**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**





**FORM
      20-F**





**o**
            **REGISTRATION
                STATEMENT PURSUANT TO SECTION 12(b) OR (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, 2005**


**OR**


**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**


**For
      the transition period from __________ to __________**


**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 .................**




**Commission
      file number 000-49843**




**PRANA
      BIOTECHNOLOGY LIMITED**


(Exact
      name of Registrant as specified in its charter


and
      translation of Registrant’s name into English)




**Australia**


(Jurisdiction
      of incorporation or organization)




**Level
      2, 369 Royal Parade, Parkville, Victoria 3052 Australia**


(Address
      of principal executive offices)





Securities
      registered or to be registered pursuant to Section 12(b) of the Act: **None**





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




**American
      Depositary Shares, each representing ten Ordinary Shares**


(Title
      of
      Class)





Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act: **None**





Indicate
      the number of outstanding shares of each of the issuer's classes of capital
      or
      common stock as of the close of the period covered by the annual
      report:




**Ordinary
      Shares, as of June 30, 2005..........................127,319,260**





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




Yes x No
o





Indicate
      by check mark which financial statement item the registrant has elected to
      follow:




Item
      17 o Item
      18
x





i


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





Yes x No
o





This
      Report on Form 20-F is incorporated by reference into our Registration Statement
      on Form F-3 File No. 333-116232.





ii





**INTRODUCTION**





Prana
      Biotechnology Limited was incorporated under the laws of the Commonwealth of
      Australia on November 11, 1997. Our mission is to develop therapeutic drugs
      designed to treat the underlying causes of degeneration of the brain and the
      eye
      as the aging process progresses, initially focusing on Alzheimer’s disease.
      Other potential applications for our therapies include age-related cataracts,
      Huntington disease, Creutzfeldt-Jakob disease (the human variant of Mad Cow
      disease), Motor Neuron disease and Parkinson’s disease. The principal listing of
      our ordinary shares and listed options to purchase our ordinary shares is on
      the
      Australian Stock Exchange. Since September 5, 2002, our American Depository
      Receipts, or ADRs, have traded on the NASDAQ Capital Market under the symbol
      “PRAN.” The Bank of New York, acting as depositary, issues our ADRs, each of
      which evidences an American Depositary Share, which in turn represents ten
      of
      our ordinary shares. As used in this annual report, the terms “we,”“us,”“our”
      and “Prana” mean Prana Biotechnology Limited, an Australian company, and its
      subsidiaries, unless otherwise indicated.




We
      have
      not obtained or applied for trademarks registrations. Any trademarks and trade
      names appearing in this annual report are owned by their respective holders.




Our
      financial statements appearing in this annual report are prepared in Australian
      dollars and in accordance with generally accepted accounting principles in
      Australia. In this annual report, all references to “U.S. dollars” or “US$” are
      to the currency of the United States of America, and all references to
“Australian dollars” or “A$” are to the currency of Australia.




Statements
      made in this annual report concerning the contents of any contract, agreement
      or
      other document are summaries of such contracts, agreements or documents and
      are
      not complete descriptions of all of their terms. If we filed any of these
      documents as an exhibit to this annual report or to any registration statement
      or annual report that we previously filed, you may read the document itself
      for
      a complete description of its terms.




Except
      for the historical information contained in this annual report, the statements
      contained in this annual report are “forward-looking statements” within the
      meaning of Section 27A of the Securities Act of 1933, as amended, and Section
      21E of the Securities Exchange Act of 1934, as amended, and the Private
      Securities Litigation Reform Act of 1995, as amended, with respect to our
      business, financial condition and results of operations. Such forward-looking
      statements reflect our current view with respect to future events and financial
      results. We urge you to consider that statements which use the terms
“anticipate,”“believe,”“do not
      believe,”“expect,”“plan,”“intend,”“estimate,”“anticipate” and similar
      expressions are intended to identify forward-looking statements. Neither our
      registered independent accounting firm, nor any other independent accountants,
      have compiled, examined, or performed any procedures, with respect to the
      prospective financial information contained herein nor have they expressed
      any
      opinion or any other form of assurance on such information or its achievability,
      and assume no responsibility for, and disclaim any association with, the
      prospective financial information. We




iii


remind
      readers that forward-looking statements are merely predictions and therefore
      inherently subject to uncertainties and other factors and involve known and
      unknown risks that could cause the actual results, performance, levels of
      activity, or our achievements, or industry results, to be materially different
      from any future results, performance, levels of activity, or our achievements
      expressed or implied by such forward-looking statements. Such forward-looking
      statements are also included in Item 4 - “Information on the Company” and Item 5
      - “Operating and Financial Review and Prospects.” ** Readers
      are cautioned not to place undue reliance on these forward-looking statements,
      which speak only as of the date hereof. Except as required by applicable law,
      including the securities laws of the United States, we undertake no obligation
      to publicly release any update or revision to any forward-looking statements
      to
      reflect new information, future events or circumstances, or otherwise after
      the
      date hereof. We have attempted to identify significant uncertainties and other
      factors affecting forward-looking statements in the Risk Factors section that
      appears in Item 3.D. “Key Information-Risk Factors.”








iv





**TABLE
      OF CONTENTS**


Page


**PART
                        I**
                    **1****ITEM
                        1.**
                    **IDENTITY
                        OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS**
                    **1****ITEM
                        2.**
                    **OFFER
                        STATISTICS AND EXPECTED TIMETABLE**
                    **1****ITEM
                        3.**
                    **KEY
                        INFORMATION**
                    **1**A.
                    Selected
                        Financial Data
                    1B.
                    Capitalization
                        and Indebtedness
                    3C.
                    Reasons
                        for the Offer and Use of Proceeds
                    3D.
                    Risk
                        Factors
                    3**ITEM
                        4.**
                    **INFORMATION
                        ON THE COMPANY**
                    **14**A.
                    History
                        and Development of the Company
                    14B.
                    Business
                        Overview
                    17C.
                    Organizational
                        Structure
                    31D.
                    Property,
                        Plants and Equipment
                    31**ITEM
                        5.**
                    **OPERATING
                        AND FINANCIAL REVIEW AND PROSPECTS**
                    **31**A.
                    Operating
                        Results
                    32B.
                    Liquidity
                        and Capital Resources
                    43C.
                    Research
                        and Development, Patents and Licenses
                    46D.
                    Trend
                        Information
                    50E.
                    Off-Balance
                        Sheet Arrangements
                    50F.
                    Tabular
                        Disclosure of Contractual Obligations
                    50**ITEM
                        6.**
                    **DIRECTORS,
                        SENIOR MANAGEMENT AND EMPLOYEES**
                    **50**A.
                    Directors
                        and Senior Management
                    50B.
                    Compensation
                    53C.
                    Board
                        Practices
                    55D.
                    Employees
                    61E.
                    Share
                        Ownership
                    61**ITEM
                        7.**
                    **MAJOR
                        SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**
                    **66**A.
                    Major
                        Shareholders
                    66B.
                    Related
                        Party Transactions
                    67C.
                    Interests
                        of Experts and Counsel
                    67**ITEM
                        8.**
                    **FINANCIAL
                        INFORMATION**
                    **68**A.
                    Financial
                        Statements and Other Financial Information
                    68B.
                    Significant
                        Changes
                    68**ITEM
                        9.**
                    **THE
                        OFFER AND LISTING**
                    **69**A.
                    Offer
                        and Listing Details
                    69B.
                    Plan
                        of Distribution
                    70C.
                    Markets
                    70D.
                    Selling
                        Shareholders
                    70
  v
 E.
                      Dilution
                      71F.
                      Expenses
                          of the Issue
                      71**ITEM
                          10.**
                      **ADDITIONAL
                          INFORMATION**
                      **71**A.
                      Share
                          Capital
                      71B.
                      Memorandum
                          and Articles of Association
                      71C.
                      Material
                          Contracts
                      71D.
                      Exchange
                          Controls
                      73E.
                      Taxation
                      74F.
                      Dividend
                          and Paying Agents
                      81G.
                      Statement
                          by Experts
                      81H.
                      Documents
                          on Display
                      81I.
                      Subsidiary
                          Information
                      82**ITEM
                          11.**
                      **QUANTITATIVE
                          AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**
                      **82****ITEM
                          12.**
                      **DESCRIPTION
                          OF SECURITIES OTHER THAN EQUITY SECURITIES**
                      **83******
                      ****
                      ******PART
                          II**
                      **83****ITEM
                          13.**
                      **DEFAULTS,
                          DIVIDEND ARREARAGES AND DELINQUENCIES**
                      **83****ITEM
                          14.**
                      **MATERIAL
                          MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
                          OF
                          PROCEEDS**
                      **83****ITEM
                          15.**
                      **CONTROLS
                          AND PROCEDURES**
                      **83****ITEM
                          16.**
                      **RESERVED**
                      **84****ITEM
                          16A.**
                      **AUDIT
                          COMMITTEE FINANCIAL EXPERT**
                      **84****ITEM
                          16B.**
                      **CODE
                          OF ETHICS**
                      **84****ITEM
                          16C.**
                      **PRINCIPAL
                          ACCOUNTANT FEES AND SERVICES**
                      **84****ITEM
                          16D.**
                      **EXEMPTIONS
                          FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
                          COMMITTEE**
                      **85****ITEM
                          16E.**
                      **PURCHASE
                          OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
                          PURCHASERS**
                      **85****ITEM
                          17.**
                      **FINANCIAL
                          STATEMENTS**
                      **85****ITEM
                          18.**
                      **FINANCIAL
                          STATEMENTS**
                      **86****ITEM
                          19.**
                      **EXHIBITS**
                      **86****SIGNATURES**
                      **90**


vi





**PART
      I**




**ITEM
      1.**  **IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS**





Not
      applicable.




**ITEM
      2.**  **OFFER
      STATISTICS AND EXPECTED TIMETABLE**





Not
      applicable.




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




**A.**  **Selected
      Financial Data**





The
      following table presents our selected financial data as of the dates and for
      each of the periods indicated. You should read the selected financial data
      set
      forth below together with Item 5. “Operating and Financial Review and Prospects”
      as well as our financial statements and notes thereto appearing elsewhere in
      this annual report.




The
      selected financial data as of June 30, 2005 and 2004 and for each of the three
      years in the period ended June 30, 2005 have been derived from our audited
      financial statements and notes thereto included elsewhere in this annual report.
      The selected financial data as of June 30, 2003, 2002 and 2001 and for the
      years
      ended June 30, 2002 and 2001 have been derived from our audited financial
      statements and notes thereto which are not included in this annual report.




We
      prepare our financial statements in accordance with generally accepted
      accounting principles in Australia, or A-GAAP, which differ in certain
      significant respects from generally accepted accounting principles in the United
      States, or U.S. GAAP. Please refer to Note 25 to the financial statements for
      a
      description of the differences between A-GAAP and U.S. GAAP as they relate
      to
      us, and a reconciliation of net loss and total equity for the periods and as
      of
      the dates therein indicated.








1





**Statements
      of Financial Performance Data:**


**Year
                  Ended June 30,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**(in
                  A$, except per share and share data)A-GAAP:Revenue
                  from ordinary activities
              
              
              2,653,113
              
              
              2,321,227
              
              
              1,816,478
              
              
              793,970
              
              
              516,182Depreciation
                  and amortization expense
              
              
              (1,165,227
              )
              
              (1,195,006
              )
              
              (1,185,973
              )
              
              (1,160,595
              )
              
              (1,140,658
              )Patents,
                  research and development expense
              
              
              (7,109,839
              )
              
              (4,853,536
              )
              
              (1,386,006
              )
              
              (1,961,159
              )
              
              (2,311,619
              )Patents,
                  research and development expense - related parties
              
              
              (577,757
              )
              
              (379,045
              )
              
              (475,289
              )
              
              (537,327
              )
              
              (64,785
              )Legal
                  expense
              
              
              (1,047,448
              )
              
              (1,650,467
              )
              
              (848,660
              )
              
              (923,816
              )
              
              (252,675
              )Employee
                  benefits expense
              
              
              (2,438,303
              )
              
              (1,060,730
              )
              
              (760,980
              )
              
              (378,853
              )
              
              (122,199
              )Consulting
                  fee expense
              
              
              (1,607,892
              )
              
              (1,706,809
              )
              
              (567,730
              )
              
              (604,873
              )
              
              (306,530
              )Corporate
                  compliance expense
              
              
              (562,123
              )
              
              (419,708
              )
              
              (395,604
              )
              
              (339,383
              )
              
              (196,629
              )Foreign
                  exchange loss
              
              
              (1,362,572
              )
              
              (182,768
              )
              
              (12,481
              )
              
              -
              
              
              -Impairment
                  of intangible assets
              
              
              (10,388,339
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  expenses from ordinary activities - related parties
              
              
              -
              
              
              (81,470
              )
              
              (114,247
              )
              
              (30,000
              )
              
              (30,000
              )Other
                  expenses from ordinary activities
              
              
              (1,402,210
              )
              
              (677,302
              )
              
              (654,346
              )
              
              (306,431
              )
              
              (230,066
              )Net
                  loss
              
              
              (25,008,597
              )
              
              (9,885,614
              )
              
              (4,584,838
              )
              
              (5,448,467
              )
              
              (4,138,979
              )Loss
                  per share - basic and diluted
              
              
              (0.20
              )
              
              (0.13
              )
              
              (0.08
              )
              
              (0.10
              )
              
              (0.08
              )Weighted
                  average number of ordinary shares outstanding - basic and
                  diluted
              
              
              122,754,061
              
              
              75,701,818
              
              
              61,131,313
              
              
              57,623,389
              
              
              53,090,491*U.S.
                  GAAP:*Net
                  loss
              
              
              (17,675,019
              )
              
              (9,208,199
              )
              
              (3,244,397
              )
              
              (4,728,019
              )
              
              (3,048,784
              )Loss
                  per share - basic and diluted
              
              
              (0.14
              )
              
              (0.12
              )
              
              (0.05
              )
              
              (0.08
              )
              
              (0.06
              )Weighted
                  average number of ordinary shares outstanding - basic and
                  diluted
              
              
              122,754,061
              
              
              75,701,818
              
              
              61,131,313
              
              
              57,623,389
              
              
              53,090,491





**Statements
          of Financial Position Data:**
 **As
                  at June 30,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**(in
                  A$ )*A-GAAP:*Cash
                  assets
              
              
              21,453,304
              
              
              29,580,398
              
              
              3,463,783
              
              
              3,585,014
              
              
              6,854,873Working
                  capital
              
              
              19,427,962
              
              
              27,041,537
              
              
              3,093,745
              
              
              2,840,984
              
              
              6,454,969Total
                  assets
              
              
              22,289,159
              
              
              41,415,398
              
              
              16,389,926
              
              
              17,581,319
              
              
              22,287,460Contributed
                  equity
              
              
              55,405,707
              
              
              49,505,493
              
              
              16,741,023
              
              
              13,001,486
              
              
              12,276,892Accumulated
                  deficit during   development stage
              
              
              (50,473,473
              )
              
              (25,464,876
              )
              
              (15,579,262
              )
              
              (10,994,424
              )
              
              (5,545,957
              )Total
                  equity
              
              
              19,594,176
              
              
              38,702,559
              
              
              15,823,703
              
              
              16,668,986
              
              
              21,392,877*U.S.
                  GAAP:*Total
                  assets
              
              
              22,289,159
              
              
              34,197,794
              
              
              7,944,306
              
              
              7,231,703
              
              
              10,298,744Accumulated
                  deficit during   development stage
              
              
              (41,783,900
              )
              
              (24,108,881
              )
              
              (14,900,682
              )
              
              (11,656,285
              )
              
              (6,928,266
              )Contributed
                  equity
              
              
              61,378,076
              
              
              55,593,837
              
              
              22,278,765
              
              
              18,372,088
              
              
              16,332,427Total
                  equity
              
              
              19,594,176
              
              
              31,484,956
              
              
              7,378,083
              
              
              6,715,803
              
              
              9,404,161





2


**Exchange
      Rate Information**




The
      following tables set forth, for the periods and dates indicated, certain
      information regarding the rates of exchange of A$1.00 into the US$ based on
      the
      noon market buying rate in New York City for cable transfers in Australian
      dollars as certified for customs purposes by the Federal Reserve Bank of New
      York, or the noon buying rate.




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




The
      noon
      buying rate on December 18, 2005 was US$0.7455= A$1.00





Year
              Ended
                June 30,
            
            At
                Period End
            
            Average
                Rate
            
            High
            
            Low2001
            
            
            0.5100
            
            
            0.5320
            
            
            0.5996
            
            
            0.48282002
            
            
            0.5614
            
            
            0.5682
            
            
            0.5747
            
            
            0.48582003
            
            
            0.6713
            
            
            0.5623
            
            
            0.6729
            
            
            0.52802004
            
            
            0.6903
            
            
            0.7139
            
            
            0.8005
            
            
            0.63452005
            
            
            0.7620
            
            
            0.7535
            
            
            0.7988
            
            
            0.6852




**B.**  **Capitalization
      and Indebtedness**




Not
      applicable.




**C.**  **Reasons
      for the Offer and Use of Proceeds**




Not
      applicable.




**D.**  **Risk
      Factors**




*Investing
      in our American Depositary Shares involves a high degree of risk and
      uncertainty. You should carefully consider the risks and uncertainties described
      below before investing in our American Depositary Shares. Additional risks
      and
      uncertainties not presently known to us or that we believe to be immaterial
      may
      also adversely affect our business. If any of the following risks actually
      occurs, our business, prospects, financial condition and results of operations
      could be harmed. In that case, the daily price of our depositary shares could
      decline, and you could lose all or part of your investment.*





3


***Risks
      Related To Our Business***




**We
      are a development stage company at an early stage in the development of
      pharmaceutical products and our success is uncertain.**




We
      are a
      development stage company at an early stage in the development of our
      pharmaceutical products that are designed to treat the underlying causes of
      degeneration of the brain and the eye as the aging process progresses. We have
      not sufficiently advanced the development of any of our products, including
      our
      current lead product candidate, PBT-2, to market or generate revenues from
      their
      commercial application. Our current or any future product candidates, if
      successfully developed, may not generate sufficient or sustainable revenues
      to
      enable us to be profitable.




**There
      is a high risk that we may not be able to complete the development of PBT-2
      or
      develop other pharmaceutical products.**




We
      may
      not be able to develop our current or any future pharmaceutical product
      candidates adequately to attract a suitable collaborative partner. The projects
      initially specified in connection with any such collaboration and any associated
      funding, may change or discontinue with the changing interests of either the
      collaborator or us, and any such change may change the budget for the projects
      under the collaboration. Additionally, our research may not lead to the
      discovery of additional product candidates, and any of our current and future
      product candidates may not be successfully developed, prove to be safe and
      efficacious in clinical trials, meet applicable regulatory standards and receive
      regulatory approval, be capable of being produced in commercial quantities
      at
      reasonable costs, or be successfully or profitably marketed, either by us or
      a
      collaborative partner. **** The
      products we develop may not be able to penetrate the potential market for a
      particular therapy or indication or gain market acceptance among health care
      providers, patients and third-party payors. We cannot predict if or when the
      development of PBT-2 or any future pharmaceutical product will be completed
      or
      commercialized, whether funded by us, as part of a collaboration or through
      a
      grant.




**We
      may need to prioritize the development of our most promising candidates at
      the
      expense of the development of other products.**




We
      may
      need to prioritize the allocation of development funds towards what we believe
      to be our most promising products. The nature of the drug development process
      is
      such that there is a constant availability of new information and data which
      could positively or adversely affect a product in development. We cannot predict
      how such new information and data may impact in the future the prioritization
      of
      the development of our current or future product candidates or that any of
      our
      products, regardless of its development stage or the investment of time and
      funds in its development, will continue to be funded or developed.




4


**We
      may require substantial additional financing in the future to sufficiently
      fund
      our operations and research.**




We
      have
      been unprofitable to date and expect to incur losses over the next several
      years
      as we expand our drug discovery and development programs and pre-clinical
      testing and as we conduct clinical trials of our product candidates. We may
      not
      have sufficient financial resources available to us or sufficient to meet our
      actual operating expenses and capital requirements on a long-term basis. Our
      actual cash requirements may vary materially from those now planned and will
      depend upon numerous factors, including:




·
            the
                continued progress of our research and development
                programs;




·
            the
                timing, scope, results and costs of pre-clinical studies and clinical
                trials;




·
            the
                cost, timing and outcome of regulatory submissions and
                approvals;




·
            determinations
                as to the commercial potential of our product
                candidates;




·
            our
                ability to successfully expand our contract manufacturing
                services;




·
            our
                ability to establish and maintain collaborative arrangements;
                and




·
            the
                status and timing of competitive
                developments.




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




**We
      will not be able to commercialize PBT-2 or any future product candidates if
      we
      fail to adequately demonstrate their safety, efficacy and superiority over
      existing therapies.**




Before
      obtaining regulatory approvals for the commercial sale of any of our
      pharmaceutical products, we must demonstrate through pre-clinical testing and
      clinical studies that our product candidates are safe and effective for use
      in
      humans for each target indication. Conducting pre-clinical testing and clinical
      studies is an expensive, protracted and time-consuming process. Likewise,
      results from early clinical trials may not be predictive of results obtained
      in
      large-scale, later-stage clinical testing. In addition, even though a potential
      drug product shows promising results in clinical trials, regulatory authorities
      may not grant the necessary approvals without sufficient safety and efficacy
      data.




5


We
      may
      not be able to undertake further clinical trials of PBT-2
      and
      any future product candidate, including one that may emerge from our vaccine
      program, or to demonstrate the safety and efficacy or superiority of any of
      these product candidates over existing therapies or other therapies under
      development, or enter into any collaborative arrangement to commercialize our
      current or future product candidates on terms acceptable to us, or at all. In
      April,
      2005, we ceased clinical trials of our PBT-1 compound in
      Alzheimer’s disease and we may not be able to undertake future clinical trials
      of PBT-1 in the future. Clinical trial results that show insufficient safety
      and
      efficacy could have a material adverse effect on our business, financial
      condition and results of operations.




**We
      may experience delays in our clinical trials that could adversely affect our
      business and operations.**




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




·
            government
                or regulatory delays, including delays in obtaining approvals from
                applicable hospital ethics committees and internal review
                boards;





·
            slower
                than expected patient recruitment;





·
            our
                inability to manufacture sufficient quantities of our new proprietary
                compound or our other product candidates or matching
                controls;





·
            unforeseen
                safety issues; and





·
            lack
                of efficacy or unacceptable toxicity during the clinical
                trials.





Patient
      enrollment is a function of, among other things, the nature of the clinical
      trial protocol, the existence of competing protocols, the size and longevity
      of
      the target patient population, and the availability of patients who comply
      with
      the eligibility criteria for the clinical trial. Delays in planned patient
      enrollment may result in increased costs, delays or termination of clinical
      trials. Moreover, we rely on third parties to assist us in managing and
      monitoring clinical trials. Any failure by these third parties to perform under
      their agreements with us may cause the trials to be delayed or result in a
      failure to complete the trials.




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




6


**We
      have limited manufacturing experience with our product candidates. Delays in
      manufacturing sufficient quantities of such materials to the required standards
      for pre-clinical and clinical trials may negatively impact our business and
      operations.**




We
      may
      not be able to manufacture sufficient quantities of PBT-2 or any future product
      candidates (including PBT-1) in a cost-effective or timely manner. Any delays
      in
      production would delay our pre-clinical and human clinical trials which could
      have a material adverse effect on our business, financial condition and results
      of operations.




We
      may be
      required to enter into contracting arrangements with third parties to
      manufacture PBT-2 and any future product candidates for large-scale, preclinical
      and/or clinical trials. We may not be able to make the transition from
      laboratory-scale to development-scale, or from development-scale to commercial
      production. We may need to develop additional manufacturing resources, enter
      into collaborative arrangements with other parties who have established
      manufacturing capabilities, or have third parties manufacture our products
      on a
      contract basis. We may not have access on acceptable terms to the necessary
      and
      substantial financing that would be required to scale-up production and develop
      effective commercial manufacturing processes and technologies. We may not be
      able to enter into collaborative or contracting arrangements on acceptable
      terms
      with parties that will meet our requirements for quality, quantity and
      timeliness.




We
      expect
      that we will be required to design and develop new synthetic pathways for most,
      if not all, of the products that we currently intend to develop. We can not
      predict the success of such efforts, the purity of the products that may be
      obtained or the nature of the impurities that may result from such efforts.
      If
      we are not able to obtain an acceptable purity for any product candidate or
      an
      acceptable impurity profile, pre-clinical and clinical trials would be delayed,
      which could have a material adverse effect on the priority of the development
      of
      our product candidates, our business, financial condition and results of
      operations.




**We
      are dependent upon a sole supplier of our lead compound, PBT-2, and could incur
      significant costs and delays if we are unable to promptly find a replacement.**




We
      typically rely on a single manufacturer to develop Good Manufacturing Practice
      (GMP) synthetic processes for our lead compounds. Our lead compound, PBT-2,
      is
      manufactured by the Institute of Drug Technology Limited and we relied on
      Orgasynth Industries to manufacture our PBT-1 compound prior to ceasing its
      clinical trials for Alzheimer's disease in April 2005. We intend to continue
      these relationships and this approach with further compounds if it remains
      financially viable. We have not had any prior manufacturer of our compounds
      elect to cease its relationship with our company. We may not be able to promptly
      find a replacement manufacturer, if required, without incurring material
      additional costs and substantial delays.




**We
      have a history of operating losses and may not achieve or maintain profitability
      in the future.**




We
      have
      incurred losses in every period since we began operations in 1997. We expect
      to
      continue to incur additional operating losses over at least the next several
      years and to increase our cumulative losses substantially as we expand our
      research and development and pre-clinical activities and commence additional
      clinical trials of PBT-2. We reported a net loss of A$25,008,597, A$9,885,614
      and A$4,584,838 during the fiscal years ended June 30, 2005, 2004, and 2003,
      respectively. As of June 30, 2005, our accumulated deficit was A$50,473,473.
      We
      may not be able to achieve or maintain profitability.




7


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




Any
      future success will depend in large part on whether we can:




·
            obtain
                and maintain patents to protect our own
                products;





·
            obtain
                licenses to the patented technologies of third
                parties;





·
            operate
                without infringing on the proprietary rights of third parties;
                and





·
            protect
                our trade secrets and know-how.





Patent
      matters in biotechnology are highly uncertain and involve complex legal and
      factual questions. Accordingly, the availability and breadth of claims allowed
      in biotechnology and pharmaceutical patents cannot be predicted. Any of the
      pending or future patent applications filed by us or on our behalf may not
      be
      approved, or we may not develop additional proprietary products or processes
      that are patentable or that we will be able to license any other patentable
      products or processes.




Our
      commercial success will also depend, in part, on our ability to avoid
      infringement of patents issued to others. If a court determines that we were
      infringing any third party patents, we could be required to pay damages, alter
      our products or processes, obtain licenses or cease certain activities. Licenses
      required under patents held by third parties may not be made available on terms
      acceptable to us or at all. To the extent that we are unable to obtain such
      licenses, we could be foreclosed from the development, manufacture or
      commercialization of the product requiring such license or encounter delays
      in
      product introductions while we attempt to design around such patents, and any
      of
      these circumstances could have a material adverse effect on our business,
      financial condition and results of operations.




We
      may
      have to resort to litigation to enforce any patents issued or licensed to us
      or
      to determine the scope and validity of third party proprietary rights. We may
      have to defend the validity of our patents in order to protect or enforce our
      rights against a third party. Third parties have in the past and may in the
      future assert against us infringement claims or claims that we have infringed
      a
      patent, copyright, trademark or other proprietary right belonging to them.
      Any
      infringement claim, even if not meritorious, could result in the expenditure
      of
      significant financial and managerial resources and could negatively affect
      our
      profitability. While defending our patents, the scope of the claim may be
      reduced in breadth and inventorship of the claimed subject matter, and
      proprietary interests in the claimed subject matter may be altered or reduced.
      Any such litigation, regardless of outcome, could be expensive and time
      consuming, and adverse determinations in any such proceedings could prevent
      us
      from developing, manufacturing or commercializing our products and could have
      a
      material adverse effect on our business, financial condition and results of
      operations.




8


**If
      we do not obtain the necessary governmental approvals we will be unable to
      commercialize our pharmaceutical products.**




Our
      ongoing research and development activities are, and the production and
      marketing of our pharmaceutical product candidates derived therefrom will be,
      subject to regulation by numerous governmental authorities in Australia,
      principally the Therapeutics Goods Administration, or TGA, and the Food and
      Drug
      Administration, or FDA, in the United States, the Medicines and Heathcare
      Products Regulatory Agency, or MHRA, in the United Kingdom and the European
      Medicines Evaluation Authority, or EMEA. Prior to marketing, any therapeutic
      product developed must undergo rigorous pre-clinical testing and clinical
      trials, as well as an extensive regulatory approval process mandated by the
      TGA
      and, to the extent that any of our pharmaceutical products under development
      are
      marketed abroad, by foreign regulatory agencies, including the FDA in the United
      States and the MHRA in the United Kingdom. These processes can take many years
      and require the expenditure of substantial resources. Delays in obtaining
      regulatory approvals would adversely affect the development and
      commercialization of our pharmaceutical product candidates. We may not be able
      to obtain the clearances and approvals necessary for clinical testing or for
      manufacturing and marketing our pharmaceutical products candidates.




**Our
      research and development efforts will be seriously jeopardized if we are unable
      to retain key personnel and cultivate key academic and scientific
      collaborations.**




Our
      future success depends to a large extent on the continued services of our senior
      management and key scientific personnel. We have entered into employment or
      consultancy agreements with these individuals. The loss of their services could
      negatively affect our business. Our success is highly dependent on the continued
      contributions of our scientific personnel and on our ability to develop and
      maintain important relationships with leading academic institutions and
      scientists. Competition among biotechnology and pharmaceutical companies for
      qualified employees is intense, and we may not be able to continue to attract
      and retain qualified scientific and management personnel critical to our
      success. We also have relationships with leading academic and scientific
      collaborators who conduct research at our request or assist us in formulating
      our research and development strategies. These academic and scientific
      collaborators are not our employees and may have commitments to, or consulting
      or advisory contracts with, other entities that may limit their availability
      to
      us. In addition, these collaborators may have arrangements with other companies
      to assist such companies in developing technologies that may prove competitive
      to ours.




**If
      we are unable to successfully keep pace with technological change or with the
      advances of our competitors, our technology and products may become obsolete
      or
      non-competitive.**




The
      biotechnology and pharmaceutical industries are subject to rapid and significant
      technological change. Our competitors in Australia and elsewhere are numerous
      and include major pharmaceutical companies, biotechnology firms, universities
      and other research institutions. These competitors may develop technologies
      and
      products that are more effective than any that we are developing, or which
      would
      render our technology and products obsolete or non-competitive. Many of these
      competitors have greater financial and technical resources and manufacturing
      and
      marketing capabilities than we do. In addition, many of our competitors have
      much more experience than we do in pre-clinical testing and human clinical
      trials of new or improved drugs, as well as in obtaining FDA, TGA, EMEA, MHRA
      and other regulatory approvals.




9


We
      know
      that competitors are developing or manufacturing various technologies or
      products for the treatment of diseases that we have targeted for product
      development. Some of these competitive products use therapeutic approaches
      that
      compete directly with our PBT-2 product candidate. Our ability to further
      develop our products may be adversely affected if any of our competitors were
      to
      succeed in obtaining regulatory approval for their competitive products sooner
      than us.




**Acceptance
      of our products in the marketplace is uncertain, and failure to achieve market
      acceptance will negatively impact our business and
      operations.**




Our
      current or future products may not achieve market acceptance even if they are
      approved by the TGA, FDA or any other regulatory authority. The degree of market
      acceptance of such products will depend on a number of factors,
      including:




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





·
            the
                establishment and demonstration to the medical community of the safety,
                clinical efficacy and cost-effectiveness of our product candidates
                and
                their potential advantages over existing therapeutics and technologies;
                and





·
            the
                pricing and reimbursement policies of governments and third-party
                payors.





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




**The
      failure to establish a sales, marketing and distribution capability would
      materially impair our ability to successfully market and sell our pharmaceutical
      products.**




We
      currently have no experience in marketing, sales or distribution of
      pharmaceutical products. If we develop any commercially marketable
      pharmaceutical products and decide to perform our own sales and marketing
      activities, we will require additional management, will need to hire sales
      and
      marketing personnel, and will require additional capital. Qualified personnel
      may not be available in adequate numbers or at a reasonable cost. Further,
      additional financing may not be available on acceptable terms, or at all, and
      our sales staff may not achieve success in their marketing efforts.
      Alternatively, we may be required to enter into marketing arrangements with
      other parties who have established appropriate marketing, sales and distribution
      capabilities. We may not be able to enter into marketing arrangements with
      any
      marketing partner or if such arrangements are established, our marketing
      partners may not be able to commercialize our products successfully. Other
      companies offering similar or substitute products may have well-established
      and
      well-funded marketing and sales operations in place that will allow them to
      market their products more successfully. Failure to establish sufficient
      marketing capabilities would materially impair our ability to successfully
      market and sell our pharmaceutical products.




10


**If
      healthcare insurers and other organizations do not pay for our products, or
      impose limits on reimbursement, our business may suffer.**




The
      drugs
      we hope to develop may be rejected by the marketplace due to many factors,
      including cost. The continuing efforts of governments, insurance companies,
      health maintenance organizations and other payors of healthcare costs to contain
      or reduce healthcare costs may affect our future revenues and profitability
      and
      those of our potential customers, suppliers and collaborative partners, as
      well
      as the availability of capital. In Australia and certain foreign markets, the
      pricing or profitability of prescription pharmaceuticals is already subject
      to
      government control. We expect initiatives for similar government control at
      both
      the state and federal level to continue in the United States. The adoption
      of
      any such legislative or regulatory proposals could have a material adverse
      effect on our business and prospects.




Our
      ability to commercially exploit our products successfully will depend in part
      on
      the extent to which reimbursement for the cost of our products and related
      treatment will be available from government health administration authorities,
      private health coverage insurers and other organizations. Third-party payors,
      such as government and private health insurers, are increasingly challenging
      the
      price of medical products and services. Uncertainty exists as to the
      reimbursement status of newly approved health care products thereafter and
      in
      foreign markets, including the United States. If third-party coverage is not
      available to patients for any of the products we develop, alone or with
      collaborators, the market acceptance of these products may be reduced, which
      may
      adversely affect our future revenues and profitability. In addition, cost
      containment legislation and reductions in government insurance programs may
      result in lower prices for our products and could materially adversely affect
      our ability to operate profitably.




**We
      may be exposed to product liability claims, which could harm our
      business.**




The
      testing, marketing and sale of human health care products also entails an
      inherent risk of product liability. We may incur substantial liabilities or
      be
      required to limit development or commercialization of our products if we cannot
      successfully defend ourselves against product liability claims. We have obtained
      no fault compensation insurance for the PBT-1 clinical trial and extension
      study
      and the PBT-2 clinical trials and intend to obtain similar coverage for future
      clinical trials. **** Such
      coverage may not be available in the future on acceptable terms, or at all.
      This
      may result in our inability to pursue further clinical trials or to obtain
      adequate protection in the event of a successful claim. We may not be able
      to
      obtain product liability insurance in the event of the commercialization of
      a
      product or such insurance may not be available on commercially reasonable terms.
      Even if we have adequate insurance coverage, product liability claims or recalls
      could result in negative publicity or force us to devote significant time,
      attention and financial resources to those matters.




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




Any
      material changes in interest rate, exchange rate, relevant taxation and other
      legal regimes and government policies may adversely affect us and the market
      price of our securities.




11


***Risks
      Relating to Our Securities***




**Our
      stock price may be volatile and the U.S. trading market for our American
      Depositary Shares is limited.**




The
      market price for our securities, like that of the securities of other
      pharmaceutical and biotechnology companies, has fluctuated substantially and
      may
      continue to be highly volatile in the future. During the last two fiscal years,
      the market price for our ordinary shares on the Australian Stock Exchange has
      ranged from as low as A$0.13 to a high of A$1.18 and the market price of our
      American Depositary Shares on the NASDAQ Capital Market has ranged from as
      low
      as US$0.98 to a high of US$10.50. The market price for our securities has been
      affected by both broad market developments and announcements relating to actual
      or potential developments concerning products under development. We believe
      that
      the following factors, in addition to other risk factors described above and
      elsewhere in this annual report, will continue to significantly affect the
      market price of our ordinary shares:




·
            the
                results of pre-clinical testing and clinical trials by us and our
                competitors;





·
            developments
                concerning research and development, manufacturing, and marketing
                alliances or collaborations by us and our
                competitors;





·
            announcements
                of technological innovations or new commercial products by us and
                our
                competitors;





·
            determinations
                regarding our patent applications, patents and those of
                others;





·
            publicity
                regarding actual or potential results relating to medicinal products
                under
                development by us and our
                competitors;





·
            proposed
                governmental regulations and developments in Australia, the United
                States
                and elsewhere;





·
            litigation;





·
            economic
                and other external factors; and





·
            period-to-period
                fluctuations in our operating
                results.





In
      addition, stock markets have experienced extreme price and volume fluctuations.
      These fluctuations have especially affected the stock market price of many
      high
      technology and healthcare related companies, including pharmaceutical and
      biotechnology companies, and, in many cases, are unrelated to the operating
      performance of the particular companies.




**New
      corporate governance regulations could increase the cost of our operations.**




As
      a
      result of recent corporate governance scandals and the legislative and
      litigation environment resulting from those scandals, the costs of being a
      public company in general have increased. The Sarbanes-Oxley Act of 2002
      requires changes in some of our corporate governance and securities disclosure
      or compliance practices. We expect that the on-going implementation of these
      regulations will further increase our legal compliance costs and will make
      some
      activities more time consuming. We are presently evaluating and monitoring
      regulatory developments and cannot estimate the magnitude of additional costs
      we
      may incur as a result of such developments. The implementation of Section 404
      of
      the Sarbanes-Oxley Act of 2002, which governs internal controls and procedures
      for financial reporting, will require us to expend significant management time
      and financial resources to comply with the applicable requirements. This and
      other proposed legislation may increase the fees of our professional advisors
      and our insurance premiums.




12


**Our
      accounting staff will need to be trained on the application of U.S. GAAP and
      the
      Securities and Exchange Commission accounting
      requirements.**




Our
      management has concluded that our company has insufficient accounting personnel
      that have sufficient knowledge and experience in U.S. GAAP and the Securities
      and Exchange Commission accounting requirements. The accounting personnel who
      prepare our financial statements will need to be trained on the application
      of
      U.S. GAAP accounting pronouncements and standardized reconciliation templates
      will need to be improved to assist in the reconciliation process between A-GAAP
      and U.S. GAAP. If the accounting personnel who prepare our financial statements
      are not adequately trained, our disclosure may be deficient and could result
      in
      a material misstatement to our annual or interim financial statements.




**There
      is a substantial risk that we are a passive foreign investment company, or
      PFIC,
      which will subject our U.S. investors to adverse tax
      rules.**




Holders
      of our ADRs who are U.S. residents face income tax risks. There is a
      substantial risk that we are a passive foreign investment company, commonly
      referred to as PFIC. Our treatment as a PFIC could result in a reduction in
      the
      after-tax return to the holders of our ADRs and would likely cause a reduction
      in the value of such ADRs.  For U.S. federal income tax purposes, we
      will
      be classified as a PFIC for any taxable year in which either (i) 75% or more
      of
      our gross income is passive income, or (ii) at least 50% of the average value
      of
      all of our assets for the taxable year produce or are held for the production
      of
      passive income.  For this purpose, cash is considered to be an asset,
      which
      produces passive income. As a result of our substantial cash position and the
      decline in the value of our stock, we believe that we became a PFIC in 2004
      under a literal application of the asset test described above, which looks
      solely to the market value.  If we are classified as a PFIC for U.S.
      federal income tax purposes, highly complex rules would apply to U.S.
      holders **** owning
      ADRs.  Accordingly, you are urged to consult your tax advisors regarding
      the application of such rules. United States residents should carefully read
      “Item 10E. Additional Information - Taxation, United States Federal Income Tax
      Consequences” for a more complete discussion of the U.S. federal income tax
      risks related to owning and disposing of our ADRs.





**We
      do not anticipate paying dividends on our ordinary shares.**




We
      have
      never declared or paid cash dividends on our ordinary shares and do not expect
      to do so in the foreseeable future. The declaration of dividends is subject
      to
      the discretion of our Board of Directors and will depend on various factors,
      including our operating results, financial condition, future prospects and
      any
      other factors deemed relevant by our board of directors. You should not rely
      on
      an investment in our company if you require dividend income from your investment
      in our company. The success of your investment will likely depend entirely
      upon
      any future appreciation of the market price of our ordinary shares, which is
      uncertain and unpredictable. There is no guarantee that our ordinary shares
      will
      appreciate in value or even maintain the price at which you purchased your
      ordinary shares.





13


***Risks
      Relating to our Location in Australia***




**It
      may be difficult to enforce a judgment in the United States against us and
      most
      of our officers and directors or to assert U.S. securities laws claims in
      Australia or serve process on most of our officers and
      directors.**




We
      are
      incorporated in Australia. Most of our executive officers and directors are
      nonresidents of the United States. Therefore, it may be difficult for an
      investor, or any other person or entity, to enforce a U.S. court judgment based
      upon the civil liability provisions of the U.S. federal securities laws in
      an
      Australian court against us or any of those persons or to effect service of
      process upon these persons in the United States. Additionally, it may be
      difficult for an investor, or any other person or entity, to enforce civil
      liabilities under U.S. federal securities laws in original actions instituted
      in
      Australia.





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




**A.**  **History
      and Development of the Company**




Our
      legal
      and commercial name is Prana Biotechnology Limited. We were incorporated under
      the laws of the Commonwealth of Australia on November 11, 1997 and began limited
      operations shortly thereafter. Our registered office is located at Suite 2,
      1233
      High Street, Armadale, Victoria, 3143, Australia and our telephone number is
      011-61-3-9824-8166. Our principal executive office is located at Level 2, 369
      Royal Parade, Parkville, Victoria 3052, Australia and our telephone number
      is
      011-61-3-9349-4906. Our address on the Internet is www.pranabio.com .
      The
      information in our website is not incorporated by reference into this annual
      report.




From
      our
      inception until our initial public offering registering our shares on the
      Australian Stock Exchange, or ASX, on March 28, 2000, we financed our operations
      with loans from two of our directors, totaling A$2,038,728. On March 28, 2000,
      we sold 16,000,000 of our ordinary shares and 8,000,000 options to purchase
      our
      ordinary shares in an initial public offering. We received net proceeds of
      A$7,474,323 from the sale of shares and exercise of options. On February 15,
      2001, we completed a private placement of 6,666,666 ordinary shares to
      institutional investors at a price per share of A$0.75 and received net proceeds
      of A$4,745,599 from the private placement. During the years ended June 30,
      2003
      and 2002, we received net proceeds of A$3,569,792 and A$580,345, respectively,
      for the exercise of 7,427,584 and 1,160,690 options (including the conversion
      of
      7,289,310 listed options in March 2003), which funds were added to our working
      capital. In September 2003, we raised an additional A$4,675,019 (net of issuance
      costs) through a private placement of 7,102,853 ordinary shares to institutional
      and accredited investors at a subscription price of A$0.70 per share. In April
      2004, we raised A$26,352,147 (net of issuance costs) in a private placement
      in
      the United States, which was held in escrow pending receipt of the requisite
      approval of the transaction by our shareholders that was obtained on June 1,
      2004, through the sale of 4,000,000 ADRs to institutional and accredited
      investors at a price of US$5.00 per ADR and five-year warrants to purchase
      3,000,000 ADRs at an exercise price of US$8.00 per ADR. In the fiscal year
      ended
      June 30, 2004, we also received net proceeds of A$757,166 for the exercise
      of
      options to purchase 1,325,000 ordinary shares, which funds were added to our
      working capital. Additionally, during the fiscal year ended June 30, 2004 we
      issued ordinary shares for nil consideration at a cost of A$3,167 which was
      subtracted from our working capital. In the fiscal year ended June 30, 2005,
      we
      received net proceeds of A$4,753,333 from the exercise of options to purchase
      9,500,000 ordinary shares, which funds were added to our working capital. As
      at
      June 30, 2005, we had A$21,453,304 in cash and cash equivalents and our working
      capital was A$19,427,962. ****




14


Our
      mission is to develop therapeutic drugs designed to treat the underlying causes
      of degeneration of the brain and the eye as the aging process progresses,
      initially focusing on Alzheimer’s disease. Other potential applications for our
      therapies include age-related cataracts, Huntington’s disease and Parkinson’s
      disease. Our technology is the outcome of many years of intense research from
      some of the leading scientists in the world in the area of age-related
      degenerative diseases.




Since
      completing our initial public offering and listing process on the ASX on March
      28, 2000, we have concentrated our resources toward the pursuit of our disease
      targets. Initially we focused on clinical trials of our PBT-1 compound as a
      therapeutic for the treatment of Alzheimer’s disease. We commenced our planned
      phase II human clinical trial for PBT-1 in August 2000 at the Mental Health
      Research Institute and the Royal Melbourne Hospital. The 36 week trial was
      completed in January 2002. All patients from this study were then provided
      the
      opportunity to roll into a further 48 week extension study. 32
      out of
      36 patients completed
      the initial trial, out of which 27 patients elected to start the extension
      study
      and 18 patients completed the full 84-week study. On October 12, 2004, we
      announced the results of the open label 84-week “Extension Study” of our Phase
      II clinical trial of PBT-1. On October 18, 2004, we announced plans to pursue
      a
      Phase II/III study to examine the effect of PBT-1 in moderate to severe
      Alzheimer’s disease patients in the second quarter of 2005, to be known as the
      PLACQUE (Progression Limiting in Alzheimer’s: Clioquinol’s Efficacy) study. On
      April 11, 2005, we announced that we would not proceed with the PLACQUE study
      and that we had re-evaluated our further work on the PBT-1 program. As part
      of
      our effort to manufacture Good Manufacturing Practice (GMP) grade PBT-1 clinical
      trial material, we characterized the various impurities that occur in the
      synthetic process and found unacceptably high levels of a
      di-iodo-8-hydroxyquinoline impurity that could potentially increase the risk
      of
      side-effects and mutagenicity. We considered methods to reduce the levels of
      the
      di-iodo impurity, however, we reached the conclusion that attempts to reduce
      the
      impurity to safe levels were not likely to be successful in a timely,
      commercially viable manner and that further development of PBT-1 for the
      treatment of Alzheimer’s disease was not appropriate. As a result of these
      events, we proceeded to conduct a strategic review of our pending strategic
      development programs.




15


On
      June
      16, 2005, we announced that we had completed a review of our strategic
      development programs and we reaffirmed our commitment to our lead candidate
      for
      the potential treatment of Alzheimer's disease, PBT-2. Unlike PBT-1, PBT-2
      has a
      structure that does not contain iodine and is therefore not capable of forming
      the di-iodo impurity that has been associated with mutagenicity. PBT-2 was
      announced as a new lead metal protein attenuating compound, or MPAC, molecule
      for Alzheimer’s disease in early August 2003. PBT-2 is the result of rational
      drug design. It has been built “from the ground up” to fulfill very specific
      criteria. It was designed so that it will be orally bioavailable and cross
      the
      blood brain barrier. PBT-2 was selected from over 300 compounds that had been
      developed by us at such time and has demonstrated significant effectiveness
      in
      both pre-clinical *in
      vitro* and *in
      vivo* testing
      and has been designed to have an improved safety and efficacy profile compared
      to PBT-1. In
      February 2004, we were awarded a second research and development START grant
      of
      A$1.35 million to take PBT-2 through safety testing and Phase I clinical trials
      for Alzheimer's disease. Formal preclinical toxicology testing for PBT-2 has
      been completed and in March 2005, we commenced a series of Phase I clinical
      trials at a facility associated with the Utrecht University Hospital in Utrecht,
      the Netherlands. On November 7, 2005, we announced the successful completion
      of
      the Phase I trial for PBT-2, a double blind, placebo-controlled single dose
      escalation study, conducted on 55 healthy, male volunteers between the ages
      of
      18 and 50, which was designed to evaluate the safety, tolerability and
      pharmacokinetics of PBT-2. Data from the study shows that PBT-2 was well
      tolerated with little difference in the incidence of adverse events between
      those receiving PBT-2 and those receiving the placebo. Additionally, the
      pharmacokinetic analysis demonstrated that the drug exposure increased
      predictably and in a linear manner, both of which are strong characteristics
      for
      a central nervous system drug. Concurrent findings in a pre-clinical mouse
      model
      indicate that PBT-2 passes into the brain of mice more extensively than its
      predecessor, PBT-1. We have also completed three out of four stages of our
      second Phase I clinical trial, a multi-dose escalation safety clinical trial
      of
      PBT-2 in elderly, healthy, male and female volunteers. We anticipate completing
      the final dosing stage in December 2005. In
      addition, the preclinical toxicology studies and GMP manufacturing development
      required for Phase II and Phase III clinical studies of PBT-2 are concurrently
      underway.




In March
      2003, we announced our first major licensing and research collaboration with
      Schering A.G., or Schering, a major international pharmaceutical company, and
      Neurosciences Victoria Ltd., or NSV, an organization of the Universities of
      Melbourne and Monash, established to promote, commercialization of discoveries
      emanating from Victoria, Australia universities and medical research institutes.
      Under such collaboration, we appointed NSV to act as our agent for the purpose
      of receipt of funding from Schering for certain specified research and
      development projects and to facilitate the licensing of intellectual property
      arising from such projects to Schering, all under the terms of a separate
      research and collaboration agreement between Schering and NSV. These
      projects were designed to investigate the possibility of the use of MPACs and
      similar compounds as diagnostic markers for brain imaging of Alzheimer’s
      disease. Although these studies demonstrated brain penetration of particular
      MPACs, they did not support further exploration of MPACs as diagnostic markers.
      The parties concluded this collaboration as of June 30, 2005.




16


We
      have
      also identified and filed an international patent application directed to a
      novel target for an Alzheimer's disease vaccine. The Commonwealth Government
      of
      Australia provided us with a A$227,252 Biotechnology Innovation Fund, or BIF
      grant for the initial proof of concept stage of this research. The
      research under this BIF grant finished at the end of January 2005 following
      the
      completion of project milestones stipulated in the grant, demonstrating that
      a
      mouse could generate antibodies that preferentially recognize dimerized βAmyloid .
      We are
      currently negotiating a contract with Prima Biomed Ltd., or Prima, an Australian
      biotechnology company publicly traded on the ASX (ASX: PRR), to undertake the
      characterization and scale-up of prospective antibody candidates that were
      identified during the initial proof of concept stage for testing in future
      passive vaccine trials in Alzheimer's disease model mice. We will be utilizing
      the resources of Prima, the Austin Research Institute, the University
      of Melbourne and the Mental Health Research Institute to pursue this therapeutic
      approach. The research will assess the ability of the immune system to
      selectively produce specific antibodies which target the “toxic linked” forms of
      beta amyloid associated with the pathology of Alzheimer’s disease, as an
      effective treatment for the disease.




Since
      inception, we have not been required to invest material amounts for capital
      expenditures since our development efforts have taken place at research
      facilities operated by institutions with whom we have relationships. In the
      three fiscal years ended June 30, 2005 our capital expenditures have totaled
      A$272,757. We have not incurred any material capital expenditures since July
      1,
      2005.




**B.**  **Business
      Overview**




**Prana’s
      Background**




Medical
      science has made a significant number of breakthroughs over the past century.
      The average life span in western cultures has substantially increased. The
      diseases associated with aging have, however, yet to be fully understood or
      effectively treated. It is now believed that a number of age-related diseases
      may be capable of being treated.




Our
      platform technology was developed over a period of many years with the financial
      support of various institutions and from various grants. The majority of these
      funds were directed at research into Alzheimer's disease, however the outcomes
      demonstrated by this research have created strong implications for other
      age-related degenerative disorders where the pathology of the disease is based
      on the inter-relationship between metals and proteins. Positive effects of
      clioquinol (the compound which provided us with our proof-of-concept for metal
      protein attenuating compound, or MPAC, action in Alzheimer’s disease, or PBT-1)
      have now been published **** in
      animal
      models of Parkinson’s disease and Huntington’s disease. These findings continue
      to strengthen the “theory of metal related toxicity” in many neurodegenerative
      diseases and continue to provide evidence supporting our position that MPACs
      will be a useful therapeutic in a variety of neurodegenerative diseases. There
      is currently no cure or prevention for Alzheimer's disease nor any successful
      cure for any of the principal forms of neurodegenerative diseases which comprise
      our disease targets.




17


The
      protein believed to be involved in Alzheimer's disease is
βAmyloid. Very little was known about βAmyloid protein until 1984 when
      Profes sors
      Colin Masters, Konrad Beyreuther and the late Dr. Glenner sequenced
      the
      chemistry of the protein which has since become the dominant focus world-wide
      of
      Alzheimer’s disease research.




In
      1987,
      Professors. Masters and Beyreuther and Professor Rudolph Ta nzi
      of
      Harvard Medical School discovered how βAmyloid was produced and in 1994
      Professor Ashley Bush of Harvard Medical School discovered that the interaction
      between metals and βAmyloid is associated with the toxicity seen in
      Alzheimer ’s
      disease, hopefully paving the way for the development of therapeutic drugs
      to
      treat the disease.




Our
      intellectual property has been developed over an extended period through the
      collaborative efforts of highly regarded scientists and research institutions
      in
      this field.




**Research
      Institutions**




The
      intellectual property owned by our company has been developed at several
      internationally recognized institutional research facilities:




·
            The
                Massachusetts General Hospital, Genetics and Aging Unit in Boston.
                Massachusetts General Hospital is the largest teaching hospital for
                Harvard Medical School;




·
            The
                University of Melbourne, Department of
                Pathology;




·
            The
                Mental Health Research Institute;
                and




·
            The
                Biomolecular Research Institute in Melbourne.




Work
      conducted at the first two of these institutions identified an initial preferred
      compound, clioquinol, codenamed PBT-1, which was used in our Phase II human
      clinical trials. Our research program also aims to find further and potentially
      more effective preferred compounds for the treatment of Alzheimer’s disease as
      well as for our other major disease indications (such as Parkinson’s disease and
      Huntington’s disease). These efforts have lead to the development of a novel
      MPAC within the same chemical class as PBT-1, PBT-2, a low molecular weight
      chemical entity that demonstrates a significant preclinical improvement over
      PBT-1, and a portfolio of approximately 400
      MPAC
      molecules in total (approximately 300 of which are of the same chemical class
      as
      PBT-1 and the remaining MPACs are of other chemical classes).




**Platform**  **Technology
      and Research Programs**




We
      regard
      our intellectual property as a “platform technology” since we believe that it
      addresses the causes of a broad spectrum of age related diseases based on the
      interrelationship of metals and proteins. To date, the majority of our research
      efforts have been directed at research into potential therapeutics for the
      treatment of Alzheimer’s disease. Recent published data together with our
      initial findings have provided strong indications that the pathology for other
      certain age-related and degenerative disorders may also be based on the
      inter-relationship between certain metals and proteins, and we believe that
      the
      platform technology may also be applicable for:




18


·
            Age-related
                cataracts;




·
            Parkinson’s
                disease;




·
            Huntington’s
                disease;




·
            other
                neurodegenerative diseases.




***Alzheimer’s
      Disease*** *.* Research
      is ongoing to increase our understanding of the neuropathology of Alzheimer’s
      disease. Our research continues to focus on the structure and function of β -amyloid
      and its precursor, and protein structural studies specifically around the sites
      of interaction between metals, metal complexes and our MPACs and the significant
      proteins in Alzheimer’s disease such as APP and b -amyloid.
      PBT-2 has completed the initial formal preclinical toxicology testing required
      to support initial human trials and in March 2005, we commenced a series of
      Phase I clinical trials, at a facility associated with the Utrecht University
      Hospital in Utrecht, the Netherlands. On November 7, 2005, we announced the
      successful completion of the first Phase I trial for PBT-2. We have also
      completed three out of four stages of a second Phase I clinical trial, a
      multi-dose escalation safety clinical trial of PBT-2 in elderly, healthy, male
      and female volunteers. We anticipate completing the final dosing stage in
      December 2005. In addition, the preclinical toxicology studies and GMP
      manufacturing development required for Phase II and Phase III clinical studies
      of PBT-2 are concurrently underway. We can give no assurance that the Phase
      I
      trial will be completed or prove to be successful, or that further trials will
      be initiated with PBT-2, or if initiated that they will be completed or prove
      to
      be successful.




The
      research and development projects under our licensing and research collaboration
      with Schering A.G. and Neurosciences Victoria Ltd. concentrated on the
      development of a new Alzheimer’s diagnostic. These projects were designed to
      investigate the possibility of MPACs and similar compounds being used as
      diagnostic markers for brain imaging of Alzheimer’s disease. Although these
      studies demonstrated brain penetration of particular MPACs, they did not support
      further exploration of MPACs as diagnostic markers. The parties concluded this
      collaboration as of June 30, 2005.




***Age-Related
      Cataracts*** .
      Basic
      research in the area of age related cataracts is being conducted by several
      independent groups of researchers around the world. Data to date indicate that
      some age-related cataracts contain the same protein aggregation as that seen
      in
      Alzheimer’s disease. Preliminary animal data suggests that the deposition of
      some proteins in age related cataracts may be related to the inappropriate
      interaction of metals and amyloid species. At present, we are not undertaking
      active research in this area, although through the close ties with Professor
      Masters and the University of Melbourne, we retain the ability and opportunity
      to investigate the usefulness of its MPAC portfolio in treating and/or
      preventing age-related cataracts, if and when additional evidence arises to
      prioritize this opportunity. We can give no assurance that such research will
      continue or if continuing will be successful.




19


***Parkinson's
      Disease*** *.* Parkinson’s
      disease is another crippling disease of the aging population. It causes a
      progressive slowing of movement, tremor and the loss of fine motor control.
      Increasingly, dementia is being recognized as a significant component of
      Parkinson’s disease. Existing therapies may provide some short term symptomatic
      relief but do not address the underlying cause of the disease. We believe that
      our platform technology may affect the aggregation of the proteins concerned
      and
      may provide a pathway for reversing the disease. Parkinson’s disease is believed
      to affect 150 people per 100,000 or 2.5% of persons over the age of 85. It
      has
      been reported that approximately four million people suffer from Parkinson’s
      disease worldwide.




Our
      Melbourne research team is working on the key protein (alpha-synuclein) that
      aggregates to form the diagnostic marker of this disease. We believe that the
      aggregated form of this protein is susceptible to the same therapeutic strategy
      that is being used for Alzheimer’s disease, and laboratory tests are in progress
      to confirm this approach. The molecules already developed as part of the
      Alzheimer’s disease program are being tested and validated as prospective agents
      for the treatment of Parkinson’s disease, together with agents arising from the
      current chemistry synthetic program. Experimental animal models are being
      developed and integrated into the rationale drug design screening regime. During
      2005, we entered into a contractual arrangement with the Integrative
      Neuroscience Facility based at the Howard Florey Institute in Melbourne to
      assist in the examination of the effect of MPACs administered to the
      6-hydroxydopamine (PD) mouse model. Recent published data from groups unrelated
      to us have demonstrated the usefulness of clioquinol in treating the symptoms
      of
      Parkinson’s disease generated in preclinical models of the disease. These
      results, although yet to be repeated, provide further support to our position
      that MPACs (clioquinol and others) may provide a useful treatment in Parkinson’s
      disease patients.




***Huntington's
      Disease*** *.* Huntington’s
      disease is a crippling genetic neurodegenerative disorder of the central nervous
      system caused by a mutation in a gene which encodes the huntingtin protein.
      The
      disease results in progressive deterioration of physical, cognitive and
      emotional abilities that lead to severe incapacitation and eventually death,
      generally 15-25 years after the onset of the disease. Huntington's disease
      primarily affects adults, usually between the ages of 30 and 50.




U.S.-based
      researchers recently presented the effects of clioquinol in an animal model
      of
      Huntington’s disease, showing evidence of improved behavior, motor skills and
      inhibition of the abnormal form of the huntingtin protein. Based on these
      findings, we are currently testing our proprietary MPACs in collaboration with
      researchers **** based
      at **** the
      Veterans Affairs Medical Center and the Department of Neurology, University
      of
      California, San Francisco, under a collaborative research agreement.




**Clinical
      Trials**




In
      2000,
      having demonstrated the effectiveness of PBT-1 in the laboratory, we received
      official Ethics Committee approval from the Royal Melbourne Hospital, Victoria,
      Australia, to test PBT-1 in human subjects. Phase II human clinical trials
      for
      PBT-1 commenced during August 2000 and were completed in January 2002 and an
      academic paper outlining the findings was published in the peer reviewed journal *Archives
      of Neurology* in
      December 2003. The clinical trials were conducted principally at our sponsored
      facilities at the Royal Melbourne Hospital and the Mental Health Research
      Institute, both based in Melbourne. Prescribed dosages of clioquinol, or PBT-1
      (our prototype MPAC selected to develop proof-of-concept) were administered
      to
      50% of the study candidates, the other 50% received a placebo. The trial, known
      as PBT1-011 AD, **** was
      a
      "double blind trial" so neither the administrating medical personnel nor the
      patients involved in the trial process were aware of who received PBT-1 and
      who
      received the placebo. All subjects were asked to perform various prescribed
      cognitive tests to determine if the introduction of PBT-1 had a demonstrable
      effect as compared to those subjects receiving the placebo. On completion of
      the
      initial 36 weeks of dosing, all subjects were invited to continue into an
      extension study, during which they received treatment with PBT-1 for an
      additional 48 weeks.




20


The
      trial
      was performed to contemporary “best practice” clinical trial standards. We
      contracted Kendle Pty Ltd. to manage the clinical trials, ensuring compliance
      to
      the required international standards of Good Clinical Practice as set out by
      the
      International Conference on Harmonization. These protocols provide strict
      guidelines for the performance of clinical trials in an ethical and
      scientifically acceptable manner, and are mandatory for applications to
      international regulatory authorities for market access.




The
      Institutional Ethics Committee overseeing the trial carefully addressed safety
      concerns as follows:




·
            The
                dose of clioquinol to be used in the clinical trial is below the
                dose
                previously recommended for use as a short term antidiarria agent.
                All
                patients commenced on 250 mg per day, increasing to a maximum of
                750 mg
                per day.




·
            The
                underlying biochemical mechanism associated with clioquinol toxicity
                is
                not fully understood. Recent work suggests that clioquinol may alter
                absorption and/or renal excretion of Vitamin B12. All patients in
                the
                study received supplementary Vitamin
                B12.




·
            The
                trial protocol required close monitoring of all patients by a safety
                committee of clinical experts. This committee independently monitored
                all
                patient data including laboratory results and neurological test results
                on
                a regular basis.




In
      April
      2002, Professor Masters reported that the trial achieved its targeted benchmarks
      and that the two major initial findings of the study were:




·
            The
                βAmyloid protein, which was a target of the activity of PBT-1, was
                significantly reduced in the blood of mild to moderate patients in
                the
                treatment group compared to an increase in the placebo group;
                and




·
            The
                progression of Alzheimer’s disease was slowed down in the more severely
                affected patients in the treatment group compared to the placebo
                group.
                The initial findings of the study indicate the rate of cognitive
                deterioration was slowed in these patients.




21


Upon
      completion of the 36 week double blind portion of the PBT1-011AD trial, all
      of
      the patients who participated in such trial were offered the opportunity to
      continue into an extension trial, known as PBT1-011ADEX. Of the 36 patients
      who
      commenced the PBT1-011AD trial, 27 continued into the PBT1-011ADEX trial and
      18
      completed the additional 48 weeks of treatment with clioquinol. In April 2004,
      a
      summary of the findings of the 48-week extension study were presented for the
      first time by Professor Colin Masters at the 8th International
      Springfield/Montreal Symposium on Advances in Alzheimer’s disease. The details
      of the trial findings are available on our website ( www.pranabio.com ) ,
      however
      the information in our website is not incorporated by reference into this annual
      report. In April, 2005, we ceased clinical trials of our PBT-1 compound in
      Alzheimer’s disease. See Item 4.A. "Information on the Company - History and
      Development of the Company."




In
      2003,
      PBT-2 successfully completed in-house preclinical screening and the initial
      formal preclinical toxicology testing required to support initial human trials.
      In March 2005, we commenced a series of Phase I clinical trials, at a facility
      associated with the Utrecht University Hospital in Utrecht, the Netherlands.
      On
      November 7, 2005, we announced the successful completion of the first Phase
      I
      trial for PBT-2. See Item 4.A. "Information on the Company - History and
      Development of the Company." We have also completed three out of four stages
      of
      a second Phase I multi-dose escalation safety clinical trial of PBT-2 in
      elderly, healthy, male and female volunteers. We anticipate completing the
      final
      dosing stage in December 2005. In addition, the preclinical toxicology studies
      and GMP manufacturing development required for Phase II and Phase III clinical
      studies of PBT-2 are concurrently underway. No assurance can be given that
      future clinical studies will commence, or if initiated will be completed and
      prove to be successful, or that we will be able to commerci alize
      drugs based on our βAmyloid theory of Alzheimer's disease.




**Rational
      Drug Design**




Rational
      drug design employs experiment based, computer-generated models, which target
      the molecular composition of various substances (in the case of Alzheimer’s
      disea se
      the
βAmyloid Protein) and design new chemical entities with the propensity to
      influence the targeted substances (proteins) and
      metal-mediated oxyradical formation which leads to neurodegenerative changes.




Our
      medicinal chemistry program is based at the University of Melbourne. To date,
      our scientists have developed a pipeline of compounds across multiple chemical
      classes that target the interaction of specific metals and target aggregating
      proteins such as βAmyloid. Compounds
      continue to be designed, synthesized and undergo the required early phase
      preclinical screening before they are available for human testing. **** Based
      on
      the results of initial screening, our medicinal chemists continue to develop
      new
      chemical entities with novel design features and we believe
      that rational drug design will provide new and specifically designed drugs
      which
      will display efficacy in disaggregating aggregation-prone proteins such as
      βAmyloid, α-synuclein and huntingtin ,
      paving
      the way for future therapeutics.




A
      series
      of *in
      vitro* assays
      have been established to screen compounds developed by our medicinal chemistry
      group. From early 2002, a program was initiated to undertake preliminary *in
      vivo* pharmacology and kinetic studies of the new compounds demonstrating activity
      in
      the *in
      vitro* screens
      was established by our medical chemistry group. The Alzheimer’s disease
      transgenic mouse model that demonstrated efficacy of PBT-1 and animal models
      for
      Parkinson’s disease and Huntington’s disease are currently being used by our
      medical chemical group to evaluate *in
      vivo* efficacy
      and confirm the selection of lead compounds to take to formal pre-clinical
      studies. Data generated by these *in
      vitro* and *in
      vivo* screens
      will also be incorporated into the medicinal chemistry program to further refine
      development strategies for new compounds.




22


PBT-2,
      our current lead MPAC product candidate, was selected from this “rationally
      designed” pipeline in 2003 and is the first such new and specifically designed
      compound to move into formal development. It has
      been built “from the ground up” to fulfill very specific criteria. It was
      designed so that it will be orally bioavailable and cross the blood brain
      barrier. PBT-2 was selected from over 300 compounds that had been developed
      by
      us at such time and has demonstrated significant effectiveness in both
      pre-clinical *in
      vitro* and *in
      vivo* testing
      and has been designed to have an improved safety and efficacy
      profile.  PBT-2
      has
      completed formal preclinical toxicology testing and in March 2005, we commenced
      a series of Phase I clinical trials at a facility associated with the Utrecht
      University Hospital in Utrecht, the Netherlands. On November 7, 2005, we
      announced the successful completion of the first Phase I trial for PBT-2. See
      Item 4.A. "Information on the Company - History and Development of the Company."
      We have also completed three out of four stages of a second Phase I multi-dose
      escalation safety clinical trial of PBT-2 in elderly, healthy, male and female
      volunteers. We anticipate completing the final dosing stage in December 2005.
      In
      addition, the preclinical toxicology studies and GMP manufacturing development
      required for Phase II and Phase III clinical studies of PBT-2 are concurrently
      underway.








23





**Patent
      Portfolio**


**Invention**
              **Status**
              **Comments**Amyloid
                  Precursor Protein (“APP”) Modulators for use in Alzheimer’s disease,
                  entitled, “*A
                  method for assaying and treating Alzheimer’s Disease*”
                Inventor:
                  Prana
              Five
                  patents granted, two in Australia and one in Europe, Japan and
                  the United
                  States. An application in the United States and Canada is under
                  examination.
              The
                  invention includes claims directed to the use of specified modulators
                  of
                  cation interaction with APP and the use of these agents in the
                  treatment
                  of Alzheimer’s disease. Granted European claims include the use of zinc
                  binding agents for oral administration in the treatment of Alzheimer’s
                  disease.Metal
                  binding domain inhibitors of Β-amyloid, entitled, “*Beta
                  amyloid peptide inhibitors*”
                Inventor:
                  Prana
              This
                  International (PCT) application has entered national phase in Europe,
                  Canada, Japan, United States and Australia. Currently accepted
                  in
                  Australia and pending elsewhere.
              The
                  invention encompasses claims to agents capable of inhibiting binding
                  of
                  specified metal ions to the N-terminus of Β-amyloid and the use of these
                  agents in the treatment of amyloid related conditions
                  including Alzheimer’s disease.A
                  screen for Β-amyloid formation and inhibitors, entitled, “*An
                  in vitro system for determining the formation of A**b**Amyloid*”
                Inventor:
                  General Hospital Corporation
              One
                  patent granted in the United States and Japan. Examination is pending
                  for
                  a further Japanese and Canadian application.
              The
                  invention is directed to an assay for the formation of Β-amyloid in a
                  biological sample and inhibitors of Β-amyloid
                  formation.A
                  differential screen for 40/42 Β-amyloid, entitled,*“A
                  diagnostic assay for Alzheimer’s Disease*”
                Inventor:
                  General Hospital Corporation
              One
                  patent granted in the United States and a further United States
                  application has been issued. Canadian application has been allowed.
              The
                  invention is directed to an antibody based diagnostic assay for
                  the
                  detection and quantification of
                  Β-amyloid species.Known
                  metal binding agents for treatment of Amyloidosis, entitled, “*Identification
                  of agents for use in the treatment of Alzheimer’s Disease*”
                Inventor:
                  General Hospital Corporation
              Patent
                  granted in Australia and in Japan. Examination is pending in Japan,
                  Europe
                  and Canada. A United States application awaits expected
                  allowance.
              The
                  invention is directed to the use of specified metal binding agents
                  to
                  reduce Β-amyloid mediated neurotoxicity and assays to identify agents
                  capable of modifying neurotoxic properties of Β-amyloid. The accepted case
                  in Australia is under opposition.Clioquinol
                  for treatment of Alzheimer’s disease, entitled, “*Use
                  of Clioquinol for the therapy of Alzheimer’s Disease*”
                Inventor:
                  General Hospital Corporation/Prana
              A
                  U.S. continuation application is currently under examination.
              The
                  invention includes claims directed to the use of Clioquinol for
                  the
                  treatment of Alzheimer’s disease and Clioquinol pharmaceutical
                  compositions.
  24
 Clioquinol
                    and known metal binding agents for use in Amyloidosis, entitled,
                    “*Agents
                    for use in the treatment of Alzheimer’s Disease*”
                  Inventor:
                    General Hospital Corporation
                Granted
                    patents in Australia and the US. A further U.S. continuation
                    application
                    is under examination. Examination is pending in Canada and Japan.
                    The case
                    has been allowed in Europe.
                The
                    invention is directed to compositions containing Clioquinol and
                    known
                    metal binding agents and their use in the treatment of amyloid
                    related
                    diseases. The accepted case in Australia is under
                    opposition.Screen
                    for agents which alter Β-amyloid neurotoxic properties, entitled,
                    “*Method
                    for Screening drugs useful for treating Alzheimer’s
                    Disease*”
                  Inventor:
                    General Hospital Corporation
                A
                    continuation-in-part application has been granted in the United
                    States and
                    further divisional case has been filed.
                The
                    invention is primarily directed to specified assays that identify
                    agents
                    capable of modifying neurotoxic properties of Β-amyloid.Immunotherapy,
                    entitled, “*Neurotoxic
                    Oligomers*”
                  Inventor:
                    General Hospital Corporation and Prana
                The
                    International (PCT) Application has entered national phase in
                    Australia,
                    Canada, Europe, Japan, NZ, China and the United States and is
                    pending
                    examination.
                The
                    invention is directed to an immunotherapy strategy using tyrosine
                    cross-linked protein aggregates. The immunotherapeutic approach
                    may be
                    used in the treatment of Alzheimer’s disease and other amyloid related
                    conditions.Cataracts,
                    entitled, “*Methods
                    for the Identification of Agents that Inhibit or Promote Cataracts
                    and
                    Uses thereof*”
                  Inventor:
                    General Hospital Corporation
                The
                    International (PCT) Application has entered national phase in
                    Australia,
                    Europe, Japan and the United States and is pending
                    examination.
                The
                    invention is directed to assays for the detection of agents useful
                    in the
                    treatment of cataract and a method of treatment utilizing specified
                    chelators.APP
                    Copper Binding Domain agonists, entitled, “*Methods
                    of screening for inhibitors of Alzheimer’s Disease*”
                  Inventor:
                    Prana
                This
                    case has entered national phase in the United States and is pending
                    examination.
                The
                    invention encompasses claims to the identification of agents
                    functioning
                    as copper agonists and the use of the agents in the treatment
                    of amyloid
                    related conditions including Alzheimer’s disease.8-OHq
                    role in cognition, entitled, “*Treatment
                    of Neurodegenerative Conditions*”
                  Inventor:
                    Prana
                Filed
                    as a provisional application in the United States, continued
                    as an
                    International (PCT) Application pending national phase
                    entry.
                The
                    invention encompasses the utility of the 8-hydroxyquinoline MPAC
                    class in
                    the treatment of neurodegenerative cognitive changes.8-OHq
                    MPAC class, entitled, “*8-Hydroxyquinoline
                    derivatives*”
                  Inventor:
                    Prana
                International
                    (PCT) Application that has entered national phase in 14
                    jurisdictions.
                The
                    invention is directed to chemical structures of the 8-hydroxyquinoline
                    MPAC class and their utility in the treatment of neurological
                    conditions.‘Follow
                    up’ MPAC classes, entitled, ‘*Neurologically-Active
                    Compounds*’
                  Inventor:
                    Prana
                International
                    (PCT) Application that has entered national phase in 14
                    jurisdictions.
                The
                    invention is directed to alternative MPAC chemical structures
                    and their
                    utility in the treatment of neurological conditions.
  25
 ‘F4’
                    MPAC compounds, entitled, ‘*Neurologically-
                    Active Compounds’*
                  Inventor:
                    Prana
                International
                    (PCT) Application that is in international phase.
                The
                    invention is directed to ‘F4’ MPAC chemical structures and their utility
                    in the treatment of neurological conditions.‘F4
                    Grp 1’ MPAC compounds
                  ‘*Neurologically-
                    Active Compounds’*
                  Inventor:
                    Prana
                Australian
                    provisional application
                The
                    invention is directed to ‘F4’ MPAC chemical structures and their utility
                    in the treatment of neurological conditions.MPAC
                    compounds, entitled, ‘*Compound
                    V’*.
                  Inventor:
                    Prana
                Australian
                    provisional application
                The
                    invention is directed to ‘compound V’ MPAC chemical structures and their
                    utility in the treatment of neurological conditions.MPAC
                    compounds, entitled, ‘*Compound
                    VI’*.
                  Inventor:
                    Prana
                Australian
                    provisional application
                The
                    invention is directed to ‘Compound VI’ MPAC chemical structures and their
                    utility in the treatment of neurological conditions.‘F2’
                    MPAC compounds, entitled,*‘Neurologically-Active
                    Compounds’*
                  Inventor:
                    Prana
                Australian
                    provisional application
                The
                    invention is directed to ‘F2’ MPAC chemical structures and their utility
                    in the treatment of neurological conditions.An
                    agent for metal binding in Alzheimer’s Disease, entitled, ‘*Use
                    of Phanquinone for the treatment of Alzheimer’s Disease*’.
                  Inventor:
                    Prana
                A
                    U.S. granted patent and pending Japanese application.
                This
                    invention is directed to the use of Phanquinone for the treatment
                    of
                    Alzheimer’s disease.An
                    agent for metal binding to reduce memory impairment, entitled,
                    ‘*Use
                    of Phanquinone for the treatment of memory impairment*’.
                  Inventor:
                    Prana
                Pending
                    Japanese and U.S. applications.
                This
                    invention is directed to the use of Phanquinone for the treatment
                    of
                    memory impairment.An
                    agent for metal binding in Alzheimer’s Disease, entitled, ‘*Use
                    of Clioquinol for the treatment of Alzheimer’s Disease*’.
                  Inventor:
                    Prana
                A
                    U.S. granted patent and pending Japanese application.
                This
                    invention is directed to the use of Clioquinol for the treatment
                    of
                    Alzheimer’s disease.Pharmaceutical
                    compositions, entitled, ‘*Pharmaceutical
                    compositions of Clioquinol with B12 for therapeutic use’*.
                  Inventor:
                    Prana
                A
                    U.S. granted patent.
                This
                    invention is directed to compositions for the treatment of neurological
                    disease.An
                    agent for metal binding in Parkinson’s disease, entitled, ‘*Use
                    of Clioquinol for the treatment of Parkinson’s Disease*’.
                  Inventor:
                    Prana
                A
                    U.S. granted patent.
                This
                    invention is directed to the use of Clioquinol**for
                    the treatment of Parkinson’s
                    disease.





26


**Patent
      Matters**




Patent
      matters in biotechnology are highly uncertain and involve complex legal and
      factual questions. Accordingly, the availability and breadth of claims allowed
      in biotechnology and pharmaceutical patents cannot be predicted. Statutory
      differences in patentable subject matter may limit the protection we can obtain
      on some or all of our inventions outside Australia or prevent us from obtaining
      patent protection outside Australia, either of which could have a material
      adverse effect on our business, financial condition and results of operations.
      For example, methods of treating humans are not patentable in many countries
      outside Australia and the United States. Moreover, since patent applications
      are
      not published until at least 18 months from their first filing date and the
      publication of discoveries in the scientific literature often lags behind actual
      discoveries, we cannot be certain that we or any of our licensors were the
      first
      creator of inventions covered by pending patent applications or that we or
      our
      licensors were the first to file patent applications for such inventions.
      Additionally, the enforceability of a patent is dependent on a number of factors
      that may vary between jurisdictions. These factors may include the novelty
      of
      the invention, the requirement that the invention not be obvious in the light
      of
      prior art (including prior use or publication of the invention), the utility
      of
      the invention, and the extent to which the patent clearly describes the best
      method of working the invention.




While
      we
      intend to seek patent protection for our therapeutic products and technologies,
      we cannot be certain that any of the pending or future patent applications
      filed
      by us or on our behalf will be approved, or that we will develop additional
      proprietary products or processes that are patentable or that we will be able
      to
      license any other patentable products or processes. We also cannot be certain
      that others will not independently develop similar products or processes,
      duplicate any of the products or processes developed or being developed by
      us or
      licensed to us, or design around the patents owned or licensed by us, or that
      any patents owned or licensed by us will provide us with competitive advantages.
      Furthermore, we cannot be certain that patents held by third parties will not
      prevent the commercialization of products incorporating the technology developed
      by us or licensed to us, or that third parties will not challenge or seek to
      narrow, invalidate or circumvent any of the issued, pending or future patents
      owned or licensed by us.




Our
      commercial success will also depend, in part, on our ability to avoid
      infringement of patents issued to others. If a court determines that we were
      infringing any third party patents, we could be required to pay damages, alter
      our products or processes, obtain licenses or cease certain activities. We
      cannot be certain that the licenses required under patents held by third parties
      would be made available on terms acceptable to us or at all. To the extent
      that
      we are unable to obtain such licenses, we could be foreclosed from the
      development, manufacture or commercialization of the product requiring such
      license or encounter delays in product introductions while we attempt to design
      around such patents, and any of these circumstances could have a material
      adverse effect on our business, financial condition and results of
      operations.




We
      may
      have to resort to litigation to enforce any patents issued or licensed to us
      or
      to determine the scope and validity of third party proprietary rights. Such
      litigation could result in substantial costs and diversion of effort by us.
      We
      may have to participate in opposition proceedings before the Australian Patent
      and Trademark Office or another foreign patent office, or in interference
      proceedings declared by the United States Patent and Trademark Office, to
      determine the priority of invention for patent applications filed by
      competitors. Any such litigation, interference or opposition proceeding,
      regardless of outcome, could be expensive and time consuming, and adverse
      determinations in any such proceedings could prevent us from developing,
      manufacturing or commercializing our products and could have a material adverse
      effect on our business, financial condition and results of
      operations.




27


In
      addition to patent protection, we rely on unpatented trade secrets and know-how
      and proprietary technological innovation and expertise that are protected in
      part by confidentiality and invention assignment agreements with our employees,
      advisors and consultants.





**Competition**




We
      believe that we will face competition in differing levels of intensity in all
      of
      the areas in which we are conducting research. Our competitors in Australia
      and
      elsewhere are numerous and include, among others, major pharmaceutical
      companies, biotechnology firms, universities and other research institutions.
      These competitors may develop technologies and products that are more effective
      than any that we are developing, or which would render our technology and
      products obsolete **** or
      non-competitive. **** Many
      of
      these competitors have greater financial, research and screening capabilities,
      technical resources and manufacturing and marketing capabilities than we do.
      In
      addition, many of our competitors have much more experience than we do in
      pre-clinical testing and human clinical trials of new or improved drugs, as
      well
      as in obtaining FDA, TGA and other regulatory approvals.





**Regulatory
      Considerations**




Our
      ongoing research and development activities are, and the production and
      marketing of our pharmaceutical product candidates derived therefrom will be,
      subject to regulation by numerous governmental authorities in Australia,
      principally the Therapeutic Goods Administration, or TGA, and by the Federal
      Drug Authority, or FDA, in the United States, the Medicines Control Agency,
      or
      MHRA, in the United Kingdom and the European Medicines Evaluation Authority,
      or
      EMEA. Prior to marketing, any therapeutic product developed must undergo
      rigorous pre-clinical testing and clinical trials, as well as an extensive
      regulatory approval process mandated by the TGA and, to the extent that any
      of
      our pharmaceutical products under development are marketed abroad, by foreign
      regulatory agencies, including the FDA, EMEA and MHRA. Clinical trials are
      conducted in three sequential phases but the phases may overlap.




Pre-clinical
      studies involve laboratory evaluation of product characteristics and animal
      studies to assess the initial efficacy and safety of the product. Clinical
      trials involve the administration of the investigational product to humans
      under
      the supervision of a qualified principal investigator. Phase I clinical trials
      may be performed in healthy human subjects or, depending on the disease, in
      patients. The goal of phase I clinical trials is to establish initial data
      about
      the safety, tolerance and pharmacokinetics of the product in humans. In phase
      II
      clinical trials, in addition to safety, the efficacy of the product is evaluated
      in limited patients with the target disease. Phase III trials typically involve
      additional testing for safety and clinical efficacy in expanded, large-scale,
      multi-center studies of patients with the target disease.




28


Clinical
      trials can take many years to complete and require the expenditure of
      substantial resources. The length of time varies substantially according to
      the
      type, complexity, novelty and intended use of the product candidate. Delays
      in
      obtaining regulatory approvals could adversely affect the development and
      commercialization of our pharmaceutical product candidates and could have a
      material adverse impact on our business, financial condition and results of
      operations.




We
      have
      completed formal preclinical toxicology testing of PBT-2 and in March 2005,
      we
      commenced a series of Phase I clinical trials at a facility associated with
      the
      Utrecht University Hospital in Utrecht, the Netherlands. On November 7, 2005,
      we
      announced the successful completion of the first Phase I trial for PBT-2. See
      Item 4.A. "Information on the Company - History and Development of the Company."
      We have also completed three out of four stages of a second Phase I multi-dose
      escalation safety clinical trial of PBT-2 in elderly, healthy, male and female
      volunteers. We anticipate completing the final dosing stage in December 2005.
      In
      addition, the preclinical toxicology studies and GMP manufacturing development
      required for Phase II and Phase III clinical studies of PBT-2 are concurrently
      underway. We cannot make any assurances that we will complete the Phase I
      program for PBT-2 or enter further clinical trials with PBT-2.




We
      cannot
      make any assurances that we will be able to enter into a collaborative
      arrangement with a large pharmaceutical or biotechnology company to
      commercialize PBT-2. Nor can we make any assurances that once clinical trials
      are completed by us or a collaborative partner, we will be able to submit as
      scheduled a marketing approval request to the applicable governmental regulatory
      authority, or that such request and application will be reviewed and cleared
      by
      such governmental authority in a timely manner, or at all. Although we intend
      to
      make use of fast-track and abbreviated regulatory approval programs when
      possible, we cannot be certain that we will be able to obtain the clearances
      and
      approvals necessary for clinical testing or for manufacturing and marketing
      our
      pharmaceutical products candidates.




During
      the course of clinical trials and toxicology studies, product candidates may
      exhibit unforeseen and unacceptable drug-related toxicities or side effects.
      If
      any unacceptable toxicities or side effects were to occur, we may, or regulatory
      authorities may require us to, interrupt, limit, delay or abort the development
      of our potential products. In addition, unacceptable toxicities could ultimately
      prevent the clearance of our product candidates by the TGA or the FDA for any
      or
      all targeted indications. Even after being cleared by the TGA or the FDA, any
      of
      our products may later be shown to be unsafe or not to have its purported
      effect, thereby preventing widespread use or requiring withdrawal from the
      market. We cannot make any assurances that PBT2 or any future product candidate
      (including PBT-1) will be safe or effective when administered to
      patients.




**Manufacturing
      and Raw Materials**




We
      have
      used a third party manufacturer to produce the primary drug product (API) and
      secondary drug forms for our large-scale, preclinical and clinical PBT-1 and
      PBT-2 trials, and we expect that we will use a third party manufacturer for
      any
      future product candidates. We have not faced any difficulty in obtaining raw
      materials for our research and development activities or our clinical studies
      to
      date, although recognize that this is a costly, complex and time consuming
      process. We cannot make any assurances that we will be able to manufacture
      sufficient quantities of PBT-2 or any future product candidates (including
      PBT-1) in a cost-effective or timely manner. Any delays in production would
      delay our pre-clinical and human clinical trials, which could have a material
      adverse effect on our business, financial condition and results of operations.
      We also cannot make any assurances that we will be able to enter into
      collaborative or contracting arrangements on acceptable terms with third party
      manufacturers that will meet our requirements for quality, quantity and
      timeliness.




29


We
      expect
      that we will be required to design and develop new synthetic pathways for most,
      if not all, of the products that we currently intend to develop. We can not
      predict the success of such efforts, the purity of the products that may be
      obtained or the nature of the impurities that may result from such efforts.
      If
      we are not able to obtain an acceptable purity for any product candidate or
      an
      acceptable impurity profile, pre-clinical and clinical trials would be delayed,
      which could have a material adverse effect on the priority of the development
      of
      our product candidates, our business, financial condition and results of
      operations.




**Government
      Grants**




In
      May
      2003, we announced that the Australian Industry Research and Development Board,
      or IR&D Board, approved our application for funding under the Biotechnology
      Innovation Fund grant
      in
      the amount of A$227,252 for research into the development of an immunotherapy
      for Alzheimer’s disease. The research under this grant was completed in January
      2005 following the completion of certain project milestones stipulated in the
      grant, demonstrating that a mouse could generate antibodies that preferentially
      recognize dimerized β Amyloid. ****




In
      the
      first quarter of 2004, we were granted a START grant from the IR&D Board to
      support further development of PBT-2 and other Alzheimer’s disease research up
      to an amount of A$1.35 million. The grant is payable, in arrears, on the
      achievement of pre-specified milestones. We can make no assurances that we
      can
      achieve these milestones or receive all of such
      amount. The research under this grant was initially
      to be completed over a two year period and such period was subsequently extended
      until the end of 2005. As of September 30, 2005, we were entitled to
      approximately A$1.15 million under this grant.




**Commercial
      Collaboration**




In
      March
      2003, we announced a collaboration with Schering A.G. (FSE:SCH, NYSE:SHR) of
      Germany to fund and license research discoveries, particularly in the area
      of
      imaging and diagnostics, under project agreements between us and Neurosciences
      Victoria Ltd. and a separate
      research and collaboration agreement between Schering A.G. and Neurosciences
      Victoria Ltd .
      The
      parties concluded this collaboration as of June 30, 2005. The
      commercial arrangements that we entered into in connection with such
      collaboration are subject to ongoing confidentiality. See
      Item
      4A. “Information on the Company - History and Development of the
      Company.”




In
      August
      2003, utilizing the grant we received from the Commonwealth
      Government of Australia under
      the
      BIF, we entered into an agreement with Prima, through its collaborative research
      partner, the Austin Research Institute, together with the University of
      Melbourne and the Mental Health Research Institute, to undertake proof of
      concept research for our prospective Alzheimer’s disease vaccine target. This
      collaboration enabled us to access Prima's adjuvant vaccine technology, known
      as
      DCtag, in the design of candidate vaccine fragments. Under the terms of our
      contractual relationship with Prima, we retained all commercial rights to the
      monoclonal antibodies and Prima and us will be the joint owners of any new
      intellectual property arising from the collaboration. This proof of concept
      research was completed in January 2005. We
      are
      currently negotiating a contract with Prima to undertake the characterization
      and scale-up of prospective antibody candidates that were identified during
      the
      initial proof of concept stage for testing in future passive vaccine trials
      in
      Alzheimer's disease model mice. We will be utilizing the resources of Prima,
      the Austin
      Research Institute, the University
      of Melbourne and the Mental Health Research Institute to pursue this therapeutic
      approach. The research will assess the ability of the prospective antibody
      candidates to target the “toxic linked” forms of beta amyloid associated with
      the pathology of Alzheimer’s disease, as a possible vaccine therapeutic approach
      for treatment of the disease.




30


**C.**  **Organizational
      Structure**




In
      August
      2004, we established two wholly owned subsidiaries, Prana
      Biotechnology Inc., incorporated in the United States, and Prana Biotechnology
      UK plc, incorporated in the United Kingdom .
      Prana
      Biotechnology Inc. was established in the United States due to the increase
      in
      our U.S. operations and U.S. investors in our company. Prana Biotechnology
      UK
      plc was established in the United Kingdom to allow us to conduct commercial
      and
      clinical operations in the United Kingdom.




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




We
      own
      computer equipment, office furniture and lab equipment, the major item being
      a
      mass spectrometer that is being used at the University of Melbourne. We are
      party to a three year property lease signed in May 2004 that provides executive
      office space at 369 Royal Parade, Parkville, Victoria 3052, Australia, at an
      initial annual rental of A$105,551, which is increased by 3.5% on a cumulative
      basis on the May anniversary of the lease.




**ITEM
      5.** **OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS**





*The
      following discussion and analysis includes certain forward-looking statements
      with respect to the business, financial condition and results of operations
      of
      our company. The words "estimate," "project,”“intend," "expect" and similar
      expressions are intended to identify forward-looking statements within the
      Private Securities Litigation Reform Act of 1995. These forward-looking
      statements are subject to risks and uncertainties that could cause actual
      results to differ materially from those contemplated by such forward-looking
      statements. This discussion and analysis should be read in conjunction with
      our
      financial statements and notes thereto included elsewhere in this
      Report.*





31


**A.**  **Operating
      Results**




**Background**





We
      were
      incorporated under the laws of the Commonwealth of Australia on November 11,
      1997. Our mission is to develop therapeutic drugs designed to treat the
      underlying cause of degeneration of the brain and the eye as the aging process
      progresses. The principal listing of our ordinary shares and listed options
      to
      purchase our ordinary shares is on the Australian Stock Exchange, or ASX. Since
      September 5, 2002, our American Depository Receipts, or ADRs, have traded on
      the
      NASDAQ Capital Market under the symbol “PRAN.” We have two wholly-owned
      subsidiaries, Prana Biotechnology Inc. and Prana Biotechnology UK Limited,
      incorporated in the United States and the United Kingdom, respectively, in
      August 2004.





Our
      financial statements appearing in this annual report are prepared in Australian
      dollars and in accordance with generally accepted accounting principles in
      Australia. In this annual report, all references to “U.S. dollars” or “US$” are
      to the currency of the United States of America, and all references to
“Australian dollars” or “A$” are to the currency of Australia.





All
      of
      our revenues are generated in Australian dollars, except for interest earned
      on
      foreign currency bank accounts, and the majority of our expenses are incurred
      in
      Australian dollars.





**Overview**





We
      are a
      development stage enterprise at an early stage in the development of our
      pharmaceutical products that are designed to treat the underlying causes of
      degeneration of the brain and the eye as aging progresses. We have incurred
      net
      losses since inception and expect to incur substantial and increasing losses
      for
      the next several years as we expand our research and development activities
      and
      move our product candidates into later stages of development. All of our product
      candidates are in early stages of development and we face the risks of failure
      inherent in developing drugs based on new technologies. The process of carrying
      out the development of our products to later stages of development may require
      significant additional research and development expenditures, including
      pre-clinical testing and clinical trials, as well as for obtaining regulatory
      approval. To date, we have funded our operations primarily through the sale
      of
      equity securities, proceeds from the exercise of options, government grants,
      licensing and research collaborations and interest income.





Since
      completing our initial public offering and listing process on the ASX on March
      28, 2000, we have concentrated our resources toward the pursuit of our disease
      targets. Initially we focused on clinical trials of our PBT-1 compound as a
      therapeutic for the treatment of Alzheimer’s disease. We commenced our planned
      phase II human clinical trial for PBT-1 in August 2000 at the Mental Health
      Research Institute and the Royal Melbourne Hospital. The 36 week trial was
      completed in January 2002. All patients from this study were then provided
      the
      opportunity to roll into a further 48 week extension study. 32 out of 36
      patients completed the initial trial, out of which 27 patients elected to start
      the extension study and 18 patients completed the full 84-week study. On October
      12, 2004, we announced the results of the open label 84-week “Extension Study”
      of our Phase II clinical trial of PBT-1. On October 18, 2004, we announced
      plans
      to pursue a Phase II/III study to examine the effect of PBT-1 in moderate to
      severe Alzheimer’s disease patients in the second quarter of 2005, to be known
      as the PLACQUE (Progression Limiting in Alzheimer’s: Clioquinol’s Efficacy)
      study. On April 11, 2005, we announced that we would not proceed with the
      PLACQUE study and that we had re-evaluated our further work on the PBT-1
      program. As part of our effort to manufacture Good Manufacturing Practice (GMP)
      grade PBT-1 clinical trial material, we characterized the various impurities
      that occur in the synthetic process and found unacceptably high levels of a
      di-iodo-8-hydroxyquinoline impurity that could potentially increase the risk
      of
      side-effects and mutagenicity. We considered methods to reduce the levels of
      the
      di-iodo impurity, however, we reached the conclusion that attempts to reduce
      the
      impurity to safe levels were not likely to be successful in a timely,
      commercially viable manner and that further development of PBT-1 for the
      treatment of Alzheimer’s disease was not appropriate. As a result of these
      events, we proceeded to conduct a strategic review of our pending strategic
      development programs.




32


On
      June
      16, 2005, we announced that we had completed a review of our strategic
      development programs and we reaffirmed our commitment to our other lead
      candidate for the potential treatment of Alzheimer's disease, PBT-2. Unlike
      PBT-1, PBT-2 has a structure that does not contain iodine and is therefore
      not
      capable of forming the di-iodo impurity that has been associated with
      mutagenicity. PBT-2 was announced as a new lead metal protein attenuating
      compound, or MPAC, molecule for Alzheimer’s disease in early August 2003. PBT-2
      is the result of rational drug design. It has been built “from the ground up” to
      fulfill very specific criteria. It was designed so that it will be orally
      bioavailable and cross the blood brain barrier. PBT-2 was selected from over
      300
      compounds that had been developed by us at such time and has demonstrated
      significant effectiveness in both pre-clinical *in
      vitro* and *in
      vivo* testing
      and has been designed to have an improved safety and efficacy profile compared
      to PBT-1. In February 2004, we were awarded a second research and development
      START grant of A$1.35 million to take PBT-2 through safety testing and Phase
      I
      clinical trials for Alzheimer's disease. Formal preclinical toxicology testing
      for PBT-2 has been completed and in March 2005, we commenced a series of Phase
      I
      clinical trials at a facility associated with the Utrecht University Hospital
      in
      Utrecht, the Netherlands. On November 7, 2005, we announced the successful
      completion of the first Phase I trial for PBT-2, a double blind,
      placebo-controlled single dose escalation study, conducted on 55 healthy, male
      volunteers between the ages of 18 and 50, which was designed to evaluate the
      safety, tolerability and pharmacokinetics of PBT-2. Data from the study shows
      that PBT-2 was well tolerated with little difference in the incidence of adverse
      events between those receiving PBT-2 and those receiving the placebo.
      Additionally, the pharmacokinetic analysis demonstrated that the drug exposure
      increased predictably and in a linear manner, both of which are strong
      characteristics for a central nervous system drug. Concurrent findings in a
      pre-clinical mouse model indicate that PBT-2 passes into the brain more
      extensively than its predecessor, PBT-1. We have also completed three out of
      four stages of a second Phase I multi-dose escalation safety clinical trial
      of
      PBT-2 in elderly, healthy, male and female volunteers. We anticipate completing
      the final dosing stage in December 2005. In addition, the preclinical toxicology
      studies and GMP manufacturing development required for Phase II and Phase III
      clinical studies of PBT-2 are concurrently underway.




33


**Recently
      Issued But Not Yet Adopted Accounting Pronouncements Applicable To
      Us**





***Australian
      Pronouncements***





On
      July
      3, 2002, the Australian Financial Reporting Council announced that Australia
      would adopt International Financial Reporting Standards. Our management has
      been
      assessing the significance of these changes and preparing for their
      implementation. We will be required to prepare consolidated financial statements
      that comply with Australian equivalents to International Financial Reporting
      Standards, or IFRS, for reporting periods beginning on or after January 1,
      2005.
      Accordingly, our first half-year report prepared under Australian IFRS will
      be
      for the half-year reporting period ending December 31, 2005, and our first
      annual financial report prepared under Australian IFRS will be for the year
      ending June 30, 2006.





We
      have
      completed a study of the impact of the Australian IFRS as a consolidated entity,
      including the formulation of the Australian IFRS accounting policies that are
      intended to be adopted from July 1, 2005. The likely impact of the accounting
      policy changes on the results and financial position of the consolidated entity
      has been determined and disclosed in Note 1(t) (unaudited) to the consolidated
      financial statements.





***United
      States Pronouncements***





On
      December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
      "Share-Based Payment", or SFAS 123(R), which is a revision of SFAS No. 123,
      “Accounting for Stock Based Compensation”, or SFAS 123. Generally, the approach
      in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS
      123 permitted, but did not require, share-based payments to employees to be
      recognized based on their fair values while SFAS 123(R) requires all share-based
      payments to employees to be recognized based on their fair values. SFAS 123(R)
      also revises, clarifies and expands guidance in several areas, including
      measuring fair value, classifying an award as equity or as a liability and
      attributing compensation cost to reporting periods. The new standard will be
      effective for us commencing July 1, 2005.





As
      permitted by SFAS 123, we currently account for share-based payments to
      employees using Accounting Principles Board, or APB, Opinion No. 25, “Accounting
      for Stock Issued to Employees,” the intrinsic value method. Accordingly, the
      adoption of the SFAS 123(R) fair value method may have significant impact on
      our
      results of operations, although it will have no impact on our overall financial
      position. The impact of the adoption of SFAS 123(R) cannot be predicted at
      this
      time, as it depends on levels of share-based payments for future grant. However,
      had we adopted SFAS 123(R) in prior periods, the impact of that Standard would
      have approximated the impact of SFAS 123, as disclosed in Note 25(a) of our
      financial statements included in this Report.





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
      -
      an amendment of APB Opinion No. 29," or SFAS 153, which amends APB Opinion
      No.
      29, "Accounting for Nonmonetary Transactions" to eliminate the exception for
      nonmonetary exchanges of similar productive assets and replaces it with a
      general exception for exchanges of nonmonetary assets that do not have
      commercial substance. SFAS 153 is effective for nonmonetary asset exchanges
      occurring in fiscal periods beginning after June 15, 2005. The new standard
      will
      be effective for us commencing July 1, 2005. At this time, we do not anticipate
      that the adoption of this statement will have a material effect on our
      consolidated financial position or results of operations.





34


In
      May
      2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error
      Corrections: a replacement of APB Opinion No. 20 and FASB Statement
      No. 3”, or SFAS 154, which requires companies to apply voluntary
      changes in accounting principles retrospectively whenever it is practicable. SFAS
      154
      changes the requirements for the accounting for and reporting of a voluntary
      change in accounting principle as well as the changes required by an accounting
      pronouncement which does not include specific transition provisions. SFAS 154 will be effective for accounting changes made by us in fiscal
      years beginning after July 1, 2006. At this time, we do not anticipate that
      the
      adoption of SFAS 154 will have a material effect our consolidated financial
      position or results of operations.





**Differences
      Between Australian Accounting Standards and U.S. Accounting Standards**





We
      prepare our financial statements in accordance with generally accepted
      accounting principles in Australia, or A-GAAP, which differ in certain
      significant respects from generally accepted accounting principles in the United
      States, or U.S. GAAP. The following table sets forth a comparison of our net
      loss and total equity in accordance with A-GAAP and U.S. GAAP as of the dates
      and for the periods indicated:




**As
                of and for the years ended June 30,****2005**
            
            **2004**
            
            **2003**Net
                loss in accordance with:A-GAAP
            
            
            (25,008,597
            )
            
            (9,885,614
            )
            
            (4,584,838
            )U.S.
                GAAP
            
            
            (17,675,019
            )
            
            (9,208,199
            )
            
            (3,244,397
            )Total
                equity in accordance with:A-GAAP
            
            
            19,594,176
            
            
            38,702,559
            
            
            15,823,703U.S.
                GAAP
            
            
            19,594,176
            
            
            31,484,956
            
            
            7,378,083




See
      Note
      25 to our financial statements for a description of the differences between
      A-GAAP and U.S. GAAP as they relate to us, and a reconciliation of net loss
      and
      total equity for the dates and periods indicated therein. Differences between
      A-GAAP and U.S. GAAP that have a material effect on net loss and total equity
      relate to share-based compensation and intangible assets.





35


**Critical
      Accounting Policies**





We
      prepare our financial statements in accordance with A-GAAP. As such, we are
      required to make certain estimates, judgments, and assumptions that management
      believes are reasonable based upon the information available. These estimates,
      judgments and assumptions affect the reported amounts of assets and liabilities
      at the date of the financial statements and the reported amounts of revenues
      and
      expenses during the periods presented. The significant accounting policies
      listed in Note 1 of the financial statements that management believes are the
      most critical to aid in fully understanding and evaluating our financial
      condition and results of operations under A-GAAP are discussed
      below.





*Recoverable
      amount of non-current assets* .
      Each
      reporting period, our Board of Directors assesses the recoverable amount of
      all
      non-current assets to ensure its carrying value does not exceed its recoverable
      amount. Where the carrying amount of a non-current asset is greater than its
      recoverable amount, the asset is revalued down to its recoverable amount. The
      recoverable amount is estimated based on expected net cash flows discounted
      to
      their present values using a market-determined, risk-adjusted discounted rate.





On
      June
      30, 2005, following the announcement in April 2005 regarding the cessation
      of
      our PBT-1 program, our Board of Directors determined that the core intellectual
      property relating to PBT-1 had been impaired and the carrying value was
      written-off.





*Intangible
      assets and patents, research and development expense* .
      Until
      December 1999, costs associated with the acquisition and development of our
      core
      intellectual property were capitalized as intangible assets. After considering
      an independent valuation of our core intellectual property at December 1999,
      our
      Board of Directors revalued the assets upwards by A$14,661,942 to A$16,500,000.
      The revaluation was recorded in the asset revaluation reserve in equity.
      Subsequent to the revaluation, all costs associated with the acquisition and
      development of core intellectual property are charged to patents, research
      and
      development expense. On July 1, 2000, our Board of Directors deemed the revalued
      carrying amount of core intellectual property to be cost for financial reporting
      purposes.





Prior
      to
      the announcement in April 2005 regarding the cessation of our PBT-1 program,
      our
      core intellectual property was amortized on a straight-line basis over a period
      of 15 years, the period in which the future benefits were expected to arise. On
      June
      30, 2005, following such announcement, our Board of Directors determined that
      the core intellectual property relating to PBT-1 had been impaired and the
      carrying value was written-off.





*Revenue
      recognition* .
      We
      recognize revenue to the extent that it is probable that the economic benefits
      will flow to us and the revenue can be reliably measured.





·
            Interest
                income is recognized as earned when collectibility is reasonably
                assured.





·
            Government
                grants are recorded as income when key milestones set within each
                agreement are achieved and accepted by all parties to the grant.
                The
                agreements provide for payments at different phases based on product
                development. Milestones are based on the phases of each product
                development, for example phase 1, phase 2 and phase 3. Revenue is
                not
                recognized prior to acceptance that the milestones have been achieved,
                as
                collectibility is not assured until this point is reached. Once each
                milestone is reached and approved, the grantor is obligated to pay
                and
                there are no further significant obligations as to that part of the
                milestone. Grant income for achievement of such milestones is agreed
                between the parties in legally binding contracts. Revenue for each
                milestone achieved is fixed at the initiation of the program.





36


·
            Reimbursements
                of expenses are recognized as revenue when the reimbursement is received
                and the related expenses have been
                incurred.





·
            Corporate
                partner revenues are comprised of amounts received for certain research
                and development activities under our collaboration with Schering
                A.G. and
                Neurosciences Victoria Ltd. Revenues are recognized as earned on
                a
                straight line basis over the lives of the respective agreements that
                we
                entered into with Neurosciences Victoria Ltd. in connection with
                the
                collaboration. The straight line basis is considered appropriate
                as such
                agreements do not contain clearly defined milestones. Such agreements
                are
                performed on a “best efforts” basis with no guarantee of either
                technological or commercial success.





**Significant
      Costs and Expenses**





*Depreciation
      and amortization expense* .
      Depreciation of property and equipment is provided on a straight-line basis
      over
      the estimated useful lives of three to 14 years. Prior to the impairment of
      our
      core intellectual property as of June 30, 2005, amortization of our core
      intellectual property was provided on a straight-line basis over the estimated
      useful lives of 15 years. See Notes 1(d) and 1(e) to the financial statements.





*Patents,
      research and development expenses* .
      Our
      patents, research and development expenses consist primarily of compensation
      and
      related costs for research and development personnel, expenses for testing
      facilities and payments under our research agreements. Patents, research and
      development expenses also include costs associated with the acquisition and
      development of patents, which have been expensed subsequent to December 1999.
      See Note 1(e) to the financial statements.





*Legal
      expenses* .
      Our
      legal expenses consist of fees paid to our outside counsel for various legal
      matters dealt with in the ordinary course of business as well as legal fees
      associated with patent applications and for the defense of patents.





*Consulting
      fee expenses* .
      Our
      consulting fee expenses consist primarily of directors’ fees and other
      consultancy fees paid to scientists.





*Employee
      benefits expenses* .
      Employee benefit expenses consist primarily of payments to employees for their
      services as employees, including our Chief Executive Officer.




37


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





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





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





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





**Results
      of Operations**




**Year
      ended June 30, 2005 compared to year ended June 30, 2004**




*Revenues
      from ordinary activities*




Revenues
      from ordinary activities increased to A$2,653,113 for the year ended June 30,
      2005 from A$2,321,227 for the year ended June 30, 2004, an increase of
      A$331,886, or 14.3%. Revenues in the year ended June 30, 2005 consisted of
      A$892,135 interest income, A$629,692 government grant income, and A$1,125,000
      received under the licensing and research collaboration we entered into with
      Schering A.G. and Neurosciences Victoria Ltd. in March 2003. Revenues in the
      year ended June 30, 2004 consisted of A$211,327 interest income, A$647,400
      government grant income, and A$1,462,500 received under the licensing and
      research collaboration we entered into with Schering A.G. and Neurosciences
      Victoria Ltd. in March 2003. The increase in revenues is attributable to a
      A$680,808 increase in interest income arising from the funds we received in
      June
      2004 in connection with our US$20 million private placement of securities in
      the
      United States. This increase was partially offset by a A$337,500 reduction
      in
      funding from Schering A.G. and Neurosciences Victoria Ltd, due to the completion
      of one of the contracts in connection with our collaboration with Schering
      A.G
      and Neurosciences Ltd in June 2004. We estimate that our revenues in the 2006
      fiscal year will consist of approximately A$700,000 of interest income and
      A$115,855 of government grant income.





*Depreciation
      and amortization expenses*




Depreciation
      and amortization expenses remained substantially consistent at A$1,165,227
      for
      the year ended June 30, 2005 compared to A$1,195,006 for the year ended June
      30,
      2004.




38


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




*Patents,
      research and development expenses*




Patents,
      research and development expenses increased to A$7,687,596 for the year ended
      June 30, 2005 from A$5,232,581 for the year ended June 30, 2004, an increase
      of
      A$2,455,015, or 46.9%. The increase in expenses is attributable to an increase
      in pre-clinical and clinical trial costs, as we accelerated the research of
      PBT-1 and PBT-2. We expect that our patents, research and development expenses
      will increase in the 2006 fiscal year to approximately A$8.5 million, primarily
      due to further clinical trials and introducing new candidates for development.





*Legal
      expenses*




Legal
      expenses decreased to A$1,047,448 for the year ended June 30, 2005 from
      A$1,650,467 for the year ended June 30, 2004, a decrease of A$603,019, or 36.6%.
      The decrease in legal expenses was primarily due to the settlement of the
      dispute with P.N. Gerolymatos S.A. for which a provision of A$971,764 was made
      in the 2004 fiscal year. As a result of the settlement, our legal fees in
      respect of the action declined by A$94,938. This reduction was partially offset
      by the increase in legal fees of A$189,966 associated with Securities and
      Exchange Commission compliance following the filing of a registration statement
      in connection with the June 2004 private placement in the United States. In
      fiscal year 2005, legal fees in respect of employment matters also increased
      by
      A$58,027 and our intellectual property expenses increased by A$210,215. We
      expect that our legal expenses in the 2006 fiscal year will be substantially
      similar to those for the 2005 fiscal year.





*Employee
      benefits expense*




Employee
      benefits expenses increased to A$2,438,303 for the year ended June 30, 2005
      from
      A$1,060,730 for the year ended June 30, 2004, an increase of A$1,377,573, or
      129.9%. The increase in employee benefits expenses was primarily due to the
      increase in staff from 12 employees at June 30, 2004 to 17 employees at June
      30,
      2005. The increase in staff in the 2005 fiscal year was due to the acceleration
      of our research and development for our principal product candidate PBT-2 during
      such period, and the establishment of our office in the United States. The
      increase in the number of employees also affected our costs associated with
      their employment (such as taxes on salaries). Employee benefits expenses also
      increased in the 2005 fiscal year because Dr. Jonas Alsenas, who served as
      our
      Chief Executive Officer from March 2004 to June 2005, was paid for the majority
      of the 2005 fiscal year unlike the previous fiscal year in which he was
      compensated only for the last quarter. Mr. Alsenas received compensation
      of A$ 696,358
      (excluding equity) through June 16, 2005, when he resigned as our Chief
      Executive Officer and director. We anticipate that employee benefit expenses
      for the
      2006 fiscal year will
      be
      approximately A$1,690,000.





39


*Consulting
      fee expenses*




Consulting
      fee expenses decreased to A$1,607,892 for the year ended June 30, 2005 from
      A$1,706,809 for the year ended June 30, 2004, a decrease of A$98,917, or 5.8%.
      The decrease in consulting fees was primarily due to a reduction in consulting
      fees paid to directors for additional consulting services amounting to
      A$246,860. The fees paid to our research and development consultants declined
      by
      A$27,963 in the 2005 fiscal year. This decrease was partially offset by A$60,000
      paid to the Company Secretary. A new consultant was also engaged in the United
      States to whom we paid A$115,906 in the 2005 fiscal year. We anticipate that
      consulting fee expenses for
      the
      2006 fiscal year will
      be
      substantially similar to those for the 2005 fiscal year .





*Corporate
      compliance expenses*




Corporate
      compliance expenses increased to A$562,123 for the year ended June 30, 2005
      from
      A$419,708 for the year ended June 30, 2004, an increase of A$142,415, or 33.9%.
      The increase in corporate compliance expenses is attributable to additional
      Securities and Exchange Commission filing requirements following the filing
      of
      the registration statement in connection with the June 2004 private placement
      in
      the United States and additional listing fees. We anticipate that corporate
      compliance expenses for the 2006 fiscal year will be substantially similar
      to
      those for the 2005 fiscal year.





*Foreign
      exchange losses*




Foreign
      exchange losses increased to A$1,362,572 for the year ended June 30, 2005 from
      A$182,768 for the year ended June 30, 2004, an increase of A$1,179,804, or
      645.5%. The increase in foreign exchange losses in the 2005 fiscal year is
      attributable to the significant increase in foreign currency funds because
      the
      funds that we received in connection with our June 2004 private placement in
      the
      United States were held in U.S. dollars.





*Impairment
      of intangible assets*




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





*Other
      expenses from ordinary activities*




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





40


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




*Revenues
      from ordinary activities*




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





*Depreciation
      and amortization expenses*




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





*Patents,
      research and development expenses*




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





*Legal
      expenses*




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





41


*Employee
      benefits expense*




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





*Consulting
      fee expenses*




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





*Corporate
      compliance expenses*




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





*Foreign
      exchange losses*




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





*Other
      expenses from ordinary activities*




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





42


**Inflation
      and Seasonality**




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




**B.**  **Liquidity
      and Capital Resources**




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





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





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





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





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





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





Net
      cash
      used in operating activities was A$11,418,813, A$5,347,420 and A$3,590,613
      during the years ended June 30, 2005, 2004 and 2003, respectively. Our payments
      to suppliers and employees during the years ended June 30, 2005, 2004 and 2003
      were A$13,959,679, A$7,896,711 and A$5,271,577 respectively. The increase in
      payments from the year ended June 30, 2004 to the year ended June 30, 2005
      was
      due to the acceleration of the research and development for our PBT-1 and PBT-2
      product candidates. During the years ended June 30, 2005, 2004 and 2003, our
      payments to suppliers and employees were offset by government grants of
      A$532,283, A$909,946 and A$836,575, respectively, and interest income of
      A$883,583, A$176,845 and A$106,835, respectively. Additionally, during the
      years
      ended June 30, 2005, 2004 and 2003, our payments to suppliers and employers
      were
      further offset by A$1,125,000, A$1,462,500 and A$506,250, respectively, for
      research funding attributable to our collaboration with Schering A.G. and
      Neurosciences Victoria Ltd.





43


Net
      cash
      used in investing activities was A$50,466, A$134,362 and A$87,929 during the
      years ended June 30, 2005, 2004 and 2003 respectively. The higher expenditures
      in the 2004 fiscal year compared to other years is primarily the result of
      fit-out costs associated with the move to our new offices in Parkville,
      Victoria, Australia in 2004.





Net
      cash
      provided by financing activities was A$4,704,757, A$31,781,165 and A$3,569,792
      during the years ended June 30, 2005, 2004 and 2003, respectively. Cash flows
      from financing activities during the year ended June 30, 2005 reflected the
      exercise of options into ordinary share capital. Cash flows from financing
      activities during the year ended June 30, 2004 reflected net proceeds of
      A$4,675,019 from a private placement in September 2003, net proceeds of
      A$26,352,147 from a private placement of our ADRs to institutional and
      professional investors in the United States in June 2004 and net proceeds of
      A$757,166 from the exercise of our publicly traded options. Cash flows from
      financing activities during the year ended June 30, 2003 reflected the exercise
      of options into ordinary share capital.





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





As
      of
      June 30, 2005, our principal commitments consisted of obligations under our
      agreements with Professor Ashley Bush and Mr. Geoffrey Kempler. Under the ten
      year contract we entered into with Professor Ashley Bush in January, 2004,
      effective as of February 1, 2003, we agreed to pay Professor Bush a consulting
      fee of US$100,000 per year increasing on the anniversary of the agreement by
      the
      U.S. consumer price index. We also agreed to issue to Professor Bush 1,650,000
      ordinary shares (of which 825,000 were issued during the 2004 fiscal year and
      825,000 were issued in August 2005) and to grant Professor Bush options to
      purchase 825,000 ordinary shares at an exercise price A$0.50 per share (of
      which
      options to purchase 412,000 ordinary shares were granted during the 2004 fiscal
      year and 413,000 were granted in August 2005). On June 15, 2005, we entered
      into
      an agreement with Geoffrey Kempler in connection with his appointment as our
      Chief Executive Officer. Under this contract, we agreed to pay Mr. Kempler
      A$367,000 per annum plus superannuation, a A$100,000 bonus upon satisfactory
      completion of a successful Phase I trial for PBT-2 and an additional A$100,000
      upon satisfactory completion of a proof of study concept study for PBT-2. Under
      the agreement with Mr. Kempler, we are required to continue to remunerate him
      in
      accordance with its terms until June 1, 2010 if he terminates the contract
      for
      good reason or the consolidated entity terminates it without cause.





44


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





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





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





·
            costs
                and timing of obtaining regulatory approvals;





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





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





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





45


In
      March
      2005, we commenced a series of Phase I clinical trials for our current principal
      product candidate PBT-2 at a facility associated with the Utrecht University
      Hospital in Utrecht, the Netherlands. On November 7, 2005, we announced the
      successful completion of the Phase I trial for PBT-2, a double blind,
      placebo-controlled single dose escalation study, conducted on 55 healthy, male
      volunteers between the ages of 18 and 50, which was designed to evaluate the
      safety, tolerability and pharmacokinetics of PBT-2. Data from the study shows
      that PBT-2 was well tolerated with little difference in the incidence of adverse
      events between those receiving PBT-2 and those receiving the placebo.
      Additionally, the pharmacokinetic analysis demonstrated that the drug exposure
      increased predictably and in a linear manner, both of which are strong
      characteristics for a central nervous system drug. Concurrent findings in a
      pre-clinical mouse model indicate that PBT-2 passes into the brain of mice
      with
      more extensively than its predecessor, PBT-1. We have also completed three
      out
      of four stages of a second Phase I multi-dose escalation safety clinical trial
      of PBT-2 in elderly, healthy, male and female volunteers. We anticipate
      completing the final dosing stage in December 2005. In addition, the preclinical
      toxicology studies and GMP manufacturing development required for Phase II
      and
      Phase III clinical studies of PBT-2 are concurrently underway. We anticipate
      that expenditures for the Phase I program for PBT-2 will amount to A$700,000,
      however such expenditures may adjust due to numerous factors. For information
      on
      such factors, see Item 5.C. "Operating and Financial Review and Prospects -
      Research and Development, Patents and Licenses." We expect to fund such
      expenditures from our working capital.





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





**Conditions
      in Australia**




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




**C.**  **Research
      and Development, Patents and Licenses**




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





46


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





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





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





47


We
      have
      also identified and filed an international patent application directed to a
      novel target for an Alzheimer's disease vaccine. The
      Commonwealth Government of
      Australia provided us with a A$227,252 BIF grant for the initial proof of
      concept stage of this research. The research under this BIF grant finished
      at
      the end of January 2005 following the completion of certain project milestones
      stipulated in the grant, demonstrating that a mouse could generate antibodies
      that preferentially recognize dimerized β Amyloid.  **** We
      are
      currently negotiating a
      contractual agreement with Prima to undertake the characterization and scale-up
      of prospective antibody candidates that were identified during the initial
      proof
      of concept stage for testing in future passive vaccine trials in Alzheimer's
      disease model mice. We will be utilizing the resources of Prima, the Austin
      Research Institute, the University of Melbourne and the Mental Health Research
      Institute to pursue this therapeutic approach. The research will assess the
      ability of the immune system to selectively produce specific antibodies which
      target the “toxic linked” forms of beta amyloid associated with the pathology of
      Alzheimer’s disease, as an effective treatment for the disease.




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





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





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





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





48


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




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




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





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




49


**D.**  **Trend
      Information**




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




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




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




**F.**  **Tabular
      Disclosure of Contractual Obligations**




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




Contractual
                Obligations
            
            Payments
                due by periodTotal
            
            less
                than 1 year
            
            1-3years
            
            3-5
              years
            
            more
                than 5 yearsOperating
                lease obligations
            
            
            A$
                204,257
            
            
            A$106,569
            
            $
            A97,688
            
            
            A$
                --
            
            
            A$
                --Purchase
                obligations *
            
            
            3,139,305
            
            
            685,128
            
            
            1,606,481
            
            $
            635,191
            
            
            212,505Total
            
            
            A$3,343,562
            
            
            A$791,697
            
            
            A$1,704,1,69
            
            
            A$635,191
            
            
            A$212,505





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




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




**A.**  **Directors
      and Senior Management**




Our
      directors and executive officers are as follows:




Name
            
            Age
            
            PositionGeoffrey
                P. Kempler
            
            50
            
            Chairman
                of the Board of Directors and Chief Executive OfficerRoss
                Thomas Murdoch
            
            40
            
            President
                and Chief Operating OfficerRichard
                Revelins
            
            43
            
            Chief
                Financial Officer and SecretaryDianne
                Angus
            
            45
            
            Senior
                Vice President ofBusiness Development,Intellectual
                Propertyand ResearchPeter
                Marks
            
            50
            
            DirectorColin
                L. Masters
            
            58
            
            DirectorBrian
                D. Meltzer
            
            52
            
            DirectorGeorge
                W. Mihaly
            
            52
            
            Director




50


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




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




***Richard
      Revelins*** has
      served as our Company Secretary since February 2000 and was appointed Chief
      Financial Officer of our company in June 2004. Mr. Revelins is an executive
      director and principal of Peregrine Corporate Limited, an Australian-based
      investment bank. Mr. Revelins has held senior positions in international
      merchant banks and is currently a director of a number of companies listed
      on
      the Australian Stock Exchange, including Atlas Gold Limited, Gaming and
      Entertainment Group Limited, Yamarna Goldfields Limited and Cangold Inc., a
      company listed on the Canadian Venture Exchange. Mr. Revelins serves as our
      Chief Financial Officer on a part-time basis and devotes approximately one
      to
      two work days a week to such position.




51


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




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




52


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




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




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




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




**B.**  **Compensation**




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




53


Salaries,
                fees,commissions
                andbonuses
            
            Pension,
                retirement and other similarbenefitsJonas
                Alsenas(1)
            
            A$1,779,526
            
            A$432,266Geoffrey
                P. Kempler
            
            A$311,759
            
            A$26,220Colin
                L. Masters
            
            A$115,000
            
            --Brian
                D. Meltzer
            
            A$104,869
            
            --George
                W. Mihaly
            
            A$129,869
            
            --All
                directors and officers as a group, consisting of seven persons
                atJune
                30, 2005(1)
            
            A$3,068,693(1)
            
            A$499,436(1)








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




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




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




54


**C.**  **Board
      Practices**




**Introduction**




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




**Non-Executive
      and Independent Directors**





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





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





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




55


**Term
      of Directors**





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




**Directors’
      Service Contracts**





We
      do not
      have any service contracts with our directors, other than the agreement that
      we
      entered into with Mr. Kempler, the Chairman of our Board of Directors, in
      connection with his appointment as our Chief Executive Officer. Our directors
      are not entitled to any benefits upon termination of their service as our
      directors.





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





56


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





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





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





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





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




The
      agreement contains customary confidentiality provisions.




**Indemnification
      of Directors and Officers**




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




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




57


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




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




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




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




**Committees
      of the Board of Directors**




Our
      Board
      of Directors has established the following committees:




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




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




58


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




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




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




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




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




59


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




**NASDAQ
      Marketplace Rules and Home Country Practices**




NASDAQ
      Marketplace Rule 4350, or Rule 4350, was recently amended to permit foreign
      private issuers, such as our company, to follow certain home country corporate
      governance practices without the need to seek individual exemptions from NASDAQ.
      Instead, a foreign private issuer must provide NASDAQ with a letter from outside
      counsel in its home country certifying that to the extent that the issuer does
      not comply with Rule 4350 it complies with its home country law and practice.
      On
      March 30, 2005, we provided NASDAQ with a notice that we do not comply with
      the
      following requirements of Rule 4350, and instead follow Australian law and
      practice in respect of such requirements:




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





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





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




**D.**  **Employees**




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




60


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




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




As
      of
      June 30, 2005, except for one employee located in the United States, all of
      our
      employees were located in Australia. During the fiscal years ended June 30,
      2004
      and 2003 all of our employees were located
      in Australia .




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




**E.**  **Share
      Ownership**




**Beneficial
      Ownership of Executive Officers and Directors**




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




Name
            
            Number
                of Ordinary Shares
              Beneficially
                Owned (1)
            
            Percentage
                of
              Ownership
                (2)Geoffrey
                P. Kempler
            
            18,055,000
            (3)(4)
            
            14.09%Richard
                Revelins437437
            
            542,808
            (5)(6)
            
            *Ross
                T. Murdoch437437
            
            50,000
            (7)
            
            *Dianne
                Angus
            
            -
            
            
            *Peter
                Marks
            
            43,111
            (8)
            
            *Colin
                L. Masters
            
            184,666
            (9)
            
            *Brian
                D. Meltzer
            
            626,666
            (10)(11)
            
            *George
                W. Mihaly
            
            526,666
            (12)(13)
            
            *All
                directors and executive officers as a group (seven persons)
            
            20,028,917
            (14)
            
            15.63%





*
            Less
                than 1%




(1)
            Beneficial
                ownership is determined in accordance with the rules of the SEC,
                and
                generally includes voting or investment power with respect to securities.
                Ordinary shares relating to options currently exercisable or exercisable
                within 60 days of the date of this annual report are deemed outstanding
                for computing the percentage of the person holding such securities
                but are
                not deemed outstanding for computing the percentage of any other
                person.
                Except as indicated by footnote, and subject to community property
                laws
                where applicable, the persons named in the table above have sole
                voting
                and investment power with respect to all shares shown as beneficially
                owned by them.




61


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




(3)
            Of
                such shares, 30,000 ordinary shares are held directly by Mr. Kempler,
                13,965,000 ordinary shares are held by Baywick Pty Ltd., an Australian
                corporation owned by Mr. Kempler, 90,000 ordinary shares are held
                of
                record by Crystal Triangle Pty Ltd., an Australian corporation owned
                by
                Mr. Kempler and 2,970,000 ordinary shares are held of record by NRB
                Developments Pty Ltd., an Australian corporation in which Mr. Kempler
                holds a 50% interest. Mr. Kempler may be deemed to be the beneficial
                owner
                of the ordinary shares held directly by Baywick Pty Ltd., Crystal
                Triangle
                Pty Ltd. and NRB Developments Pty Ltd.




(4)
            Includes
                1,000,000 ordinary shares issuable upon the exercise of options,
                exercisable for nil consideration on or before June 30, 2010. These
                options may not be exercised until December 17, 2005 and thereafter,
                only
                if the price of our ordinary shares has achieved and maintained a
                minimum
                value of A$1.00 for five consecutive trading days.




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




(6)
            Includes
                options to purchase 500,000 ordinary shares exercisable at A$0.50
                on or
                before December 17, 2007, held by Darontack Pty Ltd., an Australian
                corporation owned by Mr. Revelins.




(7)
            Of
                such shares, 50,000 ordinary shares are held by Angela Murdoch, Dr
                Murdochs’ wife.




(8)
            Of
                such shares, 43,111 ordinary shares are held by Lampam Pty Ltd.,
                an
                Australian corporation owned by Mr. Marks. Does not include options
                to
                purchase 300,000 ordinary shares at nil consideration on or before
                June
                30, 2010 that have been approved for grant by our shareholders but
                have
                not yet been granted.




(9)
            Of
                such shares,****166,666
                ordinary shares are held directly by Dr. Masters,****16,000
                ordinary shares are held by Helen Masters, Dr. Masters’ wife, 1,000
                ordinary shares are held by Seth Masters, Dr. Masters’ son, and 1,000
                ordinary shares are held by Kate Masters, Dr. Masters’ daughter. Does not
                include options to purchase 1,000,000 ordinary shares at nil consideration
                on or before June 30, 2010 that have been approved for grant by our
                shareholders but have not yet been
                granted.




(10)
            Of
                such shares, 326,666 ordinary shares are held by Navon Pty Ltd.,
                an
                Australian corporation owned by Mr. Meltzer.




(11)
            Includes
                300,000 ordinary shares issuable upon the exercise of options, exercisable
                for nil consideration on or before June 30, 2010. These options may
                not be
                exercised until December 17, 2005 and thereafter, only if the price
                of our
                ordinary shares has achieved and maintained a minimum value of A$1.00
                for
                five consecutive trading days.




62


(12)
            Of
                such shares 166,666 ordinary shares are held directly by Mr. Mihaly,
                4,000
                ordinary shares are held by each of Kieren Mihaly and Warwick Mihaly,
                Dr.
                Mihaly’s sons, and 52,000 ordinary shares are held of record by Waide Pty
                Ltd., an Australian corporation owned by Mr. Mihaly.




(13)
            Includes
                300,000 ordinary shares issuable upon the exercise of options, exercisable
                for nil consideration on or before June 30, 2010. These options may
                not be
                exercised until December 17, 2005 and thereafter, only if the price
                of our
                ordinary shares has achieved and maintained a minimum value of A$1.00
                for
                five consecutive trading days.




(14)
            Does
                not include options to purchase an aggregate 1,300,000 ordinary shares
                at
                nil consideration on or before June 30, 2010 that have been approved
                by
                our shareholders for grant to Messrs. Marks and Masters but have
                not yet
                been granted.




**Stock
      Option Plans**




***Employee
      and Consultants Option Plan 2000***




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




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




***2004
      Option Plans***




In
      November 2004, we adopted the 2004
      Employees’, Directors’ and Consultants’ Share and Option Plan (the
      “2004 ASX Plan”) and the 2004
      American Depository Share (ADS) Option Plan (the
      “2004 ADS Plan”; and together with the 2004 ASX Plan, the “2004 Plans”). Under
      the 2004 ASX Plan we may issue ordinary shares traded on the ASX, and under
      the
      2004 ADS Plan we may issue American Depository Shares (“ADSs”) reported on the
      NASDAQ Capital Market. We were initially authorized to issue under the 2004
      Plans up to an aggregate 12,000,000 ordinary shares or ADSs representing
      12,000,000 ordinary shares. In November 2005, our shareholders approved an
      amendment to the 2004 Plans to provide for the issuance thereunder of an
      additional 10,000,000 ordinary shares (or ADSs representing 10,000,000 ordinary
      shares), so that we may issue under the 2004 Plans up to an aggregate 22,000,000
      ordinary shares or ADSs representing 22,000,000 ordinary shares. Any increase
      in
      such maximum number of ordinary shares or ADSs issuable under the 2004 Plans
      is
      subject to shareholder approval. As of June 30, 2005, an aggregate 6,928,439
      ordinary shares had been issued, or were issuable under options granted, under
      the 2004 Plans, and 5,071,561 ordinary shares were available for future
      issuances or grants under the 2004 Plans (prior to the November 2005 increase
      in
      the maximum number of ordinary shares issuable under the 2004
      Plans).




63


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




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




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




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




64


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




As
      of
      June 30, 2005, options to purchase 3,800,000 ordinary shares (or 380,000 ADRs)
      had been issued under the ADS Plan, at an exercise price of US$0.50 per share
      (or US$5.00 per ADR). No options granted under the ADS Plan have been exercised
      to date.




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




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




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




65


As
      of
      June 30, 2005, 428,439 ordinary shares had been issued under the ASX Plan.
      In
      addition, as of June 30, 2005, options to purchase 1,100,000 ordinary shares
      having an exercise price of A$0.50 per share and options to purchase 1,600,000
      ordinary shares having an exercise price of nil per share had been granted
      under
      the ASX Plan. No options granted under the ASX Plan have been exercised to
      date.




**ITEM
      7.**  **MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTION****S**




**A.**  **Major
      Shareholders**




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




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





(1)
            Beneficial
                ownership is determined in accordance with the rules of the Securities
                and
                Exchange Commission and generally includes voting or investment power
                with
                respect to securities. Ordinary shares relating to options currently
                exercisable or exercisable within 60 days of the date of this annual
                report are deemed outstanding for computing the percentage of the
                person
                holding such securities but are not deemed outstanding for computing
                the
                percentage of any other person. Except as indicated by footnote,
                and
                subject to community property laws where applicable, the persons
                named in
                the table above have sole voting and investment power with respect
                to all
                shares shown as beneficially owned by
                them.




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




(3)
            Of
                such shares, 30,000 ordinary shares are held directly by Mr. Kempler,
                13,965,000 ordinary shares are held by Baywick Pty Ltd., an Australian
                corporation owned by Mr. Kempler, 90,000 ordinary shares are held
                of
                record by Crystal Triangle Pty Ltd., an Australian corporation owned
                by
                Mr. Kempler and 2,970,000 ordinary shares are held of record by NRB
                Developments Pty Ltd., an Australian corporation in which Mr. Kempler
                holds a 50% interest. Mr. Kempler may be deemed to be the beneficial
                owner
                of the ordinary shares held directly by Baywick Pty Ltd., Crystal
                Triangle
                Pty Ltd. and NRB Developments Pty Ltd.




66


(4)
            Includes
                1,000,000 ordinary shares issuable upon the exercise of options,
                exercisable for nil consideration on or before June 30, 2010. These
                options may not be exercised until December 17, 2005 and thereafter,
                only
                if the price of our ordinary shares has achieved and maintained a
                minimum
                value of A$1.00 for five consecutive trading days.




(5)
            Mr.
                Boris Liberman is the sole owner of Jagen Nominees Pty Ltd. and may
                be
                deemed to hold the voting and investment powers for the ordinary
                shares
                held by Jagen Nominees Pty Ltd.




**Significant
      Changes in the Ownership of Major Shareholders**




In
      June
      2004, we completed a private placement of four
      million ADRs and five-year warrants to purchase an additional three million
      ADRs  to
      institutional and professional investors, as a result of which the ownership
      interest of our major shareholders at such time was diluted. Fifteen of the
      investors, who appointed OrbiMed
      Advisors LLC as
      their
      nominee, acquired 800,000
      ADRs (representing
      8,000,000 ordinary shares) and
      currently exercisable five-year warrants to purchase 600,000
      ADRs (representing 6,000,000 ordinary shares) at
      an
      exercise price of US$8.00 per ADR. See Item 5B. “Operating and Financial Review
      and Prospects - Liquidity and Capital Resources.” During the period of April 11,
      2005 through April 13, 2005, OrbiMed
      Advisors LLC sold
      the
      800,000 ADRs (representing 8,000,000 ordinary shares) that it held of record.





**Record
      Holders**




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




**B.**  **Related
      Party Transactions**




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




See
      Note
      21 to the financial statements.




**C.**  **Interests
      of Experts and Counsel**




Not
      applicable.




67


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




**A.**  **Financial
      Statements and Other Financial Information**




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




**Legal
      Proceedings**




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




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




**Dividend
      Distribution Policy**




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




**B.**  **Significant
      Changes**




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




68


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




**A.**  **Offer
      and Listing Details**




**Australian
      Stock Exchange**




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




Per
                  Ordinary Share (A$)High
              
              LowFiscal
                  Year Ended June 30,2001
              
              
              1.29
              
              
              0.362002
              
              
              2.60
              
              
              0.502003
              
              
              2.39
              
              
              0.442004
              
              
              1.18
              
              
              0.452005
              
              
              0.70
              
              
              0.13Fiscal
                  Year Ended June 30, 2004:First
                  Quarter
              
              
              1.15
              
              
              0.55Second
                  Quarter
              
              
              0.72
              
              
              0.45Third
                  Quarter
              
              
              0.65
              
              
              0.48Fourth
                  Quarter
              
              
              1.18
              
              
              0.58





Fiscal
                Year Ended June 30, 2005:First
                Quarter
            
            
            0.69
            
            
            0.49Second
                Quarter
            
            
            0.70
            
            
            0.51Third
                Quarter
            
            
            0.60
            
            
            0.43Fourth
                Quarter
            
            
            0.48
            
            
            0.13Month
                Ended:June
                2005
            
            
            0.18
            
            
            0.18July
                2005
            
            
            0.18
            
            
            0.16August
                2005
            
            
            0.23
            
            
            0.18October
                2005
            
            
            0.19
            
            
            0.17November
                2005
            
            
            0.17
            
            
            0.29





**NASDAQ
      Capital Market**




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





69





Per
                ADR (US$)High
            
            LowFiscal
                Year Ended June 30,2003
                (from September 5, 2002)
            
            
            12.80
            
            
            2.962004
            
            
            10.50
            
            
            2.952005
            
            
            5.19
            
            
            0.98Fiscal
                Year Ended June 30, 2004:First
                Quarter
            
            
            7.49
            
            
            3.87Second
                Quarter
            
            
            5.65
            
            
            2.95Third
                Quarter
            
            
            5.21
            
            
            3.69Fourth
                Quarter
            
            
            10.50
            
            
            4.43Fiscal
                Year Ended June 30, 2005:First
                Quarter
            
            
            5.19
            
            
            3.40Second
                Quarter
            
            
            5.05
            
            
            3.70Third
                Quarter
            
            
            4.99
            
            
            3.36Fourth
                Quarter
            
            
            3.55
            
            
            0.98Month
                Ended:June
                2005
            
            
            1.46
            
            
            1.20July
                2005
            
            
            1.46
            
            
            1.20August
                2005
            
            
            1.73
            
            
            1.35September
                2005
            
            
            1.60
            
            
            1.32October
                2005
            
            
            1.50
            
            
            1.21November
                2005
            
            
            2.23
            
            
            1.25




**B.**  **Plan
      of Distribution**




Not
      applicable.




**C.**  **Markets**




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




**D.**  **Selling
      Shareholders**




Not
      applicable.




70


**E.**  **Dilution**




Not
      applicable.




**F.**  **Expenses
      of the Issue**




Not
      applicable.




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




**A.**  **Share
      Capital**




Not
      applicable.




**B.**  **Memorandum
      and Articles of Association** ****




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




**C.**  **Material
      Contracts**




On
      May 7,
      1999, we entered into an agreement for the assignment of patents and
      intellectual property licensing with the University of Melbourne. The agreement
      provides for the assignment of various patents and patent rights to our company.
      In consideration of the assignment of the patents, we agreed to make certain
      payments to the University of Melbourne and to pay a royalty of 1.5% on the
      net
      price of products sold utilizing such patents. In addition, we agreed to pay
      the
      lesser of 1.5% of the net invoice price of products sold or 10% of royalties
      received from any license or sub-licensee we appoint to utilize the patents.




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




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




71


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





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




Under
      this collaboration, we, through our contractor the University of Melbourne,
      undertook specific research and development projects, and Schering A.G. funded
      up to A$2.7 million of our research and development costs over the life of
      the
      projects and agreed to pay additional milestone payments and royalties from
      discoveries. Despite the arrangement between the parties, the early results
      of
      the research and development did not support the continuation of the
      collaboration past June 30, 2005. As a result, th e
      parties
      concluded this collaboration as of June 30, 2005. See
      Item
      4A., “Information on the Company - History and Development of the
      Company.”





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





72


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




**D.**  **Exchange
      Controls** ****




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





**The
      Foreign Acquisitions and Takeovers Act 1975**




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





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





73


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





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





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





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




**E.**  **Taxation**




***Australian
      Tax Consequences***





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




**Nature
      of ADRs for Australian Taxation Purposes**




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




74


**Taxation
      of Dividends**




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




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




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




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 same extent
      as Australian resident stockholders. The Australian Taxation Office maintains
      the view that the Double Taxation Convention between the United States and
      Australia does not limit Australian capital gains tax. Australian capital gains
      tax applies to net capital gains at a taxpayer’s marginal tax rate but for
      certain stockholders a discount of the capital gain may apply if the shares
      have
      been held for 12 months or more. For individuals, this discount is 50%. Net
      capital gains are calculated after reduction for capital losses, which may
      only
      be offset against capital gains.




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




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




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




75


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




**Dual
      Residency**




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




**Stamp
      Duty**




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




**Australian
      Death Duty**




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




**Goods
      and Services Tax**




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





**United
      States Federal Income Tax Consequences**





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




76


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




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




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




**Taxation
      of Dividends**




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




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




77


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




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




**Disposition
      of ADRs**




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




78


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




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




**Passive
      Foreign Investment Companies**




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




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





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





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





79


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





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





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





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





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





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





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





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





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





If
      the
      ADRs are considered “marketable stock” and if you elect to “mark-to-market” your
      ADRs, you would not be subject to the rules described above. Instead, you will
      generally include in income any excess of the fair market value of the ADRs
      at
      the close of each tax year over your adjusted basis in the ADRs. If the fair
      market value of the ADRs had depreciated below your adjusted basis at the close
      of the tax year, you may generally deduct the excess of the adjusted basis
      of
      the ADRs over its fair market value at that time. However, such deductions
      generally would be limited to the net mark-to-market gains, if any, that you
      included in income with respect to such ADRs in prior years. Income recognized
      and deductions allowed under the mark-to-market provisions, as well as any
      gain
      or loss (to the extent of net mark-to-market gains) on the disposition of ADRs
      with respect to which the mark-to-market election is made, is treated as
      ordinary income or loss. Loss on a disposition, to the extent in excess of
      net
      mark-to-market gains, would be treated as capital loss. Our ADRs should be
      considered “marketable stock” if they traded at least 15 days during each
      calendar quarter of the relevant calendar year in more than de minimis
      quantities.





80


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





**Backup
      Withholding and Information Reporting**




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




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




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




**U.S.
      Gift and Estate Tax**




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




**F.**  **Dividend
      and Paying Agents**




Not
      applicable.




**G.**  **Statement
      by Experts**




Not
      applicable.




**H.**  **Documents
      on Display**




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




81


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




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




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




**I.**  **Subsidiary
      Information**




Not
      applicable.




**ITEM
          11.** **QUANTITATIVE
          AND QUALITATIVE DISCLOSURE ABOUT MARKET
          RISKS**





We
      invest
      our excess cash in interest-bearing accounts and time deposits with
      government-insured institutions. Certain of our cash equivalents are subject
      to
      interest rate risk. Due to the short duration and conservative nature of these
      instruments, we do not believe that we have a material exposure to interest
      rate
      risk. Our major market risk is changes in foreign exchange rates as we have
      approximately A$7.3 million in time deposits held in U.S. dollars as of June
      30,
      2005. A hypothetical 10% adverse movement in end-of-period exchange rates would
      reduce the cash balance by approximately A$0.7 million.





82


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





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




**ITEM
      12.**  **DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES**





Not
      applicable.




**PART
      II**




**ITEM
      13.**  **DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES**





Not
      applicable.




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


Not
      applicable




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





Our
      management, including our chief executive officer and chief financial officer
      are responsible for establishing and maintaining our disclosure controls and
      procedures (within the meaning of Rule 13a-15(e) of the Securities Exchange
      Act of 1934). We have established and maintain disclosure controls and
      procedures that are designed to provide reasonable assurance that information
      required to be disclosed by our company in reports that we file or submit under
      the U.S. Securities Exchange Act of 1934, as amended, is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms and that such information was made known
      to them by others within the company, as appropriate to allow timely decisions
      regarding required disclosure.




We
      evaluated the effectiveness of our disclosure controls and procedures under
      the
      supervision of our chief executive officer and chief financial officer as of
      the
      end of the period covered by this annual report on Form 20-F. Based
      upon
      that evaluation, our chief executive officer and chief financial officer have
      concluded that, as of such date, our disclosure controls and procedures were
      ineffective in that we had insufficient accounting personnel that have
      sufficient knowledge and experience in U.S. GAAP and the Securities and Exchange
      Commission accounting requirements. The accounting personnel who prepare our
      financial statements will need to be trained on the application of U.S. GAAP
      accounting pronouncements and standardized reconciliation templates will need
      to
      be improved to assist in the reconciliation process between A-GAAP and U.S.
      GAAP.




83


All
      internal control systems no matter how well designed, have inherent limitations.
      Therefore, even those systems determined to be effective may not prevent or
      detect misstatements and can provide only reasonable assurance with respect
      to
      financial statement preparation and presentation. Also, projections of any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or that the
      degree of compliance with the policies or procedures may
      deteriorate.




**ITEM
      16.** **RESERVED**




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


Our
      Board
      of Directors has determined that Mr. Brian Meltzer, an independent director,
      meets the definition of an audit committee financial expert, as defined in
      Item
      401(h) of Regulation S-K. For a brief listing of Mr. Meltzer’s relevant
      experience, see Item 6.A. “Directors, Senior Management and Employees --
      Directors and Senior Management.”




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


We
      have
      adopted a code of ethics that applies to our chief executive officer and all
      senior financial officers of our company, including the chief financial officer,
      chief accounting officer or controller, or persons performing similar functions.
      The code of ethics is publicly available on our website at www.pranabio.com .
      Written
      copies are available upon request. If we make any substantive amendment to
      the
      code of ethics or grant any waivers, including any implicit waiver, from a
      provision of the codes of ethics, we will disclose the nature of such amendment
      or waiver on our website.  **ITEM
      16C.** **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**


Fees
      Paid
      to Principal Accountants





The
      following table sets forth, for each of the years indicated, the fees paid
      to
      our principal independent registered public accounting firm, Deloitte
      Touche Tohmatsu, the other member firms of Deloitte Touche Tohmatsu and their
      respective affiliates. All of such fees were pre-approved by our Audit
      Committee.





Year
                Ended June 30,2005
            
            2004Services
                Rendered
            
            Fees
            
            FeesAudit
                (1)
            
            
            A$175,481
            
            
            A$129,522Audit-related
            
            
            --
            
            
            --Tax
                (2)
            
            
            A$11,631
            
            
            A$59,580Other
                (3)
            
            
            A$14,920
            
            
            A$6,900Total
            
            
            A$202,032
            
            
            A$196,002




84





(1)
            Audit
                fees consist of services that would normally be provided in connection
                with statutory and regulatory filings or engagements, including services
                that generally only the independent accountant can reasonably
                provide.




(2)
            Tax
                fees relate to services performed by the tax division for tax compliance,
                planning, and advice.





(3)
            Other
                fees relate to services performed in respect of the audit of grants
                received from the Australian Industry Research and Development Board.





Pre-Approval
      Policies and Procedures





Our
      Audit
      Committee has adopted policies and procedures for the pre-approval of audit
      and
      non-audit services rendered by our independent registered public accounting
      firm, Deloitte Touche Tohmatsu. Pre-approval of an audit or non-audit service
      may be given as a general pre-approval, as part of the audit committee’s
      approval of the scope of the engagement of our independent registered public
      accounting firm, or on an individual basis. Any proposed services exceeding
      general pre-approved levels also requires specific pre-approval by our audit
      committee. The policy prohibits retention of the independent registered public
      accounting firm to perform the prohibited non-audit functions defined in Section
      201 of the Sarbanes-Oxley Act or the rules of the Securities and Exchange
      Commission, and also requires the audit committee to consider whether proposed
      services are compatible with the independence of the registered public
      accounting firm.




**ITEM
          16D. EXEMPTIONS
          FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
          COMMITTEE**





Not
      applicable.




**ITEM
          16E. PURCHASE
          OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
          PURCHASERS**





**Issuer
      Purchase of Equity Securities**





Neither
      we, nor any affiliated purchaser of our company, have purchased any of our
      securities during the year ended June 30, 2005.




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




Our
      company has elected to furnish financial statements and related information
      specified in Item 18.





85


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





PageIndex
                to Consolidated Financial Statements
            F-0Report
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Statements of Financial Position
            F-2Consolidated
                Statements of Financial Performance
            F-3Consolidated
                Statements of Cash Flows
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity
            F-5Notes
                to Consolidated Financial Statements
            F-7





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





Index
      to
      Exhibits




Exhibit
            Description




1.1
            Constitution
                of Registrant (1)




2.1
            Deposit
                Agreement dated March 23, 2001, among the Registrant and the Bank
                of New
                York, as Depositary, and owners and holders of American Depositary
                Receipts issued thereunder, including the Form of American Depositary
                Receipts (2)




4.1
            Research
                Funding and Intellectual Property Assignment Agreement dated December
                1,
                2000, between the Registrant and the University of Melbourne(1)




4.2
            Agreement
                for the Assignment of Patents and Intellectual Property Licensing
                dated
                May 7, 1999, between the Registrant and the University of Melbourne
                University of Melbourne University of Melbourne (1)




4.3
            Agreement
                for the Assignment of Patents and Intellectual Property Licensing
                dated
                February 8, 2000, between Registrant and the Biomolecular Research
                Institute (1)




4.4
            License
                Agreement dated January 1, 2001, between the Registrant and The General
                Hospital Corporation (1)




4.5
            Variation
                Agreement dated August 8, 2001, between the Registrant and The General
                Hospital Corporation, which amends the License Agreement dated January
                1,
                2001, between the parties (1)




4.6
            Second
                Amendment to Exclusive License Agreement dated January 1, 2001, between
                the Registrant and The General Hospital Corporation, dated March
                15, 2004,
                between the between the Registrant and The General Hospital Corporation
                (6)


86
 4.7
              Agreement
                  for Services dated February 7, 2000, between the Registrant and
                  Prof.
                  Colin Masters (1)


4.8
            Agreement
                to Provide Accounting, Administration, Corporate Advice and Company
                Secretarial Services dated February 23, 2000, between the Registrant
                and
                Malvern Administrative Services (1)




4.9
            Form
                of Indemnity for Clinical Trials dated September 2000, between the
                Registrant and Melbourne Health (Royal Melbourne Hospital Campus),
                Royal
                Melbourne Hospital Research Foundation Incorporated, University of
                Melbourne, Mental Health Research Institute of Victoria (1)




4.10
            Commitment
                dated November 7, 2001, between the Registrant and University of
                Melbourne
                (1)




4.11
            Grant
                Deed agreement dated August 25, 2003, commencing August 1, 2003,
                between
                the Registrant and the Industry Research and Development Board on
                behalf
                of the Commonwealth of Australia
                (7)




4.12
            Grant
                Agreement, commencing September 1, 2003, between the Registrant and
                the
                Industry Research and Development Board on behalf of the Commonwealth
                of
                Australia (8)




4.13
            Letter
                agreement dated January 6, 2004, between the Registrant and Kendle
                Pty
                Ltd. regarding strategic alliance (9)




4.14
            Project
                Agreement dated March 11, 2004, between the Registrant and Neurosciences
                Victoria Ltd.****(10)




4.15
            Project
                Agreement dated March 11, 2004, between the Registrant and Neurosciences
                Victoria Ltd. (11)




4.16
            Project
                Agreement dated March 11, 2004, between the Registrant and Neurosciences
                Victoria Ltd. (12)




4.17
            Purchase
                Agreement dated April 27, 2004, among the Registrant and the investors
                signatory thereto (3)




4.18
            Registration
                Rights Agreement dated April 27, 2004, among the Registrant and the
                investors signatory thereto (4)




4.19
            Form
                of Warrant (5)




4.20
            [RESERVED]




4.21
            Settlement
                Agreement dated July 28, 2004, among the Registrant, P.N. Gerolymatos
                S.A,
                or PNG, Mr. Gerolymatos, The General Hospital Corporation of
                Massachusetts, or The GHC, Professor Ashley Bush, Dr. Rudolph Tanzi
                and
                Dr. Robert Cherny and the ancillary agreements of even date therewith
                exhibited thereto, including the Patent Assignment and Settlement
                Agreement among the Registrant and PNG, Patent Rights Security Agreement
                among the Registrant and PNG and the Derivatives Agreement among
                the
                Registrant and PNG (13)


87
 4.22
              Prana
                  Biotechnology Limited,Employees
                  and Consultants Option Plan 2000 (1)


4.23
            Prana
                Biotechnology Limited, 2004 American Depository Share (ADS) Option
                Plan
                (14)




4.24
            Prana
                Biotechnology Limited, 2004 Employees’, Directors’ and Consultants’ Share
                and Option Plan (15)




4.25
            Employment
                Agreement dated June 15, 2005, among the Registrant and Mr. Kempler




8.1
            List
                of Subsidiaries of the Registrant




10.1
            Consent
                of Deloitte Touche Tohmatsu, Independent Registered Public Accounting
                Firm.




12.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
                of the Securities Exchange Act, as
                amended.




12.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
                of the Securities Exchange Act, as amended.




13.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.




13.2
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





(1)
            Incorporated
                by reference to our Registration Statement on Form 20-F filed with
                the
                Securities and Exchange Commission on May 28, 2002 (File No.
                000-49843).




(2)
            Incorporated
                by reference to our Registration Statement on Form F-6 filed with
                the
                Securities and Exchange Commission on March 9, 2001 (File No.
                333-13264).




(3)
            Incorporated
                by reference to Item 1 of our Report on Form 6-K for the month of
                April,
                2004 (File No. 000-49843).




(4)
            Incorporated
                by reference to Item 2 of our Report on Form 6-K for the month of
                April,
                2004 (File No. 000-49843).


(5)
            Incorporated
                by reference to Item 3 of our Report on Form 6-K for the month of
                April,
                2004 (File No. 000-49843).




(6)
            Filed
                as Exhibit 4.6 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




(7)
            Filed
                as Exhibit 4.11 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




(8)
            Filed
                as Exhibit 4.12 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




88


(9)
            Filed
                as Exhibit 4.13 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




(10)
            Filed
                as Exhibit 4.14 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




(11)
            Filed
                as Exhibit 4.15 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




(12)
            Filed
                as Exhibit 4.16 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




(13)
            Filed
                as Exhibit 4.21 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




(14)
            Incorporated
                by reference to Annexure A to Item 1 of our Report on Form 6-K for
                the
                month of November, 2004 (File No. 000-49843).




(15)
            Incorporated
                by reference to Annexure B to Item 1 of our Report on Form 6-K for
                the
                month of November, 2004 (File No. 000-49843).




89




**PRANA
        BIOTECHNOLOGY LIMITED**
 
 **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Page
                  Number**Report
                  of Independent Registered Public Accounting Firm
              F-1Consolidated
                  Statements of Financial Position
              F-2Consolidated
                  Statements of Financial Performance
              F-3Consolidated
                  Statements of Cash Flows
              F-4Consolidated
                  Statements of Changes in Stockholders’ Equity
              F-5Notes
                  to Financial Statements
              F-7
 
 F-0
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 **DELOITTE
        TOUCHE TOHMATSU**
 
 **To
        The Board of Directors and Shareholders of Prana Biotechnology
        Limited**
 
 We
        have
        audited the accompanying consolidated statements of financial position of
        Prana
        Biotechnology Limited and subsidiaries (a development stage company) (the
        “Company”) as of June 30, 2005 and 2004 and the related consolidated statements
        of financial performance, cash flows and changes in stockholders' equity
        for
        each of the three years in the period ended June 30, 2005, and for the period
        from November 11, 1997 (date of inception) to June 30, 2005. These financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company's internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements present fairly, in all material
        respects, the financial position of Prana Biotechnology Limited and subsidiaries
        as of June 30, 2005 and 2004, and the results of their operations and their
        cash
        flows for each of the three years in the period ended June 30, 2005, and
        for the
        period from November 11, 1997 (date of inception) to June 30, 2005, in
        conformity with accounting principles generally accepted in Australia.
 
 Accounting
        principles generally accepted in Australia vary in certain significant respects
        from accounting principles generally accepted in the United States of America.
        Information relating to the nature and effect of such differences is presented
        in Note 25 to the consolidated financial statements.
 
 
 /s/  Deloitte
        Touche Tohmatsu
 **DELOITTE
        TOUCHE TOHMATSU**
 Chartered
        Accountants
 
 Melbourne,
        Australia
 September
        30, 2005
 
 F-1
 
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **CONSOLIDATED
        STATEMENTS OF FINANCIAL POSITION**
 **(in
        Australian dollars)**
 **June
                    30,**Notes
                
                **2005**
                
                **2004****Current
                    Assets**Cash
                    assets
                
                
                
                
                
                21,453,304
                
                
                29,580,398Receivables
                
                
                5
                
                
                174,476
                
                
                92,917Other
                
                
                6
                
                
                495,165
                
                
                72,769**Total
                    Current Assets**
                
                
                
                
                
                22,122,945
                
                
                29,746,084**Non
                    Current Assets**Property
                    and equipment
                
                
                7
                
                
                166,214
                
                
                180,971Intangible
                    assets
                
                
                8
                
                
                -
                
                
                11,488,343**Total
                    Non Current Assets**
                
                
                
                
                
                166,214
                
                
                11,669,314**Total
                    Assets**
                
                
                
                
                
                22,289,159
                
                
                41,415,398**Current
                    Liabilities**Payables
                
                
                9
                
                
                2,571,181
                
                
                2,661,950Provisions
                
                
                10
                
                
                78,602
                
                
                42,597**Total
                    Current Liabilities**
                
                
                
                
                
                2,649,783
                
                
                2,704,547**Non-Current
                    Liabilities**Provisions
                
                
                10
                
                
                45,200
                
                
                8,292**Total
                    Non-Current Liabilities**
                
                
                
                
                
                45,200
                
                
                8,292**Total
                    Liabilities**
                
                
                
                
                
                2,694,983
                
                
                2,712,839**Net
                    Assets**
                
                
                
                
                
                19,594,176
                
                
                38,702,559**Equity**Contributed
                    equity
                  2005:
                    127,319,260 fully paid ordinary shares
                  2004:
                    115,984,380 fully paid ordinary shares
                
                
                11
                
                
                55,405,707
                
                
                49,505,493Reserve
                
                
                12
                
                
                14,661,942
                
                
                14,661,942Accumulated
                    deficit during the development stage
                
                
                12
                
                
                (50,473,473
                )
                
                (25,464,876
                )**Total
                    Equity**
                
                
                
                
                
                19,594,176
                
                
                38,702,559
 
 See
        notes
        to the consolidated financial statements.
 
 F-2
 
 **PRANA
            BIOTECHNOLOGY LIMITED**
 **(A
            Development Stage Enterprise)**
 
 **CONSOLIDATED
        STATEMENTS OF FINANCIAL PERFORMANCE**
 **(in
        Australian dollars)**
 **Years
                    ended********June
                    30,**
                
                **Period
                    from****Inception**
                  **(November
                    11, 1997)****2005**
                
                **2004**
                
                **2003**
                
                **to
                    June 30, 2005**Notes**Revenue
                    from ordinary activities**
                
                
                2
                
                
                2,653,113
                
                
                2,321,227
                
                
                1,816,478
                
                
                8,179,728Depreciation
                    and amortization expense
                
                
                3
                
                
                (1,165,227
                )
                
                (1,195,006
                )
                
                (1,185,973
                )
                
                (6,502,436
                )Patents,
                    research and development expense
                
                
                3
                
                
                (7,109,839
                )
                
                (4,853,536
                )
                
                (1,386,006
                )
                
                (17,797,596
                )Patents,
                    research and development expense - related parties
                
                
                3,
                    21
                
                
                (577,757
                )
                
                (=(379,045
                )
                
                (475,289
                )
                
                (2,280,699
                )Legal
                    expense
                
                
                
                
                
                (1,047,448
                )
                
                (1,650,467
                )
                
                (848,660
                )
                
                (4,736,148
                )Employee
                    benefits expense
                
                
                
                
                
                (2,438,303
                )
                
                (1,060,730
                )
                
                (760,980
                )
                
                (4,684,831
                )Consulting
                    fee expense
                
                
                
                
                
                (1,607,892
                )
                
                (1,706,809
                )
                
                (567,730
                )
                
                (4,973,832
                )Corporate
                    compliance expense
                
                
                
                
                
                (562,123
                )
                
                (419,708
                )
                
                (395,604
                )
                
                (1,989,446
                )Foreign
                    exchange loss
                
                
                
                
                
                (1,362,572
                )
                
                (182,768
                )
                
                (12,481
                )
                
                (1,557,821
                )Impairment
                    of intangible assets
                
                
                
                
                
                (10,388,339
                )
                
                -
                
                
                -
                
                
                (10,388,339
                )Other
                    expenses from ordinary activities - related parties
                
                
                21
                
                
                -
                
                
                (81,470
                )
                
                (114,247
                )
                
                (268,217
                )Other
                    expenses from ordinary activities
                
                
                
                
                
                (1,402,210
                )
                
                (677,302
                )
                
                (654,346
                )
                
                (3,473,836
                )**Loss
                    from ordinary activities before income tax
                    expense**
                
                
                
                
                
                (25,008,597
                )
                
                (9,885,614
                )
                
                (4,584,838
                )
                
                (50,473,473
                )**Income
                    tax expense relating to ordinary activities**
                
                
                4
                
                
                -
                
                
                -
                
                
                -
                
                
                -**Net
                    loss**
                
                
                12(b)
                
                
                (25,008,597
                )
                
                (9,885,614
                )
                
                (4,584,838
                )
                
                (50,473,473
                )**Loss
                    per share**
                  **(basic
                    and diluted)**
                
                
                18
                
                
                (0.20
                )
                
                (0.13
                )
                
                (0.08
                )
                
                N/A
 
 See
        notes
        to the consolidated financial statements.
 
 F-3
 
  **PRANA
            BIOTECHNOLOGY LIMITED**
 **(A
            Development Stage Enterprise)**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(in
        Australian dollars)**
 **Years
                    Ended June 30,**
                
                **Period
                    from****Inception
                    (November 11, 1997)****2005**
                
                **2004**
                
                **2003**
                
                **to
                    June 30, 2005**Notes**Cash
                    Flows from**
                  **Operating
                    Activities**Payments
                    to suppliers and employees
                
                
                
                
                
                (13,959,679
                )
                
                (7,896,711
                )
                
                (5,271,577
                )
                
                (35,638,125
                )Interest
                    received
                
                
                
                
                
                883,583
                
                
                176,845
                
                
                106,835
                
                
                1,741,413Government
                    grant received
                
                
                
                
                
                532,283
                
                
                909,946
                
                
                836,575
                
                
                3,122,518Nasdaq
                    reimbursements received
                
                
                
                
                
                -
                
                
                -
                
                
                231,304
                
                
                231,304Neuroscience
                    Victoria monies received
                
                
                
                
                
                1,125,000
                
                
                1,462,500
                
                
                506,250
                
                
                3,093,750Net
                    cash flows used in
                  operating
                    activities
                
                
                13
                    (a)
                
                
                (11,418,813
                )
                
                (5,347,420
                )
                
                (3,590,613
                )
                
                (27,449,140
                )**Cash
                    Flows from Investing Activities**Payments
                    for purchase of equipment
                
                
                
                
                
                (50,466
                )
                
                (134,362
                )
                
                (87,929
                )
                
                (356,989
                )Net
                    cash flows used in
                  investing
                    activities
                
                
                
                
                
                (50,466
                )
                
                (134,362
                )
                
                (87,929
                )
                
                (356,989
                )**Cash
                    Flows from Financing Activities**Proceeds
                    from issue of shares
                
                
                
                
                
                -
                
                
                33,853,606
                
                
                -
                
                
                46,854,565Payment
                    of share issue costs
                
                
                
                
                
                (48,576
                )
                
                (2,834,941
                )
                
                -
                
                
                (3,667,054
                )Proceeds
                    from exercise of options
                
                
                
                
                
                4,753,333
                
                
                762,500
                
                
                3,713,792
                
                
                9,812,471Payment
                    of underwriting costs
                
                
                
                
                
                -
                
                
                -
                
                
                (144,000
                )
                
                (144,000
                )Repayment
                    of borrowings
                
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,038,728
                )Net
                    cash flows provided by
                  financing
                    activities
                
                
                
                
                
                4,704,757
                
                
                31,781,165
                
                
                3,569,792
                
                
                50,817,254Net
                    (decrease)/ increase in
                  cash
                    held
                
                
                
                
                
                (6,764,522
                )
                
                26,299,383
                
                
                (108,750
                )
                
                23,011,125Opening
                    cash brought forward
                
                
                
                
                
                29,580,398
                
                
                3,463,783
                
                
                3,585,014
                
                
                -
  Exchange
                    rate adjustments on cash held in foreign currencies
                
                
                
                
                
                (1,362,572
                )
                
                (182,768
                )
                
                (12,481
                )
                
                (1,557,821
                )**Closing
                    cash carried forward**
                
                
                13
                    (b)
                
                
                21,453,304
                
                
                29,580,398
                
                
                3,463,783
                
                
                21,453,304
  See
        notes
        to the consolidated financial statements.
 
 F-4
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
 **(in
        Australian dollars, except for number of shares)**
 
 **Number
                  of Shares**
              
              **Contributed
                  Equity**
              
              **Accumulated**
                **Deficit
                  During Development Stage**
              
              **Asset
                  Revaluation Reserve**
              
              **Total****Balance,
                  November 11, 1997 (Inception)**
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              (690
              )
              
              -
              
              
              (690
              )Issuance
                  of shares to founders
              
              
              20
              
              
              20
              
              
              -
              
              
              -
              
              
              20**Balance,
                  June 30, 1998**
              
              
              20
              
              
              20
              
              
              (690
              )
              
              -
              
              
              (670
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              (80,000
              )
              
              -
              
              
              (80,000
              )**Balance,
                  June 30, 1999**
              
              
              20
              
              
              20
              
              
              (80,690
              )
              
              -
              
              
              (80,670
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              (1,326,288
              )
              
              -
              
              
              (1,326,288
              )Revaluation
                  of intangible assets to directors’ valuation
              
              
              -
              
              
              -
              
              
              -
              
              
              14,661,942
              
              
              14,661,942297
                  for 1 share split
              
              
              5,920
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of shares in connection with private placement
              
              
              960
              
              
              960
              
              
              -
              
              
              -
              
              
              9605,000
                  for 1 share split
              
              
              34,493,100
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of shares in connection with initial public offering, net of issue
                  costs
              
              
              16,000,000
              
              
              7,470,863
              
              
              -
              
              
              -
              
              
              7,470,863Issuance
                  of shares in connection with exercise of options
              
              
              5,000
              
              
              2,500
              
              
              -
              
              
              -
              
              
              2,500**Balance,
                  June 30, 2000**
              
              
              50,505,000
              
              
              7,474,343
              
              
              (1,406,978
              )
              
              14,661,942
              
              
              20,729,307Net
                  loss
              
              
              -
              
              
              -
              
              
              (4,138,979
              )
              
              -
              
              
              (4,138,979
              )Issuance
                  of shares in connection with private placements, net of issue
                  costs
              
              
              6,666,666
              
              
              4,745,599
              
              
              -
              
              
              -
              
              
              4,745,599Non-cash
                  issuance of shares to consultants
              
              
              88,600
              
              
              48,950
              
              
              -
              
              
              -
              
              
              48,950Non-cash
                  issuance of options to consultants
              
              
              -
              
              
              8,000
              
              
              -
              
              
              -
              
              
              8,000**Balance,
                  June 30, 2001**
              
              
              57,260,266
              
              
              12,276,892
              
              
              (5,545,957
              )
              
              14,661,942
              
              
              21,392,877Net
                  loss
              
              
              -
              
              
              -
              
              
              (5,448,467
              )
              
              -
              
              
              (5,448,467
              )Issuance
                  of shares in connection with exercise of options
              
              
              1,160,690
              
              
              580,346
              
              
              -
              
              
              -
              
              
              580,346Non-cash
                  issuance of shares to consultants
              
              
              191,794
              
              
              144,230
              
              
              -
              
              
              -
              
              
              144,230**Balance,
                  June 30, 2002**
              
              
              58,612,750
              
              
              13,001,468
              
              
              (10,994,424
              )
              
              14,661,942
              
              
              16,668,986
 
 F-5
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
 
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)**
 **(in
        Australian dollars, except for number of shares)**
 
 **Number
                  of Shares**
              
              **Contributed
                  Equity**
              
              **Accumulated**
                **Deficit
                  During Development Stage**
              
              **Asset
                  Revaluation Reserve**
              
              **Total**Net
                  loss
              
              
              -
              
              
              -
              
              
              (4,584,838
              )
              
              -
              
              
              (4,584,838
              )Issuance
                  of shares in connection with exercise of options, net of underwriting
                  costs
              
              
              7,427,584
              
              
              3,569,792
              
              
              -
              
              
              -
              
              
              3,569,792Non-cash
                  issuance of shares to consultants
              
              
              146,969
              
              
              169,763
              
              
              -
              
              
              -
              
              
              169,763**Balance,
                  June 30, 2003**
              
              
              66,187,303
              
              
              16,741,023
              
              
              (15,579,262
              )
              
              14,661,942
              
              
              15,823,703Net
                  loss
              
              
              -
              
              
              -
              
              
              (9,885,614
              )
              
              -
              
              
              (9,885,614
              )Issuance
                  of shares in connection with private placements, net of issue
                  costs
              
              
              47,102,853
              
              
              31,018,665
              
              
              -
              
              
              -
              
              
              31,018,665Issuance
                  of shares in connection with exercise of options
              
              
              1,325,000
              
              
              762,500
              
              
              -
              
              
              -
              
              
              762,500Non-cash
                  issuance of shares to consultants and directors
              
              
              1,369,224
              
              
              983,305
              
              
              -
              
              
              -
              
              
              983,305**Balance,
                  June 30, 2004**
              
              
              115,984,380
              
              
              49,505,493
              
              
              (25,464,876
              )
              
              14,661,942
              
              
              38,702,559Net
                  loss
              
              
              -
              
              
              -
              
              
              (25,008,597
              )
              
              -
              
              
              (25,008,597
              )Issuance
                  of shares in connection with exercise of options, net of issue
                  costs
              
              
              9,506,666
              
              
              4,708,574
              
              
              -
              
              
              -
              
              
              4,708,574Non-cash
                  issuance of shares to consultants and directors
              
              
              478,214
              
              
              255,141
              
              
              -
              
              
              -
              
              
              255,141Non-cash
                  issuance of shares for settlement of litigation
              
              
              1,350,000
              
              
              756,000
              
              
              -
              
              
              -
              
              
              756,000Non-cash
                  issuance of options to consultants
              
              
              -
              
              
              180,499
              
              
              -
              
              
              -
              
              
              180,499**Balance,
                  June 30, 2005**
              
              
              127,319,260
              
              
              55,405,707
              
              
              (50,473,473
              )
              
              14,661,942
              
              
              19,594,176
  See
        notes
        to the consolidated financial statements.
 
 F-6
 PRANA
        BIOTECHNOLOGY
        LIMITED
 (A
        Development Stage
        Enterprise)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)
 **1.**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Background**
 
 Prana
        Biotechnology Limited, Prana Biotechnology Inc. and Prana Biotechnology UK
        Limited (“Prana” or the “consolidated entity”) is a development stage enterprise
        engaged in the research and development of therapeutic drugs designed to
        treat
        the underlying cause of degeneration of the brain and the eye as the aging
        process progresses. Prana Biotechnology Limited (the “Company”), the parent
        entity was incorporated on November 11, 1997 in Melbourne, Australia. The
        UK and
        US subsidiaries were incorporated in August 2004.
 
 On
        March
        28, 2000, the Company completed its initial public offering in Australia
        and
        listed on the Australian Stock Exchange (“ASX”). In September 2002, the
        Company’s shares were approved for listing on the NASDAQ Capital Market (symbol:
        PRAN).
 
 **Financial
        Reporting Framework**
 
 The
        financial report is a general purpose financial report, which has been prepared
        in accordance with the requirements of the Corporations Act 2001, Accounting
        Standards and Urgent Issues Group Consensus Views and complies with other
        requirements of the law.
 
 The
        financial report has been prepared on the basis of historical cost and except
        where stated, does not take into account changing money values or current
        valuations of non-current assets. Cost is based on the fair values of the
        consideration given in exchange for assets.
 
 **Development
        Stage - Risks and uncertainties**
 
 As
        a
        development stage enterprise, the consolidated entity’s prospects are subject to
        the risks, expenses and uncertainties frequently encountered by companies
        which
        have not yet commercialized any applications of their technology, particularly
        in new and evolving markets. Prana’s operating results may fluctuate
        significantly in the future as a result of a variety of factors, including
        capital expenditure and other costs relating to establishing, maintaining
        and
        expanding the operations, the number and mix of potential customers, potential
        pricing of future products by the consolidated entity and its competitors,
        new
        technology introduced by the consolidated entity and its competitors, delays
        or
        expense in obtaining necessary equipment, economic and social conditions
        in the
        biotechnology industry and general economic conditions.
 
 Prana
        will continue to review the need to seek additional funding through public
        and
        private financing and/or through collaboration or other arrangements with
        corporate partners. The consolidated entity cannot be certain that it will
        be
        able to raise any required funding or capital, on favorable terms or at all,
        or
        that it will be able to establish corporate collaborations on acceptable
        terms,
        if at all. If the consolidated entity is unable to obtain such additional
        funding or capital, it may be required to reduce the scope of its development
        plans.
 
 Prana’s
        experience in exploiting its technology is limited. The consolidated entity
        cannot be certain that its operations will be profitable in the short-term,
        or
        at all. If Prana fails in any of its efforts to establish or expand its
        business, the results of operations, financial condition and liquidity of
        the
        consolidated entity could be materially adversely affected. The consolidated
        entity cannot be certain that it will be able to obtain or retain any permits
        required by the consolidated entity to market, sell and deliver its technology.
        Any of these factors could result in the cessation of Prana’s operations.
 
 **Significant
        Accounting Policies**
 
 Accounting
        policies are selected and applied in a manner which ensures that the resulting
        financial information satisfies the concepts of relevance and reliability,
        thereby ensuring that the substance of the underlying transactions or other
        events is reported.
 
 The
        following significant accounting policies have been adopted in the preparation
        and presentation of the financial report:
 
 F-7
 
 PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 **(a)**
              **Principles
                  of consolidation**
 
 The
        consolidated financial statements are prepared by combining the financial
        statements of all the entities that comprise the consolidated entity, being
        the
        Company (the parent entity) and its controlled entities as defined in Accounting
        Standard AASB 1024: *Consolidated
        Accounts* .
        The
        companies comprising the consolidated entity are disclosed above. Consistent
        accounting policies are employed in the preparation and presentation of the
        consolidated financial statements.
 
 The
        consolidated financial statements include the information and results of
        each
        controlled entity from the date on which the Company obtains control and
        until
        such time as the Company ceases to control such entity.
 
 In
        preparing the consolidated financial statements, all intercompany balances
        and
        transactions, and unrealized profits arising within the consolidated entity
        are
        eliminated in full.
 
 **(b)**
              **Cash
                  and cash equivalents**
 
 For
        the
        purposes of the Statement of Cash Flows, cash includes cash on hand and in
        banks
        and money market investments readily convertible to cash.
 
 **(c)**
              **Recoverable
                  amount of non-current
                  assets**
 
 Each
        reporting period, the directors assess the recoverable amount of all non-current
        assets. Where the carrying amount of a non-current asset is greater than
        its
        recoverable amount, the asset is revalued down to its recoverable amount.
        The
        recoverable amount is estimated based on expected net cash flows discounted
        to
        their present values using a market-determined, risk-adjusted discounted
        rate.
 
 **(d)**
              **Property
                  and equipment**
 
 Property
        and equipment consists of laboratory equipment, computer equipment, furniture
        and fittings and leasehold improvements attributable to the Company’s premises
        at Parkville, Victoria, Australia and is recorded at cost. Depreciation is
        provided on a straight-line basis over the estimated useful lives of three
        to 14
        years.
 Laboratory
                    equipment
                10%-33%Computer
                    equipment
                33%Furniture
                    and fittings
                7.5%-33%Leasehold
                    improvements
                7.5%
 **(e)**
              **Intangible
                  assets and patents, research and development
                  expense**
 
 Until
        December 1999, costs associated with the acquisition and development of the
        consolidated entity’s core intellectual property were capitalized as intangible
        assets. After considering an independent valuation of the consolidated entity’s
        core intellectual property at December 1999, the directors revalued the assets
        upwards by A$14,661,942 to A$16,500,000. The revaluation was recorded in
        the
        asset revaluation reserve in equity. Subsequent to the revaluation, all costs
        associated with the acquisition and development of core intellectual property
        are charged to patents, research and development expense.
 
 In
        accordance with Australian Accounting Standard AASB 1041: *Revaluation
        of Non-Current Assets* (“AASB
        1041”), on July 1, 2000 the directors deemed the revalued carrying amount of
        core intellectual property to be cost for financial reporting purposes.
 
 Core
        intellectual property was amortized on a straight-line basis over a period
        of 15
        years, being the period in which the future benefits are expected to arise.
        The
        directors regularly reviewed the carrying value of core intellectual property
        to
        ensure its carrying value did not exceed its recoverable amount.
 
 F-8
 
  PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 As
        a
        result of the cancellation of a clinical study for the compound PBT-1 in
        April
        2005 due to toxicity issues, the consolidated entity reviewed the carrying
        value
        of the core intellectual property and resolved to impair the value to A$nil
        as
        of June 30, 2005.
 
 **(f)**
              **Payables**
 
 Liabilities
        for trade creditors and other amounts are carried at cost, which is the fair
        value of the consideration to be paid in the future for goods and services
        received, whether or not billed to the consolidated entity.
 
 Payables
        to related parties are carried at the principal amount.
 
 **(g)**
              **Share
                  capital**
 
 Ordinary
        share capital is recognized at the fair value of the consideration received
        by
        the consolidated entity, as determined by the directors.
 
 **(h)**
              **Revenue
                  recognition**
 
 Revenue
        is recognized to the extent that it is probable that the economic benefits
        will
        flow to the entity and the revenue can be reliably measured.
 
 Interest
 
 Interest
        income is recognized as earned when collectibility is reasonably
        assured.
 
 Government
        grants
 
 Government
        grants are recorded as income when key milestones set within each agreement
        are
        achieved and accepted by all parties to the grant. The agreements comprise
        different phases based on product development. Milestones are based on the
        phases of each product development, for example Phase 1, Phase 2 and Phase
        3.
        Revenue is not recognized prior to acceptance that the milestones have been
        achieved, as collectibility is not assured until this point is reached. Once
        each milestone is reached and approved, the grantor is obligated to pay and
        there are no further significant obligations as to that part of the milestone.
        Grant income for achievement of such milestones is agreed between the parties
        in
        legally binding contracts. Revenue for each milestone achieved is fixed up
        front.
 
 Reimbursements
 
 Reimbursements
        of expenses are recognized as revenue when the reimbursement is received
        and the
        related expenses have been incurred.
 
 Corporate
        partner revenues
 
 Corporate
        partner revenues are comprised of amounts earned under agreements with Schering
        A.G. and Neuroscience Victoria Ltd. for certain research and development
        activities. Revenues are recognized as earned on a straight line basis over
        the
        lives of the relevant agreements. The straight line basis is considered
        appropriate as the agreements do not contain clearly defined milestones.
        Such
        agreements are performed on a "best efforts" basis with no guarantee of either
        technological or commercial success.
 
 F-9
 
 PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 **(i)**
              **Income
                  tax**
 
 Tax-effect
        accounting is applied using the liability method whereby income tax is regarded
        as an expense and is calculated on the accounting profit after allowing for
        permanent differences. To the extent timing differences occur between the
        time
        items are recognized in the financial statements and when items are taken
        into
        account in determining taxable income, the net related taxation benefit or
        liability, calculated at current rates, is disclosed as a future income tax
        benefit or a provision for deferred income tax. The net future income tax
        benefit relating to tax losses is not carried forward as an asset unless
        the
        benefit is virtually certain of being realized. The future income tax benefit
        relating to timing differences is not carried forward as an asset unless
        its
        realization is assured beyond reasonable doubt.
 
 Where
        assets are revalued, no provision for potential capital gains tax has been
        made.
 
 **(j)**
              **Employee
                  entitlements**
 
 Provision
        is made for employee entitlement benefits accumulated as a result of employees
        rendering services up to the reporting date. These benefits include wages
        and
        salaries, annual leave and long service leave.
 
 Employee
        entitlements expenses and revenues arising in respect of the following
        categories:
 
 ·
              Wages
                  and salaries, non-monetary benefits, annual leave, long service
                  leave,
                  sick leave and other leave entitlements;
                  and
 ·
              Other
                  types of employee entitlements;
 
 are
        charged against profits on a net basis in their respective
        categories.
 
 The
        value
        of the options issued under the Employee and Consultants Option Plans described
        in Note 15(b) are not being charged as an expense when they have been issued
        to
        an employee or director.
 
 **(k)**
              **Loss
                  per share**
 
 Basic
        loss per share is determined by dividing the loss from ordinary activities
        after
        income tax by the weighted average number of ordinary shares outstanding
        during
        the period. The computation of diluted loss per share is similar to basic
        loss
        per share, except that it assumes the potentially dilutive securities, such
        as
        share options and warrants, were converted to shares as of the beginning
        of the
        period. For all periods presented, diluted loss per share is equivalent to
        basic
        loss per share as the potentially dilutive securities are excluded from the
        computation of diluted loss per share because the effect is anti-dilutive.
        See
        Note 18.
 
 **(l)**
              **Financial
                  instruments issued by the consolidated
                  entity**
 
 Debt
        and equity instruments
 
 Debt
        and
        equity instruments are classified as either liabilities or as equity in
        accordance with the substance of the contractual arrangement.
 
 Transaction
        costs on the issue of equity instruments
 
 Transaction
        costs arising on the issue of equity instruments are recognized directly
        in
        equity as a reduction of the proceeds of the equity instruments to which
        the
        costs relate. Transaction costs are the costs that are incurred directly
        in
        connection with the issue of those equity instruments and which would not
        have
        been incurred had those instruments not been issued.
 
 F-10
 
  PRANA
            BIOTECHNOLOGY LIMITED (A
              Development Stage
              Enterprise)
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
              noted)
 
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 Interest
        and dividends
 
 Interest
        and dividends are classified as expenses or as distributions of profit
        consistent with the Statements of Financial Position classification of the
        related debt or equity instruments or component parts of compound
        instruments.
 
 **(m)**
              **Goods
                  and services tax**
 
 Revenues,
        expenses and assets are recognized net of the amount of goods and services
        tax
        (GST), except:
 
 i.
              Where
                  the amount of GST incurred is not recoverable from the taxation
                  authority,
                  it is recognized as part of the cost of acquisition of an asset
                  or as part
                  of an item of expense; or
 ii.
              For
                  receivables and payables which are recognized inclusive of
                  GST.
 
 The
        gross
        amount of GST recoverable from, or payable to, the taxation authority is
        included as part of receivables or payables.
 
 Cash
        flows attributable to GST are included in the Statements of Cash Flows on
        a
        gross basis. The GST component of cash flows arising from investing and
        financing activities which is recoverable from, or payable to, the taxation
        authority is classified as operating cash flows.
 
 **(n)**
              **Receivables**
 
 Trade
        receivables and other receivables are recorded at amounts due less any provision
        for doubtful debts.
 
 **(o)**
              **Foreign
                  currency**
 
 Foreign
        currency transactions
 All
        foreign currency transactions during the financial year are brought to account
        using the exchange rate in effect at the date of the transaction. Accounts
        payable and receivable balances at reporting date are translated at the exchange
        rate in effect at that date. Exchange rate differences are recognized in
        net
        profit and loss in the period in which they arise.
 
 Foreign
        operations
 Financial
        statements of integrated foreign operations are translated at reporting date
        using the temporal method with exchange differences being taken to net profit
        or
        loss for the period.
 
 **(p)**
              **Start-up
                  and organization costs**
 
 Costs
        of
        start-up activities and organizational costs are expensed as
        incurred.
 
 **(q)**
              **Reclassifications**
 
 Certain
        prior year amounts have been reclassified to conform to the current year
        presentation.
 
 F-11
 PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 **(r)**
              **Leased
                  assets**
 
 A
        finance
        lease is one which effectively transfers from the lessor to the lessee
        substantially all the risks and benefits incidental to ownership of the leased
        property. Leased assets classified as finance leases are recognized as assets.
        The amount initially brought to account is the present value of minimum lease
        payments. Finance leased assets are amortized on a straight line basis over
        the
        estimated useful life of the asset. Finance lease payments are allocated
        between
        interest expense and reduction of lease liability over the term of the lease.
        The interest expense is determined by applying the interest rate implicit
        in the
        lease to the outstanding lease liability at the beginning of each lease payment
        period.
 
 Operating
        lease payments are recognized as an expense on a basis which reflects the
        pattern in which economic benefits from the leased asset are
        consumed.
 
 **(s)**
              **Provisions**
 
 Provisions
        are recognized when the consolidated entity has a present obligation, the
        future
        sacrifice of economic benefits is probable, and the amount of the provision
        can
        be measured reliably.
 
 When
        some
        or all of the economic benefits required to settle a provision are expected
        to
        be recovered from a third party, the receivable is recognized as an asset
        if it
        is probable that recovery will be received and the amount of the receivable
        can
        be measured reliably.
 
 The
        amount recognized as a provision is the best estimate of the consideration
        required to settle the present obligation at reporting date, taking into
        account
        the risks and uncertainties surrounding the obligation. Where a provision
        is
        measured using the cash flows estimated to settle the present obligation,
        its
        carrying amount is the present value of those cash flows.
 
 **(t)**
              **Adoption
                  of Australian Equivalents to International Financial Reporting
                  Standards
                  (Unaudited)**
 
 The
        consolidated entity will be required to prepare financial statements that
        comply
        with Australian equivalents to International Financial Reporting Standards
        (“A-IFRS”) for reporting periods beginning on or after January 1, 2005.
        Accordingly, the consolidated entity’s first half-year report prepared under
        A-IFRS will be for the half-year reporting period ending December 31, 2005,
        and
        its first annual financial report prepared under A-IFRS will be for the year
        ending June 30, 2006.
 
 The
        consolidated entity has completed an A-IFRS impact study, including the
        formulation of the A-IFRS accounting polices that are intended to be adopted
        from July 1, 2005. The likely impact of the accounting policy changes on
        the
        results and financial position of the consolidated entity has been
        determined.
 
 The
        following Pro Forma Consolidated Statements of Financial Performance and
        Financial Position outline the impact on the current year result and financial
        position of the consolidated entity had the financial statements been prepared
        using A-IFRS, based on the directors’ accounting policy decisions current at the
        date of this financial report. Users of the financial reports should note
        that
        further developments in A-IFRS (for example, the release of further
        pronouncements by the Australian Accounting Standards Board and the Urgent
        Issues Group), if any, may result in changes to the accounting policy decisions
        made by the directors to date, and, consequently, the likely impacts outlined
        in
        the following pro forma financial statements.
 
 The
        directors may, at any time until the completion of the consolidated entity’s
        first A-IFRS compliant financial report, elect to revisit and, where considered
        necessary, revise the accounting policies applied in preparing the pro forma
        financial statements.
  F-12
 
 PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 **(t)
        Adoption of Australian Equivalents to International Financial Reporting
        Standards (Unaudited) (continued)**
 
 **UNAUDITED
        PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE**
 **FOR
        THE YEAR ENDED JUNE 30, 2005**
 
 Note
              
              **Historical
                  A-GAAP**
                **Consolidated**
              
              **AASB
                  2: Share-Based Payments**
              
              **AASB
                  138: Intangible Assets**
              
              **Pro
                  Forma A-IFRS Consolidated****Revenues
                  From Ordinary Activities**
              
              
              
              
              
              2,653,113
              
              
              -
              
              
              -
              
              
              2,653,113Depreciation
                  and amortization expense
              
              
              B
              
              
              (1,165,227
              )
              
              -
              
              
              1,016,804
              
              
              (148,423
              )Patents,
                  research and development expense
              
              
              
              
              
              (7,109,839
              )
              
              -
              
              
              -
              
              
              (7,109,839
              )Patents,
                  research and development expense- related parties
              
              
              
              
              
              (577,757
              )
              
              -
              
              
              -
              
              
              (577,757
              )Legal
                  expense
              
              
              
              
              
              (1,047,448
              )
              
              -
              
              
              -
              
              
              (1,047,448
              )Employee
                  benefits expense
              
              
              A
              
              
              (2,438,303
              )
              
              (1,704,734
              )
              
              -
              
              
              (4,143,037
              )Consulting
                  fee expense
              
              
              
              
              
              (1,607,892
              )
              
              -
              
              
              -
              
              
              (1,607,892
              )Corporate
                  compliance expense
              
              
              
              
              
              (562,123
              )
              
              -
              
              
              -
              
              
              (562,123
              )Foreign
                  exchange loss
              
              
              
              
              
              (1,362,572
              )
              
              -
              
              
              -
              
              
              (1,362,572
              )Impairment
                  of intangible assets
              
              
              B
              
              
              (10,388,339
              )
              
              -
              
              
              9,602,099
              
              
              (786,240
              )Other
                  expenses from ordinary activities - related parties
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  expenses from ordinary activities
              
              
              
              
              
              (1,402,210
              )
              
              -
              
              
              -
              
              
              (1,402,210
              )**Loss
                  From Ordinary Activities Before Income Tax
                  Expense**
              
              
              
              
              
              (25,008,597
              )
              
              (1,704,734
              )
              
              10,618,903
              
              
              (16,094,428
              )**Income
                  Tax Expense Relating To Ordinary Activities**
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Net
                  Loss**
              
              
              
              
              
              (25,008,597
              )
              
              (1,704,734
              )
              
              10,618,903
              
              
              (16,094,428
              )
  F-13
 
  PRANA
            BIOTECHNOLOGY LIMITED (A
              Development Stage
              Enterprise)
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
              noted)
 
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 **(t)
        Adoption of Australian Equivalents to International Financial Reporting
        Standards (Unaudited) (continued)**
  **UNAUDITED
        PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION**
 **AS
        AT JUNE 30, 2005**
  Note
              
              **Historical
                  A-GAAP**
                **Consolidated**
              
              **AASB
                  2:**
                **Share-Based
                  Payments**
              
              **AASB
                  138 Intangible Assets**
              
              **Pro
                  Forma A-IFRS Consolidated****Current
                  Assets**Cash
                  assets
              
              
              
              
              
              21,453,304
              
              
              -
              
              
              -
              
              
              21,453,304Receivables
              
              
              
              
              
              174,476
              
              
              -
              
              
              -
              
              
              174,476Other
              
              
              
              
              
              495,165
              
              
              -
              
              
              -
              
              
              495,165**Total
                  Current Assets**
              
              
              
              
              
              22,122,945
              
              
              -
              
              
              -
              
              
              22,122,945**Non-current
                  Assets**Property
                  and equipment
              
              
              
              
              
              166,214
              
              
              -
              
              
              -
              
              
              166,214**Total
                  Non-current Assets**
              
              
              
              
              
              166,214
              
              
              -
              
              
              -
              
              
              166,214**Total
                  Assets**
              
              
              
              
              
              22,289,159
              
              
              -
              
              
              -
              
              
              22,289,159**Current
                  Liabilities**Payables
              
              
              
              
              
              2,571,181
              
              
              -
              
              
              -
              
              
              2,571,181Provisions
              
              
              
              
              
              78,602
              
              
              -
              
              
              -
              
              
              78,602**Total
                  Current Liabilities**
              
              
              
              
              
              2,649,783
              
              
              -
              
              
              -
              
              
              2,649,783**Non-current
                  Liabilities**Provisions
              
              
              
              
              
              45,200
              
              
              -
              
              
              -
              
              
              45,200**Total
                  Non-current Liabilities**
              
              
              
              
              
              45,200
              
              
              -
              
              
              -
              
              
              45,200**Total
                  Liabilities**
              
              
              
              
              
              2,694,983
              
              
              -
              
              
              -
              
              
              2,694,983**Net
                  Assets**
              
              
              
              
              
              19,594,176
              
              
              -
              
              
              -
              
              
              19,594,176**Equity**Contributed
                  equity
              
              
              A
              
              
              55,405,707
              
              
              1,704,734
              
              
              -
              
              
              57,110,441Reserves
              
              
              B
              
              
              14,661,942
              
              
              -
              
              
              (14,661,942
              )
              
              -Accumulated
                  deficit during the development stage
              
              
              A&B
              
              
              (50,473,473
              )
              
              (1,704,734
              )
              
              14,661,942
              
              
              (37,516,265
              )**Total
                  Equity**
              
              
              
              
              
              19,594,176
              
              
              -
              
              
              -
              
              
              19,594,176
  F-14
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 **(t)
        Adoption of Australian Equivalents to International Financial Reporting
        Standards (Unaudited) (continued)**
 
 The
        following explanatory notes relate to the unaudited pro forma consolidated
        financial statements above and describe the differences between the accounting
        polices under A-IFRS and the current treatment of those items under Australian
        Generally Accepted Accounting Principles (“A-GAAP”).
 
 A.
        Share-based Payments
 Under
        A-GAAP, the consolidated entity does not recognize an expense for share-based
        compensation granted to employees or directors. Under A-IFRS, the fair value
        of
        share options issued to employees and directors is determined at the grant
        date
        and expensed over the expected vesting period of the options. As permitted
        under
        A-IFRS first time adoption, the consolidated entity will not retrospectively
        recognize share-based payments that have vested before January 1,
        2005.
 
 For
        the
        year ended June 30, 2005, under A-IFRS, contributed equity will increase
        by
        A$1,704,734 and an additional employee benefits expense of the same amount
        will
        be recognized in profit and loss in relation to the options issued during
        the
        year.
 
 B.
        Intangible Assets
 Under
        A-GAAP, the consolidated entity revalued the core intellectual property to
        fair
        value in December 1999. Under A-IFRS, the revaluation is permissible only
        if
        there is an active market for the asset. As a consequence, upon transition
        to
        A-IFRS at July 1, 2004, intangible assets will decrease by A$10,208,582 with
        an
        associated decrease in the asset revaluation reserve of A$14,661,942 and
        accumulated losses of A$4,453,360 at that date.
 
 Under
        A-IFRS, internally generated intangible assets from expenditure on research
        activities are not recognizable. As a consequence, upon transition to A-IFRS
        at
        July 1, 2004, intangible assets will decrease by A$410,321 with a corresponding
        increase in accumulated deficit at that date.
 
 As
        a
        result of the above transition adjustments, the carrying value of the intangible
        assets at 1 July 2004 was A$869,440.
 
 The
        impact of the above transition adjustment to A-IFRS for the year ended June
        30,
        2005 is that the amortization expense will decrease by A$1,016,804 and the
        impairment of intangible assets will decrease by A$9,602,099. In addition,
        the
        asset revaluation reserve as at June 30, 2005 will decrease by
        A$14,661,942.
 
 C.
        Financial Instruments
 The
        directors have elected not to apply the first-time adoption exemption available
        to Prana to defer the date of transition of AASB 132: *Financial
        Instruments: Disclosure and Presentation* and AASB
        139: *Financial
        Instruments: Recognition and Measurement'* to July
        1,  2005.
        This has nil effect on the consolidated financial statements.
 
 D.
        Reconciliation of Accumulated Deficit as at July 1, 2004
  ConsolidatedAccumulated
                  deficit under A-GAAP
              
              
              (25,464,876
              )Intangible
                  assets - reversal of amortization from revaluation
              
              
              4,453,360Intangible
                  assets - derecognition of research expenditure
              
              
              (410,321
              )Accumulated
                  deficit under A-IFRS
              
              
              (21,421,837
              )
 
 E.
        Reconciliation of Contributed Equity as at July 1, 2004
 There
        were no adjustments to the Contributed Equity of the consolidated entity
        at July
        1,  2004.
        Contributed Equity under A-GAAP and under A-IFRS at July 1,  2004
        was
        A$49,505,493.
 
 F-15
 
  PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 
 **1**  **BACKGROUND
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 **(t)
        Adoption of Australian Equivalents to International Financial Reporting
        Standards (Unaudited) (continued)**
 
 F.
        Reconciliation of the Asset Revaluation Reserve as at July 1,
        2004
 
 ConsolidatedAsset
                  revaluation reserve under A-GAAP
              
              
              14,661,942Intangible
                  assets - reversal of revaluation
              
              
              (14,661,942
              )Asset
                  revaluation reserve under A-IFRS
              
              
              -
 
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003****2.
                  REVENUE FROM ORDINARY ACTIVITIES**Interest
                  - Other persons/corporations
              
              
              892,135
              
              
              211,327
              
              
              111,686Government
                  grant (i)
              
              
              629,692
              
              
              647,400
              
              
              967,000Nasdaq
                  reimbursements (ii)
              
              
              -
              
              
              -
              
              
              231,304Corporate
                  partner revenues (iii)
              
              
              1,125,000
              
              
              1,462,500
              
              
              506,250Other
                  revenues
              
              
              6,286
              
              
              -
              
              
              238Total
                  revenues from ordinary activities
              
              
              2,653,113
              
              
              2,321,227
              
              
              1,816,478
 (i)
        On
        July 26, 2001, the consolidated entity announced the grant of a A$1.74 million
        START grant from the Australian Industry Research and Development Board to
        expand the consolidated entity s core intellectual property for drug treatment
        of neurodegenerative diseases. During the year ended June 30, 2003, the
        consolidated entity met the revenue recognition criteria to record A$967,000
        of
        the grant as revenue. This grant was completed ahead of schedule on June
        30,
        2003. At June 30, 2003, revenue was over accrued by A$21,750.
 
 On
        May 5,
        2003, the consolidated entity announced a Biotechnology Innovation Fund grant
        of
        A$227,252 from the Australian Industry Research and Development Board to
        research the development of an immunotherapy from Alzheimer’s Disease. During
        the years ended June 30, 2005 and 2004, the consolidated entity met the revenue
        recognition criteria to record revenue of A$101,689 and A$125,515, respectively.
        This grant was completed in January 2005.
 
 On
        February 18, 2004, the consolidated entity announced a further START grant
        of
        A$1.35 million from the Australian Industry Research and Development Board
        to
        take its second generation drug candidate for Alzheimer’s disease, PBT-2,
        through safety testing and Phase 1 Clinical Trials. During the years ended
        June
        30, 2005 and 2004, the Company met the revenue recognition criteria to record
        revenue of A$528,003 and A$543,635, respectively.
 
 (ii)
        In
        September 2002, the Company listed on the NASDAQ Capital Market. Under an
        agreement with the Bank of New of York, 50% of the costs associated with
        the
        listing were reimbursed. This reimbursement of A$231,304 was recognized as
        revenue in the year ended June 30, 2003.
 
 (iii)
        In
        March 2003, Prana entered into various agreements with Schering A.G. and
        Neuroscience Victoria Ltd. for certain research and development activities.
        The
        revenue under these agreements is recognized as earned on a straight line
        basis
        over the lives of the relevant agreements.
 
 F-16
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003****3.
                  EXPENSES FROM ORDINARY ACTIVITIES**Depreciation
                  of non-current assetsEquipment
              
              
              65,223
              
              
              95,002
              
              
              85,971Amortization
                  of non-current assetsCore
                  intellectual property
              
              
              1,100,004
              
              
              1,100,004
              
              
              1,100,002Total
                  depreciation and amortization expense
              
              
              1,165,227
              
              
              1,195,006
              
              
              1,185,973
 
 
 Patents,
                  research and development expenseResearch
                  and development
              
              
              7,109,839
              
              
              4,853,536
              
              
              1,242,481Research
                  and development - related parties
              
              
              577,757
              
              
              379,045
              
              
              475,289Patents
              
              
              -
              
              
              -
              
              
              143,525Total
                  patents, research and development expense
              
              
              7,687,596
              
              
              5,232,581
              
              
              1,861,295Rental
                  expense under operating leases
              
              
              105,911
              
              
              6,947
              
              
              -
 
 **4.
                  INCOME TAX**(a)Prima
                  facie income tax benefit calculated on the loss from ordinary activities
                  before income tax:Income
                  tax benefit calculated at 30%
              
              
              7,502,579
              
              
              2,965,684
              
              
              1,375,451Effect
                  of lower tax rates of tax on overseas income
              
              
              (4,567
              )
              
              -
              
              
              -(Over)/under
                  provision of income tax in previous year
              
              
              2,258,204
              
              
              1,052,868
              
              
              -Non-deductible
                  amortization expense
              
              
              (330,001
              )
              
              (330,001
              )
              
              (330,001
              )Other
                  non-deductible expenses
              
              
              (3,426,262
              )
              
              (497,360
              )
              
              (300,312
              )Timing
                  differences and tax losses not brought to account as future income
                  tax
                  benefits (Note 4(b))
              
              
              (5,999,953
              )
              
              (3,191,191
              )
              
              (745,138
              )Income
                  tax expense relating to ordinary activities
              
              
              -
              
              
              -
              
              
              -(b)Potential
                  future tax benefits at 30% not brought to account attributable
                  to:Tax
                  losses - revenue
              
              
              11,700,174
              
              
              6,097,949
              
              
              3,005,525Timing
                  differences
              
              
              506,046
              
              
              108,318
              
              
              9,55112,206,220
              
              
              6,206,267
              
              
              3,015,076
  F-17
 
 PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **4**  **INCOME
        TAX (continued)**
 
 The
        consolidated entity has future income tax benefits of tax losses not recognized
        as assets because recovery is not virtually certain. Such benefits will only
        be
        obtained if:
  (iii)
              future
                  assessable income is derived of a nature and of an amount sufficient
                  to
                  enable the benefit to be realized;
 (ii)
              the
                  conditions for deductibility imposed by tax legislation continue
                  to be
                  complied with; and
 (iii)
              no
                  changes in tax legislation adversely affect the consolidated entity
                  in
                  realizing the benefit.
 
 The
        consolidated entity has no franking credits available at year end.
 
 **June
                  30,****2005**
              
              **2004****5.
                  CURRENT RECEIVABLES**Government
                  grant receivable (inclusive of GST)
              
              
              -
              
              
              1,390Sundry
                  debtors and other
              
              
              121,037
              
              
              39,571Goods
                  and services tax receivable
              
              
              53,439
              
              
              51,956174,476
              
              
              92,917
 
 **6.
                  OTHER ASSETS**Prepayments
              
              
              495,165
              
              
              71,609Withholding
                  tax
              
              
              -
              
              
              1,160495,165
              
              
              72,769
 
 **7.
                  PROPERTY AND EQUIPMENT**Gross
                  carrying amountBalance
                  at beginning of year
              
              
              506,523
              
              
              372,161Additions
              
              
              50,466
              
              
              134,362Disposals
              
              
              -
              
              
              -Balance
                  at end of year
              
              
              556,989
              
              
              506,523Accumulated
                  depreciationBalance
                  at beginning of year
              
              
              (325,552
              )
              
              (230,550
              )Disposals
              
              
              -
              
              
              -Depreciation
                  expense
              
              
              (65,223
              )
              
              (95,002
              )Balance
                  at end of year
              
              
              (390,775
              )
              
              (325,552
              )Net
                  book value at end of year
              
              
              166,214
              
              
              180,971
 Aggregate
        depreciation allocated during the year is recognized as an expense and disclosed
        in Note 3.
  F-18
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 
 **7.**  **PROPERTY
        AND EQUIPMENT (continued)**
 
 **June
                  30,****2005**
              
              **2004**Laboratory
                  equipment, at cost
              
              
              325,899
              
              
              325,899Less
                  accumulated depreciation
              
              
              (314,707
              )
              
              (292,340
              )Total
                  laboratory equipment
              
              
              11,192
              
              
              33,559Computer
                  equipment, at cost
              
              
              116,652
              
              
              81,109Less
                  accumulated depreciation
              
              
              (64,510
              )
              
              (31,204
              )Total
                  computer equipment
              
              
              52,142
              
              
              49,905Furniture
                  and fittings, at cost
              
              
              43,039
              
              
              29,304Less
                  accumulated depreciation
              
              
              (5,636
              )
              
              (1,417
              )Total
                  furniture and fittings
              
              
              37,403
              
              
              27,887Leasehold
                  improvements, at cost
              
              
              71,399
              
              
              70,211Less
                  accumulated depreciation
              
              
              (5,922
              )
              
              (591
              )Total
                  leasehold improvements
              
              
              65,477
              
              
              69,620Total
              
              
              166,214
              
              
              180,971
 
 
 **8.
                  INTANGIBLE ASSETS**Core
                  intellectual property - at deemed cost
              
              
              16,500,000
              
              
              16,500,000Accumulated
                  amortization
              
              
              (6,111,661
              )
              
              (5,011,657
              )Impairment
                  of core intellectual property
              
              
              (10,388,339
              )
              
              --
              
              
              11,488,343
  Aggregate
        amortization allocated during the year is recognized as an expense and disclosed
        in Note 3.
 
 The
        Intellectual Property was impaired on June 30, 2005 following the announcement
        to the market in April 2005 concerning the cessation of the PBT-1 clinical
        trial.
 
 F-19
 PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 
 **June
                  30,****2005**
              
              **2004**Notes**9.
                  PAYABLES (CURRENT)**Trade
                  creditors
              
              
              
              
              
              1,235,320
              
              
              336,779Accrual
                  for settlement of patent dispute
              
              
              
              
              
              -
              
              
              971,764Accrued
                  patents, research and development expenses
              
              
              
              
              
              171,031
              
              
              483,289Accrued
                  legal expense
              
              
              
              
              
              189,199
              
              
              72,059Accrued
                  employee benefits expense
              
              
              
              
              
              192,386
              
              
              5,894Accrued
                  consulting expense
              
              
              
              
              
              476,033
              
              
              90,256Accrued
                  corporate compliance expense
              
              
              
              
              
              148,815
              
              
              96,400Other
                  accrued expenses
              
              
              
              
              
              76,934
              
              
              191,951Deferred
                  revenue
              
              
              
              
              
              56,463
              
              
              155,261Amounts
                  payable to Directors
              
              
              
              
              
              25,000
              
              
              205,258Amounts
                  payable to Director-related entity
              
              
              21
              
              
              -
              
              
              53,0392,571,181
              
              
              2,661,950**10.
                  PROVISIONS**CurrentAnnual
                  leave
              
              
              15
              
              
              78,602
              
              
              42,597Non-CurrentLong
                  service leave
              
              
              15
              
              
              45,200
              
              
              8,292
 
 **June
                  30,****2005**
              
              **2004**
              
              **2003**Notes**11.
                  CONTRIBUTED EQUITY****(a)****Contributed
                  equity**Ordinary
                  shares fully paid
              
              
              11(b)
              
              
              54,662,445
              
              
              49,505,493
              
              
              16,733,023Options
                  fully paid
              
              
              11(c)
              
              
              289,699
              
              
              -
              
              
              8,000Warrants
                  fully paid
              
              
              11(d)
              
              
              453,563
              
              
              -
              
              
              -55,405,707
              
              
              49,505,493
              
              
              16,741,023
 
 **(b)**  **Movements
          in shares on issue**
  **June
                    30,****2005**
                
                **2004**
                
                **2003****Number
                    of Shares**
                
                **$**
                
                **Number
                    of Shares**
                
                **$**
                
                **Number
                    of Shares**
                
                **$**Beginning
                    of the year
                
                
                115,984,380
                
                
                49,505,493
                
                
                66,187,303
                
                
                16,733,023
                
                
                58,612,750
                
                
                12,993,468Movement
                    during the year
                
                
                11,334,880
                
                
                5,156,952
                
                
                49,797,077
                
                
                32,772,470
                
                
                7,574,553
                
                
                3,739,555End
                    of the year
                
                
                127,319,260
                
                
                54,662,445
                
                
                115,984,380
                
                
                49,505,493
                
                
                66,187,303
                
                
                16,733,023
 
 F-20
 
  PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 
 **11**  **CONTRIBUTED
        EQUITY (continued)**
 
 Details
        of share issuances are as follows:
 **Date**
                **Details**
                **Notes**
                **Number**
                **Issue
                    Price**
                **$**July
                    8, 2002
                Exercise
                    of options
                
                4,000
                0.50
                2,000July
                    10, 2002
                Exercise
                    of options
                
                13,274
                0.50
                6,637July
                    12, 2002
                Non-cash
                    share issue in consideration for services provided by
                    consultants
                (i)
                13,550
                2.02
                27,371September
                    18, 2002
                Exercise
                    of options
                
                32,000
                0.50
                16,000September
                    30, 2002
                Exercise
                    of options
                
                25,000
                0.50
                12,500October
                    15, 2002
                Exercise
                    of options
                
                20,081
                0.50
                10,040November
                    20, 2002
                Exercise
                    of options
                
                113,000
                0.50
                56,500November
                    22, 2002
                Exercise
                    of options
                
                33,072
                0.50
                16,536November,
                    25 2002
                Exercise
                    of options
                
                7,000
                0.50
                3,500December
                    4, 2002
                Non-cash
                    share issue in consideration for services provided by
                    consultants
                (i)
                15,318
                1.74
                26,653December
                    12, 2002
                Exercise
                    of options
                
                50,000
                0.50
                25,000January
                    8, 2003
                Exercise
                    of options
                
                50,000
                0.50
                25,000January
                    22, 2003
                Exercise
                    of options
                
                2,620
                0.50
                1,310January
                    30, 2003
                Exercise
                    of options
                
                9,700
                0.50
                4,850January
                    30, 2003
                Non-cash
                    share issue in consideration for services provided by
                    consultants
                (i)
                118,101
                0.98
                115,739February
                    14, 2003
                Exercise
                    of options
                
                499,403
                0.50
                249,702February
                    20, 2003
                Exercise
                    of options
                
                483,746
                0.50
                241,873February
                    28, 2003
                Exercise
                    of options
                
                2,530,483
                0.50
                1,265,242March
                    5, 2003
                Exercise
                    of options
                
                3,107,891
                0.50
                1,553,945March
                    15, 2003
                Exercise
                    of options
                
                25,000
                0.50
                12,500March
                    2003
                Underwriting
                    costs
                (ii)
                -
                -
                (144,000)April
                    3, 2003
                Exercise
                    of options
                
                421,314
                0.50
                210,657Year
                    ended
                  June30
                    ,2003
                Total
                
                7,574,553
                
                3,739,555August
                    11, 2003
                Exercise
                    of options
                
                50,000
                0.50
                25,000August
                    13, 2003
                Exercise
                    of options
                
                25,000
                0.50
                12,500August
                    27, 2003
                Exercise
                    of options
                
                16,000
                0.50
                8,000August
                    27, 2003
                Non-cash
                    share issue in consideration for services provided by
                    consultants
                (i)
                70,768
                0.70
                49,538August
                    29, 2003
                Exercise
                    of options
                
                34,000
                0.50
                17,000September
                    16, 2003
                Share
                    issue to professional investors for cash
                
                7,102,853
                0.70
                4,971,997January
                    12, 2004
                Non-cash
                    share issue to directors
                (iii)
                249,999
                0.48
                120,000January
                    12, 2004
                Non-cash
                    share issue in consideration for services provided by
                    consultants
                (i)
                67,955
                0.64
                43,491February
                    20, 2004
                Non-cash
                    share issue in consideration for services provided by
                    consultants
                (i)
                155,502
                0.55
                85,526
 
 F-21
 
 PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **11**  **CONTRIBUTED
          EQUITY (continued)**
 Date
                Details
                Notes
                Number
                Issue
                    Price
                $April
                    8, 2004
                Exercise
                    of options
                
                200,000
                0.70
                140,000April
                    15, 2004
                Exercise
                    of options
                
                100,000
                0.70
                70,000April
                    16, 2004
                Exercise
                    of options
                
                200,000
                0.50
                100,000April
                    16, 2004
                Exercise
                    of options
                
                200,000
                0.70
                140,000April
                    20, 2004
                Exercise
                    of options
                
                300,000
                0.50
                150,000April
                    22, 2004
                Exercise
                    of options
                
                200,000
                0.50
                100,000May
                    10, 2004
                Non-cash
                    share issue to consultant Professor Ashley Bush as per consulting
                    contract
                    (Note 14)
                (i)
                825,000
                0.83
                684,750June
                    1, 2004
                Share
                    issued to US investors for cash
                
                40,000,000
                0.72
                28,881,609Expired
                    options
                
                -
                -
                8,000Capital
                    raising costs
                
                -
                -
                (2,834,941)Year
                    ended
                  June
                    30, 2004
                Total
                
                49,797,077
                
                32,772,470August
                    9, 2004
                Non-cash
                    share issue in settlement of litigation
                (iv)
                1,350,000
                0.56
                756,000September
                    16, 2004
                Non-cash
                    share issue in consideration for services provided by
                    consultants
                (i)
                49,775
                0.82
                40,816December
                    8, 2004
                Exercise
                    of options
                
                9,506,666
                0.50
                4,753,333December
                    17, 2004
                Non-cash
                    share issue to directors
                (iii)
                249,999
                0.48
                120,000February
                    21, 2005
                Non-cash
                    share issue in consideration for services provided by
                    consultants
                (i)
                178,440
                0.55
                98,142Capital
                    raising costs
                (v)
                -
                -
                (611,339)Year
                    ended
                  June
                    30, 2005
                
                
                11,334,880
                
                5,156,952
  (i)
              The
                  consolidated entity recognized non-cash compensation expense for
                  shares
                  issued in consideration for services provided by consultants based
                  on
                  either the directors’ valuation of the services rendered or the shares
                  issued.
  (ii)
              Underwriters
                  subscribed the balance of the listed options with an expiration
                  date of
                  March 1, 2003 that had not been exercised by existing option holders
                  and
                  charged A$144,000 for their
                  services.
 
 (iii)
              The
                  base fee for three of the Company’s directors was paid by the issue of
                  83,333 shares each as approved at the 2003 and 2004 Annual General
                  Meetings.
 
 (iv)
              The
                  Company settled a litigation dispute with P.N. Gerolymatos via
                  the issue
                  of 1,350,000 shares valued as of the date the settlement agreement
                  was
                  signed.
 
 (v)
              The
                  capital raising costs incurred in fiscal year 2005 include the
                  issue of
                  warrants to a consultant as part of the US capital raising that
                  occurred
                  in June 2004. Capital raising costs also include the issue of options
                  to a
                  consultant that assisted Prana with the June 2004 US capital raising
                  and
                  the exercise of options.
 
 F-22
  PRANA
        BIOTECHNOLOGY
        LIMITED
 (A
        Development Stage
        Enterprise)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)
 **11**  **CONTRIBUTED
          EQUITY (continued)**
 
 **(c)**  **Movements
        in share options**
  **Years
                    Ended June 30,****2005**
                
                **2004**
                
                **2003****Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**Beginning
                    of the year
                
                
                21,269,167
                
                
                -
                
                
                21,085,000
                
                
                8,000
                
                
                27,894,310
                
                
                8,000Issued
                    during the year
                
                
                3,080,000
                
                
                289,699
                
                
                1,709,167
                
                
                -
                
                
                618,274
                
                
                -Expired
                    during the year
                
                
                (11,150,501
                )
                
                -
                
                
                (200,000
                )
                
                (8,000
                )
                
                -
                
                
                -Exercised
                    during the year (Note 11(b))
                
                
                (9,506,666
                )
                
                -
                
                
                (1,325,000
                )
                
                -
                
                
                (7,427,584
                )
                
                -End
                    of the year
                
                
                3,692,000
                
                
                289,699
                
                
                21,269,167
                
                
                -
                
                
                21,085,000
                
                
                8,000
 
 Details
        of option issuances are summarized as follows.
 
 2003
 ·
              On
                  July 10, 2002, the Company issued 13,274 options to an employee
                  and
                  100,000 options to an outside consultant under the Employee and
                  Consultants Option Plan 2000 (see Note 15(b)) as a reward for services
                  rendered to the Company. Of the 100,000 options issued to the consultant,
                  one-third are exercisable beginning May 2001, another third May
                  2002 and
                  the final third May 2003. The options are exercisable until June
                  30, 2005
                  at an exercise price of A$0.50 per option. These options are forfeited
                  in
                  the event the employee or consultant terminate employment with
                  the
                  Company. 13,274 options were exercised on 10 July 2002. The balance
                  of the
                  options lapsed on June 30, 2005.
 ·
              On
                  October 31, 2002, the Company issued 100,000 options to an outside
                  consultant under the Employee and Consultants Option Plan 2000
                  (see Note
                  15(b)) as a reward for services rendered to the Company. Such options
                  were
                  exercisable on or before June 30, 2005 at an exercise price of
                  A$0.50 per
                  option. These options are forfeited in the event the consultant
                  terminates
                  employment with the Company. These options lapsed on June 30, 2005.
 ·
              On
                  October 31, 2002, the Company issued 200,000 options to an outside
                  consultant in consideration for services rendered. Such options
                  are
                  exercisable on or before October 1, 2005 at an exercise price of
                  A$0.50
                  per option.
 ·
              On
                  March 1, 2003, the Company issued 55,000 options to underwriters
                  in
                  connection with the underwriters’ subscription of the remaining balance of
                  the listed options with an expiration date of March 1, 2003 that
                  had not
                  been exercised by existing option holders. Such options were exercised
                  on
                  the same day at an exercise price of A$0.50 per option.
 ·
              On
                  June 6, 2003, the Company issued 5,000 options to an outside consultant
                  in
                  consideration for services rendered. Such options are exercisable
                  beginning March 1, 2005 through June 30, 2005 at an exercise price
                  of
                  A$1.50 per option. These options lapsed on June 30,
                  2005.
 ·
              On
                  June 6, 2003, the Company issued 145,000 options to employees under
                  the
                  Employee and Consultants Option Plan 2000 (see Note 15(b)) as a
                  reward for
                  services rendered to the Company. Of the 145,000 options, 50,000
                  options
                  are immediately exercisable, 20,000 options are exercisable beginning
                  August 1, 2003, 25,000 options are exercisable beginning December
                  25,
                  2003, and 50,000 options are exercisable beginning May 31, 2004.
                  All
                  options have an exercise price of A$0.50 per option and are exercisable
                  until June 30, 2005. These options are forfeited in the event the
                  employees terminate employment with the Company. These options
                  lapsed on
                  June 30, 2005.
 
 F-23
  PRANA
          BIOTECHNOLOGY
          LIMITED
 (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 
 **11**  **CONTRIBUTED
          EQUITY (continued)**
 
 2004
 ·
              On
                  August 8, 2003, the Company issued 10,000 options to outside consultants
                  under the Employee and Consultants Option Plan 2000 (see Note 15(b))
                  as a
                  reward for services rendered to the Company. Of the 10,000 options
                  issued
                  to the consultants, half are exercisable beginning December 1,
                  2003 and
                  the other half are exercisable beginning January 1, 2005. The options
                  are
                  exercisable until June 30, 2005 at an exercise price of A$0.50
                  per option.
                  These options are forfeited in the event the consultants terminate
                  employment with the Company. These options lapsed on June 30,
                  2005.
 ·
              On
                  September 10, 2003, the Company issued 5,000 options to an outside
                  consultant in consideration for services rendered to the Company.
                  Such
                  options are exercisable between March 2, 2005 and June 30, 2005
                  at an
                  exercise price of A$1.50 per option. These options lapsed on June
                  30,
                  2005.
 ·
              On
                  September 15, 2003, the Company issued 244,667 options to employees
                  and
                  17,500 options to outside consultants under the Employee and Consultants
                  Option Plan 2000 (see Note 15(b)) as a reward for services rendered
                  to the
                  Company. Of the 244,667 options issued to employees, 58,000 were
                  escrowed
                  until August 1, 2004, 166,667 were escrowed until May 31, 2004
                  and 20,000
                  were escrowed until August 31, 2004. Of the options issued to the
                  consultants, 2,500 are exercisable beginning July 1, 2004, 7,500
                  are
                  escrowed until July 31, 2004 and 7,500 are escrowed until August
                  31, 2004.
                  The options are exercisable until June 30, 2005 at an exercise
                  price of
                  A$0.50 per option. These options are forfeited in the event the
                  employees
                  or consultants terminate employment with the Company. These options
                  lapsed
                  on June 30, 2005.
 ·
              On
                  October 31, 2003, the Company issued 500,000 options to an outside
                  consultant in consideration for services rendered to the Company.
                  Such
                  options were exercisable on or before April 23, 2004 at an exercise
                  price
                  of A$0.70 per option. The options were exercised in April 2004.
 ·
              On
                  November 27, 2003, the Company issued 500,000 options to an outside
                  consultant under the Employee and Consultants Option Plan 2000
                  (see Note
                  15(b)) as a reward for services rendered to the Company. Such options
                  are
                  exercisable on or before June 30, 2005 at an exercise price of
                  A$0.50 per
                  option. These options lapsed on June 30,
                  2005.
 ·
              On
                  December 5, 2003, the Company issued 20,000 options to employees
                  under the
                  Employee and Consultants Option Plan 2000 (see Note 15(b)) as a
                  reward for
                  services rendered to the Company. The options are exercisable between
                  July
                  1, 2004 and June 30, 2005 at an exercise price of A$0.50 per option.
                  These
                  options are forfeited in the event the employees terminate employment
                  with
                  the Company. These options lapsed on June 30,
                  2005.
 ·
              On
                  May 10, 2004, the Company issued 412,000 options to Professor Ashley
                  Bush,
                  an outside consultant, as per the ten year consulting contract
                  with
                  Professor Bush (see Note 14). Such options are exercisable on or
                  before
                  February 1, 2007 at an exercise price of A$0.50 per option.
 2005
 ·
              On
                  December 17, 2004, the Company issued 1,600,000 options to directors
                  under
                  the 2004 Employees, Directors and Consultants Share and Option
                  Plan (see
                  Note 15(b)) in recognition of future contributions to the growth
                  and
                  success of the Company. The options are escrowed for one year from
                  the
                  date of grant and are exercisable once the ASX share price reaches
                  A$1.00
                  for five consecutive trading days. The options are exercisable
                  at A$nil
                  consideration and expire on June 30, 2010. This issue was approved
                  by
                  shareholders at the 2004 Annual General Meeting.
 ·
              On
                  December 17, 2004, the Company issued 380,000 options to a director
                  under
                  the 2004 ADS Option Plan (see Note 15(b)) as per his employment
                  contract.
                  The options vested on June 14, 2005 following an agreement between
                  Jonas
                  Alsenas and the Company on Jonas stepping down as CEO and director
                  of the
                  Company and are exercisable at US$5.00. The options expire on December
                  17,
                  2012 and upon exercise convert to ADRs (1 ADR = 10 Shares). This
                  issue was
                  approved by shareholders at the 2004 Annual General
                  Meeting.
 ·
              On
                  December 17, 2004, the Company issued 600,000 options to outside
                  consultants under the 2004 Employees, Directors and Consultants
                  Share and
                  Option Plan (see Note 15(b)) in consideration for services rendered
                  to the
                  Company. Of the 600,000 options, 400,000 options vest immediately
                  and
                  200,000 options vest quarterly until the expiration date. The options
                  are
                  exercisable until December 17, 2007 at an exercise price of A$0.50
                  per
                  option.
 
 F-24
  PRANA
          BIOTECHNOLOGY
          LIMITED
 (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **11**  **CONTRIBUTED
        EQUITY (continued)**
  ·
              On
                  February 21, 2005, the Company issued 500,000 options to the Company
                  Secretary under the 2004 Employees, Directors and Consultants Share
                  and
                  Option Plan (see Note 15(b)) as reward for services rendered to
                  the
                  Company. Such options are exercisable on or before December 17,
                  2007 at an
                  exercise price of A$0.50 per option.
  **(d)**  **Movement
        in warrants**
  **Years
                    Ended June 30,****2005**
                
                **2004**
                
                **2003****Number
                    of Warrants**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Warrants**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Warrants**
                
                **Comp.**
                  **Expense
                    ($)**Beginning
                    of the year
                
                
                3,000,000
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issued
                    during the year
                
                
                320,000
                
                
                453,563
                
                
                3,000,000
                
                
                -
                
                
                -
                
                
                -End
                    of the year
                
                
                3,320,000
                
                
                453,563
                
                
                3,000,000
                
                
                -
                
                
                -
                
                
                -
 
 Details
        of warrant issuances are summarized as follows.
 
 2004
 ·
              On
                  June 4, 2004, the Company issued 3,000,000 warrants to US investors
                  as
                  part of the 1 June 2004 US capital raising disclosed in (b) above.
                  These
                  warrants are convertible to 30,000,000 shares (3,000,000 ADRs)
                  at an
                  exercise price of US$8.00 per warrant on or before June 4,
                  2009.
 2005
 ·
              On
                  December 17, 2004, the Company issued 320,000 warrants to an outside
                  consultant in consideration for services rendered to the Company
                  for the
                  June 1, 2004 US capital raising disclosed in (b) above. The resulting
                  compensation expense was accounted for as an issuance cost and
                  therefore
                  recorded as a deduction of contributed equity in the Statements
                  of
                  Shareholders’ Equity. The warrants are convertible to 3,200,000 shares
                  (320,000 ADRs) at an exercise price of US$8.00 per warrant on or
                  before
                  June 4, 2009.
 
 **(e)
                  Terms and conditions of contributed equity**Ordinary
                  sharesOrdinary
                  shares have the right to receive dividends as declared and, in
                  the event
                  of winding up the Company, to participate in the proceeds from
                  the sale of
                  all surplus assets in proportion to the number of and amounts paid
                  up on
                  shares held. Ordinary shares entitle their holder to one vote,
                  either in
                  person or by proxy, at a meeting of the Company.Options
                  and warrantsOption
                  holders and warrant holders do not have the right to receive dividends
                  and
                  are not entitled to vote at a meeting of the Company. Options and
                  warrants
                  may be exercised at any time from the date they vest to the date
                  of their
                  expiry. Share options convert into ordinary shares on a one for
                  one basis
                  on the date they are exercised. Warrants and US options convert
                  into
                  ordinary shares, being one warrant or US option for ten ordinary
                  shares,
                  on the date they are exercised.
 
 F-25
  PRANA
          BIOTECHNOLOGY
          LIMITED
 (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **11**  **CONTRIBUTED
        EQUITY (continued)**
 
 **(f)**  **Shares,
          options and warrants issued after reporting date**
 
 Details
        of share issuances are as follows:
  **Date**
              
              **Details**
              
              **Number**
              
              **Issue
                  Price**
              
              **Comp.
                  Expense ($)**August
                  10, 2005
              
              
              Issue
                  of shares to consultant Professor Ashley Bush as per consulting
                  contract
                  (Note 14)
              
              
              825,000
              
              
              0.37
              
              
              305,250825,000
              
              
              
              
              
              305,250
 
 Details
        of option issuances are as follows:
 
 On
        August
        10, 2005, the Company issued 413,000 options to consultant Professor Ashley
        Bush
        in accordance with the ten year consulting contract with same (see Note 14).
        The
        options were issued under the 2004 Employees, Directors and Consultants Share
        and Option Plan. Such options expire on February 1, 2007 and are exercisable
        at
        A$0.50 per option.
 
 **June
                    30,****2005**
                
                **2004**
                
                **2003**Notes**12.
                    RESERVE AND ACCUMULATED DEFICIT**Asset
                    revaluation reserve
                
                
                12(a)
                
                
                14,661,942
                
                
                14,661,942
                
                
                14,661,942Accumulated
                    deficit during the development stage
                
                
                12(b)
                
                
                (50,473,473
                )
                
                (25,464,876
                )
                
                (15,579,262
                )
  **(a)****Asset
                      revaluation reserve**iNature
                      and purpose of reserveThe
                      asset revaluation reserve is used to record increments and
                      decrements in
                      the value of non-current assetsiiMovements
                      in reserve
  Balance
                      at beginning of year
                  
                  
                  14,661,942
                  
                  
                  14,661,942
                  
                  
                  14,661,942Revaluation
                      of core intellectual property to directors’ valuation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Balance
                      at end of year
                  
                  
                  14,661,942
                  
                  
                  14,661,942
                  
                  
                  14,661,942
 On
          July
          1, 2000, as allowed by AASB 1041, the directors deemed the carrying value
          of the
          consolidated entity’s core intellectual property at valuation to be cost. As a
          result, the asset revaluation reserve is no longer available to absorb
          any
          future write-downs of core intellectual property. Subsequent to July 1,
          2000,
          future write-downs of these assets to the recoverable amount must be made
          through the Statements of Financial Performance.
 
 F-26
  PRANA
          BIOTECHNOLOGY
          LIMITED
 (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 
 **June
                  30,****2005**
              
              **2004**
              
              **2003****12****RESERVE
                  AND ACCUMULATED DEFICIT (continued)**
 
 **(b)****Accumulated
                  deficit during the development stage**Balance
                  at beginning of year
              
              
              (25,464,876
              )
              
              (15,579,262
              )
              
              (10,994,424
              )Net
                  loss for the year
              
              
              (25,008,597
              )
              
              (9,885,614
              )
              
              (4,584,838
              )Balance
                  at end of year
              
              
              (50,473,473
              )
              
              (25,464,876
              )
              
              (15,579,262
              )
 
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003****13****STATEMENTS
                  OF CASH FLOWS****(a)****Reconciliation
                  of the net loss to the net cash flows from
                  operations**Net
                  loss
              
              (25,008,597)
              
              (9,885,614)
              
              (4,584,838)**Non-cash
                  items**Depreciation
                  of property, plant and equipment
              
              65,223
              
              95,002
              
              85,971Amortization
                  of intangible assets
              
              1,100,004
              
              1,100,004
              
              1,100,002Non-cash
                  issue of shares and options in consideration of operating
                  expenses
              
              439,457
              
              983,305
              
              169,763Foreign
                  exchange loss
              
              1,362,572
              
              182,768
              
              12,481Impairment
                  of core intellectual property
              
              10,388,339
              
              -
              
              -**Changes
                  in assets and liabilities**(Decrease)/increase
                  in payables
              
              665,231
              
              2,120,733
              
              (371,116)(Increase)/decrease
                  in receivables
              
              (81,559)
              
              50,906
              
              (35,887)(Increase)/decrease
                  in prepayments
              
              (422,396)
              
              (20,407)
              
              8,005Increase
                  in provision for employee entitlements
              
              72,913
              
              25,883
              
              25,006Net
                  cash flows used in operating activities
              
              (11,418,813)
              
              (5,347,420)
              
              (3,590,613)**(b)****Reconciliation
                  of cash**Cash
                  balance comprises:-
                  cash on hand
              
              1,163,077
              
              8,531,593
              
              2,263,783-
                  term deposit/on call
              
              11,290,227
              
              21,048,805
              
              1,200,000-
                  commercial bill
              
              9,000,000
              
              -
              
              -Closing
                  cash balance
              
              21,453,304
              
              29,580,398
              
              3,463,783
 
 **(c)** **Non-cash
        financing and investing activities**
 
 During
        the years ended June 30, 2005, 2004 and 2003, the Company issued shares,
        options
        and warrants in connection with non-cash transactions. See Notes 11(b), 11(c),
        and 11(d).
 
 F-27
  PRANA
            BIOTECHNOLOGY
            LIMITED
 (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 **14**  **EXPENDITURE
        COMMITMENTS**
  The
        Company has entered into a ten year contract with Professor Ashley Bush,
        commencing February 1, 2003 which includes a payment of US$100,000 per annum
        for
        ten years increasing at the rate of the US Consumer Price Index on the
        anniversary of the contract. The contract also includes the issue of 1,650,000
        bonus shares of which 825,000 were issued during the 2004 financial year
        and
        824,000 options at an exercise price A$0.50 of which 412,000 were issued
        during
        the 2004 year. The balance of 825,000 shares and 413,000 options were issued
        on
        August 10, 2005.
 
 The
        Company moved premises in June 2004 and entered into an operating lease for
        a
        three year period totaling A$306,781, including rent increases by 3.5% per
        annum. Outgoing costs are set yearly by the landlord.
 
 Future
        minimum lease payments under the office lease are as follows as of June 30,
        2005:
 
 Fiscal
                  year2006
              
              
              106,5692007
              
              
              97,6882008
              
              
              -2009
              
              
              -2010
              
              
              -Thereafter
              
              
              -Total
              
              
              204,257
 
 The
        CFO
        Solution provides administrative support at a rate of A$15,000 per month
        which
        can be terminated with three months notice by either the Company or The CFO
        Solution.
 
 The
        Company has contracts with various consultants that are payable within less
        than
        one year.
 
 The
        Company has also entered into a contract with Geoffrey Kempler. For details
        refer to Note 19.
 
 **15.****EMPLOYEE
                    ENTITLEMENTS AND SUPERANNUATION
                    COMMITMENTS**
  Notes**(a)****Employee
                    Entitlements**The
                    aggregate employee entitlement liability is composed of:Provisions
                    (current)
                
                
                
                
                
                78,602
                
                
                42,597Provisions
                    (non-current)
                
                
                
                
                
                45,200
                
                
                8,29210
                
                
                123,802
                
                
                50,889Number
                    of employees: 17 (2004: 12 employees)
 
 **(b)**  **Employee
        and Consultants Option Plans**
  At
        the
        Annual General Meeting held on November 22, 2000, shareholders approved the
        establishment of the Employee and Consultants Option Plan 2000 designed to
        reward directors, employees and consultants for their contributions to the
        Company. It was also proposed as a method of retaining key personnel, for
        the
        growth and development of the Company’s intellectual property rights. The
        options could not be transferred and were not quoted on the ASX. At June
        30,
        2005, there were no directors, seven employees (including three executives),
        and
        five consultants participating in the Scheme. All options were issued with
        an
        exercise price of A$0.50 and expired on June 30, 2005. No further options
        will
        be issued under this plan.
 
 F-28
  PRANA
            BIOTECHNOLOGY
            LIMITED
 (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 
 **15**  **EMPLOYEE
          ENTITLEMENTS AND SUPERANNUATION COMMITMENTS
          (continued)**
 
 At
        the
        Annual General Meeting held on November 17, 2004, the shareholders approved
        the
        establishment of new Employee and Consultant Plans designed to reward directors,
        employees and/or consultants for their contributions to the Company. As per
        the
        previous plan, the new plans are to be used as a method of retaining key
        personnel for the growth and development of the Company’s intellectual property
        rights. Due to Prana’s US presence, a US plan (the 2004 ADS Option Plan) and an
        Australian plan (the 2004 Employees, Directors and Consultants Share and
        Option
        Plan) were developed. At June 30, 2005, equity had been issued to one previous
        director while a director under the 2004 ADS Option Plan and four directors
        and
        three consultants under the 2004 Employees, Directors and Consultants Share
        and
        Option Plan.. At the 2004 Annual General Meeting shareholders authorized
        the
        Company to issue in aggregate of up to 12 million ordinary shares under the
        plans. The Share Plan Committee, a sub-committee of the Remuneration Committee
        administers the Plans and is able to change the terms of the equity issued
        under
        them from the default terms.
 
 Under
        the
        2004 ADS Option Plan, the default exercise price must equal or exceed the
        fair
        value of the ADS on the date the options are awarded. The option expiry date
        cannot exceed ten years from the date the options were awarded. The default
        vesting conditions are 25% per year on the date the options were awarded.
 
 Under
        the
        2004 Employees, Directors and Consultants Share and Option Plan, the default
        exercise price must be equal or less than the market value of the ordinary
        shares on ASX on the date of grant. The option expiry date cannot exceed
        ten
        years from the date the options were granted. The default vesting conditions
        are
        25% per year on the date the options were granted.
 
 Information
        with respect to the number of options granted under the Employee and Consultants
        Option Plan 2000 is as follows:
 **Years
                    Ended June 30,****2005**
                
                **2004**
                
                **2003****Number
                    of Options**
                
                **Exercise
                    Price ($)**
                
                **Number
                    of Options**
                
                **Exercise
                    Price ($)**
                
                **Number
                    of Options**
                
                **Exercise
                    Price ($)**Beginning
                    of the year
                
                
                897,167
                
                
                0.50
                
                
                555,000
                
                
                0.50
                
                
                210,000
                
                
                0.50Issued
                    during the year
                
                
                -
                
                
                -
                
                
                792,167
                
                
                0.50
                
                
                358,274
                
                
                0.50Exercised
                    during the year
                
                
                -
                
                
                -
                
                
                (450,000
                )
                
                0.50
                
                
                (13,274
                )
                
                0.50Expired
                    during the year
                
                
                (897,167
                )
                
                0.50
                
                
                -
                
                
                -
                
                
                -
                
                
                -End
                    of the year
                
                
                -
                
                
                -
                
                
                897,167
                
                
                0.50
                
                
                555,000
                
                
                0.50
 
 Information
        with respect to the number of options granted under the 2004 Employees,
        Directors and Consultants Share and Option Plan as follows:
  **Years
                    Ended June 30,****2005**
                
                **2004**
                
                **2003****Number
                    of Options**
                
                **Exercise
                      Price ($)**
                
                **Number
                    of Options**
                
                **Exercise
                    Price ($)**
                
                **Number
                    of Options**
                
                **Exercise
                    Price ($)**Beginning
                    of the year
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issued
                    during the year
                
                
                1,600,000
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issued
                    during the year
                
                
                1,100,000
                
                
                0.50
                
                
                -
                
                
                -
                
                
                -
                
                
                -End
                    of the financial year
                
                
                2,700,000
                
                
                0.50
                
                
                -
                
                
                -
                
                
                -
 
 
 F-29
  PRANA
          BIOTECHNOLOGY
          LIMITED
 (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 
 **15**  **EMPLOYEE
          ENTITLEMENTS AND SUPERANNUATION COMMITMENTS (continued)**
 Information
        with respect to the number of shares issued under the 2004 Employees, Directors
        and Consultants Share and Option Plan as follows:
  **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003****Number
                  of Shares**
              
              **Number
                  of Shares**
              
              **Number
                  of Shares**Beginning
                  of the year
              
              
              -
              
              
              -
              
              
              -Issued
                  during the year
              
              
              428,439
              
              
              -
              
              
              -End
                  of the financial year
              
              
              428,439
              
              
              -
              
              
              -
 
 Information
        with respect to the number of options granted under the 2004 ADS Option Plan
        as
        follows:
  **Years
                    Ended June 30,****2005**
                
                **2004**
                
                **2003****Number
                    of Options**
                
                **Exercise
                    Price ($)**
                
                **Number
                    of Options**
                
                **Exercise
                    Price ($)**
                
                **Number
                    of Options**
                
                **Exercise
                    Price ($)**Beginning
                    of the year
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issued
                    during the year1
                
                
                380,000
                
                $
                US5.00
                    (A$6.57)
                
                
                -
                
                
                -
                
                
                -
                
                
                -End
                    of the year1
                
                
                380,000
                
                $
                US5.00
                    (A$6.57)
                
                
                -
                
                
                
                
                
                -
 1 These
        options are exercisable into ADRs (one US option converts to one NASDAQ ADR
        =
        ten ASX shares)
 
 The
        difference between the total market value of options issued during a financial
        year at the date of issue, and the total amount received from executives
        and
        employees is not recognized in the financial statements except for the purposes
        of determining director and executive remuneration in respect of that financial
        year as detailed in the Remuneration Report and Note 19 of the financial
        statements. The benefit to consultants is recognized in the financial statements
        over the period in which the services are provided.
 
 Options
        issued carry no dividend rights or right to vote.
 
 **16**  **CONTINGENT
        LIABILITIES**
  The
        consolidated entity is not involved in any legal or arbitration proceedings
        and,
        so far as directors are aware, no such proceedings are pending or threatened
        against the consolidated entity.
 
 **17**  **SUBSEQUENT
        EVENTS**
  No
        matters or circumstances have arisen since the end of the financial year
        which
        significantly affected or may significantly affect the operations of the
        consolidated entity, the results of those operations, or the state of affairs
        of
        the consolidated entity in subsequent financial years.
 
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003****18****LOSS
                  PER SHARE**Basic
                  loss per share
              
              
              (0.20
              )
              
              (0.13
              )
              
              (0.08
              )Weighted
                  average number of ordinary shares on issue used in the calculation
                  of
                  basic loss per share
              
              
              122,754,061
              
              
              75,701,818
              
              
              61,131,313
  The
        options and warrants in place do not have the effect to dilute the loss per
        share.
 
 F-30
  PRANA
            BIOTECHNOLOGY
            LIMITED
 (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 
 **19.****DIRECTORS’
                    AND EXECUTIVES’ REMUNERATION**(a)
                    The directors and executive information has been prepared in
                    accordance
                    with AASB 1046:*Directors
                    and Executives Disclosures by Disclosing Entities*:
  Directors
                      of Prana Biotechnology Ltd during the year:Geoffrey
                      Kempler
                  
                  Executive
                      Chairman
                    CEO
                  
                  Appointed
                      November 11, 1997
                    Re-appointed
                      June 16, 2005Colin
                      Masters
                  
                  Executive
                      Director
                  
                  Appointed
                      December 9, 1999George
                      Mihaly
                  
                  Non-Executive
                      Director
                  
                  Appointed
                      December 9, 1999Brian
                      Meltzer
                  
                  Non-Executive
                      Director
                  
                  Appointed
                      December 9, 1999Jonas
                      Alsenas
                  
                  Executive
                      Director
                  
                  Appointed
                      March 25, 2004CEO
                  
                  Appointed
                      August 9, 2004
                    Stepped
                      down June 16, 2005Specified
                      Executives of Prana Biotechnology Ltd during the year:Ross
                      Murdoch
                  
                  President
                      and COO
                  
                  Employed
                      September 20, 2002Dianne
                      Angus
                  
                  Senior
                      Vice President of IP,Licensing
                      and Research
                  
                  Employed
                      August 1, 2002Richard
                      Revelins
                  
                  Company
                      Secretary
                  
                  Appointed
                      February 7, 2002CFO
                  
                  Appointed
                      June
                      2004
  Remuneration
            of all Executive and Non-executive Directors, Officers and Employees
            of the
            Company is determined by the Board following recommendation by the Remuneration
            Committee.
 
 The
        Company is committed to remunerating Senior Executives in a manner that is
        market competitive and consistent with ‘Best Practice’ including the interests
        of Shareholders. Remuneration packages are based on fixed and variable
        components, determined by the Executive’s position, experience and performance,
        and may be satisfied via cash or equity.
 
 Non-executive
        Directors are remunerated out of the aggregate amount approved by Shareholders
        and at a level that is consistent with industry standards. Non-executive
        Directors do not receive performance based bonuses and prior Shareholder
        approval is required to participate in any issue of equity. No retirement
        benefits are payable other than statutory superannuation, if applicable.
  (b)
          Directors and Specified Executives Remuneration
 Base
                  Fee2005
              
              Cash
              
              Shares
              
              Superannuation
              
              Equity3
              
              TotalDirectors:Geoffrey
                  Kempler
              
              
              262,197
              
              
              -
              
              
              26,220
              
              
              49,562
              
              
              337,979Colin
                  Masters1
              
              
              75,000
              
              
              40,000
              
              
              -
              
              
              -
              
              
              115,000George
                  Mihaly1
              
              
              75,000
              
              
              40,000
              
              
              -
              
              
              14,869
              
              
              129,869Brian
                  Meltzer1
              
              
              50,000
              
              
              40,000
              
              
              -
              
              
              14,869
              
              
              104,869Jonas
                  Alsenas2
              
              
              696,358
              
              
              -
              
              
              -
              
              
              1,515,434
              
              
              2,211,792726,289
              
              
              120,000
              
              
              26,220
              
              
              1,594,734
              
              
              2,899,509
 1 The fee
        includes the issue of 83,333 shares each as approved at the 2004 Annual General
        Meeting valued at A$40,000 at date of issue.
 2 The fee
        includes payment relating to Jonas Alsenas stepping down as CEO per the
        Separation Agreement and General Release. See Note 19(c).
 3 The
        equity was issued as per Annual General Meeting held on November 17, 2004.
        As
        per Australian Accounting Standards, the options issued to the Directors
        have
        been valued at the grant date. As a result, the value does not reflect the
        current market price of the Company shares. The Board believe that if the
        options were valued in today’s market, they would have minimal intrinsic value
        given the exercise price and the current market price of the Company’s
        shares.
 
 F-31
 
 PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
  **19****DIRECTORS’
                  AND EXECUTIVES’ REMUNERATION
                  (continued)**
 
 2005
              
              Base
                  Fee
              
              Superannuation
              
              Equity
              
              TotalSpecified
                  ExecutivesRoss
                  Murdoch4
              
              
              275,000
              
              
              24,750
              
              
              -
              
              
              299,750Dianne
                  Angus1 & 3 & 4
              
              
              180,000
              
              
              16,200
              
              
              2,670
              
              
              198,870Richard
                  Revelins2
              
              
              60,000
              
              
              -
              
              
              110,000
              
              
              170,000515,000
              
              
              40,950
              
              
              112,670
              
              
              668,620
 1 The
        equity amount relates to equity issued in the year ended June 30, 2004 that
        vested in the current financial year.
 2 The
        equity amount relates to 500,000 options issued to Mr. Revelins for his services
        as CFO valued at grant date.
 3 Base fee
        includes additional hours worked above four days per week plus a bonus paid
        in
        recognition of additional work not otherwise remunerated in respect of PBT-1
        patent dispute and clinical trial advancement.
 4 No
        equity
        was received by these executives during the 2005 year.
 
 There
        were only three executives in the Company and consolidated entity during
        2005.
 
 The
        following Director was under contract at June 30, 2005:
  Duration
              Notice
                  Requirements
              TerminationGeoffrey
                  Kempler
              Until
                  termination by either party
              For
                  Good Reason Mr. Kempler may terminate with
                30
                  days notice
              *pay
                  remuneration entitlements up to June 1, 2010
                *accrued
                  entitlements, bonuses and equity issues
                *accelerate
                  the vesting of any unvested optionsWithout
                  Good Reason Mr. Kempler may terminate with
                90
                  days notice
              *Bonus
                  pro-rated only if termination occurs in 1styearWithout
                  Cause the Company may terminate with
                90
                  days notice
              *pay
                  remuneration entitlements up to June 1, 2010
                *accrued
                  entitlements, bonuses and equity issues
                *accelerate
                  the vesting of any unvested optionsWith
                  Cause the Company may terminate without notice
              *Bonus
                  pro-rated only if termination occurs in 1styear
 
 The
        following Senior Executives were under contract at June 30, 2005:
 
 Mr.
        R.
        Murdoch has a contract dated May 31, 2004 which provides for a base annual
        salary of A$275,000 plus superannuation at a rate of 9% and options in the
        Company to the value of 25% of the base salary per annum based on the
        achievement of performance milestones. The terms and conditions of the issue
        of
        options may be subject to change in future years as the Company develops
        its
        remuneration policies. The term of the employment contract is for a period
        of
        three years commencing on May 29, 2002. As the period has expired, the
        employment contract will continue until termination by either party. The
        employment contract can be terminated on four months notice. Accrued
        entitlements are payable upon termination. In the case of redundancy, nine
        months salary is payable and all options will vest immediately.
 
 F-32
 
  PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
 **19**  **DIRECTORS’
        AND EXECUTIVES’ REMUNERATION (continued)**
 
 Ms
        D.
        Angus has a contract dated October 21, 2003, amended in September 2004, which
        provides for a base annual salary of A$165,000 plus superannuation at a rate
        of
        9% and options in the Company to the value of 20% of the base salary per
        annum
        based on the achievement of performance milestones. The terms and conditions
        of
        the issue of options may be subject to change in future years as the Company
        develops its remuneration policies. The term of the employment contract is
        for a
        period of three years commencing on August 1, 2002. As the period has expired,
        the employment contract will continue until termination by either party.
        The
        employment contract can be terminated on four months notice. Accrued
        entitlements are payable upon termination. In the case of redundancy, nine
        months salary is payable and all options will vest immediately.
 
 2004
              
              Base
                  Fee
              
              Consultant
                  Fee
              
              Superannuation
              
              Equity
              
              TotalDirectors:Geoffrey
                  Kempler
              
              
              266,818
              
              
              -
              
              
              18,182
              
              
              -
              
              
              285,000Jonas
                  Alsenas
              
              
              32,365
              
              
              -
              
              
              -
              
              
              -
              
              
              32,365Colin
                  Masters1
              
              
              40,000
              
              
              8,333
              
              
              -
              
              
              -
              
              
              48,333George
                  Mihaly1
              
              
              40,000
              
              
              78,858
              
              
              347
              
              
              -
              
              
              119,205Brian
                  Meltzer1
              
              
              40,000
              
              
              50,000
              
              
              -
              
              
              -
              
              
              90,000419,183
              
              
              137,191
              
              
              18,529
              
              
              -
              
              
              574,903
  1 The base
        fee includes the issue of 83,333 shares each as approved at the 2003 Annual
        General Meeting valued at A$40,000 at date of issue.
 
 2004
              
              Base
                  Fee
              
              Consultant
                  Fee
              
              Superannuation
              
              Equity1
              
              TotalSpecified
                  ExecutivesRoss
                  Murdoch
              
              
              235,417
              
              
              -
              
              
              21,188
              
              
              100,748
              
              
              357,353Dianne
                  Angus
              
              
              151,827
              
              
              -
              
              
              13,665
              
              
              31,751
              
              
              197,243387,244
              
              
              -
              
              
              34,853
              
              
              132,499
              
              
              554,596
  1 The
        Black Scholes Model was used to calculate the value of these options at grant
        date.
 
 There
        were only two executives in the Company during 2004.
 
 F-33
 
 PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **19**  **DIRECTORS’
        AND EXECUTIVES’ REMUNERATION (continued)**
 
 (c)
                  Remuneration Options
 
 Options
                  Granted as Remuneration 2005:
              Granted
                  No.
              Grant
                  Date
              Value
                  per option at Grant Date
              Exercise
                  Price
              First
                  Exercise Date
              Last
                  Exercise
                DateDirectors:Geoffrey
                  Kempler1
              1,000,000
              December
                  17, 2004
              $0.51
              -
              After
                  December 17, 2005, if the share price reaches A$1.00 for 5 consecutive
                  trading days
              June
                  30, 2010George
                  Mihaly1
              300,000
              December
                  17, 2004
              $0.51
              -
              After
                  December 17, 2005, if the share price reaches A$1.00 for 5 consecutive
                  trading days
              June
                  30, 2010Brian
                  Meltzer1
              300,000
              December
                  17, 2004
              $0.51
              -
              After
                  December 17, 2005, if the share price reaches A$1.00 for 5 consecutive
                  trading days
              June
                  30, 2010Jonas
                  Alsenas2, 3
              380,000
              November
                  17, 2004
              US3.08
                  ($3.99)
              US$5.00
                  ($6.50)
              June
                  14, 2005
              December
                  17, 20121,980,000Specified
                  Executives:Richard
                  Revelins2
              500,000
              February
                  21, 2005
              $0.22
              $0.50
              February
                  21, 2005
              December
                  17, 2007500,000
 1 The
        Barrier Pricing Model was used to calculate the value of these options at
        grant
        date, being December 17, 2004.
 2 The
        Black
        Scholes Model was used to calculate the value of these options at grant date,
        being November 17, 2004 and February 21, 2005.
 3 The
        options issued to Jonas Alsenas are exercisable into ADR’s (1 ADR = 10 shares).
 
 Options
                  Granted as Remuneration 2004:
              Granted
                  No.
              Grant
                  Date
              Value
                  per option at Grant Date
              Exercise
                  Price
              First
                  Exercise Date
              Last
                  Exercise
                DateExecutives:Ross
                  Murdoch
              50,000
              6
                  June 2003
              $0.345
              $0.50
              31
                  May 2004
              30
                  June 2005Ross
                  Murdoch
              15,000
              6
                  June 2003
              $0.345
              $0.50
              25
                  December 2003
              30
                  June 2005Ross
                  Murdoch
              166,667
              15
                  September 2003
              $0.483
              $0.50
              31
                  May 2004
              30
                  June 2005Dianne
                  Angus
              20,000
              6
                  June 2003
              $0.345
              $0.50
              1
                  August 2003
              30
                  June 2005Dianne
                  Angus
              10,000
              6
                  June 2003
              $0.345
              $0.50
              25
                  December 2003
              30
                  June 2005Dianne
                  Angus
              58,000
              15
                  September 2003
              $0.483
              $0.50
              1
                  August 2004
              30
                  June 2005319,667
  F-34
 
 PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **As
                  of and For the Years Ended June 30,****2005**
              
              **2004**
              
              **2003****20.****AUDITORS’
                  REMUNERATION**Amounts
                  received or due and receivable for:-
                  audit fees
              
              
              175,481
              
              
              129,522
              
              
              126,178-
                  tax fees
              
              
              11,631
              
              
              59,580
              
              
              23,400-
                  audit related fees
              
              
              14,920
              
              
              6,900
              
              
              7,400202,032
              
              
              196,002
              
              
              156,978
 
 **21.****RELATED
                    PARTY****AND
                    SPECIFIED EXECUTIVE DISCLOSURES****Specified
                    Directors’ and Specified Executives’
                    Remuneration**Details
                    of specified directors’ and specified executives’ remuneration are
                    disclosed in note 19 to the financial
                    statements.
  **As
                    of and For the Years Ended June 30,****2005**
                
                **2004**
                
                **2003****Director-related
                    entity transactions**Kendle
                    Pty Ltd, a Director-related company to G. Mihaly until December
                    2004,
                    provided continuous analysis and reviews of the consolidated
                    entity’s
                    commercialization and intellectual property management as well
                    as clinical
                    trial management and monitoring (on normal commercial terms and
                    conditions).
                  Fees
                    paid to Kendle Pty Ltd up until December 31, 2004 were:
                
                
                577,757
                
                
                379,045
                
                
                475,289Amount
                    owing to Kendle Pty Ltd(included
                    in Payables, inclusive of GST)
                
                
                N/A
                
                
                53,039
                
                
                48,968Aroma
                    Science Pty Ltd, a Director-related company to G Kempler, provided
                    office,
                    computer administration and meeting facilities (on normal commercial
                    terms
                    and conditions) up until June 30, 2004.
                  Fees
                    paid to Aroma Science Pty Ltd during the year were:
                
                
                -
                
                
                81,470
                
                
                114,247Amount
                    owing to Aroma Science Pty Ltd(included
                    in Payables, inclusive of GST)
                
                
                -
                
                
                -
                
                
                492
 
 **Specified
        Directors’ and Specified Executives’ Equity Holdings**
 Number
          of
          Shares held by Specified Directors’ and Specified Executives’
 Balance
                  July 1, 2004
              
              Received
                  as Remuneration
              
              Options
                  Exercised
              
              Net
                  Change Other
              
              Balance
                June
                  30, 2005No.
              
              No.
              
              No.
              
              No.
              
              No.Specified
                  DirectorsGeoffrey
                  Kempler
              
              
              17,055,000
              
              
              -
              
              
              -
              
              
              -
              
              
              17,055,000Colin
                  Masters
              
              
              101,333
              
              
              83,333
              
              
              -
              
              
              -
              
              
              184,666George
                  Mihaly
              
              
              143,333
              
              
              83,333
              
              
              -
              
              
              -
              
              
              226,666Brian
                  Meltzer
              
              
              243,333
              
              
              83,333
              
              
              -
              
              
              -
              
              
              326,666Specified
                  ExecutivesRoss
                  Murdoch
              
              
              50,000
              
              
              -
              
              
              -
              
              
              -
              
              
              50,000Dianne
                  Angus
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Richard
                  Revelins
              
              
              42,808
              
              
              -
              
              
              -
              
              
              -
              
              
              42,808
  F-35
 PRANA
        BIOTECHNOLOGY
        LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 
 **21****RELATED
                  PARTY AND SPECIFIED EXECUTIVE DISCLOSURES
                  (continued)**
 
 **Specified
                  Directors’ and Specified Executives’ Equity
                  Holdings**Number
                  of Options held by Specified Directors and
                  Executives
 
 Balance
                  July
                    1, 2004
                  No.
                
                Granted
                    as Remuneration
                  No.
                
                Options
                    Exercised
                  No.
                
                Options
                    Sold
                  No.
                
                Options
                    Expired
                  No
                
                Balance
                  June
                    30, 2005
                  No.
                
                Total
                    Exercisable June 30, 2005
                  No.
                
                Total
                    Not Exercisable June 30, 2005
                  No.Specified
                    DirectorsGeoffrey
                    Kempler
                
                
                9,167,500
                
                
                1,000,000
                
                
                -
                
                
                (7,290,000
                )
                
                (1,877,500
                )
                
                1,000,000
                
                
                -
                
                
                1,000,000Colin
                    Master
                
                
                1,000,000
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,000,000
                )
                
                -
                
                
                -
                
                
                -George
                    Mihaly
                
                
                300,000
                
                
                300,000
                
                
                -
                
                
                (300,000
                )
                
                -
                
                
                300,000
                
                
                -
                
                
                300,000Brian
                    Meltzer
                
                
                300,000
                
                
                300,000
                
                
                -
                
                
                -
                
                
                (300,000
                )
                
                300,000
                
                
                -
                
                
                300,000
 Specified
            Executives
 Ross
                    Murdoch
                
                
                281,667
                
                
                -
                
                
                -
                
                
                -
                
                
                (281,667
                )
                
                -
                
                
                -
                
                
                -Dianne
                    Angus
                
                
                88,000
                
                
                -
                
                
                -
                
                
                -
                
                
                (88,000
                )
                
                -
                
                
                -
                
                
                -Richard
                    Revelins
                
                
                50,000
                
                
                500,000
                
                
                -
                
                
                -
                
                
                (50,000
                )
                
                500,000
                
                
                500,000
                
                
                -
 
 **PART
        I**
 
 F-36
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **22**  **SEGMENT
        INFORMATION**
 
 The
        consolidated entity’s activities are predominantly within Australia and cover
        research into Alzheimer’s Disease and other major age-related degenerative
        disorders.
 
 **23**  **FINANCIAL
        INSTRUMENTS**
 
 **(a)**  **Significant
        accounting policies**
 Details
        of the significant accounting policies and methods adopted, including the
        criteria for recognition, the basis of measurement and the basis on which
        revenues and expenses are recognized, in respect of each class of financial
        asset, financial liability and equity instrument are disclosed in Note 1
        to the
        financial statements.
 
 **(b)**  **Interest
        rate risk**
 The
        consolidated entity has cash on deposit which is professionally managed by
        external parties to optimize the impact of interest rate fluctuations pursuant
        to conservative investment guidelines.
 
 At
        June
        30, 2005, the consolidated entity had the following cash accounts:
 
 ·
              $31,359
                  in a six month term deposit at a fixed interest rate of 4.50% which
                  matures on November 17, 2005;
 ·
              US$5,077,088
                  ($6,667,232) in a 31 day term deposit at a fixed interest rate
                  of 2.88%
                  which matured on July 11, 2005;
 ·
              $4,591,636
                  in at call deposit accounts, earning interest of
                  5.40%;
 ·
              $194,880
                  in Australia dollar cheque accounts at variable interest rates
                  ranging
                  from 4.28% to 4.60% as of June 30,
                  2005;
 ·
              US$445,783
                  ($585,402) in various US cheque accounts at variable interest rates
                  from
                  0% to 2.80% as of June 30, 2005;
 ·
              GBP$161,425
                  ($382,595) in a GBP cheque account at a variable interest rate
                  of 2.90% as
                  of June 30, 2005;
 ·
              $9,000,000
                  30 day commercial bill with a fixed interest rate of 5.57% which
                  matured
                  on July 29, 2005; and
 ·
              $200
                  in petty cash which does not earn any interest.
 
 The
        weighted average interest rate is 4.57% and apart from usual variances in
        general rates of interest the consolidated entity is not exposed to any
        significant interest rate risk.
 
 At
        June
        30, 2004, the consolidated entity had the following cash accounts:
 
 ·
              $30,000
                  in a six month term deposit at a fixed interest rate of
                  5.20%;
 ·
              $1,600,000
                  in 120 day term deposits at fixed interest rates between 5.35%
                  and
                  5.44%;
 ·
              US$13,500,000
                  ($19,418,805) in a 27 day term deposit at a fixed interest rate
                  of
                  0.60%;
 ·
              $1,299,608
                  in Australian dollar cheque accounts at variable interest rates
                  ranging
                  from 3.97% to 4.40% as of June 30,
                  2004;
 ·
              US$5,027,554
                  ($7,231,785) in a US cheque account at a variable interest rate
                  of 0.05%
                  as of June 30, 2004; and
 ·
              $200
                  in petty cash which does not earn any interest.
 
 The
        weighted average interest rate is 0.89% and apart from usual variances in
        general rates of interest the Company was not exposed to any significant
        interest rate risk.
 
 Receivables
        and payables are non-interest bearing.
 
 F-37
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **23.**  **FINANCIAL
        INSTRUMENTS (continued)**
 
 The
        consolidated entity’s exposure to interest rates and the effective weighted
        average interest rate for classes of financial assets and liabilities is
        set out
        below:
 
 **June
                  30, 2005**
              
              **Floating**
                **Interest
                  Rate**
              
              **Fixed
                  Interest**
                **Maturing
                  in**
              
              **Non-Interest
                  bearing**
              
              **Total**
              
              **Average
                  Interest Rate****1
                  year**
                **or
                  less**
              
              **1-5
                  years**Financial
                  AssetsCash
              
              
              1,162,877
              
              
              20,290,227
              
              
              -
              
              
              200
              
              
              21,453,304
              
              
              4.57
              %Receivables
              
              
              -
              
              
              -
              
              
              -
              
              
              174,476
              
              
              174,476
              
              
              -1,162,877
              
              
              20,290,227
              
              
              -
              
              
              174,676
              
              
              21,627,780Financial
                  LiabilitiesPayables
              
              
              -
              
              
              -
              
              
              -
              
              
              2,571,181
              
              
              2,571,181
              
              
              -Provisions
              
              
              -
              
              
              -
              
              
              -
              
              
              123,802
              
              
              123,802
              
              
              --
              
              
              -
              
              
              -
              
              
              2,694,983
              
              
              2,694,983
 
 **June
                  30, 2004**
              
              **Floating**
                **Interest
                  Rate**
              
              **Fixed
                  Interest**
                **Maturing
                  in**
              
              **Non-Interest
                  bearing**
              
              **Total**
              
              **Average
                  Interest Rate****1
                  year**
                **or
                  less**
              
              **1-5
                  years**Financial
                  AssetsCash
              
              
              8,531,393
              
              
              21,048,805
              
              
              -
              
              
              200
              
              
              29,580,398
              
              
              0.89
              %Receivables
              
              
              -
              
              
              -
              
              
              -
              
              
              92,917
              
              
              92,917
              
              
              -8,531,393
              
              
              21,048,805
              
              
              -
              
              
              93,117
              
              
              29,673,315Financial
                  LiabilitiesPayables
              
              
              -
              
              
              -
              
              
              -
              
              
              2,661,950
              
              
              2,661,950
              
              
              -Provisions
              
              
              -
              
              
              -
              
              
              -
              
              
              50,889
              
              
              50,889
              
              
              --
              
              
              
              
              
              -
              
              
              -
              
              
              2,712,839
              
              
              2,712,839
 
 **(c)**  **Net
        fair values**
 The
        carrying amount of financial assets and financial liabilities recorded in
        the
        financial statements represents their respective net fair values, determined
        in
        accordance with the accounting policies disclosed in Note 1 to the financial
        statements.
 
 F-38
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **23.**  **FINANCIAL
        INSTRUMENTS (continued)**
 
 **(d)**  **Credit
        risk**
 Financial
        assets, which potentially expose the consolidated entity to concentrations
        of
        credit risk, consist primarily of cash and receivables. The consolidated
        entity’s cash and cash equivalents are placed with high credit quality financial
        institutions and receivables are presented net of any allowances for estimated
        doubtful receivables. Accordingly, the Directors believe the consolidated
        entity
        has no significant concentration of credit risk.
 
 **24**  **ADDITIONAL
        COMPANY INFORMATION**
 
 Prana
        Biotechnology Limited is a listed public company, incorporated and operating
        in
        Australia.
 Registered
                    Office
                Principal
                    Place of BusinessSuite
                    2
                Level
                    21233
                    High Street
                369
                    Royal ParadeArmadale
                    Vic 3148
                Parkville
                    Vic 3052Australia
                AustraliaTel:
                    +61 (03) 9824 8166
                Tel:
                    +61 (03) 9349 4906
 
 F-39
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)
 **25**  **RECONCILIATION
        TO US GAAP**
  The
        financial statements have been prepared in accordance with A-GAAP, which
        differ
        in certain significant respects from accounting principles generally accepted
        in
        the United States of America (“US GAAP”). The following is a summary of the
        adjustments to net loss and total equity required when reconciling such amounts
        recorded in the financial statements to the corresponding amounts in accordance
        with US GAAP, considering the differences between A-GAAP and US GAAP.
  Reconciliation
        of net loss
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003**Net
                  loss in accordance with A-GAAP
              
              
              
              
              
              (25,008,597
              )
              
              (9,885,614
              )
              
              (4,584,838
              )*US
                  GAAP adjustments*:Share-based
                  compensation
              
              
              (a)Options
                  issued to consultants for services rendered
              
              
              
              
              
              155,800
              
              
              (429,811
              )
              
              (81,610
              )Options
                  issued to directors and employees for services
                rendered
              
              
              
              
              
              (17,829
              )
              
              (87,768
              )
              
              (28,108
              )Options
                  issued to underwriters in connection with
                subscription
                  of listed options
              
              
              
              
              
              -
              
              
              -
              
              
              (26,400
              )Shares
                  issued to consultants and directors for services
                rendered
              
              
              
              
              
              (21,996
              )
              
              (33,023
              )
              
              (31,004
              )Intangible
                  assets - Core intellectual property
              
              
              (b)Reversal
                  of amortisation expense attributable to
                costs
                  capitalised under A-GAAP but expensed
                under
                  US GAAP
              
              
              
              
              
              60,670
              
              
              60,670
              
              
              60,670Reversal
                  of amortisation expense attributable to
                upward
                  asset revaluation
              
              
              
              
              
              977,463
              
              
              977,463
              
              
              977,463Reversal
                  of impairment expense attributable to costs
                capitalised
                  under A-GAAP but expensed under US
                GAAP
              
              
              
              
              
              9,804,092
              
              
              -
              
              
              -Intangible
                  assets - Capitalised patent costs
              
              
              (c)Costs
                  capitalised under US GAAP but expensed
                under
                  A-GAAP
              
              
              
              
              
              263,232
              
              
              477,390
              
              
              717,119Amortisation
                  expense attributable to above
              
              
              
              
              
              (307,806
              )
              
              (287,506
              )
              
              (247,689
              )Impairment
                  of costs capitalised under US GAAP
                but
                  expensed under A-GAAP
              
              
              
              
              
              (3,580,048
              )
              
              -
              
              
              -Deferred
                  tax effect of US GAAP adjustments
              
              
              (d)
              
              
              **-**
              
              
              **-**
              
              
              **-**Net
                  loss in accordance with US GAAP
              
              
              
              
              
              (17,675,019
              )
              
              (9,208,199
              )
              
              (3,244,397
              )Loss
                  per share in accordance with US GAAP:Basic
                  and diluted
              
              
              
              
              
              (0.14
              )
              
              (0.12
              )
              
              (0.05
              )Weighted
                  average shares - basic and diluted
              
              
              
              
              
              122,754,061
              
              
              75,701,818
              
              
              61,131,313
 
 F-40
 
  PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
            noted)
  **25**  **RECONCILIATION
            TO US GAAP (continued)**
 
 Reconciliation
            of shareholders’ equity
 
 **Years
                      Ended June 30,****2005**
                  
                  **2004**Total
                      equity in accordance with A-GAAP
                  
                  
                  
                  
                  
                  19,594,176
                  
                  
                  38,702,559*US
                      GAAP adjustments*:Intangible
                      assets - Core intellectual property
                  
                  
                  (b)Costs
                      capitalised under A-GAAP but expensed under US GAAP
                  
                  
                  
                  
                  
                  -
                  
                  
                  (910,058
                  )Reversal
                      of amortisation expense attributable to above
                  
                  
                  
                  
                  
                  -
                  
                  
                  276,415Reversal
                      of upward asset revaluation
                  
                  
                  
                  
                  
                  -
                  
                  
                  (14,661,942
                  )Reversal
                      of amortisation expense attributable to above
                  
                  
                  
                  
                  
                  -
                  
                  
                  4,453,360Intangible
                      assets - Capitalised patent costs
                  
                  
                  (c)Costs
                      capitalised under US GAAP but expensed under A-GAAP
                  
                  
                  
                  
                  
                  -
                  
                  
                  4,551,285Amortisation
                      expense attributable to above
                  
                  
                  
                  
                  
                  -
                  
                  
                  (926,663
                  )Deferred
                      tax effect of US GAAP adjustments
                  
                  
                  (d)
                  
                  
                  -
                  
                  
                  -Total
                      equity in accordance with US GAAP
                  
                  
                  
                  
                  
                  19,594,176
                  
                  
                  31,484,956
 Rollforward
        analysis of shareholders’ equity under US GAAP
 
 **Years
                  Ended June 30,****2005**
              
              **2004**Balance
                  in accordance with US GAAP, beginning of year
              
              
              
              
              
              31,484,956
              
              
              7,378,083Issuance
                  of shares in connection with private placement, net of
                issue
                  costs
              
              
              
              
              
              -
              
              
              31,018,665Issuance
                  of shares in connection with exercise of options, net of
                issue
                  costs
              
              
              
              
              
              4,708,574
              
              
              762,500Issuance
                  of options to consultants for services rendered
              
              
              (a)
              
              
              24,699
              
              
              429,811Issuance
                  of options to directors and employees for services
                  rendered
              
              
              (a)
              
              
              17,829
              
              
              87,768Issuance
                  of shares to consultants and directors for services
                  rendered
              
              
              (a)
              
              
              277,136
              
              
              1,016,328Issuance
                  of shares for legal settlement
              
              
              
              
              
              756,000
              
              
              -Net
                  loss in accordance with US GAAP
              
              
              
              
              
              (17,675,019
              )
              
              (9,208,199
              )Balance
                  in accordance with US GAAP, end of year
              
              
              
              
              
              19,594,176
              
              
              31,484,956
 
 F-41
 
 **PRANA
        BIOTECHNOLOGY LIMITED** **(A
          Development Stage
          Enterprise)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
  **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 **a.**
              **Share-based
                  compensation**
 
 *Options
        issued to consultants for services rendered*
 
 As
        disclosed in Note 11(c), the Company issued 600,000, 1,444,500 and 405,000
        share
        options to outside consultants during the years ended June 30, 2005, 2004
        and
        2003, respectively. Under A-GAAP, the Company recognized compensation expense
        based on the directors’ valuation of the options issued during the year ended
        June 30, 2005. No compensation cost was recognized in respect of the options
        issued by the Company during the years ended June 30, 2004 and 2003 under
        A-GAAP. Under US GAAP, the options issued to the outside consultants are
        accounted for under Statements of Financial Accounting Standards (“SFAS”) No.
        123: *Accounting
        for Stock Based Compensation* (“SFAS
        123”) and Emerging Issues Task Force Issue No. 96-18: *Accounting
        for Equity Instruments That Are Issued to Other than Employees for Acquiring,
        or
        in Conjunction with Selling, Goods or Services* (“EITF
        96-18”). Accordingly, the Company has calculated compensation cost based on the
        estimated fair value of the options measured on the date the services were
        completed by the respective consultants, using the Black-Scholes model with
        the
        following weighted average assumptions:
  ·
              risk-free
                  interest rate of 4.9% for 2005, 5.5% for 2004 and 4.5% for
                  2003;
 ·
              no
                  dividends;
 ·
              expected
                  volatility of 62% for 2005, 82% for 2004 and 48% for 2003;
                  and
 ·
              expected
                  life of two years for 2005, 2004, and
                  2003.
 
 The
        compensation cost is charged to operations ratably over the vesting period.
        The
        resulting difference between the A-GAAP compensation expense (if any) and
        the US
        GAAP compensation expense is recognized in the reconciliation.
 
 *Options
        issued to directors and employees for services rendered*
 
 As
        disclosed in Note 11(c), the Company issued 2,480,000, 264,667 and 158,274
        share
        options to directors and employees during the years ended June 30, 2005,
        2004
        and 2003, respectively. Under A-GAAP, no compensation cost has been recognized
        in respect of the share options issued by the Company. Under US GAAP, the
        Company has elected to account for the issuance of share options to the
        directors and employees in accordance with Accounting Principles Board (“APB”)
        Opinion No. 25: *Accounting
        for Stock Issued to Employees* and
        related interpretations (“APB 25”). Under APB 25, compensation cost is
        recognized to the extent that the quoted market price of the stock exceeds
        the
        exercise price of the options at the measurement date, and is charged to
        earnings ratably over the vesting period. For options that vest upon the
        achievement of a target stock price, compensation expense is recognized when
        the
        target is achieved.
 
 Had
        compensation cost related to the issuance of options to directors and employees
        been recorded at fair value on the date of grant in accordance with SFAS
        123,
        the consolidated entity’s net loss and loss per share amounts (calculated in
        accordance with US GAAP) would have been reduced to the pro forma amounts
        indicated below:
 
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003**US
                  GAAP net loss, as reported
              
              
              (17,675,019
              )
              
              (9,208,199
              )
              
              (3,244,397
              )Add:
                  Stock-based employee compensation expense included
                in
                  US GAAP reported net loss
              
              
              17,829
              
              
              87,768
              
              
              28,108Deduct:
                  Total stock-based employee compensation expense
                determined
                  under fair value based method
              
              
              (1,708,925
              )
              
              (137,741
              )
              
              (41,331
              )US
                  GAAP pro forma net loss
              
              
              (19,366,115
              )
              
              (9,258,172
              
              
              (3,257,620
              )US
                  GAAP basic and diluted loss per share-
                  As reported
              
              
              (0.14
              )
              
              (0.12
              )
              
              (0.05
              )-
                  Pro forma
              
              
              (0.16
              )
              
              (0.12
              )
              
              (0.05
              )
 
 F-42
 
  **PRANA
          BIOTECHNOLOGY LIMITED** (A
            Development Stage
            Enterprise)
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
            otherwise
            noted)**
 
 **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 *Options
        issued to underwriters in connection with subscription of listed
        options*
 
 As
        disclosed in Note 11(c), the Company issued 55,000 share options to underwriters
        on March 1, 2003 in connection with the underwriters’ subscription of the
        remaining balance of the listed options with an expiration date of March
        1, 2003
        that had not been exercised by existing option holders. Under A-GAAP, no
        compensation cost was recognized in respect of the share options issued by
        the
        Company. Under US GAAP, the options issued to the underwriters were accounted
        for under SFAS 123. Accordingly, the consolidated entity has calculated
        compensation cost based on the estimated fair value of the options measured
        on
        March 1, 2003. Because the options are exercisable only on the date of grant,
        the Company estimated the fair value of the options based on the intrinsic
        value
        of the options.
 
 *Shares
        issued to consultants and directors for services rendered*
 
 As
        disclosed in Note 11(b), the Company issued 228,215, 1,119,225 and 146,969
        shares to outside consultants in consideration for services rendered to the
        Company during the years ended June 30, 2005, 2004 and 2003, respectively.
        The
        Company also issued 249,999 shares to directors in consideration for services
        rendered to the Company during each of the years ended June 30, 2005 and
        2004.
        Under A-GAAP, the consolidated entity recognized compensation expense based
        on
        the directors’ valuation of the services rendered or shares issued. Under US
        GAAP, the shares issued to the outside consultants and directors are accounted
        for under SFAS 123 and EITF 96-18. Accordingly, compensation expense is based
        on
        the quoted market price of the shares measured on the date the services were
        completed. The resulting difference between the A-GAAP compensation expense
        and
        the US GAAP compensation expense is recognized in the accompanying
        reconciliation.
 
 **b.**
              **Intangible
                  assets - Core intellectual
                  property**
 
 Under
        A-GAAP, the consolidated entity capitalised costs associated with the
        acquisition and development of core intellectual property until December
        1999.
        Such costs were amortized on a straight-line basis over the estimated useful
        life of 15 years. In December 1999, the directors revalued the intangible
        assets
        upwards by A$14,661,942 and recorded the revaluation in the asset revaluation
        reserve in equity. The increased asset value resulted in additional amortisation
        for periods subsequent to the revaluation. All costs associated with the
        acquisition and development of core intellectual property incurred subsequent
        to
        the December 1999 revaluation are expensed as incurred under
        A-GAAP.
 
 Under
        US
        GAAP, costs associated with the acquisition of core intellectual property
        are
        capitalised while costs associated with the development of core intellectual
        property are expensed as incurred. Upward revaluations of intangible assets
        are
        not allowed (except in connection with a purchase business combination).
        Accordingly, the amortization expense attributable to the costs capitalized
        under A-GAAP but expensed under US GAAP as well as the amortization expense
        attributable to the upward asset revaluation is reversed in the accompanying
        reconciliation.
 
 As
        a
        result of the cancellation of a clinical study for the compound PBT-1 in
        April
        2005 due to toxicity issues, the consolidated entity reviewed the carrying
        value
        of the core intellectual property and resolved to impair the value to A$nil
        as
        of June 30, 2005 based on estimated future discounted cash flows. The A-GAAP
        impairment expense relating to costs capitalised under A-GAAP but expensed
        under
        US GAAP has been reversed in the accompanying reconciliation.
 
 F-43
  **PRANA
        BIOTECHNOLOGY LIMITED** (A
          Development Stage
          Enterprise)
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 
 **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 **c.**
              **Intangible
                  assets - Capitalised patent
                  costs**
 
 Under
        A-GAAP, all costs associated with the acquisition and development of patents
        incurred subsequent to the December 1999 revaluation of core intellectual
        property (see paragraph (b) above) are expensed as incurred. For US GAAP
        purposes, up until December 31, 2004, all costs associated with the acquisition
        of patents, legal costs incurred in connection with successful patent defences
        and costs associated with successful patent applications deemed to be
        recoverable from the future development of products were capitalised and
        amortized on a straight-line basis over the estimated useful life of 15 years.
        Such capitalised costs are tested for recoverability whenever events or
        circumstances indicate that the carrying amount of the costs may not be
        recoverable. All other costs associated with patents were expensed as incurred.
        Effective January 1, 2005, the Company changed its US GAAP accounting policy
        and
        expenses all patent costs as incurred.
 
 As
        a
        result of the cancellation of a clinical study for the compound PBT-1 in
        April
        2005 due to toxicity issues, the consolidated entity reviewed the carrying
        value
        of the US GAAP capitalised patent costs and resolved to impair the capitalised
        costs to the fair value of A$nil based on estimated future discounted cash
        flows. The resulting impairment expense has been recognized in the accompanying
        reconciliation.
 
 **d.**
              **Deferred
                  tax effect of US GAAP
                  adjustments**
 
 The
        deferred tax effect of US GAAP adjustments is A$nil because it is more likely
        than not that the net deferred tax asset will not be realized, and accordingly,
        the consolidated entity has recorded a 100% valuation allowance against the
        net
        deferred tax asset.
 
 F-44
  **PRANA
        BIOTECHNOLOGY LIMITED** (A
          Development Stage
          Enterprise)
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 **e.**
              **Statement
                  of cash flows**
 
 The
        presentation of the Statements of Cash Flows in accordance with A-GAAP differs
        from that required in accordance with SFAS No. 95: *Statement
        of Cash Flows* (“SFAS
        95”) under US GAAP. Under A-GAAP, cash held in term deposits with original
        maturities of less than one year is classified as cash. Under US GAAP, term
        deposits with original maturities greater than 90 days do not qualify as
        cash or
        cash equivalents; rather, such term deposits are classified as current
        investments. Accordingly, the net change in term deposits with original
        maturities greater than 90 days is classified as a component of cash flows
        from
        investing activities for US GAAP purposes.
 
 The
        following is a reconciliation of the Statements of Cash Flows had the statement
        been prepared using the presentation requirements of SFAS 95 (A-GAAP measurement
        principles have been adopted):
  **Years
                    Ended June 30,****2005**
                
                **2004**
                
                **2003**Net
                    cash flows used in operating activities, as reported
                
                
                (11,418,813
                )
                
                (5,347,420
                )
                
                (3,590,613
                )Net
                    cash flows used in investing activities, as reported
                
                
                (50,466
                )
                
                (134,362
                )
                
                (87,929
                )Less:
                    Term deposits with original maturities greater than 90
                    days
                
                
                (31,359
                )
                
                (1,630,000
                )
                
                -Net
                    cash outflows used in investing activities, as adjusted
                
                
                (81,825
                )
                
                (1,764,362
                )
                
                (87,929
                )Net
                    cash flows from financing activities, as reported
                
                
                4,704,757
                
                
                31,781,165
                
                
                3,569,792Net
                    increase/(decrease) in cash held, as adjusted
                
                
                (6,795,881
                )
                
                24,669,383
                
                
                (108,750
                )Opening
                    cash brought forward
                
                
                29,580,398
                
                
                3,463,783
                
                
                3,585,014
  Exchange
                    rate adjustments on foreign currency transactions
                
                
                (1,362,572
                )
                
                (182,768
                )
                
                (12,481
                )Cash
                    at end of year, as reported
                
                
                21,453,304
                
                
                29,580,398
                
                
                3,463,783Less:
                    Term deposits with original maturities greater than 90
                    days
                
                
                (31,359
                )
                
                (1,630,000
                )
                
                -Cash
                    at end of year, as adjusted
                
                
                21,421,945
                
                
                27,950,398
                
                
                3,463,783
 F-45
 
 PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 **f.**
              **Classification
                  differences**
  Under
        A-GAAP, interest income is reported as a component of revenue from ordinary
        activities. Under US GAAP, interest income is reported as a component of
        non-operating income.
 
 Under
        A-GAAP, amortisation of intangible assets used in research and development
        projects is reported in depreciation and amortisation expense. Under US GAAP,
        amortisation of intangible assets used in research and development projects
        is
        reported in research and development expense.
 
 Under
        A-GAAP, other expenses from ordinary activities consist of the
        following:
 
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003**Travel
              
              
              432,316
              
              
              284,105
              
              
              295,257Insurance
              
              
              191,705
              
              
              53,451
              
              
              62,403Marketing
              
              
              442,920
              
              
              230,459
              
              
              198,832Office
                  overhead costs
              
              
              322,017
              
              
              190,488
              
              
              198,704Other
              
              
              13,252
              
              
              269
              
              
              13,397Total
              
              
              1,402,210
              
              
              758,772
              
              
              768,593
  Under
        US
        GAAP, travel, insurance, marketing and office overhead costs are classified
        as
        general and administrative costs.
 
 **g.**
              **Additional
                  US GAAP disclosures**
 
 *Share-based
        compensation*
 The
        following table summarizes the activity of share options issued to directors
        under the 2004 Employees, Directors and Consultants Share and Option Plan
        (adopted on November 17, 2004) during the year ended June 30, 2005 and share
        options issued to employees under the Employee and Consultants Option Plan
        2000
        during the years ended June 30, 2004 and 2003:
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              
              
              **2003****Number
                  of**
                **options**
              
              **Weighted
                  average exercise price ($)**
              
              **Number
                  of options**
              
              **Weighted
                  average exercise price ($)**
              
              
              
              **Number
                  of options**
              
              **Weighted
                  average exercise price ($)**Outstanding
                  at beginning of year
              
              
              409,667
              
              
              0.50
              
              
              145,000
              
              
              0.50
              
              
              
              
              
              -
              
              
              -Granted
              
              
              2,100,000
              
              
              0.12
              
              
              264,667
              
              
              0.50
              
              
              
              
              
              158,274
              
              
              0.50Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              (13,274
              )
              
              0.50Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              (409,667
              )
              
              0.50
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -Outstanding
                  at end of year (a)
              
              
              2,100,000
              
              
              0.12
              
              
              409,667
              
              
              0.50
              
              
              
              
              
              145,000
              
              
              0.50Exercisable
                  at end of year
              
              
              500,000
              
              
              0.50
              
              
              311,667
              
              
              0.50
              
              
              
              
              
              50,000
              
              
              0.50
 
 (a)
              Of
                  the 2,100,000 options outstanding as of June 30, 2005, 1,600,000
                  options
                  have an exercise price of A$nil and a weighted average remaining
                  contractual life of six years. The remaining 500,000 options have
                  an
                  exercise price of A$0.50 with a weighted average remaining contractual
                  life of three years.
 
 
 F-46
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 The
        weighted average grant date fair value of the options issued to directors
        under
        the 2004 Employees, Directors and Consultants Share and Option Plan during
        the
        year ended June 30, 2005 and options issued to employees under the Employee
        and
        Consultants Option Plan 2000 during the years ended June 30, 2004 and 2003
        is
        A$0.44, A$0.44 and A$0.43, respectively. The fair value was estimated at
        the
        date of the grant using the Black-Scholes option pricing model for options
        without market conditions and the Barrier option pricing model was used for
        options with market conditions, with the following weighted average
        assumptions:
 
 ·
              risk-free
                  interest rate of 5.2% for 2005, 4.9% for 2004 and 4.3% for
                  2003;
 ·
              no
                  dividends;
 ·
              expected
                  volatility of 65.7% for 2005, 74.3% for 2004 and 82.0% for 2003;
                  and
 ·
              expected
                  life of five years for 2005 and two years for 2004 and
                  2003.
 
 The
        following table summarizes the activity of share options issued to directors
        under the 2004 ADS Option Plan during the year ended June 30, 2005. Each
        option
        is exercisable for one ADR which equals ten shares. The 2004 ADS Option Plan
        was
        adopted on November 17, 2004 and therefore no options were issued under the
        plan
        in prior years.
 
 **Year
                  ended June 30, 2005****Number
                  of options**
                **over
                  ADRs**
              
              **Weighted
                  average exercise price ($)**Outstanding
                  at beginning of year
              
              
              -
              
              
              -Granted
              
              
              380,000
              
              $
              US5.00
                  ($6.57
              )Exercised
              
              
              -
              
              
              -Expired
              
              
              -Forfeited
              
              
              -
              
              
              -Outstanding
                  at end of year (b)
              
              
              380,000
              
              $
              US5.00
                  ($6.57
              )Exercisable
                  at end of year
              
              
              380,000
              
              $
              US5.00
                  ($6.57
              )
 
 (b)
              All
                  380,000 options outstanding as of June 30, 2005 have an exercise
                  price of
                  US$5.00 ($6.57) and a weighted average remaining contractual life
                  of eight
                  years.
 
 The
        weighted average grant date fair value of the options issued to directors
        under
        the 2004 ADS Option Plan during the year ended June 30, 2005 is A$3.99. The
        fair
        value was estimated at the date of the grant using the Black-Scholes option
        pricing model with the following weighted average assumptions:
 
 ·
              risk-free
                  interest rate of 5.4%;
 ·
              no
                  dividends;
 ·
              expected
                  volatility of 73.6%; and
 ·
              expected
                  life of eight years.
 
 F-47
 
 PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 The
        following table summarizes the activity of share options issued to consultants
        during the year ended June 30, 2005, 2004 and 2003:
 
 **Years
                  Ended June 30,****2005**
              
              **2004**
              
              **2003****Number
                  of options**
              
              **Weighted
                  average exercise price ($)**
              
              **Number
                  of options**
              
              **Weighted
                  average exercise price ($)**
              
              **Number
                  of options**
              
              **Weighted
                  average exercise price ($)**Outstanding
                  at beginning of year
              
              
              1,109,500
              
              
              0.35
              
              
              815,000
              
              
              0.51
              
              
              410,000
              
              
              0.50Granted
              
              
              600,000
              
              
              0.50
              
              
              1,444,500
              
              
              0.57
              
              
              405,000
              
              
              0.51Exercised
              
              
              -
              
              
              -
              
              
              950,000
              
              
              0.61
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              (497,500
              )
              
              0.52
              
              
              (200,000
              )
              
              0.50
              
              
              -
              
              
              -Outstanding
                  at end of year (c)
              
              
              1,212,000
              
              
              0.50
              
              
              1,109,500
              
              
              0.35
              
              
              815,000
              
              
              0.51Exercisable
                  at end of year
              
              
              1,045,333
              
              
              0.50
              
              
              1,089,500
              
              
              0.42
              
              
              815,000
              
              
              0.50
 
 (c)
              All
                  1,212,000 options outstanding as of June 30, 2005, have an exercise
                  price
                  of A$0.50 with an average remaining contractual life of two
                  years.
 
 The
        weighted average grant date fair value of options issued to consultants during
        the years ended June 30, 2005, 2004 and 2003 is A$0.27, A$0.30 and A$0.19,
        respectively. Refer to Note 25(a), Options *issued to consultants for services rendered* for
        the
        assumptions used to estimate the grant date fair value.
 
 As
        previously disclosed, the Company issued 55,000 share options to underwriters
        on
        March 1, 2003 which were immediately exercised on the same day. Because the
        options were exercisable only on the date of grant, the Company estimated
        the
        grant date fair value of A$0.48 based on the intrinsic value of the
        options.
 
 Refer
        to
        Notes 11(b) and 11(d) for information regarding shares and warrants granted
        to
        consultants and directors during the years ended June 30, 2005, 2004 and
        2003
 
 *Income
        tax*
 
 The
        consolidated entity has adopted SFAS No. 109: *Accounting
        for Income Taxes* (“SFAS
        109”) for US GAAP purposes. SFAS 109 requires a “liability approach” to
        accounting for income taxes, which as it applies to the consolidated entity,
        is
        very similar to that adopted under A-GAAP.
 
 Under
        A-GAAP, the deferred tax asset in respect of income tax losses carried forward
        disclosed in Note 4 is not recognized unless the benefit is virtually certain
        of
        realisation. Under US GAAP, the benefit is not recognized unless realisation
        is
        more likely than not.
 
 F-48
  PRANA
        BIOTECHNOLOGY LIMITED (A
          Development Stage
          Enterprise)
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 The
        components of A-GAAP loss from ordinary activities before income tax expense
        consisted of the following for the years ended June 30, 2005, 2004 and
        2003:
 
 **Years
                  ended June 30, 2005****2005**
              
              **2004**
              
              **2003**Australia
              
              
              (24,933,300
              )
              
              (9,885,614
              )
              
              (4,584,838
              )Foreign
              
              
              (75,
                  297
              )
              
              -
              
              
              -(25,008,597
              )
              
              (9,885,614
              )
              
              (4,584,838
              )
 
 The
        components of the US GAAP deferred tax assets and liabilities as of June
        30,
        2005 and 2004 are as follows:
 
 **June
                  30, 2005****2005**
              
              **2004**Deferred
                  tax assetsNet
                  operating loss carryforwards
              
              
              11,700,174
              
              
              6,097,949Foreign
                  exchange losses
              
              
              410,951
              
              
              31,500Provision
                  accruals
              
              
              37,141
              
              
              15,268Other
              
              
              57,954
              
              
              61,550Total
                  gross deferred tax assets
              
              
              12,206,220
              
              
              6,174,767Deferred
                  tax liability
              
              
              -
              
              
              -Net
                  deferred tax asset
              
              
              12,206,220
              
              
              6,206,267Valuation
                  allowance
              
              
              (12,206,220
              )
              
              (6,206,267
              )Net
                  recorded deferred taxes
              
              
              -
              
              
              -
 
 As
        of
        June 30, 2005, the Company has net operating loss carryforwards in Australia
        of
        A$38,940,507 that may be carried forward indefinitely and net operating loss
        carryforwards in the United States of A$60,073 that can be carried forward
        for
        20 years
 F-49
 
  PRANA
          BIOTECHNOLOGY LIMITED (A
            Development Stage
            Enterprise)
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
            otherwise
            noted)**
 
 **25**  **RECONCILIATION
        TO US GAAP (continued)**
 
 *Recently
        issued but not yet adopted accounting pronouncements*
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        123 (revised 2004): *Share-Based
        Payments* (“SFAS
        123R”). This statement eliminates the option to apply the intrinsic value
        measurement provisions of APB 25 to stock compensation awards issued to
        directors and employees. Rather, SFAS 123R requires companies to measure
        the
        cost of director and employee services received in exchange for an award
        of
        equity instruments based on the grant-date fair value of the award. That
        cost
        will be recognized over the period during which the director or employee
        is
        required to provide services in exchange for the award -- the requisite service
        period (usually the vesting period). SFAS 123R applies to all awards granted
        after the required effective date (July 1, 2005 for Prana) and to awards
        modified, repurchased, or cancelled after that date.
 
 As
        permitted by SFAS 123, the consolidated entity currently accounts for
        share-based payments to directors and employees using APB 25, the intrinsic
        value method. Accordingly, the adoption of the SFAS 123R fair value method
        may
        have a significant impact on the consolidated entity’s results of operations,
        although it will have no impact on its overall financial position. The full
        impact of the adoption of SFAS 123R cannot be predicted at this time, as
        it
        depends on levels of share-based payments for future grants. However, had
        the
        consolidated entity adopted SFAS 123R in prior periods, the impact of that
        standard would have approximated the impact of SFAS 123, as disclosed in
        Note
        25(a), *Share-based
        compensation -*  *Options
        issued to directors and employees for services rendered* .
 
 In
        December 2004, the FASB issued SFAS No. 153: *Exchanges
        of Nonmonetary Assets - an amendment of APB Opinion No. 29* (“SFAS
        153”), which amends APB Opinion No. 29: *Accounting
        for Nonmonetary Transactions* to
        eliminate the exception for nonmonetary exchanges of similar productive assets
        and replaces it with a general exception for exchanges of nonmonetary assets
        that do not have commercial substance. SFAS 153 is effective for nonmonetary
        assets exchanges occurring in fiscal periods beginning after June 15, 2005
        (fiscal 2006 for Prana).  At this time, management reasonably believes
        that
        the adoption of SFAS 153 will not have a material effect on the consolidated
        entity’s financial position or results of operations.
 
 In
        May
        2005, the FASB issued SFAS No. 154: Accounting Changes and Error Corrections
        (“
        SFAS 154”), a replacement of APB Opinion No. 20: Accounting Changes and SFAS No.
        3: Reporting Accounting Changes in Interim Financial Statements, effective
        for
        fiscal years beginning after December 15, 2005 (fiscal 2007 for Prana). SFAS
        154
        changes the requirements for the accounting for and reporting of a voluntary
        change in accounting principle as well as the changes required by an accounting
        pronouncement which does not include specific transition provisions. At this
        time management reasonably believes that the adoption of SFAS 154 will not
        have
        a material effect on the consolidated entity’s financial position or results of
        operations.





F-50





**SIGNATURES**





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


Prana Biotechnology LimitedBy:
              /s/
                Geoffrey P. KemplerGeoffrey
                P. KemplerChief
                Executive Officer


Dated:
      December 21, 2005




90