**SECURITIESAND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 20-F**

| (Mark One) |
|------------|
| o          |   | REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b)OR 12(g) OF  THE SECURITIES EXCHANGE ACT OF 1934 |
| OR         |
| x          |   | ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d)OF THE  SECURITIES EXCHANGE ACT OF 1934 |
| ** ** |   | **For the  fiscal year ended June 30, 2006  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             |

 

**Commissionfile number 0-51373**

**CHEMGENEXPHARMACEUTICALS LIMITED**

(Exact name ofRegistrant as specified in its charter)**Australia**(Jurisdiction of incorporation or organization)

**PigdonsRoadWaurn PondsP.O. Box 1069, GrovedaleVictoria 3216 AustraliaTelephone 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:

**Ordinaryshares without par value (“ordinary shares”)**

**AmericanDepositary Shares each representing the 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 ofoutstanding shares of each of the issuer’s class of capital or common stock asof June 30, 2006:

**151,362,786ordinary shares without par value**

Indicate if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act

Yes /No                  **YES**

If this report isan annual or transition report, indicate if the registrant is not required to file report pursuant  to Section 13 or 15(d) of the SecuritiesExchange Act of 1934

Yes /No                  **No**

Note- Checking the abovewill not relieve any registrant required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 from their obligations underthose sections.

Indicate bywhether the registrant (1) has filed all reports required to be filed bySections 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and  (2)has been subject to such  filingrequirements for the past 90 days.

Yes /No                  **Yes**

Indicate whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer | ** ** | **No**     |
|-------------------------|------------|------------|
|                    | ** ** | ** ** |
| Accelerated  filer      | ** ** | **No**     |
|                    | ** ** | ** ** |
| Non-accelerated  filer  | ** ** | **Yes**    |

 

Indicate by whichfinancial statement item the registrant has elected to follow.

Item 17 **X**               Item 18  __

If this is an annualreport indicate whether the registrant is a shell company (as defined by Rule12b-2 of the Exchange Act

Yes /No                  **No**

 (APPLICABLE ONLY TO ISSUERS INVOLVED INBANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

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

o Yes    o No

Please send copiesof notice and communications from the Securities and Exchange Commission to:

Ross KaufmanGreenberg Traurig, LLP200 Park AvenueNew 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                                                                           |     |     |     |
| ** **   |                                                                                            |     |     |     |
| **ITEM 10.** | **ADDITIONAL  INFORMATION**                                                                     |     |     |     |
| **A.**       | Share  capital                                                                                  |     |     |     |
| **B.**       | Constitution                                                                                    |     |     |     |
| **C.**       | Material contracts                                                                              |     |     |     |
| **D.**       | Exchange  controls and other limitations affecting security holders                             |     |     |     |
| **E.**       | Taxation                                                                                        |     |     |     |
| **F.**       | Dividends and  paying agents                                                                    |     |     |     |

 

2

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| **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**                                                     |     |     |     |
| ** **     | ** **                                                                       |     |     |     |
| **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**                                                                     |     |     |     |

 

3

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**GLOSSARY**

**CML**                                       ChronicMyelogenous Leukemia is a malignant cancer of the bone marrow that causes rapidgrowth of the blood-forming cells (known as myeloid precursors) in the bonemarrow, peripheral blood, and body tissues. CML can occur in adults (usuallymiddle-aged) and children. CML affects 1 to 2 people per 100,000 and accountsfor 7-20% cases of leukemia.

**DACH-Ac-Pt**                        (1R,2R-diaminocyclohexane)– (trans-diacetato) – (dichloro) – platinum(IV) is a novel platinum analoguethat has potential to treat several cancer types. The molecule has beenlicensed by the M. D. Anderson Cancer Center in Houston, Texas to ChemGenexPharmaceuticals (CXS299). DACH-Ac-Pt was developed with the goal of overcoming thelimitations of existing platinum-based anti-cancer therapeutics currently onthe market.

**GAD**                                       GlutamicAcid Decarboxylase is an enzyme found on the surface of beta cells in thepancreas. Levels of GAD in the blood are associated with an autoimmune processthat leads to inflammation and destruction of beta cells, usually resulting inthe development of type 1 diabetes. Diagnostic tests for GAD can be used toindicate an increased risk of type 1 diabetes.

**HHT**                                       Homoharringtonineis a natural compound isolated from the Chinese evergreen tree *Cephalotaxus harringtonia*. HHT has a broad antitumoractivity in rodents and antileukemic effects in humans. HHT is used in Chinafor the treatment of leukemia.

**MDS**                                       MyelodysplasticSyndrome is a group of conditions caused by abnormal blood-forming cells of thebone marrow. In MDS, the bone marrow cannot produce blood cells effectively,and many abnormal cells are destroyed before they leave the bone marrow orshortly after entering the bloodstream. This results in low blood countscausing anemia and other complications. It is estimated that there are between10,000 and 15,000 new cases of MDS in the USA each year.

**NAT-2**                                    N-Acetyltransferase2 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 associatedwith NAT-2 activity, and individuals can be classified as being fast or slowacetylators. Variation in NAT-2 activity causes different rates of metabolicconversion of molecules ranging from caffeine to various therapeutics.

***Psammomysobesus***            Aspecies of gerbil also known as the sand rat or the Israeli sand rat. Theanimal is a well-defined model for dietary induced type 2 diabetes.

**PSARL**                                  Presenilin-AssociatedRhomboid-like protein is a protein located within the mitochondria that appearsto be involved in the regulation of mitochondrial function and energy balance.The mitochondria are sub-cellular organelles that covert energy stored inmolecules such as glucose to forms that can be directly used by the cell.

***Rattusnorvegicus***               Acommon species of laboratory rat also known as the brown rat or the Norway rat.

**SGIP1**                                    SH3-DomainGRB2-Like Interacting Protein 1 is a protein that appears to be involved in theregulation of the internalization of neurotransmitter receptors in the brain.Specifically, it appears that SGIP1 is a novel brain-specific component of theneuronal molecular machinery that regulates energy balance in mammals.

4

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**USE OFCERTAIN DEFINED TERMS**

As used herein the terms “ChemGenex”and the “Company” refer to ChemGenex Pharmaceuticals Limited and itsconsolidated subsidiaries as at the date of filing.

**PRESENTATIONOF FINANCIAL INFORMATION; AVAILABLE INFORMATION**

The Company’s fiscal yearends on June 30 of each year. References in this document to a particular yearare to the fiscal year unless otherwise indicated.  The Company prepares annual reportscontaining consolidated financial statements and an opinion thereon by anindependent registered public accounting firm. Such financial statements complywith Australian Accounting Standards which include Australian equivalents toInternational Financial Reporting Standards (“AIFRS”). This Annual Report onForm 20-F contains a reconciliation to accounting principles generally acceptedin the United States of America (“U.S. GAAP”) of net loss and shareholders’equity. The Company also prepares half-yearly reports prepared in conformitywith AIFRS, which contain interim condensed consolidated financial informationthat are subjected to a review by an independent registered public accountingfirm.

The Company’sconsolidated financial statements are reported in Australian dollars. In thisAnnual Report on Form 20-F, references to “U.S. dollars”, US$ or “$” are toU.S. currency and references to “Australian dollars” or “A$” are to Australiancurrency.

**ENFORCEMENTOF LIABILITIES AND SERVICE OF PROCESS**

The Company isincorporated under the laws of New South Wales, Commonwealth of Australia.  The majority of its directors and executiveofficers, and the experts named in this Annual Report, reside outside the U.S.A substantial part of the Company’s assets, its directors’ and officers’ assetsand such experts’ assets are located outside the U.S. As a result, it may notbe possible for investors to effect service of process within the U.S. upon theCompany or its directors, executive officers or such experts, or to enforceagainst them or the Company, judgments obtained in U.S. courts based upon thecivil liability provisions of the federal securities laws of the U.S. Inaddition, the Company has been advised by its Australian lawyers, McCulloughRobertson, that there is doubt that the courts of Australia will enforceagainst the Company, its officers, directors and experts named herein,judgments obtained in the U.S. based upon the civil liability provisions of thefederal securities laws of the U.S. or will enter judgments in original actionsbrought in Australian courts based upon the federal securities laws of the U.S.

**FORWARD-LOOKINGSTATEMENTS**

Except for historical information contained herein, the mattersdiscussed in this Annual Report are “forward-looking statements.” Theseforward-looking statements include, but are not limited to, statements aboutthe Company’s and its strategic partners’ respective plans, objectives,expectations, estimates, strategies, product approvals and development plans,and anticipated financial results. These statements are typically identified bythe 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 the Company’s current expectations and beliefsconcerning future events but are subject to risks and uncertainties, includingbut not limited to economic, competitive, governmental and technologicalfactors affecting the Company’s operations, results of operations, markets,products, prices and prospects, and other factors discussed below and elsewherein this Annual Report. These factors may cause the Company’s results to differmaterially from the statements made in this Annual Report or otherwise made byor on behalf of the Company. Item 3.D. “Risk Factors” is a summary (not listedin order of priority) of some of the risk factors that could adversely affectthe Company’s results. The risks and uncertainties described are not the onlyones the Company faces. Additional risks not presently known to the Company orother factors not perceived by the Company to present significant risks to itsbusiness at this time also may impair its business operation. The Company doesnot undertake to update any of these forward-looking statements or to announcethe results of any revisions to these forward-looking statements except asrequired by law.

5

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# **PART I**

### **ITEM 1.****                  IDENTITY OFDIRECTORS, SENIOR MANAGEMENT AND ADVISORS**

Not applicable.

### **ITEM 2.****                  OFFER STATISTICSAND EXPECTED TIMETABLE**

Not applicable.

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

### **A.****            Selected consolidatedfinancial data**

The following tablepresents selected financial data of the Company as of the dates and for each ofthe periods indicated. You should read the selected financial data set forthbelow together with Item 5. “Operating and Financial Review and Prospects” aswell as the Company’s audited consolidated financial statements and notesthereto appearing elsewhere in this Annual Report.

The selected consolidatedfinancial data as of June 30, 2006, 2005 and 2004 and for each of the threeyears in the period ended June 30, 2006 have been derived from, and are qualifiedin its entirety by reference to, the Company’s audited consolidated financialstatements and notes thereto included elsewhere in this Annual Report.

The Companyprepares its consolidated financial statements in accordance with currentAustralian Accounting Standards, which differ in certain significant respectsfrom U.S. GAAP. A description of the significant differences andreconciliations of net loss and shareholders’ equity for the periods and as ofthe dates therein indicated are set forth in Note 27 to the Company’sconsolidated financial statements included elsewhere herein.

Selectedconsolidated financial data as of and for the years ended June 30, 2006, 2005,and 2004 is set out below.

6

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

 
| **Consolidated Income Statement Data in  Accordance with U.S. GAAP  A$’000, except per share data** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues from  ordinary activities                                                                       |       | 2,055      |       | 3,828      |       | 3,490      |       |
| Net loss                                                                                                 |       | (10,444    | )          | (6,189     | )          | (20,060    | )          |
| Basic and diluted loss  per share (A$)                                                                   |       | (0.09      | )          | (0.06      | )          | (0.35      | )          |

 
| **Consolidated Balance Sheet Data in  Accordance with AIFRS:  A$’000** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash assets                                                                 |       | 15,554     |       | 8,512      |       |
| Plant and  equipment, net                                                   |       | 329        |       | 587        |       |
| Total assets                                                                |       | 32,965     |       | 26,575     |       |
| Long-term debt                                                              |       | —     |       |       |       |
| Total  liabilities                                                          |       | 1,960      |       | 1,340      |       |
| Net assets                                                                  |       | 31,005     |       | 25,235     |       |
| Accumulated  deficit                                                        |       | (81,023    | )          | (70,653    | )          |
| Contributed  equity                                                         |       | 99,893     |       | 84,592     |       |
| Reserves                                                                    |       | 12,135     |       | 11,296     |       |

 
| **Consolidated Balance Sheet Data in  Accordance with U.S. GAAP  A$’000** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                                                                   |       | 16,044     |       | 9,718      |       | 2,252      |       |
| Net assets                                                                     |       | 14,073     |       | 8,378      |       | 131        |       |
| Contributed equity                                                             |       | 99,501     |       | 84,201     |       | 69,865     |       |

 

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(a)      Other expenses from ordinaryactivities comprise consulting and advisory costs, scientific advisory boardcosts, accounting and auditing costs, costs associated with originalregistration and NASDAQ listing (in 2005), travel expenses and outsourcedemployee costs.

7

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**Dividends**

No dividend hasbeen paid by the Company in the five fiscal years up to and including fiscal2006.

**Exchangerates**

The consolidatedfinancial statements of the Company which form part of this Annual Report arepresented in Australian dollars (A$).

Thefollowing table sets forth, for the periods and dates indicated, certaininformation concerning the noon buying rate in New York City for Australiandollars expressed in U.S. dollars per A$1.00 as certified for customs purposesby the Federal Reserve Bank of New York.
| Month          | ** ** | **Month’s highest exchange rate** | ** ** | **Month’s lowest exchange rate** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| November 2006  |       | 0.7896                                                |       | 0.7629                                               |       |
|           |       |                                                  |       |                                                 |       |
| October 2006   |       | 0.7692                                                |       | 0.7434                                               |       |
|           |       |                                                  |       |                                                 |       |
| September 2006 |       | 0.7704                                                |       | 0.7461                                               |       |
|           |       |                                                  |       |                                                 |       |
| August 2006    |       | 0.7699                                                |       | 0.7568                                               |       |
|           |       |                                                  |       |                                                 |       |
| July 2006      |       | 0.7664                                                |       | 0.7407                                               |       |
|           |       |                                                  |       |                                                 |       |
| June 2006      |       | 0.7527                                                |       | 0.7284                                               |       |

 
| **Years ended June 30,** | ** ** | **Average** | ** ** |
|--------------------------|------------|-------------|------------|
|                     |       |        |       |
| 2006                     |       | 0.7475      |       |
|                     |       |        |       |
| 2005                     |       | 0.7535      |       |
|                     |       |        |       |
| 2004                     |       | 0.7134      |       |
|                     |       |        |       |
| 2003                     |       | 0.5847      |       |
|                     |       |        |       |
| 2002                     |       | 0.5237      |       |

 

As at December 15, 2006the Australian dollar closed at US$0.7826

### **B.****            Capitalization andindebtedness**

Notapplicable.

### **C.****            Reasons for the offerand use of proceeds**

Not applicable.

### **D.****            Risk factors**

Prospectiveinvestors and shareholders should be aware that any investment in the Companyinvolves a degree of risk and should be made only by those with the necessaryexpertise to appraise the investment. In addition to the other information inthis document, the following risk factors should be considered in evaluatingwhether to make or

8

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hold an investmentin the Company. Any or all of these factors could have a material and adverseeffect on the Company’s operational results, financial condition and prospects.Furthermore, the trading price of ChemGenex shares could decline resulting inthe loss of all or part of any investment therein.

**The Companyhas a history of operating losses and negative cash flow and may never becomeprofitable**

ChemGenex is acompany that has a history of operating losses. These losses have arisen mainlyfrom the costs incurred in research and development of its products and generaladministrative costs. For the year ended June 30, 2006, the Company’s net losswas A$10,369,719 and its accumulated deficit as of June 30, 2006 wasA$81,023,002. The Company expects to continue to incur operating losses overthe next two years and may never be profitable. To date, the Company hasgenerated revenues through research and development funding from its partners,milestone payments 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.

**Additionalfunding is likely to be required to give the Company time to reachprofitability. Raising such additional funding could entail restrictions on therights of holders of ordinary shares. If the Company is unable to raiseadditional funds it may have to curtail its operations.**

The Company’s needfor capital at any given time depends on a number of factors, including:

·                  theability to enter collaborations to support its research and developmentprograms;

·                  theamount, and timing, of milestone payments the Company receives from itscollaborators;

·                  therate of progress and cost of the Company’s research activities;

·                  thecosts of preparing, filing, prosecuting, maintaining and enforcing patentclaims and other intellectual property rights;

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

·                  theemergence of competing products and other adverse market development; and

·                  changesin, or termination of, the Company’s existing collaboration and licensingarrangements.

The Company maynot receive further revenues from collaboration and licensing agreements orchanges in the development of the Company’s drug candidates may cause availablecapital resources to be used more quickly than expected.

The Company is likely inthe future to require additional funds, in addition to funds received fromlicensing and collaboration agreements, to continue research and development.It is likely that the Company will seek funds through further licensing andcollaboration agreements and through additional sale of the Company’ssecurities. The Company may not be able to secure licensing and collaborationagreements on satisfactory terms, if at all. Also, the public markets forissues of biotechnology company securities are volatile and competitive. TheCompany may not be able to attract additional funds on acceptable terms, if atall. The Company also may decide to access the public equity markets whenever conditionsare favorable, even if the Company does not have an immediate need foradditional 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.

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If adequate fundsare not available, the Company may have to significantly reduce its researchand development programs or obtain funds through licensing and collaborationagreements at an earlier stage in the drugs’ development than the Companyenvisaged. If adequate funds are not available on acceptable terms, its abilityto invest in the progress of its development programs and product portfoliowill be materially and adversely affected, with the result that its prospectsare less favorable.  Following the issue of 36,565,170 shares at A$0.43cents each on May/June of 2006 ChemGenex had working capital of approximatelyA$14 million. Based on the anticipated cash flow requirements of the Company’sexisting research and development activities, the Board has concluded thatthese funds should be sufficient to support operations into the second half ofcalendar 2007. The Board remains confident that adequate funds to continue theCompany’s operations will be raised from partnership agreements and/or equityplacements as required in the future.

The Companyanticipates a net loss in fiscal 2007.

**If theCompany is unable to retain and attract key employees, its scientific andmanagement capabilities could be reduced.**

The loss of keyemployees could weaken the Company’s scientific and management capabilities,resulting in delays in the development of its cancer clinical trials andbroader research programs thus impacting negatively on the Company’s business.ChemGenex is significantly dependent on certain scientific and managementpersonnel, including Dr. Gregory R. Collier, Dr. Dennis M. Brown, Dr. James A.Campbell, Eric P. Merrigan, Tina Herbert, Dr. Kenneth R. Walder, and Dr. JohnBlangero. 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.

**TheCompany is dependent on its academic collaborators, consultants and scientificadvisors and their confidentiality.**

The Company has relationships with collaborators and consultants atacademic and other scientific institutions who conduct research undercontractually defined terms at the Company’s request.  It is the Company’s policy that all of itsemployees, academic collaborators, consultants and scientific advisors enterinto confidentiality agreements that control the dissemination of allintellectual property produced that results from their work for theCompany.  It is possible; however, thatunauthorized dissemination of such confidential information could materiallyadversely affect the Company’s business, financial condition and results ofoperations.  Such collaborators alsocould enter into employment agreements or consulting arrangements withcompetitors.

**TheCompany may not be successful in its clinical trials programs.  These programs are costly, time consuming andof uncertain outcome.  If such programsare not successful, the Company may invest substantial amounts of time andmoney without developing revenue-producing products.**

Clinical trials ofpromising products can take years, the duration depending among other factorson type, complexity, novelty and intended use of the product candidate. TheCompany may fail to successfully complete clinical trials and bring products tomarket for a number of reasons, including:

·                  asthe Company enters a more extensive clinical program in several differentdiseases, the data generated in these studies may not be as compelling as theearlier results;

·                  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;

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

·                  thefailure to obtain required regulatory approvals.

**If theproducts that the Company brings to market are not commercially successful, theCompany’s liquidity may be adversely affected.**

The Company’ssuccess depends on acceptance of the Company’s products by the market,including physicians and third-party payers, and consequently the Company’sliquidity and viability as a going concern may be adversely affected if it isunable to achieve market acceptance of its products. Factors that may affectthe rate and level of market acceptance of any of the Company’s products include:

·                  theexistence or entry onto the market of superior competing products or therapies;

·                  theprice of the Company’s products compared to competing products;

·                  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;

·                  thewillingness of physicians to adopt a new treatment regimen; and

·                  publicityconcerning the product type in general.

**Even ifthe Company’s products are approved, they may still face later regulatorydifficulties, which could impair its ability to market its products or force itto incur substantial additional expenses.**

Even if theCompany receives regulatory approval to sell any of its products, the U.S. Foodand Drug Administration (“FDA”), the Australian Therapeutics GoodsAdministration or comparable foreign regulatory agencies could require theCompany to conduct post-marketing trials to further evaluate safety andefficacy or could prevent the Company from using the labeling claims which theCompany would like to use to promote its products. Regulators will undertakeperiodic reviews and inspections. If they discover previously unknown problemswith a product or its manufacturing facility or if the Company fails to complywith regulatory requirements, regulators could:

·                  imposefines against the Company;

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

·                  requirethe Company to recall or remove a product from the market;

·                  suspendor withdraw its regulatory approvals;

·                  requirethe Company to conduct additional clinical trials;

·                  requirethe Company to change its product labeling; or

·                  requirethe Company to submit additional marketing applications.

If any of these eventsoccur, the Company’s ability to sell its products will be impaired and theCompany may incur substantial additional expense to comply with the regulatoryrequirements. In addition, in certain countries, even after regulatoryapproval, the Company is still required to obtain price reimbursement approval.This may delay the marketing of the Company’s products or, when approval cannotbe obtained, mean that the product cannot be sold at all.

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**If theCompany is unable to keep pace with technological change or with the advancesof its competitors, its technology and products may become obsolete ornon-competitive.**

The biotechnologyand pharmaceutical industries are subject to rapid technological change whichcould affect the success of the Company’s drugs or make them obsolete. Thefield of biotechnology is characterized by significant and rapid technologicalchange. Research and discoveries by others may result in medical insights orbreakthroughs which render the Company’s drug candidates less competitive oreven obsolete before they generate revenue.

**TheCompany’s business faces intense competition from major pharmaceuticalcompanies and specialized biotechnology companies engaged in the development ofdrugs directed at the conditions and disorders that are the focus of theCompany’s therapeutics programs.  As aresult its competitors may be able to establish superior proprietary positions.**

The Company’scompetitors in the biotechnology and pharmaceutical industries may havesuperior research and development capabilities, drugs, manufacturing capabilityor marketing expertise. Many of the Company’s competitors have significantlygreater financial and human resources and may have more experience in researchand development. As a result, the Company’s competitors may develop safer ormore effective drugs, or implement more effective sales and marketing programsor be able to establish superior proprietary positions. In addition, theCompany anticipates that it will face increased competition in the future asnew companies enter the Company’s markets and alternative drugs becomeavailable.

The Company’sproducts under development are expected to address a broad range of marketsincluding, but not limited to anti-cancer drugs for the treatment of chronicmyelogenous leukemia (“CML”) and other forms of leukemia, prostate cancer andother solid tumors, Type 2 diabetes, obesity and depression. The Company’scompetitive position will be determined in part by the potential indicationsfor which the Company’s products are developed and ultimately approved byregulatory authorities. The relative speed with which the Company or itscollaborative partners can develop products, complete the clinical trials andapproval processes and supply commercial quantities of the products to themarket, are expected to be important competitive factors.

The Company’scompetitors may be developing products that could compete with the products theCompany is developing. The Company and its collaborators will need to persuadepatients and physicians to adopt its products over its competitors’ products.

In the field ofcancer therapeutics the Company faces intense competition from majorpharmaceutical companies and specialized biotechnology companies engaged in thedevelopment of product candidates and other therapeutic products. Several ofthese companies have products in the same indications or utilize similartechnologies and/or personalized medicine techniques.  In June 2006 the FDA approved the release ofSprycel® (dasatinib), a drug for Gleevec®-resistant CML developed andcommercialized by Bristol-Myers Squibb. Novartis is also developing Nilotinib® (AMN-107) a new drug that targets Gleevec®-resistant CML ’ Significantly,neither Sprycel® nor Nilotinib® have demonstrated efficacy against the T315Ibcr-abl mutation, and it is this sub-set of resistant CML patients that arebeing targeted by the Company for initial approval. Supergen has ongoing Phase2 studies with decitabine in CML. Xanthus Life Sciences is currently conducting a Phase 2 study withamonafide malate (listed as an example product candidate – Refer Item 4B.Business Overview – ChemGenex’s development pipeline) in acute myeloidleukemia.  The previous list isindicative only, and there may be other competitive trials or technologieselsewhere in the world. Additionally, many of the Company’s competitors,including large pharmaceutical companies, have greater financial and humanresources and more experience than the Company does.

In the fields ofDiabetes, Obesity and Depression therapeutics the Company faces competitionfrom several internationally-regarded genomics and target discovery companiesthat are active in the search for new potent therapeutics against thesediseases. Companies such as DeCode Genetics, Curagen Corporation and Exelixisare applying different proprietary technologies to the search for noveltargets.

**Ifthe healthcare industry limits coverage or reimbursement levels, the acceptanceof the Company’s products could suffer. It may not be able to sell its drug profitably.**

The healthcare industryis subject to changing political, economic and regulatory influences that mayaffect the procurement practices and operations of healthcare facilities.  During the past several years, the healthcareindustry

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has been subjectto increased government regulation of reimbursement rates and capitalexpenditures.  Among other things, thirdparty payers are increasingly attempting to contain or reduce healthcare costsby limiting both coverage and levels of reimbursement for healthcare productsand procedures. Cost control policies of third party payers, includinggovernment agencies, may adversely affect acceptance and use of the Company’sproduct line.

**If theCompany is unable to successfully establish and protect its intellectualproperty, which is significant to the Company’s competitive position, itscompetitors may be able to take advantage of its research and developmentefforts.**

The Company’ssuccess depends in part on its ability to obtain and maintain protection forits inventions and proprietary information, so that it can stop others frommaking, using or selling its inventions or proprietary rights. The Company ownsa portfolio of patents and patent applications. There is a significant delaybetween the time of filing of a patent application and the time its contentsare made public, and others may have filed patent applications for subject mattercovered by the Company’s pending patent applications without the Company beingaware of those applications. The Company’s patent applications may not havepriority over patent applications of others and its pending patent applicationsmay not result in issued patents. Even if the Company obtains patents, they maynot be valid or enforceable against others. Moreover, even if the Companyreceives patent protection for some or all of its products, those patents maynot give the Company an advantage over competitors with similar products.

To develop andmaintain its competitive position, the Company also relies on unpatented tradesecrets and improvements, unpatented know-how and continuing technologicalinnovation, which it protects with security measures it considers to bereasonable, including confidentiality agreements with its collaborators,consultants and employees. The Company may not have adequate remedies if theseagreements are breached and the Company’s competitors may independently developany of this proprietary information.

If the Companyfails to obtain adequate protection for its intellectual property, the Company’scompetitors may be able to take advantage of the Company’s research anddevelopment efforts. The Company’s success will depend, in large part, on itsability to obtain and maintain patent or other proprietary protection for itstechnologies in general and, in particular, drugs and processes. The Companymay not be able to obtain patent protection for the use of certain drug compounds,processes developed by its employees or medical uses of compounds discoveredthrough its technology. Legal standards relating to patents coveringpharmaceutical or biotechnological inventions and the scope of claims madeunder these patents are still developing. There is no consistent policyregarding the breadth of claims allowed in biotechnology patents. The Company’spatent position is therefore uncertain and involves complex legal and factualissues. This risk factor is one that faces many companies in the biotechnologyindustry and the Company is not aware of any Company-specific risks.

**TheCompany may incur substantial costs as a result of disputes relating tointellectual property.**

The Company mayhave to initiate litigation to enforce its patent and license rights. If theCompany’s competitors file patent applications that claim technology alsoclaimed by the Company, the Company may have to participate in interference oropposition proceedings to determine the priority of invention. An adverse outcomecould subject the Company to significant liabilities and require the Companyeither to cease using a technology or to pay license fees.

The Company couldincur substantial costs in any litigation or other proceeding relating topatent rights, even if it is resolved in the Company’s favor. Some of theCompany’s competitors may be able to sustain the costs of complex litigationmore effectively or for a longer time than the Company can because of theirsubstantially greater resources. In addition, uncertainties relating to anypatent, pending patent or intellectual property litigation could have amaterial adverse effect on the Company’s ability to bring a technology tomarket, enter into collaborations in respect of the disputed or othertechnologies, or raise additional funds.

**TheCompany may not be able to bring any of the drug candidates it is developing tomarket.**

Development ofdrug candidates involves a lengthy and complex process. Any drug candidate thatthe Company seeks to offer commercially to the public must be put throughextensive research, development and pre-clinical and clinical testing whichwill be costly to the Company. This development process takes several years. Inaddition, the

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Company or itspartners will need to obtain regulatory approvals to conduct clinical trialsand manufacture drugs before they can be marketed. Results of pre-clinicalstudies are not necessarily indicative of results that may be obtained inclinical trials and results in early clinical trials may be different fromthose obtained in long-term testing or in general use. Adverse or inconclusiveresults from pre-clinical testing or clinical trials may substantially delay,or halt entirely, the development of products.

The Company mayfail to successfully develop a drug candidate for many reasons, including:

·                  thefailure to establish any collaborative third party agreements to support drugdevelopment;

·                  thefailure to produce a promising compound in sufficient quantities to conductclinical trials or to manufacture the compound at commercially acceptablequantities and prices;

·                  thefailure of the drug in pre-clinical studies;

·                  theinability of clinical trials to demonstrate that the drug is safe and effectivein humans; or

·                  thefailure to obtain required regulatory approvals.

**ChemGenexPharmaceuticals Limited shares may fluctuate in value.**

The market pricefor ChemGenex Pharmaceuticals Limited shares and the securities of othersimilar companies have been volatile. Factors that could significantly impactthe market price of ChemGenex Pharmaceuticals Limited shares in the futureother than those described elsewhere in this Annual Report include:

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

·                  terminationof collaborations by the Company or its partners;

·                  governmentalregulatory initiatives;

·                  theFDA, the Australian Therapeutic Goods Administration or European MedicinesEvaluation Agency approving or denying new applications;

·                  patentor proprietary rights developments;

·                  publicconcern as to the safety or ethical implications of biotechnology products;

·                  salesof substantial amounts of the Company’s shares by existing shareholders;

·                  priceand volume fluctuations in the stock market at large that do not relate to theCompany’s operating performance;

·                  changesin financial estimates by securities analysts, comments by securities analysts,or the Company’s failure to meet analysts’ expectation;

·                  actualor anticipated variations in periodic operating results;

·                  newproducts or services introduced or announced by the Company or its competitors;

·                  changesin the market valuations of other similar companies;

·                  announcementsby the Company of significant acquisitions, strategic partnerships, jointventures or capital commitments; and

·                  additionsor departures of key personnel.

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**The Company’s products may not receive andmaintain regulatory approval. The complexity and multi-jurisdictional nature ofthe applicable regulatory processes could result in delays in achieving suchregulatory approval, which would have an adverse effect on the Company’sfinancial conditions, its programs and projected revenues.**

The internationalpharmaceutical industry is highly regulated by numerous governmentalauthorities in the U.S., Australia and Europe and by regulatory agencies inother countries where the Company intends to market products it may develop.National regulatory authorities administer a wide range of laws and regulationsgoverning the testing, approval, manufacturing, labeling and marketing of drugsand also review the quality, safety and effectiveness of such products. Theseregulatory requirements are a major factor in determining whether a technologycan be developed into a marketable clinical application or a specific productand the amount of time and expense associated with such development.

Governmentregulation imposes significant costs and restrictions on the development ofpharmaceutical products for human use, including those the Company isdeveloping. The development, clinical evaluation, manufacture and marketing ofthe Company’s products and ongoing research and development activities aresubject to regulation by governments and regulatory agencies in all territorieswithin which the Company intends to manufacture and market its products(whether themselves or through a partner). The Company’s products may notsuccessfully complete the clinical trial process. Similarly, regulatoryapprovals to manufacture and market the Company’s products may not ultimatelybe obtained.

The time taken toobtain regulatory approval varies between countries. The Company’s products maynot be approved in any country within the timescale envisaged, or at all. Thismay result in a delay, or make impossible, the commercialization of itsproducts. Furthermore, each regulatory authority may impose its ownrequirements (for instance, by restricting the product’s indicated uses) andmay refuse to grant, or may require additional data before granting, anapproval, even though the relevant product candidate may have been approved byanother country’s authority.

If regulatory approval isobtained, the product and its manufacture will be subject to continual reviewand this approval may be withdrawn or restricted. Changes in applicablelegislation or regulatory policies, or discovery of problems with the product,or its production process, site or manufacturer, may result in the impositionof restrictions on the product, its sale, manufacture or use, includingwithdrawal of the product from the market, or may otherwise have an adverseeffect on the Company’s liquidity and financial condition.

The Company hasnot had any of its product candidates receive approval for commercialization inAustralia, the U.S. or elsewhere.

**TheCompany may be unable to secure adequate insurance at an acceptable cost.  Failure to secure such insurance may exposethe Company to liability in the event of a claim.**

The Company’sbusiness exposes it to potential product liability, professional indemnity andother risks which are inherent in the research and development, pre-clinicalstudies, clinical trials, manufacturing, marketing and use of pharmaceuticalproducts.  The Company in carrying out itsactivities will potentially face contractual and statutory claims, or othertypes of claims.  Consumers, healthcareproducers or persons selling products based on the Company’s technology may beable to bring claims against the Company based on the use of such products inclinical trials and the sale of products based on the Company’s technology. TheCompany is insured for product liability with a policy covering US$2,000,000that covers bodily injury or property damage arising out of the Company’sproducts used in the regular course of the clinical trials. The policy wasrecently renewed for the period from October 1, 2006 to May 1, 2007. TheCompany also carries directors’ and officers’ liability policies in the U.S.and Australia, with coverage of A$10,000,000, and customary employer’s liability,fiduciary liability and property insurance coverages in amounts that areconsidered usual for similarly situated companies. Product liability or anyfuture necessary insurance cover may not be available to the Company at anacceptable cost, if at all, and if there is any claim, the level of theinsurance the Company carries now or in the future may not be adequate.Similarly, a product liability, professional indemnity or other claim maymaterially and adversely affect the Company’s liquidity or its ability tocontinue to progress its product development. In addition, it may be necessaryfor the Company to secure certain levels of insurance as a condition to theconduct of clinical trials. In the event of any claim, the Company’s insurancecoverage may not be adequate.

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**TheCompany may face product liability claims.**

The testing,marketing and sale of human health care products entails an inherent risk ofproduct liability.  The Company incarrying out its activities will potentially face contractual and statutoryclaims, or other types of claim. In addition, the Company is exposed topotential product liability risks that are inherent in the research anddevelopment, pre-clinical study, clinical trials, manufacturing, marketing anduse of medical devices and drug products. Consumers, healthcare producers orpersons selling products based on the Company’s technology may be able to bringclaims against the Company based on the use of such products in clinical trialsand the sale of products based on the Company’s technology.

**TheCompany may be subject to special interest groups and adverse public opinion.**

Government bodiesand regulatory agencies require that potential pharmaceutical products aresubject to pre-clinical studies, including animal testing, prior to conductinghuman trials. ChemGenex arranges for such work either directly or through itscollaborators. While the Company has not been subject to the attention ofspecial interest groups, or any adverse public opinion of which it is aware,such work entails the risk of adverse public opinion and the attention ofspecial interest groups, including those of animal rights activists.  These groups may in the future focus on theCompany’s activities or those of its licensees or collaborators, and this mightadversely affect the Company’s operations, by requiring it to curtail itsactivities or to change its testing procedures.

The pharmaceuticaland biotechnology industries are frequently subject to adverse publicity onmany topics, including corporate governance or accounting issues, productrecalls and research and discovery methods, as well as political controversyover the impact of novel techniques and therapies on humans, animals and theenvironment. While there has to date been no adverse publicity about theCompany, its collaborators, or its products, such adverse publicity in thefuture, should it arise, may hurt the Company’s public image, which could harmits operations, cause its share price to decrease or impair its ability to gainmarket acceptance for its products.  TheCompany has adopted an ethics policy for genetic research.

## **ITEM 4.****                  INFORMATION ONTHE COMPANY**

### **A.****            History anddevelopment of the Company**

The Company wasfounded in September 1958 as N & B Finance and Development Corporation. Itwas renamed the Kingsway Finance Group in August 1964 and then became AustraliaWide Industries Limited in May 1986. Australia Wide Industries Limited listedon the Australian Stock Exchange (“ASX”) in July 1986 and operated for tenyears as a listed mining and exploration company (ASX: AWI). The Companycommenced biotechnology activities in July 1996 and changed its name to AutogenLimited (ASX: AGT) in May 1999. Autogen Limited, in turn, changed its name toAGT Biosciences Limited in March 2003 and then to ChemGenex PharmaceuticalsLimited (ASX: CXS) in June 2004. Biotechnology remains the focus of the Company’sactivities. The Company’s Australian Business Number (ABN) is 79 000 248 304.It operates pursuant to its constitution, the Australian Corporations Act 2001,other legislation in Australia and the U.S., and the rules of the ASX.  The Company’s representative in the U.S. is Dr. Dennis M Brown, President – U.S. Operations, 3475Edison Way, Suite M, Menlo Park, CA 94025 U.S.A. The Company’s registeredoffice is Edmondson Turner & Co., 439 Bay Street, Brighton, Melbourne,Victoria 3186 Australia.  Its principaladministration office is Pigdons Road, Waurn Ponds, Victoria 3217Australia.  Its telephone number is+613-5227-2752.  The Company’s websiteaddress is www.chemgenex.com. Information on the Company’s website and websites linked to it does notconstitute part of this Annual Report.

The Company in itspresent form is the result of the merger of AGT Biosciences Limited andChemGenex Therapeutics, Inc. which was approved by shareholders in the GeneralMeeting on June 21, 2004 and concluded on the same date. ChemGenex is a genomics-driven pharmaceutical development company dedicated to improvingthe lives of patients by developing novel personalized therapeutics in the areasof cancer, obesity, diabetes and depression. The Company has two molecules inPhase 2 clinical trials in the U.S. and has a pipeline of pre-clinical

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anti-cancercompounds in development. The Company has assembled a comprehensive technologyplatform that enables the identification of novel targets for complex diseases.These discoveries are then validated with a range of systems biology approachesand evaluated in terms of “drugability”. The target discovery and validationapproach is based on:

·                  Acollection of tissue and DNA samplesfrom worldwide population groups (>44,000 samples);

·                  Validatedanimal model systems for diabetes/obesity and depression/anxiety;

·                  A1400 Central Processing Unit parallel Linux cluster supercomputer forstatistical analysis of genetic data;

·                  TheeXpress Technology Platform, a proprietary research engine for rapid targetdiscovery and validation for any disease.

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

The Company’sresearch commitments (not including fees payable to scientific consultants andadvisors to the Company) as of June 30, 2006 are as follows:

A twelve month,A$2,420,000 extension to a research agreement first signed on 2 June, 2005 withDeakin University (Geelong, Australia) to conduct gene discovery, smallmolecule screening and validation research according to instruction from theCompany in the fields of obesity, diabetes and depression. This agreement iscalled “Research, License and Commercialisation Agreement (“Research ServicesProvision)”. The extension covers the period from January 1, 2006 to December31, 2006.

A twelve month,A$263,963 extension to a research agreement first signed on January 14, 1998 withthe International Diabetes Institute (Melbourne, Australia) to conduct genediscovery and validation research according to instruction from the Company inthe fields of obesity and diabetes. This agreement is called “ResearchAgreement for Human Diabetes / Obesity Discovery”. The extension covers theperiod from January 1, 2006 to December 31, 2006.

A twelve month,US$649,752 (A$865,182) extension to a research agreement first signed onDecember 31, 2002 with the Southwest Foundation for Biomedical Research (SanAntonio, Texas, U.S.) to conduct human genomics research according toinstruction from the Company. This agreement is called “the Research Agreement”.The extension covers the period from January 1, 2006 to December 31, 2006.

An agreementsigned in June 16, 2006 with Premier Research Group plc to provide clinicalstudy services which ChemGenex may submitt to the FDA in support of clinicalstudies being conducted with Ceflatonin®. The agreement is called “the Master Clinical Service Agreement”. Theservices to be provided by this agreement cover a period of approximately 24months but may be terminated, by either party, during that time within theterms provided in the agreement.

The Company has nofixed asset commitments as at June 30, 2006, and has incurred no significantfixed asset expenditure since that date. Expenditure on plant and equipment isusually minimal due to the Company’s outsourcing arrangements. Recent capitalexpenditure on plant and equipment is as follows:
|                           | ** ** | **Plant and equipment expenditure (A$000)** | ** ** |
|---------------------------|------------|-----------------------------------------------------------------|------------|
| Year ended June  30, 2006 |       | 14                                                              |       |
| Year ended June 30,  2005 |       | 15                                                              |       |

 

**Importantevents since June 30, 2006**

Mr. Denis Wade was appointed a director of the company on December 5,2006. Mr. Wade will become a member of the company’s Audit committee replacingMr. Roger Byrne.

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### **B.****            Business overview**

The Companyfocuses on the development of novel therapeutic agents in three diseases:cancer, metabolic syndrome (which includes diabetes and obesity) and depression(which includes anxiety). Product development in the three disease areas issupported by four product development platforms: Gene-Based Target Discovery,Target Validation, Drug Discovery and Drug Development. The combination ofthese platforms is collectively known as the eXpress Technology Platform. Inthe field of cancer, ChemGenex currently has two small molecule drug candidatesin Phase 2 human trials (Ceflatonin® and Quinamed®) and a broad pipeline ofcompounds and validated targets, including four pre-clinical cancer compounds(CXS299, CXS2101, CXS6001 and CXS273) and two early-stage discoveriesidentified in the Target Discovery program. In the field of metabolic syndrome, the Company has previously partneredits Target Discovery and Target Validation capabilities with Merck Santé, hasdiscovered and protected by patent more than 50 other gene and protein targetsand has established two new unencumbered programs; (i) a small moleculediscovery program, and (ii) a predictive biomarker program.. In the field of depressionthe Company has previously partnered its Target Discovery and Target Validationcapabilities with Vernalis (R&D) Limited, and has discovered ten earlystage targets.

**ChemGenex’scompetitive advantage**

The Company’scompetitive advantage can be considered in terms of protected intellectualproperty (IP), the research and development platforms that support thedevelopment of existing IP and the creation of new IP and the organizationalability to realize the commercial value of the Company’s IP and other assets.

The Company hasapproximately 50 patent families in various states of protection ranging fromprovisional applications through to granted patents in a number ofjurisdictions. In addition to IP that is protected by patents there issignificant know how and expertise within the senior research staff of theCompany.

The research anddevelopment infrastructure of the Company is described below and consists ofskills in medicinal chemistry and product development for cancer therapeutics,gene discovery using animal models and human samples from known populations, high-powered statistical analysis capabilities to determine linkagesbetween 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 Deakin University’sout-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.

**Businessstrategy**

The Company’sbusiness strategy for growth and profitability is to discover, develop andcommercialize novel therapeutics that address significant unmet needs in thepharmaceutical industry, based on the Company’s understanding of the geneticbasis of disease.  The Company keeps itscore competencies in-house (such as laboratory research management,pre-clinical work, clinical strategy and management), outsourcing the majorityof laboratory research and all clinical testing to specialists, to minimize itsinfrastructure and fixed overhead costs. In the fields of diabetes, obesity and depression the Company seeksearly partnering of discovery programs in order to share development costs andrisks with partners and to ensure that programs are commercially andscientifically focused.  In the field ofcancer, the Company intends to seek out joint venture or licensing partners forfurther development and commercialization of its products following Phase 2clinical evaluation.  This will allowChemGenex to license its products before full regulatory approval is requiredto place the product in the market.  Thegoal in each case is to seek multinational partners with drug developmentmilestones payable to the Company on completion of agreed targets andsubmission of regulatory documents and, eventually, payment or royalties onsales of commercialized products.  Theexpectation is that the size of the payments to the Company will vary

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depending on thesize of the eventual market, the stage of development of the product concerned andthe strength of the data that is generated prior to partnering.

**Componentsof ChemGenex’s discovery, validation and drug development platforms**

Target discovery and Biomarkers

The target discovery, validation and drug development platforms utilizeinfrastructure located at Deakin University (Geelong, Australia), theInternational Diabetes Institute (Melbourne, Australia) and the SouthwestFoundation for Biomedical Research (San Antonio, Texas).  Key features of the Target Discovery platforminclude:

·                  Deakin University’s out-bred colony of *Psammomys obesus*, a well-characterized animal model ofdiabetes, obesity and depression. The Company has exclusive access to thiscolony for both discovery 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 found the animal model to beuseful in studying metabolic disorders, such as diabetes and obesity, as wellas Central Nervous System disorders such as depression and anxiety.  *Psammomys obesus*populations develop a range of body weight, blood glucose, and insulin levelswith distributions similar to those found in human populations.  This animal model is used to discovercandidate genes (and the proteins they encode) with altered levels ofexpression that are associated 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 BiomedicalResearch.  The Company has contractualagreements with both institutions. Candidate genes that are found to exist inthe human genome and be associated with the diseases in question are thensubject to further rigorous analysis. As an example the PSARL(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 the genes that were discovered using theTarget Discovery platform have potential utility as biomarkers. That is, genevariants or differences in levels of gene expression, and thus protein levels,may predict disease state or propensity to develop certain diseases. TheCompany has recently expanded its efforts in biomarker discovery and isscreening for novel genes and proteins that might have commercial utility.

Target validation

The Target validation platform utilizes infrastructure located at DeakinUniversity in Geelong, Australia. It encompasses a comprehensive set of proprietaryand non-proprietary technologies from gene discovery, gene structure andfunction analysis to the validation of gene and protein products that may bepotential therapeutic or diagnostic targets. 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 in Target Validation include invitro (cell culture) experiments to determine the effect 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 the blocking of expression of thegene target SGIP1 (SH3-Domain GRB2-Like Interacting Protein 1) in *Psammomys obesus* and *Rattus norvegicus*.In the Company’s laboratory experiments SGIP1 was identified as having increasedexpression in the hypothalamus of obese compared to lean *Psammomys*

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* obesus*. The candidate genewas confirmed as being associated with disease using the Company’s humangenetics group in the SouthwestFoundation for Biomedical Research. To examine the role of SGIP1 in thedevelopment of obesity, antisense oligonucleotides of the genes were infusedinto a specific region of the brain (the lateral cerebral ventricle) in both *Psammomys obesus* and *Rattusnorvegicus*. The procedure has the effect of blocking the expressionof the SGIP1 genes in the brain and the Company believes this is a proxy ofwhat could occur if therapeutic agents could be used to affect the level of theprotein. When treated with antisense SGIP1, both species showed approximately40% reduction in food intake and 5-8% loss of body weight compared with controlanimals.

Drug discovery

The Company’s diabetes and obesity program based atDeakin University has expanded its scope to include chemical screening and thediscovery of small molecules that are potential insulin sensitizers. This newchemogenomics-based program integrates systems biology with drug discovery anddevelopment, and has already identified a range of lead compounds that areprogressing into preclinical studies.

The Company’s diabetes screen is based on GeneExpression Signatures, which are accurate measurements of gene expression inmodel systems of diabetes reflecting changes in the complex control mechanismsand pathways that are involved in the treatment of the disease. Byunderstanding the ‘signature’ of cells recovering from diabetes it is possibleto quickly and accurately determine the effects of any given compound’s actionsacross multiple pathways within a cell, and ascertain if it has potential as atreatment. As lead molecules progress through preclinical development thesignatures are used to accelerate medicinal chemistry programs, allowing rapidassessment of compounds based on the signatures of different moleculariterations.

The Company’santi-cancer therapeutic development platform focuses on developing novel smallmolecule therapeutics for the treatment of cancer and related conditions.  The major strategy has been to screen agentsstudied by the U.S. National Cancer Institute that have confirmed humanclinical activity but were not fully developed. Among these agents the Company identifies compounds suitable fordevelopment based on its assessment of mechanism of action, molecular targetsaffected, potential formulation improvements and genetic differences betweenpatients that can be exploited in clinical development.  It utilizes chemical genomics and drugscreening systems to identify agents affecting novel targets and evaluates acompound’s suitability as a drug and formulation technology to maximizedelivery and bioavailability, meaning the extent to which a chemical isabsorbed and distributed in the blood in an unchanged form followingadministration to a living organism.

Drug development

The Company’spre-clinical and clinical development efforts are based in Menlo Park,California.  In vitro and in vivoscreening models are used to evaluate lead compounds. Data from these models isfed back into extensive in-house databases for iterative analysis. A parallelseries of profiling assays is performed to determine the potentialpharmaceutical attributes and vulnerabilities of a compound.

Compounds thatmerit 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,efficacy and toxicology studies in laboratory animal models. Additionally,compound manufacturing, scale-up considerations and dosage form stabilitystudies are also performed.

Those agents withacceptable pharmacological and toxicological profiles may become the subject ofevaluation in humans.  This requiressubmission to the U.S. FDA of an Investigational New Drug (IND) application forpermission to begin Phase I dose escalation studies. After the MaximumTolerated Dose is identified at the schedule contemplated for therapeutic use,Phase 2 studies evaluating potential disease indications are performed. Ifsignificant activity is identified, then larger Phase 3 studies are conductedin support of a New Drug Application (NDA). If approved the product can then becommercialized.

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**ChemGenex’sdevelopment pipeline**

In the field ofcancer the Company has two clinical stage product candidates, four pre-clinicalstage product candidates and two discovery stage targets that have recentlybeen identified.

*Clinicalstage product candidates*

The Company hasapplied its genomic and clinical development expertise with its knowledge ofcancer to identify small molecule therapeutic targets in oncology. By focusingon compounds with confirmed clinical activity and using genomic tools tooptimize their development, the Company has been able to create a pipeline ofproduct candidates described below:

Ceflatonin®(homoharringtonine)

Homoharringtonine(“HHT)” is a small molecule with established clinical activity as a singleagent in hematological malignancies. The Company’s scientists have discoveredthat it affects a number of critical cellular pathways, including theregulation of genes associated with programmed cell death (apoptosis) and theinhibition of formation of new blood vessels in solid tumors (angiogenesis).The Company has received Orphan Drug Status protection for HHT in CML in boththe U.S.A. and Europe. In previous published Phase 2 clinical trials, 70% ofpatients showed complete hematological remission (CHR) in chronic myeloidleukemia (“CML”) after interferon-α failure. In more recent pilot studiesin CML patients who had failed Gleevec®, 100% of chronic-phase patients and 70%of accelerated-phase patients achieved a CHR. The Company is currentlyconducting Phase 2/3 trials in the U.S.A. and Europe for CML patients who havethe T315I bcr-abl mutation that confers resistance to Gleevec® andSprycel®. At the M.D.Anderson Cancer Center the 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.  The Company hasone issued patent and has four active patent applications covering Ceflatonin® formulations, purification, synthesis anduses. The Company has licensed from Stragen Pharma S.A. three issued patentsand has four active patent applications covering the preparation ofhomoharringtonine derivates, purification, and the use of homoharringtonineresistant to Gleevec®.

Quinamed®(amonafide dihydrochloride)

Amonafidedihydrochloride (amonafide) is a synthetic organic compound with establishedanti-cancer clinical activity. The Company has recently discovered thatamonafide affects a number of targets in the epidermal growth factor receptorpathway, which controls the growth of a number of tumor types, in addition toaffects on an enzyme that is critical for normal cell replication,topoisomerase II.  In National CancerInstitute (“NCI”)-sponsored clinical studies with amonafide monohydrochloride,25% of breast cancer patients and 15% of prostate cancer patients showed eitherpartial (>50% reduction in tumor volume) or complete (no measurable disease)responses.  However, researchers alsonoted some unpredictable side effects. It was later discovered that differences in how patients metabolize thedrug has a significant impact on toxicities. These metabolic differences can now be determined by testing a patient’sNAT-2 genotype. The Company’s development strategy is to determine a patient’sNAT-2 genotype and then treat them with a more precise and personal dose neededto produce the optimal result.  In theCompany’s Phase I clinical trial, investigators were able to achieve a higheroverall dose intensity based on NAT-2 genotype status and using a weeklyschedule without observing unexpected side effects.  The Phase I trial enrolled a total of 32patients and evaluable responses were observed in patients suffering from threedifferent types of solid tumors.  ThePhase 2a study has recently completed enrolling prostate, ovarian and breastcancer patients who are not responding to hormone therapy (i.e. hormonerefractory patients) at the Sarah Cannon Cancer Center in Nashville, Tennessee. The Company has two issued patents andhas three active patent applications covering amonafide salts, formulations,synthesis and uses.

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*Pre-clinicalstage product candidates*

In addition toCeflatonin® and Quinamed® theCompany is developing several other pre-clinical oncology compounds, includingthe following:

CXS299: This is anew platinum (IV) compound recently licensed from the M.D. Anderson CancerCenter in Houston, Texas.  CXS299 is afirst in class platinum IV agent that is active against cancer cells resistantto the effects of commercially available platinum-based therapies.  Currently approved platinum II agents havegenerated sales of greater than US$1 billion. However, some patients developresistance to platinum II therapy resulting in a need for additionaltherapies.  CXS299 is currently inpre-clinical development and could enter Phase I in 2008.

CXS2101:  This compound inhibits NF-Kappa B and hasbeen shown to increase the anti-cancer activity of other agents in animalmodels.

CXS6001:  This compound affects levels of thestructural protein tubulin in cancer cells and has shown anti-tumor efficacy inmouse models.

CXS273:  This compound affects the integrity of DNAand has been shown to increase the anti-cancer activity of cisplatin in a mousemodel.

*Validatedtargets*

The SEPS 1 gene (formerly called Tanis) was identified by the Companyfollowing the observation of increased hepatic gene expression in diabetes in *Psammomys obesus*.  TheCompany 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 is linked to signalingpathways within a cell that are thought to be associated with insulinresistance, which is the cause of Type 2 diabetes.  Evidence indicates that the PSARL generepresents an important target not only in diabetes but potentially in otherdiseases, such as cancer and age-related degenerative diseases and the Company’spatent protection has been  broadenedaccordingly.

Beacon was isolated in *Psammomys obesus*as a gene expressed in direct proportion to body fat content.  The protein product of the Beacon gene isexpressed as a small peptide in the hypothalamus, a part of the brain thatregulates energy intake and expenditure, and is understood to play a role inenergy balance.  The Company’s researchhas demonstrated that the expression of the Beacon gene is proportional to theamount of body fat, and that giving the Beacon peptide to lean animalssignificantly increased their feeding rate and body weight in direct proportionto 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 regulation of satiation at theneurological level.  The Company hasdetermined that suppression of SGIP1 expression reduced the feeding rate of *Psammomys obesus* significantly over a period of fourdays.  While the SGIP1 gene has beenidentified in humans, additional work on the expression and function of thegene in humans is still needed.

*Discoverystage targets*

The Company hasmore than 50 discovery stage candidates, in different stages of patentprotection.

**Additionalopportunities**

The Company has identified over 50 target genes involved in diabetes,obesity and depression.  Out of thisgroup, the Company has licensed to its alliance partner Merck Santé fourvalidated gene targets for continuing pre-clinical development of thesediscoveries.  The purpose of suchresearch is to develop lead compounds based on the validated targets that willresult in commercialized human therapeutics. The Company has the potential to use its novel gene discoveries forlicensing and commercialization in the areas of diagnostics, over-the-counterproducts,

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animal health and applications of these gene discoveries.  These applications are not covered by thecontractual arrangements with Merck Santé.

In order to take full advantage of the Company’s expertise and validatedgene targets for diabetes/obesity, the Company is pursuing partners for theco-development of over-the-counter products for obesity.  The Company has discovered several obesitytargets that are proteins found in the wall of the gut and are involved insending signals to the brain indicating fullness.  The Company has filed patent applications forthese proteins that may be suitable targets for developing over the counterproducts.  The goal of a potentialcommercial partnership would be to obtain a partner that would fundhigh-throughput screening of natural product libraries in order to identifycompounds with the potential to act on the target proteins.  The Company’s most advanced target in thisresearch program is a gene called CXS829 that is involved in the transmissionto the brain from the stomach of the sensation of satiation (“fullness”).  ChemGenex has filed patent applications onthis discovery, as well as two chemical entities that are antagonistic to thetarget and work to regulate the protein’s activity.

While the Company has yet to commercialize any of its proprietary targetsfor diagnostic use it has established a commercial collaboration with KyokutoPharmaceutical Corporation, a Japanese pharmaceutical company, for thedevelopment of a diagnostic kit for Type 1 diabetes based on glutamic aciddecarboxylase (“GAD”) technology. The presence of antibodies to GAD in theblood provides early evidence of diabetes and can be used for the prediction,diagnosis, and management of the disease. This diagnostic is currently indevelopment (see details in Research and development programs below).

The Company hasgenerated revenue through the use of the capacity in its technology platformfor fee-for-service contract research. Many drug development companies do not have proprietary technology tovalidate genetic targets with demonstrable links to a disease state. Thesecompanies are the prospective clients for use of the Company’s technology.  In 2002 the Company had a significantcontract with Sequenom for this purpose and in 2003 the service was utilized bytwo Australian biotechnology companies. While the Company continues to seek fee-for-service revenue no furthercontracts have yet been arranged.

**Researchand product development programs**

The Company currently contracts its target discovery research programs tothree organizations; Deakin University in Geelong, Victoria, Australia, theInternational Diabetes Institute in Melbourne, Victoria, Australia and theSouthwest Foundation for Biomedical Research in San Antonio, Texas. Thediscovery and validation programs are involved in the previously describedcollaborative programs with Merck Santé (diabetes and obesity targets) andVernalis (depression targets). Cancer research is carried out at the Company’slaboratory in Menlo Park, California, and clinical trials conducted at the M.D.Anderson Cancer Center, the Sarah Cannon Center in Nashville, Tennessee, andleading European hospitals.

TheCompany has been accepted into the inaugural Pharmaceutical Partnership Program(P3) of the Australian Federal government, through which the Company has theability to earn grant revenue based on the growth of the Company’s research inAustralia over the next five years. Admission into the Australian government’s P3 scheme involved a peerreview process and the Company was one of only seven Australian-ownedbiotechnology companies admitted into 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. The Company’s maximum entitlement under this scheme is capped atA$4.8 million over five years.

**Commercial and research anddevelopment collaborations**

The following sectiondescribes the Company’s existing commercial collaborators and the commercialagreements with respect to the Company’s principal research and developmentprograms and commercialization agreement:

Vernalis Researchand Development Option Agreement: Autogen Research Pty Ltd. (a wholly owned subsidiary of the Company)entered into a Research and Development Option Agreement dated August 31, 2004with British biotechnology company Vernalis (R&D) Limited (a wholly ownedsubsidiary of Vernalis plc).  Pursuant tothis agreement Vernalis (R&D) Limited agreed to partner with the Company’sresearch program for the discovery and validation of novel genes and proteinsinvolved in depression and anxiety, with the goal of using the product of thesegenes as therapeutic agents or as a target for drug discovery.  The initial term of the Agreement was for sixmonths, and was extended by Vernalis (R&D) Limited for an additional sixmonths.  Under the agreement Vernalis

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(R&D) Limitedpaid an initial fee and a subsequent fee to ChemGenex.  If Vernalis (R&D) Limited exercised itsoption to negotiate in good faith a license and collaboration agreement togovern the future terms of the parties’ relationship, including a grant toVernalis of an exclusive world-wide license under the Company’s interest in theprogram’s intellectual property, additional fees will become payable inconsideration of the option grant.  Theagreement can be terminated by one party if the other is in material breach nottimely remedied, if there is a risk of insolvency administration of the otherparty or if there is a risk of dissolution of the other party.  In the event of these terminations thenon-defaulting party is granted the right to continue the research program anda world-wide license to use and exploit the defaulting party’s relevantintellectual property. Vernalis (R&D) Limited paid 200,000 pounds sterling(A$506,291) for the initial term in September 2004, and paid a further 300,000pounds sterling ( A$720,738) for the additional six month term in May 2005. Thepayments from Vernalis (R&D) Limited were made in consideration of theCompany performing a mutually agreed research program and granting to Vernalis(R&D) Limited 50% of the IP rights and know-how produced under the terms ofthe partnership. Any subsequent payments will be contingent upon the results ofthe work undertaken and negotiations between the parties. The agreement willterminate if the parties have not executed a Licence and CollaborationAgreement by March 1, 2007.

General Research Agreement:  Chemgenex Pharmaceuticals entered into aGeneral Research Agreement on December 20, 2005 with Merck Santé (a subsidiaryof Merck KGaA) pursuant to which Merck Santé agrees to fund a minimum of€210,000 per annum for the Company to undertake preclinical research on itsbehalf.  The term of the agreement is toDecember 31, 2008.  Additional fees arepayable if additional staff resources are required to complete specific researchprograms.

Patent and TechnologyLicense Agreement: On February 7, 2005 ChemGenex Pharmaceuticals Limitedentered into a technology licensing agreement with The University of Texas M.D. Anderson Cancer Center to develop information or discoveries relating to theanti-cancer activities of DACH-Ac-Pt [(1R,2R-diaminocyclohexane)-(trans-diacetato)-(dichloro)-platinum(IV)]a novel cisplatin analog now referred to by the Company as CXS299. Theroyalty-bearing, exclusive license is for certain IP rights defined in UnitedStates Patent No. 5,434,256, and foresees the pre-clinical and clinicaldevelopment of CXS299. ChemGenex Pharmaceuticals Limited has incurred expensesof US$50,000 (paid by cash and issue of shares) in March 2005.  Further fees payable under this agreementwill be dependent upon the commencement of various stages of clinical trialsrequired, the results of those trials and the licensing of product associatedwith the trials. Unless terminated by either party the agreement will remain ineffect until patent rights or technology rights associated with the agreementexpire.

Research, License andCommercialization 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 propertydeveloped under the terms of the agreement 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 may be terminated if theUniversity 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 the Company, among other conditions.  It may also be terminated by DeakinUniversity if ChemGenex fails to 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 thisagreement from January 1, 2005 to December 31, 2005 was extended by 12 monthsto December 31, 2006 on April 3, 2006.ChemGenex incurred expenses of A$1,210,000 in fiscal 2005, and A$2,420,000 infiscal 2006 for services provided under the agreement. Further expenses of$1,210,000 will be incurred until expiry date.

Research, License and CommercializationAgreement:  Autogen Research Pty Ltd.entered into this agreement with the SFBR, based in San Antonio, Texas, onDecember 31, 2002.  Under the terms ofthis agreement Autogen Research Pty Ltd undertakes to collaborate with SFBR andto provide funding for a project in return for the joint

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ownership and an exclusive license to use andcommercialize the intellectual property resulting from the funded project onthe terms set forth in the agreement. Among the conditions for termination are failure to timely commence andprogress the agreed work plan, insolvency, change in control and other similarconditions.  The agreement also isterminable if Autogen Research Pty Ltd does not provide the agreedfunding.  The term of this agreement wasextended to December 31, 2006 on December 16, 2005. Autogen Research Pty Ltd incurred expenses of A$555,304 in fiscal 2004,A$490,929 in fiscal 2005 and A$895,138 in fiscal 2006 under this agreement.Further expenses of A$437,660 will be incurred until expiry date.

Research Agreement: On January 14, 1998 Autogen Pty Ltd. entered into a research agreementwith the International Diabetes Institute (IDI) to conduct gene discovery andvalidation research according to instruction from the Company in the fields ofobesity and diabetes pursuant to which Autogen Research Pty Ltd undertakes tocollaborate with the IDI and to provide the funding for a project in return forjoint ownership 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 terminated if the IDIdoes not timely commence its work, if it fails to achieve milestones or useappropriate professional standards or if the program is not producing resultsin the opinion of Autogen Research Pty Ltd, among other conditions.  It may also be terminated by the IDI ifAutogen Research Pty Ltd fails to provide the agreed funding.  Under certain circumstances Autogen ResearchPty Ltd is obligated to pay the royalties to the IDI even in the event of earlytermination.  The term of this agreementwas extended to December 31, 2006 on February 27, 2006. Autogen Research Pty Ltd incurred expenses of A$1,233,323 in fiscal 2004, A$1,104,190 in  fiscal 2005 andA$501,838 in fiscal 2006 under this agreement. Further expenses of A$131,982will be incurred until expiry date.

Sole LicenseAgreement:  On March 1, 1999: Autogen PtyLtd and Kyokuto Pharmaceutical Industrial Co. Ltd., licensed certainintellectual property for use in Kyokuto’s diagnostic products in Japan.  The contract relates to the use of anengineered hybrid of certain forms of glutamic acid decarboxylase in thediagnostic and presymptomatic detection of insulin dependent (type 1)diabetes.  Under the agreement Kyokuto isobligated to pay a net royalty on sales, at certain minimum levels.  If less than the minimum net royalty is paid,the Company can terminate the license on three months’ notice or convert it toa 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.

**Patents, licenses and proprietaryrights**

The Companypursues a policy of seeking to obtain patent protection for its inventions inAustralia, the U.S., Europe, Japan and in selected other countries. The Companyalso relies upon trade secrets, know-how, continuing technological innovationsand licensing opportunities to develop and maintain its competitive position.To date, the Company has not threatened or instituted proceedings against anythird party on patent or other proprietary rights nor has any third partythreatened or instituted proceedings against the Company.

Certain productsand processes currently being developed or considered for development by theCompany are in the area of biotechnology. The number of patent filings bybiotechnology firms in major jurisdictions is particularly high and the outcomeof such applications is generally uncertain and involves complex legal andfactual questions. To date, no consistent international policy has emergedregarding the breadth of claims allowed in biotechnology patents. Accordingly,there can be no assurance that the Company will develop products or processesthat are patentable, that patent applications made by the Company, or made byparties who have agreed to license their inventions to the Company, will resultin patents being issued or that, if issued, the claims allowed will besufficiently broad to protect what the Company believes to be its proprietaryrights or that such patents will prevent others from developing similar orfunctionally equivalent products or processes. In addition, products orprocesses

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covered by suchpatents, or any other products or processes developed by the Company orlicensed to the Company, may infringe patents owned by third parties or besubject to claims of patent infringement by these parties. In such a situation,the Company may have to obtain a license, defend an infringement action incourt or challenge the scope or validity of any infringed or allegedlyinfringed patents. Such required licenses may not be available to the Companyat all, or if available, such licenses may not be on terms acceptable to theCompany or that the Company will prevail in any patent litigation. Failure toobtain a license or prevail in any patent litigation relating to any technologythat the Company may require to commercialize its products or processes mayhave a material adverse impact on the Company.

Litigation mayalso be necessary to enforce any patents granted to the Company or to determinethe scope and validity of third party patents. Patent litigation is timeconsuming and expensive. The Company may not have, or be able to devote thenecessary resources to conduct patent litigation. Patent applications made byor licensed to the Company may not result in patents being issued or, ifissued, the patents may not provide the right to exclude competitors withsimilar technology.

The Companymaintains an active policy of filing patent applications.  It is possible that patents may not begranted on pending applications made by the Company or parties that havelicensed their inventions to the Company. Similarly, issued patents may notprovide significant proprietary protection or commercial advantage or may beinfringed or designed around by others. Since publication of inventions ordiscoveries in scientific or patent literature often lags behind actualinvention or discovery, it is possible that the inventions covered by each ofthe Company’s pending patent applications may not have dominant status in termsof date of invention. The Company’s patents or patent applications may becomeinvolved in opposition proceedings instituted by third parties. If suchproceedings were initiated against the Company’s rights, the defense of suchrights could involve substantial costs and the outcome cannot be anticipated.If patents are issued to other parties that contain valid claims that areinterpreted to cover any of the Company’s products, it is possible that theCompany may not be able to obtain licenses to such patents at a reasonablecost, if at all, or may not be able to develop or obtain alternative technology.Competitors or potential competitors may have filed applications for, may havereceived patents covering, or may obtain additional patents and proprietaryrights that may relate to, compounds or processes competitive with those of theCompany.

The Company alsorelies upon unpatented proprietary technology, and no assurance can be giventhat others will not independently develop substantially equivalent proprietarytechnology and techniques, or otherwise gain access to the Company’sproprietary technology or disclose such technology, or that the Company canmeaningfully protect its rights to its unpatented proprietary technology,secrets and know-how.

It is the Company’spolicy generally to require its consultants, outside scientific collaborators,sponsored researchers and other advisors to execute confidentiality agreementsprior to the commencement of consulting or other relationships with theCompany. Employees have a similar confidentiality provision in their employmentcontracts. These agreements provide that all confidential information developedor made known to the individual during the course of the individual’srelationship with the Company is to be kept confidential and not disclosed tothird parties except in specific, limited circumstances. The Company alsorequires signed confidentiality or material transfer agreements from any personwho is to receive confidential data or proprietary material from the Company.In the case of consultants, the agreements generally provide that all inventionsconceived by the individual while rendering services to the Company shall beassigned to the Company as the exclusive property of the Company. Similarprovisions are contained in the Company’s employment contracts, and provisionsof many national laws, including Australia, provide that intellectual propertyrights created during the course of employment belong to the employer. Therecan be no assurance, however, that these agreements and provisions will providemeaningful protection or adequate remedies for the Company’s intellectualproperty rights, trade secrets or other confidential information in the eventof unauthorized use or disclosure.

Patent protectionis being sought in major markets through the filing of U.S. and InternationalPatent Cooperation Treaty (“PCT”) applications. The portfolio includes 22 PCTapplications and currently derived from these applications are over 96 nationaland regional patent applications in 12 different jurisdictions, including theU.S., Europe and Japan. The portfolio also includes 5 provisional patentapplications not listed above that have been submitted in the past year.

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Under the PCT, asingle patent application is filed which designates various countries orregions. The application is referred to as an International application. Allmajor countries and regions (e.g. Europe) can be designated and thiseffectively reserves the right to lodge patent applications in those countriesand regions up to 18 months following the filing of the PCT application. Duringthat period, an International Search Report and an International PreliminaryExamination Report are issued by the relevant national patent office (e.g. theUnited States Patent and Trademark Office (“USPTO”), or Australian PatentOffice) and there are opportunities to amend the claims and specificationalthough new matters cannot be added. At the end of the 18 month period (i.e.generally 30 months after filing of the initial provisional application), theapplicant decides in which countries to pursue national or regionalapplications.

**Competition**

The Company faces, andwill continue to face, intense competition from one or more of the followingentities:

·                  biotechnologycompanies;

·                  pharmaceuticalcompanies;

·                  academicand research institutions; and

·                  governmentagencies.

The Company isalso subject to significant competition from organizations that are pursuingapproaches, technologies and products that are the same as, or similar to, itstechnology and products. Any products that are developed through the Company’stechnologies will compete in highly competitive markets. Further, the Company’scompetitors may be more effective at using their technologies to developcommercial products. Many of the organizations competing with the Company havegreater capital resources, larger research and development staffs andfacilities, 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 be product candidatesof which the Company is not aware at an earlier stage of development that maycompete with the Company’s product candidates.

Specific competition riskaccording to disease class is summarized below.

Cancer

In the field ofcancer therapeutics the Company faces intense competition from majorpharmaceutical companies and specialized biotechnology companies engaged in thedevelopment of product candidates and other therapeutic products. Several ofthese companies have products in the same indications or utilize similartechnologies and/or personalized medicine techniques.  In June 2006 the FDA approved the release ofSprycel® (dasatinib), a drug for Gleevec®-resistant CML developed andcommercialized by Bristol-Myers Squibb. Novartis is also developing Nilotinib® (AMN-107) a new drug that targets Gleevec®-resistant CML ‘ Significantly,neither Sprycel® nor Nilotinib® have demonstrated efficacy against the T315Ibcr-abl mutation, and it is this sub-set of resistant CML patients that arebeing targeted by the Company for initial approval. Supergen has ongoing Phase2 studies with decitabine in CML. Xanthus Life Sciences is currently conducting a Phase 2 study withamonafide malate in acute myeloid leukemia. There are also a number of othercompetitive trials or technologies elsewhere in the world.

Metabolic Syndrome andDepression

There are numerousinternationally-regarded genomics and target discovery companies that areactive in the search for new potent therapeutics against these diseases. Someof the Company’s competitors have entered into collaborations with leadingcompanies within the Company’s target markets. Companies that are applyingdifferent proprietary technologies to the search for novel targets include:

·                  Amgen,Inc.

·                  CuragenCorporation, Inc.

·                  DeCodeGenetics.

·                  Excelixis, Inc.

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·                  Genentech,Inc.

·                  HumanGenome Sciences, Inc.

·                  IncytePharmaceuticals, Inc.

·                  ZymoGenetics,Inc.

A number oforganizations are attempting to rapidly identify and patent genes and genefragments 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 being issuedby the USPTO, and these claims may make it difficult to commercialize products,or, if licenses are made available, may make the royalty burden on theseproducts so high as to prevent commercial success.

Material effects ofgovernment regulation

The internationalpharmaceutical industry is highly regulated by numerous governmentalauthorities in Australia, the U.S., the U.K., Europe and by regulatory agenciesin other countries where the Company intends to test or market products it maydevelop. National regulatory authorities administer a wide range of laws andregulations governing the testing, approval, manufacturing, labeling andmarketing of drugs and devices and also review the quality, safety andeffectiveness 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.

The nationalregulatory 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 Companyanticipates that the introduction of new products will continue to requiresubstantial effort, time and expense in order to comply with regulatoryrequirements.

No new drug ispermitted to be sold in developed countries without extensive data on itsquality, safety and efficacy first being obtained, organized and submitted togovernmental regulatory authorities. The development stage of this process maybe divided into two parts: (i) pre-clinical; and (ii) clinical development.Included in pre-clinical development are the development of processes formanufacturing the product candidate, toxicology studies and other activitiessuch as pharmacology and drug metabolism studies. Clinical trials run until,and in some cases after, the product is marketed and cover several, sometimesoverlapping, phases.

In Phase I trials,a small number of healthy human volunteers are exposed to a product candidate.Typically, the volunteers are administered single or multiple doses, followingwhich the effects of the candidate drug are closely monitored. The way the bodydeals with the product candidate from administration to elimination

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(pharmacokinetics)is also studied. Phase 2 trials involve the first studies on patients andexplore the doses required to produce the desired benefits.  Safety and pharmacokinetic information isalso collected. 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.

In addition to theforms of regulation referred to above, the prices of pharmaceutical products inmany countries are controlled by law. In some countries, such as France andJapan, the prices of individual products are regulated. By contrast, in theU.K., prices are controlled by reference to limits upon the overallprofitability, measured by the rate of return on capital employed, of sales ofproducts supplied under the U.K. National Health Service. The permitted rate ofreturn on capital employed for each pharmaceutical company is determinedthrough negotiations with the U.K. Department of Health under the 1999Pharmaceutical Price Regulation Scheme. If a company’s actual rate of returnexceeds the agreed rate, it is required to negotiate either a repayment of pastprofits which the Department of Health considers to be excessive or futureprice reductions. There is no assurance that the current arrangements willcontinue in the future.

Governments mayalso influence the price of pharmaceutical products through their control ofnational 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.****            Organizationalstructure**

ChemGenexPharmaceuticals Limited is a limited liability corporation listed 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 andequipment**

The Company’sheadquarters are in Geelong, Victoria, Australia.  Its headquarters, comprising leased premisesof approximately 80 square meters, contains office space and storage space. Theproperty plant and equipment recorded includes leasehold improvements,furniture and fittings, computer equipment, and equipment used in research anddevelopment by external providers.

These propertiesare in good condition.

The headquarterspremises was leased from Deakin University on a monthly tenancy basis until anew three year lease agreement commenced on November 1, 2006. Designatedresearch projects are subcontracted to third party laboratories including DeakinUniversity.

ChemGenexPharmaceuticals, Inc. leases approximately 2,400 square feet of corporateoffice space in Menlo Park, California, under a lease agreement that terminateson December 31, 2006.  The U.S.subsidiary also subleases approximately 500 square feet of laboratory space toconduct *in vitro* experiments to support oncologydiscovery and development programs in Menlo Park, California under a subleasethat terminates on December 31, 2006. The Company is negotiating arrangementsfor the lease of these premises after December 30, 2006.

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Environmental

The Company’soperations are not subject to any significant environmental regulations undereither Australian Commonwealth or State legislation. The Company uses hazardousmaterials that could be dangerous to human health, safety or the environment.As appropriate, the Company stores these materials and various wastes resultingfrom their use at its facilities pending ultimate use and disposal. The Companyis subject to a variety of federal, state and local laws in both Australia andthe U.S. and regulations governing the use, generation, manufacture, storage,handling and disposal of these materials and wastes resulting from the use ofsuch materials. While the costs for compliance, including costs related to thedisposal of hazardous materials, to date have been nominal, the Company mayincur significant costs complying with both existing and future environmentallaws and regulations. ChemGenex Pharmaceuticals, Inc. is subject to regulationby the Occupational Safety and Health Administration, or OSHA, the Californiaand federal environmental protection agencies and to regulation under the ToxicSubstances Control Act. OSHA or the California or federal EPA may adoptregulations that may affect the U.S. subsidiary’s research and developmentprograms. The Company is unable to predict whether any agency will adopt anyregulations that could have a material adverse effect on its operations.

## **ITEM 5.****                  OPERATING ANDFINANCIAL REVIEW AND PROSPECTS**

The following discussionand analysis should be read in conjunction with Item 3A. “Selected consolidatedfinancial data” and the Company’s audited consolidated financial statements,the notes thereto and other financial information appearing elsewhere in thisAnnual Report.  In addition to historicalinformation, the following discussion and other parts of this Annual Reportcontain forward-looking statements that reflect the Company’s plans, estimates,intentions, expectations and beliefs. Actual results could differ materially from those discussed in theforward-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 followingreview is based on the Company’s audited consolidated financial statementswhich are prepared under Australian Accounting Standards, a summary of thesignificant differences between these standards and U.S. GAAP is given belowand more detailed information is provided in the Company’s audited consolidatedfinancial statements included elsewhere in this Annual Report.

For all periods upto and including the year ended June 30, 2005 the Company prepared itsfinancial statements in accordance with Australian generally acceptedaccounting practice (“AGAAP”). These financial statements for the year endedJune 30, 2006 are the first the Company is required to prepare in accordancewith Australian equivalents to International Financial Reporting Standards (“AIFRS”).

Accordingly theCompany has prepared financial statements that comply with AIFRS applicable forperiods beginning after January 1, 2005 and the significant accounting policiesmeeting those requirements are described in the attached consolidated financialstatements.. In preparing these consolidated financial statements, the Companyhas started from an opening balance sheet as at July 1, 2004, the Company’sdate of transition to AIFRS, and made those changes in accounting policies andother restatements required by AASB 1 First-time adoption of AIFRS.

**Recentlyissued but not yet adopted accounting pronouncements applicable to ChemGenex**

***Australianpronouncements***

Amendment to AASB 121 *The Effectsof Change in Foreign Exchange Rates* [AASB 2006-1]

A requirement of AASB 121 (issued in July 2004) isthat a monetary item can be part of the reporting entity’s net investment inforeign operation provided the monetary item is denominated in the functionalcurrency of either the reporting entity or the foreign operation.

In December 2005, the IASB amended IAS 21 so that amonetary item can be denominated in any currency and still be part of thereporting entity’s net investment in a foreign operation. The implications ofthe amendment are as follows-

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·                  Whena monetary item forms part of a reporting entity’s net investment in a foreignoperation and is denominated in the functional currency of the reportingentity, an exchange difference arises in the foreign operation’s individualfinancial statements.

·                  If such an itemis denominated in the functional currency of the foreign operation, an exchangedifference arises in the reporting entity’s separate financial statements.

·                  If such an itemis denominated in a currency other than the functional currency of either thereporting entity or the foreign operation, an exchange difference arises in thereporting entity’s separate financial statements and in the foreign operations’sindividual financial statements.

Such exchange differences are reclassified to theseparate component of equity in the consolidated financial statements.

The Standard is applicable to ChemGenex annualreporting period beginning on July 1, 2006.

UIG Interpretation 8 *Scope ofAASB 2 Share based payment*

This Interpretation clarifies that the scope of AASB 2includes transactions in which the entity cannot identify specifically some orall ot the goods or services received as consideration for the equityinstruments of the entity or other share-based payment.

AASB 2 applies to particular transactions in whichgoods or services are received, such as transactions in which an entityreceives goods or services as consideration for equity instruments of theentity. This includes transactions in which the entity cannot identifyspecifically some or all of the goods or services received.

The entity shall measure the unidentified goods orservices received at the grant date. However for cash-settled transactions, theliability shall be remeasured at each reporting date until it is settled.

This interpretation is applicable to ChemGenex annualreporting from July 1, 2006.

***U.S. pronouncements***

*AccountingChanges and Error Corrections*

In May 2005, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 154, *AccountingChanges and Error Corrections*, a replacement of AccountingPrinciples Board (“APB”) Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”).  SFAS 154 provides guidance on the accountingfor and reporting of accounting changes, including changes in principle,accounting estimates, and the reporting entity, as well as, corrections oferrors in previously issued financial statements.  SFAS 154 requires retrospective applicationof voluntary changes in accounting principle to prior period financialstatements, unless it is impracticable to do so.  SFAS 154 also provides that a change inaccounting estimate that is affected by a change in accounting principle isaccounted for as a change in estimate. SFAS 154 carries forward from APB 20, *AccountingChanges*, the reporting for a correction of an error, a change in thereporting entity, and the requirement to justify a voluntary change inaccounting principle on the basis of preferability.  SFAS 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005 with early adoption permitted for accounting changes and corrections oferrors made in fiscal years beginning after the date SFAS 154 was issued.  The Company plans to adopt this pronouncementin fiscal years beginning July 1, 2006 and does not believe the adoption ofSFAS 154 will have a material effect on the consolidated financial statements.

*Uncertaintyin Income Taxes*

In July 2006, the FASB issued FASB Interpretation (“FIN”)No. 48, *Accounting for Uncertainty in IncomeTaxes*, an interpretation of FASB No. 109, *Accounting for Income Taxes* (“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 on derecognition, measurement,classification, interest and penalties, accounting in interim periods, disclosure,and transition.      In addition, FIN 48clearly scopes out income taxes from SFAS No. 5, *Accounting for Contingencies*.  FIN 48 applies to all    tax positions related to income taxessubject to SFAS No. 109.  This includestax positions considered to be “routine” as     well as those with a high degree of uncertainty.  The guidance contained in FIN 48 is alsoapplicable to pass-through entities,     non-taxable entities, and entities whose tax liability is subject to100% credit for dividends paid.  FIN 48utilizes the following two-step approach for

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evaluating tax positions: recognition (step one) andmeasurement (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 is only addressed if step one hasbeen 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 atax position that was previously recognized would occur when a companysubsequently determines that a tax position no longer meets themore-likely-than-not threshold of being sustained.  FIN 48 specifically prohibits the use of avaluation allowance as a substitute for derecognition of tax positions.  FIN 48 requires expanded disclosures,including a tabular roll forward of the beginning and ending aggregateunrecognized tax benefits as well as specific detail related to taxuncertainties for which it is reasonably possible the amount of unrecognizedtax benefit will significantly increase or decrease within twelve months.  These disclosures are required at each annualreporting period, unless a significant change occurs in an interim period.  FIN 48 is effective for fiscal years beginningafter December 15, 2006.  The Companyplans to adopt this pronouncement in fiscal year beginning July 1, 2007 anddoes not believe the adoption of FIN 48 will have a material effect on theconsolidated financial statements.

### *Fair Value Measurements*

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS 157”).  SFAS 157 provides enhanced guidance for usingfair value to measure assets and liabilities and also responds to investors’requests for expanded information about the extent to which companies measureassets and liabilities at fair value, the information used to measure fairvalue, and the effect of fair value measurements on earnings.  SFAS 157 applies whenever other standards require(or permit) assets or liabilities to be measured at fair value and does notexpand the use of fair value in any new circumstances.  Under SFAS 157, fair value refers to theprice that would be received to sell an asset or paid to transfer a liability inan orderly transaction between market participants in the market in which thereporting entity transacts.  SFAS 157clarifies the principle that fair value should be based  on the assumptions market participants woulduse when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair valuehierarchy that prioritizes the information used to develop thoseassumptions.  The fair value hierarchygives the highest priority to quoted prices in active markets and the lowestpriority to unobservable data.  UnderSFAS 157, fair value measurements would be separately disclosed by level withinthe fair value hierarchy.  SFAS 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007.  The Company plans toadopt this pronouncement in fiscal years beginning July 1, 2008 and does notbelieve the adoption of SFAS 157 will have a material effect on theconsolidated financial statements.

**Differences between Australianaccounting standards and U.S. accounting standards**

The Company prepares its audited consolidatedfinancial statements in accordance with AIFRS, which differ in certainsignificant respects from U.S. GAAP. The following table sets forth acomparison of the Company’s net loss and total equity in accordance with AIFRSand U.S. GAAP as of the dates and for the periods indicated:
| **Period**                             | ** ** | **Year to June 30, 2006  A$’000** | ** ** | **Year to June 30, 2005  A$’000** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                   |       |                                                       |       |                                                       |       |
| Net loss in  accordance with A IFRS    |       | (10,370                                                    | )          | (6,235                                                     | )          |
| Net loss in  accordance with U.S. GAAP |       | (10,444                                                    | )          | (6,189                                                     | )          |

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

 

See Note 27 to the audited consolidated financialstatements included elsewhere herein for a description of the differencesbetween AIFRS and U. S. GAAP as they relate to the Company, and areconciliation to U.S. GAAP of net loss and total equity for the dates andperiods indicated therein. Differences between AIFRS and U.S. GAAP that have amaterial effect on net loss and total equity relate to share-basedcompensation, purchase accounting and marketable securities.

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**Applicationof critical accounting policies**

The Company prepares its financial statements in accordance withgenerally accepted accounting principles. As such, it is required to makeestimates, judgments, and assumptions that management believes are reasonablebased upon the information available. The estimates, judgments and assumptionsaffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe periods presented. The significant accounting policies listed in Note 2 ofthe Company’s audited consolidated financial statements that managementbelieves are the most critical to aid in fully understanding and evaluating itsfinancial condition and results of operations are discussed below.

***AIFRS  and U.S. GAAP***

*RevenueRecognition*

Research revenue comprises amounts received forcertain research and development activities under the Company’s collaborationswith Merck Santé and Vernalis

For thesecontracts revenues are recognized as earned on a straight line basis over thelives of the respective agreements as this reflects the level of effortrequired over the performance period. Such agreements are performed on a “bestefforts” basis with no guarantee of either technological or commercial success.Project funding received in advance of the period in which the associatedresearch efforts are performed is included in deferred revenue.

***U.S. GAAP***

*In-ProcessResearch and Development*

In connection withthe June 21, 2004 merger with ChemGenex Therapeutics, Inc. (accounted for underthe purchase method of accounting), for U.S. GAAP purposes the Companyallocated A$16.6 million of the purchase price to in-process research anddevelopment projects that had not yet reached technological feasibility and are reasonably believed to have noalternative future use.  Under US GAAPthis inprocess research and development expenditure was written off in thefinancial statements for that year. The value assigned to in-process researchand development 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 discountrate of 43.5% used in determining the in-process research and developmentexpenditures reflects a higher risk of investment because of the higher levelof  uncertainty due in part to the natureof the Company and the industry to constantly develop new technology for futureproduct releases.  The forecasts used bythe Company in valuing in-process research and development were based onassumptions the Company believed at the time to be reasonable, but which areinherently uncertain and unpredictable. Given the uncertainties of the development process, no assurance can begiven that deviations from the Company’s estimates will occur and no assurancecan be given that the in-process research and development projects identifiedwill ever reach either technological or commercial success.

*Share-based Compensation*

UnderU.S. GAAP, the Company had elected, to June 30, 2005, to account forshare-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 vestupon the achievement of a target stock price, compensation expense isrecognized when the target is achieved.

SinceJuly 1, 2005 the Company has accounted for share-based compensationattributable to share options granted to employees in accordance with FAS No.123R (as for share-based compensation attributable to share options granted tonon-employees) as detailed below.

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Under U.S. GAAP, theCompany accounts for share-based compensation attributable to share optionsgranted to non-employees in accordance with FAS No. 123, *Accountingfor Stock-Based Compensation*, as amended by FAS No. 148, *Accounting for Stock-Based Compensation-Transition and Disclosure*(collectively,**“FAS No. 123”),**and EmergingIssues Task Force Issue No. 96-18*, Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services*(“EITF No. 96-18”).  Under FAS No. 123 and EITF No. 96-18,share-based compensation for stock options granted to non-employees is equal tothe fair value of the share options as of the measurement date.  The Company determines the fair value ofoptions granted to non-employees using the Black-Scholes option valuationmodel, which requires the input of highly subjective assumptions, including theestimated fair value of the Company’s common stock and expected stock pricevolatility.  Share-based compensationrelated to unvested options granted to non-employees is remeasured periodicallyas the underlying options vest.

### **A.****            Operating results**

The Company’sprincipal activity since July 1996 has been research and development of noveltargets and therapeutics for human diseases including obesity, diabetes,depression and cancer. The Company has made losses since commencing its currentprincipal activities. As at June 30, 2006, the Company’s accumulated deficitwas A$ 81,023,002 compared to A$70,653,283 as at June 30, 2005.

The Company’slosses fluctuate from year to year principally due to the commencement ortermination of collaborative research and development agreements, the timing ofmilestone payments, government grants, the level of interest income andvariations in the level of expenditures relating to research and clinicaldevelopment programs. The Company expects to incur continued losses in comingyears. The Company continues to incur the greater part of its costs onpersonnel and external contract costs needed to support the research anddevelopment of its platforms, including expenses related to the protection ofpatent and other intellectual property rights.

**Overview**

The Company is a biopharmaceutical company committedto advancing patient care by discovering, developing and commercializing novelmedicines for cancer, diabetes, obesity, depression and anxiety. ChemGenexPharmaceuticals Limited was formed through the merger of AGT BiosciencesLimited and ChemGenex Therapeutics, Inc. on June 21, 2004. AGT BiosciencesLimited was a publicly-listed company that specialized in the use of genomicstools to identify and validate novel targets for therapeutic intervention indiabetes, obesity, depression and anxiety. AGT Biosciences Limited, which hadpreviously been called Autogen Limited (from May 1999 to March 2003) andAustralia Wide Industries Limited (from July 1986 to May 1999), commencedbiotechnology activities on July 10, 1996. On June 28, 2002, a 20% shareholdingin Autogen Limited held by the then Executive Chairman was sold to thepublicly-listed Australian investment company, Charter Pacific CorporationLimited. This led to a significant restructure of the management team andsignificantly 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. The merged entity has an aggregate of 151,362,786 shares of ordinarystock outstanding.

To date, the Company hasdevoted substantially all of its resources to the development of its targetdiscovery and validation technologies, research and development and preclinicaland early stage clinical testing of Ceflatonin® (homoharringtonine) andQuinamed® (amonafide dichloride) and other product candidates. It has incurrednet losses since the commencement of biotechnology operations and expects toincur substantial and increasing losses for the next several years as itexpands 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 ongoing partnership agreements in its two maindiscovery programs; diabetes and obesity (with Merck Santé) and depression andanxiety (with Vernalis (R&D) Limited). Planned core activities over the next several years are to:

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

·                  continue thedevelopment of Quinamed®, currently in Phase 2 clinical trial for the treatmentof solid tumors including prostate, breast and ovarian cancer;

·                  continue thedevelopment of its other cancer-treating product candidates;

·                  expand theCompany’s research, discovery and development programs in the fields of diabetesand obesity;

·                  expand theCompany’s research, discovery and development programs in the fields ofdepression and anxiety;

·                  advance theCompany’s preclinical cancer-treating candidates into clinical development;

·                  establish andmaintain sales and marketing operations;

·                  commercialize anyproduct candidates that receive regulatory approval; and

·                  in-licensetechnology and acquire or invest in businesses, products or technologies thatare synergistic with the Company’s own.

ChemGenex has a limited history of operations with itscurrent management team and business focus.

The Company’s business issubject to significant risks, including but not limited to the risks inherentin its ongoing clinical trials and the regulatory approval process, the resultsof its research and development efforts, competition from other products andtechnologies and uncertainties associated with obtaining and enforcing patentrights.

**Resultsof operations – fiscal years**

The followingtables are intended to illustrate a tabular analysis of the consolidated incomestatements for the 2006 and 2005 fiscal years.

The table belowshows contribution of different revenue types to total revenue for fiscal 2006and 2005. All revenue was earned in Australia and is expressed in A$.
| ** **             | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|------------------------|------------|-----------|------------|-----------|------------|
|                   |       |      | ** ** | **A$**    | ** ** |
| Research revenue       |       | 1,676,297 |       | 3,527,312 |       |
| Interest revenue       |       | 241,634   |       | 266,987   |       |
| Patent  reimbursement  |       | 230,223   |       | 104,085   |       |
| Exchange rate  benefit |       | —    |       | —    |       |
| Other revenue          |       | 148,868   |       | 196,902   |       |
| Total revenue          |       | 2,297,022 |       | 4,095,286 |       |

 

The table below showspercentage revenue changes for fiscal 2006 and 2005:
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Revenues from  ordinary activities |       | -43.9    | %          | 13.9     | %          |

 

The table belowshows the proportion of individual expenses items to total operating costs forfiscal 2006 and 2005. 
| ** **                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Research  expenditure                    |       | 56.7     | %          | 44.7     | %          |
| Employee costs                           |       | 21.5     | %          | 25.5     | %          |
| Patent costs                             |       | 4.5      | %          | 4.3      | %          |
| Legal costs                              |       | 0.9      | %          | 1.0      | %          |
| Depreciation                             |       | 2.1      | %          | 2.7      | %          |
| Amortization                             |       | 0.0      | %          | 0.0      | %          |
| Non-current  asset write-down            |       | 0.0      | %          | 0.0      | %          |
| Other expenses  from ordinary activities |       | 14.3     | %          | 21.8     | %          |
|                                     |       |     |       |     |       |
| TOTAL EXPENSES                           |       | 100.0    | %          | 100.0    | %          |

 

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While the level ofresearch and development expenditure has remained relatively constant for thepast three fiscal years, the relativity to other expenses altered significantlyin 2005 reflecting the increase in the Company’s operating base following the mergerwith ChemGenex Therapeutics Inc. in June 2004.

**Comparisonof fiscal year 2006 with fiscal year 2005**

*Revenue*

The Company’s total revenuedecreased by A$1.8 million or 43.9% from A$4.1 million in fiscal 2005 to A$2.3million in fiscal 2006. The decrease primarily reflects the completion ResearchAgreements with Merck Sante Vernalis (R&D) Limited during the year whichhave not been replaced at the same agreements with similar revenue values.

*Costs andexpenses*

The Company’s costs andexpenses are detailed in the consolidated statements of financial performance.

*Research expenditure*

Research expenditure increasedby 55% from A$4.6 million in fiscal 2005 to A$7.2 million in fiscal 2006. Thisreflects increased expenses associated with clinical trials for Ceflatoninincurred during the year.

*Employee costs*

Employee expenses increased byA$0.07 million or 3% to A$2.7 million in fiscal 2006,

*Patent costs*

**Patent costs include regulatorycharges involved in applying for, and maintaining, patent protection togetherwith charges from patent attorneys for specialist advice on these matters.Patent costs are expensed as incurred. Patent costs increased by 29% in fiscal2006 due to different timing of various patent activities.**

*Legal costs*

Legal costs did not alter significantlyfrom fiscal year 2005 to 2006.

*Depreciation*

No substantive change fromprevious year.

*Amortization*

With the introduction of AIFRSAccounting Standards from July 1, 2004 there were no Amortization costsrecognised in fiscal 2006 or 2005.

*Other expenses from ordinaryactivities*

Otherexpenses from ordinary activities decreased by 20% from A$2.3 million in fiscal2005 to A$1.8 million in fiscal 2006. This decrease primarily reflects the “oneoff” costs associated with the initial SEC registration and NASDAQ listingincurred fiscal June 2005.

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*Net loss*

The Company’s net lossincreased by A$4.1 million or 66% from A$6.2 million in fiscal 2005 toA$10.4 million in fiscal 2006 for the reasons described above.

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

The Company’sfuture revenues, liquidity and capital requirements are dependent upon severalfactors, including, but not limited to, its success in generating significantrevenues from partnerships and/or sales; the time and cost required tomanufacture and find partners for its products; the time and cost required forclinically developed products to obtain regulatory approvals; competitivetechnological developments; additional government-imposed regulation andcontrol; and changes in healthcare systems which affect reimbursement, pricingor availability of drugs and market acceptance of drugs and drug technologies.

To date, the Company hasfunded its operations primarily through the payments from pharmaceuticalindustry partners and the issue of equity securities. From July 1, 1996, whenthe Company’s biotechnology activities commenced, it has received approximatelyA$60.5 million (including A$15.7 million in fiscal 2006) from the issue ofequity securities. In addition, during this period, the Company has received A$26.0million from its pharmaceutical partners for depression, diabetes and obesityresearch.

Over the past five yearsthe Company has been able to obtain approximately 80% of the funding requiredfor the combined diabetes, obesity, depression and anxiety contracts researchspending via collaborative research agreements-
| **Period**                | ** ** | **Contract Research Spending** | ** ** | **Collaborative Funding** | ** ** |
|---------------------------|------------|------------------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | ** **                               | ** ** | ** **                     | ** ** |
| ** **                | ** ** | **A$**                                   | ** ** |
| ** **                | ** ** | ** **                               | ** ** | ** **                     | ** ** |
| 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                      |       |
|                      |       |                                     |       |                           |       |
| Fiscal year 2002          |       | 4,100,780                                |       | 3,362,728                      |       |
|                      |       |                                     |       |                           |       |
| Total since July 1,  2001 |       | 20,810,706                               |       | 16,141,227                     |       |

 

Netcash used in operating activities of A$8,485,618 in fiscal 2006 and A$6,944,186in fiscal 2005 was primarily a result of the cash shortfall associated with ourresearch activities (detailed in Item 4B – Business Overview - commercial andresearch and development collaborations) and expenses incurred foradministration infrastructure.

Asof June 30, 2006, the Company had A$15.5 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 2007without 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.

Minimal cash has been provided by, or used for, investing activitiesduring each of the three years in the period ended June 30, 2006.

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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  potential foreign currency exposure from thissituation and utilizes forward exchange contracts when appropriate to managethis risk.

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

Included withinresearch and development expenditure is the following external expenditure onresearch and development projects.

Over the last twoyears total expenditure on research and development has resulted in theconsumption of significant cash resources, totaling A$11,829,352. The principalexpenditures have been as follows:
| Program               | ** ** | **Expenditure  July 2004 -June 2006** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|
| ** **            | ** ** | ** **                                           | ** ** |
| Diabetes and  obesity |       | A$7,164,994                                          |       |
|                  |       |                                                 |       |
| Depression            |       | A$760,000                                            |       |
|                  |       |                                                 |       |
| Cancer                |       | A$3,904,358                                          | -          |

 

Whilst the Company madeno expenditure in cancer research until fiscal 2005, ChemGenex Therapeutics,Inc. had expended US$5,955,000 (A$9,353,000) in cancer related research. Thisexpenditure is reflected in the purchase price paid by the Company forChemGenex Therapeutics, Inc.

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The majorexpenditure during the last two years by specific research undertaking is asfollows:
| **Collaborator**                                              | ** ** | **Agreement and commencement date**                                                                                                          | ** ** | **Commitment at June 30, 2006** | ** ** | **Expiry  date**    | ** ** | **Expenditure July 2004-June 2006** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------|------------|-------------------------------------|
| Deakin University and the International Diabetes  Institute   |       | “Research Agreement – *Psammomys obesus* Diabetes / Obesity Discovery”                                                        |       | A$Nil                           |       | December 31, 2004   |       | A$550,000                           |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
|                                                          |       | Gene discovery research according to instruction  from the Company in the fields of obesity and diabetes. (February 28, 1997)                |       |                            |       |                |       |                                |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
| Deakin University                                             |       | “Research Agreement – Functional Studies”                                                                                     |       | A$Nil                           |       | December 31, 2004   |       | A$520,000                           |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
|                                                          |       | Gene and protein validation research according to  instruction from the Company in the fields of obesity and diabetes. (June 26,  2000)      |       |                            |       |                |       |                                |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
| Deakin University                                             |       | “the Research Agreement for Depression and Anxiety”                                                                                |       | A$Nil                           |       | December 31, 2004   |       | A$190,000                           |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
|                                                          |       | Gene discovery and validation research according to  instruction from the Company in the fields of depression and anxiety. (August16,  2000) |       |                            |       |                |       |                                |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
| Deakin University                                             |       | “Research, License and Commercialization Agreement” (April  21, 2005)                                                              |       | A$1,210,000                     |       | December 31, 2006   |       | A$3,630,000                         |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
| International Diabetes Institute                              |       | “Research Agreement for Human Diabetes / Obesity  Discovery”                                                                       |       | A$131,892                       |       | December 31, 2006   |       | A$1,606,027                         |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
|                                                          |       | Gene discovery and validation research according to  instruction from the Company in the fields of obesity and diabetes. (January  14, 1998) |       |                            |       |                |       |                                |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
| Southwest Foundation for Biomedical Research                  |       | “the Research Agreement”                                                                                                           |       | US$342,876                      |       | December 31, , 2006 |       | A$1,386,066                         |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
|                                                          |       | Human genomics research according to instruction  from the Company. (December 31, 2002)                                                      |       | (A$437,660)                     |       |                |       |                                |
|                                                          |       |                                                                                                                                         |       |                            |       |                |       |                                |
| Various contracts managed by ChemGenex  Pharmaceuticals, Inc. |       | Ongoing preclinical and clinical development of  cancer therapeutics (June 30, 2006 commitments based Premier Research CRO  Agreement)       |       | US$3,607,000  (A$4,859,208)     |       | Trial dependent     |       | A$3,881,390                         |

 

These research anddevelopment expenses have been financed principally through working capitalraised by equity placements and through ongoing funding from commercialcollaborators.  Since its commencement ofbiotechnology activities in 1996 the Company has raised A$60.5 million, ofwhich a net total of A$43.5 million has been invested in direct researchexpenditure by the Company through June 30, 2006.

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See Item 4B. “Businessoverview - Components of the ChemGenex Discovery, Development and ValidationPlatforms” for further information on the current status of the developmentprograms.

See Item 4B. “Businessoverview - Commercial Collaborations” for further information on the status ofresearch and development and commercial collaborations.

See Item 3D. “RiskFactors” for the risks associated with developing and bringing drug candidatesto market.

**Research and Development**

The Company hasthree programs; (i) cancer; (ii) diabetes and obesity; and (iii) depression andanxiety. The cancer program has two molecules in clinical trials and a suite ofearlier-stage molecules in pre-clinical development. The latter two programs arepreclinical, focusing on the discovery and validation of novel gene and proteintargets and screening for small molecules that may have potential as new drugsto treat these diseases. The status of these three programs is discussed below.

*Cancer*

The cancer programhas two therapeutic agents in Phase 2 clinical trials for three indications inthe USA and several molecules in pre-clinical development.

Ceflatonin iscurrently in a Phase 2/3 trial in the U.S.A. and Europe for CML patients whohave the T315I bcr-abl mutation that confers resistance to Gleevec® and Sprycel®. At the M.D. Anderson Cancer Center theCompany is conducting a combination (with Gleevec®) therapy Phase 2 trial in CML patientswho had failed Gleevec®. 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.

A Phase I clinicaltrial of Quinamed was completed successfully in early 2004, and the Companyinitiated a Phase 2 trial in prostate cancer patients in late 2004. The trialis being performed at the Sarah Cannon Cancer Center in Nashville, Tennessee.The most advanced pre-clinical therapeutic is CXS299, which was recentlylicensed from the MD Anderson Cancer Center.

Expendituresassociated with the cancer programs were cumulative costs incurred by ChemGenexTherapeutics, Inc. up to June 21, 2004, the merger date. The following is thebreakdown of the programs costs converted to A$:
|                              | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** | **Fiscal 2002** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|-----------|------------|
| ** **                   | ** ** | **A$000’s**     | ** ** |
| Ceflatonin                   |       | 581                  |       | 1,149                |       | 2,215                |       | 3,945     |       |
| Quinamed                     |       | 1,282                |       | 2,168                |       | 1,913                |       | 5,363     |       |
| Other  pre-clinical projects |       | 15                   |       | 15                   |       | 15                   |       | 45        |       |
| Total                        |       | 1,878                |       | 3,332                |       | 4,143                |       | 9,353     |       |

 

Completion of theproject as pertaining to the three clinical trials for the two therapeuticagents is defined as the completion of the Phase 2 studies. Phase 2 trials areclinical trials conducted on a limited number of patients to,(i) determine the efficacy of the compound for specific indications, (ii) determinedosage tolerance and optimal dosage and (iii) identify possible adverseeffects and safety risks. The trials also seek to establish the most effectiveroute of administration. Trials are conducted on a larger, but still limited numberof carefully monitored patients. Phase 2 trials may last up to two and one-halfyears.

Theregulatory authorities in each country may impose their own requirements andmay refuse to grant, or may require additional data before granting approvaleven though the relevant product has been approved by another authority. TheUS, Australia and European Union countries have very high standards oftechnical appraisal and, consequently, in most cases, a lengthy approvalprocess for pharmaceutical products. The time required to obtain such approvalin particular countries varies, but if obtained generally takes from six monthsto several years, if approval is received at all, from the date of application,depending upon the degree of control exercised by the

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regulatoryauthority, the duration of its review procedures, and the nature of theproduct. The trend in recent years has been towards stricter regulation andhigher 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 Goods Administration,and in Europe, the European Committee for Proprietary Medicinal Productsprovides a mechanism for European Union-member states to exchange informationon all aspects of product licensing and assesses license applications submittedunder two different procedures (the multistate and the high-tech concentrationprocedures).

The Company haslaunched an international Phase 2/3 study in CML patients with the T315Ibcr-abl point mutation, which confers resistance to tyrosine kinase inhibitortherapy. The first patients were dosed in September 2006, and patients havecommenced enrollment under FDA approved protocols in  Q3, 2007. The Company was awarded Fast Trackstatus from the FDA for this trail on November 15, 2006. The Fast Trackdesignation will enable the Company to file a New Drug Application  (“NDA”) on a rolling basis as data becomes available. This permits the FDA to reviewthe filing as it is received, rather than waiting fir an entire document priorto commencing the review process.

The Company has anadditional Phase 2/3 study in CML patients who have failed both Gleevec andSprycel. It is anticipated that the first patients will be enrolled in Q1,2007.

Ceflatonincommenced in mid 2005 a Phase 2 clinical trial in combination with Gleevec totreat CML patients, who are Gleevec non responders, at the MD Anderson CancerCenter in Houston, Texas. This trial has been superceded by two internationalPhase 2/3 trials described above.

Ceflatonin iscurrently in a Phase 2 clinical trial to treat MDS patients at the MD AndersonCancer Center in Houston, Texas. To date the study has completed treatments onnine patients, and approximately eleven more patients will be treated tocomplete the Phase 2 trial. Expected completion of this trial is during thefirst half of 2007.

A Phase 2 clinicaltrial of Quinamed in prostate cancer patients commenced in 2004. This trial wasexpanded to include ovarian and breast cancer patients in September 2005, andhas completed enrollment of 48 patients. The trial is being performed at theSarah Cannon Cancer Center in Nashville, Tennessee.

Due to the highlevel of funds required to support clinical trials the Company has decided toconcentrate its activities on the trial involving Ceflatinon on CML patientswith the T315I mutation, as this has been deemed to provide the best prospectsfor an early product approval at this time.

During thesestudies, the Company may seek to license the compounds to a pharmaceuticalindustry partner who would support appropriate registration-directed trials.

Actual andestimated 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** | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** |
|------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                   | ** ** | **(Estimated)**      | ** ** | **(Estimated)**      | ** ** | **(Actual)**         | ** ** | **(Actual)**         | ** ** |
| ** **                   | ** ** | **A$000’s**     | ** ** |
| Ceflatonin                   |       | 5,915                |       | 5,949                |       | 2,002                |       | 349                  |       |
| Quinamed                     |       | 157                  |       | 230                  |       | 111                  |       | 110                  |       |
| Other  pre-clinical projects |       | 19                   |       | 14                   |       | 27                   |       | 0                    |       |
| Total                        |       | 6,091                |       | 6,193                |       | 2,140                |       | 459                  |       |

 

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None of our productcandidates have been approved for commercialization in the U.S. or elsewhere.We, or any of our collaborators, may not be able to conduct clinical testing orobtain the necessary approvals from the FDA or other regulatory authorities forsome products. Failure by us, or our collaborators, to obtain requiredgovernmental approvals will delay or preclude our collaborators or us frommarketing therapeutics or diagnostic products developed with us or limit thecommercial use of such products and could have a material adverse effect on ourbusiness, financial condition and results of operations.

*Diabetesand Obesity*

The current statusof the diabetes and obesity program is that it is an ongoing discovery andvalidation program. That is, proprietary and non-proprietary technologies areemployed to discover novel genes and proteins associated with the diseases, andsmall molecules screening is undertaken to identify potential therapeuticagents. The Company has discovered and protected, by patent application, morethan 50 novel targets in these diseases.

Whilst the nuancesof discovery research make accurate predictions difficult there are severaldiscoveries that are at a stage that, based on the Company’s prior experience,would be ready to license to a partner to fund further research by mid 2007.The Company is under no obligation to continue with diabetes and obesityresearch, although this Program is supported by the Board and Management as onethat could lead to material net cash inflows for the Company as royaltyrevenue. There are many risks involved in the progression of discovery programsto commercially released therapeutics; risks include the inability toeffectively drug the target, undesirable complications, clinical trial resultsand competitive position of the market at the proposed time of release.Industry averages suggest that the probability of a validated target reachingthe market are less than two percent, and the time taken for this progressionvaries from seven to 12 years.

*Depressionand Anxiety*

The current statusof the depression and anxiety program is that it is an ongoing discovery andvalidation program. That is, proprietary and non-proprietary technologies areemployed to discover novel genes and proteins associated with the diseases, anda suite of biological validation technologies are used to confirm the potentialof the discoveries as targets whose activities might usefully be modified bytherapeutic agents. The Company has discovered and protected by patentapplication ten novel targets in these diseases.

As with theabove-described diabetes and obesity project the Company is under no obligationto continue with this research, although this Program is supported by the Boardand Management as one that could lead to material net cash inflows for theCompany. There are many risks involved in the progression of discovery programsto commercially released therapeutics; risks include the inability toeffectively drug the target, undesirable complications, clinical trial results andcompetitive position of the market at the proposed time of release. Industryaverages suggest that the probability of a validated target reaching the marketare less than two percent, and the time taken for this progression varies fromseven to 12 years.

### **D.            Trend information**

The Company is adevelopment stage company and it is difficult to predict with any degree ofaccuracy the outcome of the Company’s research and development efforts.  The following are developments that theCompany considers a possible progression in the near term in its business:

·                  Phase2 clinical trials for Quinamed® and Ceflatonin®, Phase 2/3 clinical trials forCeflatonin®  and possible partnering ofthese lead therapeutics with a pharmaceutical or biotechnology partner;

·                  Progressionof targets from the diabetes and obesity target discovery program topreclinical development;

·                  Ongoingdevelopment of the depression and anxiety target discovery program; and

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·                  Partneringof the novel satiation target for either therapeutic or over the counterdevelopment and ongoing development of that program.

For additionalinformation on the current status of the Company’s product development andresearch programs, see above Item 4B, “Business overview - Commercial andResearch and Development Collaborations” and Item 5C, “Research and ProductDevelopment Programs.” The Company is not aware of any changes bearing upon itsfinancial condition since the date of the financial statements included in thisAnnual Report.

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

The Company has nooff-balance sheet arrangements that have or are reasonably likely to havecurrent or future effect on the Company’s financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that are material to investors.

### **F.             Tabular Disclosure of ContractualObligations**

The table belowshows the contractual obligations and commercial commitments as at June 30,2006:
|                                      | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| **In A$’s**                | ** ** | **Total**  | ** ** | **Less than 1 year**       | ** ** | **1-3 years** | ** ** | **After 3 years** | ** ** |
| Operating leases(a)                  |       | 39,606     |       | 39,606                                    |       | — |   | — |   |
| Research  expenditure commitments(b) |       | 6,638,850  |       | 4,064,426                                 |       | 2,574,424 |   | — |   |
|                                 |       |       |       |                                      |       |   |   |   |   |
| Total contractual cash  obligations  |       | 6,678,456  |       | 4,104,032                                 |       | 2,574,424 |   | — |   |

----

(a)      As at June 30, 2006, thecompany leased office premises from Deakin University on a monthly tenancybasis at $551 per month. This arrangement was replaced by a three year leasecommitment at $6,704 per annum commencing on November 1, 2006.

(b)     Research expenditurecommitments include fees payable under the major research and developmentprograms discussed in Item 5C. “Research and Product Development Programs” aswell as fees payable to scientific consultants and advisors to the Company.

### **G.            Assets Acquired in a BusinessCombination to be used in Research & Development Activities**

In June 2004 ChemGenex Pharmaceuticals Limited (then AGT BiosciencesLimited) acquired all of the shares in ChemGenex Therapeutics Inc. for a totalpurchase price, including direct acquisition costs, of approximately A$17.1million. The fair value of net tangible assets amounted to approximately A$0.1million.

The remaining value received from the acquisition relates primarily tothe relevant patents for the anti-cancer compounds Ceflatonin and Quinamed heldby ChemGenex Therapeutics Inc. at the time of the acquisition, and the inprocess research and 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 European hospitals and the M.D. Anderson Cancer Center in Houston in 2006.

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Quinamed is a synthetic small molecule with established anti-canceractivity in humans. Quinamed affects the growth of a number of tumor types;however, researchers have also noted some unpredictable side effects.Researchers have been working on treating patients with a precise and personaldose that maximizes Quinamed’s clinical effect while minimizing its sideeffects.

The development history of these compounds prior to the acquisition isas follows-

(a)          NCI in the USA began funding early researchrelating to the two projects in the early 1980’s.

(b)         In early 1999 management of ChemGenex TherapeuticsInc. began work on both research and development projects, continuing the drugdevelopment phase from the initial NCI development work.

(c)          From 2000 ChemGenex Therapeutics Inc. continuedchemical development, and by the business combination date of June 30, 2004approximately A$3.9 million (or 20%) of the total expected research anddevelopment program costs of A$19.7 million had been spent on the Ceflatoninproject and approximately A$5.3 million (or 28%) of the total program costs ofA$19.1 million had been spent on the Quinamed project.

The Company has developed discounted cash flow models for the compoundsbased on the following assumptions-

·                  Projected market share for the compounds based onthe forecast market share for each type of cancer

·                  Projected cash flows based on patent expiry datesof 2022 for Ceflatonin and 2024 for Quinamed and allowed for eroded cash flowsto 2026 for Ceflatonin and 2028 for Quinamed as generic drug providers takeadvantage of the patents expiries

·                  Research and development expenses projected overthe forecast period by project, including an analysis of expenses incurred toJune 2005 and remaining expenses expected until proposed approval dates

·                  Projected capital expenditure, depreciation, taxand working capital, and

·                  A risk-adjusted discount rate which the Companybelieves is toward the middle of the range adopted by “second stage” or “expansion”companies and slightly above the top end of the range of discount rates forBridge/Initial Public Offering assessments usually undertaken by venturecapital investors.

The modelprojected that the Ceflatonin compound would commence producing net positiveannual cash flows in 2008 and would continue to generate net positive annualcash flows for the Company to 2026. The model projected that the Quinamedcompound would commence producing net positive annual cash flows in 2009 andwould continue to generate net positive annual cash flows until 2028. Naturallyany delays in taking these compounds to the market would delay the achievementof positive cash flows; however, given the overall uncertainty involved withgetting such products to the market, it is impossible to accurately predict theconsequences of any unknown delays.

From these modelsthe Company estimated the value of Ceflatonin at A$14.8 million and Quinamed atA$13.0 million. Based on these valuations, the Company concluded that theentire excess purchase price of A$17.0 million can be considered as in-processresearch and development, which is classified as goodwill under AIFRS.

Subsequent to theacquisition, there have been no significant developments related to the currentstatus of the acquired in-process research and development that would result inmaterial changes to the assumptions.

Failure to achieve theexpected levels of revenue and net income from a product or products based onthis acquired research and development will negatively impact the return oninvestment expected at the time that the purchase was completed and may resultin impairment charges to the goodwill of A$17.0 million under AIFRS.

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**ITEM 6.                  DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES**

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

Certaininformation concerning the current directors of the Company is set forth below.Non-executive directors are not full-time employees of the Company. Thereexists no arrangement or understanding with major shareholders, customers,suppliers or others pursuant to which any person referred to below was selectedas a director or member of senior management.

No director isrelated to any other. Biographical information with respect to the directors inoffice at June 30, 2006 is as follows:

**Mr Brett Heading****                                       BCom LLB(Hons) ASIA (Non-executive Chairman)**

Mr Heading is anexperienced corporate lawyer, a partner of McCullough Robertson for 20years.  He specialises in capital raisings, mergers and acquisitions andboard advice. He has a wide ranging client base including emerging companies inthe biotechnology and agribusiness sectors. His government appointments includemembership of the Takeovers Panel, and the Board of Taxation. During the past 3years Mr Heading served as a director of the following ASX listed companies -Peplin Limited (from August 2000 to June 2004), Australian Cancer TechnologyLimited (from November 2004 to April 2005) and Village Life Limited (fromOctober 2003 to April 2005). Age 50.

**Dr GregCollier****                                                B.Sc(Hons)PhD (Chief Executive Officer and Managing Director)**

Dr. Collier is oneof Australia’s leading biotechnology executives, and is credited with leadingthe transformation of the former Australian genomics company Autogen into theintegrated international biopharmaceutical company ChemGenex Pharmaceuticals.As CEO of the company, Dr. Collier has overseen the partnering of majorresearch programs, the $14 million acquisition of a private US biotechnologycompany and listing of the company’s securities on the NASDAQ exchange. Dr.Collier is recognised internationally as a leader who has guided his companyalong a value-creating path towards marketed products, and is a regular invitedspeaker at international research and biotechnology conferences. Age 48.

**Mr KevinDart****                                                         (Non-executiveDirector)**

Mr Dart hasextensive experience in bringing new technologies to the market over the last11 years and has been involved in listed and unlisted public companies over thepast 17 years. Mr Dart has extensive experience in mergers and acquisitions,takeovers, capital raisings and cross-border transactions in the USA, HongKong, United Kingdom and Japan. He is Chief Executive/Managing Director ofCharter Pacific Corporation Limited (from February 1989), a director ofMonteray Group Limited (from August 2005). Mr Dart is a member of the company’sRemuneration Committee. Age 55.

**Mr RogerByrne****                                             LLB.(Non-executive Director)**

Mr Byrne is aformer partner of Clayton Utz with extensive experience as a corporate lawyer.Mr Byrne engaged in mergers and acquisitions, public capital raisings, privateequity raisings and corporate structuring. He consults to several clients oncommercialisation and corporate issues and was a director of the ASX listedMonteray Group Limited (from April 2004 to August 2005).  Mr Byrne servedas a member of the company’s Audit Committee until October 2006. Age 44.

**Mr ElmarSchnee****                                     B.ComM.Mktg (Non-executive Director)**

Mr Schnee isGeneral Partner and Member of the Executive Board of Merck KGaA and a directorof a number of Merck KGaA subsidiaries. Mr Schnee has more than 20 yearsexperience in the international pharmaceutical industry, with specificexpertise in business development and marketing. Mr Schnee has a depth ofunderstanding in product development and launch that is expectedto enhance the company’s position as it progresses with thecommercialisation of its core technologies through alliances and in-housedevelopment. Age 47.

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**Dr Dennis Brown                B.ScM.A PhD (Executive Director)**

Dr. Brown has over25 years experience in the biotechnology and biopharmaceutical industries withspecific experience in cancer research and product development. Dr. Brownreceived his PhD. degree from New York University, and held academic positionsat Stanford University and Harvard University Medical School prior to beginninghis industry career. Dr. Brown was a co-founder of Matrix Pharmaceutical Inc.and was the scientific founder of ChemGenex Therapeutics Inc. in 1999, shapingand leading the company’s clinical and early stage research programs. Age 57.

**Mr Patrick Burns               BALLB (Hons) (Non-executive Director)**

Mr Burns hasextensive experience as an executive and director in technology and venturecapital organisations.  He is a directorof firmView Inc. (from December 2003), Euclid Systems Corporation (from March1998) and the ASX listed Progen Industries Limited (from March 1999).  Prior to this Mr Burns had over 25 yearsexperience as a senior executive in the venture capital industry afterpractising law in New York with Milbank, Tweed, Hadley & McCloy.  Mr Burns is Chairman of the company’s AuditCommittee and is also a member of the Remuneration Committee.  Age 69.

**Mr Peter Bradfield             LLB (Non-executive Director)**

Mr Bradfield is anexperienced executive and director of Australian and internationalcompanies.  He is a former CEO of EnergyResources of Australia Limited and former Managing Director of the EldersMining Group of companies.  Mr Bradfield alsohas substantial experience in the management of high technology platforms as aformer director of the CSIRO and Cooperative Research Centres.  Mr Bradfield currently provides strategicmarketing and development advice to a range of Australian and internationalclients and served as a director for the ASX listed Ticor Limited (from June1998 to May 2004).  Mr Bradfield isChairman of the company’s Remuneration Committee and is also a member of theAudit Committee. Age 64.

**Mr Steven Cole                    (Alternateto Mr Kevin Dart, appointed May 5, 2006)**

Mr Cole has abackground in banking and finance and has over 20 years experience as CompanySecretary and Chief Financial Officer of listed and unlisted companies. Duringthis time he has been involved in mergers and acquisitions, takeovers, companyrestructures, management buy-outs and cross-border transactions in a wide rangeof industry sectors. Mr Cole has extensive experience establishing new publiccompanies, undertaking initial public offerings, public capital raisings andlistings on the Australian Stock Exchange, and has been associated with theNASDAQ listing of Australian companies. Age 53

### **B.            Compensation**

The aggregateamount of compensation paid to all directors of the Company as a group by theCompany and its subsidiaries for services in all capacities during fiscal 2006was A$1,345,214 including A$273,774 of options. This amount includes directors’ fees, salaries and bonus payments, butexcludes amounts 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 2006 was A$41,098  The Company’s remuneration policy fordirectors and executives is to:

·                  haveregard to the directors’ experience and the nature and complexity of their workand due regard to directors’ remuneration in comparable companies in order topay a competitive salary that attracts and retains management of the highestquality;

·                  linkindividual remuneration packages to the Company’s long-term performance throughthe award of share options and incentive schemes; and

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

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

·                  basicsalary;

·                  benefitsin kind;

·                  shareoptions and incentives; and

·                  pensionarrangements.

The remunerationof each of the directors and senior management who served during fiscal 2006 isset out below. For details regarding share options held by directors and seniormanagement, see Item 6E. Share Ownership and Options.

Remunerationpackages, which consist of base salary, fringe benefits, incentive schemes(including performance-related bonuses), superannuation, and entitlements uponretirement or termination, are reviewed with due regard to performance andother relevant factors.  The followingtable discloses the remuneration of the directors and senior management of theCompany:
| ** **                   | ** ** | ** **      | ** ** | ** ** | ** ** | **Post employment** | ** ** | **Equity**  | ** ** | **Other**    | ** ** | ** **    | ** ** |
|------------------------------|------------|-----------------|------------|------------|------------|--------------------------|------------|-------------|------------|--------------|------------|---------------|------------|
| **Name**                     | ** ** | **Salary/fees** | ** ** | **Bonus**  | ** ** | **Superannuation**       | ** ** | **Options** | ** ** | **Benefits** | ** ** | **Total**     | ** ** |
| **Specified Directors** | ** ** | **A$**          | ** ** | **A$**     | ** ** | **A$**                   | ** ** | **A$**      | ** ** | **A$**       | ** ** | **A$**        | ** ** |
| Brett Heading                |       | 70,532          |       | —     |       | —                   |       | —      |       | —       |       | 70,532        |       |
| Dr. Gregory  Collier         |       | 379,097         |       | —     |       | 27,973                   |       | 273,774     |       | 20,628       |       | 701,472       |       |
| Kevin Dart                   |       | 50,000          |       | —     |       | 4,500                    |       | —      |       | —       |       | 54,500        |       |
| Roger Byrne                  |       | 50,000          |       | —     |       | 4,500                    |       | —      |       | —       |       | 54,500        |       |
| Elmar Schnee                 |       | 54.500          |       | —     |       | —                   |       | —      |       | —       |       | 54,500        |       |
| Dr. Dennis Brown             |       | 272,720         |       | —     |       | —                   |       | —      |       | 36,817       |       | 309,537       |       |
| Patrick Burns                |       | 50,215          |       | —     |       | —                   |       | —      |       | —       |       | 50,215        |       |
| Peter Bradfield              |       | 45,833          |       | —     |       | 4,125                    |       | —      |       | —       |       | 49,958        |       |
| **Total  Remuneration:**     |       |            |       |       |       |                     |       |        |       |         |       |          |       |
| **Specified  directors**     | ** ** | **972,897**     | ** ** | **—** | ** ** | **41,098**               | ** ** | **273,774** | ** ** | **57,445**   | ** ** | **1,345,214** | ** ** |
|                         |       |            |       |       |       |                     |       |        |       |         |       |          |       |
| **Specified  Executives(a)** |       |            |       |       |       |                     |       |        |       |         |       |          |       |
| Harry Pedersen               |       | 254,302         |       | —     |       | —                   |       | —      |       | 26,702       |       | 281,004       |       |
| Dr. James  Campbell          |       | 160,550         |       | —     |       | 14,449                   |       | 69,769      |       |         |       | 244,768       |       |
| Tina Herbert                 |       | 202,966         |       | —     |       | —                   |       | —      |       | 13,407       |       | 216,373       |       |
| Shawnya Michaels             |       | 124,078         |       | —     |       | —                   |       | —      |       | 24,442       |       | 148,520       |       |
| Eric Merrigan                |       | 120,000         |       | —     |       | 10,800                   |       | 26,163      |       | —       |       | 156,963       |       |
| **Total  Remuneration:**     | ** ** | ** **      | ** ** | ** ** | ** ** | ** **               | ** ** | ** **  | ** ** | ** **   | ** ** | ** **    | ** ** |
| **Specified executives**     | ** ** | **861,896**     | ** ** | **—** | ** ** | **25,249**               | ** ** | **95,932**  | ** ** | **64,551**   | ** ** | **1,047,628** | ** ** |

 

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(a)  Specifiedexecutives are the five highest paid non-consultant executives of the Companyother than the Board of Directors.

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### **C.            Board practices**

All executiveshold service contracts with the Company or one of its subsidiaries. Servicecontracts for Australian-based executives are for fixed terms, while those ofU.S.-based staff are for an indefinite term. All service contracts are approvedby the Board of Directors. The Company’s purpose in entering into servicecontracts with executives is to enable the recruitment of high qualityexecutives and to obtain protection from their sudden departure to competitorcompanies. Additionally, service contracts optimize protection for the Company’sintellectual property rights and other commercially sensitive information.

The details of thesenior management executives’ contracts are summarized below:
| **Executive**          | ** ** | **Date of  Contract**                     | ** ** | **Notice  period for termination** |
|------------------------|------------|-------------------------------------------|------------|------------------------------------|
| Dr. Gregory R. Collier |       | July 1, 2003 – June 30, 2008         |       | Six months                         |
| Dr. Dennis M.  Brown   |       | July 1, 2006 to June 30, 2007             |       | Four months                        |
| Dr. James A. Campbell  |       | September 1, 2006 –August 31, 2007   |       | Three months                       |
| Eric P. Merrigan       |       | October 1, 2006 – September 30, 2007 |       | Three months                       |
| Shawnya Michaels       |       | July 1, 2006 to June 30, 2007             |       | One month                          |
| Tina Herbert           |       | July 1, 2006 to June 30, 2007             |       | One month                          |
| Dr. Kenneth R. Walder  |       | December 20, 2002 – ongoing          |       | Thirty days                        |
| Dr. John  Blangero     |       | September 4, 2001 – ongoing          |       | Thirty days                        |

 

The terms andconditions of the appointment of non-executive directors are set out in aformal letter of appointment which deals with the following matters:  duration of appointment (subject to approvalof shareholders), remuneration, expectations concerning preparation andattendance at Board meetings, conflict resolution and the right to seekindependent legal and professional advice (subject to the prior approval of theChairman).  The Company is committed topracticing good corporate governance of its affairs as part of its managementof relationships with its shareholders and other stakeholders. The Companyseeks to uphold, and to report on compliance with, best practice in corporategovernance. During the fiscal year ended June 30, 2006, and at present, theCompany paid a premium in respect of a contract insuring the directors of theCompany, the Company Secretary, and all executive officers of the Company andof any affiliate against a liability incurred as such by a director, Secretaryor executive officer to the extent permitted by the Australian Corporations Act2001, including

(a)           a willful breach of duty; or

(b)           a contravention of sections 182 or183 of the Corporations Act 2001,

as permitted bysection 199B of the Corporations Act 2001.

The contract ofinsurance prohibits disclosure of the nature of the liability and the amount ofthe premium.

**The Board**

The Board of theCompany is responsible for the Company’s system of corporate governance.  This includes responsibility for the approvalof the annual and half-year financial report, the establishment of the long-termgoals of 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-executive directors is to ensure that independentjudgment is brought to Board deliberations and decisions.  The non-executive directors possess a widerange of skills and experience, relevant to the development of the Company,which complement those of the Chairman. It is the Company’s policy that the Board should comprise a majority ofnon-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 were as follows:
|                                   | ** ** | **Directors’ Meetings** | ** ** | **Audit Committee  Meetings** | ** ** | **Remuneration Committee  Meetings** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|-------------------------------------------|------------|
| **Number  of meetings held:**     | ** ** | **10**                            | ** ** | **7**                              | ** ** | **2**                                     | ** ** |
| **Number  of meetings attended:** |       |                              |       |                               |       |                                      |       |
| Brett Heading                     |       | 10                                |       | —                             |       | —                                    |       |
| Dr. Gregory  Collier              |       | 10                                |       | —                             |       | —                                    |       |
| Kevin Dart*                       |       | 9                                 |       | —                             |       | 2                                         |       |
| Roger Byrne                       |       | 10                                |       | 7                                  |       | —                                    |       |
| Elmar Schnee                      |       | 3                                 |       | —                             |       | —                                    |       |
| Dr. Dennis Brown                  |       | 9                                 |       | —                             |       | —                                    |       |
| Patrick Burns                     |       | 8                                 |       | 7                                  |       | 2                                         |       |
| Peter Bradfield                   |       | 8                                 |       | 7                                  |       | 2                                         |       |
| Stephen Cole*                     |       | 1                                 |       | —                             |       | —                                    |       |

 

During the yearended June 30, 2006  2 CircularResolutions of Directors were also passed, pursuant to S248A of theCorporations Act 2001

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* Mr. S.A. Colewas appointed as Alternate Director for Mr. K.J. Dart on May 5, 2006 andparticipated in the meeting which Mr. Dart was unable to attend.

The Board ofDirectors of the Company is responsible for the corporate governance of theCompany.  The Board guides and monitorsthe business and affairs of the Company on behalf of the shareholders by whomthey are elected and to whom they are accountable. In 2004 the Australian StockExchange Corporate Governance Council’s (the Council’s) “Principles of GoodCorporate Governance and Best Practice Recommendations” (the Recommendations)were introduced.  ChemGenexPharmaceuticals Limited’s Corporate Governance Statement is now structured withreference to the Council’s principles and recommendations, which are asfollows:

Principle 1.             Lay solid foundations formanagement and oversight

Principle 2.             Structure the board to add value

Principle 3.             Promote ethical and responsibledecision making

Principle 4.             Safeguard integrity in financialreporting

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 ofstakeholders

The Company’scorporate governance practices were in place throughout the year ended June 30,2005 and were fully compliant with the Council’s best practice recommendations.For further information on corporate governance policies adopted by ChemGenexPharmaceuticals Limited, refer to the Company’s website: www.chemgenex.com.

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**Boardcommittees**

In accordance withbest practice, the Company has established an Audit Committee with writtenterms of reference that deal with its authorities and duties.  The terms of reference of the Audit Committeehave been reviewed during the year and updated to ensure compliance withcurrent best practice.

**Auditcommittee**

The Board hasestablished an audit committee, which operates under a charter approved by theBoard.  It is the Board’s responsibilityto ensure that an effective internal control framework exists within theentity.  This includes internal controlsto deal with both the effectiveness and efficiency of significant businessprocesses, the safeguarding of assets, the maintenance of proper accountingrecords, and the reliability of financial information as well as non-financialconsiderations such as the benchmarking of operational key performanceindicators.  The Board has delegated theresponsibility for the establishment and maintenance of a framework of internalcontrol and ethical standards for the management of the Company to the auditcommittee.

The committee alsoprovides the Board with additional assurance regarding the reliability offinancial information for inclusion in the financial reports.  All members of the audit committee are non-executivedirectors.

The members of theaudit committee during the year ended June 30, 2006 were: Patrick O Burns(Chairman), Roger V. Byrne and Peter J. Bradfield.

*Qualificationsof audit committee members*

Patrick O. Burnshas over 40 years experience as a corporate lawyer, senior executive anddirector of public and private companies.

Roger V. Byrne hasover 20 years experience as a corporate lawyer who retired as a partner fromClayton Utz in 2002. Mr. Byrne engaged in mergers and acquisitions, publiccapital raisings, private equity raisings and corporate structuring.

Peter J. Bradfieldhas over 30 years experience as a senior executive and director of public andprivate companies.

The AuditCommittee held seven meetings during fiscal year 2005.

**Remunerationcommittee**

On June 8, 2006the Board established a Remuneration Committee to review all compensationarrangements for the directors, the chief executive officer and the executive team,under the direction of the Board, and to make recommendation to the Board onthese matters.

The members of theremuneration committee are: Peter J. Bradfield (Chairman), Kevin .J. Dart andPatrick .O. Burns

*Qualificationsof remuneration committee members*

P.J. Bradfield hasover 30 years experience as a senior executive and director of public andprivate companies.

K.J. Dart has over25 years experience as a senior executive and director of public and privatecompanies.

P.O. Burns hasover 40 years experience as a corporate lawyer, senior executive and directorof public and private companies.

The RemunerationCommittee held two meetings during fiscal year 2006.

It is the Company’sobjective to provide maximum stakeholder benefit from the retention of a highquality board and executive team by remunerating directors and key executivesfairly and appropriately with reference to relevant employment marketconditions. To assist in achieving this objective, the Board links the natureand amount of executive directors’ and officers’ emoluments to the Company’sfinancial and operational performance. The expected outcomes of theremuneration structure are:

·                  retentionand motivation of key executives;

·                  attractionof quality management to the company; and

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

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The Board assesses theappropriateness of the nature and amount of emoluments of such officers on aperiodic basis by reference to relevant employment market conditions with theoverall objective of ensuring maximum stakeholder benefit from the retention ofa high quality board and executive team. 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 isintended that the manner of payment chosen will be optimal for the recipientwithout creating undue cost for the Company. Further details on the remunerationof directors and executives are also provided in Note 20 to the Company’saudited consolidated financial statements included elsewhere in this AnnualReport.

All seniorexecutives have the opportunity to qualify for participation in the SeniorExecutive Share Option Plan which currently provides incentives where specifiedcriteria are met including criteria relating to profitability, cash flow, shareprice growth and environmental performance. Details regarding the issue of share options under this plan areprovided in Note 15 to the Company’s audited consolidated financial statementsincluded elsewhere in this Annual Report.

In relation to thepayment of bonuses, options and other incentive payments, discretion isexercised by the Board, having regard to the overall performance of the Companyand the performance of the individual during the period. There is no scheme toprovide retirement benefits, other than statutory superannuation, to non-executivedirectors.

**ScientificAdvisory Board**

The Company’sScientific Advisory Board identifies new research opportunities and monitorsexisting programs.  Its members are asfollows:

Professor PaulZimmet, AO, MD, FRACP, FACE, is the Chairman of the Company’s ScientificAdvisory Board. Professor Zimmet is a leading scientist in the fields of diabetesand obesity. He is Professor/Director of the International Diabetes Institute,Professor of Diabetes at the Monash University, Honorary Professor at DeakinUniversity and Professor in the Graduate School of Public Health at theUniversity 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 at the Southwest Foundationfor Biochemical Research in San Antonio, U.S. He is the first researcher fromthe Southwest Foundation to be selected for a “Method to Extend Research inTime” (MERIT) award from the U.S. National Institutes of Health. He is aleading international statistical geneticist. Dr. Blangero is also on themanagement team of the Company where he serves as the Chief Scientific Directorof Human Genomics.  He was responsiblefor developing new statistical software to increase greatly the amount of datathat could be handled in genetic studies of families. Dr. Blangero leads anumber of government-funded research projects in the U.S. related to thegenetics of common complex diseases.

Professor IanGust, AO, MD, FRCPA, FRACP, FTS, was the founding Director of the MacFarlane BurnetCentre for Medical Research and subsequently was Research and DevelopmentDirector for CSL Limited (“CSL”).  Duringthe ensuing 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 adviserto Bill and Melinda Gates Children’s Vaccine Program, the International AIDSVaccine Initiative and the World Health Organization.  He is a non-executive director of Promics PtyLtd, Biota Holdings Limited and Biota, Inc..

Professor DavidJames B.Sc (Hons) PhD is the Director of the Diabetes and Obesity ResearchProgram, Garvan Institute of Medical Research in Sydney. Professor James wasthe discoverer of the GLUT4 glucose transporter molecule and is recognized asan international leader in the field of diabetes molecular cell biology.Professor James has a distinguished academic research career, was the recipientof a Wellcome Trust Senior Research Fellowship, and was the recipient in 1999of the Glaxo Wellcome Australia Medal.

Professor HagopKantarjian MD is Professor of Medicine and Chairman of the Department ofLeukemia at M.D. Anderson Cancer Center in Houston, Texas. Professor Kantarjianspecializes in leukemia and holds an interest in creating new treatmentapproaches for these diseases. Professor Kantarjian has authored andcontributed to over 560 medical publications, articles and abstracts and, forhis accomplishments, has received awards, including a

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Leukemia Societyof America Scholarship from 1989-1994 and a Leukemia Society of America SpecialFellow Scholarship from 1982-1983.

Dr. John HughesB.Sc (Hons) PhD FIPAA is a leading Australian biotechnology patent attorney anda partner with Davies Collison Cave with more than 13 years experience inpatent law. Dr. Hughes is involved in the drafting and prosecution of patentapplications directed to all facets of biotechnology, including inventionsrelating to molecular biotechnology, pharmacology, transgenic plants andanimals as well as general chemistry and microbiology. Dr. Hughes has asubstantial U.S. practice at the drafting and prosecution levels of patentfiling. Dr. Hughes has post-doctoral experience at Yale University andGenentech, Inc., mainly in microbial genetics and molecular biology and trainedas a patent attorney in New York before returning to Australia.

***Compliancewith NASDAQ Rules***

NASDAQ listing rulesrequire that the Company disclose the home country practices that it follows inlieu of compliance with NASDAQ corporate governance rules.  The following describes the home countrypractices and the related NASDAQ rule:

Majority of IndependentDirectors:  The Company follows homecountry practice rather than NASDAQ’s requirement in Marketplace Rule4350(c)(1) that the majority of the Board of each issuer be comprised ofindependent directors as defined 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.  TheASX does not have a requirement that each issuer’s Board be comprised of amajority of independent directors. Furthermore, no law, rule or regulation of the Australian Securities andInvestments Commission (“ASIC”), the public authority which exercisessecurities law jurisdiction over the Company, has such a requirement nor doesthe Corporations Act (the “Act”), which is the applicable corporate lawlegislation.

Compensation ofOfficers:  The Company follows homecountry practice rather than NASDAQ’s requirement in Marketplace Rule4350(c)(3) that chief executive compensation be determined or recommended tothe Board by the majority of independent directors of a compensation committeeof independent directors.  Similarly,compensation of other officers is not determined or recommended to the Board bya majority of the independent directors or a compensation committee comprisedsolely of independent directors.  Thesedecisions are made by the Company’s Board as a whole, and it is not comprisedof a majority of independent directors; the Company has no remunerationcommittee.  The ASX does not have arequirement that each listed issuer have a remuneration committee or otherwisefollow the procedures embodied in NASDAQ’s Marketplace Rule.  Furthermore, no law, rule or regulation ofthe ASIC has such a requirement nor does the applicable corporate lawlegislation.  Such home country practicesare not prohibited by the laws of Australia.

Nomination:  The Company follows home country practicerather than NASDAQ’s requirement in Marketplace Rule 4350(c)(4) that directornominees be selected or recommended by a majority of the independent directorsor by a nominations committee comprised of independent directors.  These decisions are made by the Company’sBoard as a whole, and it is not comprised of a majority of independentdirectors; the Company has no nominations committee.  The ASX does not have a requirement that eachlisted issuer have a nominations committee or otherwise follow the proceduresembodied in NASDAQ’s Marketplace Rule. Furthermore, no law, rule or regulation of the ASIC has such arequirement nor does the applicable corporate law legislation.  Accordingly, selections or recommendations ofdirector nominees by a board of directors that is not comprised of a majorityof directors that are not independent is not prohibited by the laws ofAustralia.

Quorum:  The Company follows home country practicerather than NASDAQ’s requirement in Marketplace Rule 4350(f) that each issuerprovide for a quorum of at least 331/3 percent of the outstanding shares of theissuer’s common stock (voting stock). Pursuant to its Constitution the Company is currently required to have aquorum for a general meeting of two persons holding ordinary shares.  The practice followed by the Company is notprohibited by Australian law.

Pursuant to theSarbanes-Oxley Act of 2002, the Securities and Exchange Commission issued newrules that, among other things, require NASDAQ to impose independencerequirements on each member of the audit committee of a listed company and theNASDAQ also reformulated its corporate governance requirements.  The recently-adopted

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SEC and NASDAQrules apply to the Company as of July 31, 2005. The Company has taken the appropriate steps with respect to itscorporate governance system, including the addition of independent directors toits audit committee, to assure timely compliance with the SEC rules and theamended corporate governance standards of NASDAQ

### **D.            Employees**

As at June 30,2006, the Company employed seven individuals on a full-time basis.

The Companyemploys a number of contract employees in research and development.  During the last fiscal year, the averagenumber of contract employees was 50.

The followingtable summarizes the number of full-time employees employed by the Company,including executive directors, as at the year end of the last three fiscalyears:
|                  | ** ** | **June 30,** | ** ** | ** ** |
|------------------|------------|-------------------|------------|------------|
| **2006**         | ** ** | **2005**          | ** ** | **2004**   |
| **  ** | ** ** | ** **        | ** ** | ** ** |
| 7                |       | 8                 |       | 8          |

 

### **E.             Share ownership and options**

The relevant interest of each director in the share capital of theCompany as notified by the directors to the ASX in accordance with S205G(1) ofthe Corporations Act 2001 at June 30, 2005 is as follows:
|                      | ** ** | **Ordinary shares** | ** ** | **Options over  ordinary shares** | ** ** |
|----------------------|------------|--------------------------|------------|---------------------------------------------|------------|
| Brett Heading        |       | 100,000                  |       | —                                      |       |
| Dr. Gregory  Collier |       | —                   |       | 3,800,000                                   |       |
| Kevin Dart           |       | 28,259,247               |       | 7,399,324                                   |       |
| Roger Byrne          |       | —                   |       | —                                      |       |
| Elmar Schnee         |       | 18,833,750               |       | 4,439,308                                   |       |
| Dr. Dennis Brown     |       | 14,398,297               |       | —                                      |       |
| Patrick Burns        |       | —                   |       | —                                      |       |
| Peter Bradfield      |       | —                   |       | —                                      |       |

 

Employee share optionplan

An employee share optionplan (ESOP) has been established where the Company may, at the discretion ofthe Board, grant options over the ordinary shares of the Company to directors,executives, advisors and support staff of the Company. These options, issuedfor nil consideration, are granted in accordance with performance guidelinesestablished by the directors of the Company. The options cannot be transferred and will not be quoted on theASX.  There are currently one director,one executive and 18 scientific advisors and support staff who hold optionsissued under the ESOP.

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Information withrespect to the number of options granted under the ESOP is as follows:
|                                 | ** ** | **Year to June 30, 2006** | ** ** | **Year to June 30, 2005**            | ** ** |
|---------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                      | ** ** | **Number of options**               | ** ** | **Weighted average  exercise price (A$)** | ** ** | **Number of options** | ** ** | **Weighted average  exercise price (A$)** | ** ** |
| Balance at  beginning of period |       | 1,775,000                                     |       | 0.71                                                     |       | 1,440,000 |   | 0.74 |   |
| -   granted           |       | 544,500                                       |       | 0.54                                                     |       | 360,000 |   | 0.56 |   |
| -   forfeited         |       | (40,000                                       | )          | 0.52                                                     |       | — |   | — |   |
| -   exercised         |       | —                                        |       | —                                                   |       | (25,000 | ) | 0.50 |   |
| Balance at end  of period       |       | 2,279,500                                     |       | 0.67                                                     |       | 1,775,000 |   | 0.71 |   |
| Exercisable at end of  period   |       | 1,664,500                                     |       | 0.53                                                     |       | 1,160,000 |   | 0.52 |   |

 

In addition tooptions granted under the ESOP, 3,300,000 options have been granted to Dr.Gregory Collier after approval by shareholders at General Meetings. Details oftheses options and ESOP options granted to Dr. Gregory Collier are included inNotes 14 and 24 to the Company’s audited consolidated financial statements.

The Company uses the fair value measurementprovisions 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.  Options granted as part of director andexecutive emoluments have been valued using the Black-Scholes option pricingmodel, which takes account of factors including the option exercise price, thecurrent level and volatility of the underlying share price, the risk-freeinterest rate, expected dividends on the underlying share, current market priceof the underlying share and the expected life of the option.  See below for further details.

Fairvalues of options: The fair value of each option is estimated on the date ofgrant using Black-Scholes option pricing model with the following assumptionsused for grants made during the 2006 financial year:
| Option exercise price                  |   | $0.43 and $0.65   |
|----------------------------------------|--------|-------------------|
|                                   |   |              |
| Share price at  date of issue          |   | $0.54 and $0.64   |
|                                   |   |              |
| Dividend yield                         |   | 0%                |
|                                   |   |              |
| Expected  volatility                   |   | 70%               |
|                                   |   |              |
| Risk-free  interest rate at issue date |   | 5.4%              |
|                                   |   |              |
| Life of option                         |   | 4.1 and 4.5 years |

 

The dividend yield reflects the assumption that the current dividendpayout will continue with no anticipated increases. The expected life of theoptions is based on historical data and is not necessarily indicative ofexercise patterns that may occur. The expected volatility reflects theassumption that the historical volatility is indicative of future trends, whichmay also not necessarily be the actual outcome.

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The resulting weighted average fair values per option for those optionsvesting 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                                   |       |
| 310,000                |       | 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                                   |       |

 

Under AIFRS these fair values are recognized as expenses in the financialstatements when the options were granted after 7 November 2002 and vested after1 July 2005.

## **ITEM7.****                                                     MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

### **A.            Major shareholders**

As at November30,, 2006 the Company had knowledge of the following ownership interest (directand beneficial) of 5% or greater in its ordinary shares:
| Shareholder                          | ** ** | **Number of shares held** | ** ** | **% of issued shares** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|
| Charter Pacific  Corporation Limited |       | 28,110,087                               |       | 18.6                                  | %          |
| Merck Santé                     |       | 18,793,750                               |       | 12.4                                  | %          |
| Queensland  Investment Corporation   |       | 15,158,424                               |       | 10.0                                  | %          |
| Dr. Dennis M. Brown                  |       | 14,398,297                               |       | 9.5                                   | %          |

 

Charter PacificCorporation Limited is a publicly listed company with approximately 2,700shareholders as at November 30, 2006. Charter Pacific Corporation Limited is noted as a related party as it isa major shareholder and as Mr. Kevin Dart is a director of ChemGenexPharmaceuticals Limited and a director, and Chief Executive Officer, of CharterPacific Corporation Limited.

Queensland InvestmentCorporation is wholly owned by the Government of the State of Queensland in theCommonwealth of Australia.

At November 30, 2006calculation of major shareholders, the issued share capital of the Company was151,362,786 ordinary shares.  The majorshareholders do not have different voting rights.

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At November 30, 2006, thedirectors of the Company controlled ordinary shares representing approximately40.7% of the Company’s outstanding share capital, as follows:
| Directors        | ** ** | **Number of shares held** | ** ** |
|------------------|------------|------------------------------------------|------------|
|             |       |                                     |       |
| Brett Heading    |       | 100,000                                  |       |
| Kevin Dart       |       | 28,259,247                               |       |
| Elmar Schnee     |       | 18,833,750                               |       |
| Dr. Dennis Brown |       | 14,398,297                               |       |
| **Total**        |       | 61,591,294                               |       |

 
| Specified Executives | ** ** | **Number of shares held** | ** ** |
|---------------------------|------------|------------------------------------------|------------|
|                      |       |                                     |       |
| Harry Pedersen            |       | 1,203,377                                |       |
| Dr. James  Campbell       |       | 5,000                                    |       |
| Tina Herbert              |       | 760,027                                  |       |
| Shawnya Michaels          |       | 760,027                                  |       |
| Eric Merrigan             |       | 50,000                                   |       |
| **Total**                 |       | 2,778,431                                |       |

 

As far as is knownto the Company and subject to the disclosure provided under Item 8B.  “Financial information — Significant Changes”the Company 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. ****                              Relatedparty transactions**

Legal services wereprovided 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$52,237 and A$52,934, during the years ended June 30,2006, and 2005, respectively. During the four months from July to October 2006,the value of legal services provided by McCullough Robertson was $10,600.

Mr. Brett Heading is adirector of two companies that are the joint holders of 5% of the shares ofGlobal Markets Capital Group LLC (“GMCG”) which has provided advisory andconsulting services to the Company. The value of advisory and consultingservices provided by GMCG was A$53,751and A$65,214, during the years ended June30, 2006and 2005, respectively.  Duringthe four months from July to October 2006 the value of services provided byGMCG was $15,990. Mr. Brett Heading has no beneficial interest in the twocompanies that are 5% shareholders in GMCG.

As an individualinvestor, Mr. Brett Heading holds 100,000 shares in the Company.

Mr. Kevin Dart is adirector and shareholder of Charter Pacific Corporation Limited, which holds28,110,087 sharesand 7,399,324 options exercisable at A$1.25 expiring March 12, 2010 in theCompany.  Charter Pacific CorporationLimited is a 40.7% shareholder of GMCG that has provided advisory andconsulting services to the Company as indicated above. Mr. Dart is associatedwith a private superannuation fund which holds 149,160 shares in the Company.

Mr. Elmar Schnee is adirector of Merck Santé which holds 18,793,750 shares and 4,439,308 optionsexercisable at A$1.25 expiring March 12, 2010 in the Company. As an individualinvestor Mr. Schnee holds 40,000 shares in the Company. Merck Santé is party toresearch and development and commercialization agreements with the Company’s100% owned subsidiary Autogen Research Pty Ltd. Under these ongoing agreements Merck Santé provided research anddevelopment payments to Autogen Research Pty Ltd totaling A$1,666,276 and  A$2,637,198

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for the years ended June30, 2006, and 2005, respectively.  Underexisting agreements Merck Santé was not due to provide, and has not providedresearch and development funding between July and October 2006.

Dr. Dennis M. Brown is an executive director of the Company. As anindividual investor Dr. Dennis M. Brown holds 14,398,297 shares.

### **C.****                                    Interestsof experts and counsel**

Not applicable.

## **ITEM8.****                                                     FINANCIALINFORMATION**

### **A.****                                    Consolidatedstatements and other financial information**

Reference is madeto page F-1.  Financial Statements for alist of all financial statements, including the notes thereto, and exhibits.

*Dividends*

The Company doesnot currently pay dividends.  The paymentof future dividends will be dependent upon future earnings, the financialcondition of the Company and other factors. In addition, the Company expects to retain a substantial portion offuture earnings, if only to finance the growth and development of thebusiness.  Accordingly, the Company doesnot expect to pay dividends in the near future.

*Legal matters*

TheCompany is not engaged in any legal or arbitration proceedings.

### **B.****                                    Significantchanges**

On December 5, 2006 Mr. Dennis Wade was appointed a director of theCompany. Mr Wade will take the place of Roger Byrne on the Audit Committee. Mr.Byrne remains a director of the Company. The Company is not aware of any othermatter or circumstance that has arisen since June 30. 2006 that hassignificantly affected, or may significantly affect the operations of theCompany, the results of those operations or the state of affairs of theconsolidated Company in future fiscal years.

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## **ITEM9.****                                                     THEOFFER AND LISTING**

### **A.****                                    Offerand listing details**

**Tradingmarket for ordinary shares and ADRs**

The Company’sordinary shares were listed on the ASX on July 10, 1986. The ASX is theprincipal trading market for the ordinary shares.  The following table sets forth, for theperiods indicated, the highest and lowest market quotations for the ordinaryshares reported on the Daily Official List of the ASX. 

**Annualhigh and low market price of ordinary shares and average daily trading volumeon ASX for last five full fiscal years**
|        | ** ** | ** **                     | ** ** | **High (A$)** | ** ** | **Low (A$)** | ** ** | **Ave. daily trading volume** | ** ** |
|--------|------------|--------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------------------|------------|
|   |       |                           |       |               |       |              |       |                                         |       |
| 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                                       |       |
| 2002   |       | July 1, 2001 to June  30, 2002 |       | 1.15               |       | 0.47              |       | 27,027                                       |       |

 

**Quarterly high and low marketprice of ordinary shares and average daily trading volume for last two full fiscalyears and beyond**
|             | ** ** | ** **         | ** ** | **High  (A$)** | ** ** | **Low  (A$)** | ** ** | **Ave. daily trading volume** | ** ** |
|-------------|------------|--------------------|------------|----------------|------------|---------------|------------|----------------------------------------------|------------|
| Fiscal 2007 |       | September  quarter |       | 0.55           |       | 0.34          |       | 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                                       |       |
| Fiscal 2005 |       | June  quarter      |       | 0.80           |       | 0.43          |       | 114,678                                      |       |
|        |       | March  quarter     |       | 0.69           |       | 0.48          |       | 45,166                                       |       |
|        |       | December  quarter  |       | 0.73           |       | 0.47          |       | 143,504                                      |       |
|        |       | September  quarter |       | 0.58           |       | 0.43          |       | 76,843                                       |       |

 

**Monthly high and low market priceof ordinary shares and average daily trading volume for last six months**
|                | ** ** | **High  (A$)** | ** ** | **Low  (A$)** | ** ** | **Ave. daily trading volume** | ** ** |
|----------------|------------|----------------|------------|---------------|------------|----------------------------------------------|------------|
| November 2006  |       | 0.68           |       | 0.49          |       | 194,508                                      |       |
| October 2006   |       | 0.52           |       | 0.46          |       | 145,024                                      |       |
| September 2006 |       | 0.48           |       | 0.41          |       | 61,792                                       |       |
| August 2006    |       | 0.55           |       | 0.43          |       | 109,978                                      |       |
| July 2006      |       | 0.44           |       | 0.35          |       | 193,237                                      |       |
| June 2006      |       | 0.46           |       | 0.34          |       | 288,872                                      |       |

 

As at December 15,, 2006the ordinary shares closed at AUD0.62 cents.

At December 15,2006 the Company had 151,362,786 ordinary shares issued and outstanding. Theshares are without par value. See Item 10B Memorandum and articles ofincorporation for a detailed description of the rights attaching to the shares.Also see Item 12A. “American Depositary Shares” for a description of the rightsattaching to the ADR.

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On December 10,2002 the Company established a Level I ADR program, in which the ordinaryshares trade in the form of ADSs, which are evidenced by American DepositaryReceipts or ADRs, issued by The Bank of New York, as Depositary, and registeredon Form F-6 pursuant to the U.S. Securities Act of 1933, as amended.

The Company’sLevel I ADR program was upgraded to a Level II program on June 28, 2005, inconnection with the Company’s listing on the NASDAQ Capital Market. OneAmerican Depositary Share (“ADS”) represents fifteen ordinary shares.

As of November 30,2006 there were approximately 34,400 record holders of the Company’s ordinaryshares, of which 9.1% of the total ordinary shares issued and outstanding wereheld of record by 86 U.S. residents (based solely on their addresses).

As of December 15,2006, there were 45,616 ADRs outstanding.

**Annualhigh and low market price ADR’s and average daily trading volume on NASDAQ forfull fiscal years since listing**
|      | ** ** | ** **                     | ** ** | **High (US$)** | ** ** | **Low (US$)** | ** ** | **Ave. daily trading volume** | ** ** |
|------|------------|--------------------------------|------------|---------------------|------------|--------------------|------------|----------------------------------------------|------------|
| 2006 |       | July  1, 2005 to June 30, 2006 |       | 8.55                |       | 4.12               |       | 1,588                                        |       |

 

**Quarterly high and low marketprice of ADRs and average daily trading volume since NASDAQ listing**
|             | ** ** | ** **         | ** ** | **High (US$)** | ** ** | **Low (US$)** | ** ** | **Ave. daily trading volume** | ** ** |
|-------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|----------------------------------------------|------------|
| Fiscal 2007 |       | September  quarter |       | 5.64                |       | 3.90               |       | 193                                          |       |
| 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                                          |       |

 

**Monthlyhigh and low market price ADRs and average daily trading volume for the lastsix months**
|                | ** ** | **  High (US$)  ** | ** ** | **  Low (US$)  ** | ** ** | **Ave. daily trading volume** | ** ** |
|----------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------|------------|
| November 2006  |       | 7.90                                        |       | 5.40                                       |       | 542                                          |       |
| October 2006   |       | 5.65                                        |       | 4.70                                       |       | 309                                          |       |
| September 2006 |       | 5.54                                        |       | 4.97                                       |       | 75                                           |       |
| August 2006    |       | 5.64                                        |       | 4.82                                       |       | 374                                          |       |
| July 2006      |       | 4.64                                        |       | 3.90                                       |       | 130                                          |       |
| June 2006      |       | 4.94                                        |       | 4.12                                       |       | 463                                          |       |

 

As at December 15,2006 ADRs on the NASDAQ Capital Market closed at US$7.31

### **B.****                                 Planof distribution**

Not applicable.

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### **C.****                                 Markets**

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

The Company’s ADRswere listed on the NASDAQ Capital Market on June 28, 2005. Each ADR evidences15 ordinary shares.

### **D.****                                 Sellingshareholders**

Not applicable.

### **E.****                                   Dilution**

Not applicable.

### **F.****                                   Expensesof the issue**

Not applicable.

## **ITEM10.****                                              ADDITIONALINFORMATION**

### **A.****                                                            Sharecapital**

Not applicable

### **B.****                                    Memorandumand articles of incorporation**

Incorporated by referenceto the Company’s Registration Statement on Form 20-F (file no. 0-51373) filedwith the Commission on June 23, 2005.

### **C.****                                    Materialcontracts**

The followingcontracts are the only contracts not entered into in the ordinary course ofbusiness which have been entered into by the Company within two yearsimmediately preceding the date of this document and are or may be material tothe Company:

The Company’sprincipal commercial collaborations are described under Item 4.B. “Businessoverview – commercial and research and development collaborations.”

Under theAgreement and Plan of Merger dated as of April 27, 2004 among AGT BiosciencesLimited (the Company), AGT Biosciences, Inc., ChemGenex Therapeutics, Inc. (nowChemGenex Pharmaceuticals, Inc.) and Dr. Dennis M. Brown, the Company acquired100% of ChemGenex Therapeutics, Inc. through a merger, using ordinaryshares.  Pursuant to the terms of theagreement, the Company has continuing indemnity obligations in favor of theselling shareholders, represented by Dr. Dennis M. Brown, and Dr. Dennis M.Brown has certain continuing indemnity obligations in favor of theCompany.  Each of the sellingshareholders, who are now shareholders of the Company, entered into a non-saleundertaking restricting their ability to trade the ordinary shares received inthe merger for a period ending on June 21, 2005.

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### **D.****                                    Exchangecontrols and other limitations affecting security holders**

Exchange controls

Under existingAustralian legislation, the Reserve Bank of Australia does not inhibit theimport and export of funds, and, generally, no permission is required to begiven to the Company for the movement of funds in and out of Australia.  However, from time to time, Australianforeign exchange controls are implemented against prescribed countries,entities and persons.  Certain transactionsrelating to Iraq, the National Union for the Total Independence of Angola(UNITA), certain persons associated with the former government of the FederalRepublic of Yugoslavia, and ministers and senior officials of the Government ofZimbabwe are currently prohibited, without the specific prior approval, of theReserve Bank of Australia.  Restrictionsalso apply to transactions, accounts and assets relating to the Taliban, Osamabin Laden, the Al-Qaida organization and other persons and entities identifiedas terrorists or sponsors of terrorism.

Accordingly, atthe present time, remittances of any dividends, interest or other payment bythe Company to non-resident holders of the Company’s securities in the U.S. arenot, subject to the above, restricted by exchange controls or otherlimitations.

Takeovers Act

There are nolimitations, either under the laws of Australia or under the Constitution ofChemGenex Pharmaceuticals Limited, to the right of non-residents to hold orvote the Company’s ordinary shares other than the Commonwealth ForeignAcquisitions and Takeovers Act 1975 (the “Takeovers Act”).  The Takeovers Act may affect the right ofnon-Australian residents, including U.S. residents, to hold ordinary shares butdoes not affect the right to vote, or any other rights associated with anyordinary shares held in compliance with its provisions.  Acquisitions of shares in Australiancompanies by foreign interests are subject to review and approval by the Treasurerof the Commonwealth of Australia under the Takeovers Act.  The Takeovers Act applies to any acquisitionof outstanding shares of an Australian company that exceeds, or results in aforeign person or persons controlling the voting power of more than a certainpercentage of those shares. The thresholds are 15% where the shares areacquired by a foreign person, or group of associated foreign persons, or 40% inaggregate in the case of foreign persons who are not associated. Any proposedacquisition that would result in an individual foreign person (with associates)holding more than 15% must be notified to the Treasurer in advance of theacquisition.  At January 31, 2005,approximately 39.6% of the Company’s fully paid outstanding ordinary shareswere held by shareholders outside Australia. In addition to the Takeovers Act, there are statutory limitations inAustralia on foreign ownership of certain businesses, such as banks andairlines, not relevant to the Company. However, there are no other statutory orregulatory provisions of Australian law or ASX requirements that restrictforeign ownership or control of the Company.

Corporations Act 2001

As applied to theCompany, the Corporations Act 2001 (the “Corporations Act 2001”) prohibits anylegal person (including a corporation) from acquiring a relevant interest inordinary shares if after the acquisition that person or any other person’svoting power in the Company increases from 20% or below to more than 20%, orfrom a starting point that is above 20% and below 90%.

This prohibitionis subject to a number of specific exceptions set out in section 611 of theCorporations Act 2001 which must be strictly complied with to be applicable.

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

It does not matterhow remote the relevant interest is or how it arises.  The concepts of “power” and “control” aregiven wide and extended meanings in this context in order to deem certainpersons 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 arelevant interest in those shares. Certain situations (set out in section 609 of the Corporations Act 2001)which would otherwise constitute the holding of a relevant interest areexcluded from the definition.

A person’s votingpower in the Company is that percentage of the total votes attached to ordinaryshares in which that person and its associates (as defined in the CorporationsAct 2001) holds a relevant interest.

### **E.****                                   Taxation**

This summary isbased on the tax laws of the U.S.(including the Internal Revenue Code of 1986,as amended, its legislative history, existing and proposed regulationsthereunder, published rulings and court decisions) and on the Australian taxlaw and practice as in effect on the date hereof.  In addition, this summary is based on theincome tax convention between the U.S. and Australia (the “Treaty”). Theforegoing laws and legal authorities as well as the Treaty are subject tochange (or changes in interpretation), possibly with retroactive effect.  Finally, this summary is based in part uponthe representations of the Company’s ADR Depositary and the assumption thateach obligation in the Deposit Agreement and any related agreement will beperformed in accordance with its terms.

The discussiondoes not address any aspects of U.S. taxation other than federal incometaxation or any aspects of Australian taxation other than federal incometaxation, inheritance taxation, stamp duty and goods and services tax.  This discussion does not address all aspectsof U.S. or Australian federal tax considerations that may be important toparticular investors in light of their individual investment circumstances orinvestors subject to special tax regimes, like broker-dealers, insurancecompanies or financial institutions, tax-exempt organizations, regulatedinvestment companies, real estate investment trusts or real estate mortgageinvestment conduits, persons who actually or constructively own ten percent ormore of the Company’s ADRs or ordinary shares, persons who hold ADRs orordinary shares as part of a straddle, “hedge” or “conversion transaction” withother investments, persons who have elected mark-to-market accounting, orpersons who acquired their ADRs or ordinary shares through the exercise ofoptions or similar derivative securities or otherwise as compensation.  This discussion applies only to shares heldas capital assets.  Prospective investorsare urged to consult their tax advisers regarding the U.S. and Australian federal,state and local tax consequences and any other tax consequences of owning anddisposing of ADRs and ordinary shares.

**AustralianTax Consequences**

In this sectionthe Company discusses Australian tax considerations that apply tonon-Australian tax residents who are residents of the U.S. with respect to theownership and disposal by the absolute beneficial owners of ADRs.  This summary does not discuss any foreign orstate tax considerations, other than stamp duty.

**Nature ofADRs for Australian Taxation Purposes**

ADRs held by aU.S. Holder will be treated for Australian taxation purposes as held under a “baretrust” for that holder. Consequently, the underlying ordinary shares will beregarded as owned by the ADR holder for Australian income tax and capital gainstax purposes. Dividends paid on the underlying ordinary shares will also betreated as dividends paid to the ADR holder, as the person beneficiallyentitled to those dividends. Therefore, in the following analysis the Companydiscusses the tax consequences to non-Australian resident holders of ordinaryshares which, for Australian taxation purposes, will be the same as to U.S.Holders of ADRs.

**Taxationof Dividends**

Australia operatesa dividend imputation system under which dividends may be declared to be “franked”to the extent of tax paid on company profits. Fully franked dividends are notsubject to dividend withholding tax. Dividends payable by the Company tonon-Australian resident stockholders will be subject to dividend withholdingtax, to the extent the dividends are unfranked. Dividend withholding tax willbe imposed at 30%, unless a stockholder is a resident of a country with whichAustralia has a double taxation agreement. Under the provisions of the Treaty,the Australian tax withheld on unfranked dividends paid by the Company to whicha resident of the U.S. is beneficially entitled is generally limited to 15% ifthe U.S. resident holds less than 10% of the voting rights of the Company,unless the shares are effectively connected to a permanent establishment orfixed base in Australia

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through which thestockholder carries on business or provides independent personal services,respectively. Where the U.S. resident holds 10% or more of the voting rights ofthe Company, the withholding tax rate is reduced to 5%.

**Tax onSales or other Dispositions of Shares - Capital Gains Tax**

Non-Australianresident stockholders will not be subject to Australian capital gains tax onthe gain made on a sale or other disposal of our shares, unless they, together withassociates, hold 10% or more of our issued capital at any time during the fiveyears before the disposal of the shares. If a non-Australian resident stockholder did own a 10% or more interest,that stockholder would be subject to Australian capital gains tax to the sameextent as Australian resident stockholders. The Australian Taxation Officemaintains the view that the Double Taxation Convention between the U.S. andAustralia does not limit Australian capital gains tax. Australian capital gainstax applies to net capital gains at a taxpayer’s marginal tax rate but forcertain stockholders a discount of the capital gain may apply if the shareshave been held for 12 months or more. For individuals, this discount is50%.  Net capital gains are calculatedafter reduction for capital losses, which may only be offset against capitalgains.

**Tax onSales or other Dispositions of Shares - Stockholders Holding Shares on RevenueAccount**

Somenon-Australian resident stockholders may hold shares on revenue rather than oncapital account, for example, share traders. These stockholders may have thegains made on the sale or other disposal of the shares included in theirassessable income under the ordinary income provisions of the income tax law,if the gains are sourced in Australia. Non-Australian resident stockholders assessable under these ordinaryincome provisions in respect of gains made on shares held on revenue accountwould be assessed for those gains at the Australian tax rates fornon-Australian residents, which start at a marginal rate of 29%. Some relieffrom the Australian income tax may be available to non-Australian residentstockholders under the Double Taxation Convention between the U.S. andAustralia, for example, because the stockholder does not have a permanentestablishment in Australia.

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

**DualResidency**

If a stockholderwere a resident of both Australia and the U.S. under those countries’ domestictaxation laws, that stockholder may be subject to tax as an Australianresident. If, however, the stockholder is determined to be a U.S. resident forthe purposes of the Double Taxation Convention between the U.S. and Australia,the Australian tax would be subject to limitation by the Double TaxationConvention. Stockholders should obtain specialist taxation advice in thesecircumstances.

**StampDuty**

Any transfer ofshares through trading on the ASX, whether by Australian residents or foreignresidents, are not subject to stamp duty within Australia.

**AustralianDeath Duty**

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

**Goods andServices Tax**

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

**U.S.****FederalIncome Taxation**

As used below, a “U.S. Holder” is a beneficial owner of anADR or ordinary share that is, for U.S. federal income tax purposes, (i) acitizen or resident alien individual of the United States, (ii) a corporation(or an entity treated as a corporation) organized under the law of the UnitedStates, any State thereof or the District of Columbia, (iii) an

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estate the income of which is subject to U.S. federalincome tax without regard to its source or (iv) a trust if (1) a court withinthe United States is able to exercise primary supervision over theadministration of the trust, and one or more United States persons have theauthority to control all substantial decisions of the trust, or (2) the trustwas in existence on August 20, 1996 and properly elected to continue to betreated as a United States 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.

**Nature ofADRs 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 as specifically notedbelow, the tax consequences discussed below with respect to ADRs will be thesame for ordinary shares in the Company, and exchanges of ordinary shares forADRs, and ADRs for ordinary shares, generally will not be subject to U.S.federal income tax.

**Taxation of Dividends**

*U.S. Holders*.  In general, subject to the passive foreigninvestment company rules discussed below, a distribution on an ADR willconstitute a dividend for U.S. federal income tax purposes to the extent madefrom the Company’s current or accumulated earnings and profits as determinedunder U.S. federal income tax principles. If a distribution exceeds the Company’s current and accumulated earningsand profits, it will be treated as a non-taxable reduction of basis to theextent of the U.S. Holder’s tax basis in the ADR on which it is paid, and tothe extent it exceeds that basis it will be treated as capital gain.  For purposes of this discussion, the term “dividend”means a distribution that constitutes a dividend for U.S. federal income taxpurposes.

The gross amount of anydividend on an ADR (which will include the amount of any Australian taxeswithheld) will be subject to U.S. federal income tax as foreign source dividendincome.  The amount of a dividend paid inAustralian dollars will be its value in U.S. dollars based on the prevailingspot market exchange rate in effect on the day that the U.S. Holder receivesthe dividend or, in the case of a dividend received in respect of an ADR, onthe date the Depositary receives it, whether or not the dividend is convertedinto U.S. dollars.  Any gain or lossrealized on a conversion or other disposition of the Australian dollarsgenerally will be treated as U.S. source ordinary income or loss.  Any Australian withholding tax will betreated 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.  Forpurposes of computing those limitations separately under current law forspecific categories of income, a dividend generally will constitute foreignsource “passive income” or, in the case of certain holders, “financial servicesincome” for purposes of the current foreign tax credit limitation rules.  For taxable years beginning after December31, 2006, “financial services income” generally will be treated as “generalcategory income,” and “passive income” generally will be treated as “passivecategory income.”  A U.S. Holder will bedenied a foreign tax credit with respect to Australian income tax withheld fromdividends received on an ADR to the extent the U.S. Holder has not held the ADRfor at least 16 days of the 30-day period beginning on the date which is 15days before the ex-dividend date or to the extent the U.S. Holder is under anobligation to make related payments with respect to substantially similar or relatedproperty.  Any days during which a U.S.Holder has substantially diminished its risk of loss on the ADR are not countedtoward meeting the 16-day holding period required by the statute. The rulesrelating to the determination of the foreign tax credit are complex, and youshould consult your own tax adviser to determine whether and to what extent youwould be entitled to this credit.  Youshould consult your tax adviser with respect to the determination of the foreigntax credit limitation, as the relevant rules are complex and are scheduled tochange in future years.  Alternatively,any Australian withholding tax may be taken as a deduction against taxableincome if the U.S. Holder elects to deduct rather than credit all of hisforeign income taxes.  A dividend willnot be eligible for the corporate dividends received deduction.

Subject to certain exceptions for short-term and hedgedpositions, a dividend an individual receives on an ADR before January 1, 2011will be subject to a maximum tax rate of 15% if the dividend is a “qualifieddividend.”  A dividend will be aqualified dividend if (a) the dividend is paid on an ordinary share and theordinary shares are readily tradable on an established securities market in theUnited States and (b) the dividend is paid on an ADR or an ordinary share andthe Company is eligible for benefits of a comprehensive income tax treaty withthe United

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States that the Secretary of the Treasury determines issatisfactory for purposes of these rules and that includes an exchange ofinformation program, and (ii) the Company was not, in the year prior to theyear the dividend was paid, and is not, in the year the dividend is paid, (A)in the case of taxable years of the Company beginning before January 1, 2005, apassive foreign investment company (“PFIC”), foreign personal holding company (“FPHC”)or foreign investment company (“FIC”), and (B), in the case of taxable yearsbeginning after December 31, 2004, a PFIC. Effective for taxable years of foreign corporations beginning afterDecember 31, 2004, the rules relating to FPHCs and FICs are repealed.  The ADRs will be listed on the NASDAQ CapitalMarket.  It is not clear whether thatlisting will qualify them as readily tradable on an established securitiesmarket in the United States.  Moreover,because only the ADRs and not the shares themselves are listed on a U.S.exchange, based on existing guidance it is not clear whether dividends paid bythe Company will be treated as paid on shares that are readily tradable on anestablished securities market in the United States.  However, the Treaty satisfies therequirements of clause (i)(b), and, although the matter is not free from doubt,the Company should be a resident of Australia entitled to the benefits of theTreaty.  Based on the Company’s auditedfinancial statements and relevant market and shareholder data, the Companybelieves it was not a PFIC, FPHC or FIC for U.S. federal income tax purposesfor its 2005 taxable year and was not a PFIC for its 2006 taxable year.  However, because the determination of whetherthe Company is a PFIC is based upon the composition of the income and assetsfrom time to time, there can be no assurances that the Company will not becomea PFIC for any future taxable year. However, as described in the section belowentitled “Passive Foreign Investment Company Rules,” if the Company were a PFICin a year while a U.S. Holder held an ADR or ordinary share, and if the U.S.Holder has not made a qualified electing fund election effective for the first yearthe U.S. Holder held the ADR or ordinary share, the ADR or ordinary shareremains an interest in a PFIC for all future years or until such an election ismade.  The Internal Revenue Service takesthe position that that rule will apply for purposes of determining whether anADR is an interest in a PFIC in the year a dividend is paid or in the prioryear, even if the Company does not satisfy the tests to be a PFIC in either ofthose years.  Even if the Company has notbeen a PFIC in any prior year and is not currently a PFIC, because thecomposition of the Company’s income and assets will vary over time, there canbe no assurance that the Company will not be considered a PFIC for any taxableyear.  The U.S. Treasury has announcedits intention to promulgate rules pursuant to which holders of stock ofnon-U.S. corporations, and intermediaries though whom the stock is held, willbe permitted to rely on certifications from issuers to establish that dividendsare treated as qualified dividends. Because those procedures have not yet been issued, it is not clearwhether the Company will be able to comply with them.  Special limitations on foreign tax creditsapply to dividends subject to the reduced rate of tax.  Holders of ADRs and ordinary shares shouldconsult their own tax advisers regarding the availability of the reduceddividend tax rate in the light of their own particular circumstances.

*Non-U.S. Holders*.  A dividend paid to a non-U.S. Holder of anADR will not be subject to U.S. federal income tax unless the dividend iseffectively connected with the conduct of trade or business by the non-U.S.Holder within the United States (and is attributable to a permanentestablishment 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 willbe subject to tax on an effectively connected dividend in the same manner as aU.S. Holder.  A corporate non-U.S. Holdermay 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 of Capital Gains**

*U.S. Holders*.  Subject to the passive foreign investmentcompany rules discussed below, on a sale or other taxable disposition of anADR, a U.S. Holder will recognize capital gain or loss in an amount equal tothe difference between the U.S. Holder’s adjusted basis in the ADR and theamount realized on the sale or other disposition, each determined in U.S.dollars.  Any gain a U.S. Holderrecognizes generally will be U.S. source income for U.S. foreign tax creditpurposes, and, subject to certain exceptions, any loss generally will be a U.S.source loss.  If an Australian tax ispaid on a sale or other disposition of an ADR, 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 theAustralian tax.

In general, any adjusted net capital gain of an individualin a taxable year beginning before January 1, 2011 is subject to a maximum taxrate of 15%.  In later years, the maximumtax rate on the net capital gain of an individual will be 20%.  The deductibility of capital losses issubject to limitations.

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*Non-U.S. Holders.*  A non-U.S. Holder will not be subject to U.S.federal income tax on gain recognized on a sale or other disposition of an ADRunless (i) the gain is effectively connected with the conduct of trade orbusiness by the non-U.S. Holder within the United States (and is attributable to a permanent establishment orfixed base the non-U.S. Holder maintains in the United 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 United States for 183 or more days in the taxable year of the saleor other disposition and certain other conditions apply.  Any effectively connected gain of a corporatenon-U.S. Holder may also be subject under certain circumstances to anadditional “branch profits tax,” the rate of which may be reduced pursuant toan applicable income tax treaty.

**Passive Foreign Investment Company Rules**

A special set of U.S. federal income tax rules applies to aforeign corporation that is a PFIC for U.S. federal income tax purposes.  As noted above, based on the Company’saudited financial statements and relevant market and shareholder data, theCompany believes it was not aPFIC for U.S. federal income tax purposes for its 2005 or 2006 taxable years.

In general, a foreign corporation is a PFIC if at least 75%of its gross income for the taxable year is passive income or if at least 50%of its assets for the taxable year produce passive income or are held for theproduction of passive income.  Ingeneral, passive income for this purpose means, with certain designatedexceptions, dividends, interest, rents, royalties (other than certain rents androyalties derived in the active conduct of trade or business), annuities, netgains from dispositions of certain assets, net foreign currency gains, incomeequivalent to interest, income from notional principal contracts and paymentsin lieu of dividends.  The determinationof whether a foreign corporation is a PFIC is a factual determination madeannually and is therefore subject to change. Subject to exceptions pursuant to certain elections that generallyrequire the payment of tax, once stock in a foreign corporation is stock in aPFIC in the hands of a particular shareholder that is a United States person, it remains stock in a PFIC in the hands ofthat shareholder.

If the Company is treated as a PFIC, contrary to the taxconsequences described in “U.S. Federal Income Tax Considerations—Taxation ofDividends” and “—U.S. Federal Income Tax Considerations—Taxation of CapitalGains” above, a U.S. Holder that does not make an election described in thesucceeding two paragraphs would be subject to special rules with respect to (i)any gain realized on a sale or other disposition of an ADR and (ii) any “excessdistribution” by the Company to the U.S. Holder (generally, any distributionduring a taxable year in which distributions to the U.S. Holder on the ADRexceed 125% of the average annual taxable distributions the U.S. Holderreceived 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 orexcess distribution would be allocated ratably over the U.S. Holder’s holdingperiod for the ADR, (ii) the amount allocated to the taxable year in which thegain or excess distribution is realized would be taxable as ordinary income and(iii) the amount allocated to each prior year, with certain exceptions, wouldbe subject to tax at the highest tax rate in effect for that year, and theinterest charge generally applicable to underpayments of tax would be imposedin respect of the tax attributable to each of those years.  A U.S. Holder who owns an ADR during any yearthe Company is****a PFIC must file Internal RevenueService Form 8621.

The special PFIC rules described above will not apply to aU.S. Holder if the U.S. Holder makes a timely election to treat the Company asa “qualified electing fund” (“QEF”) in the first taxable year in which the U.S.Holder owns an ADR and the Company is a PFIC and if the Company complies withcertain 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 any actual dividend from the Companywould qualify for the 15% maximum tax rate on dividends described above if theCompany is a PFIC in the taxable year the ordinary income is realized or thedividend is paid or in the preceding taxable year.  The Company has not yet determined whether,if it is a PFIC, it would make the computations necessary to supply U.S.Holders with the information needed to report income and gain pursuant to a QEFelection.  It is, therefore, possiblethat U.S. Holders would not be able to make or retain that election in any yearthe Company is a PFIC.  Although a QEFelection 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

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of certain elections), the QEF election will not applyduring any later taxable year in which the Company does not satisfy the teststo be a PFIC.  If a QEF election is notmade in that first taxable year, an election in a later year generally willrequire the payment of tax and interest.

In lieu of a QEF election, a U.S. Holder of stock in a PFICthat is considered marketable stock could elect to mark the stock to marketannually, recognizing as ordinary income or loss each year an amount equal tothe difference as of the close of the taxable year between the fair marketvalue of the stock and the U.S. Holder’s adjusted basis in the stock.  Losses would be allowed only to the extent ofnet mark-to-market gain previously included in income by the U.S. Holder underthe election for prior taxable years.  AU.S. Holder’s adjusted basis in the ADRs will be adjusted to reflect theamounts included or deducted with respect to the mark-to-market election.  If the mark-to-market election were made, therules set forth in the second preceding paragraph would not apply for periodscovered by the election.  Amark-to-market election will not apply during any later taxable year in whichthe Company does not satisfy the tests to be a PFIC.  In general, the ADRs will be marketable stockif the ADRs are traded, other than in *de minimis* quantities,on at least 15 days during each calendar quarter on a national securitiesexchange that is registered with the SEC or on a designated national marketsystem or on any exchange or market that the Treasury Department determines tohave rules sufficient to ensure that the market price accurately represents thefair market 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 Internal Revenue Servicedesignates the ASX as havingrules adequate to carry out the purposes of the PFIC rules.  There can be no assurance that the InternalRevenue Service will make that designation.

**Information Reporting and BackupWithholding**

Dividends paid on, and proceeds from the sale or otherdisposition of, an ADR to a U.S. Holder generally may be subject to informationreporting requirements and may be subject to backup withholding at the rate of28% unless the U.S. Holder provides an accurate taxpayer identification numberor otherwise establishes an exemption. 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, providedcertain required information is furnished to the Internal Revenue Service.  A non-U.S. Holder generally will be exemptfrom these information reporting requirements and backup withholding tax butmay be required to comply with certain certification and identificationprocedures in order to establish its eligibility for exemption.

The discussion above is notintended to constitute a complete analysis of all tax considerations applicableto an investment in ADRs or ordinary shares. Holders should consult their tax adviser(s) concerning the taxconsequences to them in his particular situation.

**Thediscussion above is not intended to constitute a complete analysis of all taxconsiderations applicable to an investment in ADRs or ordinary shares.  Holders and potential holders should consulttheir tax adviser(s) concerning the tax consequences relevant to them in theirparticular situation.**

### **F.****                                      Dividendsand paying agents**

Not applicable

### **G.****                                    Statementby experts**

Not applicable

### **H.****                                    Documentson display**

This Annual Reporton Form 20-F and any related documents may be inspected by investors at theCompany’s registered office at Edmondson Turner & Co., 439 Bay Street,Brighton, Victoria, Australia, or at the Company’s headquarters at PigdonsRoad, Waurn Ponds, Victoria, Australia or at the public reference room of theSEC located

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at Room 1024,Judiciary Plaza, 450 Fifth Street, N.W., Washington DC 20549, at prescribedrates.  The Company is subject to theinformation requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordancetherewith, is required to file reports, including annual reports on Form 20-F,and other information with the U.S. Securities and Exchange Commission inelectronic form.  More informationconcerning the public reference room of the SEC can be obtained by calling theSEC at 1-800-SEC-0330.  The SEC filingsof the Company are available to the public from commercial document retrievalservices and at the website maintained by the SEC at www.sec.gov.  The Company also maintains a website atwww.chemgenex.com.  Information on theCompany’s website and websites linked to it do not constitute part of thisAnnual Report.

### **I.****                                         Subsidiaryinformation**

Not applicable

## **ITEM11.****                                              QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company hasexposure to changes in foreign currency exchange rates and interest rates. TheCompany does not utilize derivative financial instruments or other financialinstruments subject to market risk.

****Foreigncurrency exchange rates****

The principalcurrency of the Company is the Australian dollar. Under existing partnershipagreements the Company receives funds Euros. Cash to fund working capitalrequirements is managed centrally in Australia and held in Australian dollars.

The followingtable shows the sensitivity of the Company’s 2006/2007 earnings as a result ofan appreciation or depreciation in the value of the June 30, 2006 exchange rateof the Australian dollar against the Euro based on foreign currency receiptsfrom partnership agreements against the the US dollar for commitments forresearch expenditure existing at June 30, 2006. ..
| ** ** | ** ** | **A$ Depreciation** | ** ** | ** ** | ** ** | **A$ Depreciation** | ** ** |
|------------|------------|--------------------------|------------|------------|------------|--------------------------|------------|
| ** ** | ** ** | **-15%**                 | ** ** | **-10%**   | ** ** | **-5%**                  | ** ** | **0%** | ** ** | **5%** | ** ** | **10%** | ** ** | **15%** | ** ** |
| €     |       | 54,193                   |       | 36,129     |       | 18,064                   |       | — |   | (18,064 | ) | (36,129 | ) | (54,193 | ) |
| US $       |       | (342,718                 | )          | (228,417   | )          | (114,239                 | )          | — |   | 114,439 |   | 228,478 | ) | 342,718 |   |
| Total      |       | (288,525                 | )          | (192,288   | )          | (96,175                  | )          | — |   | 96,175 |   | 192,288 |   | 288,525 |   |

 

****Interest rates****

Cash, held in calland short-term deposit accounts at the National Australia Bank Limited andGreater Bay Bank are subject to variable interest rates. The Company does notconsider its exposure to interest rates to be significant.

## **ITEM12.****                                              DESCRIPTIONOF SECURITIES OTHER THAN EQUITY SECURITIES**

### **A****                                    DebtSecurities**

Not applicable.

### **B****                                    Warrantsand Rights**

Not applicable.

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### **C****                                    OtherSecurities**

Not applicable.

### **D****                                    AmericanDepositary Shares**

Not applicable.

# **PART II**

## **ITEM13.****                                              DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES**

None.

## **ITEM14.****                                              MATERIALMODIFICATIONS TO THE RIGHT OF SECURITY HOLDERS AND USE OF PROCEEDS**

None.

## **ITEM15.****                                              CONTROLSAND PROCEDURES**

**A.  Controlsand Procedures**

As of June 30,2006 the Company’s management, including its Chief Executive Officer and itsChief Financial Officer, reviewed  theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934. Based on that review, the Company’s Chief ExecutiveOfficer and Chief Financial Officer concluded that the design and operation ofthe Company’s existing disclosure controls and procedures are effective toensure that information required to be disclosed in the reports that theCompany files and submits under the Exchange Act is (i) recorded, processed,summarized and reported as and when required and (ii) accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosure asof the end of the Company’s most recent fiscal year.

In preparation forthe adoption of Section 404 of the Sarbanes-Oxley Act of 2002 by all ForeignPrivate Issuers, management has initiated a detailed evaluation of existinginternal controls against Section 404 requirements. Management will allocatethe necessary resources and initiate required actions to redress any possibleSection 404 weaknesses prior to that date.

In planning andperforming the audit of the consolidated financial statements of ChemGenexPharmaceuticals Limited for the year ended June 30, 2005 and June 30, 2006Ernst & Young considered the internal controls over financial reporting todesign auditing procedures for the purpose of expressing an opinion on theconsolidated financial statements. The consideration of internal controls overfinancial reporting was not to express an opinion on the effectiveness of theCompany’s internal controls over financial reporting. However they notedcertain matters involving internal controls over financial reporting and itsoperation that they considered to be material weaknesses under standardsestablished by the Public Company Oversight Board (United States).

A controldeficiency exists when the design or operation of a control does not allowmanagement or employees, in the normal course of performing their assignedfunctions, to prevent or detect misstatements on a timely basis. A significantdeficiency is a control deficiency, or a combination of control deficiencies,that adversely effects the company’s ability to initiate, authorize, record,process or report external financial data reliably in accordance with generallyaccepted accounting principles such that there is more than a remote likelihoodof a misstatement of the company’s annual or interim financial statements thatis more than inconsequential and will not be prevented or

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detected. Amaterial weakness is a significant deficiency, or combination of significantdeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.

In connection withthe audit of our fiscal year ended June 30, 2006, Ernst & Young, theCompany’s independent auditors, informed our Audit Committee that they considerthe following matters represent material weaknesses in the operation of ourinternal controls over financial reporting:

·                                         Lackof knowledge to perform tax effective accounting; and

·                                         Lackof US GAAP expertise

We have and willcontinue to mitigate the above material weaknesses by conferring and / orhiring outside accounting advisers with respect to the technical requirementsapplicable to our financial statements.

No changes in theCompany’s internal controls over financial reporting occurred during the periodcovered by this report that materially affected, or are reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

**B. Management’s annual report on internal control overfinancial reporting**

Not applicable.

**C. Attestation report of the registered public accountingfirm**

Not applicable.

**D. Changes in internal control over financial reporting**

There were nosignificant changes in our internal controls or in other factors that couldsignificantly affect these controls and procedures subsequent to the date ourchief executive officer and our chief financial officer completed theirevaluation, nor were there any significant deficiencies or material weaknessesin our internal controls and procedures requiring corrective actions, otherthan those described above.

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

The Board ofDirectors of the Company has determined that Patrick Owen Burns, an independentmember of its Board of Directors and a member of its Audit Committee, is anaudit committee financial expert within the meaning of the Sarbanes-Oxley andrelated regulations.

## **ITEM16B.  CODE OF ETHICS**

We have adopted aCode of Ethics that applies to all of the Company’s employees, including ourprincipal executive officer, principal financial officer, principal accountingofficer or controller. The Code can be downloaded at our website(www.chemgenex.com). Additionally, any person, upon request, can ask for a hardcopy or electronic file of such Code. If we make any substantive amendment tothe Code of Ethics or grant any waivers, including any implicit waiver, from aprovision of the Code of Ethics, we will disclose the nature of such amendment orwaiver on our website. During the year ended June 30, 2005, no such amendmentwas made or waiver granted

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## **ITEM16C.  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

For purposes ofthis Form 20-F Annual Report and other SEC filings, the Company’s independentregistered public accounting firm is Ernst & Young.  For statutory reporting purposes and filingswith the ASX and ASIC in Australia, the Company’s auditor is Ernst & Young.

The following table setsforth the fees billed to us by our statutory auditor, Ernst & Young, forthe years ended June 30, 2006 and 2005, respectively:
| Ernst & Young | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
|              |       |     |       |     |       |
| Audit fees        |       | 212,325  |       | 93,250   |       |
|              |       |     |       |     |       |
| Tax fees          |       | —   |       | 12,000   |       |
|              |       |     |       |     |       |
| All other fees    |       | —   |       | 17,709   |       |
|              |       |     |       |     |       |
| Total             |       | 212,325  |       | 122,959  |       |

 

For purposes ofthe initial registration  Form 20-F  and the 2005 20-F Annual Report the Company’sindependent registered public accounting firm was Deloitte Touche Tohmatsu. Thefollowing table sets forth the fees billed to us by the independent registered publicaccounting firm, Deloitte Touche Tohmatsu, for the years ended June 30, 2006and 2005, respectively:
| Deloitte Touche Tohmatsu | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| Audit fees (a)           |       | —   |       | 497,804  |       |
|                     |       |     |       |     |       |
| Audit-related  fees      |       | —   |       | —   |       |
|                     |       |     |       |     |       |
| Tax fees                 |       | —   |       | —   |       |
|                     |       |     |       |     |       |
| All other fees           |       | —   |       | —   |       |
|                     |       |     |       |     |       |
| Total                    |       | —   |       | 497,804  |       |

 

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(a)Audit fees billed by Deloitte Touche Tohmatsu relate to the audit of financial statements and review of SEC filingsfor purposes of the Company’s Registration Statement on Form 20-F lodged inJune 2005 as well as the Annual Report on Form 20-F for the year ended June 30,2005.

***Audit Committee Pre-Approval Policies andProcedures***

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

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

## **ITEM16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**

Not applicable.

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

Not applicable.

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# **PART III**

## **ITEM17.****                                              FINANCIALSTATEMENTS**

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

## **ITEM18.****                                              FINANCIALSTATEMENTS**

The Company haschosen to respond to Item 17 in lieu of responding to this Item.

## **ITEM19.****                                              EXHIBITS**

The followingdocuments are filed as exhibits to this Annual Report on Form 20-F:

1.                                      Constitutionof the 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 theRegistration Statement on Form F-6 relating to the ADSs (File No. 333-101016)filed with the Commission on November 1, 2002)

3.               Material Contracts:

3.1         Service Contracts ofDirectors and Consultants

(a)                                  SecondmentAgreement between Deakin University and the Autogen Limited dated March 19,2002 in respect 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 #.

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3.2         OtherContracts
|   | (a)    | Research and License Agreement 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 License Agreement dated April 28, 1999  between Autogen Pty Ltd. and Lipha S.A.* #                                                                                                                    |
|   |   |                                                                                                                                                                                                               |
|   | (d)    | Research and License Agreement dated February 11,  2002 between Autogen Research Pty Ltd. and Lipha S.A.* #                                                                                                        |
|   |   |                                                                                                                                                                                                               |
|   | (e)    | Research Services (Subcontracting) Agreement dated  June 26, 2000 between Autogen Research Pty Limited and Deakin University.* #                                                                                   |
|   |   |                                                                                                                                                                                                               |
|   | (f)    | Research and Development Option Agreement dated  August 30, 2004 between Autogen Research Pty Ltd and Vernalis (R&D)  Limited.* #                                                                              |
|   |   |                                                                                                                                                                                                               |
|   | (g)    | Research, License and Commercialisation Agreement  (Gene Discovery in Depression), dated August 16, 2000 between Autogen  Research Pty Ltd. and Deakin University.* #                                              |
|   |   |                                                                                                                                                                                                               |
|   | (h)    | Commercialisation License (Field of Diabetes and  Obesity) “AGT 203” dated March 14, 2003 between Autogen Limited (now  ChemGenex Pharmaceuticals Limited) and Merck Santé s.a.s.* #                |
|   |   |                                                                                                                                                                                                               |
|   | (i)    | Commercialisation License (Field of Diabetes and  Obesity) “AGT 121” dated March 14, 2003 between the Autogen Limited (now  ChemGenex Pharmaceuticals Limited) and Merck Santé s.a.s.* #            |
|   |   |                                                                                                                                                                                                               |
|   | (j)    | Commercialisation License (Field of Diabetes and  Obesity) “TANIS” dated August 26, 2002 between the Autogen Pty Ltd and Merck  Santé s.a.s.* #                                                     |
|   |   |                                                                                                                                                                                                               |
|   | (k)    | Commercialisation License (Field of Obesity)  “BEACON” dated April 28, 1999 between Autogen Pty Ltd and Lipha S.A.* #                                                                                    |
|   |   |                                                                                                                                                                                                               |
|   | (l)    | Research, License and Commercialization Agreement  dated December 31, 2002 between Autogen Research Pty Ltd. and the Southwest  Foundation for Biomedical Research.* #                                             |
|   |   |                                                                                                                                                                                                               |
|   | (m)    | Variation Agreement dated June 24, 2003 between  Autogen Research Pty Limited and Southwest Foundation for Biomedical  Research.* #                                                                                |
|   |   |                                                                                                                                                                                                               |
|   | (n)    | Extension Agreement dated July 1, 2004 between  Autogen Research Pty Limited and Southwest Foundation for Biomedical  Research.* #                                                                                 |
|   |   |                                                                                                                                                                                                               |
|   | (o)    | Research Agreement dated February 28, 1997 among  Autogen Pty Ltd., Deakin University and International Diabetes Institute.* #                                                                                     |
|   |   |                                                                                                                                                                                                               |
|   | (p)    | Research, License and Commercialisation Agreement  dated January 14, 1998 between Autogen Pty Ltd and International Diabetes  Institute.* #                                                                        |
|   |   |                                                                                                                                                                                                               |
|   | (q)    | Agreement dated August 18, 2004 between Autogen Pty  Ltd and International Diabetes Institute.* #                                                                                                                  |
|   |   |                                                                                                                                                                                                               |
|   | (r)    | Sponsored Clinical Study Agreement dated April 14,  2003 between The University of Texas M.D. Anderson Cancer Center and  ChemGenex Therapeutics, Inc., as amended by Amendment No. 1 dated November  18, 2004.* # |

74

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|        | (s)    | Patent and Technology License Agreement dated  February 7, 2005 between ChemGenex Pharmaceuticals Limited and The University  of Texas M. D. Anderson Cancer Center.* # |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                    |
|   | (t)    | Voting Rights deed dated June 21, 2004 between Dr.  Dennis M. Brown and Charter Pacific Corporation Ltd. #                                                              |
|   |   |                                                                                                                                                                    |
|   | (u)    | Sole Licence Agreement dated March 1, 1999 between Autogen  Pty Ltd and Kyokuto Pharmaceutical Industrial Co. Ltd. #                                                    |
|   |   |                                                                                                                                                                    |
|   | (v)    | Agreement and Plan of Merger dated April 27, 2004  between AGT Biosciences Limited, AGT Biosciences Inc., ChemGenex Therapeutics  Inc. and Dr. Dennis M. Brown. #       |
|   |   |                                                                                                                                                                    |
|   | (w)    | Research, Licence and Commercialisation Agreement  dated April 21, 2005 between ChemGenex Pharmaceuticals Limited and Deakin  University. #                             |
|   |   |                                                                                                                                                                    |
|   | (x)    | HHT Development and Commercialisation Agreement  dated June 27, 2005 between ChemGenex Pharmaceuticals Limited, Stragen Investment  B.V. and Stragen Pharma S.A.*+      |
|   |   |                                                                                                                                                                    |
|   | (y)    | HHT Supply and Distribution Agreement dated June 27,  2005 between ChemGenex Pharmaceuticals Limited and Stragen Investment B.V.*+                                      |
|   |   |                                                                                                                                                                    |
|   | (z)    | Extension Agreement dated July 27, 2005 between  Autogen Research Pty Limited and Southwest Foundation for Biomedical  Research. *+                                     |
|   |   |                                                                                                                                                                    |
|   | (aa)   | Extension Agreement dated September 20, 2005 between  Autogen Pty Ltd and International Diabetes Institute. *+                                                          |
|   |   |                                                                                                                                                                    |
|   | (bb)   | Clinical Master Service Agreement dated September  28, 2005 between ChemGenex Pharmaceuticals Limited and Inveresk Research  Limited.+                                  |
|   |   |                                                                                                                                                                    |
|   | 12.01  | Certification by the Company’s Chief Executive  Officer required by Item 15.                                                                                       |
|   |   |                                                                                                                                                                    |
|   | 12.02  | Certification by the Company’s Chief Financial  Officer required by Item 15.                                                                                       |
|   |   |                                                                                                                                                                    |
|   | 13.01  | Certification pursuant to 18 U.S.C. Section 1350.                                                                                                                       |
|   |   |                                                                                                                                                                    |
|   | 13.02  | Certification pursuant to 18 U.S.C. Section 1350.                                                                                                                       |

----

# Incorporated by reference to the Company’sRegistration Statement on Form 20-F (file no. 0-51373) filed with theCommission on June 23, 2005

+ Incorporated by reference to the Company’s AnnualReport on Form 20-F (file no. 0-51373) filed with the Commission on December19, 2005.

* Certain provisions of this exhibit have been omittedand filed separately with the Commission pursuant to an application forconfidential treatment under Rule 24b-2 promulgated under the SecuritiesExchange Act of 1934, as amended.

75

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**SIGNATURES**

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

 

**CHEMGENEXPHARMACEUTICALS LIMITED**
| By:    |                                           | /s/ Greg Collier |   |
|--------|------------------------------------------------|------------------|--------|
| Name:  | Greg Collier                                   |             |
| Title: | Chief Executive Officer  and Managing Director |             |
| Date:  | December 22, 2006                              |             |
|        |                                                |                  |        |  |  |  |

 

76

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CHEMGENEXPHARMACEUTICALS LIMITED AND SUBSIDIARIES

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

 

F- 1

----

**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directors and Shareholders ofChemGenex Pharmaceuticals Limited:

Wehave audited the accompanying consolidated balance sheets of ChemGenexPharmaceuticals Limited and its controlled entities (the Company) as of 30 June2006 and 2005, and the related consolidated statements of income, cash flowsand changes in equity for each of the two years in the period ended 30 June2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrols over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting.  Accordingly,we express no such opinion.  An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of ChemGenexPharmaceuticals Limited and its controlled entities at 30 June 2006 and 2005and the consolidated results of their operations and their cash flows for eachof the two years in the period ended 30 June 2006 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 27 to the consolidated financialstatements.

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As more fully described in Note 1, the Company has incurred recurringoperating losses and negative cash flows from operating activities.  To fund the expected levels of operatingexpenditures, the Company will require additional sources of capital.  While the Company has previously beensuccessful in raising additional capital, there can be no assurance that itwill be able to raise sufficient capital to continue its operations.  These conditions raise substantial doubtabout the Company’s ability to continue as a going concern.  Management’s plans in regard to these mattersalso are discussed in Note 1.  The 2006consolidated financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that may result from the outcomeof this uncertainty.
| /s/ Ernst & Young |   |
|-----------------------|--------|
|                  |
| Melbourne, Australia  |
| 22 December 2006      |

 

F- 2

----

**ConsolidatedStatements of Income**
| **FOR THE YEAR ENDED JUNE 30** | ** ** | **Notes**  | ** ** | **2006**        | ** ** | **2005**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------|------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **$**           | ** ** | **$**      | ** ** |
| **Revenue**                                             |       |       |       |            |       |       |       |
| Research revenue                                        |       |       | ** ** | **1,676,297**   |       | 3,527,312  |       |
| Finance income                                          |       | 4          | (b)        | **241,634**     |       | 266,987    |       |
|                                                    |       |       | ** ** | **1,917,931**   |       | 3,794,299  |       |
| Research expenditure                                    |       | 4          | (d)        | **(7,184,978**  | **)**      | (4,621,406 | )          |
| **Gross profit**                                        |       |       | ** ** | **(5,267,047**  | **)**      | (827,107   | )          |
|                                                    |       |       | ** ** | ** **      |       |       |       |
| Other income                                            |       | 4          | (a)        | **379,091**     |       | 300,987    |       |
| Administration costs                                    |       |       | ** ** | **(967,032**    | **)**      | (847,903   | )          |
| NASDAQ listing expenses                                 |       |       |       | —          |       | (911,578   | )          |
| Employee benefits  expense                              |       | 4          | (c)        | **(2,710,341**  | **)**      | (2,631,862 | )          |
| Scientific advisory  board expense                      |       |       | ** ** | **(120,913**    | **)**      | (125,763   | )          |
| Patent expense                                          |       |       | ** ** | **(575,567**    | **)**      | (446,527   | )          |
| Legal expense                                           |       |       | ** ** | **(114,416**    | **)**      | (105,945   | )          |
| Depreciation                                            |       |       | ** ** | **(272,198**    | **)**      | (269,937   | )          |
| Travel expense                                          |       |       | ** ** | **(341,037**    | **)**      | (240,340   | )          |
| Accounting and audit  expense                           |       |       | ** ** | **(380,259**    | **)**      | (129,208   | )          |
| **Loss from operations before tax  and finance costs**  |       |       | ** ** | **(10,369,719** | **)**      | (6,235,183 | )          |
|                                                    |       |       | ** ** | ** **      |       |       |       |
| Finance costs                                           |       |       |       | —          |       | —     |       |
| **Loss before income tax**                              |       |       | ** ** | **(10,369,719** | **)**      | (6,235,183 | )          |
|                                                    |       |       | ** ** | ** **      |       |       |       |
| Income tax expense                                      |       | 5          |       | —          |       | —     |       |
| **Loss after tax**                                      |       |       | ** ** | **(10,369,719** | **)**      | (6,235,183 | )          |
|                                                    |       |       | ** ** | ** **      |       |       |       |
| **Loss attributable to members of  the parent**         |       |       | ** ** | **(10,369,719** | **)**      | (6,235,183 | )          |
|                                                    |       |       | ** ** | ** **      |       |       |       |
| Basic loss per share                                    |       | 6          | ** ** | **($0.09**      | **)**      | ($0.06     | )          |
| Diluted loss per share                                  |       | 6          | ** ** | **($0.09**      | **)**      | ($0.06     | )          |

 

F- 3

----

**Consolidated Balance Sheets**

 
| **AS AT JUNE 30**                     | ** ** | **Notes**  | ** ** | **2006**        | ** ** | **2005**    | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------|------------|-------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **$**           | ** ** | **$**       | ** ** |
| **CURRENT ASSETS**                                   |       |       | ** ** | ** **      | ** ** | ** **  | ** ** |
| Cash and cash  equivalents                           |       | 8          | ** ** | **15,553,696**  |       | 8,511,952   |       |
| Trade and other  receivables                         |       | 9          | ** ** | **79,011**      |       | 381,527     |       |
| Prepayments                                          |       |       | ** ** | **71,974**      |       | 163,373     |       |
| **TOTAL CURRENT ASSETS**                             |       |       | ** ** | **15,704,681**  |       | 9,056,852   |       |
| **NON-CURRENT ASSETS**                               |       |       | ** ** | ** **      | ** ** | ** **  | ** ** |
| Plant and equipment                                  |       | 11         | ** ** | **328,820**     |       | 587,022     |       |
| Intangible assets and  goodwill                      |       | 12         | ** ** | **16,931,750**  |       | 16,931,750  |       |
| **TOTAL NON-CURRENT ASSETS**                         |       |       | ** ** | **17,260,570**  |       | 17,518,772  |       |
| **TOTAL ASSETS**                                     |       |       | ** ** | **32,965,251**  |       | 26,575,624  |       |
|                                                 |       |       | ** ** | ** **      | ** ** | ** **  | ** ** |
| **CURRENT LIABILITIES**                              |       |       | ** ** | ** **      | ** ** | ** **  | ** ** |
| Trade and other  payables                            |       | 16         | ** ** | **1,621,865**   |       | 754,992     |       |
| Deferred revenue                                     |       |       | ** ** | **185,372**     |       | 465,833     |       |
| Provisions                                           |       | 17         | ** ** | **153,105**     |       | 119,351     |       |
| **TOTAL LIABILITIES**                                |       |       | ** ** | **1,960,342**   |       | 1,340,176   |       |
|                                                 |       |       | ** ** | ** **      | ** ** | ** **  | ** ** |
| **NET ASSETS**                                       |       |       | ** ** | **31,004,909**  |       | 25,235,448  |       |
| **EQUITY**                                           |       |       | ** ** | ** **      | ** ** | ** **  | ** ** |
| Equity attributable to  equity holders of the parent |       |       | ** ** | ** **      | ** ** | ** **  | ** ** |
| Issued capital                                       |       | 18         | ** ** | **99,892,615**  |       | 84,592,891  |       |
| Retained  earnings                                   |       |       | ** ** | **(81,023,002** | **)**      | (70,653,283 | )          |
| Other reserves                                       |       | 18         | ** ** | **12,135,296**  |       | 11,295,840  |       |
| **TOTAL EQUITY**                                     |       |       | ** ** | **31,004,909**  |       | 25,235,448  |       |

 

F- 4

----

**ConsolidatedCash Flow Statements**
| **FOR THE YEAR ENDED JUNE 30** | ** ** | **Notes**  | ** ** | **2006**        | ** ** | **2005**    | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------|------------|-------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **$**           | ** ** | **$**       | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                   |       |       | ** ** | ** **      |       |        |       |
| Customer revenues  received                             |       |       | ** ** | **1,920,107**   |       | 3,618,233   |       |
| Government grants  received                             |       | 4          | (a)        | **148,868**     |       | —      |       |
| Payments to suppliers  and employees                    |       |       | ** ** | **(10,554,593** | **)**      | (10,562,419 | )          |
|                                                    |       |       | ** ** | ** **      |       |        |       |
| NET CASH FLOWS USED IN  OPERATING ACTIVITIES            |       | 8          | ** ** | **(8,485,618**  | **)**      | (6,944,186  | )          |
|                                                    |       |       | ** ** | ** **      |       |        |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**               |       |       | ** ** | ** **      |       |        |       |
| Interest  received                                      |       | 4          | (b)        | **241,634**     |       | 266,987     |       |
| Purchase of plant and  equipment                        |       | 11         | ** ** | **(13,996**     | **)**      | (15,218     | )          |
| NET CASH FLOWS FROM  INVESTING ACTIVITIES               |       |       | ** ** | **227,638**     |       | 251,769     |       |
|                                                    |       |       |       |            |       |        |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**               |       |       |       |            |       |        |       |
| Proceeds from issues of  shares                         |       | 18         | ** ** | **15,723,021**  |       | 14,451,937  |       |
| Transaction cost of  issue of shares                    |       | 18         | ** ** | **(423,297**    | **)**      | (189,353    | )          |
| NET CASH FLOWS FROM  FINANCING ACTIVITIES               |       |       | ** ** | **15,299,724**  |       | 14,262,584  |       |
|                                                    |       |       | ** ** | ** **      |       |        |       |
| Net increase in cash  and cash equivalents              |       |       | ** ** | **7,041,744**   |       | 7,570,167   |       |
| Cash and cash  equivalents at beginning of period       |       |       | ** ** | **8,511,952**   |       | 941,785     |       |
| **CLOSING CASH CARRIED FORWARD**                        |       | 8          | ** ** | **15,553,696**  |       | 8,511,952   |       |

 

F- 5

----

**ConsolidatedStatements of Changes in Equity**
| ** **                                                                | ** ** | ** **     | ** ** | **Equity**     | ** ** | **Equity**    | ** ** | ** **      | ** ** | ** **     | ** ** |
|---------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                | ** ** | **Issued**     | ** ** | **Premium**    | ** ** | **Options**   | ** ** | **Retained**    | ** ** | **Total**      | ** ** |
| **From JULY 1, 2004 to JUNE 30, 2006** | ** ** | **Capital**    | ** ** | **Reserve**    | ** ** | **Reserve**   | ** ** | **Earnings**    | ** ** | **Equity**     | ** ** |
| ** **                                                                | ** ** | **$**          | ** ** | **$**          | ** ** | **$**         | ** ** | **$**           | ** ** | **$**          | ** ** |
| **At July 1, 2004**                                                       | ** ** | **70,257,383** | ** ** | **10,866,878** | ** ** | **6,857**     | ** ** | **(64,518,100** | **)**      | **16,713,018** | ** ** |
| ** **                                                                | ** ** | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** | ** **      | ** ** | ** **     | ** ** |
| Loss for the year June  30, 2005                                          |       |           |       |           |       |          |       | (6,235,183      | )          | (6,235,183     | )          |
| Issue of share capital                                                    | (i)        | 6,244,437      |       |           |       |          |       |            |       | 6,244,437      |       |
| less cost of issue of  share capital                                      |       | (189,353       | )          |           |       |          |       |            |       | (189,353       | )          |
| Fees paid in lieu of  cash                                                | (ii)       | 40,576         |       |           |       |          |       |            |       | 40,576         |       |
| Cost of share-based  payments                                             |       |           |       |           |       | 422,105       |       |            |       | 283,053        |       |
| Issue of share capital                                                    | (iii)      | 8,195,000      |       |           |       |          |       |            |       | 8,195,000      |       |
| Options exercised under  Employee Share Options Plan                      | (iv)       | 12,500         |       |           |       |          |       |            |       | 12,500         |       |
| Fees paid in lieu of  cash                                                | (v)        | 32,348         |       |           |       |          |       |            |       | 32,348         |       |
| **At June 30, 2005**                                                      | ** ** | **84,592,891** | ** ** | **10,866,878** | ** ** | **428,962**   | ** ** | **(70,653,283** | **)**      | **25,235,448** | ** ** |
| ** **                                                                | ** ** | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** | ** **      | ** ** | ** **     | ** ** |
| Loss for year ended  June 30, 2006                                        |       |           |       |           |       |          |       | (10,369,719     | )          | (10,369,719    | )          |
| Issue of share capital                                                    | (vi)       | 15,723,021     |       |           |       |          |       |            |       | 15,723,021     |       |
| less cost of issue of  share capital                                      |       | (423,297       | )          |           |       |          |       |            |       | (423,297       | )          |
| Cost of share-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** | ** ** |

 

----

(i)                                     On July 14, 2004, 13,009,244 ordinary shareswere issued at 48 cents each raising $6,244,437 for working capital and tofurther develop the company’s two anti-cancer compounds in Phase 2 clinicaltrials in the United States. This issue was ratified by the Annual GeneralMeeting of shareholders held on November 23, 2004.

(ii)                                  On November 23, 2004 after approval byshareholders at the Annual General meeting, 84,535 ordinary shares at an issueprice of $0.48 were issued to Topete Pty. Ltd. as consideration for servicesprovided in regard to the capital raising on July 14, 2004.

(iii)                               On January 24, 2005, 14,900,000 ordinary shares were issued at 55 centseach raising $8,195,000 to expedite the continued clinical trials. No directcosts were incurred in relation to this issue. This issue was ratified by theAnnual General Meeting of shareholders held on November 16, 2005.

(iv)                              On February 14, 2005, 25,000 ordinary shareswere issued at 50 cents raising $12,500 upon the exercise of 25,000 optionspreviously issued under the Employee Share Option Plan (ESOP).

(v)                                 On February 21, 2005, 50,543,  ordinary shares at $0.64 cents each  were issued to the University of Texas MDAnderson Cancer Center in accordance with a Patent and Technology LicenseAgreement to support clinical trials. This issue was ratified by the Annual GeneralMeeting of Shareholders held on November 16, 2005.

(vi)                              In May 2006 Chemgenex Pharmaceuticals Limitedannounced a programme of share issues to provide working capital and tocontinue the company’s ongoing research activities-

·                  On May 18, 2006 16,700,000 ordinary shareswere issued at 43 cents each.  This issuewas ratified by an Extraordinary General Meeting of shareholders held on June16, 2006.

·                  On June 1, 2006 1,665,170 ordinary shares wereissued at 43 cents under a Share Placement Programme offered to allshareholders

·                  On June 16, 2006 18,200,000 ordinary shareswere issued at 43 cents per share following approval by an ExtraordinaryGeneral Meeting of shareholders held on June 16, 2006.

F- 6

----

**Notes tothe Financial Statements**

**JUNE 30, 2006**

**1. CORPORATE INFORMATION**

The financialreport of ChemGenex Pharmaceuticals Limited (“ChemGenex” or “Company” or “Group”)for the year ended June 30, 2006 was authorised for issue in accordance with aresolution of the directors on August 24, 2006.

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 of theoperations and principal activities of ChemGenex are described in note 3.

The consolidatedfinancial statements have been prepared on the basis of going concern whichcontemplates continuity of normal business activities and the realisation ofassets and settlement of liabilities in the ordinary course of business.  Since commencing biotechnology activities inJune 1996 the Company has experienced recurring net losses and negative cashflows from operations. At June 30, 2006, the Company had an accumulated lossesof $81,023,002 and recorded a net loss of $10,369,719 and negative cash flowsfrom operations of $8,485,618 for the year ended June 30, 2006. These factorscast some uncertainty on the Company’s ability to continue as an ongoingenterprise for a reasonable period of time. The Company’s ability to continueas an ongoing enterprise in its current configuration is dependent on itsecuring continued funding from collaboration and licensing agreements and/orby raising additional equity capital.

Based onanticipated cash flow requirements of the Company’s existing research anddevelopment activities, the directors consider that the Company will havesufficient funds to support operations into the second half of calendar 2007.

The directors areconfident that adequate funds to support the Company’s continued operationswill be raised from collaboration and licensing agreements and/or equityplacements as required. From July 1, 1996 it has raised approximately $60.6million (including $29.6 million since July 1, 2004) from the issue of equitysecurities. In addition, during this time, the Company has receivedapproximately $26.0 million from its pharmaceutical partners pursuant tocollaboration and licensing agreements.

While the Companyhas previously been successful in raising additional capital, there can be noassurance that it will be able to raise sufficient capital to continue itsoperations.  In the event that additionalfunding is not obtained, the Company may have to significantly reduce itsexpenditure on research and development programs and other costs. The Company’sresearch expenditure commitments for the following 12 month period wereapproximately $6.6 million (refer Note 23) and its employee costs for the yearended June 30, 2006 were approximately $2.2 million (the directors expect theCompany’s employee costs for fiscal 2006/07 to be of a similar magnitude). Thedirectors consider that the Company’s remaining costs are predominantlydiscretionary in nature and can be reduced if required.

Accordingly, thereexists a substantial doubt about the Company’s ability to continue as a goingconcern. The Directors believe that the Company will succeed in securingadditional funding in the near future. The Company has previously relied on thesupport of their shareholders and the investment community to provide equityfunding to support their activities. The Directors are actively seeking furtherfunding to allow the Company to continue to operate. In the Directors’ opinion,there are reasonable grounds to believe that such funding will continue to beavailable. However, if such funding is unavailable, there is significantuncertainty as to whether the Company will continue as a going concern and,therefore may realise its assets and settle its liabilities at amountsdifferent from those stated in the consolidated financial statements. Noadjustments have been made to the financial statements relating to therecoverability and classification of the asset carrying amounts orclassification of liabilities that might be necessary should the Company notcontinue as a going concern.

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**(a)           Basis of accounting**

The financial report is a general-purpose financialreport, which has been prepared in accordance with the requirements of theCorporations Act 2001 and Australian Accounting Standards. The financial reporthas also been prepared on a historical cost basis.

The financial report is presented in Australiandollars.

**(b)           Statement of compliance**

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

F- 7

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This is the firstfinancial report prepared based on AIFRS and comparatives for the year endedJune 30, 2005 have been restated accordingly. Reconciliations of AIFRS equityand loss for June 30, 2005 to the balances reported in the June 30, 2005financial report are detailed in Note 2(v) below.

**(b)           Statement of compliance (cont)**

Certain Australian Accounting Standards and UrgentIssues Group (‘UIG’) interpretations have recently been issued or amended butare not yet effective and have not been adopted by the Group for the annualreporting period ended 30 June 2006. The directors’ have assessed the impact ofthese new or amended standards (to the extent relevant to the group) andinterpretations as follows:

| AASB  Amendment | ** ** | **Affected Standard (s)**                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Nature of change to  accounting policy**                    | ** ** | **Application date of  standard **** | ** ** | **Application date  for Group** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|
| 2005-1          |       | AASB 139*Financial Instruments:  Recognition and Measurement*                                                                                                                                                                                                                                                                                                                                             |       | No change to accounting policy required. Therefore  no impact |       | January 1, 2006                      |       | July 1, 2006                    |
| 2005-4          |       | AASB 139*Financial Instruments:  Recognition and Measurement,*AASB 132*Financial  Instruments: Disclosure and Presentation,*and**AASB  1*First-time adoption of AIFRS.*                                                                                                                                                                                                                                   |       | No change to accounting policy required. Therefore  no impact |       | January 1, 2006                      |       | July 1, 2006                    |
| 2005-5          |       | AASB 1*First-time adoption of  AIFRS*and**AASB 139*Financial Instruments: Recognition and Measurement*                                                                                                                                                                                                                                                                                                    |       | No change to accounting policy required. Therefore  no impact |       | January 1, 2006                      |       | July 1, 2006                    |
| 2005-6          |       | AASB 3*Business Combinations*                                                                                                                                                                                                                                                                                                                                                                             |       | No change to accounting policy required. Therefore  no impact |       | January 1, 2006                      |       | July 1, 2006                    |
| 2005-9          |       | AASB 4*Insurance Contracts,*AASB  1023*General insurance Contracts,*AASB 139*Financial Instruments: Recognition and Measurement*and**AASB 132*Financial Instruments:  Disclosure and Presentation*                                                                                                                                                                                                        |       | No change to accounting policy required. Therefore  no impact |       | January 1, 2006                      |       | July 1, 2006                    |
| 2005-10         |       | AASB 132*Financial Instruments:  Disclosure and Presentation,*AASB 101*Presentation of Financial Statements,*AASB 114*Segment  Reporting,*AASB 117*Leases,*AASB  133*Earnings per Share,*AASB 139 *Financial Instruments: Recognition and Measurement,*AASB 1*First-time adoption of AIFRS,* AASB 4*Insurance  Contracts,*AASB 1023*General insurance  Contracts*and AASB 1038*Life Insurance  Contracts* |       | No change to accounting policy required. Therefore  no impact |       | January 1, 2007                      |       | July 1, 2007                    |
| 2006-1          |       | AASB 121*The Effects of Change in  Foreign Currency Rates*                                                                                                                                                                                                                                                                                                                                                |       | No change to accounting policy required. Therefore  no impact |       | January 1, 2006                      |       | July 1, 2006                    |
|            |       | UIG Interpretation 8*Scope of  AASB 2 Share based payments*                                                                                                                                                                                                                                                                                                                                               |       | No change to accounting policy required. Therefore  no impact |       |                                 |       | July 1, 2006                    |

 

 **(c)          Basis of consolidation**

The consolidated financial statements comprise thefinancial statements of ChemGenex Pharmaceuticals Limited (“the Parent”) andits subsidiaries (‘the Group”).

The financial statements of subsidiaries are preparedfor the same reporting period as the parent company, using consistentaccounting policies. Adjustments are made to bring into line any dissimilaraccounting policies that may exist.

All intercompany balances and transactions, includingunrealised profits arising from intra-group transactions, have been eliminatedin full.  Unrealised losses areeliminated unless costs cannot be recovered.

Subsidiaries are consolidated from the date on whichcontrol is transferred to the Group and cease to be consolidated from the dateon which control is transferred from the Group.

F- 8

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**(d)           Significant accounting estimates andassumptions**

The carrying amount of certain assets and liabilitiesare often determined based on estimates and assumptions of future events. Thekey estimates and assumptions that have a significant risk of causing amaterial adjustment to the carrying amounts of certain assets and liabilitieswithin the next annual reporting period are:

*Impairment of goodwill and intangibles withindefinite useful lives*

The Group determines whether goodwill and intangibleswith indefinite useful lives are impaired at least on an annual basis. Thisrequires an estimate of the recoverable amount of the cash–generating units towhich the goodwill and intangibles with indefinite lives are allocated. Theassumptions used in this estimation of recoverable amount and the carryingamount of goodwill and intangibles with indefinite useful lives are discussedin note 13.

*Share-based payment transactions*

The Group measures the cost of share-based payments atfair value at the grant date using the Black-Scholes formula, taking intoaccount the terms and conditions upon which the instruments were granted, asdiscussed in note 14.

**(e)           Foreign currencies**

Both the functional and presentation currency ofChemGenex Pharmaceuticals Limited and its Australian subsidiary AutogenResearch Pty Ltd is Australian dollars (A$).

Transactions in foreign currencies are initiallyrecorded in the functional currency at the rate of exchange ruling at the dateof the transaction. Monetary assets and liabilities denominated in foreigncurrencies are retranslated at the rate of exchange ruling at the balance sheetdate.

All differences in the consolidated financial reportare taken to the income statement.

Non-monetary items that are measured in terms ofhistorical cost in a foreign currency are translated using the exchange rate asat the date of the initial transaction. Non-monetary items that are measured atfair value in a foreign currency are translated using the exchange rates at thedate the fair value was determined.

The functional currency of the overseas subsidiaryChemGenex Pharmaceuticals Inc. is United States dollars (US$).

As at the reporting date the assets and liabilities ofthe overseas subsidiary are translated into the presentation currency of theParent at the rate of exchange ruling at the balance sheet date and the incomestatement is translated at the weighted average exchange rates for the period.The exchange differences arising on translation are taken directly to aseparate component of equity.

On disposal of a foreign entity, the deferredcumulative amount recognised in equity relating to that particular foreignoperation is recognised in the income statement.

**(f)            Cash and cash equivalents**

Cash and short-term deposits in the balance sheetcomprise cash at bank and in hand and short-term deposits with an originalmaturity of three months or less. For the purposes of the Cash Flow Statement,cash includes cash and cash equivalents as defined above, net of outstandingbank overdrafts.

**(g)           Trade and other receivables**

Trade receivables, which generally have 30 day terms,are recognised and carried at original invoice amount less any allowance forany uncollectible amounts.  An estimatefor doubtful debts is made when collection of the full amount is no longerprobable. Bad debts are written-off when incurred.

F- 9

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**(h)           Plant and equipment**

*Cost and valuation*

Plant and equipment are carried at cost lessaccumulated depreciation and any impairment in value.

*Depreciation*

Depreciation is provided on a straight-line basis onall plant and equipment.
| Major depreciation periods  are:      |   |       |
|---------------------------------------|--------|------------|
|                                  |   |       |
| Plant and  equipment:                 |   |       |
|                                  |   |       |
| ·  research  equipment |   | 5-7 years  |
|                                  |   |       |
| ·  office  equipment   |   | 3-13 years |

 

*Impairment*

The carrying values of plant and equipment arereviewed for impairment when events or changes in circumstances indicate thecarrying value may not be recoverable.

If any such indication exists and where the carryingvalue exceeds the estimated recoverable amount the assets are written down totheir recoverable amount. The recoverable amount of plant and equipment is thegreater of the fair value less costs to sell and value in use.

**(i)            Goodwill**

Goodwill on acquisition is initially measured at cost,being the excess of the cost of the business combination over the acquirer’sinterest in the fair value of identifiable assets, liabilities and contingentassets acquired. Following initial recognition, goodwill is measured at costless any accumulated impairment losses. The basis for calculating possibleimpairment of goodwill is set out in note 13.

Goodwill has not been amortised since theimplementation of AIFRS on July 1, 2004. Goodwill is reviewed for impairmentannually or more frequently if events or changes in circumstances indicate thatthe carrying value may be impaired.

At the acquisition date, any goodwill acquired isallocated to each of the cash-generating units expected to benefit from thecombination’s synergies. Impairment is determined by assessing the recoverableamount of the cash-generating unit to which the goodwill relates.

Where the recoverable amount of the cash-generatingunit is less than the carrying amount, an impairment loss is recognised.

Where goodwill forms part of a cash-generating unitand part of the operation within that unit is disposed of, the goodwillassociated with the operation disposed of is included in the carrying amount ofthe operation when determining the gain or loss on disposal of the operation.

Goodwill disposed of in this circumstance is measuredon the basis of the relative values of the operation disposed of and theportion of the cash-generating unit retained.

**(k)          Research costs**

Research costs areexpensed as incurred.

F- 10

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**(j)            Impairment of assets**

At each reporting date, the Group assesses whetherthere is any indication that an asset may be impaired. Where an indicator ofimpairment exists, the Group makes a formal estimate of the recoverable amount.Where the carrying amount of an asset exceeds its recoverable amount the assetis considered impaired and is written down to its recoverable amount.

An asset’s recoverable amount is the higher of itsfair value less costs to sell and its value in use and is determined for anindividual asset, unless the asset does not generate cash inflows that arelargely independent of those from other assets or group of assets and the asset’svalue in use cannot be estimated to be close to its fair value.  In such cases the asset is tested forimpairment as part of the cash generating unit to which it belongs.  When the carrying amount of an asset orcash-generating unit exceeds its recoverable amount, the asset orcash-generating unit is considered impaired and is written down to itsrecoverable amount.

In assessing value in use, the estimated future cashflows are discounted to their present value using a pre-tax discount rate thatreflects current market assessments of the time value of money and the risksspecific to the asset.

**(l)            Employeebenefits**

Provision is made for employee benefits accumulated asa result of employees rendering services up to the reporting date.  These benefits include wages and salaries,annual leave and long service leave.

Liabilities arising in respect of wages and salaries,annual leave and other employee entitlements expected to be settled withintwelve months of the reporting date are measured based on remuneration rateswhich are expected to be paid when the liability is settled. All other employeeentitlement liabilities are measured at the present value of the estimatedfuture cash outflow to be made in respect of services provided by employees upto the reporting date. In determining the present value of the future cashoutflows, the interest rates attaching to government guaranteed securities whichhave terms to maturity approximating the terms of the related liability areused.

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

The Group makescontributions to external superannuation funds in accordance with existingemployment contracts and to meet it’s obligations under Australian taxationlaw.

The Group has no liabilities or commitments for postemployment benefits for any employee as at June 30, 2006.

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

The Group may provide benefits to employees (includingdirectors), consultants and suppliers of the Group in the form of share-basedpayment transactions, whereby employees render services in exchange for sharesor rights to purchase shares (‘equity settled transactions’). These benefitsmay be provided under the Employee Share Option Plan (‘ESOP’) or by issuesapproved at General Meetings of Shareholders.

The cost of equity-settled transactions is measured byreference to the fair value at the date at which they are granted. The fairvalue is determined using the Black Scholes option pricing model. In valuingequity-settled transactions, no account is taken of any performance conditions,other than conditions linked to the price of the shares of ChemGenexPharmaceuticals Limited (‘market conditions’).

The cost of equity-settled transactions is recognised,together with a corresponding increase in equity, over the period in which theperformance conditions are fulfilled, ending on the date on which therecipients become entitled to the award (‘vesting date’).

The cumulative expense recognised for equity-settledtransactions at each reporting date until vesting date reflects:

(i)                                     the extent to which the vesting period hasexpired, and

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

This opinion is formed based on the best availableinformation at balance date. No adjustment is made for the likelihood of marketperformance conditions being met as the effect of these conditions is includedin the determination of fair value at grant date.

Where the terms of an equity-settled award aremodified, as a minimum an expense is recognised as if the terms had not beenmodified. In addition, an expense is recognised for any increase in the valueof the transaction as a result of the modification, as measured at the date ofmodification.

Where an equity-settled award is cancelled, it istreated as if it had vested on the date of cancellation, and any expense notyet recognised for the award is recognised immediately. However, if a new awardis substituted for the cancelled award, and designated as a replacement awardon the date that it is granted, the cancelled and new award are treated as ifthey were a modification of the original award, as described in the previousparagraph.

F- 11

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**(o)           Leases**

Leases where the lessor retains substantially all ofthe risks and benefits of ownership of the assets are classified as operatingleases. Operating lease payments are recognised as an expense in the incomestatement on a straight-line basis over the lease term.

**(p)           Trade and payables**

Liabilities for trade creditors and other amounts arecarried at cost which is fair value of the consideration to be paid in thefuture for goods and services, whether or not billed to the Group.

**(q)           Issued Capital**

Issued and paid up capital is recognised at the fairvalue of the consideration received by the Group and is classified as equity.

Any transaction costs arising on the issue of ordinaryshares are recognised directly in equity as a reduction of the share proceeds received.

**(r)           Revenue recognition**

*a) Research revenue*

Revenue under researchcollaboration agreements is recognised as earned on a straight-line basis overthe life of the respective agreement as this reflects the level of effortrequired over the performance period. These agreements are performed on a “bestefforts” basis with no guarantees of either technical or commercial success.Project funding received in advance of the period in which the associatedresearch efforts are performed is included in deferred revenue.

*b) Interest*

Interest income isrecognised as interest accrues using the effective interest method, which isthe rate that exactly discounts estimated future cash receipts through theexpected life of the financial asset to the net carrying amount of thefinancial asset.

*c) Patent reimbursement*

Patent reimbursementcomprises amounts received in accordance with partnership agreements for patentcosts incurred by the Group in conjunction with specified research projects.The revenue is recognised when the reimbursable expense is incurred andapproved in accordance with the agreement.

*d) Government grants*

Revenue from governmentgrants is recognised when received and all attaching conditions have beencomplied with.

When the grant relates to anexpense item, it is recognised as income over the periods necessary to matchthe grant on a systematic basis to the costs that it is intended to compensate.

*e) Reimbursement of initialNASDAQ expenses*

Under an agreement with theBank of New York ChemGenex was reimbursed for some costs associated withobtaining the initial NASDAQ listing. The revenue was recognised when the reimbursable expenses were incurredin accordance with the agreement.

**(s)            Loss per share**

Basic loss per share isdetermined by dividing the loss from ordinary activities after income tax bythe weighted average number of ordinary shares, outstanding during the period.

The computation of dilutedloss per share is similar to basic loss per share, except that it assumes thepotentially dilutive securities, such as share options, were converted toshares as of the beginning of the period. For all periods presented, dilutedloss per share is equivalent to basic loss per share as the potentiallydilutive securities are excluded from the computation of diluted loss per sharebecause the effect is ant-dilutive.

**(t)             Income taxes**

Deferred income tax assetsand liabilities are measured at the tax rates that are expected to apply to theyear when the asset is realised or the liability is settled, based on tax ratesthat have been enacted or substantively enacted at the balance sheet date.

Deferred income tax assetshave not been recognised as it is not considered probable that taxable profitwill be available against which deductible temporary differences, and thecarry-forward of unused tax assets and unused tax losses can be utilised.

F- 12

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**(u)           Othertaxes**

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

·                  where the GST incurred on a purchase of goodsand services is not recoverable from the taxation authority, in which case theGST is recognised as part of the cost of acquisition of the asset or as part ofthe expense item as applicable; and

·                  receivables and payables are stated with theamount of GST included.

The net amount of GSTrecoverable from, or payable to, the taxation authority is included as part ofreceivables or payables in the consolidated Balance Sheet.

Cash flows are included inthe consolidated Cash Flow Statement on a gross basis and the GST component ofcash flows arising from investing and financing activities, which isrecoverable from, or payable to, the taxation authority are classified asoperating cash flows.

Commitments andcontingencies are disclosed net of the amount of GST recoverable from, orpayable to, the taxation authority.

F- 13

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**(v)           Impactof adoption of AIFRS**

For all periods up to andincluding the year ended June 30, 2005, the Group prepared its financialstatements in accordance with Australian generally accepted accounting practice(“AGAAP”). These financial statements for the year ended June 30, 2006 are thefirst the Group is required to prepare in accordance with AIFRS.

Accordingly the Group hasprepared financial statements that comply with AIFRS applicable for periodsbeginning after January 1, 2005 and the significant accounting policies meetingthose requirements are described in note 2. In preparing these 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 inaccounting policies and other restatements required by AASB 1 First-timeadoption of AIFRS.

This note explains theprincipal adjustments made by the Group in restating its AGAAP balance sheet asat July 1, 2004 and its previously published AGAAP financial statements for theyear ended June 30, 2005.

*Exemptions applied*

AASB 1 allows first-timeadopters certain exemptions from the general requirement to apply AIFRSretrospectively.

The Group has taken the following exemptions:

·                  AASB 2 *Share-based Paymen*thas not been applied to any equity instruments that were granted on or beforeNovember 7, 2002, nor has it been applied to equity instruments granted afterNovember 7, 2002 that vested before January 1, 2005.

·                  AASB 3 *Business Combinations*has not been applied to acquisitions of subsidiaries that occurred before July1, 2004.

*Explanation of material adjustments to the cash flow statement*

There are no materialdifferences between the cash flow statement presented under AIFRS and the cashflow statement presented under previous AGAAP.

The impacts of adoptingAIFRS on the total equity and profit after tax as reported under AGAAP areillustrated 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 *Business Combination*Goodwill is not amortised as impairment is expensed when it is identified.  Under AGAAP Goodwill was expensed over 20years. The Amortisation of Goodwill charged after July 1, 2004 has beenreversed under AIFRS.

F- 14

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**(ii) Reconciliation of loss after tax under AGAAPto 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 as impairment is expensed when it is identified.  Under AGAAP Goodwill was expensed over 20years. The Amortisation of Goodwill charged after July1, 2004 has been reversedunder AIFRS.

(B)        Share-based payment costs are charged to the income statement underAASB 2 ‘*Share-Based Payments’*, but not underAGAAP.

F- 15

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**3.SEGMENT INFORMATION**

The Group performs biotechnology research.

Following the acquisition of ChemGenex TherapeuticsInc. in June 2004 the group’s operations have been conducted in Australia andthe United States of America.

Discovery and clinicalresearch activities in oncology are managed at the Group’s American offices inMenlo Park, California.

Discovery into metabolicsyndrome and depression are managed at the Group’s Australian offices inGeelong, Victoria.
| **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     |       |

 

F- 16

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| **JUNE 30, 2005**                | ** ** | **Australia** | ** ** | **United States of  America** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **$**         | ** ** | **$**                                   | ** ** | **$**      | ** ** |
| **Revenue**                                |       |          |       |                                    |       |       |       |
|                                       |       |          |       |                                    |       |       |       |
| Research revenue                           |       | 3,527,312     |       | —                                  |       | 3,527,312  |       |
| Finance revenue                            |       | 266,918       |       | 69                                      |       | 266,987    |       |
| Other revenue                              |       | 300,987       |       | —                                  |       | 300,987    |       |
| Inter-segment  sales                       |       | —        |       | —                                  |       | —     |       |
| Total segment  revenue                     |       | 4,095,217     |       | 69                                      |       | 4,095,286  |       |
| Inter-segment  elimination                 |       | —        |       | —                                  |       | —     |       |
| Total  consolidated revenue                |       | 4,095,217     |       | 69                                      |       | 4,095,286  |       |
| **Result**                                 |       |          |       |                                    |       |       |       |
|                                       |       |          |       |                                    |       |       |       |
| Segment result                             |       | (4,341,699    | )          | (1,893,484                              | )          | (6,235,183 | )          |
| Inter-segment  elimination                 |       | —        |       | —                                  |       | —     |       |
| Net loss for the  year                     |       | (4,341,699    | )          | (1,893,484                              | )          | (6,235,183 | )          |
| **Assets  and liabilities**                |       |          |       |                                    |       |       |       |
|                                       |       |          |       |                                    |       |       |       |
| Segment assets                             |       | 26,334,304    |       | 241,320                                 |       | 26,575,624 |       |
| Segment  liabilities                       |       | 1,193,852     |       | 146,324                                 |       | 1,340,176  |       |
| **Cash  flow information**                 |       |          |       |                                    |       |       |       |
|                                       |       |          |       |                                    |       |       |       |
| Net operating  cash flows                  |       | (5,109,950    | )          | (1,834,236                              | )          | (6,944,186 | )          |
| Net investing  cash flows                  |       | 257,069       |       | (5,300                                  | )          | 251,769    |       |
| Net financing  cash flows                  |       | 12,357,279    |       | 1,905,305                               |       | 14,262,584 |       |
| Net increase in  cash and cash equivalents |       | 7,504,398     |       | 65,769                                  |       | 7,570,167  |       |
| **Other  segment information**             |       |          |       |                                    |       |       |       |
|                                       |       |          |       |                                    |       |       |       |
| Capital  expenditure                       |       | 9,849         |       | 5,369                                   |       | 15,218     |       |
| Depreciation                               |       | 258,221       |       | 11,716                                  |       | 269,937    |       |

 

F- 17

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**4. REVENUES AND EXPENSES**

 
| **JUNE 30**                          | ** ** | **Notes**  | ** ** | **2006**       | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **$**          | ** ** | **$**      | ** ** |
| (a) Other Income                          |       |       | ** ** | ** **     |       |       |       |
|                                      |       |       | ** ** | ** **     |       |       |       |
| Export market  development grant          |       |       | ** ** | **148,868**    |       | —     |       |
| Patent reimbursement                      |       |       | ** ** | **230,223**    |       | 104,085    |       |
| Reimbursement of  initial NASDAQ expenses |       |       |       | —         |       | 196,902    |       |
|                                      |       |       | ** ** | **379,091**    |       | 300,987    |       |
|                                      |       |       | ** ** | ** **     |       |       |       |
| (b) Finance income                        |       |       | ** ** | ** **     |       |       |       |
| Bank interest received                    |       |       | ** ** | **241,634**    |       | 266,987    |       |
|                                      |       |       | ** ** | ** **     |       |       |       |
| (c) Employee benefits  expense            |       |       | ** ** | ** **     |       |       |       |
| Wages and salaries                        |       |       | ** ** | **(1,927,841** | **)**      | (1,834,591 | )          |
| Worker’s compensation  costs         |       |       | ** ** | **(7,240**     | **)**      | (15,630    | )          |
| Expense of share-based  payments          |       |       | ** ** | **(467,895**   | **)**      | (422,104   | )          |
| Superannuation costs                      |       |       | ** ** | **(76,755**    | **)**      | (81,708    | )          |
| Wages on-costs                            |       |       | ** ** | **(230,610**   | **)**      | (277,829   | )          |
| ** **                                |       |       | ** ** | **(2,710,341** | **)**      | (2,631,862 | )          |
|                                      |       |       | ** ** | ** **     |       |       |       |
| (d) Research costs                        |       |       | ** ** | ** **     |       |       |       |
| Metabolic syndrome                        |       |       | ** ** | **3,479,875**  |       | 3,685,119  |       |
| Depression                                |       |       | ** ** | **380,000**    |       | 380,000    |       |
| Oncology                                  |       |       | ** ** | **3,325,103**  |       | 556,287    |       |
|                                      |       |       | ** ** | **7,184,978**  |       | 4,621,406  |       |
|                                      |       |       | ** ** | ** **     |       |       |       |
| (e) Operating lease costs                 |       |       | ** ** | **89,698**     |       | 75,201     |       |

F- 18

----

**5. INCOME TAX**

 
| **JUNE 30, 2006**                                                                                                                                               | ** ** | **Notes**  | ** ** | **2006**        | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                                                                                | ** ** | ** ** | ** ** | **$**           | ** ** | **$**      | ** ** |
| *A reconciliation of income tax expense applicable  to accounting profit before income tax and income tax expense for the years  ended June 2006 and 2005 is as follows:* |       |       | ** ** | ** **      |       |       |       |
| Accounting loss  before income tax                                                                                                                                        |       |       | ** ** | **(10,369,719** | **)**      | (6,235,183 | )          |
|                                                                                                                                                                      |       |       | ** ** | ** **      |       |       |       |
| Tax at statutory  rates (30% Australia, 34% USA)                                                                                                                          |       |       | ** ** | **(3,265,930**  | **)**      | (1,946,294 | )          |
| Research and development allowance                                                                                                                                        |       |       | ** ** | **(321,077**    | **)**      | (308,884   | )          |
| Internal intellectual property transfer eliminated  on consolidation but taxable in USA                                                                                   |       |       | ** ** | **4,580,358**   |       | —     |       |
| Non-deductible items-                                                                                                                                                     |       |       | ** ** | ** **      |       |       |       |
| NASDAQ registration                                                                                                                                                       |       |       |       | —          |       | 214,400    |       |
| Equity based benefits                                                                                                                                                     |       |       | ** ** | **251,837**     |       | 126,631    |       |
|                                                                                                                                                                      |       |       | ** ** | **1,245,188**   |       | (1,914,147 | )          |
| Future income  tax benefits not recognised                                                                                                                                |       |       | ** ** | **(1,245,188**  | **)**      | 1,914,147  |       |
| Income tax  expense reported in income statement                                                                                                                          |       |       |       | —          |       | —     |       |

 

*Deferred income tax benefits*

Future income taxbenefit arising from tax losses of the parent and a controlled entity notrecognised at reporting date as realisation of the benefit is not regarded asprobable.
| Revenue losses            | ** ** | **13,878,135** |   | 15,123,323 |   |
|---------------------------|------------|----------------|--------|------------|--------|
| Capital gains  tax losses | ** ** | **436,439**    |   | 436,439    |   |
|                      | ** ** | **14,314,574** |   | 15,559,762 |   |

 

This future income tax benefit will only be obtained if:

(a)           future assessableincome is derived of a nature and of an amount sufficient to enable the benefitto be realised;

(b)           the conditions fordeductibility imposed 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*

AtJune 30, 2006 there is no recognised or unrecognised deferred income taxliabilities included (2005: $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, the possibility ofdefault is remote. The head entity of the tax consolidated group is the ParentEntity.

**Tax effect accounting by members of the taxconsolidated group**

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

Refer to note 27(e) for additional incometax disclosures.

F- 19

----

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

Basic loss pershare is determined by dividing the loss from ordinary activities after incometax by the weighted average number of ordinary shares, outstanding during theperiod.

The computation ofdiluted 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 following reflectsthe income and share data used in the earnings per share computations:
| ** **                                      | ** ** | **2006**        | ** ** | **2005**   | ** ** |
|-------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                      | ** ** | **$**           | ** ** | **$**      | ** ** |
| Net loss  attributable to ordinary shareholders | ** ** | **(10,369,719** | **)**      | (6,235,183 | )          |

 
| ** **                                                                          | ** ** | **Number of shares 2006** | ** ** | **Number of shares 2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| Weighted average  number of ordinary shares used in calculating earnings per share: | ** ** | **117,647,158**                          |       | 105,707,630                              |       |

 

There have been no othertransactions involving ordinary shares or potential ordinary shares since thereporting date and before the completion of these financial statements.

### **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. CASHAND CASH EQUIVALENTS**
| ** **                                                                                                                                      | ** ** | **2006**        | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                                                      | ** ** | **$**           | ** ** | **$**      | ** ** |
| ** **                                                                                                                                      |       |            |       |       |       |
| Cash at bank and at  hand                                                                                                                       | ** ** | **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                                                                                                                                        | ** ** | **(10,369,719** | **)**      | (6,235,183 | )          |
| *Adjustments for*                                                                                                                               | ** ** | ** **      | ** ** | ** ** | ** ** |
| Depreciation of plant and equipment                                                                                                             | ** ** | **272,198**     |       | 269,937    |       |
| Interest received                                                                                                                               | ** ** | **(241,634**    | **)**      | (266,987   | )          |
| Share options expensed                                                                                                                          | ** ** | **839,456**     |       | 495,029    |       |
| *Changes in assets and liabilities*                                                                                                             | ** ** | ** **      | ** ** | ** ** | ** ** |
| (Increase)/decrease in trade and other receivables                                                                                              | ** ** | **302,516**     |       | (351,086   | )          |
| (Increase)/decrease in prepayments                                                                                                              | ** ** | **91,399**      |       | (74,751    | )          |
| Increase/(decrease) in trade payables and deferred  revenue                                                                                     | ** ** | **586,412**     |       | (900,496   | )          |
| Increase in provisions                                                                                                                          | ** ** | **33,754**      |       | 119,351    |       |
| Net cash flow  used in operating activities                                                                                                     | ** ** | **(8,485,618**  | **)**      | (6,944,186 | )          |

 

F- 20

----

 

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

 
| **JUNE 30,** | ** ** | **Notes**  | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-------------------|------------|------------|------------|------------|------------|----------|------------|
| ** **        | ** ** | ** ** | ** ** | **$**      | ** ** | **$**    | ** ** |
| Trade debtors     |       |       |       | —     |       | 381,527  |       |
| Other debtors     |       |       | ** ** | **79,011** |       | —   |       |
| ** **        |       |       | ** ** | **79,011** |       | 381,527  |       |

 

**Termsand conditions**

Terms and conditions relating to the above financial instruments.

(i)            Trade debtors arenon-interest bearing and generally on 30 day terms.

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

**Related Parties**

As at June 30, 2006 theamount owing by related parties and included in Trade and other receivables was$NIL (2005: $97,149).  Refer Note 26Related Party Disclosures.

**10.CONSOLIDATED SUBSIDIARIES**
| **Name**                        | ** ** | **Country of  incorporation** | ** ** | **Percentage of equity interest  held by the consolidated entity** | ** ** | **Investment** | ** ** |
|---------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                      | ** ** | ** **                         | ** ** | **2006**                                                                                              | ** ** | **2005**       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **                         | ** ** | **%**                                                                                                 | ** ** | **%**          | ** ** | **$** | ** ** | **$** | ** ** |
| ** **                      | ** ** | ** **                         | ** ** | ** **                                                                                            | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Autogen Research  Pty Ltd       |       | Australia                          | ** ** | **100**                                                                                               |       | 100            | ** ** | **2** |   | 2 |   |
|                            |       |                               | ** ** | ** **                                                                                            |       |           | ** ** | ** ** |   |   |   |
| ChemGenex  Pharmaceuticals Inc. |       | USA                                | ** ** | **100**                                                                                               |       | 100            | ** ** | **15,120,000** |   | 15,120,000 |   |
|                            |       |                               | ** ** | ** **                                                                                            |       |           | ** ** | ** ** |   |   |   |
|                            |       |                               | ** ** | ** **                                                                                            |       |           |       | **15,120,002** |   | 15,120,002 |   |

 

F- 21

----

 

**11. PLANT AND EQUIPMENT**

 
| ** **                 | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **$**      | ** ** | **$**      | ** ** |
| ** **                 |       |       |       |       |       |
| *Carrying  amount*         |       |       |       |       |       |
| Office equipment           |       |       |       |       |       |
| At cost                    |       | 92,333     |       | 78,337     |       |
| Accumulated  depreciation  |       | (56,345    | )          | (36,171    | )          |
|                       |       | 35,988     |       | 42,166     |       |
| Research  equipment        |       |       |       |       |       |
| At cost                    |       | 1,604,036  |       | 1,604,036  |       |
| Accumulated  depreciation  |       | (1,311,204 | )          | (1,059,180 | )          |
|                       |       | 292,832    |       | 544,856    |       |
| Total plant and  equipment |       | 328,820    |       | 587,022    |       |
|                       |       |       |       |       |       |
| Total plant and  equipment |       |       |       |       |       |
| At cost                    |       | 1,696,369  |       | 1,682,273  |       |
| Accumulated  depreciation  |       | (1,367,549 | )          | (1,095,351 | )          |
| Total net  carrying amount |       | 328,820    |       | 587,022    |       |

 
| ** **                                                                                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                      | ** ** | **$**      | ** ** | **$**      | ** ** |
| *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                                                                                   |       | 42,166     |       | 44,861     |       |
| Additions at  cost                                                                                              |       | 13,996     |       | 15,218     |       |
| Depreciation  expense                                                                                           |       | (20,174    | )          | (17,913    | )          |
| Carrying amount  at the end of year                                                                             |       | 35,988     |       | 42,166     |       |
|                                                                                                            |       |       |       |       |       |
| Office equipment                                                                                                |       |       |       |       |       |
| Carrying amount  at beginning                                                                                   |       | 544,856    |       | 796,880    |       |
| Additions at  cost                                                                                              |       | —     |       | —     |       |
| Depreciation  expense                                                                                           |       | (252,024   | )          | (252,024   | )          |
| Carrying amount at the  end of year                                                                             |       | 292,832    |       | 544,856    |       |

 

F- 22

----

 

**12. INTANGIBLE ASSETS AND GOODWILL**

 
| ** **                               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | **$**      | ** ** | **$**      | ** ** |
| *Carrying  amount*                       |       |       |       |       |       |
| At cost                                  |       | 16,962,561 |       | 16,962,561 |       |
| Accumulated  amortisation and impairment |       | (30,811    | )          | (30,811    | )          |
|                                     |       | 16,931,750 |       | 16,931,750 |       |

 

As at June 30, 2006 and2005, these assets were tested for impairment.

No impairment loss wascharged for the years ended June 30, 2006 and 2005.

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

The followingdescribes key assumptions on which the management has based its cash flowprojections to undertake impairment testing of goodwill and intellectualproperty.

For each of thecompounds, currently subject to clinical trials for oncology applications bythe company, we have projected future cash flows using information fromscientific journals on the existing incidence of the disease, projections ofpatients that would be eligible for the proposed treatment and expected growthfigures.

Direct costs havebeen based on existing manufacturing and supply agreements and industrystandards used for other associated costs.

### **14. SHARE BASED PAYMENT PLANS**

**EmployeeShare Option Scheme**

An Employee ShareOption Plan (ESOP) has been established where ChemGenex Pharmaceuticals Limitedmay, at the discretion of management, grant options over the ordinary shares ofChemGenex Pharmaceuticals Limited to directors, executives and certaincontractors 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 cannot be transferred and willnot be quoted on the ASX.  Currently onedirector, three employees and 19 scientific consultants hold options issued underthe ESOP.

On September 29,2005 275,000 options with a fair value of $0.35 at grant date were granted overordinary shares with an exercise price of $0.43, and on February 22, 2006269,500 options with a fair value of $0.36 were granted over ordinary shareswith an exercise price of $0.65. These options are exercisable until March 24,2010.  (During the year ended June 30,2005, 360,000 options with a fair value of $0.40 were granted over ordinaryshares with an exercise price of $0.56)

The fair value ofthe options issued under ESOP are estimated at the date of grant using the BlackScholes Valuation Method. The following table gives the assumptions made indetermining fair value of options granted during the years ended June 30, 2006and 2005.
| ** **                        | ** ** | **2006**           | ** ** | **2005**   | ** ** |
|-----------------------------------|------------|--------------------|------------|------------|------------|
| ** **                        | ** ** | ** **         | ** ** | ** ** | ** ** |
| Dividend yield  (%)               | ** ** | **0.00**           |       | 0.00       |       |
| Expected  volatility (%)          | ** ** | **70.00**          |       | 65.00      |       |
| Risk-free  interest rate (%)      | ** ** | **5.40**           |       | 5.17       |       |
| Expected life of  options (years) | ** ** | **4.1 – 4.5** |       | 5.3        |       |
| Option exercise  price ($)        | ** ** | **0.43 and 0.65**  |       | 0.56       |       |
| Share price at grant  date ($)    | ** ** | **0.54 and 0.64**  |       | 0.63       |       |

 

F- 23

----

When calculating the expected life of the options itis assumed the options will not be 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 the yearended June 30, 2006 no options were exercised over ordinary shares.

The followingtable illustrates the number, weighted average exercise prices (WAEP) and fairvalue of share options issued under the ESOP:
| ** **                     | ** ** | **2006**      | ** ** | **2005**   | ** ** |
|--------------------------------|------------|---------------|------------|------------|------------|
| ** **                     | ** ** | **Number**    | ** ** | **WAEP**   | ** ** | **Number** | ** ** | **WAEP** | ** ** |
| ** **                     | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  beginning of year  | ** ** | **1,775,000** | ** ** | **$**      | **0.71**   |   | 1,440,000 |   | $ | 0.74 |   |
|                           | ** ** | ** **    | ** ** | ** ** |       |   |   |   |   |
| **-**   granted | ** ** | **544,500**   | ** ** | **$**      | **0.54**   |   | 360,000 |   | $ | 0.56 |   |
|                           | ** ** | ** **    | ** ** | ** ** |       |   |   |   |   |
| -   forfeited   | ** ** | **(40,000**   | **)**      | **$**      | **0.52**   |   | — |   | — |   |
|                           | ** ** | ** **    | ** ** | ** ** |       |   |   |   |   |
| -   exercised   | ** ** | **—**    | ** ** | **—** |       | (25,000 | ) | $ | 0.50 |   |
|                           | ** ** | ** **    | ** ** | ** ** |       |   |   |   |   |
| Balance at end  of year        | ** ** | **2,279,500** | ** ** | **$**      | **0.67**   |   | 1,775,000 |   | $ | 0.71 |   |
|                           | ** ** | ** **    | ** ** | ** ** |       |   |   |   |   |
| Exercisable at end of  year    | ** ** | **1,664,500** | ** ** | **$**      | **0.53**   |   | 1,160,000 |   | $ | 0.52 |   |

 

Included in the balance outstanding at the beginning of the year areoptions over 615,000 shares (2005:615,000) that have not been recognised inaccordance with AASB 2 as the options were granted on or before November 7,2002. These options have not been subsequently modified and therefore do notneed to be accounted for in accordance with AASB 2.

Thecontractual life for the share options outstanding at June 30, 2006 is 3 yearsand 9 months (2005: 4 years and 9 months).

Shareoptions issued under ESOP and outstanding at the end of the year have thefollowing exercise prices:
| **Expiry date** | ** ** | **Exercise price** | ** ** | **Outstanding 2006** | ** ** | **Outstanding 2005** | ** ** |
|----------------------|------------|-------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **           | ** ** | **$**                   | ** ** | ** **                | ** ** | ** **                | ** ** |
| March 24, 2010       |       | 1.15                    |       | 400,000                   |       | 400,000                   |       |
| March 24, 2010       |       | 0.90                    |       | 215,000                   |       | 215,000                   |       |
| March 24, 2010       |       | 0.90                    |       | 300,000                   |       | 300,000                   |       |
| March 24, 2010       |       | 0.50                    |       | 190,000                   |       | 190,000                   |       |
| March 24, 2010       |       | 0.50                    |       | 280,000                   |       | 310,000                   |       |
| March 24, 2010       |       | 0.56                    |       | 350,000                   |       | 360,000                   |       |
| March 24, 2010       |       | 0.43                    |       | 275,000                   |       | —                    |       |
| March 24, 2010       |       | 0.65                    |       | 269,500                   |       | —                    |       |

 

F- 24

----

**Optionsapproved 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 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 options wereissued to Greg Collier during the years ended June 30, 2006 or 2005.

No options issuedwith shareholder approval have been exercised, cancelled or forfeited.

The fair value ofthe options issued to Greg Collier with Annual General Meeting (‘AGM’) approvalunder are estimated at the date of grant using the Black Scholes ValuationMethod. The following table gives the assumptions made in determining fairvalue of these options-  
| ** **                        | ** ** | **November 2003** | ** ** | **June 2004** | ** ** |
|-----------------------------------|------------|------------------------|------------|--------------------|------------|
| Dividend yield (%)                | ** ** | **0.00**               | ** ** | **0.00**           | ** ** |
| Expected volatility (%)           | ** ** | **65.00**              | ** ** | **65.00**          | ** ** |
| Risk-free interest rate  (%)      | ** ** | **5.77**               | ** ** | **5.77**           | ** ** |
| Expected life of  options (years) | ** ** | **3.0**                | ** ** | **5.75**           | ** ** |
| Option exercise price  ($)        | ** ** | **0.30**               | ** ** | **0.50**           | ** ** |
| Share price at grant date ($)     | ** ** | **0.53**               | ** ** | **0.54**           | ** ** |

 

When calculatingthe expected life of the options it is assumed the options will not beexercised 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.

F- 25

----

### On November 16, 2005 shareholders approved the issue of 1,000,000options over 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 usingthe Black Scholes Valuation Method with the following assumptions-

·                  Dividendyield- 0%

·                  Expectedvolatility- 70%

·                  Risk-freeinterest rate 5.4%

·                  Expectedlife of options- 3 years

·                  Optionexercise price- $0.75

·                  Shareprice  at issue date- $0.65

### **15. PENSIONS AND POST EMPLOYMENT BENEFITS**

The Group makes contributions to external superannuation funds to meetit’s obligations under Australian taxation law.

The Group has no ongoing liabilities or commitments for post employmentbenefits for any employee as at June 30, 2006.

**16.TRADE AND OTHER PAYABLES**
| **JUNE 30, 2006**         | ** ** | **Notes**  | ** ** | **2006**      | ** ** | **2005** | ** ** |
|-------------------------------------|------------|------------|------------|---------------|------------|----------|------------|
| ** **                          | ** ** | ** ** | ** ** | **$**         | ** ** | **$**    | ** ** |
| Trade creditors and  other payables |       |       | ** ** | **1,621,865** |       | 754,992  |       |
|                                | ** ** | ** ** | ** ** | **1,621,865** |       | 754,992  |       |

 

Trade payables arenon-interest bearing and are normally settled on 30 day terms.

As at June 30, 2006 theamount owing to related parties and included in Trade and other payables was$4,168 (2005: $29,531).  Refer to Note 26for Related Party Disclosures.

**17. PROVISIONS**
| Employee entitlements | ** ** | **153,105** |   | 119,351 |
|-----------------------|------------|-------------|--------|---------|

 

**18. ISSUED CAPITAL AND RESERVES**
| ** **                                           |       |       |       | **2006**              | ** ** | **2005**              |       |           |       |       |       |
|------------------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|----------------|------------|------------|------------|
| ** **                                           |       |       |       | **Number of  shares** | ** ** | **Number of  shares** | ** ** | **2006**       | ** ** | **2005**   |       |
| ** **                                           |       |       |       | ** **            | ** ** | ** **            | ** ** | **$**          | ** ** | **$**      |       |
| **Ordinary shares**                                  | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **     |       |       |       |
| Issued and fully paid                                | ** ** | ** ** |       | **151,362,786**       | ** ** | 114,797,616           |       | **99,892,615** |       | 84,592,891 |       |
| ** **                                           |       |       |       |                  |       |                  |       |           |       |       |       |
| **Movements in shares on issue** |       |       |       |                  |       |                  |       |           |       |       |       |
| Beginning of the  financial year                     | ** ** | ** ** |       | **114,797,616**       | ** ** | 86,728,294            |       | **84,592,891** |       | 70,257,383 |       |
| Issued during  the year                              | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **     | ** ** | ** ** | ** ** |
| - Shares issued  for cash                            |       |       | (i)        | **36,565,170**        |       | 27,934,244            | ** ** | **15,723,021** |       | 14,451,937 |       |
| - less cost of  share issues                         |       |       |       | —                | ** ** | —                |       | **(423,297**   | **)**      | (189,353   | )          |
| - Fees paid in  lieu of cash                         |       |       | (ii)       | —                |       | 135,078               | ** ** | **—**     |       | 72,924     |       |
| End of the financial  year                           | ** ** | ** ** |       | **151,362,786**       | ** ** | 114,797,616           |       | **99,892,615** |       | 84,592,891 |       |

 

F- 26

----

----

(i)                                     OnJuly 14, 2004, the company issued 13,009,244 ordinary shares at an issue priceof $0.48 each raising $6,244,437 for working capital and to further develop thecompany’s two anti-cancer compounds in Phase 2 clinical trials in the UnitedStates.  This issue was ratified by theAnnual General Meeting of shareholders held on November 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 February 14,2005, the company issued 25,000 ordinary shares at an issue price of $0.50 eachraising $12,500 upon the exercise of 25,000 options previously issued under theESOP.

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, 200616,700,000 ordinary shares were issued at 43 cents each.  This issue was ratified by an ExtraordinaryGeneral Meeting of shareholders held on June 16, 2006.

·                  On June 1, 20061,665,170 ordinary shares were issued at 43 cents under a Share PlacementProgramme offered to all shareholders.

·                  On June 16, 200618,200,000 ordinary shares were issued at 43 cents per share following approvalby an Extraordinary General Meeting of shareholders held on June 16, 2006.

(ii)                                  OnNovember 23, 2004, 84,535 ordinary shares at an issue price of $0.48 each wereissued to Topete Pty Ltd as consideration for services provided to assist theequity raising of July 14, 2004.

On February 21,2005, 50,543 ordinary shares at an issue price of $0.64 each were issued to theUniversity of Texas MD Anderson Cancer Center in accordance with a Patent andTechnology License Agreement to support the clinical trials for Ceflatonin®.

Ordinary shareshave the right to receive dividends as declared and, in the event of winding upthe company, to participate in the proceeds from the sale of all surplus assetsin proportion to the number of and amounts paid up on shares held.

Ordinary sharesentitle their holders to one vote per share, either in person or by proxy, at ameeting of the company.

**ShareOptions**

*(i)Listedoptions*

At June 30, 2006there were 22,158,526 (2005: 22,158,526) unissued ordinary shares for whichoptions were outstanding exercisable at $1.25 per share expiring March 12,2010.

*(ii)UnlistedOptions*

*EmployeeShare Plan Options (ESOP)*

All employees ofthe company and its controlled entities are eligible to receive options underESOP.

During thefinancial year 544,500 options were issued over ordinary shares to employees asset out in Note 14 (2005: 360,000).

During thefinancial year no options issued under ESOP were exercised (2005: 25,000).

During the financialyear 40,000 options previously under ESOP lapsed or were cancelled (2005: nil).

At the end of theyear there were 2,279,500 (2005: 1,775,000) unissued ordinary shares in respectof which ESOP options were outstanding.

*Optionsapproved at General Meetings of Shareholders*

Separate issues ofother unlisted options have been approved by resolutions passed by shareholderson November 21, 2003 (600,000 options), June 21, 2004 (3,000,000 options) andNovember 16, 2005 (1,000,000 options)

At the end of theyear there were 4,600,000 (2005: 3,600,000) unissued ordinary shares in respectof which these options were outstanding.

F- 27

----

 
| **JUNE 30, 2006**                                                                                                                                                                                           | ** ** | **Notes**  | ** ** | **2006**       | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | ** ** | ** ** | **$**          | ** ** | **$**      | ** ** |
| ** **                                                                                                                                                                                                  |       |       | ** ** | ** **     |       |       |       |
| **Other reserves**                                                                                                                                                                                          |       |       | ** ** | ** **     |       |       |       |
| Option premium                                                                                                                                                                                              |       |       | ** ** | **10,866,878** |       | 10,866,878 |       |
| Equity benefits reserve                                                                                                                                                                                     |       |       | ** ** | **1,268,418**  |       | 428,962    |       |
|                                                                                                                                                                                                        |       |       | ** ** | **12,135,296** |       | 11,295,840 |       |
| **Option 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 benefits 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                                                                                                                                                                                        |       |       | ** ** | **428,962**    |       | 6,858      |       |
|                                                                                                                                                                                                        |       |       | ** ** | ** **     |       |       |       |
| Movements in reserve                                                                                                                                                                                        |       |       | ** ** | **839,456**    |       | 422,104    |       |
|                                                                                                                                                                                                        |       |       | ** ** | ** **     |       |       |       |
| Balance at end of year                                                                                                                                                                                      |       |       | ** ** | **1,268,418**  |       | 428,962    |       |

 

### **19.FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES**

### The Group’s financial instruments are cash and bank deposits used tofinance the Group’s operations.  TheGroup also has receivables and 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**

TheGroup’s exposure to the risk of changes in market interest rates relates tocash at bank which attracts a floating interest rate.

It isthe Group’s policy to monitor interest exposures and make fixed interestinvestments, when appropriate, to maximise interest income.

### There wereno fixed interest investments in place as at June 30, 2006.

### **(b) Foreign currency risk**

The Group has research agreements withEuropean companies and conducts significant research operations in the USAwhich provide transactional currency exposures. Such exposures arise from salesor purchases in currencies other than the measurement currency.

Allresearch revenue is denominated in currencies other than the reporting currencyand approximately 50% of all costs are denominated in currencies other than thereporting currency.

It isthe Group’s policy to monitor currency exposures and to take forward cover,when appropriate, to minimise exposure.

Therewere no forward currency contracts in place as at June 30, 2006.

### **(c) Credit risk**

TheGroup trades only with recognised, creditworthy third parties.

### **(d) Liquidity risk**

TheGroup accesses capital raisings to maintain liquidity as required.

F- 28

----

**20. FINANCIAL INSTRUMENTS**

### **(a) Interest rate risk**

The followingtable sets out the carrying amount, by maturity, of the financial instrumentsthat are exposed to interest rate risk:
| **2006**         | ** ** | **< 1 year** | ** ** | **>1-<2** | ** ** | **>2-<3** | ** ** | **>3-<4** | ** ** | **>4-<5** | ** ** | **>5 years** | ** ** | **Total**      | ** ** |
|------------------|------------|---------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|----------------------|------------|----------------|------------|
| ** **       | ** ** | **$**                     | ** ** | **$**           | ** ** | **$**           | ** ** | **$**           | ** ** | **$**           | ** ** | **$**                | ** ** | **$**          | ** ** |
| **Consolidated** | ** ** | ** **                |       |            | ** ** | ** **      |       |            | ** ** | ** **      |       |                 | ** ** | ** **     | ** ** |
| *Floating rate*  | ** ** | **4.0**                   | **%**      |            | ** ** | ** **      |       |            | ** ** | ** **      |       |                 | ** ** | ** **     | ** ** |
| Cash             | ** ** | **15,553,696**            | ** ** | **—**      | ** ** | **—**      |       | —          | ** ** | **—**      |       | —               | ** ** | **15,553,696** | ** ** |

 
| **2005**         | ** ** | **< 1 year** | ** ** | **>1-<2** | ** ** | **>2-<3** | ** ** | **>3-<4** | ** ** | **>4-<5** | ** ** | **>5 years** | ** ** | **Total**  | ** ** |
|------------------|------------|---------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|----------------------|------------|------------|------------|
| ** **       | ** ** | **$**                     | ** ** | **$**           | ** ** | **$**           | ** ** | **$**           | ** ** | **$**           | ** ** | **$**                | ** ** | **$**      | ** ** |
| **Consolidated** | ** ** | ** **                |       |            | ** ** | ** **      |       |            | ** ** | ** **      |       |                 | ** ** | ** ** | ** ** |
| *Floating  rate* | ** ** | **5.2**                   | **%**      |            | ** ** | ** **      |       |            | ** ** | ** **      |       |                 | ** ** | ** ** | ** ** |
| Cash             |       | 8,511,952                 |       | —          |       | —          |       | —          |       | —          |       | —               |       | 8,511,952  |       |

 

### **(b)Net fair values**

Recognised financialInstruments

Cash and cashequivalents: The carrying amount approximates fair value.

Trade receivables: Thecarrying amount approximates fair value.

Trade payables: Thecarrying amount approximates fair value.

### **21.CONTINGENT LIABILITIES**

The Group has nilcontingent liabilities as at June 30, 2006 and 2005, 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 has amanufacturing 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.

### **22.MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR**

No matters orcircumstances have arisen since the end of the financial year which havesignificantly affected, or may significantly affect, the operations of theGroup, the results of those operations, or the state of affairs of the Group infuture financial years.

F- 29

----

 
| **23. COMMITMENTS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **(a)Research expenditure commitments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Estimated  research expenditure contracted for at reporting date, but not provided for,  payable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| – not later than  one year- $4,064,426 (2005: $2,747,098)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| – later than one  year and not later than five years- $2,574,424 (2005: $nil)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| A Controlled Entity, Autogen Research Pty Ltd has  agreed to provide certain monies for research projects covering areas of  diabetes, obesity, autoimmune disorders and depression and anxiety with the  object of long term commercialisation. Research agreements have been  undertaken with Deakin University, Southwest Foundation and The International  Diabetes Institute. These agreements expire on December 31, 2006 and  negotiations to continue the agreements for another year under similar terms  are continuing..                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Autogen Research Pty Ltd has the option to continue  funding these research agreements subject to annual reviews which are  dependent upon research milestones being met. Autogen Research Pty Ltd has  the right to benefit from the commercialisation of any resulting products.                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| A Controlled Entity, Chemgenex Pharmaceuticals Inc.  has appointed Premier Research Plc. as the Clinical Research Organisation for  the Ceflatonin Stage 2/3 Clinical Trials for CML patients with theT315I gene  mutation. Patients recruited for Clinical Trials are guaranteed a level of  treatment beyond the trial period. Commitments for later than one year and  less than five years are based estimates of patient numbers and future  treatments required.                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **(b) Operating lease commitments**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Estimated  operating lease commitments at June 30, 2006:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| - not later than  one year- $39,606 (205: $27,566)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| - later than one  year and not later than 5 years- $Nil (2005: $Nil)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| ChemGenex  Pharmaceuticals, Inc. leases approximately 2,400 square feet of corporate  office space in Menlo Park, California, under a lease agreement that  terminates on December 31, 2006. The U.S. subsidiary also subleases  approximately 500 square feet of laboratory space to conduct *in vitro* experiments to support oncology discovery and  development programs in Menlo Park, California under a sublease that  terminates on December 31, 2006. The Company is negotiating arrangements for  the lease of these premises after December 30, 2006. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| As at June 30, 2006,  the company also leased office premises from Deakin University on a monthly  tenancy basis at $551 per month. This arrangement was replaced by a three  year lease commitment at $6,704 per annum commencing on November 1, 2006.                                                                                                                                                                                                                                                                                                          |

 

**24. DIRECTOR AND EXECUTIVEDISCLOSURES**
| **(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) |
| R.V. Byrne                                  |   | Director (non-executive) |
| E.J. Schnee                                 |   | Director (non-executive) |
| Dr. D.M. Brown                              |   | Director (executive) |
| P.O. Burns                                  |   | Director (non-executive) |
| P.J. Bradfield                              |   | Director (non-executive) |
| *(ii) Executives*                           | * * | * * |
| Dr. J. Campbell                             |   | Vice President of Operations |
| H. Pedersen                                 | **** **** | ****Vice President of Business Development (resigned  May 26, 2006)**** |
| E. Merrigan                                 |   | Chief Financial Officer and Company Secretary |
| T. Herbert                                  | **** **** | ****Senior Director of Finance and Administration**** |
| S. Michaels                                 |   | Director of Discovery Research |

 

F- 30

----

**(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 compensationarrangements for the directors, the chief executive officer and the executiveteam.  In accordance with best practicecorporate governance, the structure of non-executive director and seniormanager remuneration is separate and distinct.

The Board seeks toset aggregate remuneration at a level which provides the company with theability to attract and retain directors of the highest calibre, whilstincurring a cost which is acceptable to shareholders.

The Constitutionand the ASX Listing Rules specify that the aggregate remuneration ofnon-executive directors shall be determined from time to time by a generalmeeting.  An amount not exceeding theamount determined is then divided between the directors as agreed. The amountof aggregate remuneration sought to be approved by shareholders and the mannerin which it is apportioned amongst directors 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 company aimsto reward executives with a level and mix of remuneration commensurate withtheir position and responsibilities within the company and so as to:-

·                  rewardexecutives for company performance against target;

·                  align theinterests of executives with those of shareholders;

·                  link reward withthe strategic goals and performance of the company; and

·                  ensuretotal remuneration is competitive by market standards.

The Board assessesthe appropriateness of the nature and amount of emoluments of such officers ona periodic basis by reference to relevant employment market conditions with theoverall objective of ensuring maximum stakeholder benefit from the retention ofa high quality executive team.  Suchofficers are given the opportunity to receive their base emolument in a varietyof forms including cash and fringe benefits such as motor vehicles and expensepayment plans.  It is intended that themanner of payment chosen will be optimal for the recipient without creatingundue cost for the company.

To assist in achievingthese objectives, the Board links the nature and amount of executive directors’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- 31

----

*(ii) Compensation for Key Management Personnel*
|                       | ** ** | **Short-term**                  | ** ** | ** **   | ** ** | ** **    | ** ** | ** **               | ** ** | ** **           | ** ** | ** **   | ** ** | ** **    | ** ** |
|-----------------------|------------|---------------------------------|------------|--------------|------------|---------------|------------|--------------------------|------------|----------------------|------------|--------------|------------|---------------|------------|
| ** **            | ** ** | **Salary & Fees** | ** ** | ** **   | ** ** | ** **    | ** ** | **Post Employment** | ** ** | **Share Based** | ** ** | ** **   | ** ** |
| ** **            | ** ** | **Bonus**                       | ** ** | **Cash**     | ** ** | **Non**       | ** ** | **Super-**               | ** ** | ** **           | ** ** | **Payments** | ** ** | ** **    | ** ** |
| **Directors**         | ** ** | **Benefits**                    | ** ** | **Monetary** | ** ** | **annuation** | ** ** | **Benefits**             | ** ** | **Retirement**       | ** ** | **Options**  | ** ** | **Total**     | ** ** |
| ** **            | ** ** | **$**                           | ** ** | **$**        | ** ** | **$**         | ** ** | **$**                    | ** ** | **$**                | ** ** | **$**        | ** ** | **$**         | ** ** |
| **J.B.L. Heading**    |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| 2006                  |       | 70,532                          |       | —       |       | —        |       | —                   |       | —               |       | —       |       | 70,532        |       |
| 2005                  |       | 65,000                          |       | —       |       | —        |       | —                   |       | —               |       | —       |       | 65,000        |       |
| **Dr. G. R. Collier** |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| 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**         |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| 2006                  |       | 50,000                          |       | —       |       | —        |       | 4,500                    |       | —               |       | —       |       | 54,500        |       |
| 2005                  |       | 50,000                          |       | —       |       | —        |       | 4,500                    |       | —               |       | —       |       | 54,500        |       |
| **R.V. Byrne**        |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| 2006                  |       | 50,000                          |       | —       |       | —        |       | 4,500                    |       | —               |       | —       |       | 54,500        |       |
| 2005                  |       | 50,000                          |       | —       |       | —        |       | 4,500                    |       | —               |       | —       |       | 54,500        |       |
| **E.J. Schnee**       |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| 2006                  |       | 54,500                          |       | —       |       | —        |       | —                   |       | —               |       | —       |       | 54,500        |       |
| 2005                  |       | 50,000                          |       | —       |       | —        |       | —                   |       | —               |       | —       |       | 50,000        |       |
| **Dr. D.M. Brown**    |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| 2006                  |       | 272,720                         |       | —       |       | 36,817        |       | —                   |       | —               |       | —       |       | 309,537       |       |
| 2005                  |       | 265,516                         |       | —       |       | 18,666        |       | —                   |       | —               |       | —       |       | 284,182       |       |
| **P.O. Burns**        |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| 2006                  |       | 50,215                          |       | —       |       | —        |       | —                   |       | —               |       | —       |       | 50,215        |       |
| 2005                  |       | —                          |       | —       |       | —        |       | —                   |       | —               |       | —       |       | —        |       |
| **P.J. Bradfield**    |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| 2006                  |       | 45,833                          |       | —       |       | —        |       | 4,125                    |       | —               |       | —       |       | 49,958        |       |
| 2005                  |       | —                          |       | —       |       | —        |       | —                   |       | —               |       | —       |       | —        |       |
|             |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| **Executives**        |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| **H. Pedersen**       |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| **2006**              | ** ** | **254,302**                     | ** ** | **—**   | ** ** | **26,702**    | ** ** | **—**               | ** ** | **—**           | ** ** | **—**   | ** ** | **281,004**   | ** ** |
| 2005                  |       | 255,985                         |       | —       |       | 11,120        |       | —                   |       | —               |       | —       |       | 267,105       |       |
| **Dr. J. Campbell**   |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| **2006**              | ** ** | **160,550**                     | ** ** | **—**   | ** ** | **—**    | ** ** | **14,449**               | ** ** | **—**           | ** ** | **69,769**   | ** ** | **244,768**   | ** ** |
| 2005                  |       | 159,223                         |       | —       |       | —        |       | 14,330                   |       | —               |       | 40,000       |       | 213,553       |       |
| **T. Herbert**        |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| **2006**              | ** ** | **202,966**                     | ** ** | **—**   | ** ** | **13,407**    | ** ** | **—**               | ** ** | **—**           | ** ** | **—**   | ** ** | **216,373**   | ** ** |
| 2005                  |       | 199,137                         |       | —       |       | 10,295        |       | —                   |       | —               |       | —       |       | 209,432       |       |
| **E. Merrigan**       |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| **2006**              | ** ** | **120,000**                     | ** ** | **—**   | ** ** | **—**    | ** ** | **10,800**               | ** ** | **—**           | ** ** | **26,163**   | ** ** | **156,963**   | ** ** |
| 2005                  |       | 94,154                          |       | —       |       | —        |       | 8,425                    |       | —               |       | 10,000       |       | 112,579       |       |
| **S. Michaels**       |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| **2006**              | ** ** | **124,078**                     | ** ** | **—**   | ** ** | **24,442**    | ** ** | **—**               | ** ** | **—**           | ** ** | **—**   | ** ** | **148,520**   | ** ** |
| 2005                  |       | 119,482                         |       | —       |       | 9,140         |       | —                   |       | —               |       | —       |       | 128,622       |       |
| **Total**             |       |                            |       |         |       |          |       |                     |       |                 |       |         |       |          |       |
| **2006**              | ** ** | **1,834,793**                   | ** ** | **—**   | ** ** | **121,996**   | ** ** | **66,347**               | ** ** | **—**           | ** ** | **369,706**  | ** ** | **2,392,842** | ** ** |
| 2005                  |       | 1,723,379                       |       | —       |       | 53,055        |       | 70,457                   |       | —               |       | 328,104      |       | 2,174,995     |       |

 

F- 32

----

*(iii) Compensation by Category:  Key Management Personnel*
|                      | ** ** | **2006**      | ** ** | **2005**  | ** ** |
|----------------------|------------|---------------|------------|-----------|------------|
| ** **           | ** ** | **$**         | ** ** | **$**     | ** ** |
| Short-term           | ** ** | **1,956,789** |       | 1,776,434 |       |
| Post employment      | ** ** | **66,347**    |       | 70,457    |       |
| Share-based  payment | ** ** | **369,706**   |       | 328,104   |       |
|                 | ** ** | **2,392,842** |       | 2,174,995 |       |

 

### **(c)Remuneration options: Granted and vested**

ESOP optionsgranted as equity compensation benefits to directors and executives during thefinancial year are disclosed below. The options were issued free ofcharge.  Each option entitles the holderto subscribe for one fully paid ordinary share in the Group at exercise pricesset out in the table below.

The options mayonly be exercised after the first exercise date and before the expiry date asset out 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** | ** ** |
| ** **          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **                                                         | ** ** | **($)** | ** ** | **($)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2006**            | ** ** | ** **         | ** ** | ** **          | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Directors**       |       |               |       |                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Nil  options issued |       |               |       |                |       |                                                               |       |   |   |   |   |   |   |   |   |
|                |       |               |       |                |       |                                                               |       |   |   |   |   |   |   |   |   |
| **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 |   | 0.56 |   | Dec. 21, 2004 |   | Mar. 24, 2010 |   |
| E.  Merrigan        |       | 25,000             |       | 25,000              |       | Dec. 21, 2004                                                      |       | 0.40 |   | 0.56 |   | Dec. 21, 2004 |   | Mar. 24. 2010 |   |
| ** **          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total**           |       | 125,000            |       | 125,000             |       |                                                               |       |   |   |   |   |   |   |   |   |

 

### **(d) Shares issued on exercise of remunerationoptions**

Noshares were issued to directors or executives on the exercise of remunerationoptions in 2006 or 2005.

F- 33

----

**(e) Option holdings of KeyManagement Personnel**
|                             | ** ** | **Balance at  beginning**             | ** ** | **Granted as** | ** ** | ** **             | ** ** | ** **                 | ** ** | **Balance at  end of**    | ** ** | **Vested at June 30, 2006** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|---------------------|------------|------------------------|------------|----------------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|
| **June 30, 2006** | ** ** | **of period  July 1, 2005** | ** ** | **Remuneration  #** | ** ** | **Options  Exercised** | ** ** | **Net Change  Other** | ** ** | **period  June 30, 2006** | ** ** | **Total**                                       | ** ** | **Not  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              |       | —                                     |       | —              |       | —                 |       | —                     |       | —                              |       | —                                          |       | — |   | — |   |
| **Executives**              |       |                                       |       |                |       |                   |       |                       |       |                                |       |                                            |       |   |   |   |   |
| Dr. J. Campbell             |       | 185,000                                    |       | 200,000             |       | —                 |       | —                     |       | 385,000                             |       | 385,000                                         |       | — |   | 385,000 |   |
| H. Pedersen                 |       | —                                     |       | —              |       | —                 |       | —                     |       | —                              |       | —                                          |       | — |   | — |   |
| 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 to employees under the ESOP to June 30, 2006*
| ** **                  | ** ** | **Balance at  beginning**             | ** ** | **Granted as** | ** ** | ** **             | ** ** | ** **                 | ** ** | **Balance at  end of**    | ** ** | **Vested at June 30, 2005** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|---------------------|------------|------------------------|------------|----------------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|
| **June 30, 2005** | ** ** | **of period  July 1, 2004** | ** ** | **Remuneration  #** | ** ** | **Options  Exercised** | ** ** | **Net Change  Other** | ** ** | **period  June 30, 2005** | ** ** | **Total**                                       | ** ** | **Not  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 to employees under the ESOP to June 30, 2005*

F- 34

----

**(f)  Shareholdings of Key Management Personnel**
| ** **                  | ** ** | **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                                |       |
| H. Pedersen                 |       | 1,203,377                           |       | —                            |       | —                                |       | —                     |       | 1,203,377                            |       |
| E. Merrigan                 |       | 25,000                              |       | —                            |       | —                                |       | 25,000                     |       | 50,000                               |       |
| T. Herbert                  |       | 760,027                             |       | —                            |       | —                                |       | —                     |       | 760,027                              |       |
| S. Michaels                 |       | 760,027                             |       | —                            |       | —                                |       | —                     |       | 760,027                              |       |
| **Total**                   | ** ** | **50,244,725**                      |       | —                            |       | —                                | ** ** | **14,125,000**             | ** ** | **64,329,725**                       | ** ** |

 
| ** **                  | ** ** | **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                                |       |
| H. Pedersen                 |       | 1,203,377                           |       | —                            |       | —                                |       | —                     |       | 1,203,377                            |       |
| E. Merrigan                 |       | —                              |       | —                            |       | —                                |       | 25,000                     |       | 25,000                               |       |
| T. Herbert                  |       | 760,027                             |       | —                            |       | —                                |       | —                     |       | 760,027                              |       |
| S. Michaels                 |       | 760,027                             |       | —                            |       | —                                |       | —                     |       | 760,027                              |       |
| **Total**                   | ** ** | **42,839,825**                      |       | —                            |       | —                                | ** ** | **7,404,900**              | ** ** | **50,244,725**                       | ** ** |

 

All equity transactions with directors and executivesother than those arising from the exercise of remuneration options have beenentered into under terms and conditions no more favourable than those the Groupwould have adopted if dealing at arm’s length.

F- 35

----

**(g) Loans to directors andexecutives**

Options grantedunder the ESOP in 2000 and 2001 contained an issue price which the company, inaccordance with the terms of the ESOP, funded via an interest free “off balancesheet” loan to the option holder. The loan is repayable upon the sale of sharesobtained through exercise of the options.

Dr Greg Collier(who was not a director at the time of the grants) received 100,000 optionsunder the ESOP in financial years 2000 and 2001 and, as a result, was given aloan to fund the issue price of these options. Subsequent to the date of theseoption grants the terms and conditions of the “off balance sheet” loans havenot been changed, no repayments have been made and the balance of $96,820 isoutstanding at June 30, 2006. Interest not charged for the year ended June 30,2006 of $3,834 has been included in Note 24(b)(ii) as a non-monetary benefit. (2005: $3,834)

Neither the loansnor equity items relating to these options are included in the company’sfinancial statements as share price hurdle rates associated with these optionshave not been achieved.

There are no otherloans to specified directors and specified executives and there have been noother loans made to or repaid by specified directors and specified executivesduring the years ended June 30, 2006 and 2005.

### **(h) Employment contracts**

The CEO, Dr GregCollier, is employed under contract.  Thecurrent employment contract commenced on July 1, 2003 and terminates on June30, 2008, at which time the company may choose to commence negotiation to enterinto a new employment contract with Dr Collier. Under the terms of the present contract:-

·                  DrCollier may resign from his position and thus terminate this contract by giving6 months written notice.

·                  Thecompany may terminate this employment agreement by providing 6 months writtennotice or provide payment in lieu of the notice period.

·                  Thecompany may terminate the contract at any time without notice if seriousmisconduct has occurred.  Wheretermination with cause occurs the CEO is only entitled to remuneration up tothe 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.

### **25. AUDITORS’ REMUNERATION**

| JUNE 30, 2006                                                                                                             | ** ** | **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 | ** ** | **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   |       |
|                                                                                                                                | ** ** | **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  |       |

 

F- 36

----

### **26.RELATED PARTY DISCLOSURES**

### *Revenues*

Mr E. J. Schnee, a director of ChemgenexPharmaceuticals Limited is also a director of Merck Santé which holds18,793,750 shares and 4,439,308 options in the company. Merck Santé is party toresearch and commercialisation agreements with the company’s 100% ownedsubsidiary Autogen Research Pty Limited. Under these agreements Merck Santé provided research revenue of$1,436,053 and patent reimbursement of $230,223 to Autogen Research Pty Ltd.during the year ended June 30, 2006. (2005: $2,533,113 and $104,085)

### *Expenses*

During the year ended June 30, 2006 legal services tothe value of $52,337 (2005: $52,934) were provided by McCullough Robertsonsolicitors, a legal firm of which Mr J.B.L. Heading, a director of ChemgenexPharmaceuticals Limited, is a partner.

Mr. J.B.L. Heading is also a director of two companiesthat are the joint holders of 5% of the shares of Global Markets Capital GroupLLC that has provided advisory and consulting services to the company to thevalue of $53,751 during the year ended June 30, 2006 (2005: $65,214).  Mr Heading has no beneficial interest inthese shareholders.

Mr K.J. Dart a director of Chemgenex PharmaceuticalsLimited, is also a director and shareholder of Charter Pacific CorporationLimited, which holds 28,110,087 shares and 7,399,324 options expiring March 12,2010 in the company.  Charter PacificCorporation Limited is a 40.7% shareholder of Global Markets Capital Group LLCthat has provided advisory and consulting services to the company to the valueof $53,751 during the year ended June 30, 2006 (2005: $65,214).

### *Assets*

### As at June 30, 2006 no related parties had funds owing to ChemgenexPharmaceuticals Limited as Trade receivables.

### Included in Trade receivables as at June 30, 2005 was an amount of$97,149, owing by Merck Santé on normal commercial terms.

### *Liabilities*

### Included in Trade creditors as at June 30, 2006 was an amount of $4,168owing to McCullough Robertson on normal commercial terms.

### Included in Trade creditors as at June 30, 2005 were amounts of $24,531and $5,000, owing to McCullough Robertson, and to Global Capital MarketsCorporation respectively on normal commercial terms.

### *Deferred revenue*

Included in Deferred revenue as at June 30, 2006 wasan amount of $177,442 which had been received from Merck Santé for whichservices contracted had not been provided at that time. (2005: $217,637).

**Amountsrecognised at the reporting date as related party transactions**
|                                            | ** ** | **2006**      | ** ** | **2005**   | ** ** |
|--------------------------------------------|------------|---------------|------------|------------|------------|
| ** **                                 | ** ** | **$**         | ** ** | **$**      | ** ** |
| **Assets  and Liabilities**                | ** ** | ** **    | ** ** | ** ** | ** ** |
| **Assets**                                 | ** ** | ** **    | ** ** | ** ** | ** ** |
| Trade  receivables                         |       | —        |       | 97,149     |       |
|                                       |       |          |       |       |       |
| **Total  Assets**                          |       | —        |       | 97,149     |       |
| ** **                                 |       |          |       |       |       |
| **Liabilities**                            |       |          |       |       |       |
| Trade creditors                            | ** ** | **4,168**     |       | 29,531     |       |
| Deferred revenue                           | ** ** | **177,422**   |       | 217,637    |       |
|                                       | ** ** | ** **    |       |       |       |
| **Total  Liabilities**                     | ** ** | **181,590**   |       | 247,168    |       |
| ** **                                 | ** ** | ** **    | ** ** | ** ** | ** ** |
| **Revenues  and Expenses**                 | ** ** | ** **    | ** ** | ** ** | ** ** |
| **Revenues**                               | ** ** | ** **    | ** ** | ** ** | ** ** |
| Research Revenue                           | ** ** | **1,436,053** |       | 2,533,113  |       |
| Patent  reimbursements                     | ** ** | **230,223**   |       | 104,085    |       |
| ** **                                 | ** ** | ** **    |       |       |       |
| **Total  Revenues**                        | ** ** | **1,666,273** |       | 2,637,198  |       |
| ** **                                 | ** ** | ** **    |       |       |       |
| **Expenses**                               |       |          |       |       |       |
| Legal services  provided                   | ** ** | **52,337**    |       | 52,934     |       |
| Advisory and  consulting services provided | ** ** | **53,751**    |       | 65,214     |       |
| ** **                                 | ** ** | ** **    |       |       |       |
| **Total Expenses**                         | ** ** | **106,088**   |       | 118,148    |       |

 

F- 37

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**27. RECONCILIATION TO US GAAP**

The consolidated financial statements have beenprepared in accordance with AIFRS, which differ in certain respects fromaccounting principles generally accepted in the United States of America (“USGAAP”). The following is a summary of the adjustments to net loss and totalequity required when reconciling such amounts recorded in the consolidatedfinancial statements to the corresponding amounts in accordance with US GAAP,considering the differences between AIFRS and US GAAP.

Reconciliation of net loss

The following is a reconciliation of net loss asreported in the Consolidated Income Statements under AIFRS to the net loss asadjusted for the effects of the application of US GAAP for the years ended June30, 2006, 2005, and 2004.
| **Years Ended June 30,**               | ** ** | **2006**        | ** ** | **2005**    | ** ** |
|-------------------------------------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                            | ** ** | **$**           | ** ** | **$**       | ** ** |
| Net loss in  accordance with AIFRS                    |       | **(10,369,719** | **)**      | (6,235,183  | )          |
| US GAAP  adjustments                                  |       |            |       |        |       |
| Share-based  compensation expense, net of forfeitures | (a)        |            |       |        |       |
| - AIFRS expense                                       | ** ** | **839,456**     |       | 422,105     |       |
| - US GAAP  expenses                                   | ** ** | **(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                  |       | **(10,444,350** | **)**      | (6,189,360  | )          |
|                                                  |       |            |       |        |       |
| Loss per share  in accordance with US GAAP:           |       |            |       |        |       |
| Basic and  diluted                                    |       | **$**           | **(0.09**  | **)**       | $          | (0.06 | ) |
| Weighted average shares  - basic and diluted          |       | **117,647,158** |       | 105,707,630 |       |
|                                                       |            |                 |            |             |            |  |  |

 

Reconciliation of total equity

The following is a reconciliation of the total equityas reported in the Consolidated Balance Sheets under AIFRS to total equity asadjusted for the effects of the application of US GAAP as of June 30, 2006 and2005.
| **June 30,**                             | ** ** | **2006**        | ** ** | **2005**    | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                    | ** ** | **$**           | ** ** | **$**       | ** ** |
| Total equity in  accordance with AIFRS        |       | **31,004,909**  |       | 25,235,448  |       |
| US GAAP  adjustments                          |       |            |       |        |       |
| Fair value of  shares issued as consideration | (b)        | **(392,000**    | **)**      | (392,000    | )          |
| In-process  research and development          | (c)        | **(16,570,561** | **)**      | (16,570,561 | )          |
| Reversal of  amortisation of goodwill         | (c)        | **30,811**      |       | 30,811      |       |
| Marketable  securities                        | (d)        | **—**      |       | 74,631      |       |
| Deferred tax  effect of US GAAP adjustments   | (e)        | **—**      |       | —      |       |
| Total equity in  accordance with US GAAP      |       | **14,073,159**  |       | 8,378,329   |       |

 

F- 38

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### Rollforwardanalysis of total equity under US GAAP

| Years Ended June 30,                    | ** ** | ** ** | ** ** | **2006**        | ** ** | **2005**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|-----------------|------------|------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | **$**           | ** ** | **$**      | ** ** |
| Balance in  accordance with US GAAP, beginning of year | ** ** | ** ** |       | **8,378,329**   |       | 131,081    |       |
| Issue of shares,  net of issue costs                   |       | 18         | ** ** | **15,299,724**  |       | 14,335,508 |       |
| Issue of  options, net of forfeitures                  |       | (a)        | ** ** | **839,456**     |       | 101,100    |       |
| Net loss in  accordance with US GAAP                   | ** ** | ** ** |       | **(10,444,350** | **)**      | (6,189,360 | )          |
| Balance in accordance  with US GAAP, end of year       | ** ** | ** ** |       | **14,073,159**  |       | 8,378,329  |       |

 

*a) Share-based compensation*

As disclosed in Notes 14, 18 and 24(c) to theconsolidated financial statements, the Company issued share options todirectors, employees and non-employees as an incentive for future performanceor in consideration for services rendered.

Under AIFRS, the Company accounts for share-basedpayments under AASB 2 “*Share-Based Payments.”*   Options issued after November 7, 2002 andvested on or after January 1, 2005 are required to have the grant-date fairvalue be recognized as an expense over the vesting period.

Under US GAAP, prior to July 1, 2005, the Companyaccounted for its stock options in accordance with Accounting Principles BoardOpinion No. 25:  “*Accountingfor Stock Issued to Employees*” and related interpretations (“APB 25”)and adopted the disclosure-only provisions of SFAS No. 123 “Accounting forStock-Based Compensation” (“SFAS 123”). Under APB 25, the Company recognized compensation expense for stockoptions only if the current market price of the underlying stock exceeded theexercise price as at the measurement date. The resultant compensation cost is charged to earnings rateably over thevesting period.

Effective July 1, 2005, the Company adopted therequirements of SFAS 123 (revised 2004) *“Share-Based Payments”*(“SFAS 123R”) under US GAAP.  SFAS 123Reliminates the option to apply the intrinsic value measurement provisions ofAPB 25 to stock compensation awards issued to employees. Rather, SFAS No. 123Rrequires 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).

The Company has elected to apply SFAS 123R using themodified prospective method thereby recognising 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 is consistent with share-based paymentsrecognition under AASB 2, however, differences arise in terms of transitiondates.  This resulted in difference incompensation expense between AIFRS and US GAAP for the year ended June 30, 2005by $321,005.  There are no differences inshare-based payment expense between US GAAP and AIFRS during the year endedJune 30, 2006.

As a result of adopting SFAS 123R on July 1, 2005, theCompany’s net loss and net loss per share for the year ended June 30, 2006 washigher by $406,471 and $.003, respectively, than if it had continued to accountfor share-based compensation under APB 25. The adoption of FAS123R has had no effect on cash flows.

The following table illustrates the effect on net lossand net loss per share if the Company had applied the fair value recognitionprovisions of SFAS 123 to stock based employee compensation for the year endedJune 30, 2005.

F- 39

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| 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-based compensation to non-employees inaccordance with SFAS 123, as amended by SFAS No. 148, “*Accountingfor Stock-Based Compensation-Transition and Disclosure*”, andEmerging Issues Task Force Issue No. 96-18, *“Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction 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 mode, and recognised the compensationcost over the period in which the options vest.

**Employee Share Option Plan (ESOP)**
|                                                        | ** ** | **2006**    | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|-------------|------------|----------|------------|
| ** **                                             | ** ** | **$**       | ** ** | **$**    | ** ** |
| Total grant-date  intrinsic value of options exercised | ** ** | **—**  |       | 9,150    |       |
| Total grant-date  fair value of options granted        | ** ** | **194,121** |       | 142,902  |       |
| Total grant-date  fair value of options vested         | ** ** | **194,121** |       | 142,902  |       |
| Aggregate  intrinsic value of options:                 |       |        |       |     |       |
| Outstanding at end of year                             | ** ** | **56,900**  |       | 58,500   |       |
| Exercisable at  end of year                            | ** ** | **32,900**  |       | 34,500   |       |

 

F- 40

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### **OptionsApproved by Resolution of Shareholders**

*Options issued to Dr Greg Collier*

The options issued to Dr. Greg Collier are subject tominimum service vesting condition of between two to four years and a marketcondition in the form of a target share price.
|                                                                                   | ** ** | **2006**      | ** ** | **2005**  | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------|------------|-----------|------------|
| ** **                                                                        | ** ** | **$**         | ** ** | **$**     | ** ** |
| Number of  options outstanding at end of year                                     | ** ** | **3,300,000** |       | 3,300,000 |       |
| Weighted-average  exercise price of options outstanding at end of year            | ** ** | **0.48**      |       | 0.48      |       |
| Aggregate  intrinsic value of options:                                            |       |          |       |      |       |
| Outstanding at end of year                                                        | ** ** | **189,000**   |       | 189,000   |       |
| Exercisable at end of year                                                        | ** ** | **149,000**   |       | 149,000   |       |
| Weighed-average  remaining contractual term of options outstanding at end of year | ** ** | **3.2**       |       | 4.2       |       |

 

No options to Dr. Greg Collier were issued, exercised,cancelled or forfeited during the years ended June 30, 2006 and 2005.

Following is a summary of non-vested options to DrGreg Collier and the weighted-average grant-date fair value (WAFV):  
|                               | ** ** | **2006**      | ** ** | **2005** | ** ** |
|-------------------------------|------------|---------------|------------|----------|------------|
| ** **                    | ** ** | **Number**    | ** ** | **WAFV** | ** ** | **Number** | ** ** | **WAFV** | ** ** |
| Balance at  beginning of year | ** ** | **1,000,000** |       | $        | 0.35       |   | 2,000,000 |   | $ | 0.35 |   |
| Vested during  the year       | ** ** | **—**    | ** ** | **$**    | **—** |   | (1,000,000 | ) | $ | 0.35 |   |
| Balance at end of year        | ** ** | **1,000,000** |       | $        | 0.35       |   | 1,000,000 |   | $ | 0.35 |   |

 

The total grant-date fair value of options vestedduring the year ended June 30, 2006 was nil (2005: $351,289).

As of June 30, 2006, there was approximately $143,841of unrecognized compensation expense related to these non-vested share-basedpayments.  This cost is expected to berecognized over a period of the 2007 and 2008 years of $101,014 and $42,827respectively.

*Options issued to Stragen Investments B.V.*

The total fair value of options to Stragen, which weregranted and vested during the year ended June 30, 2006, was $371,561 andincluded in research and development expense.

Refer to Note 14 to the consolidated financialstatements for the assumptions in determining grant-date fair value of optionsand other information on share-based payments to employees and non-employees.

F- 41

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### *b) Fairvalue of shares issued as consideration.*

As disclosed in Note 18 to the consolidated financialstatements, the Company issued 28,000,000 ordinary shares as consideration foracquiring 100% of ChemGenex Therapeutics, Inc. In accordance with theacquisition agreement the value placed on the issue under the prevailing A-GAAPstandards was 54 cents per share, the closing market price on June 21, 2004.Under US GAAP the fair value of the shares issued to affect the acquisition isthe average quoted market price for a period of two days before and after thedate the terms of the agreement are agreed and announced (52.6 cents).  Accordingly, for US GAAP purposes, theCompany has recorded an adjustment to the purchase price as well as the valueof the shares issued.

*c) Goodwill on acquisition*

At June 30, 2004 the Company calculated goodwillrelating to the acquisition of ChemGenex Therapeutics, Inc. as the excess ofthe purchase price over the fair value of identifiable net assetsacquired.  In accordance with theprevailing A-GAAP standards, the resultant goodwill was to be amortised over 20years. With the implementation of AIFRS Goodwill is no longer amortised andimpairment is evaluated and expensed as per notes 2(i) and 13 of theseconsolidated financial statements. For US GAAP purposes, the Company consideredthe guidance contained in FASB Interpretations (FIN) 4, Applicability of FASBStatement No. 2 to Business Combinations Accounted for by the Purchase Method”and determined that the excess of the US GAAP purchase price over the fairvalue of identifiable net assets acquired represents the estimated value ofacquired in-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 Company holds an investment in a marketablesecurity that was fully provided for under A-GAAP during the year ended June30, 1999 because the security was deemed worthless by management.  Under US GAAP, the investment is classifiedas available-for-sale and reported at fair value based on the average of theclosing bid and asked prices as reported by the OTC Bulletin Board.  Unrealized gains and losses are excluded fromearnings, and reported, net of tax, in accumulated other comprehensive incomeuntil realized.

During the year ended June 30, 2005, a decline inmarket value, judged to be other than temporary occurred and resulted in areduction in the carrying value of the investment.  During the year ended June 30, 2006, adecline in market value, judged to be other than temporary, occurred such thatinvestment was deemed by management to have no ongoing carrying value. As aresult the value of the investment was totally written off under US GAAP as atJune 30, 2006.

*e) Deferred tax effect of US GAAP adjustments*

The deferred tax effect of US GAAP adjustments is nilbecause it is more likely than not that the net deferred tax asset will not berealized and, accordingly, the Company has recorded a 100% valuation allowanceagainst the net deferred tax assets.

*Income Tax and Deferred Tax Supplement Disclosures*

Loss before incometaxes for the years ended June 30, 2006 and 2005 was realized in the followingjurisdictions:
|                                                    | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|----------------------------------------------------|------------|-------------|------------|------------|------------|
| Australia  Operating Loss                          |       | (6,031,234  | )          | (4,337,743 | )          |
| USA Operating  Loss                                |       | (4,283,955  | )          | (1,893,484 | )          |
| USA Profit on  transfer of intellectual property   |       | 13,471,642  |       | —     |       |
| Consolidated  Exchange Loss                        |       | (54,530     | )          | (3,955     | )          |
| Elimination of  Internal USA Profit on IP Transfer |       | (13,471,642 | )          | —     |       |
| Loss before income  taxes                          |       | (10,369,719 | )          | (6,235,182 | )          |

 

F- 42

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### At June 30,2006, deferred income tax relates to the following:

|                                                                   | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| *Deferred  tax assets*                                            | * *   | * *    | * *   | * *    | * *   |
| *Current  deferred tax asset*                                     | * *   | * *    | * *   | * *    | * *   |
| Sundry creditors  and accruals                                    |       | 39,986      |       | 132,695     |       |
| Employee  benefits                                                |       | 25,187      |       | 35,805      |       |
| *Non-current  deferred tax asset*                                 | * *   | * *    | * *   | * *    | * *   |
| Sec 40-880 costs                                                  |       | 196,022     |       | —      |       |
| Capital Losses  available for offset against future capital gains |       | 436,439     |       | 436,439     |       |
| Losses available  for offset against future taxable income*       |       | 13,878,135  |       | 15,123,323  |       |
| Gross deferred  tax assets                                        |       | 14,575,769  |       | 15,728,262  |       |
| Valuation  allowance                                              |       | (14,575,769 | )          | (15,728,262 | )          |
| Net deferred tax asset  assets                                    |       | —      |       | —      |       |

 

----

*Deferred taxassets relating to tax losses

At June 30, 2006,the Company had net operating tax loss carry-forwards generated in Australiawhich 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 losscarry-forwards generated in the USA are available indefinitely subject toexisting and future US tax regulations.

At June 30, 2006,the Company also has capital losses that arose in predominately 2002 of$436,439 (2005: $436,439) and are available indefinitely for offset againstfuture capital gains of a similar nature subject to continuing to meet relevantstatutory tests.

As a result ofthese tax loss carry-forwards, the Company has significant deferred taxassets.  However due the Company’s lackof earnings history, realization of these deferred tax assets is not morelikely than not, therefore, the deferred tax assets have been fully offset by avaluation allowance.

The change in thevaluation allowance and the corresponding change in the deferred tax assetamounted to ($1,152,493), and $1,712,683 for the years ended June 30, 2006 and2005, respectively.

Operating lossesnoted above in 2006 and 2005 relate to expenditure on research projects andgeneral company administration costs.  In2006 the US subsidiary recorded a profit of AUD13,471,642 on the sale of IPrelating to the anti-cancer compound Ceflatonin to the parent company.  The US subsidiary utilised carry forward taxlosses to offset against the profit on the sale of the IP.

Refer to Note 5for the reconciliation of income tax expense applicable to accounting profitbefore income tax and income tax expense for the years ended June 30, 2006 and2005.

*f) Consolidated Income Statement classificationdifferences*

In addition to the differences in valuation and incomerecognition, other differences, essentially related to presentation, existbetween AIFRS and US GAAP.  Althoughthere is no impact on US GAAP reported Equity and Net Loss due to thesedifferences, it may be useful to understand them to interpret the ConsolidatedFinancial Statements presented in accordance with US GAAP.  The following is a summary of presentationdifferences that relate to the basic AIFRS Consolidated Financial Statements

Under AIFRS, exchange rate gains are reported as acomponent of revenue from ordinary activities. Under US GAAP, exchange rategains relating to operating activities are classified within operating income(loss) whereas exchange rate gains related to non-operating activities are classifiedas a component of non-operating income (loss).

Under AIFRS, interest income is reported as acomponent of revenue from operations. Under US GAAP, interest income isreported as a component of non-operating income (loss).

Under AIFRS, borrowing costs are classified in income(loss) from operations.  Under US GAAP,borrowing costs are classified in non-operating income (loss).

Under AIFRS, the Company classifies costs paid tothird parties under research and development contracts as research expenditure.  Other costs directly attributable to researchactivities, such as depreciation of plant and equipment, patent costs, legalcosts, personnel costs, among others, are classified in separate line items inthe Consolidated Income Statements. Under US GAAP, all costs of research anddevelopment activities are classified as research and development in theConsolidated Income Statements.

F- 43

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*g) Recently Issued but not yetadopted Accounting Pronouncements*

The following accounting pronouncements have been issuedbut have not yet been adopted by ChemGenex Pharmaceuticals Limited as at June30, 2006-

*AccountingChanges and Error Corrections*

In May 2005, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 154, *AccountingChanges and Error Corrections*, a replacement of AccountingPrinciples Board (“APB”) Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”).  SFAS 154 provides guidance on the accountingfor and reporting of accounting changes, including changes in principle,accounting estimates, and the reporting entity, as well as, corrections oferrors in previously issued financial statements.  SFAS 154 requires retrospective applicationof voluntary changes in accounting principle to prior period financial statements,unless it is impracticable to do so. SFAS 154 also provides that a change in accounting estimate that isaffected by a change in accounting principle is accounted for as a change inestimate.  SFAS 154 carries forward fromAPB 20, *Accounting Changes*, thereporting for a correction of an error, a change in the reporting entity, andthe requirement to justify a voluntary change in accounting principle on thebasis of preferability.  SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005 with early adoption permitted for accountingchanges and corrections of errors made in fiscal years beginning after the dateSFAS 154 was issued.  The Company plansto adopt this pronouncement in fiscal years beginning July 1, 2006 and does notbelieve the adoption of SFAS 154 will have a material effect on theconsolidated financial statements.

*Uncertaintyin Income Taxes*

In July 2006, the FASB issued FASB Interpretation (“FIN”)No. 48, *Accounting for Uncertainty in IncomeTaxes*, an interpretation of FASB No. 109, *Accounting for Income Taxes* (“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 tomeet before being 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 clearly scopes out income taxes from SFAS No. 5, *Accounting for Contingencies*.  FIN 48 applies to all tax positions relatedto income taxes subject to SFAS No. 109. This includes tax positions considered to be “routine” as well as thosewith a high degree of uncertainty.  Theguidance contained in FIN 48 is also applicable to pass-through entities,non-taxable entities, and entities whose tax liability is subject to 100%credit for dividends paid.  FIN 48utilizes the following two-step approach for evaluating tax positions:recognition (step one) and measurement (step two).  Step one occurs when an enterprise concludesthat a tax position, based solely on its technical merits, ismore-likely-than-not to be sustained on examination.  Step two is only addressed if step one hasbeen 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 atax position that was previously recognized would occur when a companysubsequently determines that a tax position no longer meets themore-likely-than-not threshold of being sustained.  FIN 48 specifically prohibits the use of a valuationallowance as a substitute for derecognition of tax positions.  FIN 48 requires expanded disclosures,including a tabular roll forward of the beginning and ending aggregateunrecognized tax benefits as well as specific detail related to tax uncertaintiesfor which it is reasonably possible the amount of unrecognized tax benefit willsignificantly increase or decrease within twelve months.  These disclosures are required at each annualreporting period, unless a significant change occurs in an interim period.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  TheCompany plans to adopt this pronouncement in fiscal year beginning July 1, 2007and does not believe the adoption of FIN 48 will have a material effect on theconsolidated financial statements.

F- 44

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### *Fair ValueMeasurements*

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements* (“SFAS 157”).  SFAS 157 provides enhanced guidance for usingfair value to measure assets and liabilities and also responds to investors’requests for expanded information about the extent to which companies measureassets and liabilities at fair value, the information used to measure fairvalue, and the effect of fair value measurements on earnings.  SFAS 157 applies whenever other standardsrequire (or permit) assets or liabilities to be measured at fair value and doesnot expand the use of fair value in any new circumstances.  Under SFAS 157, fair value refers to theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants in the market in whichthe reporting entity transacts.  SFAS 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing the asset or liability.  In support of this principle, SFAS 157establishes a fair value hierarchy that prioritizes the information used todevelop those assumptions.  The fairvalue hierarchy gives the highest priority to quoted prices in active marketsand the lowest priority to unobservable data. Under SFAS 157, fair value measurements would be separately disclosed bylevel within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007.  TheCompany plans to adopt this pronouncement in fiscal years beginning July 1,2008 and does not believe the adoption of SFAS 157 will have a material effecton the consolidated financial statements.

F- 45

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