ** |
|-----------------------------|------------|------------------------------|------------|---------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **A$000’s**             | ** ** |
| Ceflatonin                  |       | 9,995                        |       | 4,281                     |       | 2,002                     |       | 349                        |       |
| Quinamed                    |       | 598                          |       | 97                        |       | 111                       |       | 110                        |       |
| Other pre-clinical projects |       | 138                          |       | 0                         |       | 27                        |       | 0                          |       |
| Total                       |       | 10,731                       |       | 4,378                     |       | 2,140                     |       | 459                        |       |

 

None of ourproduct candidates have been approved for commercialization in the U.S. orelsewhere. We, or any of our collaborators, may not be able to conduct clinicaltesting or obtain the necessary approvals from the FDA or other regulatoryauthorities for some products. Failure by us, or our collaborators, to obtainrequired governmental approvals will delay or preclude our collaborators or usfrom marketing therapeutics or diagnostic products developed with us or limitthe commercial use of such products and could have a material adverse effect onour business, financial condition and results of operations.

 

*Diabetesand Obesity*

 

Thecurrent status of the diabetes and obesity program is that it is an ongoingdiscovery and validation program. That is, proprietary and non-proprietarytechnologies are employed to discover novel genes and proteins associated withthe diseases, and small molecules screening is undertaken to identify potentialtherapeutic agents. The Company has discovered and protected, by patentapplication, more than 50 novel targets in these diseases.

 

### **D.            Trend information**

### ** **

The Company is a development stage company and it is difficult topredict with any degree of accuracy the outcome of the Company’s research anddevelopment efforts. The following are developments that the Company considersa possible progression in the near term in its business:

 

•                  Phase 2 clinicaltrials for Quinamed® and Ceflatonin®, Phase 2/3 clinical trials forCeflatonin®  and possible partnering ofthese lead therapeutics with a pharmaceutical or biotechnology partner;

 

•                  Progression oftargets from the diabetes and obesity target discovery program to preclinicaldevelopment; and

 

•                  Partnering ofthe novel satiation target for either therapeutic or over the counterdevelopment and ongoing development of that program.

 

For additional information on the current status of the Company’sproduct development and research programs, see above Item 4B, “Businessoverview - Commercial and Research and Development Collaborations” and Item 5C,“Research and Product Development Programs.” The Company is not aware of anychanges bearing upon its financial condition since the date of the financialstatements included in this Annual Report.

 

41

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### **E**.             Off-balance Sheet Arrangements

### ** **

The Company has no off-balance sheet arrangements that have or arereasonably likely to have current or future effect on the Company’s financialcondition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources that arematerial to investors.

 

### **F.             TabularDisclosure of Contractual Obligations**

### ** **

The table below shows the contractual obligations and commercialcommitments as at June 30, 2007:

 
| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| **In A$’s**                    | ** ** | **Total**                  | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **After 3 years** | ** ** |
| Operating leases                    |       | 29,903                     |       | 29,903 |   | — |   | — |   |
| Research expenditure commitments(a) |       | 6,228,172                  |       | 5,097,818 |   | 1,130,354 |   | — |   |
| Total contractual cash obligations  |       | 6,258,075                  |       | 5,127,721 |   | 1,130,354 |   | — |   |

 

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(a)     Research expenditure commitments include feespayable under the major research and development programs discussed in Item 5C.“Research and Product Development Programs” as well as fees payable toscientific consultants and advisors to the Company.

 

### **G.            AssetsAcquired in a Business Combination to be used in Research & DevelopmentActivities**

### ** **

InJune 2004 ChemGenex Pharmaceuticals Limited (then AGT Biosciences Limited)acquired all of the shares in ChemGenex Therapeutics Inc. for a total purchaseprice, including direct acquisition costs, of approximately A$17.1 million. Thefair value of net tangible assets amounted to approximately A$0.1 million.

 

Theremaining value received from the acquisition relates primarily to the relevantpatents for the anti-cancer compounds Ceflatonin and Quinamed held by ChemGenexTherapeutics Inc. at the time of the acquisition, and the in process researchand development already undertaken on these compounds.

 

Ceflatoninis a small molecule with established clinical activity as a single agent inblood cell cancers. Phase 2 trials of Ceflatonin commenced in patients with CMLin US and European hospitals.

 

Quinamedis a synthetic small molecule with established anti-cancer activity in humans.Quinamed affects the growth of a number of tumor types; however, researchershave also noted some unpredictable side effects. Researchers have been workingon treating patients with a precise and personal dose that maximizes Quinamed’sclinical effect while minimizing its side effects.

 

Thedevelopment history of these compounds prior to the acquisition is as follows-

 

(a)          NCIin the USA began funding early research relating to the two projects in theearly 1980’s.

 

(b)         Inearly 1999 management of ChemGenex Therapeutics Inc. began work on bothresearch and development projects, continuing the drug development phase fromthe initial NCI development work.

 

(c)          From2000 ChemGenex Therapeutics Inc. continued chemical development, and by thebusiness combination date of June 30, 2004 approximately A$3.9 million (or 20%)of the total expected research and development program costs of A$19.7 millionhad been spent on the Ceflatonin project and approximately A$5.3 million (or28%) of the total program costs of A$19.1 million had been spent on theQuinamed project.

 

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TheCompany has developed discounted cash flow models for the compounds based onthe following assumptions-

 

•                  Projected market share for the compoundsbased on the forecast market share for each type of cancer

 

•                  Projected cash flows based on patent expirydates of 2022 for Ceflatonin and 2024 for Quinamed and allowed for eroded cashflows to 2026 for Ceflatonin and 2028 for Quinamed as generic drug providerstake advantage of the patents expiries

 

•                  Research and development expenses projectedover the forecast period by project, including an analysis of expenses incurredto June 2007 and remaining expenses expected until proposed approval dates

 

•                  Projected capital expenditure, depreciation,tax and working capital, and

 

•                  A risk-adjusted discount rate which theCompany believes is toward the middle of the range adopted by “second stage” or“expansion” companies and slightly above the top end of the range of discountrates for Bridge/Initial Public Offering assessments usually undertaken byventure capital investors.

 

Themodel projected that the Ceflatonin compound would commence producing netpositive annual cash flows in 2009 and would continue to generate net positiveannual cash flows for the Company to 2026. The model projected that theQuinamed compound would commence producing net positive annual cash flows in2012 and would continue to generate net positive annual cash flows until 2028.Naturally any delays in taking these compounds to the market would delay theachievement of positive cash flows; however, given the overall uncertaintyinvolved with getting such products to the market, it is impossible toaccurately predict the consequences of any unknown delays.

 

From these models the Company estimated the value of Ceflatonin atA$12.9 million and Quinamed at A$6.8 million. Based on these valuations, theCompany concluded that the entire excess purchase price of A$17.0 million canbe considered as in-process research and development, which is classified asgoodwill under AIFRS.

 

Subsequent to the acquisition, there have been no significantdevelopments related to the current status of the acquired in-process researchand development that would result in material changes to the assumptions.

 

Failure to achieve the expected levels of revenue and net income from aproduct or products based on this acquired research and development willnegatively impact the return on investment expected at the time that thepurchase was completed and may result in impairment charges to the goodwill ofA$17.0 million under AIFRS.

 

## **ITEM6.  DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES**

## ** **

### **A**.            Directors and senior management.

### ** **

Certain information concerning the current directors of the Company isset forth below. Non-executive directors are not full-time employees of theCompany. There exists no arrangement or understanding with major shareholders,customers, suppliers or others pursuant to which any person referred to belowwas selected as a director or member of senior management.

 

No director is related to any other. Biographical information withrespect to the directors in office at June 30, 2007 is as follows:

 

**Mr Brett Heading                BCom LLB(Hons) ASIA**

**(Non-executive Chairman)**

 

Mr Heading is an experienced corporate lawyer, a partner of McCulloughRobertson for over 22 years.  He specialises in capital raisings, mergersand acquisitions and board advice. He has a wide ranging client base includingemerging companies in the biotechnology and agribusiness sectors. Hisgovernment appointments include membership of the Takeovers Panel, and theBoard of Taxation. During the past 3 years Mr Heading served as a director ofthe following ASX listed companies - Australian Cancer Technology Limited (fromNovember 2004 to April 2005), Village Life Limited (from October 2003 to April2005) and Ambri Limited (from 10 November 2006 to present day). Age 51.

 

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** **

**Dr Greg Collier                   BSc(Hons) PhD**

**(Chief Executive Officer and Managing Director)**

 

Dr. Collier is one of Australia’s leading biotechnology executives, andis credited with leading the transformation of the former Australian genomicscompany Autogen into the integrated international biopharmaceutical companyChemGenex Pharmaceuticals. As CEO of the company, Dr. Collier has overseen thepartnering of major research programs, the $14 million acquisition of a privateUS biotechnology company and listing of the company’s securities on the NASDAQexchange. Dr. Collier is recognised internationally as a leader who has guidedhis company along a value-creating path towards marketed products, and is aregular invited speaker at international research and biotechnologyconferences. Age 49.

 

**Mr Elmar Schnee                B ComM Mktg**

**(Non-executive Director)**

 

Mr Schnee held management positions in marketing and sales in theconsumer goods industry before commencing with the pharmaceuticals industry in1988. Following senior appointments with Fisons Pharmaceuticals PLC, Migliara/KaplanAssociates, Sonofi-Synthelabo and UCB Pharma he took a Directorship position atMerck subsidiary Merck Sante S.A.S in May 2003. In addition to his duties atthe French subsidiary, he took on responsibility for the global operations ofthe Ethicals division in January 2004 and was named Head of the Ethicalsdivision in 2005. In November 2005 Mr Schnee was appointed Deputy Member of theExecutive Board and Head of the Pharmaceuticals business sector. In 2006 he wasappointed Regular Member of the Executive Board and General Partner of MerckKGaA. Age 48.

 

**Dr Dennis Brown                BSc M A PhD**

**(Executive Director)**

 

Dr. Brown has over 25 years experience in the biotechnologyand biopharmaceutical industries with specific experience in cancer researchand product development. Dr. Brown received his PhD. degree from New YorkUniversity, and held academic positions at Stanford University and HarvardUniversity Medical School prior to beginning his industry career. Dr. Brown wasa co-founder of Matrix Pharmaceutical Inc. and was the scientific founder ofChemGenex Therapeutics Inc. in 1999, shaping and leading the company’s clinicaland early stage research programs. Age 58.

 

**Mr Patrick Burns               BALLB (Hons)**

**(Non-executive Director)**

 

Mr Burns has extensive experience as an executive and director intechnology and venture capital organisations. He is a director of firmView Inc.(from December 2003), Euclid Systems Corporation (from March 1998) and the ASXlisted Progen Pharmaceuticals Limited (from March 1999). Prior to this Mr Burnshad over 25 years experience as a senior executive in the venture capitalindustry after practising law in New York with Milbank, Tweed, Hadley &McCloy. Mr Burns is Chairman of the Company’s Audit Committee and is also amember of the Remuneration Committee. Age 69.

 

**Dr Geoff Brooke                  MBBSMBA**

**(Non-executive Director, appointed February 8, 2007)**

 

Dr Brooke is Managing Director of GBS Venture Partners andhas 20 years’ venture capital experience. He was formerly President of MedvestInc, a US-based early stage venture capital group he co-founded with Johnson& Johnson. Dr Brooke’s experience includes company formation andacquisitions, as well as public listings on both NASDAQ and ASX. Dr Brooke is adirector of Sunshine Heart Inc and CogState Limited. Dr Brooke is a member ofthe Company’s Audit Committee and Remuneration Committee.  Age 51.

 

**Mr Dan Janney                    BAMBA**

**(Non-executive Director, appointed February 8, 2007)**

 

Mr Janney joined Alta Partners immediately following the firm’sfounding in 1996, and was a co-founder of the Alta BioPharma effort. Mr Janneyfocuses on investments in biopharmaceutical products and therapeutics and hasbeen directly involved in the funding and development of over 25 life sciencescompanies. Prior to joining Alta Partners he was a senior investment banker atMontgomery Securities’ focusing on life sciences companies. Mr Janney was adirector of public companies CoTherix Inc. (April 2001 to January 2007),Dynavax Technologies Corporation 

 

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(December 1996 to December 2006) and Anesiva Inc. (November2000 to December 2005). Mr Janney is Chairman of the Company’s Remunerationcommittee. Age 41

 

**Dr George Morstyn            MBBSBMedSci MAICD PhD FRACP**

**(Non-executive Director, appointed May 31, 2007)**

 

Dr Morstyn has substantial clinical, research and commercialexperience in biotechnology and oncology. He is a former Head of the ClinicalProgram of the Ludwig Institute of Cancer Research and held a number ofpositions including Senior Vice President of Development and Chief MedicalOfficer of Amgen Inc from 1991 to 2002.He was a director of Bionomics until2006. He is currently a director of Proacta Limited, Neuprotect, Cancer TrialsAustralia and the Royal Women’s Hospital, Melbourne. He is chairman of the SABof Symbio (Japan) Dr Morstyn is a member of the company’s Audit Committee. Age56

 

### **B**.            Compensation

### ** **

The aggregate amount of compensation paid to all directors of theCompany as a group by the Company and its subsidiaries for services in allcapacities during fiscal 2007 was A$1,229,911 including A$101,016 of options. Thisamount includes directors’ fees, salaries and bonus payments, but excludesamounts set aside or accrued to provide pension, retirement or similarbenefits. The aggregate amount set aside or accrued to provide pension,retirement or similar benefits for directors of the Company by the Company andits subsidiaries during fiscal 2007 was A$37,737. The Company’s remunerationpolicy for directors and executives is to:

 

•                  have regard tothe directors’ experience and the nature and complexity of their work and dueregard to directors’ remuneration in comparable companies in order to pay acompetitive salary that attracts and retains management of the highest quality;

 

•                  link individualremuneration packages to the Company’s long-term performance through the awardof share options and incentive schemes; and

 

•                  providepost-retirement benefits through the Company’s pension schemes.

 

There are four main elements of the remunerationpackage to executive directors:

 

•                  basic salary;

 

•                  benefits inkind;

 

•                  share optionsand incentives; and

 

•                  pensionarrangements.

 

The remuneration of each of the directors and senior management whoserved during fiscal 2007 is set out below. For details regarding share optionsheld by directors and senior management, see Item 6E. Share Ownership andOptions.

 

Remuneration packages, which consist of base salary, fringe benefits,incentive schemes (including performance-related bonuses), superannuation, andentitlements upon retirement or termination, are reviewed with due regard toperformance and other relevant factors. The following table discloses theremuneration of the directors and senior management of the Company:

 

45

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| ** **                      | ** ** | ** **      | ** ** | ** ** | ** ** | **Post employment** | ** ** | **Equity**  | ** ** | **Other**    | ** ** | ** **    | ** ** |
|---------------------------------|------------|-----------------|------------|------------|------------|---------------------|------------|-------------|------------|--------------|------------|---------------|------------|
| **Name**                        | ** ** | **Salary/fees** | ** ** | **Bonus**  | ** ** | **Superannuation**  | ** ** | **Options** | ** ** | **Benefits** | ** ** | **Total**     | ** ** |
| ** **                      | ** ** | **A$**          | ** ** | **A$**     | ** ** | **A$**              | ** ** | **A$**      | ** ** | **A$**       | ** ** | **A$**        | ** ** |
| **Specified Directors**         | ** ** | ** **      | ** ** | ** ** | ** ** | ** **          | ** ** | ** **  | ** ** | ** **   | ** ** | ** **    | ** ** |
| Brett Heading                   |       | 70,849          |       | —     |       | —              |       | —      |       | —       |       | 70,849        |       |
| Dr. Gregory Collier (a)         |       | 383,764         |       | —     |       | 28,355              |       | 101,016     |       | 20,203       |       | 533,338       |       |
| Kevin Dart                      |       | 30,342          |       | —     |       | 2,731               |       | —      |       | —       |       | 33,073        |       |
| Roger Byrne                     |       | 30,342          |       | —     |       | 2,731               |       | —      |       | —       |       | 33,073        |       |
| Elmar Schnee                    |       | 54.500          |       | —     |       | —              |       | —      |       | —       |       | 54,500        |       |
| Dr. Dennis Brown                |       | 317,864         |       | —     |       | —              |       | —      |       | 39,831       |       | 357,695       |       |
| Patrick Burns                   |       | 54,500          |       | —     |       | —              |       | —      |       | —       |       | 54,500        |       |
| Peter Bradfield                 |       | 30,340          |       | —     |       | 2,731               |       | —      |       | —       |       | 33,071        |       |
| Denis Wade                      |       | 9,040           |       | —     |       | 814                 |       | —      |       | —       |       | 9,854         |       |
| Geoff Brooke                    |       | 22,708          |       | —     |       | —              |       | —      |       | —       |       | 22,708        |       |
| Dan Janney                      |       | 22,708          |       | —     |       | —              |       | —      |       | —       |       | 22,708        |       |
| George Morstyn                  |       | 4,167           |       | —     |       | 375                 |       | —      |       | —       |       | 4,542         |       |
| **Total Remuneration:**         |       |            |       |       |       |                |       |        |       |         |       |          |       |
| **Specified directors**         | ** ** | **1,031,124**   | ** ** | **—** | ** ** | **37,737**          | ** ** | **101,016** | ** ** | **60,034**   | ** ** | **1,229,911** | ** ** |
|                            |       |            |       |       |       |                |       |        |       |         |       |          |       |
| **Specified Executives****(b)** |       |            |       |       |       |                |       |        |       |         |       |          |       |
| Dr. James Campbell              |       | 179,663         |       | —     |       | 16,170              |       | —      |       | —       |       | 195,833       |       |
| Tina Herbert                    |       | 209,790         |       | —     |       | —              |       | —      |       | 16,058       |       | 225,848       |       |
| Shawnya Michaels                |       | 127,146         |       | —     |       | —              |       | —      |       | 27,522       |       | 154,668       |       |
| Eric Merrigan                   |       | 108,750         |       | —     |       | 32,700              |       | —      |       | —       |       | 141,450       |       |
| Eric Humphriss                  |       | 101,399         |       |       |       | —              |       | —      |       | 12,202       |       | 113,601       |       |
| **Total Remuneration:**         | ** ** | ** **      | ** ** | ** ** | ** ** | ** **          | ** ** | ** **  | ** ** | ** **   | ** ** | ** **    | ** ** |
| **Specified executives**        | ** ** | **726,748**     | ** ** | **—** | ** ** | **48,870**          | ** ** | **—**  | ** ** | **55,782**   | ** ** | **831,400**   | ** ** |

 

----

(a) Equity options  included inDr Collier’s 2007 remuneration relates to 1,000,000 options to ordinary sharesissued to Dr. Collier following approval by shareholders at an ExtraordinaryGeneral Meeting on June 21, 2004. These options have an exercise price ofA$0.50 and expire on March 24, 2010. 500,000 of these options vest when theafter the ordinary share price on the ASX reaches $1.00 and trades continuouslyfor 30 days at $1.00 per share or above. The remaining 500,000 options vestwhen the after the ordinary share price on the ASX reaches $1.25 and tradescontinuously for 30 days at $1.25 per share or above.

 

(b) Specified executives are the five highest paid non-consultantexecutives of the Company other than the Board of Directors.

 

### **C.            Boardpractices**

### ** **

All executives hold service contracts with the Company or one of itssubsidiaries. Service contracts for Australian-based executives are for fixedterms, while those of U.S.-based staff are for an indefinite term. All servicecontracts are approved by the Board of Directors. The Company’s purpose inentering into service contracts with executives is to enable the recruitment ofhigh quality executives and to obtain protection from their sudden departure tocompetitor companies. Additionally, service contracts optimize protection forthe Company’s intellectual property rights and other commercially sensitiveinformation.

 

46

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The details of the senior management executives’ contracts aresummarized below:

 
| **Executive**          | ** ** | **Date of Contract**              | ** ** | **Notice period for termination** |
|------------------------|------------|-----------------------------------|------------|-----------------------------------|
| Dr. Gregory R. Collier |       | July 1, 2007 – June 30, 2012 |       | Six months                        |
| Dr. Dennis M. Brown    |       | July 1, 2006 –ongoing        |       | Four months                       |
| Dr. James A. Campbell  |       | September 1, 2006 –ongoing   |       | Three months                      |
| Eric P.  Merrigan      |       | October 1,  2006 –ongoing    |       | Three months                      |
| Shawnya  Michaels      |       | July 1, 2006  –ongoing       |       | One month                         |
| Tina Herbert           |       | July 1, 2006  –ongoing       |       | One month                         |
| Eric  Humphriss        |       | January 8,  2007- January 7, 2007 |       | One month                         |
| Dr. Kenneth  R. Walder |       | December 20,  2002 – ongoing |       | Thirty days                       |
| Dr. John  Blangero     |       | September 4,  2001 – ongoing |       | Thirty days                       |

 

The terms and conditions of the appointment of non-executive directorsare set out in a formal letter of appointment which deals with the followingmatters:  duration of appointment(subject to approval of shareholders), remuneration, expectations concerningpreparation and attendance at Board meetings, conflict resolution and the rightto seek independent legal and professional advice (subject to the priorapproval of the Chairman). The Company is committed to practicing goodcorporate governance of its affairs as part of its management of relationshipswith its shareholders and other stakeholders. The Company seeks to uphold, andto report on compliance with, best practice in corporate governance. During thefiscal year ended June 30, 2006, and at present, the Company paid a premium inrespect of a contract insuring the directors of the Company, the CompanySecretary, and all executive officers of the Company and of any affiliateagainst a liability incurred as such by a director, Secretary or executiveofficer to the extent permitted by the Australian Corporations Act 2001,including

 

(a)           a willful breach ofduty; or

 

(b)           a contravention ofsections 182 or 183 of the Corporations Act 2001,

 

as permitted by section 199B of the Corporations Act 2001.

 

The contract of insurance prohibits disclosure of the nature of theliability and the amount of the premium.

 

**The Board**

 

The Board of the Company is responsible for the Company’s system ofcorporate governance. This includes responsibility for the approval of theannual and half-year financial report, the establishment of the long-term goalsof the Company and strategic plans to achieve those goals, the review andadoption of annual budgets for the financial performance of the Company andmonitoring the results on a quarterly basis, and ensuring that the Company hasimplemented adequate systems of internal controls together with appropriatemonitoring of compliance activities. The Board currently comprises fivedirectors: a Chairman with non-executive responsibilities, an executivedirector, and three non-executive directors. The role of non-executivedirectors is to ensure that independent judgment is brought to Boarddeliberations and decisions. The non-executive directors possess a wide rangeof skills and experience, relevant to the development of the Company, whichcomplement those of the Chairman. It is the Company’s policy that the Boardshould comprise a majority of non-executive directors.

 

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The number of meetings ofdirectors (including meetings of committees of directors) held during the yearand the number of meetings attended by each director was as follows:

 
| ** **                       | ** ** | **Directors’ Meetings** | ** ** | **Audit Committee   Meetings** | ** ** | **Remuneration Committee  Meetings** | ** ** |
|----------------------------------|------------|------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
| **Number of meetings held:**     | ** ** | **13**                       | ** ** | **6**                          | ** ** | **7**                                | ** ** |
| **Number of meetings attended:** | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** **                           | ** ** |
| Brett  Heading                   |       | 13                           |       | —                         |       | —                               |       |
| Dr. Gregory  Collier             |       | 12                           |       | —                         |       | —                               |       |
| Kevin Dart*                      |       | 7                            |       | —                         |       | 3                                    |       |
| Roger Byrne                      |       | 8                            |       | 1                              |       | —                               |       |
| Elmar Schnee                     |       | 4                            |       | —                         |       | —                               |       |
| Dr. Dennis  Brown                |       | 10                           |       | —                         |       | —                               |       |
| Patrick  Burns                   |       | 11                           |       | 6                              |       | 7                                    |       |
| Peter  Bradfield                 |       | 7                            |       | 3                              |       | 7                                    |       |
| Denis Wade                       |       | 2                            |       | 1                              |       | —                               |       |
| Geoff Brooke                     |       | 4                            |       | —                         |       | —                               |       |
| Dan Janney                       |       | 4                            |       | —                         |       | —                               |       |
| George  Morstyn                  |       | 1                            |       | 1                              |       | —                               |       |
| Stephen  Cole*                   |       | 1                            |       | —                         |       | 4                                    |       |

 

During the year ended June 30, 2007 1 Circular Resolutions of Directorswas also passed, pursuant to S248A of the Corporations Act 2001

 

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* Mr. S.A. Cole was Alternate Director for Mr. K.J. Dart andparticipated in the 1 Director’s Meeting and 4 Remuneration Committee Meetingswhich Mr. Dart was unable to attend.

 

The Board of Directors of the Company is responsible for the corporategovernance of the Company. The Board guides and monitors the business andaffairs of the Company on behalf of the shareholders by whom they are electedand to whom they are accountable. In 2004 the Australian Stock ExchangeCorporate Governance Council’s (the Council’s) “Principles of Good CorporateGovernance and Best Practice Recommendations” (the Recommendations) wereintroduced. ChemGenex Pharmaceuticals Limited’s Corporate Governance Statementis now structured with reference to the Council’s principles andrecommendations, which are as follows:

 
| Principle 1.  | Lay solid foundations for management and  oversight |
|---------------|-----------------------------------------------------|
|          |                                                |
| Principle 2.  | Structure the board to add value                    |
|          |                                                |
| Principle 3.  | Promote ethical and responsible decision  making    |
|          |                                                |
| Principle 4.  | Safeguard integrity in financial reporting          |
|          |                                                |
| Principle 5.  | Make timely and balanced disclosure                 |
|          |                                                |
| Principle 6.  | Respect the rights of shareholders                  |
|          |                                                |
| Principle 7.  | Recognize and manage risk                           |
|          |                                                |
| Principle 8.  | Encourage enhanced performance                      |
|          |                                                |
| Principle 9.  | Remunerate fairly and responsibly                   |
|          |                                                |
| Principle 10. | Recognize the legitimate interests of  stakeholders |

 

The Company’s corporate governance practices were in place throughoutthe year ended June 30, 2005 and were fully compliant with the Council’s bestpractice recommendations. For further information on corporate governancepolicies adopted by ChemGenex Pharmaceuticals Limited, refer to the Company’swebsite: www.chemgenex.com.

 

48

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**Board committees**

 

In accordance with best practice, the Company has established an AuditCommittee with written terms of reference that deal with its authorities andduties. The terms of reference of the Audit Committee have been reviewed duringthe year and updated to ensure compliance with current best practice.

 

**Audit committee**

 

The Board has established an audit committee, which operates under acharter approved by the Board. It is the Board’s responsibility to ensure thatan effective internal control framework exists within the entity. This includesinternal controls to deal with both the effectiveness and efficiency ofsignificant business processes, the safeguarding of assets, the maintenance ofproper accounting records, and the reliability of financial information as wellas non-financial considerations such as the benchmarking of operational keyperformance indicators. The Board has delegated the responsibility for theestablishment and maintenance of a framework of internal control and ethical standardsfor the management of the Company to the audit committee.

 

The committee also provides the Board with additional assuranceregarding the reliability of financial information for inclusion in thefinancial reports. All members of the audit committee are non-executivedirectors.

 

The members of the audit committee during the year ended June 30, 2007were: Patrick O Burns (Chairman), Roger V. Byrne, Peter J. Bradfield, DenisWade and George Morstyn .

 

*Qualifications of audit committee members*

 

Patrick O. Burns has over 40 years experience as a corporate lawyer,senior executive and director of public and private companies.

 

Roger V. Byrne has over 15 years experience as a corporate lawyer whoretired as a partner from Clayton Utz in 2002. Mr. Byrne engaged in mergers andacquisitions, public capital raisings, private equity raisings and corporatestructuring.

 

Peter J. Bradfield has over 30 years experience as a senior executiveand director of public and private companies.

 

Denis Wade has over 30 years experience as a senior executive anddirector of public and private companies.

 

George Morstyn has over 15 years experience as a senior executive anddirector of public and private companies.

 

The Audit Committee held six meetings during fiscal year 2007.

 

**Remuneration committee**

 

The Board has established a Remuneration Committee to review allcompensation arrangements for the directors, the chief executive officer andthe executive team, under the direction of the Board, and to makerecommendation to the Board on these matters.

 

Members of the remuneration committee during the year ended June 30,2007 were: Peter J. Bradfield, Kevin .J. Dart, Patrick .O. Burns, Geoff Brookeand Dan Janney.

 

*Qualifications of remuneration committee members*

 

Peter J. Bradfield has over 30 years experience as a senior executiveand director of public and private companies.

 

Kevin J. Dart has over 25 years experience as a senior executive anddirector of public and private companies.

 

Patrick O. Burns has over 40 years experience as a corporate lawyer,senior executive and director of public and private companies.

 

Geoff E. D. Brooke has over 20 years experience as a senior executiveand director of public and private companies.

 

Daniel S. Janney has over 15 years experience as a senior executive anddirector of public and private companies.

 

The Remuneration Committee held seven meetings during fiscal year 2007.

 

It is the Company’s objective to provide maximum stakeholder benefitfrom the retention of a high quality board and executive team by remuneratingdirectors and key executives fairly and appropriately with reference torelevant employment market conditions. To assist in achieving this objective,the Board links the nature and amount of

 

49

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executive directors’ and officers’ emoluments to the Company’sfinancial and operational performance. The expected outcomes of theremuneration structure are:

 

•                  retention andmotivation of key executives;

 

•                  attraction ofquality management to the company; and

 

•                  performanceincentives that allow executives to share the rewards of the success of theCompany.

 

The Board assesses the appropriateness of the nature and amount ofemoluments of such officers on a periodic basis by reference to relevantemployment market conditions with the overall objective of ensuring maximumstakeholder benefit from the retention of a high quality board and executiveteam. Such officers are given the opportunity to receive their base emolumentin a variety of forms including cash and fringe benefits such as motor vehiclesand expense payment plans. It is intended that the manner of payment chosenwill be optimal for the recipient without creating undue cost for the Company.Further details on the remuneration of directors and executives are alsoprovided in Note 20 to the Company’s audited consolidated financial statementsincluded elsewhere in this Annual Report.

 

All senior executives have the opportunity to qualify for participationin the Senior Executive Share Option Plan which currently provides incentiveswhere specified criteria are met including criteria relating to profitability,cash flow, share price growth and environmental performance. Details regardingthe issue of share options under this plan are provided in Note 15 to theCompany’s audited consolidated financial statements included elsewhere in thisAnnual Report.

 

In relation to the payment of bonuses, options and other incentivepayments, discretion is exercised by the Board, having regard to the overallperformance of the Company and the performance of the individual during theperiod. There is no scheme to provide retirement benefits, other than statutorysuperannuation, to non-executive directors.

 

**Scientific Advisory Board**

 

The Company’s Scientific Advisory Board identifies new researchopportunities and monitors existing programs. Its members are as follows:

 

Professor Paul Zimmet, AO, MD, FRACP, FACE, is the Chairman of theCompany’s Scientific Advisory Board. Professor Zimmet is a leading scientist inthe fields of diabetes and obesity. He is Professor/Director of theInternational Diabetes Institute, Professor of Diabetes at the MonashUniversity, Honorary Professor at Deakin University and Professor in theGraduate School of Public Health at the University of Pittsburgh in the U.S. Heis actively involved with the World Health Organization’s diabetes and obesitystudy groups and is a member of the Australian Federal Government NationalAdvisory Group on Diabetes and the Victorian Government Advisory Committee forDiabetes. In 2004, Professor Zimmet was awarded the Hellmut Mehnert Award atthe 40th annual meeting of the European Association for the Study of Diabetes.

 

Dr. John Blangero, PhD, is a scientist at the Department of Genetics atthe Southwest Foundation for Biochemical Research in San Antonio, U.S. He isthe first researcher from the Southwest Foundation to be selected for a “Methodto Extend Research in Time” (MERIT) award from the U.S. National Institutes ofHealth. He is a leading international statistical geneticist. Dr. Blangero isalso on the management team of the Company where he serves as the ChiefScientific Director of Human Genomics. He was responsible for developing newstatistical software to increase greatly the amount of data that could behandled in genetic studies of families. Dr. Blangero leads a number ofgovernment-funded research projects in the U.S. related to the genetics ofcommon complex diseases.

 

Professor Ian Gust, AO, MD, FRCPA, FRACP, FTS, was the foundingDirector of the MacFarlane Burnet Centre for Medical Research and subsequentlywas Research and Development Director for CSL Limited (“CSL”). During theensuing decade, he was responsible for managing a research and developmentbudget of more than A$20 million per annum. Recently retired from CSL,Professor Gust serves as a scientific adviser to Bill and Melinda GatesChildren’s Vaccine Program, the International AIDS Vaccine Initiative and theWorld Health Organization. He is a non-executive director of Promics Pty Ltd,Biota Holdings Limited and Biota, Inc..

 

Professor David James B.Sc (Hons) PhD is the Director of the Diabetesand Obesity Research Program, Garvan Institute of Medical Research in Sydney.Professor James was the discoverer of the GLUT4 glucose transporter moleculeand is recognized as an international leader in the field of diabetes molecularcell biology. Professor James has a distinguished academic research career, wasthe recipient of a Wellcome Trust Senior Research Fellowship, and was therecipient in 1999 of the Glaxo Wellcome Australia Medal.

 

50

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Professor Hagop Kantarjian MD is Professor of Medicine and Chairman ofthe Department of Leukemia at M.D. Anderson Cancer Center in Houston, Texas.Professor Kantarjian specializes in leukemia and holds an interest in creatingnew treatment approaches for these diseases. Professor Kantarjian has authoredand contributed to over 560 medical publications, articles and abstracts and,for his accomplishments, has received awards, including a Leukemia Society ofAmerica Scholarship from 1989-1994 and a Leukemia Society of America SpecialFellow Scholarship from 1982-1983.

 

Dr. John Hughes B.Sc (Hons) PhD FIPAA is a leading Australianbiotechnology patent attorney and a partner with Davies Collison Cave with morethan 13 years experience in patent law. Dr. Hughes is involved in the draftingand prosecution of patent applications directed to all facets of biotechnology,including inventions relating to molecular biotechnology, pharmacology,transgenic plants and animals as well as general chemistry and microbiology.Dr. Hughes has a substantial U.S. practice at the drafting and prosecutionlevels of patent filing. Dr. Hughes has post-doctoral experience at YaleUniversity and Genentech, Inc., mainly in microbial genetics and molecularbiology and trained as a patent attorney in New York before returning toAustralia.

 

***Compliance with NASDAQ Rules***

*** ***

NASDAQ listing rules requirethat the Company disclose the home country practices that it follows in lieu ofcompliance with NASDAQ corporate governance rules. The following describes thehome country practices and the related NASDAQ rule:

 

Majority of Independent Directors:  The Company follows home country practicerather than NASDAQ’s requirement in Marketplace Rule 4350(c)(1) that themajority of the Board of each issuer be comprised of independent directors asdefined in Marketplace Rule 4200. The Company’s Board of Directors is notcomprised of a majority of independent directors, a practice which is notprohibited by the laws of Australia. The ASX does not have a requirement thateach issuer’s Board be comprised of a majority of independent directors. Furthermore,no law, rule or regulation of the Australian Securities and InvestmentsCommission (“ASIC”), the public authority which exercises securities lawjurisdiction over the Company, has such a requirement nor does the CorporationsAct (the “Act”), which is the applicable corporate law legislation.

 

Compensation of Officers:  The Company follows home country practicerather than NASDAQ’s requirement in Marketplace Rule 4350(c)(3) that chiefexecutive compensation be determined or recommended to the Board by themajority of independent directors of a compensation committee of independentdirectors. Similarly, compensation of other officers is not determined orrecommended to the Board by a majority of the independent directors or acompensation committee comprised solely of independent directors. These decisionsare made by the Company’s Board as a whole, and it is not comprised of amajority of independent directors; the Company has no remuneration committee. TheASX does not have a requirement that each listed issuer have a remunerationcommittee or otherwise follow the procedures embodied in NASDAQ’s MarketplaceRule. Furthermore, no law, rule or regulation of the ASIC has such arequirement nor does the applicable corporate law legislation. Such homecountry practices are not prohibited by the laws of Australia.

 

Nomination: The Company follows home country practice rather than NASDAQ’srequirement in Marketplace Rule 4350(c)(4) that director nominees be selectedor recommended by a majority of the independent directors or by a nominationscommittee comprised of independent directors. These decisions are made by theCompany’s Board as a whole, and it is not comprised of a majority ofindependent directors; the Company has no nominations committee. The ASX doesnot have a requirement that each listed issuer have a nominations committee orotherwise follow the procedures embodied in NASDAQ’s Marketplace Rule. Furthermore,no law, rule or regulation of the ASIC has such a requirement nor does theapplicable corporate law legislation. Accordingly, selections orrecommendations of director nominees by a board of directors that is notcomprised of a majority of directors that are not independent is not prohibitedby the laws of Australia.

 

Quorum:  TheCompany follows home country practice rather than NASDAQ’s requirement inMarketplace Rule 4350(f) that each issuer provide for a quorum of at least331/3 percent of the outstanding shares of the issuer’s common stock (votingstock). Pursuant to its Constitution the Company is currently required to havea quorum for a general meeting of two persons holding ordinary shares. Thepractice followed by the Company is not prohibited by Australian law.

 

Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and ExchangeCommission issued new rules that, among other things, require NASDAQ to imposeindependence requirements on each member of the audit committee of a

 

51

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listed company and the NASDAQ also reformulated its corporategovernance requirements. The recently-adopted SEC and NASDAQ rules apply to theCompany as of July 31, 2005. The Company has taken the appropriate steps withrespect to its corporate governance system, including the addition ofindependent directors to its audit committee, to assure timely compliance withthe SEC rules and the amended corporate governance standards of NASDAQ

 

### **D.**                                    Employees

### ** **

As at June 30, 2007, the Company employed eight individuals on afull-time basis.

 

The Company employs a number of contract employees in research anddevelopment. During the last fiscal year, the average number of contractemployees was 50.

 

The following table summarizes the number of full-time employeesemployed by the Company, including executive directors, as at the year end ofthe last three fiscal years:

 
| ** ** | ** ** | **June 30,** | ** ** | ** ** | ** ** |
|------------|------------|-------------------|------------|------------|------------|
| **2007**   | ** ** | ** **        | **2006**   | ** ** | **2005**   | ** ** |
| ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| 8          |       |              | 7          |       | 8          |   |
|            |            |                   |            |            |            |  |  |

 

### **E.**                                      Share ownership andoptions

### ** **

The relevant interest of each director in the sharecapital of the Company as notified by the directors to the ASX in accordancewith S205G(1) of the Corporations Act 2001 at September 30, 2007 is as follows:

 
| ** **           | ** ** | **Ordinary shares** | ** ** | **% of shares  issued** | ** ** | **Options over  ordinary shares** | ** ** | **% of options  issued** | ** ** |
|----------------------|------------|--------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|------------------------------------|------------|
| Brett  Heading       |       | 110,000                  |       | 0.05                              |       | 3,333                                       |       | 0.01                               |       |
| Dr. Gregory  Collier |       | —                   |       | —                            |       | 3,400,000                                   |       | 8.52                               |       |
| Elmar Schnee  *      |       | 18,833,750               |       | 10.08                             |       | 4,439,308                                   |       | 11.12                              |       |
| Dr. Dennis  Brown    |       | 13,876,552               |       | 7.43                              |       | —                                      |       | —                             |       |
| Patrick  Burns       |       | —                   |       | —                            |       | —                                      |       | —                             |       |
| Dr.Geoff  Brooke *   |       | 16,629,765               |       | 8.90                              |       | 2,736,065                                   |       | 6.86                               |       |
| Dan Janney *         |       | 37,009,671               |       | 19.82                             |       | 6,088,053                                   |       | 15.25                              |       |
| Dr. George  Morstyn  |       | —                   |       | —                            |       | —                                      |       | —                             |       |

 

----

*Includes shares and options held by entities in which Messrs Schneeand Janney, and Dr. Brooke hold directorships.

 

Employee share option plan

 

An employeeshare option plan (ESOP) has been established where the Company may, at thediscretion of the Board, grant options over the ordinary shares of the Companyto directors, executives, advisors and support staff of the Company. Theseoptions, issued for nil consideration, are granted in accordance withperformance guidelines established by the directors of the Company. The optionscannot be transferred and will not be quoted on the ASX. There are currentlyone director, three employees and 22 scientific advisors and support staff whohold options issued under the ESOP.

 

52

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Information with respect to the number of options granted under theESOP is as follows:

 
| ** **                     | ** ** | **Year to June 30, 2007** | ** ** | **Year to June 30, 2006**                  | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                     | ** ** | **Number of options**               | ** ** | **Weighted average  exercise price (A$ )** | ** ** | **Number of options** | ** ** | **Weighted average  exercise price (A$ )** | ** ** |
| Balance at beginning of period |       | 1,979,500                                     |       | 0.67                                                           |       | 1,475,000 |   | 0.75 |   |
| -   granted     |       | 1,000,000                                     |       | 0.64                                                           |       | 544,500 |   | 0.54 |   |
| -   forfeited   |       | —                                        |       | —                                                         |       | (40,000 | ) | 0.52 |   |
| -   exercised   |       | (120,000                                      | )          | 0.50                                                           |       | — |   | — |   |
| Balance at end of period       |       | 2,859,500                                     |       | 0.68                                                           |       | 1,979,500 |   | 0.70 |   |
| Exercisable at end of period   |       | 2,244,500                                     |       | 0.58                                                           |       | 1,364,500 |   | 0.53 |   |

 

In addition to options granted under the ESOP, 3,600,000 options havebeen granted to Dr. Gregory Collier after approval by shareholders at GeneralMeetings. Details of theses options and ESOP options granted to Dr. GregoryCollier are included in Note 14 to the Company’s audited consolidated financialstatements. 400,000 of these options previously granted to Dr. Collier wereexercised during the year ended June 30, 2007.

 

The Company uses the fair valuemeasurement provisions of AASB 2 *‘Share-Based Payments’*for all options granted to directors and relevant executives after November 7,2002. The straight-line amortization of the fair value of such grants over thevesting period is disclosed as part of director and executive emoluments. Optionsgranted as part of director and executive emoluments have been valued using theBlack-Scholes option pricing model, which takes account of factors includingthe option exercise price, the current level and volatility of the underlyingshare price, the risk-free interest rate, expected dividends on the underlyingshare, current market price of the underlying share and the expected life ofthe option. See below for further details.

 

Fair values of options: The fair value of each option is estimated onthe date of grant using Black-Scholes option pricing model with the followingassumptions used for grants made during the 2007 financial year:

 
| Option exercise price                  |   | $0.85 and $0.50 |
|----------------------------------------|--------|-----------------|
|                                   |   |            |
| Share price at date of issue           |   | $0.85 and $0.78 |
|                                   |   |            |
| Dividend yield                         |   | 0%              |
|                                   |   |            |
| Expected volatility                    |   | 70%             |
|                                   |   |            |
| Risk-free interest rate at  issue date |   | 5.25%           |
|                                   |   |            |
| Life of option                         |   | 3 and 5 years   |

 

The dividendyield reflects the assumption that the current dividend payout will continuewith no anticipated increases. The expected life of the options is based onhistorical data and is not necessarily indicative of exercise patterns that mayoccur. The expected volatility reflects the assumption that the historicalvolatility is indicative of future trends, which may also not necessarily bethe actual outcome.

 

53

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The resultingweighted average fair values per option for those options vesting after July 1,2003 are:

 
| **Number  of options** | ** ** | **Grant  date**    | ** ** | **Vesting  date**  | ** ** | **Weighted  average fair  value (A$)** |
|------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------------|
| 300,000                |       | November 21, 2003  |       | November 21, 2003  |       | 0.34                                   |
|                   |       |               |       |               |       |                                   |
| 325,000                |       | November  21, 2003 |       | November  21, 2003 |       | 0.36                                   |
|                   |       |               |       |               |       |                                   |
| 1,000,000              |       | June 21, 2004      |       | June 21, 2004      |       | 0.35                                   |
|                   |       |               |       |               |       |                                   |
| 1,000,000              |       | June 21, 2004      |       | June 21, 2006      |       | 0.35                                   |
|                   |       |               |       |               |       |                                   |
| 500,000                |       | June 21, 2004      |       | June 21, 2007      |       | 0.35                                   |
|                   |       |               |       |               |       |                                   |
| 500,000                |       | June 21, 2004      |       | June 21, 2008      |       | 0.35                                   |
|                   |       |               |       |               |       |                                   |
| 360,000                |       | December 21, 2004  |       | December 21, 2004  |       | 0.40                                   |
|                   |       |               |       |               |       |                                   |
| 275,000                |       | September 23, 2005 |       | September 23, 2005 |       | 0.35                                   |
|                   |       |               |       |               |       |                                   |
| 269,500                |       | February 22, 2006  |       | February 22, 2006  |       | 0.36                                   |
|                   |       |               |       |               |       |                                   |
| 400,000                |       | May 7, 2007        |       | May 7, 2007        |       | 0.42                                   |
|                   |       |               |       |               |       |                                   |
| 600,000                |       | June 6, 2007       |       | June 6, 2007       |       | 0.55                                   |

 

Under AIFRS these fair values are recognizedas expenses in the financial statements when the options were granted after 7November 2002 and vested after 1 July 2005.

 

**ITEM 7.****                        MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

## ** **

### **A**.                                    Major shareholders

### ** **

As at October 30, 2007 the Company had knowledge of the followingownership interest (direct and beneficial) of 5% or greater in its ordinaryshares:

 
| **Shareholder**                     | ** ** | **Number of shares held** | ** ** | **% of issued shares** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|
| Berne No 132 Nominees Pty Ltd       |       | 37,009,671                               |       | 19.8                                  | %          |
| Merck Santé                    |       | 18,793,750                               |       | 10.1                                  | %          |
| GBS Venture Partners Ltd            |       | 16.629,765                               |       | 8.9                                   | %          |
| Queensland Investment Corporation   |       | 15,158,424                               |       | 8.1                                   | %          |
| Dr. Dennis M. Brown                 |       | 13,876,552                               |       | 7.4                                   | %          |
| Kinetic Investment Partners Limited |       | 9,459,209                                |       | 5.1                                   | %          |

 

Berne No 132Nominees Pty Ltd, which became a shareholder during fiscal 2007, hold shares onbehalf of Alta Partners, a US based biotech investment manager.

 

MerckSanté held 18,793,750 shares (12.4%) at August 31, 2006 and 9,793,750shares (8.5%) at September 23, 2005.

 

GBS VenturePartners Ltd is an Australian based biotech venture capital company whichbecame a shareholder during fiscal 2007.

 

QueenslandInvestment Corporation is wholly owned by the Government of the State ofQueensland in the Commonwealth of Australia. Queensland Investment Corporationheld 15,158,424 shares (10.0%) at August 31, 2006 and 10,574,416 shares (9.2%)in September 23, 2005.

 

54

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Following themerger with Chemgenex Therapeutics Inc. in 2004 Dennis Brown held 14,398,297shares (9.5%) at August 31, 2006 and (12.5%) at September 23, 2005.

 

KineticInvestment Partners Limited is an Australian based biotech investment managerwhich became a shareholder in fiscal 2007.

 

CharterPacific Corporation Limited, which held 28,100,087 shares (18.6%) at August 31,2006 and 23,510,087 shares (20.5%) at September 23, 2005, ceased to be ashareholder during fiscal 2007.

 

At October 31,2007 calculation of major shareholders, the issued share capital of the Companywas 186,754,906 ordinary shares. The major shareholders do not have differentvoting rights.

 

At October 31,2007, the directors of the Company controlled ordinary shares representingapproximately 46.3% of the Company’s outstanding share capital, as follows:

 
| **Directors**    | ** ** | **Number of shares held** | ** ** |
|------------------|------------|------------------------------------------|------------|
|             |       |                                     |       |
| Brett Heading    |       | 110,000                                  |       |
| Dan Janney       |       | 37,009,671                               |       |
| Elmar Schnee     |       | 18,833,750                               |       |
| Dr. Geoff Brooke |       | 16,629,765                               |       |
| Dr. Dennis Brown |       | 13,876,552                               |       |
| **Total**        |       | 86,459,738                               |       |

 
| **Specified Executives** | ** ** | **Number of shares held** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | ** **                               | ** ** |
| Dr. James Campbell            |       | 5,500                                    |       |
| Tina Herbert                  |       | 760,027                                  |       |
| Shawnya Michaels              |       | 658,027                                  |       |
| Eric Merrigan                 |       | 55,000                                   |       |
| **Total**                     |       | 1,478,554                                |       |

 

As far as is known to the Company and subject to the disclosureprovided under Item 8B. “Financial information — Significant Changes” theCompany is not directly or indirectly owned or controlled by anothercorporation or by any government, and there are no arrangements the operationof which may result in a change of its control.

 

### **B.**                                    Related party transactions

### ** **

Legal serviceswere provided by McCullough Robertson lawyers, a legal firm of which Mr. BrettHeading is a partner. The value of legal services provided by McCulloughRobertson lawyers was A$93,282 during the year ended June 30, 2007. During the threemonths from July to September 2007, the value of legal services provided byMcCullough Robertson was $31,993.

 

Mr. BrettHeading is a director of two companies that are the joint holders of 5% of theshares of Global Markets Capital Group LLC (“GMCG”) which has provided advisoryand consulting services to the Company. The value of advisory and consultingservices provided by GMCG was A$200,483 (including share-based compensation of$165,924) during the year ended June 30, 2007. During the three months fromJuly to September 2007 no services were provided by GMCG. Mr. Brett Heading hasno beneficial interest in the two companies that are 5% shareholders in GMCG.

 

As anindividual investor, Mr. Brett Heading holds 110,000 shares in the Company.

 

Mr. ElmarSchnee is a director of Merck Santé which holds 18,793,750 shares and 4,439,308options exercisable at A$1.25 expiring March 12, 2010 in the Company. As anindividual investor Mr. Schnee holds 40,000 shares in the 

 

55

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Company. MerckSanté is party to research and development and commercialization agreementswith the Company’s 100% owned subsidiary Autogen Research Pty Ltd. Under theseongoing agreements Merck Santé provided research and development payments toAutogen Research Pty Ltd totaling A$331,377 for the year ended June 30, 2007. Underexisting agreements Merck Santé was not due to provide, and has not providedresearch and development funding between July and September 2007.

 

Dr. Dennis M. Brown is an executive director of the Company. As anindividual investor Dr. Dennis M. Brown holds 13,876,552 shares.

 

### **C**.                                    Interests of experts and counsel

### ** **

Not applicable.

 

**ITEM 8.****                        FINANCIALINFORMATION**

## ** **

### **A**.                                    Consolidated statements and otherfinancial information

### ** **

Reference is made to page F-1. Financial Statements for a list of allfinancial statements, including the notes thereto, and exhibits.

 

*Dividends*

 

The Company does not currently pay dividends. The payment of futuredividends will be dependent upon future earnings, the financial condition ofthe Company and other factors. In addition, the Company expects to retain asubstantial portion of future earnings, if only to finance the growth anddevelopment of the business. Accordingly, the Company does not expect to paydividends in the near future.

 

*Legal matters*

 

The Company is not engaged in any legal orarbitration proceedings.

 

### **B**.                                    Significant changes

### ** **

On October 26, 2007ChemGenex Pharmaceuticals Limited announced astrategic restructuring based upon the spinoff of its metabolic diseases assetsby early December, pending shareholder approval.

 

ChemGenex’s metabolic diseases assets currently reside within thecompany’s wholly-owned subsidiary Autogen Research, which is to be renamedVerva Pharmaceuticals. Pending shareholder approval at the Annual GeneralMeeting, scheduled to take place in Melbourne on November 28, VervaPharmaceuticals will be demerged from ChemGenex. Verva Pharmaceuticals thenintends to merge with Adipogen Pharmaceuticals, pursuant to a mergerimplementation agreement signed on October 29, 2007. Upon shareholder approval,ChemGenex shareholders will receive one share in Verva Pharmaceuticals forevery five ChemGenex Pharmaceuticals shares held at the record date. Inaccordance with ASX listing rules and the option agreements, existing ChemGenexoption holders will not be allocated shares in Verva Pharmaceuticals unlessoptions are exercised prior to the record date. The Verva Pharmaceuticalsshares will not be registered under the U.S. Securities Act for distribution toholders of the Company’s ADRs. After the record date the exercise price foreach remaining ChemGenex option will be reduced by approximately 7 cents.

 

56

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## **ITEM9.**                        THE OFFER AND LISTING

## ** **

### **A**.                                    Offer and listing details

### ** **

**Trading market for ordinary shares and ADRs**

 

The Company’s ordinary shares were listed on the ASX on July 10, 1986.The ASX is the principal trading market for the ordinary shares. The followingtable sets forth, for the periods indicated, the highest and lowest marketquotations for the ordinary shares reported on the Daily Official List of theASX. 

 

**Annual high and low market price of ordinary shares and average dailytrading volume on ASX for last five full fiscal years**

 
| ** ** | ** ** | ** **                     | ** ** | **High (A$ )** | ** ** | **Low (A$ )** | ** ** | **Ave. daily trading volume** | ** ** |
|------------|------------|--------------------------------|------------|--------------------------|------------|-------------------------|------------|----------------------------------------------|------------|
| ** ** | ** ** | ** **                     | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                                   | ** ** |
| 2007       |       | July 1, 2006  to June 30,2007  |       | 1.15                     |       | 0.36                    |       | 308,041                                      |       |
| 2006       |       | July 1, 2005  to June 30, 2006 |       | 0.72                     |       | 0.37                    |       | 71,880                                       |       |
| 2005       |       | July 1, 2004  to June 30, 2005 |       | 0.80                     |       | 0.43                    |       | 95,048                                       |       |
| 2004       |       | July 1, 2003  to June 30, 2004 |       | 0.84                     |       | 0.25                    |       | 247,578                                      |       |
| 2003       |       | July 1, 2002  to June 30, 2003 |       | 0.65                     |       | 0.17                    |       | 84,713                                       |       |

** **

**Quarterly high and low market price of ordinary shares and averagedaily trading volume for last two full fiscal years and beyond**

 
| ** **  | ** ** | ** **        | ** ** | **High** | ** ** | **Low**  | ** ** | **Ave. daily trading volume** | ** ** |
|-------------|------------|-------------------|------------|----------|------------|----------|------------|----------------------------------------------|------------|
| ** **  | ** ** | ** **        | ** ** | **(A$)** | ** ** | **(A$)** | ** ** | ** **                                   | ** ** |
| Fiscal 2008 | ** ** | September quarter | ** ** | 1.13     | ** ** | 0.72     | ** ** | 109,260                                      | ** ** |
| Fiscal 2007 | ** ** | June quarter      | ** ** | 1.15     | ** ** | 0.78     | ** ** | 171,743                                      | ** ** |
|        | ** ** | March quarter     | ** ** | 0.85     | ** ** | 0.57     | ** ** | 765,478                                      | ** ** |
|        | ** ** | December quarter  | ** ** | 0.66     | ** ** | 0.45     | ** ** | 183,772                                      | ** ** |
|        | ** ** | September quarter | ** ** | 0.55     | ** ** | 0.36     | ** ** | 121,669                                      | ** ** |
| Fiscal 2006 | ** ** | June quarter      | ** ** | 0.62     | ** ** | 0.37     | ** ** | 133,959                                      | ** ** |
|        | ** ** | March quarter     | ** ** | 0.66     | ** ** | 0.58     | ** ** | 50,995                                       | ** ** |
|        | ** ** | December quarter  | ** ** | 0.68     | ** ** | 0.47     | ** ** | 54,481                                       | ** ** |
|        | ** ** | September quarter | ** ** | 0.72     | ** ** | 0.50     | ** ** | 48,083                                       | ** ** |

 

**Monthly high and low market price of ordinary shares and average dailytrading volume for last six months**

 
| ** **      | ** ** | ** ** | ** ** | **High** | ** ** | **Low**  | ** ** | **Ave. daily trading volume** | ** ** |
|-----------------|------------|------------|------------|----------|------------|----------|------------|----------------------------------------------|------------|
| ** **      | ** ** | ** ** | ** ** | **(A$)** | ** ** | **(A$)** | ** ** | ** **                                   | ** ** |
| October 2007    | ** ** | ** ** | ** ** | 1.18     | ** ** | 1.01     | ** ** | 155,291                                      | ** ** |
| September  2007 | ** ** | ** ** | ** ** | 1.06     | ** ** | 0.89     | ** ** | 134,636                                      | ** ** |
| August 2007     | ** ** | ** ** | ** ** | 0.90     | ** ** | 0.72     | ** ** | 70,699                                       | ** ** |
| July 2007       | ** ** | ** ** | ** ** | 1.13     | ** ** | 0.91     | ** ** | 126,504                                      | ** ** |
| June 2007       | ** ** | ** ** | ** ** | 1.12     | ** ** | 0.93     | ** ** | 190,614                                      | ** ** |
| May 2007        | ** ** | ** ** | ** ** | 0.90     | ** ** | 0.78     | ** ** | 167,309                                      | ** ** |

 

As at November 2, 2007 the ordinary shares closed at AUD1.15.

 

At November 2, 2007 the Company had 186,754,906 ordinary shares issuedand outstanding. This includes the issue of 907,507 ordinary shares followingthe exercise of 900,000 unlisted options previously granted to Global MarketsCapital Corporation and 7,575 listed CXSOA options, since June 30, 2007.Theshares are without par value. See Item 10B Memorandumand articles of incorporation for a detailed description of the rightsattaching to the shares. Also see Item 12A. “American Depositary Shares” for adescription of the rights attaching to the ADR.

 

57

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As of October 31, 2007 approximately 12.7 million of the Company’sordinary shares (CXS), 6.8% of the total ordinary shares issued andoutstanding, were held by 83 U.S. residents (based solely on their addresses).

 

As of October 31, 2007 approximately 960,000 of the Company’s listedAUD1.25 options (CXSO), 4.3% of the total listed AUD1.25 options issued andoutstanding, were held by 17 U.S. residents (based solely on their addresses).

 

As of October 31, 2007 none of the Company’s listed AUD0.75 options(CXSOA) were held by U.S. residents (based solely on their addresses).

 

On December 10, 2002 the Company established a Level I ADR program, inwhich the ordinary shares trade in the form of ADSs, which are evidenced byAmerican Depositary Receipts or ADRs, issued by The Bank of New York, asDepositary, and registered on Form F-6 pursuant to the U.S. Securities Act of1933, as amended.

 

The Company’s Level I ADR program was upgraded to a Level II program onJune 28, 2005, in connection with the Company’s listing on the NASDAQ CapitalMarket. One American Depositary Share (“ADS”) represents fifteen ordinaryshares.

 

As of November 2, 2007, there were 46,602 ADRs outstanding.

 

**Annual high and low market price ADR’s and average daily trading volumeon NASDAQ for full fiscal years since listing**

** **
| ** ** | ** ** | ** **                    | ** ** | **High  (US$)** | ** ** | **Low  (US$)** | ** ** | **Ave.  daily trading volume** | ** ** |
|------------|------------|-------------------------------|------------|-----------------|------------|----------------|------------|--------------------------------|------------|
| ** ** | ** ** | ** **                    | ** ** |            | ** ** |           | ** ** |                           | ** ** |
| 2007       | ** ** | July 1, 2006 to June 30, 2007 | ** ** | 14.50           | ** ** | 3.85           | ** ** | 527                            | ** ** |
| 2006       | ** ** | July 1, 2005 to June 30, 2006 | ** ** | 8.55            | ** ** | 4.12           | ** ** | 1,588                          | ** ** |

 

**Quarterly high and low market price of ADRs and average daily tradingvolume since NASDAQ listing**

 
| ** **  | ** ** | ** **         | ** ** | **High (US$)** | ** ** | **Low (US$)** | ** ** | **Ave. daily trading volume** | ** ** |
|-------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|----------------------------------------------|------------|
| Fiscal 2008 |       | September  quarter |       | 15.14               |       | 8.58               |       | 786                                          |       |
| Fiscal 2007 |       | June quarter       |       | 14.50               |       | 9.20               |       | 913                                          |       |
|        |       | March quarter      |       | 9.80                |       | 7.00               |       | 587                                          |       |
|        |       | December quarter   |       | 7.90                |       | 5.10               |       | 408                                          |       |
|        |       | September quarter  |       | 5.61                |       | 3.85               |       | 202                                          |       |
| Fiscal 2006 |       | June quarter       |       | 8.25                |       | 4.12               |       | 497                                          |       |
|        |       | March quarter      |       | 7.57                |       | 5.15               |       | 1,243                                        |       |
|        |       | December quarter   |       | 8.48                |       | 5.49               |       | 3,749                                        |       |
|        |       | September quarter  |       | 8.55                |       | 6.00               |       | 863                                          |       |

 

**Monthly high and low market price ADRs and average daily trading volumefor the last six months**

 
| ** **      | ** ** | ** ** | ** ** | **High (US$)** | ** ** | **Low (US$)** | ** ** | **Ave. daily trading volume** | ** ** |
|-----------------|------------|------------|------------|---------------------|------------|--------------------|------------|----------------------------------------------|------------|
| October 2007    |       |       |       | 16.80               |       | 14.10              |       | 830                                          |       |
| September  2007 |       |       |       | 13.50               |       | 10.60              |       | 463                                          |       |
| August 2007     |       |       |       | 11.84               |       | 8.58               |       | 391                                          |       |
| July 2007       |       |       |       | 15.14               |       | 10.50              |       | 1,510                                        |       |
| June 2007       |       |       |       | 14.50               |       | 11.10              |       | 1,567                                        |       |
| May 2007        |       |       |       | 11.47               |       | 10.35              |       | 100                                          |       |

 

As at November 2, 2007 ADRs on the NASDAQ Capital Market closed at US$16.20

 

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### **B.**                                    Plan of distribution

### ** **

Not applicable.

 

### **C.**                                    Markets

### ** **

The Company’s ordinary shares were listed on the ASX on July 10, 1986.The ASX is the principal trading market for the ordinary shares.

 

The Company’s ADRs were listed on the NASDAQ Capital Market on June 28,2005. Each ADR evidences 15 ordinary shares.

 

### **D.**                                    Selling shareholders

### ** **

Not applicable.

 

### **E.**                                      Dilution

### ** **

Not applicable.

 

### **F.**                                      Expenses of the issue

### ** **

Not applicable.

 

## **ITEM10.**                           ADDITIONAL INFORMATION

## ** **

### **A.**                                                            Share capital

### ** **

Not applicable

 

### **B.**                                    Memorandum and articlesof incorporation

### ** **

Incorporated by reference to the Company’s Registration Statement onForm 20-F (file no. 0-51373) filed with the Commission on June 23, 2005.

 

### **C.**                                    Material contracts

### ** **

The following contracts are the only contracts not entered into in theordinary course of business which have been entered into by the Company withintwo years immediately preceding the date of this document and are or may bematerial to the Company:

 

The Company’s principal commercial collaborations are described underItem 4.B. “Business overview — commercial and research and developmentcollaborations.”

 

Under the Agreement and Plan of Merger dated as of April 27, 2004 amongAGT Biosciences Limited (the Company), AGT Biosciences, Inc., ChemGenexTherapeutics, Inc. (now ChemGenex Pharmaceuticals, Inc.) and Dr. Dennis M.Brown, the Company acquired 100% of ChemGenex Therapeutics, Inc. through amerger, using ordinary shares. Pursuant to the terms of the agreement, theCompany has continuing indemnity obligations in favor of the sellingshareholders, represented by Dr. Dennis M. Brown, and Dr. Dennis M. Brown hascertain continuing indemnity obligations in favor of the Company. Each of theselling shareholders, who are now shareholders of the Company, entered into anon-sale undertaking restricting their ability to trade the ordinary sharesreceived in the merger for a period ending on June 21, 2005.

 

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### **D.**                                    Exchange controls andother limitations affecting security holders

### ** **

Exchange controls

 

Under existing Australian legislation, the Reserve Bank of Australiadoes not inhibit the import and export of funds, and, generally, no permissionis required to be given to the Company for the movement of funds in and out ofAustralia. However, from time to time, Australian foreign exchange controls areimplemented against prescribed countries, entities and persons. Certaintransactions relating to Iraq, the National Union for the Total Independence ofAngola (UNITA), certain persons associated with the former government of theFederal Republic of Yugoslavia, and ministers and senior officials of theGovernment of Zimbabwe are currently prohibited, without the specific priorapproval, of the Reserve Bank of Australia. Restrictions also apply totransactions, accounts and assets relating to the Taliban, Osama bin Laden, theAl-Qaida organization and other persons and entities identified as terroristsor sponsors of terrorism.

 

Accordingly, at the present time, remittances of any dividends,interest or other payment by the Company to non-resident holders of the Company’ssecurities in the U.S. are not, subject to the above, restricted by exchangecontrols or other limitations.

 

Takeovers Act

 

There are no limitations, either under the laws of Australia or underthe Constitution of ChemGenex Pharmaceuticals Limited, to the right ofnon-residents to hold or vote the Company’s ordinary shares other than theCommonwealth Foreign Acquisitions and Takeovers Act 1975 (the “Takeovers Act”).The Takeovers Act may affect the right of non-Australian residents, includingU.S. residents, to hold ordinary shares but does not affect the right to vote,or any other rights associated with any ordinary shares held in compliance withits provisions. Acquisitions of shares in Australian companies by foreigninterests are subject to review and approval by the Treasurer of theCommonwealth of Australia under the Takeovers Act. The Takeovers Act applies toany acquisition of outstanding shares of an Australian company that exceeds, orresults in a foreign person or persons controlling the voting power of morethan a certain percentage of those shares. The thresholds are 15% where theshares are acquired by a foreign person, or group of associated foreignpersons, or 40% in aggregate in the case of foreign persons who are notassociated. Any proposed acquisition that would result in an individual foreignperson (with associates) holding more than 15% must be notified to theTreasurer in advance of the acquisition. At January 31, 2005, approximately39.6% of the Company’s fully paid outstanding ordinary shares were held byshareholders outside Australia. In addition to the Takeovers Act, there arestatutory limitations in Australia on foreign ownership of certain businesses,such as banks and airlines, not relevant to the Company. However, there are noother statutory or regulatory provisions of Australian law or ASX requirementsthat restrict foreign ownership or control of the Company.

 

Corporations Act 2001

 

As applied to the Company, the Corporations Act 2001 (the “CorporationsAct 2001”) prohibits any legal person (including a corporation) from acquiringa relevant interest in ordinary shares if after the acquisition that person orany other person’s voting power in the Company increases from 20% or below tomore than 20%, or from a starting point that is above 20% and below 90%.

 

This prohibition is subject to a number of specific exceptions set outin section 611 of the Corporations Act 2001 which must be strictly compliedwith to be applicable.

 

In general terms, a person is considered to have a “relevant interest”in a share in the Company if that person is the holder of that share, has thepower to exercise, or control the exercise of, a right to vote attached to thatshare, or has the power to dispose of, or to control the exercise of a power todispose of that share.

 

It does not matter how remote the relevant interest is or how it arises.The concepts of “power” and “control” are given wide and extended meanings inthis context in order to deem certain persons to hold a relevant interest. Forexample each person who has voting power above 20% in a company which in turnholds shares in the Company is 

 

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deemed to have a relevant interest in those shares. Certain situations(set out in section 609 of the Corporations Act 2001) which would otherwiseconstitute the holding of a relevant interest are excluded from the definition.

 

A person’s voting power in the Company is that percentage of the totalvotes attached to ordinary shares in which that person and its associates (asdefined in the Corporations Act 2001) holds a relevant interest.

 

### **E.**                                      Taxation

### ** **

This summary is based on the tax laws of the United States (includingthe Internal Revenue Code of 1986, as amended (the “Code”), its legislativehistory, existing and proposed U.S. Treasury Regulations promulgatedthereunder, published rulings and administrative pronouncements of the InternalRevenue Service (the “IRS”) and judicial decisions) and on the Australian taxlaw and practice, all as in effect on the date hereof. In addition, this summaryis based on the income tax convention between the U.S. and Australia (the “Treaty”).The foregoing laws and legal authorities as well as the Treaty are subject tochange (or changes in interpretation), possibly with retroactive effect and todiffering interpretations. Finally, this summary is based in part upon therepresentations of the Company’s ADR Depositary and the assumption that eachobligation in the Deposit Agreement and any related agreement will be performedin accordance with its terms.

 

The discussion does not address any aspects of U.S. taxation other thanfederal income taxation or any aspects of Australian taxation other thanfederal income taxation, inheritance taxation, stamp duty and goods andservices tax. This discussion does not address all aspects of U.S. orAustralian federal tax considerations that may be important to particularinvestors in light of their individual investment circumstances or investorssubject to special tax regimes, like broker-dealers, banks or other financial institutions,insurance companies, tax-exempt organizations, regulated investment companies,real estate investment trusts or real estate mortgage investment conduits,certain former U.S. citizens or residents, persons who actually orconstructively own ten percent or more of the Company’s ADRs or ordinaryshares, persons who hold ADRs or ordinary shares as part of a straddle, hedge,conversion or constructive sale transaction or other integrated transaction fortax purposes, persons who have elected mark-to-market accounting, persons thathave a functional currency other than the U.S. dollar, persons liable foralternative minimum tax, partnerships and other pass-through entities, orpersons who acquired their ADRs or ordinary shares through the exercise of optionsor similar derivative securities or otherwise as compensation. This discussionapplies only to shares held as capital assets. Prospective investors are urgedto consult their tax advisers regarding the U.S. and Australian federal, stateand local tax consequences and any other tax consequences of owning anddisposing of ADRs and ordinary shares.

 

***Australian Tax Consequences***

 

In this section the Company discusses Australian tax considerationsthat apply to non-Australian tax residents who are residents of the U.S. withrespect to the ownership and disposal by the absolute beneficial owners of ADRs.This summary does not discuss any foreign or state tax considerations, otherthan stamp duty.

 

**Nature of ADRs for Australian Taxation Purposes**

 

ADRs held by a U.S. Holder will be treated for Australian taxationpurposes as held under a “bare trust” for that holder. Consequently, theunderlying ordinary shares will be regarded as owned by the ADR holder forAustralian income tax and capital gains tax purposes. Dividends paid on theunderlying ordinary shares will also be treated as dividends paid to the ADRholder, as the person beneficially entitled to those dividends. Therefore, inthe following analysis the Company discusses the tax consequences to non-Australianresident holders of ordinary shares which, for Australian taxation purposes,will be the same as to U.S. Holders of ADRs.

 

**Taxation of Dividends**

 

Australia operates a dividend imputation system under which dividendsmay be declared to be “franked” to the extent of tax paid on company profits.Fully franked dividends are not subject to dividend withholding tax. Dividendspayable by the Company to non-Australian resident stockholders will be subjectto dividend withholding tax, to the extent the dividends are unfranked.Dividend withholding tax will be imposed at 30%, unless a stockholder is aresident of a country with which Australia has a double taxation agreement.Under the provisions of the Treaty, the Australian tax withheld on unfrankeddividends paid by the Company to which a resident of the U.S. is beneficiallyentitled is generally limited to 15% if the U.S. resident holds less than 10%of the voting rights of the 

 

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Company, unless the shares are effectively connected to a permanentestablishment or fixed base in Australia through which the stockholder carrieson business or provides independent personal services, respectively. Where theU.S. resident holds 10% or more of the voting rights of the Company, thewithholding tax rate is reduced to 5%.

 

**Tax on Sales or other Dispositions of Shares - Capital Gains Tax**

 

Non-Australian resident stockholders will not be subject to Australiancapital gains tax on the gain made on a sale or other disposal of our shares,unless they, together with associates, hold 10% or more of our issued capitalat any time during the five years before the disposal of the shares. If anon-Australian resident stockholder did own a 10% or more interest, thatstockholder would be subject to Australian capital gains tax to the same extentas Australian resident stockholders. The Australian Taxation Office maintainsthe view that the Double Taxation Convention between the U.S. and Australiadoes not limit Australian capital gains tax. Australian capital gains taxapplies to net capital gains at a taxpayer’s marginal tax rate but for certainstockholders a discount of the capital gain may apply if the shares have beenheld for 12 months or more. For individuals, this discount is 50%. Net capitalgains are calculated after reduction for capital losses, which may only beoffset against capital gains.

 

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

 

Some non-Australian resident stockholders may hold shares on revenuerather than on capital account, for example, share traders. These stockholdersmay have the gains made on the sale or other disposal of the shares included intheir assessable income under the ordinary income provisions of the income taxlaw, if the gains are sourced in Australia. Non-Australian residentstockholders assessable under these ordinary income provisions in respect ofgains made on shares held on revenue account would be assessed for those gainsat the Australian tax rates for non-Australian residents, which start at amarginal rate of 29%. Some relief from the Australian income tax may beavailable to non-Australian resident stockholders under the Double TaxationConvention between the U.S. and Australia, for example, because the stockholderdoes not have a permanent establishment in Australia.

 

To the extent an amount would be included in a non-Australian residentstockholder’s assessable income under both the capital gains tax provisions andthe ordinary income provisions, the capital gain amount would generally bereduced, so that the stockholder would not be subject to double tax on any partof the income gain or capital gain.

 

**Dual Residency**

 

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

 

**Stamp Duty**

 

Any transfer of shares through trading on the ASX, whether byAustralian residents or foreign residents, are not subject to stamp duty withinAustralia.

 

**Australian Death Duty**

 

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

 

**Goods and Services Tax**

 

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

 

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***U.S****.****Federal Income Taxation***

 

The following discussion summarizesthe principal U.S. federal income tax considerations relating to the purchase,ownership and disposition of ADRs and ordinary shares. This summary does notdescribe any state, local or non-U.S. tax law considerations, or any aspect ofU.S. federal tax other than income taxation; investors are urged to consulttheir own tax advisers regarding such matters.

 

As used below, a “U.S. Holder” is abeneficial owner of an ADR or ordinary share that is, for U.S. federal incometax purposes, (i) a citizen or resident alien individual of the United States,(ii) a corporation (or an entity treated as a corporation) organized under thelaw of the United States, any State thereof or the District of Columbia, (iii)an estate, the income of which is subject to U.S. federal income tax withoutregard to its source or (iv) a trust if (1) a court within the United States isable to exercise primary supervision over the administration of the trust, andone or more U.S. persons have the authority to control all substantialdecisions of the trust, or (2) the trust has a valid election in effect underapplicable U.S. Treasury Regulations to be treated as a U.S. person. Forpurposes of this discussion, a “non-U.S. Holder” is a beneficial owner of anADR or ordinary share that is (i) a nonresident alien individual, (ii) acorporation (or an entity treated as a corporation) created or organized in orunder the law of a country other than the United States or a politicalsubdivision thereof or (iii) an estate or trust that is not a U.S. Holder. If apartnership (including for this purpose any entity treated as a partnership forU.S. federal tax purposes) is a beneficial owner of an ADR or ordinary share,the U.S. federal tax treatment of the partner in the partnership generally willdepend on the status of the partner and the activities of the partnership. Aholder of an ADR or ordinary share that is a partnership and partners in thatpartnership should consult their own tax advisers regarding the U.S. federalincome tax consequences of holding and disposing of ADRs or ordinary shares.

 

**Natureof ADRs for U.S. Federal Income Tax Purposes**

 

Ingeneral, for U.S. federal income tax purposes, a holder of an ADR will betreated as the owner of the underlying ordinary shares. Accordingly, except asspecifically noted below, the tax consequences discussed below with respect toADRs will be the same for ordinary shares in the Company, and exchanges ofordinary shares for ADRs, and ADRs for ordinary shares, generally will not besubject to U.S. federal income tax.

 

**Taxation ofDividends**

 

*U.S. Holders*. Ingeneral, subject to the passive foreign investment company rules discussedbelow, a distribution on an ADR will constitute a dividend for U.S. federalincome tax purposes to the extent that it is made from the Company’s current oraccumulated earnings and profits as determined under U.S. federal income taxprinciples. If a distribution exceeds the Company’s current and accumulatedearnings and profits, it will be treated as a non-taxable reduction of basis tothe extent of the U.S. Holder’s tax basis in the ADR 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 any dividend onan ADR (which will include the amount of any Australian taxes withheld) will besubject to U.S. federal income tax as foreign source dividend income. Theamount of a dividend paid in Australian dollars will be its value in U.S.dollars based on the prevailing spot market exchange rate in effect on the daythat the U.S. Holder receives the dividend or, in the case of a dividendreceived in respect of an ADR, on the date the Depositary receives it, whetheror not the dividend is converted into U.S. dollars. A U.S. Holder will have atax basis in any distributed Australian dollars equal to its U.S. dollar amounton the date of receipt, and any gain or loss realized on a conversion or otherdisposition of the Australian dollars generally will be treated as U.S. sourceordinary income or loss. If dividends paid in Australian dollars are convertedinto U.S. dollars on the date they are received by a U.S. holder or theDepositary or its agent, as the case may be, the U.S. holder generally shouldnot be required to recognize foreign currency gain or loss in respect of thedividend income.

 

Subject to certain exceptions forshort-term and hedged positions, a dividend a noncorporate U.S. Holder receiveson an ADR before January 1, 2011 will be subject to a maximum tax rate of 15%if the dividend is a “qualified dividend.” A dividend will be a qualified dividend if (a) the dividend is paid onan ordinary share and the ordinary shares are readily tradable on an established securities market inthe United States and (b) the dividend is paid on an ADR or an ordinary shareand the Company is eligible for benefits of a comprehensive income tax treatywith the UnitedStates that the Secretary of the Treasury determines issatisfactory for purposes of these rules and that includes an exchange of informationprogram, and (ii) the Company was not, in the year prior to the year thedividend was paid, and is not, in the year the dividend is paid, a PFIC. TheADRs will be listed on the NASDAQ 

 

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Capital Market. It is not clearwhether that listing will qualify them as readily tradable on an establishedsecurities market in the United States. Moreover, because only the ADRs and notthe shares themselves are listed on a U.S. exchange, based on existing guidanceit is not clear whether dividends paid by the Company will be treated as paidon shares that are readily tradable on an established securities market in theUnited States. However, the Treaty satisfies the requirements of clause (i)(b),and, although the matter is not free from doubt, the Company should be aresident of Australia entitled to the benefits of the Treaty. Based on theCompany’s audited financial statements and relevant market and shareholderdata, the Companybelieves it was not a PFIC for U.S. federal income tax purposes for its , the Company believes it was not a PFIC forU.S. federal income tax purposes for its 2005 or 2006 taxable years, nor doesit anticipate being classified as a PFIC in 2007 or in future taxable years. However, because thedetermination of whether the Company is a PFIC is based upon the composition ofthe income and assets from time to time, there can be no assurances that theCompany will not become a PFIC for any future taxable year. However, asdescribed in the section below entitled “Passive Foreign Investment CompanyRules,” if the Company were a PFIC in a year while a U.S. Holder held an ADR orordinary share, and if the U.S. Holder has not made a qualified electing fundelection effective for the first year the U.S. Holder held the ADR or ordinaryshare, the ADR or ordinary share remains an interest in a PFIC for all futureyears or until such an election is made. The IRS takes the position that thatrule will apply for purposes of determining whether an ADR is an interest in aPFIC in the year a dividend is paid or in the prior year, even if the Companydoes not satisfy the tests to be a PFIC in either of those years. Even if theCompany has not been a PFIC in any prior year and is not currently a PFIC,because the composition of the Company’s income and assets will vary over time,there can be no assurance that the Company will not be considered a PFIC forany taxable year. The U.S. Treasury has announced its intention topromulgate rules pursuant to which holders of stock of non-U.S. corporations,and intermediaries though whom the stock is held, will be permitted to rely oncertifications from issuers to establish that dividends are treated asqualified dividends. Because those procedures have not yet been issued, it isnot clear whether the Company will be able to comply with them. Speciallimitations on foreign tax credits apply to dividends subject to the reducedrate of tax. U.S. Holders of ADRs and ordinary shares should consult their owntax advisers regarding the availability of the reduced dividend tax rate in thelight of their own particular circumstances.

 

Any Australian withholding tax willbe treated as a foreign income tax eligible for credit against a U.S. Holder’sU.S. federal income tax liability, subject to generally applicable limitationsunder U.S. federal income tax law. For purposes of computing those limitationsseparately for specific categories of income, a dividend generally willconstitute foreign source “passive income” or, in the case of certain holders, “financialservices income” for purposes of taxable years beginning before January 1, 2007.For taxable years beginning after December 31, 2006, “passive income” generallywill be treated as “passive category income,” and “financial services income”generally will be treated as “general category income.”  A U.S. Holderwill be denied a foreign tax credit with respect to Australian income taxwithheld from dividends received on an ADR to the extent the U.S. Holder hasnot held the ADR for at least 16 days of the 30-day period beginning on thedate which is 15 days before the ex-dividend date or to the extent the U.S.Holder is under an obligation to make related payments with respect tosubstantially similar or related property. Any days during which a U.S. Holderhas substantially diminished its risk of loss on the ADR 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. Holdersshould consult with their own tax adviser to determine whether and to whatextent they will be entitled to foreign tax credits as well as with respect tothe determination of the foreign tax credit limitation (including changes inthe rules for taxable years beginning after December 31, 2006). Alternatively,any Australian withholding tax may be taken as a deduction against taxableincome, provided that the U.S. Holder takes a deduction and not a credit forall foreign income taxes paid or accrued in the same taxable year. A dividendwill not be eligible for the corporate dividends received deduction.

 

*Non-U.S. Holders*. Adividend paid to a non-U.S. Holder of an ADR will not be subject to U.S. federal income taxunless the dividend is effectively connected with the conduct of trade orbusiness by the non-U.S. Holder within the United States (and is attributable to apermanent establishment or fixed base the non-U.S. Holder maintains in the United Statesif an applicable income tax treaty so requires as a condition for the non-U.S.Holder to be subject to U.S. taxation on a net income basis on income from theADR). A non-U.S. Holder generally will be subject to tax on an effectivelyconnected dividend in the same manner as a U.S. Holder. A corporate non-U.S.Holder may also be subject under certain circumstances to an additional “branchprofits tax,” the rate of which may be reduced pursuant to an applicable incometax treaty.

 

**Taxation ofCapital Gains**

 

*U.S. Holders*. Subjectto the passive foreign investment company rules discussed below, on a sale orother taxable disposition of an ADR, a U.S. Holder will recognize capital gainor loss in an amount equal to the difference 

 

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between the U.S. Holder’s adjustedbasis in the ADR and the amount realized on the sale or other disposition, eachdetermined in U.S. dollars. Any gain a U.S. Holder recognizes generally will beU.S. source income for U.S. foreign tax credit purposes, and, subject tocertain exceptions, any loss generally will be a U.S. source loss. IfAustralian tax is withheld on a sale or other disposition of an ADR, the amountrealized will include the gross amount of the proceeds of that sale ordisposition before deduction of the Australian tax. The generally applicablelimitations under U.S. federal income tax law on crediting foreign income taxesmay preclude a U.S. Holder from obtaining a foreign tax credit for anyAustralian tax withheld on a sale of an ADR.

 

In general, any adjusted netcapital gain of an individual in a taxable year beginning before January 1,2011 is subject to a maximum tax rate of 15%. In subsequent years, the maximumtax rate on the net capital gain of an individual will be 20%. Thedeductibility of capital losses is subject to limitations.

 

*Non-U.S. Holders.*Anon-U.S. Holder will not be subject to U.S. federal income tax on gainrecognized on a sale or other disposition of an ADR unless (i) the gain iseffectively connected with the conduct of trade or business by the non-U.S.Holder within the United States (and is attributable to apermanent establishment or fixed base that the non-U.S. Holder maintains in theUnited States if an applicable income tax treaty so requires as acondition for the non-U.S. Holder to be subject to U.S. taxation on a netincome basis on income from the ADR), or (ii) in the case of a non-U.S. Holderwho is an individual, the holder is present in the UnitedStates for 183 or more days in the taxable year of the sale orother disposition and certain other conditions apply. Any effectively connectedgain of a corporate non-U.S. Holder may also be subject under certaincircumstances to an additional “branch profits tax,” the rate of which may bereduced pursuant to an applicable income tax treaty.

 

**Passive ForeignInvestment 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 the Company’s auditedfinancial statements and relevant market and shareholder data, the Companybelieves it was not a PFIC for U.S. federal income tax purposes for its2005 or 2006 taxable years, nordoes it anticipate being classified as a PFIC in 2007 or in future taxableyears.

 

In general, a foreign corporationis a PFIC if at least 75% of its gross income for the taxable year is passiveincome or if at least 50% of its assets for the taxable year produce passiveincome or are held for the production of passive income. In general, passiveincome for this purpose means, with certain designated exceptions, dividends,interest, rents, royalties (other than certain rents and royalties derived inthe 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 in a foreign corporation is stock in a PFIC in the hands ofa particular shareholder that is a United Statesperson, it remains stock in a PFIC in the hands of that shareholder.

 

If the Company is treated as aPFIC, contrary to the tax consequences described in “U.S. Federal Income TaxConsiderations—Taxation of Dividends” and “U.S. Federal Income TaxConsiderations—Taxation of Capital Gains” above, a U.S. Holder that does notmake an election described in the succeeding two paragraphs would be subject tospecial rules with respect to (i) any gain realized on a sale or otherdisposition of an ADR (for purposes of these rules, a disposition of an ADRincludes many transactions on which gain or loss is not realized under generalU.S. federal income tax rules)  and (ii)any “excess distribution” by the Company to the U.S. Holder (generally, anydistribution during a taxable year in which distributions to the U.S. Holder onthe ADR exceed 125% of the average annual taxable distributions (whether actualor constructive and whether or not out of earnings and profits) received by theU.S. Holder on the ADR during the precedingthree taxable years or, if shorter, the U.S. Holder’s holding period for theADR). Under those rules, (i) the gain or excess distribution would be allocatedratably over the U.S. Holder’s holding period for the ADR, (ii) the amountallocated to the taxable year in which the gain or excess distribution isrealized would be taxable as ordinary income in its entirety and not as capitalgain, would be ineligible for the reduced qualified dividend rates, and couldnot be offset by any deductions or losses, and (iii) the amount allocated toeach prior year, with certain exceptions, would be subject to tax at thehighest tax rate in effect for that year, and the interest charge generallyapplicable to underpayments of tax would be imposed in respect of the taxattributable to each of those years. A U.S. Holder who owns an ADR during anyyear the Company is****a PFIC mayhave to file IRS Form 8621.

 

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The special PFIC rules describedabove will not apply to a U.S. Holder if the U.S. Holder makes a timely election,which remains in effect, to treat the Company as a “qualified electing fund” (“QEF”)in the first taxable year in which the U.S. Holder owns an ADR and the Companyis a PFIC and if the Company complies with certain reporting requirements. Instead,a shareholder of a QEF generally is currently taxable on a pro rata share ofthe Company’s ordinary earnings and net capital gain as ordinary income andlong-term capital gain, respectively. Neither that ordinary income nor anyactual dividend from the Company would qualify for the 15% maximum tax rate ondividends described above if the Company is a PFIC in the taxable year theordinary income is realized or the dividend is paid or in the preceding taxableyear. The Company has**~~~~**not yetdetermined whether, if it is a PFIC, it would make the computations necessaryto supply U.S. Holders with the information needed to report income and gainpursuant to a QEF election. It is, therefore, possible that U.S. Holders wouldnot be able to make or retain that election in any year the Company is a PFIC. Althougha QEF election generally cannot be revoked, if a U.S. Holder made a timely QEFelection for the first taxable year it owned an ADR and the Company is a PFIC(or is treated as having done so pursuant to any of certain elections), the QEFelection will not apply during any later taxable year in which the Company doesnot satisfy the tests to be a PFIC. If a QEF election is not made in that firsttaxable year, an election in a later year generally will require the payment oftax and interest.

 

In lieu of a QEF election, a U.S.Holder of stock in a PFIC that is considered marketable stock could elect tomark the stock to market annually, recognizing as ordinary income or loss eachyear an amount equal to the difference as of the close of the taxable yearbetween the fair market value of the stock and the U.S. Holder’s adjusted basisin the stock. Losses would be allowed only to the extent of net mark-to-marketgain previously included in income by the U.S. Holder under the election forprior taxable years. A U.S. Holder’s adjusted basis in the ADRs will beadjusted to reflect the amounts included or deducted with respect to themark-to-market election. If the mark-to-market election were made, the rulesset forth in the second preceding paragraph would not apply for periods coveredby the election. A mark-to-market election will not apply during any latertaxable year in which the Company does not satisfy the tests to be a PFIC. Ingeneral, the ADRs will be marketable stock if the ADRs are traded, other thanin *de minimis* quantities, on at least 15days during each calendar quarter on a national securities exchange that isregistered with the SEC or on a designated national market system or on anyexchange or market that the Treasury Department determines to have rulessufficient to ensure that the market price accurately represents the fairmarket value of the stock. The ADRs will be listed on the NASDAQ CapitalMarket. It is not clear whether trading on that market will qualify them asreadily tradable on an established securities market in the United States.Thus, there is no certainty that the shares will be considered “marketablestock” for these purposes unless and until the IRS designates the ASXas having rules adequate to carry out the purposes of the PFIC rules. There canbe no assurance that the IRS will make that designation.

 

**InformationReporting and Backup Withholding**

 

Dividends paid on, and proceedsfrom the sale or other disposition of, an ADR to a U.S. Holder generally may besubject to information reporting requirements and may be subject to backupwithholding (currently at the rate of 28%) unless the U.S. Holder provides anaccurate taxpayer identification number or otherwise demonstrates that they areexempt. The amount of any backup withholding collected from a payment to a U.S.Holder will be allowed as a credit against the U.S. Holder’s U.S. federalincome tax liability and may entitle the U.S. Holder to a refund, provided thatcertain required information is submitted to the IRS. A non-U.S. Holdergenerally 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 its eligibility forexemption.

 

**The discussion above is not intended to constitute a complete analysisof all tax considerations applicable to an investment in ADRs or ordinaryshares. Holders and potential holders should consult their tax adviser(s)concerning the tax consequences relevant to them in their particular situation.**

 

### **F.**                                      Dividends and payingagents

### ** **

Not applicable

 

**G.            Statement by experts**

 

Not applicable

 

66

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### **H.**                                    Documents on display

### ** **

This Annual Report on Form 20-F and any related documents may beinspected by investors at the Company’s registered office at Edmondson Turner& Co., 439 Bay Street, Brighton, Victoria, Australia, or at the Company’sheadquarters at Pigdons Road, Waurn Ponds, Victoria, Australia or at the publicreference room of the SEC located at Room 1024, Judiciary Plaza, 450 FifthStreet, N.W., Washington DC 20549, at prescribed rates. The Company is subjectto the information requirements of the U.S. Securities Exchange Act of 1934, asamended, and, in accordance therewith, is required to file reports, includingannual reports on Form 20-F, and other information with the U.S. Securities andExchange Commission in electronic form. More information concerning the publicreference room of the SEC can be obtained by calling the SEC at 1-800-SEC-0330.The SEC filings of the Company are available to the public from commercialdocument retrieval services and at the website maintained by the SEC at www.sec.gov.The Company also maintains a website at www.chemgenex.com. Information on theCompany’s website and websites linked to it do not constitute part of thisAnnual Report.

 

### **I.**                                         Subsidiary information

### ** **

Not applicable

 

## **ITEM11.**                                              QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

## ** **

TheCompany has exposure to changes in foreign currency exchange rates and interestrates. The Company does not utilize derivative financial instruments or otherfinancial instruments subject to market risk.

 

****Foreigncurrency exchange rates****

 

Theprincipal currency of the Company is the Australian dollar. Under existingpartnership agreements the Company receives funds Euros. Cash to fund workingcapital requirements is managed centrally in Australia and held in Australian dollars.

 

The following table shows the sensitivity of the Company’s 2007/2008earnings as a result of an appreciation or depreciation in the value of theJune 30, 2007 exchange rate of the Australian dollar against the Euro (based onforeign currency receipts from partnership agreements) and against the USdollar (for commitments for expenditure existing at June 30, 2007).

 
| **** **** | **** **** | ****A$ Depreciation**** | ** **     | ****A$ Appreciation**** | ** **     |
|----------------|----------------|------------------------------|----------------|------------------------------|----------------|
| **** **** | **** **** | ****-15%****                 | **** **** | ****-10%****                 | **** **** | ****-5%**** | ** ** | **0%** | **** **** | ****5%**** | **** **** | ****10%**** | **** **** | ****15%**** | **** **** |
| €         |           | 50,159                       |           | 33,439                       |           | 16,720 |   | — |   | (16,720 | ) | (33,439 | ) | (50,159 | ) |
| US $           |           | (737,390                     | )              | (491,593                     | )              | (245,797 | ) | — |   | 245,797 |   | 491,593 |   | 737,390 |   |
| Total          |           | (687,231                     | )              | (458,154                     | )              | (229,077 | ) | — |   | 229,077 |   | 458,154 |   | 687,231 |   |

 

****Interestrates****

 

Cash, held in call and short-term deposit accounts at the NationalAustralia Bank Limited and Greater Bay Bank are subject to variable interestrates. The Company does not consider its exposure to interest rates to besignificant.

 

## **ITEM12.**                                              DESCRIPTION OF SECURITIES OTHER THANEQUITY SECURITIES

## ** **

### **A**                                       Debt Securities

### ** **

Not applicable.

 

### **B**                                       Warrants and Rights

 

Not applicable.

 

67

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### **C**                                       Other Securities

### ** **

Not applicable.

 

### **D**                                       American DepositaryShares

### ** **

Not applicable.

 

# **PART II**

# ** **

## **ITEM13.**                                              DEFAULTS, DIVIDEND ARREARAGES ANDDELINQUENCIES

## ** **

None.

 

## **ITEM14.**                                              MATERIAL MODIFICATIONS TO THE RIGHT OFSECURITY HOLDERS AND USE OF PROCEEDS

## ** **

None.

 

## **ITEM15.**                                              CONTROLS AND PROCEDURES

## ** **

## **A.Controls and Procedures**

## ** **

As of June 30, 2007 the Company’s management, including its ChiefExecutive Officer and its Chief Financial Officer, reviewed  the effectiveness of the design and operationof the Company’s disclosure controls and procedures, as defined in Rule13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on thatreview, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of the Company’s existing disclosurecontrols and 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 when requiredand (ii) accumulated and communicated to management, including the ChiefExecutive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosure as of the end of the Company’s most recent fiscalyear.

 

In preparation for the adoption of Section 404 of the Sarbanes-OxleyAct of 2002 by all Foreign Private Issuers, management has initiated a detailedevaluation of existing internal controls against Section 404 requirements.Management will allocate the necessary resources and initiate required actionsto redress any possible Section 404 weaknesses prior to that date.

 

In planning and performing the audit of the consolidated financialstatements of ChemGenex Pharmaceuticals Limited for the year ended June 30,2005, June 30, 2006 and June 2007 Ernst & Young considered the internalcontrols over financial reporting to design auditing procedures for the purposeof expressing an opinion on the consolidated financial statements. Theconsideration of internal controls over financial reporting was not to expressan opinion on the effectiveness of the Company’s internal controls overfinancial reporting. However they noted certain matters involving internalcontrols over financial reporting and its operation that they considered to bematerial weaknesses under standards established by the Public Company OversightBoard (United States).

 

A control deficiency exists when the design or operation of a controldoes not allow management or employees, in the normal course of performingtheir assigned functions, to prevent or detect misstatements on a timely basis.A significant deficiency is a deficiency, or a combination of deficiencies, ininternal control over financial reporting that is less severe than a materialweakness, yet important enough to merit attention by those responsible foroversight of the company’s financial reporting. A material weakness is adeficiency, or combination of deficiencies 

 

68

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in internal control over financial reporting, such that there is areasonable possibility that a material misstatement of the company’s annual orinterim financial statements will not be prevented or detected on a timelybasis.

 

In connection with the audit of our fiscal year ended June 30, 2006,Ernst & Young, the Company’s independent auditors, informed our AuditCommittee that they consider the following matters represent materialweaknesses in the operation of our internal controls over financial reporting:

 

•                                         Lackof knowledge to perform tax effective accounting; and

•                                         Lackof US GAAP expertise

 

We have and will continue to mitigate the above material weaknesses byconferring and / or hiring outside accounting advisers with respect to thetechnical requirements applicable to our financial statements.

 

No changes in the Company’s internal controls over financial reportingoccurred during the period covered by this report that materially affected, orare reasonably likely to materially affect, the Company’s internal controlsover financial reporting.

 

## **B.**                                    Management’s annual report on internalcontrol over financial reporting

## ** **

Not applicable.

 

## **C.**                                    Attestation report of the registeredpublic accounting firm

## ** **

Not applicable.

 

## **D.**                                    Changes in internal control overfinancial reporting

## ** **

There were no significant changes in our internal controls or in otherfactors that could significantly affect these controls and proceduressubsequent to the date our chief executive officer and our chief financialofficer completed their evaluation, nor were there any significant deficienciesor material weaknesses in our internal controls and procedures requiringcorrective actions, other than those described above.

 

## **ITEM16A.**                                     AUDIT COMMITTEE FINANCIAL EXPERT

## ** **

The Board of Directors of the Company has determined that Patrick OwenBurns, an independent member of its Board of Directors and a member of itsAudit Committee, is an audit committee financial expert within the meaning ofthe Sarbanes-Oxley and related regulations.

 

## **ITEM16B.**                                     CODE OF ETHICS

## ** **

We have adopted a Code of Ethics that applies to all of the Company’semployees, including our principal executive officer, principal financialofficer, principal accounting officer or controller. The Code can be downloadedat our website (www.chemgenex.com). Additionally, any person, upon request, canask for a hard copy or electronic file of such Code. If we make any substantiveamendment to the Code of Ethics or grant any waivers, including any implicitwaiver, from a provision of the Code of Ethics, we will disclose the nature ofsuch amendment or waiver on our website. During the year ended June 30, 2007,no such amendment was made or waiver granted

 

## **ITEM16C.**                                     PRINCIPAL ACCOUNTANT FEES AND SERVICES

## ** **

For purposes of this Form 20-F Annual Report and other SEC filings, theCompany’s independent registered public accounting firm is Ernst & Young. Forstatutory reporting purposes and filings with the ASX and ASIC in Australia,the Company’s auditor is Ernst & Young.

 

69

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The followingtable sets forth the fees billed to us by our statutory auditor, Ernst &Young, for the years ended June 30, 2007, 2006 and 2005, respectively:

 
| **Ernst & Young** | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Audit fees            |       | 269,435    |       | 212,325    |       | 93,250     |       |
| Tax fees              |       | —     |       | —     |       | 12,000     |       |
| All other  fees       |       | —     |       | —     |       | 17,709     |       |
| Total                 |       | 269,435    |       | 212,325    |       | 122,959    |       |

 

For purposes of the initial registration  Form 20-F and the 2005 20-F Annual Report the Company’s independent registeredpublic accounting firm was Deloitte Touche Tohmatsu. The following table setsforth the fees billed to us by the independent registered public accountingfirm, Deloitte Touche Tohmatsu, since the year ended June 30, 2005:

 
| **Deloitte Touche Tohmatsu** | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Audit fees (a)               | ** ** | **—** | ** ** | **—** | ** ** | 497,804    |       |
| Audit-related fees           | ** ** | **—** | ** ** | **—** | ** ** | —     |       |
| Tax fees                     | ** ** | **—** | ** ** | **—** | ** ** | —     |       |
| All other fees               | ** ** | **—** | ** ** | **—** | ** ** | —     |       |
| Total                        | ** ** | **—** | ** ** | **—** | ** ** | 497,804    |       |

 

(a) Audit fees billed byDeloitte Touche Tohmatsu  relate to theaudit of financial statements and review of SEC filings for purposes of theCompany’s Registration Statement on Form 20-F lodged in June 2005 as well asthe Annual Report on Form 20-F for the year ended June 30, 2005.

 

***Audit Committee Pre-Approval Policies and Procedures***

 

The Company’sBoard of Directors has established pre-approval policies and procedures for theengagement of its independent registered public accounting firms for all auditand non-audit services.

 

The AuditCommittee reviews the scope of all the services to be provided, before theircommencement, in order to ensure that there are no independence issues and theservices are not prohibited services as defined by Sarbanes-Oxley Act of 2002.

 

## **ITEM16D.**                                     EXEMPTIONS FROM THE LISTING STANDARDS FORAUDIT COMMITTEES

## ** **

Not applicable.

 

## **ITEM16E.**                                       PURCHASES OF EQUITY SECURITIES BY THEISSUER AND AFFILIATED PURCHASERS

## ** **

Not applicable.

 

70

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# **PART III**

# ** **

## **ITEM17.**                                              FINANCIAL STATEMENTS

## ** **

Refer to page F-1 for an index of all Financial Statements.

 

## **ITEM18.**                                              FINANCIAL STATEMENTS

## ** **

The Company has chosen to respond to Item 17 in lieu of responding tothis Item.

 

## **ITEM19.**                                              EXHIBITS

## ** **

The following documents are filed as exhibits to this Annual Report onForm 20-F:

 

1.                                       Constitution ofthe Registrant #.

 

2.                                       DepositAgreement, dated as of December 6, 2002, by and among Autogen Limited, The Bankof New York, as Depositary, and the Owners and Holders of American DepositaryReceipts (such agreement is incorporated herein by reference to the RegistrationStatement on Form F-6 relating to the ADSs (File No. 333-101016) filed with theCommission on November 1, 2002)

 

3.               Material Contracts:

 

3.1         ServiceContracts of Directors and Consultants

 

(a)                                  Secondment Agreementbetween Deakin University and the Autogen Limited dated March 19, 2002 inrespect of the secondment to the Company of Dr. Gregory R. Collier #.

 

(b)                                 SupplementarySecondment Deed among the Company, Autogen Research Pty Ltd and Dr. Gregory R.Collier dated March 26, 2002 #.

 

71

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3.2                                 OtherContracts

 

(a)                                  Research and LicenseAgreement dated April 28, 1999 between Autogen Pty Ltd. and Lipha S.A.* #

 

(b)                                 Deed dated March 16,2001 between Autogen Research Pty Limited and Lipha S.A.* #

 

(c)                                  Research and LicenseAgreement dated April 28, 1999 between Autogen Pty Ltd. and Lipha S.A.* #

 

(d)                                 Research and LicenseAgreement dated February 11, 2002 between Autogen Research Pty Ltd. and LiphaS.A.* #

 

(e)                                  Research Services(Subcontracting) Agreement dated June 26, 2000 between Autogen Research PtyLimited and Deakin University.* #

 

(f)                                    Research andDevelopment Option Agreement dated August 30, 2004 between Autogen Research PtyLtd and Vernalis (R&D) Limited.* #

 

(g)                                 Research, License andCommercialisation Agreement (Gene Discovery in Depression), dated August 16,2000 between Autogen Research Pty Ltd. and Deakin University.* #

 

(h)                                 CommercialisationLicense (Field of Diabetes and Obesity) “AGT 203” dated March 14, 2003 betweenAutogen Limited (now ChemGenex Pharmaceuticals Limited) and Merck Santé s.a.s.*#

 

(i)                                     CommercialisationLicense (Field of Diabetes and Obesity) “AGT 121” dated March 14, 2003  between the Autogen Limited (now ChemGenexPharmaceuticals Limited) and Merck Santé s.a.s.* #

 

(j)                                     CommercialisationLicense (Field of Diabetes and Obesity) “TANIS” dated August 26, 2002 betweenthe Autogen Pty Ltd and Merck Santé s.a.s.* #

 

(k)                                  CommercialisationLicense (Field of Obesity) “BEACON” dated April 28, 1999 between Autogen PtyLtd and Lipha S.A.* #

 

(l)                                     Research, Licenseand Commercialization Agreement dated December 31, 2002 between AutogenResearch Pty Ltd. and the Southwest Foundation for Biomedical Research.* #

 

(m)                               Variation Agreementdated June 24, 2003 between Autogen Research Pty Limited and SouthwestFoundation for Biomedical Research.* #

 

(n)                                 Extension Agreementdated July 1, 2004 between Autogen Research Pty Limited and SouthwestFoundation for Biomedical Research.* #

 

(o)                                 Research Agreementdated February 28, 1997 among Autogen Pty Ltd., Deakin University andInternational Diabetes Institute.* #

 

(p)                                 Research, License andCommercialisation Agreement dated January 14, 1998 between Autogen Pty Ltd andInternational Diabetes Institute.* #

 

(q)                                 Agreement dated August18, 2004 between Autogen Pty Ltd and International Diabetes Institute.* #

 

(r)                                    Sponsored ClinicalStudy Agreement dated April 14, 2003 between The University of Texas M.D.Anderson Cancer Center and ChemGenex Therapeutics, Inc., as amended byAmendment No. 1 dated November 18, 2004.* #

 

(s)                                  Patent and TechnologyLicense Agreement dated February 7, 2005 between ChemGenex PharmaceuticalsLimited and The University of Texas M. D. Anderson Cancer Center.* #

 

72

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(t)                                    Voting Rights deeddated June 21, 2004 between Dr. Dennis M. Brown and Charter Pacific CorporationLtd. #

 

(u)                                 Sole Licence Agreementdated March 1, 1999 between Autogen Pty Ltd and Kyokuto PharmaceuticalIndustrial Co. Ltd. #

 

(v)                                 Agreement and Plan ofMerger dated April 27, 2004 between AGT Biosciences Limited, AGT BiosciencesInc., ChemGenex Therapeutics Inc. and Dr. Dennis M. Brown. #

 

(w)                               Research, Licence andCommercialisation Agreement dated April 21, 2005 between ChemGenexPharmaceuticals Limited and Deakin University. #

 

(x)                                   HHT Development andCommercialisation Agreement dated June 27, 2005 between ChemGenexPharmaceuticals Limited, Stragen Investment B.V. and Stragen Pharma S.A.*+

 

(y)                                 HHT Supply andDistribution Agreement dated June 27, 2005 between ChemGenex PharmaceuticalsLimited and Stragen Investment B.V.*+

 

(z)                                   Extension Agreementdated July 27, 2005 between Autogen Research Pty Limited and SouthwestFoundation for Biomedical Research. *+

 

(aa)                            Extension Agreement datedSeptember 20, 2005 between Autogen Pty Ltd and International DiabetesInstitute. *+

 

(bb)                          Clinical Master ServiceAgreement dated September 28, 2005 between ChemGenex Pharmaceuticals Limitedand Inveresk Research Limited.+

 

12.01                     Certificationby the Company’s Chief Executive Officer required by Item 15.

 

12.02                     Certificationby the Company’s Chief Financial Officer required by Item 15.

 

13.01                     Certificationpursuant to 18 U.S.C. Section 1350.

 

13.02                     Certificationpursuant to 18 U.S.C. Section 1350.

 

 

----

# Incorporated by reference to the Company’s Registration Statement onForm 20-F (file no. 0-51373) filed with the Commission on June 23, 2005

 

+ Incorporated by reference to the Company’s Annual Report on Form 20-F(file no. 0-51373) filed with the Commission on December 19, 2005.

 

* Certain provisions of this exhibit have been omitted and filedseparately with the Commission pursuant to an application for confidentialtreatment under Rule 24b-2 promulgated under the Securities Exchange Act of1934, as amended.

 

73

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**SIGNATURES**

 

The registrant hereby certifies that it meets all of the requirementsfor filing on Form 20-F and that it has duly caused and authorized theundersigned to sign this Annual Report on its behalf.

 

 

**CHEMGENEX PHARMACEUTICALS LIMITED**

 
| By:    | /s/ Greg Collier                              |   |
|--------|-----------------------------------------------|--------|
| Name:  | Greg Collier                                  |
| Title: | Chief Executive Officer and Managing Director |
| Date:  | November 27, 2007                             |

 

74

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CHEMGENEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES

 

**Contents**

 
| **Report of Independent  Registered Public Accounting Firm**                                     | ** ** |
|--------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                       | ** ** |
| **Consolidated Statements of  Income for the Years Ended June 30, 2007, 2006 and 2005**          | ** ** |
| ** **                                                                                       | ** ** |
| **Consolidated Balance Sheets as of  June 30, 2007 and 2006**                                    | ** ** |
| ** **                                                                                       | ** ** |
| **Consolidated Cash Flow  Statements for the Years Ended June 30, 2007, 2006 and 2005**          | ** ** |
| ** **                                                                                       | ** ** |
| **Consolidated Statement of  Changes in Equity for the Years Ended June 30, 2007,2006 and 2005** | ** ** |
| ** **                                                                                       | ** ** |
| **Notes to the  Consolidated Financial Statements**                                              | ** ** |

** **

F-1

----

 

CHEMGENEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES

 

**Report of Independent Registered PublicAccounting Firm**

 

To the Board of Directors and Shareholders of ChemGenex PharmaceuticalsLtd:

 

We haveaudited the accompanying consolidated balance sheets of ChemGenexPharmaceuticals Ltd and its controlled entities (the Company) as of 30 June2007 and 2006, and the related consolidated statements of income, shareholders’equity and cash flows for each of the three years in the period ended 30 June2007. 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 conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. We were not engaged to perform anaudit of the Company’s internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of ChemGenexPharmaceuticals Ltd and its controlled entities at 30 June 2007 and 2006 andthe consolidated results of their operations and their cash flows for each ofthe three years in the period ended 30 June 2007, in conformity with AustralianAccounting Standards.

 

AustralianAccounting Standards vary in certain significant respects from U.S. generallyaccepted accounting principles. Information relating to the nature and effectof such differences is presented in Note 26 to the consolidated financialstatements.

 

 
| **/s/ Ernst & Young** |   |
|---------------------------|--------|
|                      |
| Melbourne,  Australia     |
| 23 November  2007         |

 

F-2

----

 

CHEMGENEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES

 

**Consolidated Statements of Income**

 
| **FOR THE YEAR ENDED JUNE 30** | ** ** | **Notes**  | ** ** | **200****7**    | ** ** | **200****6** | ** ** | **2005**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **$**           | ** ** | **$**        | ** ** | **$**      | ** ** |
| **Revenue**                                             |       |       |       |            | ** ** |         |       |       |       |
| Research  revenue                                       |       |       |       | **536,111**     | ** ** | 1,676,297    |       | 3,527,312  |       |
| Finance  income                                         |       | 4          | (b)        | **862,096**     | ** ** | 241,634      |       | 266,987    |       |
|                                                    |       |       |       | **1,398,207**   | ** ** | 1,917,931    |       | 3,794,299  |       |
| Research  expenditure                                   |       | 4          | (d)        | **(7,731,988**  | **)**      | (7,184,978   | )          | (4,621,406 | )          |
| **Gross profit/(loss)**                                 |       |       |       | **(6,333,781**  | **)**      | (5,267,047   | )          | (827,107   | )          |
|                                                    |       |       |       | ** **      | ** ** |         |       |       |       |
| Other  income                                           |       | 4          | (a)        | **889,927**     | ** ** | 379,091      |       | 300,987    |       |
| Administration  costs                                   |       |       |       | **(1,710,706**  | **)**      | (967,032     | )          | (847,903   | )          |
| NASDAQ  listing expenses                                |       |       |       | **—**      | ** ** | **—**   |       | (911,578   | )          |
| Employee  benefits expense                              |       | 4          | (c)        | **(2,517,915**  | **)**      | (2,710,341   | )          | (2,631,862 | )          |
| Scientific  advisory board expense                      |       |       |       | **(118,643**    | **)**      | (120,913     | )          | (125,763   | )          |
| Patent  expense                                         |       |       |       | **(564,543**    | **)**      | (575,567     | )          | (446,527   | )          |
| Legal  expense                                          |       |       |       | **(66,434**     | **)**      | (114,416     | )          | (105,945   | )          |
| Depreciation                                            |       |       |       | **(271,344**    | **)**      | (272,198     | )          | (269,937   | )          |
| Travel  expense                                         |       |       |       | **(387,450**    | **)**      | (341,037     | )          | (240,340   | )          |
| Accounting  and audit expense                           |       |       |       | **(298,526**    | **)**      | (380,259     | )          | (129,208   | )          |
| **Loss from operations before tax and finance  costs**  |       |       |       | **(11,379,415** | **)**      | (10,369,719  | )          | (6,235,183 | )          |
|                                                    |       |       |       | ** **      | ** ** |         |       |       |       |
| Finance costs                                           |       |       |       | **—**      | ** ** | —       |       | —     |       |
| **Loss before income tax**                              |       |       |       | **(11,379,415** | **)**      | (10,369,719  | )          | (6,235,183 | )          |
|                                                    |       |       |       | ** **      | ** ** |         |       |       |       |
| Income tax expense                                      |       | 5          |       | **(321,504**    | **)**      | —       | ** ** | **—** | ** ** |
| **Loss after tax**                                      |       |       |       | **(11,700,919** | **)**      | (10,369,719  | )          | (6,235,183 | )          |
|                                                    |       |       |       | ** **      | ** ** |         |       |       |       |
| **Loss attributable to members of the parent**          |       |       |       | **(11,700,919** | **)**      | (10,369,719  | )          | (6,235,183 | )          |
|                                                    |       |       |       | ** **      | ** ** |         |       |       |       |
| Basic  loss in cents per share                          |       | 6          |       | **$**           | **(0.07**  | **)**        | $          | (0.09      | )          | $ | (0.06 | ) |
| Diluted  loss in cents per share                        |       | 6          |       | **$**           | **(0.07**  | **)**        | $          | (0.09      | )          | $ | (0.06 | ) |

 

F-3

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CHEMGENEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES

 

**Consolidated Balance Sheets**

** **
| **AS AT JUNE 30**                     | ** ** | **Notes**  | ** ** | **200****7**    | ** ** | **200****6**  | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **$**           | ** ** | **$**         | ** ** |
| **CURRENT ASSETS**                                   |       |       | ** ** | ** **      |       |          |       |
| Cash  and cash equivalents                           |       | 8          | ** ** | **25,366,562**  |       | 15,553,696    |       |
| Trade  and other receivables                         |       | 9          | ** ** | **18,000**      |       | 79,011        |       |
| Prepayments                                          |       |       | ** ** | **363,251**     |       | 71,974        |       |
| **TOTAL CURRENT ASSETS**                             |       |       | ** ** | **25,747,813**  |       | 15,704,681    |       |
| **NON-CURRENT ASSETS**                               |       |       | ** ** | ** **      |       |          |       |
| Plant  and equipment                                 |       | 11         | ** ** | **81,546**      |       | 328,820       |       |
| Goodwill                                             |       | 12         | ** ** | **16,931,750**  |       | 16,931,750    |       |
| **TOTAL NON-CURRENT ASSETS**                         |       |       | ** ** | **17,013,296**  |       | 17,260,570    |       |
| **TOTAL ASSETS**                                     |       |       | ** ** | **42,761,109**  |       | 32,965,251    |       |
|                                                 |       |       | ** ** | ** **      |       |          |       |
| **CURRENT LIABILITIES**                              |       |       | ** ** | ** **      |       |          |       |
| Trade  and other payables                            |       | 16         | ** ** | **2,445,328**   |       | 1,621,865     |       |
| Deferred  revenue                                    |       |       | ** ** | **165,688**     |       | 185,372       |       |
| Employee  entitlements                               |       |       | ** ** | **231,284**     |       | 153,105       |       |
| Provisions                                           |       | 17         | ** ** | **16,079**      | ** ** | **—**    | ** ** |
| **TOTAL CURRENT LIABILITIES**                        |       |       | ** ** | **2,858,289**   |       | 1,960,342     |       |
| **NON-CURRENT LIABILITIES**                          |       |       | ** ** | ** **      |       |          |       |
| Employee  entitlements                               |       |       | ** ** | **33,222**      | ** ** | **—**    | ** ** |
| **TOTAL NON-CURRENT LIABILITIES**                    |       |       | ** ** | **33,222**      | ** ** | **—**    | ** ** |
| **TOTAL LIABILITIES**                                |       |       | ** ** | **2,891,511**   | ** ** | **1,960,342** | ** ** |
|                                                 |       |       | ** ** | ** **      |       |          |       |
| **NET ASSETS**                                       |       |       | ** ** | **39,869,598**  |       | 31,004,909    |       |
| **EQUITY**                                           |       |       | ** ** | ** **      |       |          |       |
| Equity  attributable to equity holders of the parent |       |       | ** ** | ** **      |       |          |       |
| Issued  capital                                      |       | 18         | ** ** | **120,773,060** |       | 99,892,615    |       |
| Retained earnings                                    |       |       | ** ** | **(92,723,921** | **)**      | (81,023,002   | )          |
| Other  reserves                                      |       | 18         | ** ** | **11,820,459**  |       | 12,135,296    |       |
| **TOTAL EQUITY**                                     |       |       | ** ** | **39,869,598**  |       | 31,004,909    |       |

 

F-4

----

 

CHEMGENEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES

 

**Consolidated Cash Flow Statements**

* *
| **FOR THE YEAR ENDED JUNE 30** | ** ** | **Notes**  |   | **2007**        | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|---------------------------------------------------------|------------|------------|--------|-----------------|------------|-------------|------------|-------------|------------|
| ** **                                              | ** ** | ** ** |   | **$**           | ** ** | **$**       | ** ** | **$**       | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                |       |       |   | ** **      | ** ** |        |       |        |       |
| Customer  revenues received                             |       |       |   | **516,427**     | ** ** | 1,920,107   |       | 3,618,233   |       |
| Government  grants received                             |       | 4          | (a)    | **730,099**     | ** ** | 148,868     | ** ** | **—**  | ** ** |
| VAT  refund                                             |       |       |   | **1,911**       | ** ** | **—**  | ** ** | **—**  | ** ** |
| Payments  to suppliers and employees                    |       |       |   | **(12,860,804** | **)**      | (10,554,593 | )          | (10,562,419 | )          |
| Income  taxes paid                                      |       |       |   | **(293,238**    | **)**      | **—**  | ** ** | **—**  | ** ** |
|                                                    |       |       |   | ** **      | ** ** |        |       |        |       |
| NET  CASH FLOWS USED IN OPERATING ACTIVITIES            |       | 8          |   | **(11,905,605** | **)**      | (8,485,618  | )          | (6,944,186  | )          |
|                                                    |       |       |   | ** **      | ** ** |        |       |        |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                |       |       |   | ** **      | ** ** |        |       |        |       |
| Interest  received                                      |       | 4          | (b)    | **862,096**     | ** ** | 241,634     |       | 266,987     |       |
| Purchase  of plant and equipment                        |       | 11         |   | **(24,070**     | **)**      | (13,996     | )          | (15,218     | )          |
| NET  CASH FLOWS FROM INVESTING ACTIVITIES               |       |       |   | **(838,026**    | ** ** | 227,638     |       | 251,769     |       |
|                                                    |       |       |   |            | ** ** |        |       |        |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                |       |       |   |            | ** ** |        |       |        |       |
| Proceeds  from issues of shares                         |       | 18         |   | **21,260,131**  | ** ** | 15,723,021  |       | 14,451,937  |       |
| Transaction  cost of issue of shares                    |       | 18         |   | **(379,686**    | **)**      | (423,297    | )          | (189,353    | )          |
| NET  CASH FLOWS FROM FINANCING ACTIVITIES               |       |       |   | **(20,880,445** | ** ** | 15,299,724  |       | 14,262,584  |       |
|                                                    |       |       |   | ** **      | ** ** |        |       |        |       |
| Net  increase in cash and cash equivalents              |       |       |   | **9,812,866**   | ** ** | 7,041,744   |       | 7,570,167   |       |
| Cash  and cash equivalents at beginning of period       |       |       |   | **15,553,696**  | ** ** | 8,511,952   |       | 941,785     |       |
| **CLOSING CASH CARRIED FORWARD**                        |       | 8          |   | **25,366,562**  | ** ** | 15,553,696  |       | 8,511,952   |       |

 

F-5

----

 

CHEMGENEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES

 

**Consolidated Statements of Changes in Equity**

 
| ** **                                                                | ** ** | ** **      | ** ** | **Equity**     | ** ** | **Foreign Currency** | ** ** | **Equity**    | ** ** | ** **      | ** ** | ** **     | ** ** |
|---------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|---------------------------|------------|---------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                | ** ** | **Issued**      | ** ** | **Premium**    | ** ** | **Translation**           | ** ** | **Options**   | ** ** | **Retained**    | ** ** | **Total**      | ** ** |
| **From JULY 1, 2004 to JUNE 30, 2007** | ** ** | **Capital**     | ** ** | **Reserve**    | ** ** | **Reserve**               | ** ** | **Reserve**   | ** ** | **Earnings**    | ** ** | **Equity**     | ** ** |
| ** **                                                                | ** ** | **$**           | ** ** | **$**          | ** ** | ** **                | ** ** | **$**         | ** ** | **$**           | ** ** | **$**          | ** ** |
| **At July 1, 2004**                                                       |       | **70,257,383**  | ** ** | **10,866,878** | ** ** | ** **                | ** ** | **6,857**     | ** ** | **(64,518,100** | **)**      | **16,713,018** | ** ** |
| ** **                                                                |       | ** **      | ** ** | ** **     | ** ** | ** **                | ** ** | ** **    | ** ** | ** **      | ** ** | ** **     | ** ** |
| Loss  for year to June 30, 2005                                           |       |            |       |           |       |                      |       |          |       | (6,235,183      | )          | (6,235,183     | )          |
| Total  recognised income and expense for the period                       |       |            |       |           |       |                      |       |          |       | (6,235,183      | )          | (6,235,183     | )          |
| Issue  of share capital                                                   |       | 14,439,437      |       |           |       |                      |       |          |       |            |       | 14,439,437     |       |
| less  cost of issue                                                       |       | (189,353        | )          |           |       |                      |       |          |       |            |       | (189,353       | )          |
| Fees  paid in lieu of cash                                                |       | 72,924          |       |           |       |                      |       |          |       |            |       | 72,924         |       |
| Cost  of option-based payments                                            |       |            |       |           |       |                      |       | 422,105       |       |            |       | 422,105        |       |
| Options  exercised under Employee Share Option Plan                       |       | 12,500          |       |           |       |                      |       |          |       |            |       | 12,500         |       |
| **At July 1, 2005**                                                       |       | **84,592,891**  | ** ** | **10,866,878** | ** ** | **—**                | ** ** | **428,962**   | ** ** | **(70,653,283** | **)**      | **25,235,448** | ** ** |
| ** **                                                                |       | ** **      | ** ** | ** **     | ** ** | ** **                | ** ** | ** **    | ** ** | ** **      | ** ** | ** **     | ** ** |
| Loss  for year to June 30, 2006                                           |       |            |       |           |       |                      |       |          |       | (10,369,719     | )          | (10,369,719    | )          |
| Total  recognised income and expense for the period                       |       |            |       |           |       |                      |       |          |       | (10,369,719     | )          | (10,369,719    |       |
| Issue  of share capital                                                   |       | 15,723,021      |       |           |       |                      |       |          |       |            |       | 15,723,021     |       |
| less  cost of issue                                                       |       | (423,297        | )          |           |       |                      |       |          |       |            |       | (423,297       | )          |
| Cost  of option-based payments                                            |       |            |       |           |       |                      |       | 839,456       | ** ** | ** **      |       | 839,456        |       |
| **At June 30, 2006**                                                      |       | **99,892,615**  | ** ** | **10,866,878** | ** ** | **—**                | ** ** | **1,268,418** | ** ** | **(81,023,002** | **)**      | **31,004,909** | ** ** |
| ** **                                                                |       | ** **      | ** ** | ** **     | ** ** | ** **                | ** ** | ** **    | ** ** | ** **      | ** ** | ** **     | ** ** |
| Foreign  Exchange Translation                                             |       |            |       |           |       | (751,314                  | )          |          | ** ** | ** **      |       | (751,314       | )          |
| Loss  for year ended June 30, 2007                                        |       |            |       |           |       |                      |       |          |       | (11,700,919     | )          | (11,700,919    | )          |
| Total  recognised income and expense for the period                       |       |            |       |           |       | (751,314                  | )          |          | ** ** | **(11,700,919** | **)**      | (12,452,233    | )          |
| Issue  of share capital                                                   |       | 21,260,131      |       |           |       |                      |       |          | ** ** | ** **      |       | 21,260,131     |       |
| less  cost of issue                                                       |       | (379,686        | )          |           |       |                      |       |          | ** ** | ** **      |       | (379,686       | )          |
| Cost  of option-based payments                                            |       |            |       |           |       |                      |       | 436,477       | ** ** | ** **      |       | 436,477        |       |
| **At June 30, 2007**                                                      |       | **120,773,060** | ** ** | **10,866,878** | ** ** | **(751,314**              | **)**      | **1,704,895** | ** ** | **(92,723,921** | **)**      | **39.869,598** | ** ** |

 

REFER NOTE 17 ISSUED CAPITAL AND RESERVES FOR DETAILSMOVEMENTS IN CAPITAL AND RESERVES DURING THE PERIOD FROM JULY1, 2004 TO JUNE30, 2007

 

F-6

----

CHEMGENEXPHARMACEUTICALS LIMITED AND SUBSIDIARIES

 

**Notes to the Consolidated FinancialStatements**

 

**1.CORPORATE INFORMATION**

 

The financialreport of ChemGenex Pharmaceuticals Limited (“ChemGenex” or “Company” or “Group”)for the year ended June 30, 2007 was authorised for issue in accordance with aresolution of the directors on August 29, 2007.

 

ChemGenex is acompany limited by shares incorporated in Australia whose shares are publiclytraded on the Australian Stock Exchange (“ASX”) and are traded as Level 2American Depository Receipts (“ADRs”) on the NASDAQ Stock Market.

 

The nature ofthe operations and principal activities of ChemGenex are described in note 3.

 

Theconsolidated financial statements have been prepared on the basis of goingconcern which contemplates continuity of normal business activities and therealisation of assets and settlement of liabilities in the ordinary course ofbusiness. Since commencing biotechnology activities inJune 1996 the Company has experienced recurring net losses and negative cashflows from operations. At June 30, 2007, the Company had accumulated losses of$92,723,921 and recorded a net loss of $11,700,919 and negative cash flows fromoperations of $11,905,605 for the year ended June 30, 2007. Based on anticipatedcash flow requirements of the Company’s existing research and developmentactivities, the directors consider that the Company will have sufficient fundsto support existing operations to the second half of calendar 2008.

 

The directorsare confident that adequate funds to support the Company’s continued operationsinto 2009 and beyond will be raised from collaboration and licensing agreementsand/or equity placements as required. From July 1, 1996 it has raisedapproximately $80.9 million (including $50.5 million since July 1, 2004) fromthe issue of equity securities. In addition, during this time, the Company hasreceived approximately $26.4 million from its pharmaceutical partners pursuantto collaboration and licensing agreements.

 

**2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**(a)           Basis of accounting**

 

The financialreport is a general-purpose financial report, which has been prepared inaccordance with the requirements of the Corporations Act 2001 and AustralianAccounting Standards. The financial report has also been prepared on ahistorical cost basis.

 

The financialreport is presented in Australian dollars.

 

**(b)           Statement of compliance**

 

The financialreport complies with Australian Accounting Standards, which include Australianequivalents to International Financial Reporting Standards (“AIFRS”).Compliance with AIFRS ensures that the financial report, comprising thefinancial statements and notes thereto, complies with International FinancialReporting Standards (“IFRS”).

 

CertainAustralian Accounting Standards and Urgent Issues Group (‘UIG’) interpretationshave recently been issued or amended but are not yet effective and have notbeen adopted by the Group for the annual reporting period ended 30 June 2007.The directors’ have assessed the impact of these new or amended standards (tothe extent relevant to the group) and interpretations as follows:

 

F-7

----

 
| **Reference** | ** ** | **Title**                                                                                                                                                                         | ** ** | **Summary**                                                                                                         | ** ** | **Application  date of  standard*** | ** ** | **Impact on Group financial  report**                                                                                                                                                                                                                     | ** ** | **Application  date for  Group*** |
|---------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|
| AASB2005-10   |       | Amendments to Australian Accounting Standards [AASB 132, AASB 101,  AASB 114, AASB 117, AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023 & AASB  1038]                           |       | Amendments arise from the release in August 2005 of AASB 7 *Financial Instruments: Disclosures.*                    |       | 1 January 2007                           |       | AASB 7 is a disclosure standard so will have no direct impact on the  amounts included in the Group’s financial statements. However, the amendments  will result in changes to the financial instrument disclosures included in  the Group’s financial report. |       | 1 July 2007                            |
|          |       |                                                                                                                                                                              |       |                                                                                                                |       |                                     |       |                                                                                                                                                                                                                                                                     |       |                                   |
| AASB2007-1    |       | Amendments to Australian Accounting Standards arising from AASB  Interpretation 11 [AASB 2]                                                                                       |       | Amending standard issued as a consequence of AASB Interpretation 11 *Interim Financial Reporting and Impairment*.   |       | 1 March2007                              |       | This is consistent with the Group’s existing accounting policies for  share-based payments so will have no impact.                                                                                                                                                  |       | 1 July 2007                            |
|          |       |                                                                                                                                                                              |       |                                                                                                                |       |                                     |       |                                                                                                                                                                                                                                                                     |       |                                   |
| AASB2007-3    |       | Amendments to Australian Accounting Standards arising from AASB 8  [AASB 5, AASB, AASB 6, AASB 102, AASB 107, AASB 119, AASB 127, AASB 134, AASB  136, AASB 1023 & AASB 1038] |       | Amending standard issued as a consequence of AASB 8 *Operating Segments*.                                           |       | 1 January 2009                           |       | AASB 8 is a disclosure standard so will have  no direct impact on the amounts included in the Groups financial statements.  The impact of the new standard is yet to be  determined.                                                                                     |       | 1 July 2009                            |
|          |       |                                                                                                                                                                              |       |                                                                                                                |       |                                     |       |                                                                                                                                                                                                                                                                     |       |                                   |
| AASB 7        | * *   | *Financial Instruments:  Disclosures*                                                                                                                                             |       | New standard replacing disclosure requirements of AASB 132.                                                         |       | 1 January 2007                           |       | Refer to AASB 2005-10 above.                                                                                                                                                                                                                                             |       | 1 July 2007                            |
|          | * *   | * *                                                                                                                                                                          |       |                                                                                                                |       |                                     |       |                                                                                                                                                                                                                                                                     |       |                                   |
| AASB 8        | * *   | *Operating Segments*                                                                                                                                                              |       | This new standard will replace AASB 114 *Segment  Reporting* and adopts a management approach to segment reporting. |       | 1 January 2009                           |       | Refer to AASB 2007-3 above.                                                                                                                                                                                                                                              |       | 1 July 2009                            |

 

**(c)           Basis of consolidation**

 

Theconsolidated financial statements comprise the financial statements ofChemGenex Pharmaceuticals Limited (“the Parent”) and its subsidiaries (‘theGroup”).

 

The financialstatements of subsidiaries are prepared for the same reporting period as theparent company, using consistent accounting policies. Adjustments are made tobring into line any dissimilar accounting policies that may exist.

 

Allintercompany balances and transactions, including unrealised profits arisingfrom intra-group transactions, have been eliminated in full. Unrealised lossesare eliminated unless costs cannot be recovered.

 

Subsidiariesare consolidated from the date on which control is transferred to the Group andcease to be consolidated from the date on which control is transferred from theGroup.

 

**(d)           Significant accounting estimates andassumptions**

 

The carryingamount of certain assets and liabilities are often determined based onestimates and assumptions of future events. The key estimates and assumptionsthat have a significant risk of causing a material adjustment to the carryingamounts of certain assets and liabilities within the next annual reportingperiod are:

 

*Impairmentof goodwill and intangibles with indefinite useful lives*

 

The Groupdetermines whether goodwill and intangibles with indefinite useful lives areimpaired at least on an annual basis. This requires an estimate of therecoverable amount of the cash—generating units to which the goodwill andintangibles with indefinite lives are allocated. The assumptions used in thisestimation of recoverable amount and the carrying amount of goodwill andintangibles with indefinite useful lives are discussed in note 13.

 

*Share-basedpayment transactions*

 

The Groupmeasures the cost of share-based payments at fair value at the grant date usingthe Black-Scholes formula, taking into account, the terms and conditions uponwhich the instruments were granted, as discussed in note 14.

 

F-8

----

 

**(e)           Foreign currencies**

 

Both thefunctional and presentation currency of ChemGenex Pharmaceuticals Limited andits Australian subsidiary Autogen Research Pty Ltd is Australian dollars (A$).

 

Transactionsin foreign currencies are initially recorded in the functional currency at therate of exchange ruling at the date of the transaction. Monetary assets andliabilities denominated in foreign currencies are retranslated at the rate ofexchange ruling at the balance sheet date.

 

Alldifferences in the consolidated financial report are taken to the incomestatement.

 

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

 

The functionalcurrency of the overseas subsidiary ChemGenex Pharmaceuticals Inc. is UnitedStates dollars (US$).

 

As at the reportingdate the assets and liabilities of the overseas subsidiary are translated intothe presentation currency of the Parent at the rate of exchange ruling at thebalance sheet date and the income statement is translated at the weightedaverage exchange rates for the period. The exchange differences arising ontranslation are taken directly to a separate component of equity.

 

On disposal ofa foreign entity, the deferred cumulative amount recognised in equity relatingto that particular foreign operation is recognised in the income statement.

 

**(f)            Cash and cash equivalents**

 

Cash andshort-term deposits in the balance sheet comprise cash at bank and in hand andshort-term deposits with an original maturity of three months or less. For thepurposes of the Cash Flow Statement, cash includes cash and cash equivalents asdefined above, net of outstanding bank overdrafts.

 

**(g)           Trade and other receivables**

 

Tradereceivables, which generally have 30 day terms, are recognised and carried atoriginal invoice amount less any allowance for any uncollectible amounts. Anestimate for doubtful debts is made when collection of the full amount is nolonger probable. Bad debts are written-off when incurred.

 

**(h)           Plant and equipment**

 

*Costand valuation*

 

Plant andequipment are carried at cost less accumulated depreciation and any impairmentin value.

 

*Depreciation*

 

Depreciationis provided on a straight-line basis on all plant and equipment.

 
| Major  depreciation periods are: |   |       |
|----------------------------------|--------|------------|
|                             |   |       |
| Plant and  equipment:            |   |       |
| • research equipment        |   | 5-7 years  |
| • office equipment          |   | 3-13 years |

 

*Impairment*

 

The carryingvalues of plant and equipment are reviewed for impairment when events orchanges in circumstances indicate the carrying value may not be recoverable.

 

If any suchindication exists and where the carrying value exceeds the estimatedrecoverable amount the assets are written down to their recoverable amount. Therecoverable amount of plant and equipment is the greater of the fair value lesscosts to sell and value in use.

 

F-9

----

 

**(i)            Goodwill**

 

Goodwill onacquisition is initially measured at cost, being the excess of the cost of thebusiness combination over the acquirer’s interest in the fair value ofidentifiable assets, liabilities and contingent assets acquired. Followinginitial recognition, goodwill is measured at cost less any accumulatedimpairment losses. The basis for calculating possible impairment of goodwill isset out in note 13.

 

Goodwill hasnot been amortised since the implementation of AIFRS on July 1, 2004. Goodwillis reviewed for impairment annually or more frequently if events or changes incircumstances indicate that the carrying value may be impaired.

 

At theacquisition date, any goodwill acquired is allocated to each of the cash-generatingunits expected to benefit from the combination’s synergies. Impairment isdetermined by assessing the recoverable amount of the cash-generating unit towhich the goodwill relates.

 

Where therecoverable amount of the cash-generating unit is less than the carryingamount, an impairment loss is recognised.

 

Where goodwillforms part of a cash-generating unit and part of the operation within that unitis disposed of, the goodwill associated with the operation disposed of isincluded in the carrying amount of the operation when determining the gain orloss on disposal of the operation.

 

Goodwilldisposed of in this circumstance is measured on the basis of the relativevalues of the operation disposed of and the portion of the cash-generating unitretained.

 

**(j)            Research costs**

 

Research costsare expensed as incurred.

 

**(k)          Impairment of assets**

 

At eachreporting date, the Group assesses whether there is any indication that anasset may be impaired. Where an indicator of impairment exists, the Group makesa formal estimate of the recoverable amount. Where the carrying amount of anasset exceeds its recoverable amount the asset is considered impaired and iswritten down to its recoverable amount.

 

An asset’srecoverable amount is the higher of its fair value less costs to sell and itsvalue in use and is determined for an individual asset, unless the asset doesnot generate cash inflows that are largely independent of those from otherassets or group of assets and the asset’s value in use cannot be estimated tobe close to its fair value. In such cases the asset is tested for impairment aspart of the cash generating unit to which it belongs. When the carrying amountof an asset or cash-generating unit exceeds its recoverable amount, the assetor cash-generating unit is considered impaired and is written down to itsrecoverable amount.

 

In assessingvalue in use, the estimated future cash flows are discounted to their presentvalue using a pre-tax discount rate that reflects current market assessments ofthe time value of money and the risks specific to the asset.

 

**(l)            Pension and post-employment benefits**

 

The Group makes contributions to externalsuperannuation funds in accordance with existing employment contracts and tomeet it’s obligations under Australian taxation law.

 

The Group hasno liabilities or commitments for post employment benefits for any employee asat June 30, 2007.

 

**(m)          Employee benefits**

 

Provision ismade for employee benefits accumulated as a result of employees renderingservices up to the reporting date. These benefits include wages and salaries,annual leave and long service leave.

 

Liabilitiesarising in respect of wages and salaries, annual leave and other employeeentitlements expected to be settled within twelve months of the reporting dateare measured based on remuneration rates which are expected to be paid when theliability is settled. All other employee entitlement liabilities are measuredat the present value of the estimated future cash outflow to be made in respectof services provided by employees up to the reporting date. In determining thepresent value of the future cash outflows, the interest rates attaching togovernment guaranteed securities which have terms to maturity approximating theterms of the related liability are used.

 

F-10

----

 

**(n)           Share-based payment transactions**

 

The Group mayprovide benefits to employees (including directors), consultants and suppliersof the Group in the form of share-based payment transactions, whereby employeesrender services in exchange for shares or rights to purchase shares (‘equitysettled transactions’). These benefits may be provided under the Employee ShareOption Plan (‘ESOP’) or by issues approved at General Meetings of Shareholders.

 

The cost ofequity-settled transactions is measured by reference to the fair value at thedate at which they are granted. The fair value is determined using the BlackScholes option pricing model. In valuing equity-settled transactions, noaccount is taken of any performance conditions, other than conditions linked tothe price of the shares of ChemGenex Pharmaceuticals Limited (‘marketconditions’).

 

The cost ofequity-settled transactions is recognised, together with a correspondingincrease in equity, over the period in which the performance conditions arefulfilled, ending on the date on which the recipients become entitled to theaward (‘vesting date’).

 

The cumulativeexpense recognised for equity-settled transactions at each reporting date untilvesting date reflects:

 

(i)                  the extent to which the vestingperiod has expired, and

 

(ii)               the number of awards that, in theopinion of the directors of the Group, will ultimately vest.

 

This opinionis formed based on the best available information at balance date. 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.

 

Where 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 increase in the value of the transaction as a result of themodification, as measured at the date of modification.

 

Where 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.

 

**(o)           Leases**

 

Leases wherethe lessor retains substantially all of the risks and benefits of ownership ofthe assets are classified as operating leases. Operating lease payments arerecognised as an expense in the income statement on a straight-line basis overthe lease term.

 

**(p)           Trade and payables**

 

Liabilitiesfor trade creditors and other amounts are carried at cost which is fair valueof the consideration to be paid in the future for goods and services, whetheror not billed to the Group.

 

**(q)           Issued Capital**

 

Issued andpaid up capital is recognised at the fair value of the consideration receivedby the Group and is classified as equity.

 

Anytransaction costs arising on the issue of ordinary shares are recogniseddirectly in equity as a reduction of the share proceeds received.

 

**(r)           Revenue recognition**

 

*a) Research revenue*

 

Revenue under research collaboration agreements is recognised as earnedon a straight-line basis over the life of the respective agreement as thisreflects the level of effort required over the performance period. Theseagreements are performed on a “best efforts” basis with no guarantees of eithertechnical or commercial success. Project funding received in advance of theperiod in which the associated research efforts are performed is included indeferred revenue.

 

*b) Interest*

 

Interest income is recognised as interest accrues using the effectiveinterest method, which is the rate that exactly discounts estimated future cashreceipts through the expected life of the financial asset to the net carryingamount of the financial asset.

 

 

F-11

----

 

*c) Patent reimbursement*

 

Patent reimbursement comprises amounts received in accordance withpartnership agreements for patent costs incurred by the Group in conjunctionwith specified research projects. The revenue is recognised when thereimbursable expense is incurred and approved in accordance with the agreement.

 

*d) Government grants*

 

Revenue from government grants is recognised when received and allattaching conditions have been complied with.

 

When the grant relates to an expense item, it is recognised as incomeover the periods necessary to match the grant on a systematic basis to thecosts that it is intended to compensate.

 

*e) Reimbursement of initial NASDAQ expenses*

 

Under an agreement with the Bank of New York ChemGenex was reimbursed forsome costs associated with obtaining the initial NASDAQ listing. The revenuewas recognised when the reimbursable expenses were incurred in accordance withthe agreement.

 

**(s)           Loss per share**

 

Basic loss per share is determined by dividing the loss after income taxby the weighted average number of ordinary shares, outstanding during theperiod.

 

The computation of diluted loss per share is similar to basic loss pershare, except that it assumes the potentially dilutive securities, such asshare options, were converted to shares as of the beginning of the period. Forall periods presented, diluted loss per share is equivalent to basic loss pershare as the potentially dilutive securities are excluded from the computationof diluted loss per share because the effect is anti-dilutive.

 

**(t)            Income taxes**

 

Deferred income tax assets and liabilities are measured at the tax ratesthat are expected to apply to the year when the asset is realised or theliability is settled, based on tax rates that have been enacted orsubstantively enacted at the balance sheet date.

 

Deferred income tax assets have not been recognised as it is notconsidered probable that taxable profit will be available against whichdeductible temporary differences, and the carry-forward of unused tax assetsand unused tax losses can be utilised.

 

**(u)           Other taxes**

 

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

 

•                  where the GST incurred on apurchase of goods and services is not recoverable from the taxation authority,in which case the GST is recognised as part of the cost of acquisition of theasset or as part of the expense item as applicable; and

 

•                  receivables and payables arestated with the amount of GST included.

 

The net amount of GST recoverable from, or payable to, the taxationauthority is included as part of receivables or payables in the consolidatedBalance Sheet.

 

Cash flows are included in the consolidated Cash Flow Statement on agross basis and the GST component of cash flows arising from investing andfinancing activities, which is recoverable from, or payable to, the taxationauthority are classified as operating cash flows.

 

Commitments and contingencies are disclosed net of the amount of GSTrecoverable from, or payable to, the taxation authority.

 

**(v)           Impact of adoption of AIFRS**

 

Forall periods up to and including the year ended June 30, 2005, the Groupprepared its financial statements in accordance with Australian generallyaccepted accounting practice (“AGAAP”). The financial statements for the yearended June 30, 2006 were the first the Group was required to prepare inaccordance with AIFRS.

 

Accordinglythe Group prepared financial statements that comply with AIFRS applicable forperiods beginning after January 1, 2005 and the significant accounting policiesmeeting those requirements are described in note 2. In preparing the financialstatements, the Group has started from an opening balance sheet as at July 1,2004 the Group’s date of transition to AIFRS, and made those changes in accountingpolicies and other restatements required by AASB 1 First-time adoption ofAIFRS.

 

Thisnote explains the principal adjustments made by the Group in restating itsAGAAP balance sheet as at July 1, 2004 and its previously published AGAAPfinancial statements for the year ended June 30, 2005.

 

F-12

----

 

*Exemptionsapplied*

 

AASB1 allows first-time adopters certain exemptions from the general requirement toapply AIFRS retrospectively.

 

TheGroup has taken the following exemptions:

 

•                  AASB 2 *Share-based Paymen*t has not been applied to any equityinstruments that were granted on or before November 7, 2002, nor has it beenapplied to equity instruments granted after November 7, 2002 that vested beforeJanuary 1, 2005.

 

•                  AASB 3 *Business Combinations* has not been applied to acquisitionsof subsidiaries that occurred before July 1, 2004.

 

*Explanationof material adjustments to the cash flow statement*

 

Thereare no material differences between the cash flow statement presented underAIFRS and the cash flow statement presented under previous AGAAP.

 

Theimpacts of adopting AIFRS on the total equity and profit after tax as reportedunder AGAAP are illustrated below.

 

**(i)Reconciliation of total equity as presented under AGAAP to that under AIFRS**

 
| ** **                               | ** ** | **June 30, 2005** | ** ** | **July 1, 2004** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **$**                       | ** ** | **$**                      | ** ** |
| Total  equity under AGAAP                |       | 24,387,320                  |       | 16,713,018                 |       |
|                                     |       |                        |       |                       |       |
| Adjustments  to equity-                  |       |                        |       |                       |       |
| Write-back  of goodwill-amortisation (A) |       | 848,128                     |       | —                     |       |
|                                     |       |                        |       |                       |       |
| Total  equity under AIFRS                |       | 25,235,448                  |       | 16,713,018                 |       |

 

----

(A)      Under AASB 3 *BusinessCombination* Goodwill is not amortised as impairment is expensed whenit is identified. Under AGAAP Goodwill was expensed over 20 years. TheAmortisation of Goodwill charged after July 1, 2004 has been reversed underAIFRS.

 

**(ii)Reconciliation of loss after tax under AGAAP to that under AIFRS**

 
| **June 30, 2005**                     | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **$**            | ** ** |
| Loss  after tax as previously reported          |       | (6,661,206       | )          |
|                                            |       |             |       |
| Write-back  of goodwill-amortisation (A)        |       | 848,128          |       |
| Recognition  of share-based payment expense (B) |       | (422,105         | )          |
|                                            |       |             |       |
| Loss  after tax under AIFRS                     |       | (6,235,183       | )          |

 

----

(A)      Under AASB 3 *Business Combination*’ Goodwill is not amortised asimpairment is expensed when it is identified. Under AGAAP Goodwill was expensedover 20 years. The Amortisation of Goodwill charged after July1, 2004 has beenreversed under AIFRS.

 

(B)        Share-based payment costs are charged to theincome statement under AASB 2 ‘*Share-Based Payments’*,but not under AGAAP.

 

F-13

----

 

### **3. SEGMENT INFORMATION**

### ** **

The Groupperforms biotechnology research.

 

Following theacquisition of ChemGenex Therapeutics Inc. in June 2004 the group’s operationshave been conducted in Australia and the United States of America.

 

Discovery and clinical research activities in oncology are managed at theGroup’s American offices in Menlo Park, California.

 

Discovery into metabolic syndrome and depression are managed at the Group’sAustralian offices in Geelong, Victoria.

 
| **JUNE 30, 2007**                | ** ** | **Australia** | ** ** | **United States of  America** | ** ** | **Total**   | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------------------------|------------|-------------|------------|
| ** **                                 | ** ** | **$**         | ** ** | **$**                                   | ** ** | **$**       | ** ** |
| **Revenue**                                |       |          |       |                                    |       |        |       |
| Research  revenue                          |       | 536,111       |       | —                                  |       | 536,111     |       |
| Finance  revenue                           |       | 642,910       |       | 219,186                                 |       | 862,096     |       |
| Other  revenue                             |       | 889,927       |       | —                                  |       | 889,927     |       |
| Inter-segment sales                        |       | —        |       | 5,566,298                               |       | 5,566,298   |       |
| Total  segment revenue                     |       | 2,068,948     |       | 5,785,484                               |       | 7,854,432   |       |
| Inter-segment  elimination                 |       | —        |       | (5,566,298                              | )          | (5,566,298  | )          |
| Total  consolidated revenue                |       | 2,068,948     |       | 219,186                                 |       | 2,288,134   |       |
| **Result**                                 |       |          |       |                                    |       |        |       |
| Segment  result                            |       | (11,598,108   | )          | 5,784,991                               |       | (5,813,117  | )          |
| Income  tax expense                        |       | —        |       | (321,504                                | )          | (321,504    |       |
| Inter-segment  elimination                 |       | —        |       | (5,566,298                              | )          | (5,566,298  | )          |
| Net  loss for the year                     |       | (11,598,108   | )          | (102,811                                | )          | (11,700,919 | )          |
| **Assets and liabilities**                 |       |          |       |                                    |       |        |       |
| Segment  assets                            |       | 38,354,678    |       | 7,714,880                               |       | 46,069,558  |       |
| Inter-segment  elimination                 |       | —        |       | (3,308,449                              | )          | (3,308,449  | )          |
| Total  consolidated assets                 |       | 38,354,678    |       | 4,406,431                               |       | 42,761,109  |       |
|                                       |       |          |       |                                    |       |        |       |
| Segment  liabilities                       |       | 4,892,081     |       | 1,307,879                               |       | 6,199,960   |       |
| Inter-segment  elimination                 |       | (3,308,449    | )          | —                                  |       | (3,308,449  | )          |
| Total  consolidated liabilities            |       | 1,583,632     |       | 1,307,879                               |       | 2,891,511   |       |
|                                       |       |          |       |                                    |       |        |       |
| **Cash flow information**                  |       |          |       |                                    |       |        |       |
| Net  operating cash flows                  |       | (7,839,297    | )          | (4,066,308                              | )          | (11,905,605 | )          |
| Net  investing cash flows                  |       | 634,611       |       | 203,415                                 |       | 838,026     |       |
| Net  financing cash flows                  |       | 13,681,152    |       | 7,199,293                               |       | 20,880,445  |       |
| Net  increase in cash and cash equivalents |       | 6,476,466     |       | 3,336,400                               |       | 9,812,866   |       |
| **Other segment information**              |       |          |       |                                    |       |        |       |
| Capital  expenditure                       |       | 8,299         |       | 15,771                                  |       | 24,070      |       |
| Depreciation                               |       | 260,528       |       | 10,816                                  |       | 271,344     |       |

 

Inter-segment revenuein 2007 relates to revenues associated with work undertaken by ChemGenexPharmaceuticals Inc. under a Research Services Agreement with ChemGenexPharmaceuticals Limited which is invoiced at cost plus a 15% margin for certaincosts.

 

F-14

----

 
| **JUNE 30, 2006**                | ** ** | **Australia** | ** ** | **United States of  America** | ** ** | **Total**   | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------------------------|------------|-------------|------------|
| ** **                                 | ** ** | **$**         | ** ** | **$**                                   | ** ** | **$**       | ** ** |
| **Revenue**                                |       |          |       |                                    |       |        |       |
| Research  revenue                          |       | 1,676,297     |       | —                                  |       | 1,676,297   |       |
| Finance  revenue                           |       | 241,591       |       | 43                                      |       | 241,634     |       |
| Other  revenue                             |       | 379,091       |       | —                                  |       | 379,091     |       |
| Inter-segment sales                        |       | —        |       | 13,471,642                              |       | 13,471,642  |       |
| Total  segment revenue                     |       | 2,296,979     |       | 13,471,685                              |       | 15,768,664  |       |
| Inter-segment  elimination                 |       | —        |       | (13,471,642                             | )          | (13,471,642 | )          |
| Total  consolidated revenue                |       | 2,296,979     |       | 43                                      |       | 2,297,022   |       |
| **Result**                                 |       |          |       |                                    |       |        |       |
| Segment  result                            |       | (6,085,764    | )          | 9,187,687                               |       | 3,101,923   |       |
| Inter-segment  elimination                 |       | —        |       | (13,471,642                             | )          | (13,471,642 | )          |
| Net  loss for the year                     |       | (6,085,764    | )          | (4,283,955                              | )          | (10,369,719 | )          |
| **Assets and liabilities**                 |       |          |       |                                    |       |        |       |
| Segment  assets                            |       | 32,159,526    |       | 7,768,644                               |       | 39,928,170  |       |
| Inter-segment  elimination                 |       | —        |       | (6,962,919                              | )          | (6,962,919  | )          |
| Total  consolidated assets                 |       | 32,159,526    |       | 805,725                                 |       | 32,965,251  |       |
|                                       |       |          |       |                                    |       |        |       |
| Segment  liabilities                       |       | 8,415,744     |       | 507,517                                 |       | 8,923,261   |       |
| Inter-segment  elimination                 |       | (6,962,919    | )          | —                                  |       | (6,962,919  | )          |
| Total  consolidated liabilities            |       | 1,452,825     |       | 507,517                                 |       | 1,960,342   |       |
|                                       |       |          |       |                                    |       |        |       |
| **Cash flow information**                  |       |          |       |                                    |       |        |       |
| Net  operating cash flows                  |       | (4,483,040    | )          | (4,002,578                              | )          | (8,485,618  | )          |
| Net  investing cash flows                  |       | 235,625       |       | (7,987                                  | )          | 227,638     |       |
| Net  financing cash flows                  |       | 10,758,207    |       | 4,541,517                               |       | 15,299,724  |       |
| Net  increase in cash and cash equivalents |       | 6,510,792     |       | 530,952                                 |       | 7,041,744   |       |
| **Other segment information**              |       |          |       |                                    |       |        |       |
| Capital  expenditure                       |       | 5,956         |       | 8,040                                   |       | 13,996      |       |
| Depreciation                               |       | 259,677       |       | 12,521                                  |       | 272,198     |       |

 

Inter-segment revenue in 2006 relates to revenuesassociated with the transfer of Intellectual property under a Sale ofIntellectual Property Agreement between ChemGenex Pharmaceuticals Inc. andChemGenex Pharmaceuticals Limited. 

 

F-15

----

 

**4. REVENUES AND EXPENSES**

 
| **JUNE 30**                          | ** ** | **Notes**  | ** ** | **2007**       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **$**          | ** ** | **$**      | ** ** | **$**      | ** ** |
| (a)  Other Income                         |       |       | ** ** | ** **     | ** ** |       |       |       |       |
| Export  market development grant          |       |       | ** ** | **74,290**     | ** ** | 148,868    | ** ** | **—** | ** ** |
| P3  grant                                 |       |       | ** ** | **655,809**    | ** ** |       | ** ** | **—** | ** ** |
| Patent  reimbursement                     |       |       | ** ** | **—**     | ** ** | 230,223    |       | 104,085    |       |
| Exchange  rate benefit                    |       |       | ** ** | **157,917**    | ** ** |       |       |       |       |
| Reimbursement  of initial NASDAQ expenses |       |       | ** ** | **—**     | ** ** | **—** |       | 196,902    |       |
| VAT  refund                               |       |       | ** ** | **1,911**      | ** ** | —     | ** ** | **—** | ** ** |
|                                      |       |       | ** ** | **889,927**    | ** ** | 379,091    |       | 300,987    |       |
|                                      |       |       | ** ** | ** **     | ** ** |       |       |       |       |
| (b)  Finance income                       |       |       | ** ** | ** **     | ** ** |       |       |       |       |
| Bank  interest received                   |       |       | ** ** | **862,096**    | ** ** | 241,634    |       | 266,987    |       |
|                                      |       |       | ** ** | ** **     | ** ** |       |       |       |       |
| (c)  Employee benefits expense            |       |       | ** ** | ** **     | ** ** |       |       |       |       |
| Wages  and salaries                       |       |       | ** ** | **(1,837,968** | **)**      | (1,927,841 | )          | (1,834,591 | )          |
| Worker’s  compensation costs         |       |       | ** ** | **(13,005**    | **)**      | (7,240     | )          | (15,630    | )          |
| Expense  of share-based payments          |       |       | ** ** | **(270,553**   | **)**      | (467,895   | )          | (422,104   | )          |
| Superannuation  costs                     |       |       | ** ** | **(93,805**    | **)**      | (76,755    | )          | (81,708    | )          |
| Wages  on-costs                           |       |       | ** ** | **(302,584**   | **)**      | (230,610   | )          | (277,829   | )          |
| ** **                                |       |       | ** ** | **(2,517,915** | **)**      | (2,710,341 | )          | (2,631,862 | )          |
|                                      |       |       | ** ** | ** **     | ** ** |       |       |       |       |
| (d)  Research costs                       |       |       | ** ** | ** **     | ** ** |       |       |       |       |
| Metabolic  syndrome                       |       |       | ** ** | **(3,221,386** | **)**      | (3,479,875 | )          | (3,685,119 | )          |
| Depression                                |       |       | ** ** | **(190,000**   | **)**      | (380,000   | )          | (380,000   | )          |
| Oncology                                  |       |       | ** ** | **(4,320,602** | **)**      | (3,325,103 | )          | (556,287   | )          |
|                                      |       |       | ** ** | **(7,731,988** | **)**      | (7,184,978 | )          | (4,621,406 | )          |
|                                      |       |       | ** ** | ** **     | ** ** |       |       |       |       |
| (e)  Operating lease costs                |       |       | ** ** | **(80,282**    | **)**      | (89,698    | )          | (75,201    | )          |

 

F-16

----

 

**5. INCOME TAX**

 
| **JUNE 30**                                                                                                                                                                       | ** ** | **Notes**  | ** ** | **2007**        | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                                                                                                                                             | ** ** | ** ** | ** ** | **$**           | ** ** | **$**       | ** ** | **$**      | ** ** |
| *A reconciliation of income tax expense applicable to accounting  profit before income tax and income tax expense for the years ended June  2007, 2006 and 2005 is as follows:*        |       |       | ** ** | ** **      | ** ** |        |       |       |       |
| Accounting  loss before income tax                                                                                                                                                     |       |       | ** ** | **(11,379,415** | **)**      | (10,369,719 | )          | (6,235,183 | )          |
|                                                                                                                                                                                   |       |       | ** ** | ** **      | ** ** |        |       |       |       |
| Tax  at statutory rates (30% Australia, 34% USA)                                                                                                                                       |       |       | ** ** | **(3,465,018**  | **)**      | (3,265,930  | )          | (1,946,294 | )          |
| Research  and development allowance                                                                                                                                                    |       |       | ** ** | **(283,829**    | **)**      | (321,077    | )          | (308,884   | )          |
| Internal  intellectual property transfer eliminated on consolidation but taxable in USA                                                                                                |       |       |       | —          | ** ** | 4,580,358   | ** ** | **—** | ** ** |
| Non-deductible  items-                                                                                                                                                                 |       |       | ** ** | ** **      | ** ** |        |       |       |       |
| Increase  in employee entitlements                                                                                                                                                     |       |       | ** ** | **34,233**      | ** ** | —      | ** ** | **—** | ** ** |
| Entertainment  expenses                                                                                                                                                                |       |       | ** ** | **8,979**       | ** ** | **—**  | ** ** | **—** | ** ** |
| NASDAQ  registration                                                                                                                                                                   |       |       | ** ** | **—**      | ** ** | **—**  |       | 214,400    |       |
| Equity  based benefits                                                                                                                                                                 |       |       | ** ** | **130,943**     | ** ** | 251,837     |       | 126,631    |       |
| Other  differences                                                                                                                                                                     |       |       | ** ** | **(29,381**     | **)**      | **—**  | ** ** | **—** | ** ** |
| Adjustment  in respect of current income tax in previous year                                                                                                                          |       |       | ** ** | **341,691**     | ** ** | —      | ** ** | **—** | ** ** |
|                                                                                                                                                                                   |       |       | ** ** | **(3,262,382**  | **)**      | 1,245,188   |       | (1,914,147 | )          |
| Future  income tax benefits not recognised                                                                                                                                             |       |       | ** ** | **3,583,886**   | ** ** | (1,245,188  | )          | 1,914,147  |       |
| Income  tax expense reported in income statement                                                                                                                                       |       |       | ** ** | **321,504**     | ** ** | —      | ** ** | **—** | ** ** |
|                                                                                                                                                                                   |       |       | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
| *Deferred income tax benefits*                                                                                                                                                         |       |       | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
|                                                                                                                                                                                   |       |       | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
| Future  income tax benefit arising from tax losses of the parent and a controlled  entity not recognised at reporting date as realisation of the benefit is not  regarded as probable. |
|                                                                                                                                                                                   |       |       | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenue  losses                                                                                                                                                                        |       |       | ** ** | **17,462,021**  |       | 13,878,135  |       | 15,123,323 | ** ** |
| Capital  gains tax losses                                                                                                                                                              |       |       | ** ** | **436,439**     |       | 436,439     |       | 436,439    | ** ** |
|                                                                                                                                                                                   |       |       | ** ** | **17,989,460**  |       | 14,314,574  |       | 15,559,762 | ** ** |

* *

This futureincome tax benefit will only be obtained if:

 

(a)           future assessable income is derivedof a nature and of an amount sufficient to enable the benefit to be realised;

(b)           the conditions for deductibilityimposed by tax legislation continue to be complied with; and

(c)           no changes in tax legislationadversely affect the consolidated entity in realising the benefit.

 

*Deferred income tax liabilities*

 

At June 30, 2007 there is no recognised or unrecognised deferred incometax liabilities included (2006: $nil).

 

**Tax consolidation**

 

Effective July 1, 2003, for the purposes of income taxation, ChemGenexPharmaceuticals Limited and its 100% owned Australian subsidiary formed a taxconsolidated group. Members of the group have entered into a tax sharingarrangement in order to allocate income tax expense to the wholly-ownedAustralian subsidiary on a pro-rata basis. In addition, the agreement providesfor the allocation of income tax liabilities between the entities should thehead entity default on its tax payment obligations. At the balance date, thepossibility of default is remote. The head entity of the tax consolidated groupis the Parent Entity.

 

**Tax effect accounting by membersof the tax consolidated group**

 

Members of thetax consolidated group have entered into a tax funding agreement. The taxfunding agreement provides for the allocation of current taxes to members ofthe tax consolidated group in accordance with their accounting profit for theperiod, while deferred taxes are allocated to members of the tax consolidatedgroup in accordance with the principles of AASB 112 *Income taxes*.

 

Refer to note 26(e) for additional income tax disclosures.

 

F-17

----

 

### **6. LOSS PER SHARE**

### ** **

Basic loss pershare is determined by dividing the loss after income tax by the weightedaverage number of ordinary shares, outstanding during the period.

 

The computationof diluted loss per share is similar to basic loss per share, except that itassumes the potentially dilutive securities, such as share options, wereconverted to shares as of the beginning of the period. For all periodspresented, diluted loss per share is equivalent to basic loss per share as thepotentially dilutive securities are excluded from the computation of dilutedloss per share because the effect is ant-dilutive.

 

The followingreflects the income and share data used in the earnings per share computations:

 
| ** **                                                                          | ** ** | **2007**                             | ** ** | **2006**                             | ** ** | **2005**                             | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                          | ** ** | **$**                                | ** ** | **$**                                | ** ** | **$**                                | ** ** |
| Net  loss attributable to ordinary shareholders                                     | ** ** | **(11,700,919**                      | **)**      | (10,369,719                          | )          | (6,235,183                           | )          |
|                                                                                |       |                                 |       |                                 |       |                                 |       |
| ** **                                                                          | ** ** | **Number of shares  2007** | ** ** | **Number of shares  2006** | ** ** | **Number of shares  2005** | ** ** |
| Weighted  average number of ordinary shares used in calculating earnings per share: | ** ** | **162,281,115**                      |       | 117,647,158                          |       | 105,707,630                          |       |

 

There havebeen no other transactions involving ordinary shares or potential ordinaryshares since the reporting date and before the completion of these financialstatements.

 

### **7. DIVIDENDS PAID AND PROPOSED**

### ** **

There were nodividends paid or proposed during the year ended June 30, 2006 and there havebeen no dividends paid or proposed since reporting date and before thecompletion of these financial statements.

 

**8.CASH AND CASH EQUIVALENTS**

 
| ** **                                                                          | ** ** | **2007**        | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                                          | ** ** | **$**           | ** ** | **$**       | ** ** | **$**      | ** ** |
| Cash  at bank and at hand                                                           | ** ** | **25,366,562**  | ** ** | 15,553,696  |       | 8,511,952  |       |
| Cash  at bank earns interest at floating rates based on daily bank deposits         |       |            | ** ** |        |       |       |       |
| **Reconciliation of the net loss after tax to the net cash flows from  operations** |       |            | ** ** |        |       |       |       |
| Net  loss                                                                           | ** ** | **(11,700,919** | **)**      | (10,369,719 | )          | (6,235,183 | )          |
| *Adjustments for*                                                                   |       |            | ** ** |        |       |       |       |
| Depreciation  of plant and equipment                                                | ** ** | **271,344**     | ** ** | 272,198     |       | 269,937    |       |
| Interest  received                                                                  | ** ** | **(862,096**    | **)**      | (241,634    | )          | (266,987   | )          |
| Share  options expensed                                                             | ** ** | **436,477**     | ** ** | 839,456     |       | 495,029    |       |
| Net  exchange differences                                                           | ** ** | **(751,314**    | **)**      | **—**  | ** ** | **—** | ** ** |
| *Changes in assets and liabilities*                                                 |       |            | ** ** |        |       |       |       |
| (Increase)/decrease  in trade and other receivables                                 | ** ** | **61,011**      | ** ** | 302,516     |       | (351,086   | )          |
| (Increase)/decrease  in prepayments                                                 | ** ** | **(291,277**    | **)**      | 91,399      |       | (74,751    | )          |
| Increase/(decrease)  in trade payables                                              | ** ** | **823,605**     | ** ** | 866,873     |       | (1,238,419 | )          |
| Increase  in provisions and employee entitlements                                   | ** ** | **127,480**     | ** ** | 33,754      |       | 119,351    |       |
| Increase/(decrease  in deferred income)                                             | ** ** | **(19,684**     | **)**      | (280,461    | )          | 337,923    |       |
| Net  cash flow used in operating activities                                         | ** ** | **(11,905,605** | **)**      | (8,485,618  | )          | (6,944,186 | )          |

 

F-18

----

 

**9. TRADE AND OTHER RECEIVABLES (CURRENT)**

 
| **JUNE 30,** | ** ** | **Notes**  | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **        | ** ** | ** ** | ** ** | **$**      | ** ** | **$**      | ** ** |
| Trade  debtors    |       | (i)        |       | **18,000** | ** ** | **—** | ** ** |
| Other  debtors    |       | (ii)       |       | **—** | ** ** | **79,011** | ** ** |
| ** **        | ** ** | ** ** | ** ** | **18,000** | ** ** | **79,011** | ** ** |

** **

**Terms and conditions**

 

Terms andconditions relating to the above financial instruments:-

 

(i)            Trade debtors are non-interestbearing and generally on 30 day terms.

(ii)           Other debtors and other receivablesare non-interest bearing and have repayment terms between 30 and 90 days.

 

**10. CONSOLIDATED SUBSIDIARIES**

 
| ** **                      | ** ** | ** **                         | ** ** | **Percentage of equity interest held by the consolidated entity** | ** ** |
|---------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Name**                        | ** ** | **Country of  incorporation** | ** ** | **2007**                                                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **                         | ** ** | **%**                                                                                                     | ** ** | **%** | ** ** | **%** | ** ** |
| Autogen  Research Pty Ltd       |       | Australia                          | ** ** | **100**                                                                                                   |       | 100 |   | 100 |   |
|                            |       |                               | ** ** | ** **                                                                                                |       |   |   |   |   |
| ChemGenex  Pharmaceuticals Inc. |       | USA                                | ** ** | **100**                                                                                                   |       | 100 |   | 100 |   |

 

F-19

----

 

**11. PLANT AND EQUIPMENT**

 
| ** **                                                                                                      | ** ** | **2007**       | ** ** | **2006**   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                                                                                                      | ** ** | **$**          | ** ** | **$**      | ** ** | ** ** | ** ** |
| *Carrying amount*                                                                                               |       |           | ** ** |       |       |       |       |
| Office  equipment                                                                                               |       |           | ** ** |       |       |       |       |
| At  cost                                                                                                        | ** ** | **116,403**    | ** ** | 92,333     |       |       |       |
| Accumulated  depreciation                                                                                       | ** ** | **(75,665**    | **)**      | (56,345    | )          |       |       |
| ** **                                                                                                      |       | **40,738**     |       | 35,988     |       |       |       |
| Research  equipment                                                                                             |       |           | ** ** |       |       |       |       |
| At  cost                                                                                                        | ** ** | **1,604,036**  | ** ** | 1,604,036  |       |       |       |
| Accumulated  depreciation                                                                                       | ** ** | **(1,563,228** | **)**      | (1,311,204 | )          |       |       |
| ** **                                                                                                      |       | **40,808**     |       | 292,832    |       |       |       |
| Total  plant and equipment                                                                                      | ** ** | **81,546**     | ** ** | 328,820    |       |       |       |
|                                                                                                            |       |           | ** ** |       |       |       |       |
| Total  plant and equipment                                                                                      |       |           | ** ** |       |       |       |       |
| At  cost                                                                                                        | ** ** | **1,720,439**  | ** ** | 1,696,369  |       |       |       |
| Accumulated  depreciation                                                                                       | ** ** | **(1,638,893** | **)**      | (1,367,549 | )          |       |       |
| Total net carrying amount                                                                                       | ** ** | **81,546**     | ** ** | 328,820    |       |       |       |
|                                                                                                            |       |           | ** ** |       |       |       |       |
| *Reconciliations*                                                                                               |       |           | ** ** |       |       |       |       |
| Reconciliations  of the carrying amounts of plant and equipment at the beginning and end of  the financial year |       |           | ** ** |       |       |       |       |
| Office  equipment                                                                                               |       |           | ** ** |       |       |       |       |
| Carrying amount at beginning                                                                                    | ** ** | **35,988**     | ** ** | 42,166     |       | 44,861     |       |
| Additions  at cost                                                                                              | ** ** | **24,070**     | ** ** | 13,996     |       | 15,218     |       |
| Depreciation  expense                                                                                           | ** ** | **(19,320**    | ** ** | (20,174    | )          | (17,913    | )          |
| Carrying  amount at the end of year                                                                             | ** ** | **40,738**     | ** ** | 35,988     |       | 42,166     |       |
|                                                                                                            |       |           | ** ** |       |       |       |       |
| Research  equipment                                                                                             |       |           | ** ** |       |       |       |       |
| Carrying amount at beginning                                                                                    | ** ** | **292,832**    | ** ** | 544,856    |       | 796,880    |       |
| Additions  at cost                                                                                              | ** ** | **—**     | ** ** | —     |       | —     |       |
| Depreciation  expense                                                                                           | ** ** | **(252,024**   | **)**      | (252,024   | )          | (252,024   | )          |
| Carrying  amount at the end of year                                                                             | ** ** | **40,808**     | ** ** | 292,832    |       | 544,856    |       |

 

F-20

----

 

**12.GOODWILL**

 
| ** **                | ** ** | **2007**       | ** ** | **2006**   | ** ** |
|---------------------------|------------|----------------|------------|------------|------------|
| ** **                | ** ** | **$**          | ** ** | **$**      | ** ** |
| *Carrying amount*         |       |           |       |       |       |
| At  cost                  | ** ** | **16,962,561** |       | 16,962,561 |       |
| Accumulated  amortisation | ** ** | **(30,811**    | **)**      | (30,811    | )          |
| ** **                |       | **16,931,750** |       | 16,931,750 |       |

 

Goodwillrepresents the intellectual property previously held by ChemGenex TherapeuticsInc. This intellectual property relates to chemical compounds which have notyet received regulatory approval, and therefore a finite life for any productsassociated with these compounds cannot be determined.

 

As at June 30,2007 and 2006, these assets were tested for impairment (see note 13 below).

 

No impairmentloss was charged for the years ended June 30, 2007 and 2006.

 

### **13. IMPAIRMENT TESTING OF GOODWILL**

### ** **

The goodwillacquired through a business combination of $16.932M relates to one individualcash generating unit, being anti-cancer compounds.

 

Therecoverable amount of the anti-cancer compounds have been determined based on avalue in use calculation using cash flow projections based on financialbudgets, information from scientific journals on the existing incidence of thedisease, projections of patients that would be eligible for the proposedtreatment and the expected growth figures.

 

The valuationhas been based on cash flow projection covering 10 years from the expectedregistration date after which a 10% decline in cash flow rate is assumed. A 10year cash flow projection of revenues has been used to reflect the expectedincreasing market share over the period.

 

Thecalculation of value in use for the anti-cancer compounds is most sensitive tothe following assumptions-

 

•                  Availability of patients

 

•                  Discount rate

 

•                  Raw material costs

 

•                  Indirect costs

 

Theavailability of patients is dependent upon the incidence of the disease(estimated determined from scientific journals) from projections of the likelyuse of the products (based on the current status of alternative treatments).

 

Due to theuncertainty associated with cash flow projections for products that have notyet received regulatory approval a pre-tax discount rate of 40% has beenapplied (2006:40%).

 

Raw materialscosts used in the projection are based on the existing manufacturing agreementwith Stragen.

 

Indirect costshave been based on industry standards for companies with pharmaceuticalproducts in the market as costs structures in the company’s current developmentstage are not deemed to be appropriate.

 

### **14. SHARE BASED PAYMENT PLANS**

### ** **

**Employee Share Option Scheme**

 

An EmployeeShare Option Plan (ESOP) has been established where ChemGenex PharmaceuticalsLimited may, at the discretion of management, grant options over the ordinaryshares of ChemGenex Pharmaceuticals Limited to directors, executives andcertain contractors who provide consulting services to the Group.

 

The options,issued for nil consideration, are granted in accordance with performanceguidelines established by the directors of ChemGenex Pharmaceuticals Limited,who retain the final discretion on the issue of the options. The options cannotbe transferred and will not be quoted on the ASX. Currently one director, threeemployees and 22 scientific consultants hold options issued under the ESOP.

 

F-21

----

 

On May 7, 2007400,000 options with a fair value of $0.42 were granted over ordinary shareswith an exercise price of $0.85. These options vested upon issue and areexercisable until May 7, 2010. (During the year ended June 30, 2006, 275,000options with a fair value of $0.35 were granted over ordinary shares with anexercise price of $0.43 and 269,500 options with a fair value of $0.36 weregranted over ordinary shares with an exercise price of $0.65. These optionsvested upon issue and are exercisable until March 2010.)

 

On June 6,2007, 600,000 options with a fair value of $0.55 were issued over ordinaryshares with an exercise price of $0.50. These options vested upon issue and areexercisable until June 6, 2012. These options were issued under a contractentered into by the Company with Global Markets Capital Group LLC (“GMCG”)dated April 1, 2002 and amended April 1, 2003.

 

The fair valueof the options issued under ESOP are estimated at the date of grant using theBlack Scholes Valuation Method. The following table gives the assumptions madein determining fair value of options granted during the year ending June 30,2007, 2006 and 2005.

 
| ** **                        | ** ** | **2007**           | ** ** | **2006**       | ** ** | **2005** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------|------------|----------|------------|
| Dividend  yield (%)               | ** ** | **0.00**           |       | 0.00           |       | 0.00     |       |
| Expected  volatility (%)          | ** ** | **70.00**          |       | 70.00          |       | 65.00    |       |
| Risk-free  interest rate (%)      | ** ** | **5.25**           |       | 5.40           |       | 5.17     |       |
| Expected  life of options (years) | ** ** | **3-5**            |       | 4.1 – 4.5 |       | 5.3      |       |
| Option  exercise price ($)        | ** ** | **0.85  and 0.50** |       | 0.43 and  0.65 |       | 0.56     |       |
| Share  price at grant date ($)    | ** ** | **0.85  and 0.78** |       | 0.54 and  0.64 |       | 0.63     |       |

 

Whencalculating the expected life of the options it is assumed the options will notbe exercised until the expiry date.

 

The expectedvolatility rates used reflect the assumption that historical volatility isindicative of future trends and may not necessarily be the actual outcome.

 

Other than theassumptions outlined above no other features of the options granted wereincorporated into the measurement of fair value.

 

During theyear ended June 30, 2007 120,000 options were exercised over ordinary shares.(2006: Nil) The market price for the company’s ordinary fully share at the datethese options were issued was 80 cents.

 

The followingtable illustrates the number and weighted average exercise prices (WAEP) ofshare options issued under the ESOP:

 
| ** **                    | ** ** | **2007**      | ** ** | **2006** | ** ** | **2005**   | ** ** |
|-------------------------------|------------|---------------|------------|----------|------------|------------|------------|
| ** **                    | ** ** | **Number**    | ** ** | **WAEP** | ** ** | **Number** | ** ** | **WAEP** | ** ** | **Number** | ** ** | **WAEP** | ** ** |
| Balance  at beginning of year | ** ** | **1,979,500** | ** ** | **$**    | **0.67**   |       | 1,475,000  |   | $ | 0.75 |   | 1,140,000 |   | $ | 0.74 |   |
| -  granted               | ** ** | **1,000,000** | ** ** | **$**    | **0.64**   |       | 544,500    |   | $ | 0.54 |   | 360,000 |   | $ | 0.56 |   |
| -  forfeited             |       | —        |       | —   |       | (40,000    | )          | $ | 0.52 |   | — |   | — |   |
| -  exercised             | ** ** | **(120,000**  | **)**      | **$**    | **0.50**   |       | —     |   | — |   | (25,000 | ) | $ | 0.50 |   |
| Balance  at end of year       | ** ** | **2,859,500** | ** ** | **$**    | **0.68**   |       | 1,979,500  |   | $ | 0.70 |   | 1,475,000 |   | $ | 0.75 |   |
| Exercisable  at end of year   | ** ** | **2,244,500** | ** ** | **$**    | **0.58**   |       | 1,364,500  |   | $ | 0.53 |   | 1,160,000 |   | $ | 0.52 |   |

 

The contractual life for the share options outstanding at June 30, 2007is 5 years for 600,000 options issued to GMCG and 2 years and 9 months for theremainder (2006: 3 years and 9 months for all options; 2005: 4 years and 9months for all options).

 

F-22

----

 

Share options issued under ESOP and outstanding at the end of the yearhave the following exercise prices:

 
| **Expiry date** | ** ** | **Exercise price** | ** ** | **Outstanding 2007** | ** ** | **Outstanding 2006** | ** ** |
|----------------------|------------|-------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **           | ** ** | **$**                   | ** ** | ** **                | ** ** | ** **                | ** ** |
| March 24, 2010       |       | 1.15                    |       | 400,000                   |       | 400,000                   |       |
| March 24, 2010       |       | 0.90                    |       | 215,000                   |       | 215,000                   |       |
| March 24, 2010       |       | 0.50                    |       | 140,000                   |       | 190,000                   |       |
| March 24, 2010       |       | 0.50                    |       | 210,000                   |       | 280,000                   |       |
| March 24, 2010       |       | 0.56                    |       | 350,000                   |       | 350,000                   |       |
| March 24, 2010       |       | 0.43                    |       | 275,000                   |       | 275,000                   |       |
| March 24, 2010       |       | 0.65                    |       | 269,500                   |       | 269,500                   |       |
| May 7, 2010          |       | 0.85                    |       | 400,000                   | ** ** | **—**                | ** ** |
| June 6, 2012         |       | 0.50                    |       | 600,000                   | ** ** | **—**                | ** ** |

 

**Options approved by resolution of shareholders**

 

The followingtable summarises information about options previously issued to Dr Greg Collieron different terms and conditions to ESOP after approval by resolution atshareholder meetings-

 
| **Number of   options** | ** ** | **Grant date****(date issue approved by  shareholders)** | ** ** | **Vesting date** | ** ** | **Expiry date** | ** ** | **Exercise  price $ ** | ** ** | **Fair Value$** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|----------------------------------|------------|----------------------|------------|
| 300,000                           |       | November 28,  2002                                                           |       | November 28,  2002    |       | March 24,  2010      |       | 0.50                             |       | 0.36                 |       |
| 300,000                           |       | November 21,  2003                                                           |       | November 21,  2003    |       | December 26,  2006   |       | 0.30                             |       | 0.34                 |       |
| 1,000,000                         |       | June 21,  2004                                                               |       | June 21, 2004         |       | March 24,  2010      |       | 0.50                             |       | 0.35                 |       |
| 1,000,000                         |       | June 21,  2004                                                               |       | June 21,  2006        |       | March 24,  2010      |       | 0.50                             |       | 0.35                 |       |
| 500,000                           |       | June 21,  2004                                                               |       | June 21,  2007        |       | March 24,  2010      |       | 0.50                             |       | 0.35                 |       |
| 500,000                           |       | June 21,  2004                                                               |       | June 21,  2008        |       | March 24,  2010      |       | 0.50                             |       | 0.35                 |       |

 

No optionswere issued to Greg Collier during the years ended June 30, 2007 or 2006.

 

400,000options issued with shareholder approval were exercised during the year endedJune 30, 2007 (2006:Nil) The market price for the company’s ordinary fully paidshares at the date these options were issued was 58 cents for 300,000 and 80cents for 100,000.

 

The following share options issued to Dr GregCollier after approval by resolution at shareholder meetings remain outstanding at the end of the year-

 
| **Number of options** | ** ** | **Grant date****(date issue  approved by  shareholders)** | ** ** | **Vesting date** | ** ** | **Expiry date** | ** ** | **Exercise price $** | ** ** |
|---------------------------------|------------|--------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|--------------------------------|------------|
| 300,000                         |       | November 28,  2002                                                       |       | November 28,  2002    |       | March 24,  2010      |       | 0.50                           |       |
| 900,000                         |       | June 21,  2004                                                           |       | June 21,  2004        |       | March 24,  2010      |       | 0.50                           |       |
| 1,000,000                       |       | June 21,  2004                                                           |       | June 21,  2006        |       | March 24,  2010      |       | 0.50                           |       |
| 500,000                         |       | June 21,  2004                                                           |       | June 21,  2007        |       | March 24,  2010      |       | 0.50                           |       |
| 500,000                         |       | June 21,  2004                                                           |       | June 21,  2008        |       | March 24,  2010      |       | 0.50                           |       |

 

F-23

----

 

The fair valueof the options issued to Greg Collier with Annual General Meeting (‘AGM’)approval under are estimated at the date of grant using the Black ScholesValuation Method. The following table gives the assumptions made in determiningfair value of these options-  

 
| ** **                        | ** ** | **November 2002** | ** ** | **November 2003** | ** ** | **June 2004** | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|--------------------|------------|
| Dividend  yield (%)               | ** ** | **0.00**               | ** ** | **0.00**               | ** ** | **0.00**           | ** ** |
| Expected  volatility (%)          | ** ** | **85.00**              | ** ** | **65.00**              | ** ** | **65.00**          | ** ** |
| Risk-free  interest rate (%)      | ** ** | **5.52**               | ** ** | **5.77**               | ** ** | **5.77**           | ** ** |
| Expected  life of options (years) | ** ** | **7.33**               | ** ** | **3.0**                | ** ** | **5.75**           | ** ** |
| Option  exercise price ($)        | ** ** | **0.50**               | ** ** | **0.30**               | ** ** | **0.50**           | ** ** |
| Share  price at grant date ($)    | ** ** | **0.26**               | ** ** | **0.53**               | ** ** | **0.54**           | ** ** |

 

Whencalculating the expected life of the options it is assumed the options will notbe exercised until the expiry date.

 

The expectedvolatility rates used reflect the assumption that historical volatility isindicative of future trends and may not necessarily be the actual outcome.

 

Other than theassumptions outlined above no other features of the options granted wereincorporated into the measurement of fair value.

 

On November 16, 2005 shareholders approved the issue of 1,000,000 optionsover ordinary shares to Stragen Investments B.V.

 

The options, with a fair value of $0.37, can be exercised from June 28,2006 to June 27, 2008 at an exercise price of $0.75.

 

The fair value of these options has been calculated at grant date using the Black Scholes Valuation Method with the following assumptions-

 

•                  Dividend yield- 0%

•                  Expected volatility- 70%

•                  Risk-free interest rate 5.4%

•                  Expected life of options- 3 years

•                  Option exercise price- $0.75

•                  Share price at issue date- $0.65

 

Options issuedto Global Markets Capital Corporation (June 6, 2007) and Stragen InvestmentsB.V. (November 16, 2005) have been valued using the Black Scholes method as thefair value of the actual goods and services to be provided under thesecontracts could not be reliably estimated and valued at the time of issue.

 

During theyear ended June 30, 2007 a total of $436,477 was recognised in the ConsolidatedStatement of Income as share based expenditure of this $270,553 appeared asEmployee benefits expense (Note 4(c)) and $165,994 as administration costs. (2006:$839,456; 2005: $422,105)

 

F-24

----

 

**15.TRADE AND OTHER PAYABLES**

 
| **JUNE 30**                    | ** ** | **2007**       | ** ** | **2006**  | ** ** |
|-------------------------------------|------------|----------------|------------|-----------|------------|
| ** **                          | ** ** | **$**          | ** ** | **$**     | ** ** |
| ** **                          |       |           |       |      |       |
| Trade  creditors and other payables | ** ** | **2,445,470**  |       | 1,621,865 |       |
| ** **                          |       | **2,2445,470** |       | 1,621,865 |       |

 

Trade payablesare non-interest bearing and are normally settled on 30 day terms.

 

As at June 30,2007 the amount owing to related parties and included in Trade and otherpayables was $4,494 (2005: $4,168). Refer to Note 25 for Related PartyDisclosures.

 

**16.EMPLOYEE ENTITLEMENTS**

 
| *Current*                         |       |        |   |    |   |
|-----------------------------------|------------|-------------|--------|---------|--------|
| Employee  entitlements            | ** ** | **231,284** |   | 153,105 |   |
| Non-current                       |       |        |   |    |   |
| Provision  for long service leave | ** ** | **33,222**  |   | —  |   |
| ** **                        |       | **264,506** |   | 153,105 |   |

 

**17.ISSUED CAPITAL AND RESERVES**

 
| ** **                       | ** ** | **2007**                   | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------|------------|----------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------|------------|------------|------------|------------|------------|
| **Ordinary shares**              | ** ** | **Number of  shares** | ** ** | **Number of   shares** | ** ** | **Number of   shares** | ** ** | **2007**        | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| ** **                       | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **                       | ** ** | **$**           | ** ** | **$**      | ** ** | **$**      | ** ** |
| ** **                       |       |                       |       |                             |       |                             |       |            |       |       |       |       |       |
| Issued  and fully paid           | ** ** | **185,847,331**            |       | 151,362,786                      |       | 114,797,616                      | ** ** | **120,773,060** |       | 99,892,615 |       | 84,592,891 |       |
| ** **                       | ** ** |
| **Movements in shares on issue** | ** ** |
| ** **                       | ** ** |
| Beginning  of the financial year | ** ** | **151,362,786**            |       | 114,797,616                      |       | 86,728,294                       | ** ** | **99,892,615**  |       | 84,592,891 |       | 70,257,383 |       |
| Issued  during the year          |       |                       |       |                             |       |                             |       |            |       |       |       |       |       |
| -  Shares issued for cash        | ** ** | **34,484,545**             |       | 36,565,170                       |       | 27,934,244                       | ** ** | **21,260,131**  |       | 15,723,021 |       | 14,451,937 |       |
| - less  cost of share issues     |       | —                     |       | —                           |       | —                           | ** ** | **(379,686**    | **)**      | (423,297   | )          | (189,353   | )          |
| Fees  paid in lieu of cash       |       | —                     |       | —                           |       | 135,078                          |       | —          |       | —     |       | 72,924     |       |
| End  of the financial year       | ** ** | **185,847,331**            |       | 151,362,786                      |       | 114,797,616                      | ** ** | **120,773,060** |       | 99,892,615 |       | 84,592,891 |       |

 

F-25

----

 

On July 14,2004, the company issued 13,009,244 ordinary shares at an issue price of $0.48each raising $6,244,437 for working capital and to further develop the company’stwo anti-cancer compounds in Phase 2 clinical trials in the United States. Thisissue was ratified by the Annual General Meeting of shareholders held onNovember 23, 2004.

 

On January 24,2005, the company issued 14,900,000 ordinary shares at an issue price of $0.55each raising $8,195,000 to expedite the continued clinical trials for thecompany’s two anti-cancer compounds.

 

On February14, 2005, the company issued 25,000 ordinary shares at an issue price of $0.50each raising $12,500 upon the exercise of 25,000 options previously issuedunder the ESOP.

 

In May 2006Chemgenex Pharmaceuticals Limited announced a programme of share issues toprovide working capital and to continue the company’s ongoing researchactivities-

 

•                  On May 18, 2006 16,700,000 ordinary shares were issued at 43 centseach raising $7,181,000. This issue was ratified by an Extraordinary GeneralMeeting of shareholders held on June 16, 2006.

 

•                  On June 1, 2006 1,665,170 ordinary shares were issued at 43 centsraising $716,021 under a Share Placement Programme offered to all shareholders.

 

•                  On June 16, 2006 18,200,000 ordinary shares were issued at 43 centsper share raising $7,826,000 following approval by an Extraordinary GeneralMeeting of shareholders held on June 16, 2006.

 

On December21, 2006 the company issued 300,000 ordinary shares at an issue price of $0.30each raising $90,000 upon the exercise of 300,000 options previously issuedunder the Employee Share Option Plan (ESOP) and approved at the Annual GeneralMeeting of Shareholders held on November 21, 2003.

 

In February2007 Chemgenex Pharmaceuticals Limited announced a programme of share issues toprovide working capital and to continue the company’s ongoing researchactivities-

 

•                  On February 8, 2007 17,056,377 ordinary shares were issued toinstitutional investors at 62 cents each raising $10,574,954. In accordancewith ASX Listing Rules this issue is to be ratified by at the next AnnualGeneral Meeting of shareholders.

 

•                  On April 3, 2007 16,891,916 ordinary shares were issued at 62 centsraising $10,472,988 under a 1:10 Rights Issue offered to all eligibleshareholders by prospectus dated February 26, 2007.

 

On February 8,2007 (200,000) and April 24, 2007 (20,000), a total of 220,000 ordinary sharesat an issue price of $0.50 each raising $110,000 upon the exercise of 120,000options previously issued under the Employee Share Option Plan (ESOP) and100,000 approved at a previous Annual General Meeting of Shareholders.

 

A total of16,252 ordinary shares [April 24, 2007 (1,778), May 17, 2007 (6,290) and June27, 2007 (6,138)] were issued at a price of 75 cents each raising $12,189 uponthe exercise of CXSOA listed options issued as part of the 1:10 Rights Issueprospectus.

 

Ordinaryshares have the right to receive dividends as declared and, in the event ofwinding up the company, to participate in the proceeds from the sale of allsurplus assets in proportion to the number of and amounts paid up on sharesheld.

 

Ordinaryshares entitle their holders to one vote per share, either in person or byproxy, at a meeting of the company.

 

New ordinaryshares are issued whenever options are exercised.

 

**ShareOptions**

 

*(i)Listedoptions*

 

At June 30,2007 there were 22,158,526 (2006: 22,158,526) unissued ordinary shares forwhich options were outstanding exercisable at $1.25 per share expiring March12, 2010. These options are listed under code CXSO on the ASX.

 

On February 8,2007 ChemGenex Pharmaceuticals Limited issued 5,685,459 options toinstitutional investors at an exercise price of $0.75 per share expiring onFebruary 8, 2012.These options were allocated at no cost, on a one option forevery three new ordinary shares issued basis to shareholders who participatedin the February 8 share issue. In accordance with ASX Listing Rules this issueis to be ratified by at the next Annual General Meeting of shareholders.

 

On April 3,2007 ChemGenex Pharmaceuticals Limited issued 5,631,013 options at an exerciseprice of $0.75 per share expiring on February 8, 2012  associated with 1:10 Rights Issue offered to all eligible shareholders byprospectus dated February 26, 2007. These options were allocated at no cost, ona one option for every three new ordinary shares issued basis to allshareholders who participated in the Rights Issue.

 

At June 30,2007 there were 11,300,200 (2006: Nil) unissued ordinary shares for whichoptions were outstanding exercisable at $0.75 per share expiring February 8,2012. These options are listed under code CXSOA on the ASX.

 

F-26

----

 

**ShareOptions**

 

*(ii)UnlistedOptions*

 

*EmployeeShare Plan Options (ESOP)*

 

All employeesof the company and its controlled entities are eligible to receive optionsunder ESOP.

 

During thefinancial year 1,000,000 options were issued over ordinary shares to employeesand consultants as set out in Note 14 (2006: 544,500). During the financialyear 120,000 options issued under ESOP were exercised (2006: Nil). During thefinancial year no options previously under ESOP lapsed or were cancelled (2006:40,000).

 

### **At the end of the year there were 2,859,500 (2006:1,979,500) unissued ordinary shares in respect of which ESOP options were outstanding.**

### ** **

*Optionsapproved at General Meetings of Shareholders*

 

Separateissues of other unlisted options have been approved by resolutions passed byshareholders on November 28, 2002 (300,000 options) November 21, 2003 (300,000options), June 21, 2004 (3,000,000 options) and November 16, 2005 (1,000,000options) During the financial year 400,000 options issued following resolutionsof shareholders were exercised (2006: Nil).

 

At the end ofthe year there were 4,200,000 (2006: 4,600,000) unissued ordinary shares inrespect of which these options were outstanding.

 
| **JUNE 30**                                                                                                                                                                                                                                                                                                                                                           | ** ** | **Notes**  | ** ** | **2007**       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** | ** ** | **$**          | ** ** | **$**      | ** ** | **$**      | ** ** |
| **Other reserves**                                                                                                                                                                                                                                                                                                                                                         |       |       |       |           |       |       |       |       |       |
| ** **                                                                                                                                                                                                                                                                                                                                                                 |       |       |       |           |       |       |       |       |       |
| Equity premium reserve                                                                                                                                                                                                                                                                                                                                                     | ** ** |       | ** ** | **10,866,878** |       | 10,866,878 |       | 10,866,878 |       |
|                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** ** |       |           |       |       |       |       |       |
| Equity options reserve                                                                                                                                                                                                                                                                                                                                                     | ** ** |       | ** ** | **1,704,895**  |       | 1,268,418  |       | 428,962    |       |
|                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** ** |       |           |       |       |       |       |       |
| Foreign currency translation reserve                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | **(751,314**   | **)**      | —     |       | —     |       |
| ** **                                                                                                                                                                                                                                                                                                                                                                 |       | ** ** |       | **11,820,459** |       | 12,135,296 |       | 11,295,840 |       |
| **Equity premium reserve**                                                                                                                                                                                                                                                                                                                                                 |       |       |       |           |       |       |       |       |       |
| ** **                                                                                                                                                                                                                                                                                                                                                                 |       |       |       |           |       |       |       |       |       |
| *Nature and purpose of reserve*                                                                                                                                                                                                                                                                                                                                            |       |       |       |           |       |       |       |       |       |
| * *                                                                                                                                                                                                                                                                                                                                                                   |       |       |       |           |       |       |       |       |       |
| Amounts  contributed for the future right to acquire shares at a pre-determined price.  The reserve can be used to pay dividends or issue bonus shares.                                                                                                                                                                                                                    |       |       |       |           |       |       |       |       |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |       |       |           |       |       |       |       |       |
| **Equity options reserve**                                                                                                                                                                                                                                                                                                                                                 |       |       |       |           |       |       |       |       |       |
| ** **                                                                                                                                                                                                                                                                                                                                                                 |       |       |       |           |       |       |       |       |       |
| *Nature and purpose of reserve*                                                                                                                                                                                                                                                                                                                                            |       |       |       |           |       |       |       |       |       |
| * *                                                                                                                                                                                                                                                                                                                                                                   |       |       |       |           |       |       |       |       |       |
| The  equity benefits reserve is used to record the value of equity based benefits  provided as remuneration under the ESOP (see note 14) or to pay for services  provided by third parties in lieu of cash.                                                                                                                                                                |       |       |       |           |       |       |       |       |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |       |       |           |       |       |       |       |       |
| Balance at beginning                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | **1,268,418**  |       | 428,962    |       | 6,858      |       |
|                                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | ** **     |       |       |       |       |       |
| Movements in reserve                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | **436,477**    |       | 839,456    |       | 422,104    |       |
|                                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | ** **     |       |       |       |       |       |
| Balance at end of year                                                                                                                                                                                                                                                                                                                                                     | ** ** |       | ** ** | **1,704,459**  |       | 1,268,418  |       | 428,962    |       |
|                                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | ** **     |       |       |       |       |       |
| **Foreign currency translation reserve**                                                                                                                                                                                                                                                                                                                                   |       |       |       |           |       |       |       |       |       |
| ** **                                                                                                                                                                                                                                                                                                                                                                 |       |       |       |           |       |       |       |       |       |
| *Nature and purpose of reserve*                                                                                                                                                                                                                                                                                                                                            |       |       |       |           |       |       |       |       |       |
| * *                                                                                                                                                                                                                                                                                                                                                                   |       |       |       |           |       |       |       |       |       |
| The  foreign exchange translation reserve is used to record exchange differences  arising when the assets and liabilities of the overseas subsidiary are  translated into the presentation currency of the Parent at the rate of  exchange ruling at the balance sheet date and the income statement is  translated at the weighted average exchange rates for the period. |       |       |       |           |       |       |       |       |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |       |       |           |       |       |       |       |       |
| Balance at beginning                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | **—**     | ** ** | **—** |       | —     | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | ** **     | ** ** | ** ** |       |       | ** ** |
| Movements in reserve                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | **(751,314**   | **)**      | **—** |       | —     | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                       | ** ** |       | ** ** | ** **     | ** ** | ** ** |       |       | ** ** |
| Balance at end of year                                                                                                                                                                                                                                                                                                                                                     | ** ** |       | ** ** | **(751,314**   | **)**      | **—** |       | —     | ** ** |

### ** **

F-27

----

 

### **18. FINANCIAL RISKMANAGEMENT OBJECTIVES AND POLICIES**

 

### **The Group’s financial instruments are cash and bankdeposits used to finance the Group’s operations. The Group also has receivablesand payables. The main risks arising from the Group’s financial instruments areinterest rate risk, foreign currency risk, credit risk and liquidity risk.**

### ** **

### **(a) Interest rate risk**

### ** **

The Group’sexposure to the risk of changes in market interest rates relates to cash atbank which attracts a floating interest rate of 6%. (2006:4%).

 

It is theGroup’s policy to monitor interest exposures and make fixed interestinvestments, when appropriate, to maximise interest income.

 

### **There were no fixed interest investments in place as atJune 30, 2007 and 2006.**

### ** **

### **(b) Foreign currencyrisk**

### ** **

The Group has research agreements with Europeancompanies and conducts significant research operations in the USA which providetransactional currency exposures. Such exposures arise from sales or purchasesin currencies other than the measurement currency.

 

All researchrevenue is denominated in currencies other than the reporting currency andapproximately 50% of all costs are denominated in currencies other than thereporting currency.

 

It is theGroup’s policy to monitor currency exposures and to take forward cover, whenappropriate, to minimise exposure.

 

There were noforward currency contracts in place as at June 30, 2007 and 2006.

 

### **(c) Credit risk**

### ** **

The Grouptrades only with recognised, creditworthy third parties.

 

### **(d) Liquidity risk**

### ** **

The Groupaccesses capital raisings to maintain liquidity as required.

 

### **19. FINANCIALINSTRUMENTS**

### ** **

### **Net fair values**

### ** **

Recognisedfinancial Instruments

 

Cash and cashequivalents: The carrying amount approximates fair value.

 

Tradereceivables: The carrying amount approximates fair value.

 

Tradepayables: The carrying amount approximates fair value.

 

### **20. CONTINGENTLIABILITIES**

### ** **

The Group hasnil contingent liabilities as at June 30, 2007 and 2006, and nil contingentliabilities have arisen during the period to the date of this report.

 

The Group hascommercialisation and licensing agreements with research partners that maycreate an obligation to pay royalties, upon successful commercialisation ofdiscovery targets, in the future. The possible value of these contingentliabilities cannot be quantified until such time as sales are made.

 

The Group hasa manufacturing agreement with Stragen Investment B V which provides for apotential bonus payment to Stragen upon Federal Drug Administration (‘FDA’)approval for Ceflatonin following clinical trials. Due to uncertainty of FDAapproval of Ceflatonin, no amounts have been accrued for in the accompanyingBalance Sheet.

 

### **21. MATTERS SUBSEQUENTTO THE END OF THE FINANCIAL YEAR**

### ** **

On October 26,2007ChemGenex Pharmaceuticals Limited announced a strategic restructuring basedupon the demerger of its metabolic diseases assets by early December, pendingshareholder approval. ChemGenex’s metabolic diseases assets currently residewithin the company’s wholly-owned subsidiary Autogen Research, which is to berenamed Verva Pharmaceuticals. Pending shareholder approval at the AnnualGeneral Meeting, scheduled to take place in Melbourne on November 28, VervaPharmaceuticals will be demerged from ChemGenex. Verva Pharmaceuticals thenintends to merge with Adipogen Pharmaceuticals, pursuant to a mergerimplementation agreement signed on October 29, 2007. Upon shareholder approval,ChemGenex shareholders will receive one share in Verva Pharmaceuticals forevery five ChemGenex Pharmaceuticals shares held at the record date. Inaccordance with ASX listing rules and the option agreements, existing ChemGenexoption holders will not be allocated shares in Verva Pharmaceuticals unlessoptions are exercised prior to the record date. After the record date theexercise price for each remaining ChemGenex option will be reduced byapproximately 7 cents.

 

F-28

----

 

### **22. COMMITMENTS**

 

**(a)****     Researchexpenditure commitments**

** **

Estimated research expenditure contracted for at reporting date, butnot provided for, payable:

** **

•   not later thanone year- $5,097,818 (2006: $4,064,426)

•   later than oneyear and not later than two years- $1,100,189 (2006: $2,316,982)

•   later than twoyears and not later than three years- $30,166 (2006: $257,442)

 

A ControlledEntity, Autogen Research Pty Ltd has agreed to provide certain monies forresearch projects covering areas of diabetes, obesity, autoimmune disorders anddepression and anxiety with the object of long term commercialisation. Researchagreements have been undertaken with Deakin University, Southwest Foundationand The International Diabetes Institute. These agreements expire during 2007and negotiations to continue the agreements for under similar terms arecontinuing.

 

AutogenResearch Pty Ltd has the option to continue funding these research agreementssubject to annual reviews which are dependent upon research milestones beingmet. Autogen Research Pty Ltd has the right to benefit from thecommercialisation of any resulting products.

 

A ControlledEntity, Chemgenex Pharmaceuticals Inc. has appointed Premier Research Plc. asthe Clinical Research Organisation for the Ceflatonin Stage 2/3 Clinical Trialsfor CML patients. Patients recruited for Clinical Trials are guaranteed a levelof treatment beyond the trial period. Commitments for later than one year andless than five years are based estimates of patient numbers and futuretreatments required.

 

**(b) Operating lease commitments**

** **

Estimated operating lease commitments at June 30, 2007:

 

•    not laterthan one year- $29,903 (2006: $39,606)

 

ChemGenex Pharmaceuticals, Inc. leases approximately 2,400 square feetof corporate office space in Menlo Park, California and also subleasesapproximately 500 square feet of laboratory space under separate agreementsthat expire on December 31, 2007. The Company is negotiating arrangements forthe lease of premises after December 31, 2007.

 

As at June 30, 2007, the company also leased office premises fromDeakin University under a lease agreement that expires on December 31, 2007. 

 

**23.DIRECTOR AND EXECUTIVE DISCLOSURES**

** **

**(a) Details of Key Management Personnel**

 
| *(i) Directors*    | * *       | * *                                                                             |
|--------------------|----------------|--------------------------------------------------------------------------------------|
| * *           | * *       | * *                                                                             |
| J.B.L.  Heading    |           | Chairman  (non-executive)                                                            |
| Dr.  G.R. Collier  |           | Director  and Chief Executive Officer                                                |
| K.J.  Dart         |           | Director  (non-executive) (Resigned February 8, 2007)                                |
| R.V.  Byrne        |           | Director  (non-executive) (Resigned February 8, 2007)                                |
| E.J.  Schnee       |           | Director  (non-executive)                                                            |
| Dr.  D.M. Brown    |           | Director  (executive)                                                                |
| P.O.  Burns        |           | Director  (non-executive)                                                            |
| P.J.  Bradfield    |           | Director  (non-executive) (Resigned February 8, 2007)                                |
| Dr. D  Wade        |           | Director  (non-executive) (Appointed December 5, 2006 and resigned February 8, 2007) |
| Dr.  G.E.D. Brooke |           | Director  (non-executive) (Appointed February 8, 2007)                               |
| D.S.  Janney       |           | Director  (non-executive) (Appointed February 8, 2007)                               |
| Dr. G  Morstyn     |           | Director  (non-executive) (Appointed May 31, 2007)                                   |
|               |           |                                                                                 |
| *(ii) Executives*  | * *       | * *                                                                             |
| * *           | * *       | * *                                                                             |
| Dr.  J. Campbell   |           | Vice  President of Operations                                                        |
| E.  Merrigan       |           | Chief  Financial Officer and Company Secretary                                       |
| T.  Herbert        | **** **** | ****Senior Director of Finance****                                                   |
| S.  Michaels       |           | Senior  Director of Discovery Research                                               |
| E.  Humphriss      |           | Senior  Director of clinical affairs                                                 |

 

F-29

----

 

**(b) Remuneration of Key Management personnel**

 

*(i)Remuneration Policy*

 

The Board ofDirectors of ChemGenex Pharmaceuticals Limited, through the RemunerationCommittee, is responsible for determining and reviewing compensation arrangementsfor the directors, the chief executive officer and the executive team. Inaccordance with best practice corporate governance, the structure ofnon-executive director and senior manager remuneration is separate anddistinct.

 

The Boardseeks to set aggregate remuneration at a level which provides the company withthe ability to attract and retain directors of the highest calibre, whilstincurring a cost which is acceptable to shareholders.

 

TheConstitution and the ASX Listing Rules specify that the aggregate remunerationof non-executive directors shall be determined from time to time by a generalmeeting. An amount not exceeding the amount determined is then divided betweenthe directors as agreed. The amount of aggregate remuneration sought to beapproved by shareholders and the manner in which it is apportioned amongstdirectors is reviewed annually. The Board considers the fees paid tonon-executive directors of comparable companies when undertaking the annualreview process. Each non-executive director receives a fee for being a directorof the company.

 

The companyaims to reward executives with a level and mix of remuneration commensuratewith their position and responsibilities within the company and so as to:-

 

•                  reward executives for company performance against target;

•                  align the interests of executives with those of shareholders;

•                  link reward with the strategic goals and performance of the company;and

•                  ensure total remuneration is competitive by market standards.

 

The Boardassesses the appropriateness of the nature and amount of emoluments of suchofficers on a periodic basis by reference to relevant employment marketconditions with the overall objective of ensuring maximum stakeholder benefitfrom the retention of a high quality executive team. Such officers are giventhe opportunity to receive their base emolument in a variety of forms includingcash and fringe benefits such as motor vehicles and expense payment plans. Itis intended that the manner of payment chosen will be optimal for the recipientwithout creating undue cost for the company.

 

To assist inachieving these objectives, the Board links the nature and amount of executivedirectors’ and officers’ emoluments to the company’s financial and operationalperformance. It is the Board’s policy that employment agreements shall beentered into with the Chief Executive Officer and other specified executives.

 

F-30

----

 

*(ii) Compensation for KeyManagement Personnel*

 
| ** **             | ** ** | **Short-term**                  | ** ** | ** ** | ** ** | ** **   | ** ** | ** **          | ** ** |
|------------------------|------------|---------------------------------|------------|------------|------------|--------------|------------|---------------------|------------|
| ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | **Non**      | ** ** | **Post Employment** | ** ** | **Share Based** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **                      | ** ** | **Cash**   | ** ** | **Monetary** | ** ** | **Super-**          | ** ** | **Retirement** | ** ** | **Payments** | ** ** | ** ** | ** ** |
| **Directors**          | ** ** | **Salary & Fees** | ** ** | **Bonus**  | ** ** | **Benefits** | ** ** | **annuation**       | ** ** | **Benefits** | ** ** | **Options** | ** ** | **Total** | ** ** |
| ** **             | ** ** | **$**                           | ** ** | **$**      | ** ** | **$**        | ** ** | **$**               | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
| ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **   | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **J.B.L.  Heading**    |       |                            |       |       |       |         |       |                |       |   |   |   |   |   |   |
| **2007**               | ** ** | **70,849**                      | ** ** | **—** | ** ** | **—**   | ** ** | **—**          | ** ** | **—** | ** ** | **—** | ** ** | **70,849** | ** ** |
| 2006                   |       | 70,532                          |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | 70,532 |   |
| 2005                   |       | 65,000                          |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | 65,000 |   |
| **Dr.  G. R. Collier** |       |                            |       | ** ** |       |         |       |                |       |   |   |   |   |   |   |
| **2007**               | ** ** | **383,764**                     | ** ** | **—** | ** ** | **20,203**   | ** ** | **28,355**          | ** ** | **—** | ** ** | **101,016** | ** ** | **533,338** | ** ** |
| 2006                   |       | 379,097                         |       | **—** |       | 20,628       |       | 27,973              |       | **—** |   | 273,774 |   | 701,472 |   |
| 2005                   |       | 414,882                         |       | **—** |       | 3,834        |       | 38,702              |       | **—** |   | 278,104 |   | 735,522 |   |
| **K.J.  Dart**         |       |                            |       | ** ** |       |         |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **30,342**                      | ** ** | **—** | ** ** | **—**   | ** ** | **2,731**           | ** ** | **—** | ** ** | **—** | ** ** | **33,073** | ** ** |
| 2006                   |       | 50,000                          |       | **—** |       | **—**   |       | 4,500               |       | **—** |   | **—** |   | 54,500 |   |
| 2005                   |       | 50,000                          |       | **—** |       | **—**   |       | 4,500               |       | **—** |   | **—** |   | 54,500 |   |
| **R.V.  Byrne**        |       |                            |       | ** ** |       | ** **   |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **30,342**                      | ** ** | **—** | ** ** | **—**   | ** ** | **2,731**           | ** ** | **—** | ** ** | **—** | ** ** | **33,073** | ** ** |
| 2006                   |       | 50,000                          |       | **—** |       | **—**   |       | 4,500               |       | **—** |   | **—** |   | 54,500 |   |
| 2005                   |       | 50,000                          |       | **—** |       | **—**   |       | 4,500               |       | **—** |   | **—** |   | 54,500 |   |
| **E.J.  Schnee**       |       |                            |       | ** ** |       | ** **   |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **54,500**                      | ** ** | **—** | ** ** | **—**   | ** ** | **—**          | ** ** | **—** | ** ** | **—** | ** ** | **54,500** | ** ** |
| 2006                   |       | 54,500                          |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | 54,500 |   |
| 2005                   |       | 50,000                          |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | 50,000 |   |
| **Dr.  D.M. Brown**    |       |                            |       | ** ** |       |         |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **317,864**                     | ** ** | **—** | ** ** | **39,831**   | ** ** | **—**          | ** ** | **—** | ** ** | **—** | ** ** | **357,695** | ** ** |
| 2006                   |       | 272,720                         |       | **—** |       | 36,817       |       | **—**          |       | **—** |   | **—** |   | 309,537 |   |
| 2005                   |       | 265,516                         |       | **—** |       | 18,666       |       | **—**          |       | **—** |   | **—** |   | 284,182 |   |
| **P.O.  Burns**        |       |                            |       | ** ** |       |         |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **54,500**                      | ** ** | **—** | ** ** | **—**   | ** ** | **—**          | ** ** | **—** | ** ** | **—** | ** ** | **54,500** | ** ** |
| 2006                   |       | 50,215                          |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | 50,215 |   |
| **2005**               |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| **P.J.  Bradfield**    |       |                            |       | ** ** |       |         |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **30,340**                      | ** ** | **—** | ** ** | **—**   | ** ** | **2,731**           | ** ** | **—** | ** ** | **—** | ** ** | **33,071** | ** ** |
| 2006                   |       | 45,833                          |       | **—** |       | **—**   |       | 4,125               |       | **—** |   | **—** |   | 49,958 |   |
| **2005**               |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| **Dr.  D Wade**        |       |                            |       | ** ** |       |         |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **9,040**                       | ** ** | **—** | ** ** | **—**   | ** ** | **814**             | ** ** | **—** | ** ** | **—** | ** ** | **9,854** | ** ** |
| 2006                   |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| **2005**               |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| **Dr.  G.E.D. Brooke** |       |                            |       | ** ** |       | ** **   |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **22,708**                      | ** ** | **—** | ** ** | **—**   | ** ** | **—**          | ** ** | **—** | ** ** | **—** | ** ** | **22,708** | ** ** |
| 2006                   |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| **2005**               |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| **D.S.  Janney**       |       |                            |       | ** ** |       | ** **   |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **22,708**                      | ** ** | **—** | ** ** | **—**   | ** ** | **—**          | ** ** | **—** | ** ** | **—** | ** ** | **22,708** | ** ** |
| 2006                   |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| **2005**               |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| **Dr.  G Morstyn**     |       |                            |       | ** ** |       | ** **   |       |                |       | ** ** |   |   |   |   |   |
| **2007**               | ** ** | **4,167**                       | ** ** | **—** | ** ** | **—**   | ** ** | **375**             | ** ** | **—** | ** ** | **—** | ** ** | **4,542** | ** ** |
| 2006                   |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |
| 2005                   |       | **—**                      |       | **—** |       | **—**   |       | **—**          |       | **—** |   | **—** |   | **—** |   |

 

F-31

----

 

**Executives**

** **
| **Dr.  J. Campbell** |       |          |       |       |       |        |       |       |       |       |       |        |       |          |       |
|----------------------|------------|---------------|------------|------------|------------|-------------|------------|------------|------------|------------|------------|-------------|------------|---------------|------------|
| **2007**             | ** ** | **179,663**   | ** ** | **—** | ** ** | **—**  | ** ** | **16,170** | ** ** | **—** | ** ** | **—**  | ** ** | **195,833**   | ** ** |
| 2006                 |       | 160,550       |       | **—** |       | **—**  |       | 14,449     |       | **—** |       | 69,769      |       | 244,768       |       |
| 2005                 |       | 159,223       |       | **—** |       | **—**  |       | 14,330     |       | **—** |       | 40,000      |       | 213,553       |       |
| **T.  Herbert**      |       |          |       |       |       |        |       |       |       |       |       |        |       |          |       |
| **2007**             | ** ** | **209,790**   | ** ** | **—** | ** ** | **16,058**  | ** ** | **—** | ** ** | **—** | ** ** | **—**  | ** ** | **225,849**   | ** ** |
| 2006                 |       | 202,966       |       | **—** |       | 13,407      |       | **—** |       | **—** |       | **—**  |       | 216,373       |       |
| 2005                 |       | 199,137       |       | **—** |       | 10,295      |       | **—** |       | **—** |       | **—**  |       | 209,432       |       |
| **E.  Merrigan**     |       |          |       |       |       |        |       |       |       |       |       |        |       |          |       |
| **2007**             | ** ** | **108,750**   | ** ** | **—** | ** ** | **—**  | ** ** | **32,700** | ** ** | **—** | ** ** | **—**  | ** ** | **141,450**   | ** ** |
| 2006                 |       | 120,000       |       | **—** |       | **—**  |       | 10,800     |       | **—** |       | 26,163      |       | 156,963       |       |
| 2005                 |       | 94,154        |       | **—** |       | **—**  |       | 8,425      |       | **—** |       | 10,000      |       | 112,579       |       |
| **S.  Michaels**     |       |          |       |       |       |        |       |       |       |       |       |        |       |          |       |
| **2007**             | ** ** | **127,146**   | ** ** | **—** | ** ** | **27,522**  | ** ** | **—** | ** ** | **—** | ** ** | **—**  | ** ** | **154,668**   | ** ** |
| 2006                 |       | 124,078       |       | **—** |       | 24,442      |       | **—** |       | **—** |       | **—**  |       | 148,520       |       |
| 2005                 |       | 119,482       |       | **—** |       | 9,140       |       | **—** |       | **—** |       | **—**  |       | 128,622       |       |
| **E.  Humphriss**    |       |          |       |       |       |        |       |       |       |       |       |        |       |          |       |
| **2007**             | ** ** | **101,399**   | ** ** | **—** | ** ** | **12,202**  | ** ** | **—** | ** ** | **—** | ** ** | **—**  | ** ** | **113,601**   | ** ** |
| 2006                 | ** ** | **—**    | ** ** | **—** | ** ** | **—**  | ** ** | **—** | ** ** | **—** | ** ** | **—**  | ** ** | **—**    | ** ** |
| 2005                 | ** ** | **—**    | ** ** | **—** | ** ** | **—**  | ** ** | **—** | ** ** | **—** | ** ** | **—**  | ** ** | **—**    | ** ** |
| **Total**            | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **    | ** ** |
| **2007**             | ** ** | **1,757,872** | ** ** | **—** | ** ** | **115,816** | ** ** | **86,607** | ** ** | **—** | ** ** | **101,016** | ** ** | **2,006,311** | ** ** |
| 2006                 |       | 1,580,492     |       | **—** |       | 95,294      |       | 66,348     |       | **—** |       | 369,706     |       | 2,111,838     |       |
| 2005                 |       | 1,467,394     |       | **—** |       | 41,935      |       | 70,457     |       | **—** |       | 328,104     |       | 1,907,890     |       |

** **

*(iii) Compensation byCategory:  Key Management Personnel*

 
| ** **          | ** ** | **2007**      | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------|------------|---------------|------------|-----------|------------|-----------|------------|
| ** **          | ** ** | **$**         | ** ** | **$**     | ** ** | **$**     | ** ** |
| Short-term          | ** ** | **1,873,688** |       | 1,675,786 |       | 1,509,329 |       |
| Post  employment    | ** ** | **86,607**    |       | 66,348    |       | 70,457    |       |
| Share-based payment | ** ** | **101,016**   |       | 369,706   |       | 328,104   |       |
| ** **          |       | **2,061,311** |       | 2,111,840 |       | 1,907,890 |       |

### ** **

### **(c) Remuneration options: Granted andvested**

### ** **

ESOP optionsgranted as equity compensation benefits to directors and executives during thefinancial year are disclosed below. The options were issued free of charge. Eachoption entitles the holder to subscribe for one fully paid ordinary share inthe Group at exercise prices set out in the table below. The options may onlybe exercised after the first exercise date and before the expiry date as setout in the table below:

 
| ** **                          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** | **Terms & Conditions for Each Grant**            | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Vested  Number** | ** ** | **Granted  Number** | ** ** | **Grant date** | ** ** | **Fair Value per   option at grant  date**** ** | ** ** | **Exercise Price  per share**** ** | ** ** | **First Exercise Date** | ** ** | **Expiry Date** | ** ** |
| ** **                          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** | **($)**                                                                       | ** ** | **($)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2007 Directors & Executives** |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   |   |
| Nil options issued                  |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   |   |
|                                |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   |   |
| **2006 Directors**                  |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   |   |
| Nil options issued                  |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   |   |

 

F-32

----

 
| ** **          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** | **Terms & Conditions for  Each Grant**                     | ** ** |
|---------------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Vested  Number** | ** ** | **Granted  Number** | ** ** | **Grant date** | ** ** | **Fair Value per   option at grant  date**** ** | ** ** | **Exercise Price  per share**** ** | ** ** | **First Exercise Date** | ** ** | **Expiry Date** | ** ** |
| ** **          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **          | ** ** | **($)**                                                                       | ** ** | **($)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2006 Executives** |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
| Dr. J. Campbell     |       | 200,000            |       | 200,000             |       | Sept. 23, 2005      |       | 0.35                                                                          |       | 0.43 |   | Sept. 23, 2005 |   | Mar. 24, 2010 | ** ** |
| E. Merrigan         |       | 75,000             |       | 75,000              |       | Sept. 23, 2005      |       | 0.35                                                                          |       | 0.43 |   | Sept. 23, 2005 |   | Mar. 24, 2010 | ** ** |
|                |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
| **Total**           |       | 275,000            |       | 275,000             |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
| ** **          |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
| **2005 Directors**  |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
| Nil options issued  |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
|                |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
| **Executives**      |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
| Dr. J. Campbell     |       | 100,000            |       | 100,000             |       | Dec. 21, 2004       |       | 0.40                                                                          |       | 0.43 |   | Dec. 21, 2004 |   | Mar. 24, 2010 | ** ** |
| E. Merrigan         |       | 25,000             |       | 25,000              |       | Dec. 21, 2004       |       | 0.40                                                                          |       | 0.43 |   | Dec. 21, 2004 |   | Mar. 24, 2010 | ** ** |
|                |       |               |       |                |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
| **Total**           |       | 125,000            |       | 125,000             |       |                |       |                                                                          |       |   |   |   |   |   | ** ** |
|                     |            |                    |            |                     |            |                     |            |                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |

** **

### **(d) Shares issued onexercise of remuneration options**

### ** **

400,000 shareswere issued to either Greg Collier or related parties of Greg Collier on theexercise of remuneration options in 2007. No shares were issued to directors orexecutives on the exercise of remuneration options in 2006 or 2005.

 

F-33

----

 

**(e)Option holdings of Key Management Personnel**

** **
| ** **                  | ** ** | **Balance at**        | ** ** | **Granted as** | ** ** | ** **    | ** ** | ** **          | ** ** | **Balance at**         | ** ** | ** **                                      | ** ** | ** **      | ** ** | ** **      | ** ** |
|-----------------------------|------------|----------------------------|------------|---------------------|------------|---------------|------------|---------------------|------------|-----------------------------|------------|-------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                  | ** ** | **beginning**              | ** ** | **Remuner-**        | ** ** | ** **    | ** ** | ** **          | ** ** | **end of **       | ** ** | **Vested at June 30, 2007** | ** ** |
| ** **                  | ** ** | **of period**         | ** ** | **ation**           | ** ** | **Options**   | ** ** | **Net Change** | ** ** | **period**                  | ** ** | ** **                                      | ** ** | **Not **   | ** ** | ** **      | ** ** |
| **June 30, 2007** | ** ** | **July 1, 2006** | ** ** | **#**               | ** ** | **Exercised** | ** ** | **Other**           | ** ** | **June 30, 2007** | ** ** | **Total**                                       | ** ** | **exercisable** | ** ** | **Exercisable** | ** ** |
| ** **                  | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                                      | ** ** | ** **      | ** ** | ** **      | ** ** |
| **Directors**               |       |                       |       |                |       |          |       |                |       |                        |       |                                            |       |            |       |            |       |
| J.B.L.  Heading             |       | —                     |       | —              |       | —        |       | 3,333               |       | 3,333                       |       | 3,333                                           |       | —          |       | 3,333           |       |
| Dr.  G.R. Collier           |       | 3,800,000                  |       | —              |       | (400,000      | )          | —              |       | 3,400,000                   |       | 2,400,000                                       |       | 200,000         |       | 2,200,000       |       |
| K.J.  Dart                  |       | 7,399,324                  |       | —              |       | —        |       | (7,399,324          | )          | —                      |       | —                                          |       | —          |       | —          |       |
| R.V.  Byrne                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| E.J.  Schnee                |       | 4,439,308                  |       | —              |       | —        |       | —              |       | 4,439,308                   |       | 4,439,308                                       |       | —          |       | 4,439,308       |       |
| Dr.  D.M. Brown             |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| P.O.  Burns                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| P.J.  Bradfield             |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| Dr D.  Wade                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| Dr  G.E.D. Brooke           |       | —                     |       | —              |       | —        |       | 2,736,065           |       | 2,736,065                   |       | 2,736,065                                       |       | —          |       | 2,736,065       |       |
| D.S.  Janney                |       | —                     |       | —              |       | —        |       | 6,088,053           |       | 6,088,053                   |       | 6,088,053                                       |       | —          |       | 6,088,053       |       |
| Dr G.  Morstyn              |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| **Executives**              |       |                       |       |                |       |          |       |                |       |                        |       |                                            |       |            |       |            |       |
| Dr. J.  Campbell            |       | 385,000                    |       | —              |       | —        |       | 167                 |       | 385,167                     |       | 385,167                                         |       | —          |       | 385,167         |       |
| E.  Humphriss               |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| E.  Merrigan                |       | 100,000                    |       | —              |       | —        |       | 1,667-              |       | 101,667                     |       | 101,667                                         |       | —          |       | 101,667         |       |
| T.  Herbert                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| S.  Michaels                |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | —          |       | —          |       |
| **Total**                   | ** ** | **16,123,632**             | ** ** | —              | ** ** | **(400,000**  | **)**      | **1,429,961**       | ** ** | **17,153,593**              | ** ** | **16,153,593**                                  | ** ** | **200,000**     | ** ** | **15,953,593**  | ** ** |

* *

----

*# Includes forfeits and offers  toemployees under the ESOP to June 30, 2007*

 

*NetChange Other includes-*

 

*Listedoptions issued as part of the April 2007 Rights Issue to all eligible shareholdersincluding B. Heading, Dr. J. Campbell and E. Merrigan.*

 

*K.J.Dart resigned as a director on February 8, 2007 and the options he controlledhave been deducted from the total for the year ended June 30, 2007  D.S. Janney and Dr. G.E.D. Brooke becamedirectors on February 8, 2007 and the options held by entities in which theyhold directorships are added to the total for the year ended June 30, 2007.*

 
| ** **                  | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                                      | ** ** |
|-----------------------------|------------|----------------------------|------------|---------------------|------------|---------------|------------|---------------------|------------|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Balance at**        | ** ** | **Granted as** | ** ** | ** **    | ** ** | ** **          | ** ** | **Balance at**         | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **beginning**              | ** ** | **Remuner-**        | ** ** | ** **    | ** ** | ** **          | ** ** | **end of **       | ** ** | **Vested at June 30, 2006** | ** ** |
| ** **                  | ** ** | **of period**         | ** ** | **ation**           | ** ** | **Options**   | ** ** | **Net Change** | ** ** | **period**                  | ** ** | ** **                                      | ** ** | **Not ** | ** ** | ** ** | ** ** |
| **June 30, 2006** | ** ** | **July 1, 2005** | ** ** | **#**               | ** ** | **Exercised** | ** ** | **Other**           | ** ** | **June 30, 2006** | ** ** | **Total**                                       | ** ** | **exercisable** | ** ** | **Exercisable** | ** ** |
| ** **                  | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Directors**               |       |                       |       |                |       |          |       |                |       |                        |       |                                            |       |   |   |   |   |
| J.B.L.  Heading             |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| Dr.  G.R. Collier           |       | 3,800,000                  |       | —              |       | —        |       | —              |       | 3,800,000                   |       | 2,800,000                                       |       | 200,000 |   | 2,600,000 |   |
| K.J.  Dart                  |       | 7,399,324                  |       | —              |       | —        |       | —              |       | 7,399,324                   |       | 7,399,324                                       |       | — |   | 7,399,324 |   |
| R.V.  Byrne                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| E.J.  Schnee                |       | 4,439,308                  |       | —              |       | —        |       | —              |       | 4,439,308                   |       | 4,439,308                                       |       | — |   | 4,439,308 |   |
| Dr.  D.M. Brown             |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| P.O.  Burns                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| P.J.  Bradfield             |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |

 

F-34

----

 
| ** **                  | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                                      | ** ** |
|-----------------------------|------------|----------------------------|------------|---------------------|------------|---------------|------------|---------------------|------------|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Balance at**        | ** ** | **Granted as** | ** ** | ** **    | ** ** | ** **          | ** ** | **Balance at**         | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **beginning**              | ** ** | **Remuner-**        | ** ** | ** **    | ** ** | ** **          | ** ** | **end of **       | ** ** | **Vested at June 30, 2006** | ** ** |
| ** **                  | ** ** | **of period**         | ** ** | **ation**           | ** ** | **Options**   | ** ** | **Net Change** | ** ** | **period**                  | ** ** | ** **                                      | ** ** | **Not ** | ** ** | ** ** | ** ** |
| **June 30, 2006** | ** ** | **July 1, 2005** | ** ** | **#**               | ** ** | **Exercised** | ** ** | **Other**           | ** ** | **June 30, 2006** | ** ** | **Total**                                       | ** ** | **exercisable** | ** ** | **Exercisable** | ** ** |
| ** **                  | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Executives**              |       |                       |       |                |       |          |       |                |       |                        |       |                                            |       |   |   |   |   |
| Dr. J.  Campbell            |       | 185,000                    |       | 200,000             |       | —        |       | —              |       | 385,000                     |       | 385,000                                         |       | — |   | 385,000 |   |
| E.  Humphriss               |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| E.  Merrigan                |       | 25,000                     |       | 75,000              |       | —        |       | —              |       | 100,000                     |       | 100,000                                         |       | — |   | 100,000 |   |
| T.  Herbert                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| S.  Michaels                |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
|                        |       |                       |       |                |       |          |       |                |       |                        |       |                                            |       |   |   |   |   |
| **Total**                   | ** ** | **15,848,632**             | ** ** | **275,000**         | ** ** | **—**    | ** ** | **—**          | ** ** | **16,123,632**              | ** ** | **15,123,132**                                  | ** ** | **200,000** | ** ** | **14,923,632** |   |

 

----

*# Includes forfeits and offers  toemployees under the ESOP to June 30, 2006*

 
| ** **                  | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                                      | ** ** |
|-----------------------------|------------|----------------------------|------------|---------------------|------------|---------------|------------|---------------------|------------|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Balance at**        | ** ** | **Granted as** | ** ** | ** **    | ** ** | ** **          | ** ** | **Balance at**         | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **beginning**              | ** ** | **Remuner-**        | ** ** | ** **    | ** ** | ** **          | ** ** | **end of **       | ** ** | **Vested at June 30, 2005** | ** ** |
| ** **                  | ** ** | **of period**         | ** ** | **ation**           | ** ** | **Options**   | ** ** | **Net Change** | ** ** | **period**                  | ** ** | ** **                                      | ** ** | **Not ** | ** ** | ** ** | ** ** |
| **June 30, 2005** | ** ** | **July 1, 2004** | ** ** | **#**               | ** ** | **Exercised** | ** ** | **Other**           | ** ** | **June 30, 2005** | ** ** | **Total**                                       | ** ** | **exercisable** | ** ** | **Exercisable** | ** ** |
| ** **                  | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Directors**               |       |                       |       |                |       |          |       |                |       |                        |       |                                            |       |   |   |   |   |
| J.B.L.  Heading             |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| Dr.  G.R. Collier           |       | 3,800,000                  |       | —              |       | —        |       | —              |       | 3,800,000                   |       | 1,800,000                                       |       | 200,000 |   | 1,600,000 |   |
| K.J.  Dart                  |       | 7,399,324                  |       | —              |       | —        |       | —              |       | 7,399,324                   |       | 7,399,324                                       |       | — |   | 7,399,324 |   |
| R.V.  Byrne                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| E.J.  Schnee                |       | 4,439,308                  |       | —              |       | —        |       | —              |       | 4,439,308                   |       | 4,439,308                                       |       | — |   | 4,439,308 |   |
| Dr.  D.M. Brown             |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| **Executives**              |       |                       |       |                |       |          |       |                |       |                        |       |                                            |       |   |   |   |   |
| Dr. J.  Campbell            |       | 85,000                     |       | 100,000             |       | —        |       | —              |       | 185,000                     |       | 185,000                                         |       | — |   | 185,000 |   |
| H.  Pedersen                |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| E.  Merrigan                |       | —                     |       | 25,000              |       | —        |       | —              |       | 25,000                      |       | 25,000                                          |       | — |   | 25,000 |   |
| T.  Herbert                 |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
| S.  Michaels                |       | —                     |       | —              |       | —        |       | —              |       | —                      |       | —                                          |       | — |   | — |   |
|                        |       |                       |       |                |       |          |       |                |       |                        |       |                                            |       |   |   |   |   |
| **Total**                   | ** ** | **15,723,632**             | ** ** | **125,000**         | ** ** | —        | ** ** | —              | ** ** | **15,848,632**              | ** ** | **13,848,632**                                  | ** ** | **200,000** | ** ** | **13,648,632** | ** ** |

 

----

*# Includes forfeits and offers  toemployees under the ESOP to June 30, 2005*

 

F-35

----

### ** **

### **(f) Shareholdings of Key ManagementPersonnel**

 
| ** **                  | ** ** | **Balance****   July 1, 2006** | ** ** | **Granted as****   Remuneration** | ** ** | **On Exercise****   of Options** | ** ** | **Net Change****   Other** | ** ** | **Balance****   June 30, 2007** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|
| **June 30, 2007** | ** ** | **Ord**                                       | ** ** | **Ord.**                                    | ** ** | **Ord**                                         | ** ** | **Ord**                              | ** ** | **Ord**                                        | ** ** |
| **Directors**               |       |                                          |       |                                        |       |                                            |       |                                 |       |                                           |       |
| J.B.L.  Heading             |       | 100,000                                       |       | —                                      |       | —                                          |       | 10,000                               |       | 110,000                                        |       |
| Dr.  G.R. Collier           |       | —                                        |       | —                                      |       | 400,000                                         |       | (400,000                             | )          | —                                         |       |
| K.J.  Dart @                |       | 28,259,247                                    |       | —                                      |       | —                                          |       | (28,259,247                          | )          | —                                         |       |
| R.V.  Byrne                 |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| E.J.  Schnee                |       | 18,833,750                                    |       | —                                      |       | —                                          |       | —                               |       | 18,833,750                                     |       |
| Dr.  D.M. Brown             |       | 14,398,297                                    |       | —                                      |       | —                                          |       | (521,745                             | )          | 13,876,552                                     |       |
| P.O.  Burns                 |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| P.J.  Bradfield             |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| Dr D.  Wade                 |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| Dr  G.E.D. Brooke           |       | —                                        |       | —                                      |       | —                                          |       | 16,629,765                           |       | 16,629,765                                     |       |
| D.S.  Janney                |       | —                                        |       | —                                      |       | —                                          |       | 37,009,671                           |       | 37,009,671                                     |       |
| Dr G  Morstyn               |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| **Executives**              |       |                                          |       |                                        |       |                                            |       |                                 |       |                                           |       |
| Dr.  J. Campbell            |       | 5,000                                         |       | —                                      |       | —                                          |       | 500                                  |       | 5,500                                          |       |
| E.  Humphriss               |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| E.  Merrigan                |       | 50,000                                        |       | —                                      |       | —                                          |       | 5,000                                |       | 55,000                                         |       |
| T.  Herbert                 |       | 760,027                                       |       | —                                      |       | —                                          |       | —                               |       | 760,027                                        |       |
| S.  Michaels                |       | 760,027                                       |       | —                                      |       | —                                          |       | —                               |       | 760,027                                        |       |
| **Total**                   | ** ** | **63,166,348**                                |       | —                                      |       | —                                          | ** ** | **24,873,944**                       | ** ** | **88,040,292**                                 | ** ** |

* *

*NetChange Other includes-*

* Shares issued as part of the April 2007 RightsIssue to all eligible shareholders including B. Heading, Dr. J. Campbell and E.Merrigan.*

*Duringthe year ended June 30, 2007 Dr. D. Brown sold 521,745 ordinary shares in themarket. These sales were disclosed to the ASX in accordance with the ListingRules.*

*K.J.Dart resigned as a director on February 8, 2007 and the shares he controlledhave been deducted from the total for the year ended June 30, 2007. D.S. Janneyand Dr G.E.D .Brooke became directors on February 8, 2007 and the shares heldby entities in which they hold directorships are added to the total for theyear ended June 30, 2007.*

 
| ** **                  | ** ** | **Balance****   July 1, 2005** | ** ** | **Granted as****   Remuneration** | ** ** | **On Exercise****   of Options** | ** ** | **Net Change****   Other** | ** ** | **Balance****   June 30, 2006** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|
| **June 30, 2006** | ** ** | **Ord**                                       | ** ** | **Ord.**                                    | ** ** | **Ord**                                         | ** ** | **Ord**                              | ** ** | **Ord**                                        | ** ** |
| **Directors**               |       |                                          |       |                                        |       |                                            |       |                                 |       |                                           |       |
| J.B.L.  Heading             |       | 100,000                                       |       | —                                      |       | —                                          |       | —                               |       | 100,000                                        |       |
| Dr.  G.R. Collier           |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| K.J.  Dart                  |       | 23,159,247                                    |       | —                                      |       | —                                          |       | 5,100,000                            |       | 28,259,247                                     |       |
| R.V.  Byrne                 |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| E.J.  Schnee                |       | 9,833,750                                     |       | —                                      |       | —                                          |       | 9,000,000                            |       | 18,833,750                                     |       |
| Dr.  D.M. Brown             |       | 14,398,297                                    |       | —                                      |       | —                                          |       | —                               |       | 14,398,297                                     |       |
| P.O.  Burns                 |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| P.J.  Bradfield             |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| **Executives**              |       |                                          |       |                                        |       |                                            |       |                                 |       |                                           |       |
| Dr.  J. Campbell            |       | 5,000                                         |       | —                                      |       | —                                          |       | —                               |       | 5,000                                          |       |
| E.  Humphriss               |       | —                                        |       | —                                      |       | —                                          |       | —                               |       | —                                         |       |
| E.  Merrigan                |       | 25,000                                        |       | —                                      |       | —                                          |       | 25,000                               |       | 50,000                                         |       |
| T.  Herbert                 |       | 760,027                                       |       | —                                      |       | —                                          |       | —                               |       | 760,027                                        |       |
| S.  Michaels                |       | 760,027                                       |       | —                                      |       | —                                          |       | —                               |       | 760,027                                        |       |
| **Total**                   | ** ** | **49,041,348**                                |       | —                                      |       | —                                          | ** ** | **14,125,000**                       | ** ** | **63,166,348**                                 | ** ** |

 

F-36

----

** **
| ** **                  | ** ** | **Balance****   July 1, 2004** | ** ** | **Granted as****Remuneration** | ** ** | **On Exercise****   of Options** | ** ** | **Net Change****   Other** | ** ** | **Balance****   June 30, 2005** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|
| **June 30, 2005** | ** ** | **Ord**                                       | ** ** | **Ord.**                            | ** ** | **Ord**                                         | ** ** | **Ord**                              | ** ** | **Ord**                                        | ** ** |
| **Directors**               |       |                                          |       |                                |       |                                            |       |                                 |       |                                           |       |
| J.B.L.  Heading             |       | 100,000                                       |       | —                              |       | —                                          |       | —                               |       | 100,000                                        |       |
| Dr.  G.R. Collier           |       | —                                        |       | —                              |       | —                                          |       | —                               |       | —                                         |       |
| K.J.  Dart                  |       | 19,864,347                                    |       | —                              |       | —                                          |       | 3,294,900                            |       | 23,159,247                                     |       |
| R.V.  Byrne                 |       | —                                        |       | —                              |       | —                                          |       | —                               |       | —                                         |       |
| E.J.  Schnee                |       | 5,748,750                                     |       | —                              |       | —                                          |       | 4,085,000                            |       | 9,833,750                                      |       |
| Dr.  D.M. Brown             |       | 14,398,297                                    |       | —                              |       | —                                          |       | —                               |       | 14,398,297                                     |       |
| **Executives**              |       |                                          |       |                                |       |                                            |       |                                 |       |                                           |       |
| Dr.  J. Campbell            |       | 5,000                                         |       | —                              |       | —                                          |       | —                               |       | 5,000                                          |       |
| E.  Humphriss               |       | —                                        |       | —                              |       | —                                          |       | —                               |       | —                                         |       |
| E.  Merrigan                |       | —                                        |       | —                              |       | —                                          |       | 25,000                               |       | 25,000                                         |       |
| T.  Herbert                 |       | 760,027                                       |       | —                              |       | —                                          |       | —                               |       | 760,027                                        |       |
| S.  Michaels                |       | 760,027                                       |       | —                              |       | —                                          |       | —                               |       | 760,027                                        |       |
| **Total**                   | ** ** | **41,636,448**                                |       | —                              |       | —                                          | ** ** | **7,404,900**                        | ** ** | **49,041,348**                                 | ** ** |

 

All equitytransactions with directors and executives other than those arising from theexercise of remuneration options have been entered into under terms andconditions no more favourable than those the Group would have adopted ifdealing at arm’s length.

 

**(g) Loans to directors and executives**

 

Options granted under the ESOP in 2000 and 2001contained an issue price which the company, in accordance with the terms of theESOP, funded via an interest free “off balance sheet” loan to the optionholder. The loan is repayable upon the sale of shares obtained through exerciseof the options.

 

Dr Greg Collier (who was not a director at the time ofthe grants) received 100,000 options under the ESOP in financial years 2000 and2001 and, as a result, was given a loan to fund the issue price of theseoptions. Subsequent to the date of these option grants the terms and conditionsof the “off balance sheet” loans have not been changed, no repayments have beenmade and the balance of $96,820 is outstanding at June 30, 2007. Interest notcharged for the year ended June 30, 2007 of $3,834 has been included in Note23(b)(ii) as a non-monetary benefit. (2006: $3,834)

 

Neither the loans nor equity items relating to theseoptions are included in the company’s financial statements as share pricehurdle rates associated with these options have not been achieved.

 

There are no other loans to specified directors andspecified executives and there have been no other loans made to or repaid byspecified directors and specified executives during the years ended June 30,2007 and 2006.

 

**(h)Employment contracts**

 

The CEO, DrGreg Collier, is employed under contract. The current employment contractcommenced on July 1, 2007 and terminates on June 30, 2012, at which time thecompany may choose to commence negotiation to enter into a new employment contractwith Dr Collier. Under the terms of the present contract:-

 
| • |   | Dr  Collier may resign from his position and thus terminate this contract by  giving 6 months written notice.                                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | The  company may terminate this employment agreement by providing 6 months written  notice or provide payment in lieu of the notice period.                                                                          |
| • |   | The  company may terminate the contract at any time without notice if serious  misconduct has occurred. Where termination with cause occurs the CEO is only  entitled to remuneration up to the date of termination. |

 

All otherexecutives are employed under contracts which have a term of 12 months andprovide for termination, by either party, with notice periods between 2 and 4months.

 

F-37

----

### ** **

### **24. AUDITORS’ REMUNERATION**

 
| **JUNE 30**                                                                                                                       | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
|                                                                                                                                   | ** ** | **$**       | ** ** | **$**      | ** ** | **$**      | ** ** |
| Amounts  paid or payable to Ernst & Young Australia for:                                                                           | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| — an  audit or review of the financial report of the entity and any other entity in  the consolidated entity                      | ** ** | **269,435** |       | 212,325    |       | 93,250     |       |
| —  other services in relation to the entity and any other entity in the  consolidated entity                                      |       | —      |       | —     |       | 17,709     |       |
| — tax  advice                                                                                                                     |       | **—**  |       | —     |       | 12,000     |       |
| ** **                                                                                                                             |       | **269,435** |       | 212,325    |       | 122,959    |       |
| Amounts  paid or payable to Deloitte Touche Tohmatsu for initial SEC registration form  20—F and 2005 SEC Annual Report 20—F | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| — an  audit or review of the financial report of the entity and any other entity in  the consolidated entity                      |       | **—**  |       | —     |       | 497,804    |       |
| —  other services in relation to the entity and any other entity in the  consolidated entity                                      |       | **—**  |       | —     |       | —     |       |
| — tax  advice                                                                                                                     |       | **—**  |       | —     |       | —     |       |
|                                                                                                                                   |       | **—**  |       | —     |       | 497,804    |       |

 

### **25. RELATED PARTY DISCLOSURES**

### ** **

### ***Revenues***

### ** **

Mr E. J.Schnee, a director of Chemgenex Pharmaceuticals Limited is also a director ofMerck Santé which holds 18,793,750 shares and 4,439,308 options in the company.Merck Santé is party to research and commercialisation agreements with thecompany’s 100% owned subsidiary Autogen Research Pty Limited. Under theseagreements Merck Santé provided research revenue of $331,377 and patentreimbursement of $Nil to Autogen Research Pty Ltd. during the year ended June30, 2007. (2006: $1,436,053 and $230,223, and 2005: $2,533,113 and $104,085)

 

### ***Expenses***

### ** **

During theyear ended June 30, 2007 legal services to the value of $93,282 (2006: $52,337;2005: $52,934) were provided by McCullough Robertson solicitors, a legal firmof which Mr J.B.L. Heading, a director of Chemgenex Pharmaceuticals Limited, isa partner. $62,872 of the 2007 amount was charged to Contributed Equity forcosts associated with the February prospectus and rights issue (2006and 2005:Nil)

 

Mr. J.B.L.Heading is also a director of two companies that are the joint holders of 5% ofthe shares of Global Markets Capital Group LLC that has provided advisory andconsulting services to the company to the value of $200,483 (including share—basedcompensation of $165,924) during the year ended June 30, 2007 (2006: $53,751and $Nil; 2005: $65,214 and $Nil). Mr Heading has no beneficial interest inthese shareholders.

 

Mr K.J. Dart aformer director of Chemgenex Pharmaceuticals Limited, was also a director andshareholder of Charter Pacific Corporation Limited. Charter Pacific CorporationLimited is a significant shareholder of Global Markets Capital Group LLC thathas provided advisory and consulting services to the company to the value of$200,483 (including share-based compensation of $165,924) during the year endedJune 30, 2007 (2006: $53,751 and $Nil; 2005: $65,214 and $Nil ).

 

### ***Assets***

### ** **

### **As at June 30, 2007 and 2006 no related parties had fundsowing to Chemgenex Pharmaceuticals Limited as Trade receivables.**

### ** **

### ***Liabilities***

### ** **

### **Included in Trade and other payables as at June 30, 2007was an amount of $ 4,494 owing to McCullough Robertson on normal commercialterms.**

### ** **

F-38

----

 

### **25. RELATED PARTY DISCLOSURES (cont)**

### ** **

### **Included in Trade and other payables as at June 30, 2006was an amount of $4,168 owing to McCullough Robertson on normal commercialterms.**

### ** **

### ***Deferred revenue***

### ** **

Included inDeferred revenue as at June 30, 2007 was an amount of $165,688 which had beenreceived from Merck Santé for which services contracted had not been providedat that time. (2006: $177,442).

 

**Amounts recognised at the reporting date as related partytransactions**

 
| ** **                                 | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **$**       | ** ** | **$**      | ** ** | **$**      | ** ** |
| **Assets and Liabilities**                 | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                                 |       |        |       |       |       |       |       |
| Trade  receivables                         | ** ** | **—**  | ** ** | **—** |       |       |       |
|                                       |       |        |       |       |       |       |       |
| **Total Assets**                           | ** ** | **—**  | ** ** | **—** |       |       |       |
| ** **                                 | ** ** | ** **  | ** ** | ** ** |       |       |       |
| **Liabilities**                            |       |        |       |       |       |       |       |
| Trade  creditors                           | ** ** | **4,494**   |       | 4,168      |       |       |       |
| Deferred  revenue                          | ** ** | **165,688** |       | 177,422    |       |       |       |
| **Total Liabilities**                      | ** ** | **170,162** |       | 181,590    |       |       |       |
| ** **                                 | ** ** | ** **  |       |       |       |       |       |
| **Revenues and Expenses**                  |       |        |       |       |       |       |       |
| **Revenues**                               | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research  Revenue                          | ** ** | **331,377** |       | 1,436,053  |       | 2,533,113  |       |
| Patent  reimbursements                     | ** ** | **—**  |       | 230,223    |       | 104,085    |       |
| **Total Revenues**                         | ** ** | **331,377** |       | 1,666,273  |       | 2,637,198  |       |
| ** **                                 | ** ** | ** **  |       |       |       |       |       |
| **Expenses**                               |       |        |       |       |       |       |       |
| Legal  services provided                   | ** ** | **93,282**  |       | 52,337     |       | 52,934     |       |
| Advisory  and consulting services provided | ** ** | **458,515** |       | 53,751     |       | 65,214     |       |
| **Total Expenses**                         | ** ** | **551,797** |       | 106,088    |       | 118,148    |       |

 

**26. RECONCILIATION TO US GAAP**

 

Theconsolidated financial statements have been prepared in accordance with AIFRS,which differ in certain respects from accounting principles generally acceptedin the United States of America (“US GAAP”). The following is a summary of theadjustments to net loss and total equity required when reconciling such amountsrecorded in the consolidated financial statements to the corresponding amountsin accordance with US GAAP, considering the differences between AIFRS and USGAAP.

 

Reconciliationof net loss

 

The followingis a reconciliation of net loss as reported in the Consolidated IncomeStatements under AIFRS to the net loss as adjusted for the effects of theapplication of US GAAP for the years ended June 30, 2007, 2006 and 2005.

 
| **Years Ended June 30,**      | ** ** | **2007**        | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|----------------------------------------------|------------|-----------------|------------|-------------|------------|-------------|------------|
| ** **                                   | ** ** | **$**           | ** ** | **$**       | ** ** | **$**       | ** ** |
| Net  loss in accordance with AIFRS           | ** ** | **(11,700,919** | )          | (10,369,719 | )          | (6,235,183  | )          |
| US  GAAP adjustments                         |       |            |       |        |       |        |       |
| Share-based  compensation expenses           | (a)        |            |       |        |       |        |       |
| -  AIFRS expense                             | ** ** | **436,477**     |       | 839,456     |       | 422,105     |       |
| - US  GAAP expenses                          | ** ** | **(436,477**    | )          | (839,456    | )          | (101,100    | )          |
| Marketable  securities                       | (d)        | **—**      |       | (74,631     | )          | (275,182    | )          |
| Deferred  tax effect of US GAAP adjustments  | (e)        | **—**      | ** ** | —      |       | —      | ** ** |
| Net  loss in accordance with US GAAP         | ** ** | **(11,700,919** | )          | (10,444,350 | )          | (6,189,360  | )          |
|                                         |       |            |       |        |       |        |       |
| Loss  per share in accordance with US GAAP:  |       |            |       |        |       |        |       |
| Basic  and diluted                           | ** ** | **$**           | **(0.07**  | )           | $          | (0.09       | )          | $ | (0.06 | ) |
| Weighted  average shares - basic and diluted | ** ** | **162,281,115** |       | 117,647,158 |       | 105,707,630 |       |
|                                              |            |                 |            |             |            |             |            |  |  |  |

 

F-39

----

 

### ** **

Reconciliationof total equity

 

The followingis a reconciliation of the total equity as reported in the Consolidated BalanceSheets under AIFRS to total equity as adjusted for the effects of theapplication of US GAAP as of June 30, 2007, 2006 and 2005.

 
| **June 30,**                                  | ** ** | ** ** | **2007**        | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-----------------------------------------------|------------|------------|-----------------|------------|-------------|------------|-------------|------------|
| ** **                                    | ** ** | ** ** | **$**           | ** ** | **$**       | ** ** | **$**       | ** ** |
| Total  equity in accordance with AIFRS        |       | ** ** | **39,869,598**  |       | 31,004,909  |       | 25,235,448  |       |
| US  GAAP adjustments                          |       |       |            |       |        |       |        |       |
| Fair  value of shares issued as consideration | (b)        |       | **(392,000**    | **)**      | (392,000    | )          | (392,000    | )          |
| In-process  research and development          | (c)        |       | **(16,570,561** | **)**      | (16,570,561 | )          | (16,570,561 | )          |
| Reversal  of amortisation of goodwill         | (c)        |       | **30,811**      | **)**      | 30,811      |       | 30,811      |       |
| Marketable  securities                        | (d)        |       | **—**      | ** ** | **—**  |       | 74,631      |       |
| Deferred  tax effect of US GAAP adjustments   | (e)        |       | **—**      | ** ** | **—**  | ** ** | **—**  | ** ** |
| Total  equity in accordance with US GAAP      |       | ** ** | **22,937,848**  |       | 14,073,159  |       | 8,378,329   |       |

 

Roll forwardanalysis of total equity under US GAAP

 
| **Years Ended June 30,**                               | ** ** | ** ** | **2007**        | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|--------------------------------------------------------|------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                             | ** ** | ** ** | **$**           | ** ** | **$**       | ** ** | **$**      | ** ** |
| Balance  in accordance with US GAAP, beginning of year |       |       | **14,073,159**  |       | 8,378,329   |       | 131,081    |       |
| Issue  of shares, net of issue costs                   | 18         |       | **20,880,445**  |       | 15,299,724  |       | 14,335,508 |       |
| Issue  of options, net of  forfeitures            | (a)        |       | **436,477**     |       | 839,456     |       | 101,100    |       |
| Recognition  of foreign currency translation reserve   | 18         |       | **(751,314**    | **)**      | **—**  |       | **—** |       |
| Net  loss in accordance with US GAAP                   |       |       | **(11,700,919** | **)**      | (10,444,350 | )          | (6,189,360 | )          |
| Balance  in accordance with US GAAP, end of year  |       |       | **22,937,848**  |       | 14,073,159  |       | 8,378,329  |       |

 

*a)Share-based compensation*

 

As disclosedin Notes 14 and 17 to the consolidated financial statements, the Company issuedshare options to directors, employees and non-employees as an incentive forfuture performance or in consideration for services rendered.

 

Under AIFRS,the Company accounts for share-based payments under AASB 2 “*Share-Based Payments.”*  Options issued after November 7, 2002 and vested on or after January 1,2005 are required to have the grant-date fair value be recognized as an expenseover the vesting period.

 

Under US GAAP,prior to July 1, 2005, the Company accounted for its stock options inaccordance with Accounting Principles Board Opinion No. 25:  “*Accounting for StockIssued to Employees*” and related interpretations (“APB 25”) andadopted the disclosure-only provisions of SFAS No. 123 “Accounting forStock-Based Compensation” (“SFAS 123”). Under APB 25, the Company recognizedcompensation expense for stock options only if the current market price of theunderlying stock exceeded the exercise price as at the measurement date. Theresultant compensation cost is charged to earnings rateably over the vestingperiod.

 

Effective July1, 2005, the Company adopted the requirements of SFAS 123 (revised 2004) *“Share-Based Payments”* (“SFAS 123R”) under US GAAP. SFAS123R eliminates the option to apply the intrinsic value measurement provisionsof APB 25 to stock compensation awards issued to employees. Rather, SFAS No.123R requires companies to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award. That cost will be recognized over the period during which anemployee is required to provide services in exchange for the award - therequisite service period (usually the vesting period).

 

F-40

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The Companyhas elected to apply SFAS 123R using the modified prospective method therebyrecognising the compensation cost  in theconsolidated financial statements based on grant-date fair value for allshare-based payments granted after July 1, 2005, and based on the requirementsof SFAS 123, for all unvested awards granted prior to the effective date ofSFAS 123R.

 

SFAS 123R isconsistent with share-based payments recognition under AASB 2, however,differences arise in terms of transition dates. This resulted in difference incompensation expense between AIFRS and US GAAP for the year ended June 30, 2005by $321,005. There are no differences in share-based payment expense between USGAAP and AIFRS during the years ended June 30, 2006 and 2007.

 

As a result ofadopting SFAS 123R on July 1, 2005, the Company’s net loss and net loss pershare for the year ended June 30, 2006 was higher by $406,471 and $.003,respectively, than if it had continued to account for share-based compensationunder APB 25. The adoption of FAS123R has had no effect on cash flows.

 

The followingtable illustrates the effect on net loss and net loss per share if the Companyhad applied the fair value recognition provisions of SFAS 123 to stock basedemployee compensation for the year ended June 30, 2005.

 
| Net  Loss, as reported                                                              |   | (6,189,360 | )      |
|-------------------------------------------------------------------------------------|--------|------------|--------|
| Share-based  employee compensation expense under APB 25                             |   | 101,100    |   |
| Share-based  employee compensation expense determined under fair value-based method |   | (422,105   | )      |
| Net  loss according to US GAAP – pro forma                                     |   | (6,510,365 | )      |
|                                                                                |   |       |   |
| Net  loss per share                                                                 |   |       |   |
| Basic-  as reported                                                                 |   | ($0.06     | )      |
| Basic-  pro forma                                                                   |   | ($0.06     | )      |
|                                                                                |   |       |   |
| Diluted-  as reported                                                               |   | ($0.06     | )      |
| Diluted-  pro forma                                                                 |   | ($0.06     | )      |

 

*-Options issued to non-employees*

 

### **Under US GAAP, the Company accounts for share-basedcompensation to non-employees in accordance with SFAS 123, as amended by SFASNo. 148, “*Accounting for Stock-Based Compensation-Transitionand Disclosure*”, and Emerging Issues Task Force Issue No. 96-18, *“Accounting for Equity Instruments That Are Issued to Other Than Employeesfor Acquiring, or in Conjunction with Selling, Goods or Services*.”  Accordingly, the Company has calculatedcompensation cost based on the estimated fair value of the options as of themeasurement date, using the Black-Scholes model, and recognised thecompensation cost over the period in which the options vest.**

### ** **

**EmployeeShare Option Plan (ESOP)**

 
| ** **                                             | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|-------------|------------|------------|------------|----------|------------|
| ** **                                             | ** ** | **$**       | ** ** | **$**      | ** ** | **$**    | ** ** |
| Total  grant-date intrinsic value of options exercised | ** ** | **5,600**   | ** ** | **—** |       | 1,050    |       |
| Total  grant-date fair value of options issued         | ** ** | **498,000** |       | 193,270    |       | 144,000  |       |
| Total  grant-date fair value of options vested         | ** ** | **498,000** |       | 193,270    |       | 144,000  |       |
| Aggregate  intrinsic value of options:                 |       |        |       |       |       |     |       |
| Outstanding  at end of year                            | ** ** | **352,800** |       | 254,900    |       | 356,500  |       |
| Exercisable  at end of year                            | ** ** | **112,800** |       | 114,900    |       | 116,500  |       |

 

F-41

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*Optionsissued to Global Markets Capital Group LLC.*

 

An amount of$165,924 was included in general and administrative expense for the year endedJune 30, 2007 for options, which were issued to GMCG and which vestedimmediately.

 

**OptionsApproved by Resolution of Shareholders**

 

*Optionsissued to Dr Greg Collier*

 

The optionsissued to Dr. Greg Collier are subject to minimum service vesting condition ofbetween two to four years and a market condition in the form of a target shareprice. 

 
| ** **                                                                        | ** ** | **2007**      | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------|------------|-----------|------------|-----------|------------|
| ** **                                                                        | ** ** | **$**         | ** ** | **$**     | ** ** | **$**     | ** ** |
| Number  of options outstanding at end of year                                     | ** ** | **3,200,000** |       | 3,600,000 |       | 3,600,000 |       |
| Weighted-average  exercise price of options outstanding at end of year            | ** ** | **0.50**      |       | 0.48      |       | 0.48      |       |
| Aggregate  intrinsic value of options:                                            |       |          |       |      |       |      |       |
| Outstanding  at end of year                                                       | ** ** | **116,000**   |       | 189,000   |       | 189,000   |       |
| Exercisable  at end of year                                                       | ** ** | **76,000**    |       | 149,000   |       | 149,000   |       |
| Weighed-average  remaining contractual term of options outstanding at end of year | ** ** | **2.2**       |       | 3.2       |       | 4.2       |       |

 

No options toDr. Greg Collier were issued, cancelled or forfeited during the years endedJune 30, 2007, 2006 and 2005.

 

400,000options to Dr. Greg Collier were exercised during the year ended June 30, 2007.(2006 and 2005: Nil).

 

Following is asummary of non-vested options to Dr Greg Collier and the weighted-averagegrant-date fair value (WAFV):  

 
| ** **                    | ** ** | **2007**      | ** ** | **2006** | ** ** | **2005**   | ** ** |
|-------------------------------|------------|---------------|------------|----------|------------|------------|------------|
| ** **                    | ** ** | **Number**    | ** ** | **WAFV** | ** ** | **Number** | ** ** | **WAFV** | ** ** | **Number** | ** ** | **WAFV** | ** ** |
| Balance  at beginning of year | ** ** | **1,000,000** | ** ** | **$**    | **0.35**   |       | 1,000,000  |   | $ | 0.35 |   | 2,000,000 |   | $ | 0.35 |   |
| Vested  during the year       | ** ** | **—**    | ** ** | **$**    | **0.0**    | ** ** | **—** |   | $ | 0.0 |   | (1,000,000 | ) | $ | 0.35 |   |
| Balance  at end of year       | ** ** | **1,000,000** | ** ** | **$**    | **0.35**   |       | 1,000,000  |   | $ | 0.35 |   | 1,000,000 |   | $ | 0.35 |   |
|                               |            |               |            |          |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The totalgrant-date fair value of options vested during the year ended June 30, 2007 and2006 was nil (2005 $351,289).

 

As of June 30,2007, there was approximately $42,825 of unrecognized compensation expenserelated to these non-vested share-based payments. This cost is expected to berecognized in the year ending June 30, 2008.

 

*Optionsissued to Stragen Investments B.V.*

 

The total fairvalue of options to Stragen, which were granted and vested during the yearended June 30, 2006, was $371,561 and included in research and developmentexpense.

 

Refer to Note14 to the consolidated financial statements for the assumptions in determininggrant-date fair value of options and other information on share-based paymentsto employees and non-employees.

 

*b)Fair value of shares issued as consideration.*

 

As disclosedin Note 18 to the consolidated financial statements, the Company issued28,000,000 ordinary shares as consideration for acquiring 100% of ChemGenexTherapeutics, Inc. In accordance with the acquisition agreement the valueplaced on the issue under the prevailing A-GAAP standards was 54 cents pershare, the closing market price on June 21, 2004. Under US GAAP the fair valueof the shares issued to affect the acquisition is the average quoted marketprice for a period of two days before and after the date the terms of theagreement are agreed and announced (52.6 cents). Accordingly, for US GAAPpurposes, the Company has recorded an adjustment to the purchase price as wellas the value of the shares issued.

 

F-42

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### ** **

*c)Goodwill on acquisition*

 

At June 30,2004 the Company calculated goodwill relating to the acquisition of ChemGenexTherapeutics, Inc. as the excess of the purchase price over the fair value ofidentifiable net assets acquired. In accordance with the prevailing A-GAAPstandards, the resultant goodwill was to be amortised over 20 years. With theimplementation of AIFRS Goodwill is no longer amortised and impairment isevaluated and expensed as per notes 2(i) and 13 of these consolidated financialstatements. For US GAAP purposes, the Company considered the guidance containedin FASB Interpretations(FIN) 4, Applicability of FASB Statement No. 2 to Business CombinationsAccounted for by the Purchase Method” and determinedthat the excess of the US GAAP purchase price over the fair value ofidentifiable net assets acquired represents the estimated value of acquiredin-process research and development projects that had not yet reachedtechnological feasibility and had no alternative future use. Accordingly, thisamount was immediately expensed at the date of acquisition under US GAAP.Additionally, the A-GAAP goodwill amortisation from 1 July 2004, has beenreversed for US GAAP purposes.

 

*d)Marketable securities*

 

The Companyholds an investment in a marketable security that was fully provided for underA-GAAP during the year ended June 30, 1999 because the security was deemedworthless by management. Under US GAAP, the investment is classified asavailable-for-sale and reported at fair value based on the average of the closingbid and asked prices as reported by the OTC Bulletin Board. Unrealized gainsand losses are excluded from earnings, and reported, net of tax, in accumulatedother comprehensive income until realized.

 

During theyear ended June 30, 2005, a decline in market value, judged to be other thantemporary occurred and resulted in a reduction in the carrying value of theinvestment. During the year ended June 30, 2006, a further decline in marketvalue, judged to be other than temporary, occurred such that investment wasdeemed by management to have no ongoing carrying value. As a result the valueof the investment was totally written off under US GAAP as at June 30, 2006.

 

*e)Deferred tax effect of US GAAP adjustments*

 

The deferredtax effect of US GAAP adjustments is nil because it is more likely than notthat the net deferred tax asset will not be realized and, accordingly, theCompany has recorded a 100% valuation allowance against the net deferred taxassets.

 

Income Tax andDeferred Tax Supplement Disclosures.

 

Loss beforeincome taxes for the years ended June 30, 2007, 2006 and 2005 was realized inthe following jurisdictions:

 
| ** **                                       | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|--------------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| Australia  Operating Loss                        |       | (11,598,108 | )          | (6,031,234  | )          | (4,337,743 | )          |
| USA  Operating Profit/(Loss)                     |       | 218,693     |       | (4,283,955  | )          | (1,893,484 | )          |
| USA  Profit on transfer of Intellectual Property | ** ** | **—**  |       | 13,471,642  | ** ** | **—** | ** ** |
| USA  Profit from Research Agreement              |       | 5,556,487   | ** ** | **—**  | ** ** | **—** | ** ** |
| Consolidated  Exchange Loss                      | ** ** | **—**  |       | (54,530     | )          | (3,955     | )          |
| Elimination  of Internal USA Profit              |       | (5,566,487  | )          | (13,471,642 | )          | **—** | ** ** |
| Loss  before income taxes                        |       | (11,379,415 | )          | (10,369,719 | )          | (6,235,182 | )          |

 

At June 30,2007, deferred income tax relates to the following:

 
| ** **                                                        | ** ** | **2007**        | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|-------------|------------|-------------|------------|
| *Deferred tax assets*                                             | * *   | * *        | * *   | * *    | * *   | * *    | * *   |
| *Current deferred tax asset*                                      | * *   | * *        | * *   | * *    | * *   | * *    | * *   |
| Sundry  creditors and accruals                                    | ** ** | **13,500**      |       | 39,986      |       | 132,695     |       |
| Employee  benefits                                                | ** ** | **52,513**      |       | 25,187      |       | 35,805      |       |
| *Non-current deferred tax asset*                                  | * *   | * *        | * *   | * *    | * *   | * *    | * *   |
| Sec  40-880 costs                                                 | ** ** | **86,085**      |       | 196,022     | ** ** | **—**  | ** ** |
| Capital  Losses available for offset against future capital gains | ** ** | **436,439**     |       | 436,439     |       | 436,439     |       |
| Losses  available for offset against future taxable income*       | ** ** | **17,462,021**  |       | 13,878,135  |       | 15,123,323  |       |
| Gross  deferred tax assets                                        | ** ** | **18,050,558**  |       | 14,575,769  |       | 15,123,323  |       |
| Valuation  allowance                                              | ** ** | **(18,050,558** | )          | (14,575,769 | )          | (15,123,323 | )          |
| Net  deferred tax asset assets                                    | ** ** | **—**      | ** ** | **—**  | ** ** | **—**  | ** ** |

 

F-43

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### ** **

Deferred taxassets relating to tax losses

 

At June 30,2007, the Company had net operating tax loss carry-forwards generated inAustralia which are indefinite as to use unless it is unable to comply with therecognition criteria for carrying forward tax losses under Australian taxationlaws. The net operating tax loss carry-forwards generated in the USA areavailable indefinitely subject to existing and future US tax regulations.

 

At June 30,2007, the Company also has capital losses that arose in predominately 2002 of$436,439 and are available indefinitely for offset against future capital gainsof a similar nature subject to continuing to meet relevant statutory tests.

 

At June 30,2007, the Company has unrealized capital losses of $1,084,488 in respect of “heldfor sale” marketable securities. The unrealized capital losses incurred inrespect of such securities shall be available to offset against other capitalgains derived by the Australian group once the securities have physically beendisposed of / sold. Further, any future capital losses incurred in respect ofthe marketable securities will be available indefinitely for offset againstfuture capital gains of a similar nature subject to continuing to meet therelevant statutory tests.

 

As a result ofthe above tax loss carry-forwards, the Company has significant potentialdeferred tax assets. However due to the Company’s lack of earnings history,realization of these deferred tax assets is not more likely than not,therefore, the deferred tax assets have been fully offset by a valuationallowance.

 

The change inthe valuation allowance and the corresponding change in the deferred tax assetamounted to $3,474,789, ($547,554) and $1,498,362 for the years ended June 30,2007, 2006 and 2005 respectively.

 

Operatinglosses noted above in 2007 and 2006 relate to expenditure on research projectsand general company administration costs. In 2006 the US subsidiary recorded aprofit of AUD13,471,642 on the sale of IP relating to the anti-cancer compoundCeflatonin to the parent company. As the sale is between consolidated entities,this transaction is eliminated for financial reporting purposes. However, asthe intellectual property was transferred across tax jurisdictions, a taxablegain is recognized within the U.S. tax group which was substantially offsetwith available tax losses. Due to uncertainties regarding the commercializationof the Company’s intellectual property, the Company has recognized a fullprovision related to the realization of the underlying tax asset through incometax expense. This transaction resulted in the recognition of $321,504 of incometax expense in 2007 representing the amount of income tax paid in the U.S. totax authorities.

 

Refer to Note5 for the reconciliation of income tax expense applicable to accounting profitbefore income tax and income tax expense for the years ended June 30, 2007,2006 and 2005.

 

*f)Consolidated Income Statement classification differences*

 

Inaddition to the differences in valuation and income recognition, otherdifferences, essentially related to presentation, exist between AIFRS and USGAAP. Although there is no impact on US GAAP reported Equity and Net Loss dueto these differences, it may be useful to understand them to interpret theConsolidated Financial Statements presented in accordance with US GAAP. Thefollowing is a summary of presentation differences that relate to the basicAIFRS Consolidated Financial Statements

 

Under AIFRS,exchange rate gains are reported as a component of revenue from ordinaryactivities. Under US GAAP, exchange rate gains relating to operating activitiesare classified within operating income (loss) whereas exchange rate gainsrelated to non-operating activities are classified as a component ofnon-operating income (loss).

 

Under AIFRS,interest income is reported as a component of revenue from operations. Under USGAAP, interest income is reported as a component of non-operating income(loss).

 

Under AIFRS,the Company classifies costs paid to third parties under research anddevelopment contracts as research expenditure. Other costs directlyattributable to research activities, such as depreciation of plant andequipment, patent costs, legal costs, personnel costs, among others, areclassified in separate line items in the Consolidated Income Statements. UnderUS GAAP, all costs of research and development activities are classified asresearch and development in the Consolidated Income Statements.

 

*g)Recently Issued but not yet adopted Accounting Pronouncements*

 

The followingaccounting pronouncements have been issued but have not yet been adopted byChemGenex Pharmaceuticals Limited as at June 30, 2007-

 

F-44

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### ** **

*Uncertaintyin Income Taxes*

 

InJuly 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income Taxes*,an interpretation of FASB No. 109, *Accountingfor Income Taxes* (“FIN 48”). FIN 48 creates a single model toaddress uncertainty in tax positions and clarifies the accounting for incometaxes by prescribing the minimum recognition threshold      a tax position is required to meet beforebeing recognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure, and transition. In addition, FIN 48 clearlyscopes out income taxes from SFAS No. 5, *Accountingfor Contingencies*. FIN 48 applies to all    tax positions related to income taxessubject to SFAS No. 109. This includes tax positions considered to be “routine”as      well as those with a high degreeof uncertainty. The guidance contained in FIN 48 is also applicable topass-through entities,      non-taxableentities, and entities whose tax liability is subject to 100% credit fordividends paid. FIN 48 utilizes the following two-step approach for evaluatingtax positions: recognition (step one) and measurement (step two). Step one occurswhen an enterprise concludes that a tax position, based solely on its technicalmerits, is more-likely-than-not to be sustained on examination. Step two isonly addressed if step one has been satisfied. Under step two, the tax benefitis measured as the largest amount of benefit, determined on a cumulativeprobability basis, which is more-likely-than-not to be realized on ultimatesettlement. Derecognition of a tax position that was previously recognizedwould occur when a company subsequently determines that a tax position nolonger meets the more-likely-than-not threshold of being sustained. FIN 48specifically prohibits the use of a valuation allowance as a substitute forderecognition of tax positions. FIN 48 requires expanded disclosures, includinga tabular roll forward of the beginning and ending aggregate unrecognized taxbenefits as well as specific detail related to tax uncertainties for which itis reasonably possible the amount of unrecognized tax benefit willsignificantly increase or decrease within twelve months. These disclosures arerequired at each annual reporting period, unless a significant change occurs inan interim period. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. The Company plans to adopt this pronouncement in fiscal yearbeginning July 1, 2007 and does not believe the adoption of FIN 48 will have amaterial effect on the consolidated financial statements.

 

*Fair ValueMeasurements*

 

InSeptember 2006, the FASB issued SFAS No. 157, *FairValue Measurements* (“SFAS 157”). SFAS 157 provides enhanced guidancefor using fair value to measure assets and liabilities and also responds toinvestors’ requests for expanded information about the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFAS157 applies whenever other standards require (or permit) assets or liabilitiesto be measured at fair value and does not expand the use of fair value in anynew circumstances. Under SFAS 157, fair value refers to the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants in the market in which the reportingentity transacts. SFAS 157 clarifies the principle that fair value should bebased on the assumptions market participants would use when pricing the assetor liability. In support of this principle, SFAS 157 establishes a fair valuehierarchy that prioritizes the information used to develop those assumptions. Thefair value hierarchy gives the highest priority to quoted prices in activemarkets and the lowest priority to unobservable data. Under SFAS 157, fairvalue measurements would be separately disclosed by level within the fair valuehierarchy. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007. The Company plans to adopt thispronouncement in fiscal years beginning July 1, 2008 and does not believe theadoption of SFAS 157 will have a material effect on the consolidated financialstatements.

 

*Accountingfor Research and Development Costs*

 

InJune 2007, the Financial Accounting Standards Board (“FASB”) considered theEmerging Issues Task Force (“EITF”) review of FASB Statement No. 2 Accountingfor Research and development Costs. The Task Force reached a consensus thatnonrefundable advance payments for future research and development activitiesshould be deferred and capitalized.  Such amounts should be recognized asan expense as the related goods are delivered or the related services areperformed.  Entities should continue to evaluate whether they expect thegoods to be delivered or services to be rendered.  If an entity does notexpect the goods to be delivered or services to be rendered, the capitalizedadvance payment should be charged to expense. The consensus in this Issueshould be effective for fiscal years beginning after December 15, 2007,including interim periods within those fiscal years.  Entities should reportthe effects of applying the [consensus] in this Issue as a change in accountingprinciple through a cumulative-effect adjustment to retained earnings or toother components of equity or net assets in the statement of financial positionas of the beginning of the year of adoption.  An entity should disclosethe cumulative effect of the change on retained earnings or on other componentsof equity or net assets in the statement of financial position.  Earlierapplication is not permitted. The Company plans to adopt this pronouncement infiscal years beginning July 1, 2008 and does not believe the adoption of EITF07-3 will have a material effect on the consolidated financial statements.

 

F-45

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### ** **

*Fair ValueMeasurements*

 

InFebruary 2007, the FASB issued FAS 159, The Fair Value Option for FinancialAssets and Financial Liabilities (“FAS 159”). FAS 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue. The objective is to improve financial reporting by providing entitieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. FAS 159 is expected to expand the use offair value measurement, which is consistent with the FASB’s long-termmeasurement objectives for accounting for financial instruments. FAS 159 alsoestablishes presentation and disclosure requirements designed to facilitate comparisonsbetween entities that choose different measurement attributes for similar typesof assets and liabilities. FAS 159 does not affect any existing accountingliterature that requires certain assets and liabilities to be carried at fairvalue. This Statement does not establish requirements for recognizing andmeasuring dividend income, interest income, or interest expense. This Statementdoes not eliminate disclosure requirements included in other accountingstandards, including requirements for disclosures about fair value measurementsincluded in FASB Statements No. 157, Fair Value Measurements, andNo. 107, Disclosures about Fair Value of Financial Instruments. FAS 159 iseffective for financial statements issued for fiscal years beginning after November15, 2007. The Company plans to adopt this pronouncement in fiscal yearsbeginning July 1, 2008 and does not believe the adoption of FAS 159 will have amaterial effect on the consolidated financial statements.

 

F-46

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