**UNITED
      STATES**


**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, 2007**




**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:





Title
                of each class
            
            Name
                of each exchange on which registered**American
                Depositary Shares,**
              **each
                representing ten Ordinary Shares**
            
            **NASDAQ
                Capital Market**





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





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, 2007..........................151,517,978**





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




Yes
o No
x





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




Yes
o No
x





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 whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):




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





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




Item
      17
o Item
      18 x





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
o No
x





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


i





**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, age-related macular degeneration, certain
      cancers 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.
      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. As used in this annual report, the terms
      “we,” “us,” “our” and “Prana” mean Prana Biotechnology Limited 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
      consolidated financial statements appearing in this annual report are prepared
      in Australian dollars and in accordance with the Australian equivalents to
      International Financial Reporting Standards adopted by the Australian Financial
      Reporting Council on January 1, 2005, which became effective for our company
      as
      of our fiscal year ended June 30, 2006. 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,” and similar expressions are intended to identify forward-looking
      statements. We 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.
      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.”




ii




**TABLE
      OF CONTENTS**


Page**PART I**
                  
                  
                  
                  
                  5ITEM
                      1.
                  
                  
                  IDENTITY
                      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
                  
                  5ITEM
                      2.
                  
                  
                  OFFER
                      STATISTICS AND EXPECTED TIMETABLE
                  
                  5ITEM
                      3.
                  
                  
                  KEY
                      INFORMATION
                  
                  5A.
                  Selected
                      Consolidated Financial Data
                  
                  5B.
                  Capitalization
                      And Indebtedness
                  
                  7C.
                  Reasons
                      For The Offer And Use Of Proceeds
                  
                  7D.
                  Risk
                      Factors
                  
                  7ITEM
                      4.
                  
                  
                  INFORMATION
                      ON THE COMPANY
                  
                  16A.
                  History
                      And Development Of The Company
                  
                  16B.
                  Business
                      Overview
                  
                  19C.
                  Organizational
                      Structure
                  
                  28D.
                  Property,
                      Plants And Equipment
                  
                  28ITEM
                      4A.
                  
                  
                  UNRESOLVED
                      STAFF COMMENTS
                  
                  29ITEM
                      5.
                  
                  
                  OPERATING
                      AND FINANCIAL REVIEW AND PROSPECTS
                  
                  29A.
                  Operating
                      Results
                  
                  29B.
                  Liquidity
                      And Capital Resources
                  
                  39C.
                  Research
                      And Development, Patents And Licenses
                  
                  44D.
                  Trend
                      Information
                  
                  47E.
                  Off-Balance
                      Sheet Arrangements
                  
                  47F.
                  Tabular
                      Disclosure Of Contractual Obligations
                  
                  47ITEM 6.
                  
                  
                  DIRECTORS,
                      SENIOR MANAGEMENT AND EMPLOYEES
                  
                  48A.
                  Directors
                      And Senior Management
                  
                  48B.
                  Compensation
                  
                  50C.
                  Board
                      Practices
                  
                  51D.
                  Employees
                  
                  55E.
                  Share
                      Ownership
                  
                  55ITEM 7.
                  
                  
                  MAJOR
                      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                  
                  60A.
                  Major
                      Shareholders
                  
                  60B.
                  Related
                      Party Transactions
                  
                  61C.
                  Interests
                      Of Experts And Counsel
                  
                  61ITEM 8.
                  
                  
                  FINANCIAL
                      INFORMATION
                  
                  61A.
                  Financial
                      Statements And Other Financial Information
                  
                  61B.
                  Significant
                      Changes
                  
                  61ITEM 9.
                  
                  
                  THE
                      OFFER AND LISTING
                  
                  62A.
                  Offer
                      And Listing Details
                  
                  62B.
                  Plan
                      Of Distribution
                  
                  63C.
                  Markets
                  
                  63D.
                  Selling
                      Shareholders
                  
                  63E.
                  Dilution
                  
                  63F.
                  Expenses
                      Of The Issue
                  
                  63
  
 iii
 
  ITEM 10.
                  
                  
                  ADDITIONAL
                      INFORMATION
                  
                  63A.
                  Share
                      Capital
                  
                  63B.
                  Memorandum
                      And Articles Of Association
                  
                  64C.
                  Material
                      Contracts
                  
                  64D.
                  Exchange
                      Controls
                  
                  66E.
                  Taxation
                  
                  67F.
                  Dividends
                      And Paying Agents
                  
                  73G.
                  Statement
                      By Experts
                  
                  73H.
                  Documents
                      On Display
                  
                  73I.
                  Subsidiary
                      Information
                  
                  74ITEM 11.
                  
                  
                  QUANTITATIVE
                      AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
                  
                  74ITEM 12.
                  
                  
                  DESCRIPTION
                      OF SECURITIES OTHER THAN EQUITY SECURITIES
                  
                  74**PART
                      II**
                  
                  
                  
                  
                  74ITEM 13.
                  
                  
                  DEFAULTS,
                      DIVIDEND ARREARAGES AND DELINQUENCIES
                  
                  74ITEM 14.
                  
                  
                  MATERIAL
                      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                      PROCEEDS
                  
                  75ITEM 15.
                  
                  
                  CONTROLS
                      AND PROCEDURES
                  
                  75ITEM
                      15T.
                  
                  
                  CONTROLS
                      AND PROCEDURES
                  
                  75ITEM
                      16.
                  
                  
                  RESERVED
                  
                  75ITEM 16.
                  
                  
                  AUDIT
                      COMMITTEE FINANCIAL EXPERT
                  
                  75ITEM 16B.
                  
                  
                  CODE
                      OF ETHICS
                  
                  75ITEM 16C.
                  
                  
                  PRINCIPAL
                      ACCOUNTANT FEES AND SERVICES
                  
                  76ITEM 16D.
                  
                  
                  EXEMPTIONS
                      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                  
                  76ITEM 16E.
                  
                  
                  PURCHASES
                      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                      PURCHASERS
                  
                  77ITEM 17.
                  
                  
                  FINANCIAL
                      STATEMENTS
                  
                  77ITEM 18.
                  
                  
                  FINANCIAL
                      STATEMENTS
                  
                  77ITEM 19.
                  
                  
                  EXHIBITS
                  
                  77SIGNATURES
                  
                  80


iv




**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
      Consolidated Financial Data**




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




We
      prepare our consolidated financial statements in accordance with the Australian
      equivalents to International Financial Reporting Standards, or IFRS, adopted
      by
      the Australian Financial Reporting Council on January 1, 2005, which became
      effective for our company as of our fiscal year ended June 30, 2006. Under
      the
      Australian Accounting Standards Board, or AASB, Standard No.1, “First-time
      Adoption of Australian Equivalents to International Financial Reporting
      Standards,” or AASB 1, a company adopting Australian IFRS, or A-IFRS for the
      first time is required to adopt accounting policies that comply with A-IFRS
      and
      related interpretations that are in effect at the reporting date of its first
      annual financial statements prepared in accordance with A-IFRS, in our case
      June
      30, 2006. AASB 1 also requires that those policies be applied as of the date
      of
      transition to A-IFRS, in our case July 1, 2004, and consistently throughout
      all
      periods presented in the first annual financial statements prepared in
      accordance with A-IFRS.




The
      following selected consolidated financial data as of June 30, 2007 and 2006
      and
      for the years ended June 30, 2007, 2006 and 2005 have been derived from our
      audited consolidated financial statements and notes thereto included elsewhere
      in this annual report. The selected consolidated financial data as of June
      30,
      2005, 2004 and 2003 and for the years ended June 30, 2004 and 2003 have been
      derived from our audited consolidated financial statements and notes thereto
      which are not included in this annual report. The selected consolidated
      financial data set forth below should be read in conjunction with and are
      qualified by reference to Item 5, “Operating and Financial Review and Prospects”
and our consolidated financial statements and notes thereto included elsewhere
      in this annual report.




5




**Statement
                of Operations Data:**




**Year
                Ended June 30,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(in
                A$, except number of shares)A-IFRS:Revenue
                from continuing operations
            
            
            507,150
            
            
            762,023
            
            
            892,135
            
            
            -
            
            
            -Other
                income
            
            
            287
            
            
            288,263
            
            
            1,760,978
            
            
            -
            
            
            -Research
                and development expenses
            
            
            (4,492,193
            )
            
            (7,613,045
            )
            
            (7,109,839
            )
            
            -
            
            
            -Research
                and development expenses - related party
            
            
            -
            
            
            -
            
            
            (577,757
            )
            
            -
            
            
            -Personnel
                expenses
            
            
            (4,554,731
            )
            
            (3,418,008
            )
            
            (5,750,929
            )
            
            -
            
            
            -Intellectual
                property expenses
            
            
            (600,232
            )
            
            (466,426
            )
            
            (729,583
            )
            
            -
            
            
            -Auditor
                and accounting expenses
            
            
            (260,117
            )
            
            (205,815
            )
            
            (202,032
            )
            
            -
            
            
            -Travel
                expenses
            
            
            (309,997
            )
            
            (212,184
            )
            
            (432,316
            )
            
            -
            
            
            -Marketing
                expenses
            
            
            (215,455
            )
            
            (134,750
            )
            
            (442,920
            )
            
            -
            
            
            -Depreciation
                expenses
            
            
            (58,582
            )
            
            (118,196
            )
            
            (65,223
            )
            
            -
            
            
            -Amortization
                expenses
            
            
            -
            
            
            -
            
            
            (83,200
            )
            
            -
            
            
            -Other
                expenses
            
            
            (1,008,563
            )
            
            (824,625
            )
            
            (1,204,930
            )
            
            -
            
            
            -Foreign
                exchange gain (loss)
            
            
            (757,578
            )
            
            223,454
            
            
            (1,362,572
            )
            
            -
            
            
            -Impairment
                of intangible assets
            
            
            -
            
            
            -
            
            
            (786,240
            )
            
            -
            
            
            -Gain
                on fair value of financial liabilities
            
            
            607,691
            
            
            128,715
            
            
            5,801,397Net
                loss
            
            
            (11,142,320
            )
            
            (11,590,594
            )
            
            (10,293,031
            )
            
            -
            
            
            -Loss
                per share - basic and diluted
            
            
            (0.08
            )
            
            (0.09
            )
            
            (0.08
            )
            
            -
            
            
            -Weighted
                average number of ordinary shares outstanding - basic and
                diluted
            
            
            140,754,495
            
            
            128,053,601
            
            
            122,754,061
            
            
            -
            
            
            -*U.S.
                GAAP:*Net
                loss
            
            
            (11,142,320
            )
            
            (11,590,594
            )
            
            (11,998,032
            )
            
            (7,243,455
            )
            
            (3,244,397
            )Loss
                per share - basic and diluted
            
            
            (0.08
            )
            
            (0.09
            )
            
            (0.10
            )
            
            (0.10
            )
            
            (0.05
            )Weighted
                average number of ordinary shares outstanding - basic and
                diluted
            
            
            140,754,495
            
            
            128,053,601
            
            
            122,754,061
            
            
            75,701,818
            
            
            61,131,313





**Balance
                Sheet Data:**




**As
                at June 30,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(in
                A$ )*A-IFRS:*Cash
                and cash equivalents
            
            
            7,409,256
            
            
            10,013,778
            
            
            21,453,304
            
            
            -
            
            
            -Working
                capital
            
            
            5,564,304
            
            
            7,698,283
            
            
            18,370,555
            
            
            -
            
            
            -Total
                assets
            
            
            7,722,185
            
            
            10,421,146
            
            
            22,289,159
            
            
            -
            
            
            -Net
                assets
            
            
            5,612,195
            
            
            7,800,658
            
            
            18,536,769
            
            
            -
            
            
            -Issued
                capital
            
            
            53,988,412
            
            
            46,274,127
            
            
            45,838,897
            
            
            -
            
            
            -Share
                based payment reserves
            
            
            4,106,821
            
            
            2,867,249
            
            
            2,447,996
            
            
            -
            
            
            -Accumulated
                deficit during   development stage
            
            
            (52,483,038
            )
            
            (41,340,718
            )
            
            (29,750,124
            )
            
            -
            
            
            -Total
                equity
            
            
            5,612,195
            
            
            7,800,658
            
            
            18,536,769
            
            
            -
            
            
            -*U.S.
                GAAP:*Total
                assets
            
            
            7,722,185
            
            
            10,421,146
            
            
            22,289,159
            
            
            34,197,794
            
            
            7,944,306Accumulated
                deficit during   development stage
            
            
            (56,662,647
            )
            
            (45,520,327
            )
            
            (33,929,733
            )
            
            (22,144,137
            )
            
            (14,900,682
            )Contributed
                equity
            
            
            62,274,842
            
            
            53,320,985
            
            
            52,466,506
            
            
            46,770,289
            
            
            22,278,765Total
                equity
            
            
            5,612,195
            
            
            7,800,658
            
            
            18,536,769
            
            
            24,626,152
            
            
            7,378,083




6


**Exchange
      Rate Information**




The
      following tables set forth, for the periods and dates indicated, certain
      information regarding the rates of exchange of A$1.00 into US$ 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.




YearEnded
                June 30,
            
            At
                Period End
            
            Average
                Rate
            
            High
            
            Low2003
            
            
            0.6713
            
            
            0.5623
            
            
            0.6729
            
            
            0.52802004
            
            
            0.6903
            
            
            0.7139
            
            
            0.8005
            
            
            0.63452005
            
            
            0.7620
            
            
            0.7535
            
            
            0.7988
            
            
            0.68522006
            
            
            0.7301
            
            
            0.7478
            
            
            0.7792
            
            
            0.70142007
            
            
            0.8488
            
            
            0.7859
            
            
            0.8521
            
            
            0.7377




Month
            
            High
            
            LowApril
                2007
            
            
            0.8391
            
            
            0.8056May
                2007
            
            
            0.8348
            
            
            0.8162June
                2007
            
            
            0.8521
            
            
            0.8216July
                2007
            
            
            0.8870
            
            
            0.8459August
                2007
            
            
            0.8662
            
            
            0.7672September
                2007
            
            
            0.8701
            
            
            0.8107





The
      noon
      buying rate on September 24, 2007 was US$0.8671 = A$1.00.




**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.*




***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, PBT2, 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.




7


**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. 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,
      and we may not 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 or cease our
      operations, including our research and development activities, which would
      be
      expected to 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




8


·
            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, larger or more complex
      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.




**There
      is a substantial risk that we may not be able to complete the development of
      PBT2 or develop other pharmaceutical products.**




We
      may
      not be able to progress with the development of our current or any future
      pharmaceutical product candidates to a stage that will attract a suitable
      collaborative partner for the development of any current or future
      pharmaceutical product candidates. The projects initially specified in
      connection with any such collaboration and any associated funding may change
      or
      be discontinued as a result of 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 payers. We cannot predict if or when the
      development of PBT2 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 resources and/or funds towards
      what we believe to be our most promising product or 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.




**We
      will not be able to commercialize our PBT2 therapeutic compound for Alzheimer’s
      disease 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 PBT2 product candidate is 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.




9




We
      may
      not be able to undertake further clinical trials of our
      PBT2
      compound as a therapeutic compound for Alzheimer’s disease or other indications
      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.
      For
      example, in April
      2005, we ceased clinical trials of our PBT1 compound as a treatment for Alzheimer’s
      disease. 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
      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 PBT2 or any other
      development or product candidates in a cost-effective or timely manner.
      Manufacturing includes the production, formulation and stability testing of
      an
      active pharmaceutical ingredient. 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 operations.




We
      may be
      required to enter into contracting arrangements with third parties to
      manufacture PBT2 and any other development or 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 or may develop
      in the future. 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 manufacturer of our lead compound, PBT2, and on a
      sole
      manufacturer to encapsulate the compound and could incur significant costs
      and
      delays if we are unable to promptly find a replacement for either of them.**




We
      typically rely on a single manufacturer to develop Good Manufacturing Practice
      (GMP) synthetic processes for our lead compounds. Our lead compound, PBT2,
      is
      manufactured by the Institute of Drug Technology Australia Limited. We also
      rely
      on a sole manufacturer, Patheon Inc., to encapsulate PBT2. We intend to continue
      these relationships and this approach with further compounds if the
      relationships remains financially viable. We may not be able to promptly find
      a
      replacement manufacturer, if required, without incurring material additional
      costs and substantial delays.




10


**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 PBT2. We reported net losses of A$11,142,320 and A$11,590,594
      during the fiscal years ended June 30, 2007 and 2006, respectively. As of June
      30, 2007, our accumulated deficit was A$52,483,038. We may never be able to
      achieve or maintain profitability.




**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 and
                technologies;




·
            obtain
                licenses to the patented technologies of third
                parties;




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




·
            protect
                our trade secrets, know-how and other confidential
                information.




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, export, 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 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.




**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 Healthcare
      products Regulatory Agency, or MHRA, in the United Kingdom, the Medical
      Products Agency, or MPA, in Sweden and the
      European Medicines Agency, 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.




11




**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, MHRA, MPA,
      EMEA and other regulatory approvals.




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 PBT2 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;




12




·
            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.




**If
      healthcare insurers and other organizations do not pay for our products, or
      impose limits on reimbursement, our future 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 payers 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
      historically obtained no fault compensation insurance for our 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.




13


***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$0.15 to a high of A$0.80 and the market price of our
      American Depositary Shares on the NASDAQ Capital Market has ranged from as
      low
      as US$1.20 to a high of US$4.35. 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.




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




As
      a
      result of changes to the laws, regulations and standards relating to accounting,
      corporate governance and public disclosure, the costs of being a public company
      in general have increased in recent years. 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. We are considered a “non-accelerated
      filer” under applicable rules of the Securities and Exchange Commission. As
      such, we are required to include a report by management under Section 404(a)
      of
      the Sarbanes-Oxley Act for the first time starting with the filing of our annual
      report for the year ending June 30, 2008, and an attestation report by our
      independent auditors under Section 404(b) of the Sarbanes-Oxley Act must first
      be included in our annual report on Form 20-F for the fiscal year ending June
      30, 2009. The rules governing the standards that must be met for management
      to
      assess our internal controls over financial reporting are relatively new and
      complex and require significant documentation, testing and possible remediation
      to meet the detailed standards under the rules. During the course of its
      testing, our management may identify material weaknesses or significant
      deficiencies, which may not be remedied in time to meet the deadline imposed
      by
      the Sarbanes-Oxley Act. If our management cannot favorably assess the
      effectiveness of our internal controls over financial reporting or our auditors
      identify material weaknesses in our internal controls, investor confidence
      in
      our financial results may weaken, and our share price may suffer. We have
      expended and will need to further expend significant management time and
      financial resources to comply with the applicable requirements. This and other
      enacted and proposed legislation may increase the fees of our professional
      advisors and our insurance premiums.




14




**Our
      accounting staff will need to be trained on the application of U.S. GAAP and
      the
      Securities and Exchange Commission accounting requirements; the failure to
      adequately train our accounting staff could result in a material misstatement
      to
      our annual or interim financial statements.**




Our
      management has concluded that our company has insufficient accounting personnel
      that have sufficient knowledge and experience in U.S. GAAP and the SEC
      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-IFRS 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 during
      the
      taxable year ended June 30, 2005, and once again qualified as a PFIC during
      the
      taxable year ended June 30, 2006, under a literal application of the asset
      test
      described above, which looks solely to the market value. We believe that we
      will
      once again qualify as a PFIC during the taxable year ended June 30, 2007. 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




15


***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. All 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.




**As
      a foreign private issuer whose shares are listed on the NASDAQ Capital Market,
      we may follow certain home country corporate governance practices instead of
      certain NASDAQ requirements.**




As
      a
      foreign private issuer whose shares are listed on the NASDAQ Capital Market,
      we
      are permitted to follow certain home country corporate governance practices
      instead of certain requirements of NASDAQ Marketplace Rules. A foreign private
      issuer that elects to follow a home country practice instead of such
      requirements, must submit in advance to NASDAQ a written statement from an
      independent counsel in such issuer’s home country certifying that the issuer’s
      practices are not prohibited by the home country’s laws. In addition, a foreign
      private issuer must disclose in its annual reports filed with the Securities
      and
      Exchange Commission each such requirement that it does not follow and describe
      the home country practice followed by the issuer instead of any such
      requirement. As an Australian company listed on the NASDAQ Capital Market,
      we
      may follow home country practice with regard to, among other things, composition
      of the Board of Directors, director nomination procedures, compensation of
      officers and quorum at shareholders meetings. In addition, we may follow
      Australian law instead of the NASDAQ Marketplace Rules that require that we
      obtain shareholder approval for certain dilutive events, such as for the
      establishment or amendment of certain equity based compensation plans, an
      issuance that will result in a change of control of the company, certain
      transactions other than a public offering involving issuances of a 20% or more
      interest in the company and certain acquisitions of the stock or assets of
      another company.




**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 then 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 9,506,666 ordinary shares, which funds were added to our working
      capital. No options were exercised in the fiscal year ended June 30, 2006.
      In
      November 2006, we raised A$7,740,360 (before costs) in a private placement
      of
      21.8 million of our ordinary shares to professional investors in Australia
      and
      the United States at a price of A$0.357 per ordinary share and three-year
      options to purchase an additional 4.35 million ordinary shares at an exercise
      price of A$0.446 per ordinary share. Additionally, during the fiscal year ended
      June 30, 2007, options to purchase 758,000 ordinary shares were exercised by
      employees. No proceeds were received from the exercise of these options. As
      at
      June 30, 2007, we had A$7,409,256 in cash and cash equivalents and our working
      capital was A$5,564,304.




16


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, Parkinson’s
      disease, certain cancers and age-related macular degeneration. 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 of our ordinary
      shares 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 proof of concept compound, PBT1, as a therapeutic for the treatment of
      Alzheimer’s disease. We commenced our planned Phase II human clinical trial for
      PBT1 in August 2000. In 2004, we announced the results of our extended Phase
      II
      clinical trial of PBT1 and that we planned to pursue a Phase II/III study to
      examine the effect of PBT1 in moderate to severe Alzheimer’s disease patients in
      the second quarter of 2005. On April 11, 2005, we announced that we would not
      proceed with the Phase II/III study. As part of our effort to manufacture Good
      Manufacturing Practice (GMP) grade PBT1 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 alter 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 required levels were not
      likely to be successful in a timely, commercially viable manner and that further
      development of PBT1 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.




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, PBT2. Unlike PBT1,
      PBT2 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.
      PBT2
      was announced as a new lead metal protein attenuating compound, or MPAC,
      molecule for Alzheimer’s disease in early August 2003. PBT2 is the result of
      rational drug design. It was 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. PBT2 was selected from over 300 compounds that had been
      developed by us at such time on the basis of its significant effectiveness
      in
      both pre-clinical in vitro and in vivo testing. It was designed to have an
      improved safety and efficacy profile compared to PBT1.




In
      February 2005, we were awarded a research and development START grant of A$1.35
      million to take PBT2 through safety testing and Phase I clinical trials for
      Alzheimer’s disease. Formal preclinical toxicology testing for PBT2 was
      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 PBT2, 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 PBT2. Data from the study shows that PBT2 was well tolerated
      with little difference in the incidence of adverse events between those
      receiving PBT2 and those receiving the placebo. Additionally, the
      pharmacokinetic analysis demonstrated that the drug exposure increased/decreased
      predictably and in a linear manner, both of which are desirable characteristics
      for a central nervous system drug. Concurrent findings in a pre-clinical mouse
      model indicate that PBT2 passes into the brain more extensively than its
      predecessor, PBT1. On February 7, 2006 we announced the completion of the second
      Phase I safety clinical trial for PBT2. This trial was a multi-dose escalation
      trial of PBT2 conducted in elderly, healthy, male and female volunteers
      completed in December 2005. Volunteers were dosed at a selected dose for seven
      days, the dose range was from 200mg to 800mg per day. Both Phase I trials
      demonstrated that PBT2 was well tolerated and suitable for progression to Phase
      II trials in Alzheimer patients.




17




In
      parallel to such clinical studies, chronic preclinical animal toxicology studies
      and the development work for GMP manufacture of PBT2 required for Phase II
      clinical studies was conducted and completed by the third calendar quarter
      of
      2006. On July 20, 2006, while preparations for the Phase IIa clinical trial
      were
      underway, we announced key preclinical efficacy findings with PBT2 demonstrating
      that PBT2 could rapidly enhance memory function within five days of dosing
      in an
      Alzheimer mouse model, improve synaptic function and significantly reduce
      soluble beta-amyloid protein levels in mouse models of Alzheimer’s disease in
      acute 24 hour experiments. On October 5, 2006 we announced the grant of approval
      from the Swedish Medical Products Agency (a Swedish regulatory authority) to
      undertake a Phase IIa clinical trial in elderly patients with mild Alzheimer
      disease in Sweden. On December 19, 2006 we announced that dosing had commenced
      in the Phase IIa clinical trial. The Phase IIa trial is a three month
      double-blind, placebo-controlled safety and tolerability study of PBT2 in 80
      elderly male and female patients with mild forms of Alzheimer’s disease.
      Tolerability, safety, cerebrospinal fluid and plasma biomarker and cognition
      endpoints will be measured. On August 6, 2007, we announced that 55 patients
      (of
      the planned 80) have been randomized to participate in the Phase IIa clinical
      trial, of which 30 patients have completed the trial, and that the independent
      Data Safety Monitoring Board, or DSMB, appointed by us upon the recommendation
      of Dr. Craig Ritchie and Quintiles Limited for the Phase IIa clinical trial
      of
      PBT2 has reviewed the data of over 50 patients and concluded there have been
      no
      treatment-related serious adverse events or withdrawals and that the trial
      is
      safe to continue in accordance with the original protocol. The Phase IIa
      clinical trial is expected to be completed by the end of 2007 and report its
      final findings by the end of first calendar quarter of 2008.




Our
      company is the exclusive licensee of an international patent application in
      the
      name of the General Hospital Corporation directed to a novel target for an
      Alzheimer’s disease vaccine. The Commonwealth Government of Australia provided
      us with 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 having
      achieved the scientific milestone demonstrating that a mouse could generate
      antibodies that preferentially recognize dimerized ‘toxic linked’ forms of
      beta-amyloid and not the endogenous monomeric form of beta amyloid .
      Currently we are undertaking the screening of mouse hybridomas ( hybrid
      cells produced
      by injecting a specific antigen into a mouse, collecting an antibody-producing
      cell from the mouse’s spleen, and fusing it with a long-lived cancerous immune
      cell called a myeloma cell). Individual hybridoma’s are being tested **** to
      try to
      identify a mouse monoclonal antibody candidate for use in a prospective mouse
      passive vaccine trial by the end of 2007. We are utilizing the resources of
      the
      Mental Health Research Institute and Monash University to
      conduct this research.




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, 2007, our capital expenditures have totaled
      A$110,651. **** Since
      July 1, 2007, we have incurred A$14,101 in capital expenditures.




18




**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.




The
      protein believed to be involved in the toxicity associated with Alzheimer’s
      disease is beta amyloid. Very little was known about beta-amyloid protein until
      1984 when Professors 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, Beyreuther and Tanzi of Harvard Medical School discovered
      how beta-amyloid was produced and in 1994, Professor Ashley Bush of Harvard
      Medical School discovered that the interaction between metals and beta-amyloid
      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 and through a
      team
      of scientists employed by our company who are based at the University of
      Melbourne:




·
            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 three of these institutions demonstrated that clioquinol,
      codenamed PBT1, had potential efficacy for the treatment of Alzheimer’s disease.
      Our research efforts led to the development of a novel MPAC within the same
      chemical class as PBT1, PBT2, a low molecular weight chemical entity that
      demonstrates a significant preclinical improvement over PBT1, and a portfolio
      of approximately 400
      MPAC
      molecules in total (approximately 200 of which are of the same chemical class
      as
      PBT1 and the remaining MPACs are of other chemical classes). Our research
      program 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, Huntington’s disease, certain cancers
      and age-related macular degeneration).




**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. 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:




·
            Age-related
                cataracts;




19


·
            Parkinson’s
                disease;




·
            Huntington’s
                disease;




·
            Age-related
                macular degeneration;




·
            Certain
                cancers, and




·
            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
      beta-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
      beta-amyloid. In July 2006, we announced key preclinical efficacy findings
      with
      PBT2 demonstrating that PBT2 could rapidly enhance memory function within five
      days of dosing in an Alzheimer mouse model, improve synaptic function and
      significantly reduce soluble beta-amyloid protein levels in mouse models of
      Alzheimer’s disease in acute 24 hour experiments. Since such time, we have
      undertaken further confirmatory cognitive testing in another Alzheimer disease
      mouse model. For a description of the history and development of our lead PBT2
      compound as a therapeutic for the treatment of Alzheimer’s disease see Item 4A.
“Information on the Company - History and Development of the Company.”




***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 indicates
      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, a former director and Director of the Mental Health Research Institute
      of Melbourne, 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.




***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 ranks among
      the most common late life neurodegenerative diseases.




Our
      Melbourne research team is working on the role of a 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 of the disease, which concluded with
      positive results. In addition, groups unrelated to us have published data that
      demonstrates the usefulness of clioquinol in treating the symptoms of
      Parkinson’s disease generated in the alternative MPTP
      (1-methyl-4-phenyl-1,2,3,6-tetrahydropyridine) mouse model of the disease.
      Based
      on these positive results with clioquinol in such two mouse models , we are
      currently investigating the efficacy of other selected MPACs in these models
      to
      screen for possible MPAC candidates as treatment candidates for Parkinson’s
      disease.




20




***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 have 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 have tested several 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. PBT2 has
      shown good efficacy in the R6/2 mouse model of Huntington’s
      disease.




**Clinical
      Trials**




In
      2003,
      PBT2 successfully completed in-house preclinical screening and was selected
      by
      us as a development candidate. At such time, we initiated the initial
      preclinical toxicology testing required to support initial human trials, which
      was successfully completed in early 2005. 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 PBT2. In early 2006, we
      also successfully completed a second Phase I multi-dose escalation safety
      clinical trial of PBT2. On May 5, 2006, we announced that we received an expert
      report in respect of the Phase I trials for PBT2. The expert report was prepared
      by Dr. Craig Ritchie, psychiatrist and Director of Mental Health Clinical Trials
      at University College London and a clinical advisor to our company. Dr. Craig
      Ritchie concluded that the Phase I results provide the confidence needed to
      move
      forward to formal Phase II testing in people with Alzheimer’s disease. On May
      11, 2006, we announced our plans to move forward with a Phase IIa clinical
      trial
      for PBT2 in patients with Alzheimer’s disease. On December 19, 2006 we announced
      that dosing had commenced in the Phase IIa clinical trial. The Phase IIa trial
      is a three month double-blind, placebo-controlled safety and tolerability study
      of PBT2 in 80 elderly male and female patients with mild forms of Alzheimer’s
      disease. Tolerability, safety, cerebrospinal fluid and plasma biomarker and
      cognition endpoints will be measured. The Phase IIa clinical trial is expected
      to be completed by the end of 2007 and report its final findings by the end
      of
      first calendar quarter of 2008. For additional details regarding our clinical
      trials see Item 4.A. “Information on the Company - History and Development of
      the Company.” 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 commercialize drugs based on our beta-amyloid theory of
      Alzheimer’s disease.




**Rational
      Drug Design**




Rational
      drug design employs experiment based models, which target the molecular
      composition of various substances (in the case of Alzheimer’s disease the
      beta-amyloid protein) to allow the design of new chemical entities with the
      propensity to influence targeted substances and processes. In the case of MPACs,
      the targeted substances believed important are proteins and metals and the
      process of specific interest is believed to be metal-mediated oxyradical
      formation which leads to neurodegenerative changes.




Our
      medicinal chemistry program is based at laboratories that we lease 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 certain aggregating proteins such as beta-amyloid. 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-pro ne
      proteins such as beta-amyloid, 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 by our medicinal chemistry
      group
      to undertake preliminary *in
      vivo* pharmacology and kinetic studies of the new compounds demonstrating activity
      in
      the *in
      vitro* screens.
      We perform in *vivo* modeling
      for our lead compound candidates for Alzheimer’s disease with transgenic mice
      expressing a similar phenotype to human Alzheimer’s disease. Similarly, a
      transgenic mouse carrying a mutated Huntingtin gene is used to model
      Huntington’s disease and mice treated with neuronal toxins to produce the
      Parkinson’s phenotype are used to model Parkinson’s disease. Based on the
      results of these studies, lead compounds are selected by our medicinal chemistry
      group for formal pre-clinical studies. Data generated by these *in
      vitro* and *in
      vivo* screens
      are incorporated into our medicinal chemistry program to further refine
      development strategies for new compounds.




21




PBT2,
      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. PBT2 was selected from several hundred compounds that had been
      developed by us at such time. It has been designed to have an improved safety
      and pharmacokinetic profile and has demonstrated significant effectiveness
      in
      both pre-clinical *in
      vitro* and *in
      vivo* testing.  PBT2
      has
      completed initial 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 PBT2. In
      early 2006, we also successfully completed a second Phase I multi-dose
      escalation safety clinical trial of PBT2. On May 5, 2006 we announced that
      we
      received an expert report in respect of the Phase I trials for PBT2. The
      expert **** report
      was prepared by Dr. Craig Ritchie, psychiatrist and Director of Mental Health
      Clinical Trials at University College London and a clinical advisor to our
      company. Dr. Craig Ritchie concluded that the Phase I results provide the
      confidence needed to move forward to formal Phase II testing in people with
      Alzheimer’s disease. On May 11, 2006, we announced our plans to move forward
      with a Phase IIa clinical trial for PBT2 in patients with Alzheimer’s disease.
      On December 19, 2006 we announced that dosing had commenced in the Phase IIa
      clinical trial. The Phase IIa trial is a three month double-blind,
      placebo-controlled safety and tolerability study of PBT2 in 80 elderly male
      and
      female patients with mild forms of Alzheimer’s disease. Tolerability, safety,
      cerebrospinal fluid and plasma biomarker and cognition endpoints will be
      measured. The Phase IIa clinical trial is expected to be completed by the end
      of
      2007 and report its final findings by the end of first calendar quarter of
      2008.
      For additional details regarding our clinical trials see Item 4.A. “Information
      on the Company - History and Development of the Company.”




22




**Patent
      Portfolio**




**Invention**
            
            **Status**
            
            **Comments**“A
                method for assaying and treating Alzheimer’s Disease”
              Filed: 
                November 12, 1992
              Applicant: 
                The University of Melbourne
              Assigned
                to Prana Biotechnology Limited
            
            Patents
                granted in Australia, Europe, Japan and the United States. An application
                in Canada is under examination.
            
            The
                invention includes claims directed to the use of specified modulators
                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“Beta
                amyloid peptide inhibitors”
              Filed: 
                July 21, 2000
              Applicant:
                Biomolecular Research Institute and University of Melbourne
              Assigned
                to Prana Biotechnology Limited
            
            International
                (PCT) application has entered national phase in Europe, Canada, Japan
                and
                the United States. A patent has been granted in Australia and examination
                is expected in the other jurisdictions.
            
            The
                invention encompasses claims to agents capable of inhibiting binding
                of
                specified metal ions to the N-terminus of beta-amyloid and the use
                of
                these agents in the treatment of amyloid related conditions including
                Alzheimer’s disease.“An*in
                vitro*system for determining the formation of Ab Amyloid”
              Filed:
                October 19, 1994
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Patents
                have been granted in the United States and Japan. A patent application
                in
                Canada is undergoing examination.
            
            The
                invention is directed to an assay for the formation of beta-amyloid
                in a
                biological sample and inhibitors of that formation.“A
                diagnostic assay for Alzheimer’s Disease”
              Filed: 
                October 19, 1994
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Two
                patents have been granted in the United States and one patent granted
                in
                Canada.
            
            The
                invention is directed to an antibody based diagnostic assay for the
                detection and quantification of beta-amyloid species.“Identification
                of agents for use in the treatment of Alzheimer’s Disease”
              Filed:
                March 11, 1998
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Patents
                have been granted in Australia and United States. Applications are
                under
                examination in Japan, Europe and Canada.
            
            The
                invention is directed to the use of specified metal binding agents
                to
                reduce beta-amyloid mediated neurotoxicity and assays to identify
                agents
                capable of modifying neurotoxic properties of
                beta-amyloid“Agents
                for use in the treatment of Alzheimer’s Disease”
              Filed: 
                March 11, 1999
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Patents
                have been granted in Australia and the United States. Examination
                is
                pending in Canada and Japan. Patent has been allowed in Europe and
                is
                entering national phases in the United Kingdom, Ireland, Germany,
                France,
                Italy and Belgium.
            
            The
                invention is directed to compositions containing clioquinol and known
                metal binding agents and their use in the treatment of amyloid related
                diseases.“Method
                for Screening drugs useful for treating Alzheimer’s Disease”
              Filed:
                April 29, 1999
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            A
                continuation-in-part patent has been granted in the United States
                and a
                further U.S. divisional patent application is under examination.
            
            The
                invention is primarily directed to specified assays that identify
                agents
                capable of modifying the neurotoxic properties of
                beta-amyloid.“Neurotoxic
                Oligomers”
              Filed:
                June 28, 2000
              Applicants: 
                Prana Biotechnology Limited and The General Hospital
                Corporation
            
            A
                patent has been granted in Australia. An application is under examination
                in the United States, New Zealand and China. Examination has been
                requested Canada and Japan. An application in Europe is pending
                examination.
            
            The
                invention is directed to an immunotherapy strategy using tyrosine
                cross-linked protein aggregates. The approach may be used in the
                treatment
                of Alzheimer’s disease and other amyloid related
                conditions.




23




“Methods
                for the Identification of Agents that Inhibit or Promote Cataracts
                and
                Uses thereof” Filed: August 18, 2000
              Applicant:
                The General Hospital Corporation.
              Licensed
                to Prana Biotechnology Limited
            
            International
                (PCT) application has entered national phase. Applications in the
                United
                States and Europe are under examination. Applications in Japan and
                Canada
                have had examination requested. A patent has been granted in Australia
                and
                divisional patent allowed in the United States.
            
            The
                invention is directed to assays for the detection of agents useful
                in the
                treatment of age-related cataracts and a method of treatment utilizing
                specified metal chelators.“Methods
                of screening for inhibitors of Alzheimer’s Disease”
              Filed:
                December 12, 2000
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Application
                has entered national phase in the United States and is under
                examination.
            
            The
                invention encompasses claims to the identification of agents functioning
                as copper agonists and the use the agents in the treatment of amyloid
                related conditions including Alzheimer’s disease.“Treatment
                of Neurodegenerative Conditions”
              Filed:
                April 3, 2003
              Applicant:
                Prana Biotechnology Limited
            
            Applications
                have entered national phase in the United States, Europe, China and
                Australia. Each await request for examination.
            
            The
                invention encompasses the utility of the 8-hydroxyquinoline MPAC
                class in
                the treatment of neurodegenerative cognitive changes, particularly
                Huntington’s disease.“8-Hydroxyquinoline
                derivatives”
              Filed:
                July 16, 2003
              Applicant:
                Prana Biotechnology Limited
            
            International
                (PCT) application has entered national phase in the United States,
                Europe,
                China, Japan, Australia, Canada and eight other global
                jurisdictions.
            
            The
                invention is directed to chemical structures of the 8-hydroxyquinoline
                MPAC class and their utility in the treatment of neurological
                conditions.“Neurologically-Active
                Compounds”
              Filed:
                October 3 , 2003
              Applicant:
                Prana Biotechnology Limited
            
            International
                (PCT) Application has entered national phase in the United States,
                Europe,
                China, Japan, Australia, Canada and eight other global
                jurisdictions.
            
            The
                invention is directed to alternative MPAC chemical structures and
                their
                utility in the treatment of neurological conditions."Heterocyclic
                Compounds"
              Filed:
                January 4, 2007
              Applicant:
                Prana Biotechnology Limited
            
            A
                provisional application has been filed.
            
            The
                invention is directed to chemical structures of the 8-substituted
                quinoline MPAC class and their utility in the treatment of neurological
                conditions“Neurologically-
                Active Compounds”
              Filed:
                April 1, 2005
              Applicant:
                Prana Biotechnology Limited
            
            International
                (PCT) application designating, United States, Europe, China, Japan,
                Australia, Canada and eight other global jurisdictions.
            
            The
                invention is directed to ‘F4’ MPAC chemical structures and their utility
                in the treatment of neurological conditions.“Use
                of Phanquinone for the treatment of Alzheimer’s Disease”.
              Filed:
                October 19, 2000
              Applicant:
                Prana Biotechnology Limited
            
            Patent
                has been granted in the United States. An application in Japan is
                under
                examination.
            
            This
                invention is directed to the use of Phanquinone for the treatment
                of
                Alzheimer’s disease."Use
                of Phanquinone for the treatment of memory impairment”.
              Filed:
                April 3, 2003
              Applicant:
                Prana Biotechnology Limited
            
            Patent
                has been granted in the United States. An application in Japan is
                under
                examination.
            
            This
                invention is directed to the use of Phanquinone for the treatment
                of age
                related memory impairment.“Use
                of Clioquinol for the treatment of Alzheimer’s Disease”.
              Filed:
                February 13, 1998
              Applicant:
                Prana Biotechnology Limited
            
            Patent
                has been granted in the United States. An application in Japan is
                under
                examination.
            
            This
                invention is directed to the use of clioquinol for the treatment
                of
                Alzheimer’s disease.




24




“Pharmaceutical
                compositions of Clioquinol with B12 for therapeutic use”.
              Filed:
                February 13, 1998
              Applicant:
                Prana Biotechnology Limited.
            
            Patent
                has been granted in the United States. An application in Japan is
                under
                examination.
            
            This
                invention is directed to clioquinol pharmaceutical compositions comprising
                B12.“Use
                of Clioquinol for the treatment of Parkinson’s Disease”.
              Filed:
                February 13, 1998
              Applicant:
                Prana Biotechnology Limited.
            
            Patent
                in the United States has been granted. An application in Japan is
                under
                examination.
            
            This
                invention is directed to the use of clioquinol for the treatment
                of
                Parkinson’s disease"Method
                of treatment and prophylaxis and agents useful for same"
              Filed:
                April 13, 2007
              Applicant:
                Prana Biotechnology Limited
            
            A
                complete international (PCT) application has been filed.
            
            This
                invention is directed to MPAC compounds for the treatment of age-related
                macular degeneration..“A
                method of prophylaxis or treatment and agents for same”.
              Filed:
                June 22, 2007
              Applicant:
                Prana Biotechnology Limited
            
            A
                complete international (PCT) application has been filed.
            
            This
                invention is directed to MPAC compounds for treating certain
                cancers.




**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 grant and 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, export, 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.




25


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.




In
      addition to patent protection, we rely on unpatented trade secrets, know-how
      and
      other confidential information as well as 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, the Federal Drug
      Authority, or FDA, in the United States, the Medicines Control Agency, or MHRA,
      in the United Kingdom, the Medical
      Products Agency, or MPA, in Sweden 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.




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.




26


We
      completed the initial preclinical toxicology testing of PBT2 that is required
      to
      move a compound into 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 PBT2. In early 2006, we
      also successfully completed a second Phase I multi-dose escalation safety
      clinical trial of PBT2. On May 5, 2006, we announced that we received an expert
      report in respect of the Phase I trials for PBT2. The expert report was prepared
      by Dr. Craig Ritchie, psychiatrist and Director of Mental Health Clinical Trials
      at University College London and a clinical advisor to our company. Dr. Craig
      Ritchie concluded that the Phase I results provide the confidence needed to
      move
      forward to formal Phase II testing in people with Alzheimer’s disease. On May
      11, 2006, we announced our plans to move forward with a Phase IIa clinical
      trial
      for PBT2 in patients with Alzheimer’s disease. On December 19, 2006 we announced
      that dosing had commenced in the Phase IIa clinical trial. The Phase IIa trial
      is a three month double-blind, placebo-controlled safety and tolerability study
      of PBT2 in 80 elderly male and female patients with mild forms of Alzheimer’s
      disease. Tolerability, safety, cerebrospinal fluid and plasma biomarker and
      cognition endpoints will be measured. The Phase IIa clinical trial is expected
      to be completed by the end of calendar 2007 and to report its final findings
      in
      the first calendar quarter of 2008. For additional details regarding our
      clinical trials see Item 4.A. “Information on the Company - History and
      Development of the Company.”




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 PBT2. 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 and commercially appropriate, 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, EMEA, FDA or other
      regulatory authority for any or all targeted indications. Even after being
      cleared by a regulatory authority, 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 other development or product candidate will be safe or effective when
      administered to patients.




**Manufacturing
      and Raw Materials**




We
      have
      used third party manufacturers to produce the primary drug product (API) and
      secondary drug forms for our large-scale, preclinical and clinical PBT1 and
      PBT2
      trials, and we expect that we will use third party manufacturers for any future
      product candidates. Despite some difficulties in producing PBT1 API with an
      appropriate impurity profile, we have not faced the same difficulties in
      producing PBT2 API for our research and development activities or our clinical
      studies to date. We cannot make any assurances that we will be able to
      manufacture sufficient quantities of PBT2 or any other development or product
      candidate 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.




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 or may develop
      in the future. 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.




27




**Government
      Grants**




In
      May
      2003, the Australian Industry Research and Development Board, or IR&D Board,
      approved our application for funding under the Biotechnology
      Innovation Fund (BIF) 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 finished at the end of
      January 2005 having achieved the scientific milestone demonstrating that a
      mouse
      could generate antibodies that preferentially recognize dimerized ‘toxic linked’
forms of beta-amyloid and not the endogenous monomeric form of beta
      amyloid .




In
      the
      first quarter of 2004, we were granted a START grant from the IR&D Board to
      support further development of PBT2 and other Alzheimer’s disease research up to
      an amount of A$1.35 million. The grant was payable, in arrears, on the
      achievement of pre-specified milestones. 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. This grant was completed in December 2005 and we have
      received the entire amount of this grant.




Under
      the
      terms of the IR&D Board grants, we are required to submit reports to the
      IR&D Board in December 2006, December 2007 and December 2010 regarding any
      progress towards commercialization of our compounds and the nature of that
      commercialization that occurred as a result of the federal government
      funding.




**Commercial
      Collaboration**




In
      August
      2003, utilizing the grant we received from the Commonwealth Government of
      Australia under the BIF, we entered into an agreement with Prima Biotechnology
      Limited, or Prima, through its collaborative research partner, the Macfarlane
      Burnet Institute for Medical Research and Public Health ,
      known
      as the Burnet Research Institute at Austin, 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 intellectual property
      rights to our monoclonal antibodies that were used for the collaboration. In
      May
      2006, we terminated our collaboration with Prima due to a delay in reaching
      certain milestones. The
      scientists who worked on the project on behalf of Prima have since been hired
      by
      Monash University and we have retained their services to characterize selective
      monoclonal antibodies under a research agreement that we entered into with
      Monash University in January 2007 .




**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 at such time. Prana
      Biotechnology UK plc was established in the United Kingdom to allow us to
      conduct commercial and clinical operations in the United Kingdom. Both of the
      subsidiaries are currently inactive.




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




We
      own
      computer equipment, office furniture and laboratory equipment, the major item
      being a mass spectrometer that is being used at the University of Melbourne.




We
      were
      party to a three year property lease signed in May 2004 that expired in May
      2007
      under which we leased executive office space at 369 Royal Parade, Parkville,
      Victoria 3052, Australia, at an initial annual rental of A$105,551, which
      increased by 3.5% on a cumulative basis on the May anniversary of the lease.
      Although this lease expired in May 2007, the parties have continued to act
      in
      accordance with its terms on a month-to-month periodic lease basis and are
      currently in the process of negotiating a new lease for the office
      space.




28




**ITEM
      4A.** **UNRESOLVED
      STAFF COMMENTS**




We
      have
      received comment letters from the Securities and Exchange Commission dated
      June
      21, 2007 and August 21, 2007 in respect of our annual report on Form 20F and
      Amendment No. 1 to Form 20-F for the year ended June 30, 2006. We have submitted
      a response to both of these letters and to date, has not received further
      comments.




**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, including those Risk Factors contained in Item 3D of this annual
      report. You should read the following discussion and analysis in conjunction
      with our consolidated financial statements and the notes thereto included in
      this annual report.*




**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
      consolidated financial statements appearing in this annual report are prepared
      in Australian dollars and in accordance with the Australian equivalents to
      International Financial Reporting Standards adopted by the Australian Financial
      Reporting Council on January 1, 2005, which became effective for our company
      as
      of our fiscal year ended June 30, 2006. 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.




29


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 PBT1 compound as a
      therapeutic for the treatment of Alzheimer’s disease and in early August 2003,
      our PBT2 compound was announced as a new lead metal protein attenuating
      compound, or MPAC, molecule for Alzheimer’s disease.




On
      April
      11, 2005, we announced that we would not proceed with the scheduled Phase II/III
      study of PBT1 and that we had re-evaluated our further work on the PBT1 program.
      As part of our effort to manufacture Good Manufacturing Practice (GMP) grade
      PBT1 clinical trial material, we found unacceptably high levels of a
      di-iodo-8-hydroxyquinoline impurity that could potentially increase the risk
      of
      side-effects and mutagenic potential. 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 PBT1 for the
      treatment of Alzheimer’s disease was not appropriate. On June 30, 2005, our
      Board of Directors determined that the core intellectual property relating
      to
      PBT1 had been impaired and the carrying value was written-off.




As
      a
      result of these events, we proceeded to conduct a strategic review of our
      pending strategic development programs. 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, PBT2. We completed two Phase I studies of PBT2 (for details see Item
      4A. “Information on the Company - History and Development of the Company”) and
      on May 11, 2006, we announced our plans to move forward with a Phase IIa
      clinical trial for PBT2 in patients with Alzheimer’s disease. On December 19,
      2006 we announced that dosing had commenced in the Phase IIa clinical trial.
      The
      Phase IIa trial is a three month double-blind, placebo-controlled safety and
      tolerability study of PBT2 in 80 elderly male and female patients with mild
      forms of Alzheimer’s disease. Tolerability, safety, cerebrospinal fluid and
      plasma biomarker and cognition endpoints will be measured. The Phase IIa
      clinical trial is expected to be completed by the end of 2007 and report its
      final findings by the end of first calendar quarter of 2008. For additional
      details regarding our clinical trials see Item 4.A. “Information on the Company
      - History and Development of the Company.”




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




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




**As
                of and for the years ended June 30,****2007**
            
            **2006**
            
            **2005**Net
                loss in accordance with:A-IFRS
            
            
            (11,142,320
            )
            
            (11,590,594
            )
            
            (10,293,031
            )U.S.
                GAAP
            
            
            (11,142,320
            )
            
            (11,590,594
            )
            
            (11,998,032
            )Total
                equity in accordance with:A-IFRS
            
            
            5,612,195
            
            
            7,800,658U.S.
                GAAP
            
            
            5,612,195
            
            
            7,800,658




See
      Note
      27 to our consolidated financial statements for a description of the differences
      between A-IFRS 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-IFRS and U.S. GAAP that have a material effect on net loss and total
      equity relate to share-based compensation and intangible assets.




30


**Critical
      Accounting Policies**




We
      prepare our financial statements in accordance with A-IFRS. 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 to the consolidated 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-IFRS are discussed
      below.




*Share-
      based payments.* Equity-settled
      share-based payments granted after November 7, 2002 that were unvested as of
      January 1, 2005 are measured at fair value at the date of grant. Fair value
      is
      measured by use of the Black-Scholes model (for options without market
      conditions) or the Barrier Pricing model (for options with market conditions).
      The expected life used in the model has been adjusted, based on management’s
      best estimate, for the effects of non-transferability, exercise restrictions,
      and behavioural considerations. The date used to value share-based payments
      for
      non-employees may be different to the grant date used to value employee
      share-based payments where service conditions apply. The fair value of the
      equity-settled share-based payments is expensed on a straight-line basis over
      the vesting period for each tranche of equity, based on our estimate of shares
      that will eventually vest.




*Revenue
      recognition from continuing operations* .
      We
      recognize revenue from continuing operations to the extent that it is probable
      that the economic benefits will flow to us and the revenue from continuing
      operations can be reliably measured. To date our revenue from continuing
      operations has consisted of interest income, which is recognized as earned
      when
      collectibility is reasonably assured.




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




·
            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. Other income
                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. Other income for
                each
                milestone achieved is fixed at the initiation of the program.




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




·
            Corporate
                partner income is comprised of amounts received for certain research
                and
                development activities under the licensing and research collaboration
                we
                entered into with Schering A.G. and Neurosciences Victoria Ltd. in
                March
                2003., which was concluded in June 2005. Such income was 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 were performed on a “best efforts” basis with no guarantee
                of either technological or commercial success.




31


*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.
      Recoverable amount is the higher of fair value less costs to sell and value
      in
      use. In assessing value in use, the estimated future cash flows are discounted
      to their present value using a pre-tax discount rate that reflects current
      market assessments of the time value of money and the risks specific to the
      asset for which the estimates of future cash flows have not been adjusted.




On
      June
      30, 2005, following our announcement regarding the cessation of our PBT1 program
      in April 2005, our Board of Directors determined that the core intellectual
      property relating to PBT1 had been impaired and the carrying value was
      written-off.




*Intangible
      assets and patents, research and development expense* .
      Prior
      to our April 2005 announcement of the cessation of our PBT1 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, our Board of Directors determined that our core intellectual property
      relating to PBT1 had been impaired and the carrying value was written-off.




**Significant
      Costs and Expenses**




*Research
      and development expenses* .
      Our
      research and development expenses consist primarily of compensation and related
      costs for 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, which have been expensed subsequent
      to December 1999.




*Personnel
      expenses* .
      Our
      personnel expenses consist of directors’ fees, consultancy fees paid to
      clinicians and scientists, share-based payments, and payments for benefits
      provided to our employees and officers for their services.




*Intellectual
      property expenses* .
      Our
      intellectual property expenses consist of fees paid to our outside counsel
      for
      legal fees associated with patent applications and for the defense of
      patents.




*Auditor
      and accounting expenses .* Our
      auditor and accounting expenses fees consist of the fees paid to our auditors
      for services related to annual reports and interim reports filed or submitted
      in
      Australia and the United States and fees paid to other accounting firms in
      respect of tax and other accounting advice.




*Travel
      expenses.* Our
      travel expenses consist primarily of expenses associated with air travel,
      accommodation and associated consumables both locally and overseas by directors
      and employees.




*Marketing
      expenses.* Our
      marketing expenses consist of public relations and marketing expenses incurred
      with outside consultants in relation to ASX and NASDAQ announcements and
      presentations.




*Depreciation
      expense* .
      Depreciation of property and equipment is provided on a straight-line basis
      over
      the estimated useful lives of three to 20 years.




·Furniture
                and fittings:
            
            
            5-33
            %·Computer
                equipment:
            
            
            33
            %·Laboratory
                equipment:
            
            
            10-33
            %·Leasehold
                improvements:
            
            
            33
            %




32




*Amortization
      expense* .
      Prior
      to the impairment of our core intellectual property relating to PBT1 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.




Due
      to
      our implementation of A-IFRS and our subsequent inability to recognize our
      core
      intellectual property relating to PBT1, our amortization expenses have been
      adjusted accordingly, retroactively as of July 1, 2004.




*Other
      expenses* .
      Other
      expenses consist of corporate compliance, insurance, computer and overhead
      expenses.




*Foreign
      exchange gain (loss)* .
      Foreign
      exchange gains (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.




*Gain
      on fair value of financial liabilities* .
      Each
      reporting period, we are required to revalue financial liabilities. Our
      financial liabilities consist of warrants that were issued to the investors
      in
      our private placement in the United States in June 2004. The warrants permit
      the
      investors to purchase an aggregate 3,000,000 ADRs at an exercise price of
      US$8.00 per ADR on or before June 4, 2009. Because the warrants are exercisable
      in a currency that is not the functional currency of our company, they are
      classified as a financial liability. When the fair value of the outstanding
      warrants increases or decreases, the difference is recorded as a gain or loss,
      as applicable, on the fair value of financial liabilities.




**Results
      of Operations**




**Year
      ended June 30, 2007 compared to year ended June 30, 2006**




*Revenue
      from continuing operations*




Revenue
      from continuing operations decreased to A$507,150 for the year ended June 30,
      2007 from A$762,023 for the year ended June 30, 2006, a decrease of A$254,873,
      or 33%. Revenue from continuing operations consisted of A$507,150 and A$762,023
      in interest income in the years ended June 30, 2007 and 2006, respectively.
      The
      decrease in revenue from continuing operations in the 2007 fiscal year was
      primarily attributable to lower interest income as a result of a reduction
      in
      cash and cash equivalents.




*Other
      Income*




Other
      income decreased to A$287 for the year ended June 30, 2007 from A$288,263 for
      the year ended June 30, 2006, a decrease of A$287,976, or 100%. Other income
      in
      the year ended June 30, 2006 consisted of A$288,173 in government grant income
      that was directed to the early clinical development of PBT2, Phase I trials
      for
      PBT2 and other clinical and pre clinical development activities. We received
      the
      final amount under this grant in the year ended June 30, 2006. We did not
      receive any government grants in fiscal 2007.




*Research
      and development expenses*




Research
      and development expenses (including research and development expenses paid
      to
      related parties) decreased to A$4,492,193 for the year ended June 30, 2007
      from
      A$7,613,045 for the year ended June 30, 2006, a decrease of A$3,120,852, or
      41%.
      The decrease in research and development expenses in the year ended June 30,
      2007, was primarily attributable to a delay in the initiation of the Phase
      IIa
      trial for our PBT2 lead compound as a result of which other than costs
      attributable to first patient dosing in December 2006, most of the substantive
      patient costs and clinical research organization costs for the Phase IIa
      clinical trial were not incurred until April 2007. Research and development
      expenses in the year ended June 30, 2006 consisted of expenses associated with
      two Phase I clinical trials for our PBT2 lead compound, pre-clinical chronic
      toxicology programs and the pre-clinical research programs for our other
      compounds. Research and development expenses in the year ended June 30, 2007
      consisted of expenses associated with the Phase IIa clinical trial for PBT2
      and
      the pre-clinical research programs for our other compounds. In fiscal year
      2008,
      our research and development will be primarily directed at our PBT2 compound,
      including the completion of the Phase IIa study and manufacture of PBT2 for
      Phase IIb studies in Alzheimer’s disease or clinical trials in other
      indications. In addition, further expenditure is expected in developing our
      other potential lead compounds at a pre-clinical level, including a possible
      formal chronic toxicology program for a new lead compound.




33


*Personnel
      expenses*




Personnel
      expenses increased to A$4,554,731 for the year ended June 30, 2007 from
      A$3,418,008 for the year ended June 30, 2006, an increase of A$1,136,723 or
      33%.
      The increase in personnel expenses in the 2007 fiscal year was primarily
      attributable to a A$1,386,243 expense relating to grants of options and shares
      in the 2007 fiscal year to directors, consultants and employees. Additional
      research and development consultants were also engaged in such period. Personnel
      expenses in the 2007 fiscal year consisted of payments to employees, directors
      and consultants, including cash and equity-based payments. Personnel expenses
      in
      the 2007 included a portion of the total fair value of options granted to our
      directors and employees in the 2005 and 2006 fiscal years of A$192,890.
      Personnel expenses in the 2006 fiscal year consisted of payments to employees,
      directors and consultants and included a portion of the total fair value of
      options granted to our directors and employees at the beginning of the 2006
      calendar year.




*Intellectual
      property expenses*




Intellectual
      property expenses increased to A$600,232 for the year ended June 30, 2007 from
      A$466,426 for the year ended June 30, 2006, an increase of A$133,806, or 26%.
      The increase in intellectual property expenses in the 2007 fiscal year was
      primarily due to certain patent applications entering more expensive phases
      of
      their prosecution, including maturation into national phase examination.




*Auditor
      and accounting expenses*




Auditor
      and accounting expenses increased to A$260,117 for the year ended June 30,
      2007
      from A$205,815 for the year ended June 30, 2006, an increase of A$54,302, or
      26%. The increase in auditor and accounting expenses in the 2007 fiscal year
      was
      primarily attributable to additional audit services required for the
      reclassification of the warrants issued in connection with the June 2004 private
      placement in the United States as a financial liability because the warrants
      are
      exercisable in a currency that is not the functional currency of our
      company. ****




*Travel
      expenses*




Travel
      expenses increased to A$309,997 for the year ended June 30, 2007 from A$212,184
      for the year ended June 30, 2006, an increase of A$97,813, or 46%. The increase
      in travel expenses in the 2007 fiscal year was primarily attributable to
      additional travel expenses of consultants associated with their visit to the
      Phase IIa clinical trial sites in Sweden, travel expenses associated with the
      inaugural meeting of the Research and Development Advisory Board in New York
      in
      March 2007 and travel expenses of our U.S.-based chief strategic advisor
      associated with his visit to our company in Australia to assist with developing
      company objectives.




34


*Marketing
      expenses*




Marketing
      expenses increased to A$215,455 for the year ended June 30, 2007 from A$134,750
      for the year ended June 30, 2006, an increase of A$80,705, or 60%. The increase
      in marketing expenses in the 2007 fiscal year was primarily attributable to
      costs associated with the preparation and filing of an increased number of
      market announcements.




*Depreciation
      expenses*




Depreciation
      expenses decreased to A$58,582 for the year ended June 30, 2007 from A$118,196
      for the year ended June 30, 2006, a decrease of A$59,614, or 50%. The decrease
      in depreciation expenses in the 2007 fiscal year was primarily attributable
      to
      previously acquired fixed assets reaching the end of their depreciable life
      during such period, while we acquired a small amount of new fixed assets during
      the same period.




*Amortization
      expenses*




We
      did
      not incur any amortization expenses relating to our intellectual property in
      the
      2006 and 2007 fiscal years. ****




*Other
      expenses*




Other
      expenses (including other expenses paid to related parties) increased to
      A$1,008,563 for the year ended June 30, 2007 from A$824,625 for the year ended
      June 30, 2006, an increase of A$183,938, or 22%. The increase in other expenses
      in the 2007 fiscal year was primarily attributable to an increase in the fees
      of
      an external consultant that provides corporate compliance services to our
      company on a regular basis and increased expenses associated with the
      distribution of the 2006 annual report.




*Foreign
      exchange gain*




We
      recorded a foreign exchange loss of A$757,578 for the year ended June 30, 2007
      compared to a foreign exchange gain of A$223,454 for the year ended June 30,
      2006. In fiscal 2007, we incurred a foreign exchange loss of $763,797
      attributable to the cash balances that we held in U.S. dollars, a foreign
      exchange loss of A$6,499 attributable to the cash balances that were held in
      Great British Pounds, a foreign exchange loss of A$7,839 attributable to cash
      balances that were held in Euro and a foreign exchange gain of A$20,554
      attributable to foreign currency transactions. In fiscal 2006, we incurred
      a
      foreign exchange gain of A$1,135,003 attributable to the cash balances that
      we
      held in U.S. dollars, a foreign exchange gain of A$75,005 attributable to the
      cash balances that were held in Great British Pounds, a foreign exchange loss
      of
      A$941,047 attributable to cash balances that were held in Euro and a foreign
      exchange loss of A$45,507 attributable to foreign currency transactions.




*Impairment
      of intangible assets*




We
      did
      not record any impairment of intangible assets in the 2006 and 2007 fiscal
      years.




*Gain
      on fair value of financial liabilities*




Gain
      on
      fair value of financial liabilities increased to A$607,691 for the year ended
      June 30, 2007 compared to a gain on fair value of financial liabilities
      A$128,715 for the year ended June 30, 2006, an increase of A$478,976 or 372%.
      The increase in gain on fair value of financial liabilities is attributable
      to
      the changes in the market price of our ADRs and the volatility of the ADR market
      price.




35




**Year
      ended June 30, 2006 compared to year ended June 30, 2005**




*Revenue
      from continuing operations*




Revenue
      from continuing operations decreased to A$762,023 for the year ended June 30,
      2006 from A$892,135 for the year ended June 30, 2005, a decrease of A$130,112,
      or 14.6%. Revenue from continuing operations consisted of A$762,023 and
      A$892,135 in interest income in the years ended June 30, 2006 and 2005
      respectively. The decrease in revenue from continuing operations in the 2006
      fiscal year was attributable to lower interest income as a result of a reduction
      in cash and cash equivalents.




*Other
      Income*




Other
      income decreased to A$288,263 for the year ended June 30, 2006 from A$1,760,978
      for the year ended June 30, 2005, a decrease of A$1,472,715, or 83.6%. Other
      income in the year ended June 30, 2006 consisted of A$288,173 government grant
      income. Other income in the year ended June 30, 2005 consisted of 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. The decrease in other income in the 2006 fiscal
      year was attributable to the reduction in funding from Schering A.G. and
      Neurosciences Victoria Ltd. due to the completion of the contracts in connection
      with our collaboration with Schering A.G and Neurosciences Ltd in June 2005.




*Research
      and development expenses*




Research
      and development expenses (including research and development expenses paid
      to
      related parties) remained substantially consistent at A$7,613,045 for the year
      ended June 30, 2006 from A$7,687,596 for the year ended June 30, 2005. Research
      and development expenses in the year ended June 30, 2005 consisted of expenses
      related to clinical trials for our PBT1 compound as a treatment for Alzheimer’s
      disease that ceased in April 2005 and A$911,250 of expenses associated with
      our
      licensing and research collaboration with Schering A.G. and Neurosciences
      Victoria Ltd. that was concluded in June 2005. Research and development expenses
      in the year ended June 30, 2006 consisted of expenses associated with two Phase
      I clinical trials for our PBT2 lead compound and the pre-clinical research
      programs for our other compounds. In fiscal year 2007, our research and
      development will be primarily directed at PBT2, including the Phase IIa clinical
      trial for PBT2. In addition, further expenditure is expected in developing
      our
      other potential lead compounds at a pre-clinical level.




*Personnel
      expenses*




Personnel
      expenses decreased to A$3,418,008 for the year ended June 30, 2006 from
      A$5,750,929 for the year ended June 30, 2005, a decrease of A$2,332,921, or
      40.6%. The decrease in personnel expenses in the 2006 fiscal year was primarily
      due to the closure of our U.S. office in August 2005 and a reduction in staff
      in
      the United States and Australia. Personnel expenses in the 2005 fiscal year
      include A$2,211,792 in cash and equity payments (including the expensing of
      options grants) made to Dr. Jon Alsenas, our former U.S. based director and
      Chief Executive Officer, and A$449,800 in equity issued to a consultant. The
      decrease in personnel expenses in the 2006 fiscal year was offset in-part by
      employee salary increases and the grant of options to directors and employees
      at
      the beginning of the 2006 calendar year. Only a portion of the total fair value
      of such options granted to our directors and employees was recognized as
      personnel expenses for the fiscal year ended June 30, 2006 and a further
      A$924,782 will be recognized in future fiscal years.




*Intellectual
      property expenses*




Intellectual
      property expenses decreased to A$466,426 for the year ended June 30, 2006 from
      A$729,583 for the year ended June 30, 2005, a decrease of A$263,157, or 36.1%.
      The decrease in intellectual property expenses in the 2006 fiscal year was
      primarily due to our company handling more of the work associated with patent
      applications in-house in the 2006 fiscal year, while we engaged more external
      consultants in the 2005 fiscal year. In addition, in the 2005 fiscal year a
      new
      patent application was filed at a cost of approximately A$100,000.




36


*Auditor
      and accounting expenses*




Auditor
      and accounting expenses remained substantially consistent at A$205,815 for
      the
      year ended June 30, 2006 from A$202,032 for the year ended June 30, 2005, an
      increase of A$3,783, or 1.9%.




*Travel
      expenses*




Travel
      expenses decreased to A$212,184 for the year ended June 30, 2006 from A$432,316
      for the year ended June 30, 2005, a decrease of A$220,132, or 50.1%. The
      decrease in travel expenses in the 2006 fiscal year was due, in part, to the
      cessation of travel between the United States and Australia of Dr. Jon Alsenas,
      our former U.S. based director and Chief Executive Officer, following his
      resignation in June 2005, which expenses amounted to A$141,683 in the 2005
      fiscal year.




*Marketing
      expenses*




Marketing
      expenses decreased to A$134,750 for the year ended June 30, 2006 from A$442,920
      for the year ended June 30, 2005, a decrease of A$308,170, or 69.6%. The
      decrease in marketing expenses in the 2006 fiscal year was primarily due to
      the
      cessation of services provided to our U.S. subsidiary by a public relations
      and
      marketing consultant following the closure of our U.S. office in August 2005.




*Depreciation
      expenses*




Depreciation
      expenses increased to A$118,196 for the year ended June 30, 2006 compared to
      A$65,223 for the year ended June 30, 2005, an increase of A$52,973, or 81.2%.
      The increase in depreciation expenses in the 2006 fiscal year is the result
      of
      the acceleration of leasehold improvement depreciation in line with the life
      of
      the lease agreement.




*Amortization
      expenses*




We
      recorded amortization expenses relating to PBT1 core intellectual property
      of
      A$83,200 for the year ended June 30, 2005. As a result of the impairment of
      the
      carrying value of our core intellectual property relating to PBT1 to nil
      recoverable amount on June 30, 2005, we did not incur any amortization expenses
      relating to our intellectual property in the 2006 fiscal year. ****




*Other
      expenses*




Other
      expenses (including other expenses paid to related parties) decreased to
      A$824,625 for the year ended June 30, 2006 from A$1,204,930 for the year ended
      June 30, 2005, a decrease of A$380,305, or 46.1%. The decrease in other expenses
      in the 2006 fiscal year is primarily due to reduced expenditures following
      the
      closure of our U.S. office in August 2005.




*Foreign
      exchange gain (losses)*




We
      recorded a foreign exchange gain of A$223,454 for the year ended June 30, 2006
      compared to a foreign exchange loss of A$1,362,572 for the year ended June
      30,
      2005. In fiscal 2006, we incurred a foreign exchange gain of A$1,135,003
      attributable to the cash balances that we held in U.S. dollars, a foreign
      exchange gain of A$75,005 attributable to the cash balances that were held
      in
      Great British Pounds, a foreign exchange loss of A$941,047 attributable to
      cash
      balances that were held in Euro and a foreign exchange loss of A$45,507
      attributable to foreign currency transactions. In fiscal 2005, we incurred
      a
      foreign exchange loss of A$1,297,790 attributable to the cash balances that
      we
      held in U.S. dollars, a foreign exchange loss of A$50,574 attributable to the
      cash balances that were held in Great British Pounds and a foreign exchange
      loss
      of A$14,208 attributable to foreign currency transactions. In 2005, the
      Australian dollar appreciated by 4.3% against the U.S. dollar, while the
      Australian dollar depreciated by 9.4% against the U.S. dollar in 2006.




37




*Impairment
      of intangible assets*




Impairment
      of intangible assets was A$786,240 for the year ended June 30, 2005. This was
      a
      one-off non-cash expense incurred as a result of our 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 PBT1 clinical trial due to toxicity
      issues and the decision to continue research into PBT2 as the lead compound.
      The
      core intellectual property related primarily to externally acquired patents
      for
      PBT1.




*Gain
      on fair value of financial liabilities*




Gain
      on
      fair value of financial liabilities decreased to A$128,715 for the year ended
      June 30, 2006 compared to a gain on fair value of financial liabilities
      A$5,801,397 for the year ended June 30, 2005, a decrease of A$5,672,682 or
      97.8%. The decrease in the gain on fair value of financial liabilities is
      attributable to changes in the market price of our ADRs and the volatility
      of
      the ADR market price.




**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.




**Recently
      Issued Accounting Pronouncements Applicable To Us**




***Australian
      Pronouncements***




Certain
      new accounting standards and interpretations of the Australian Accounting
      Standards Board Urgent Issue Group have
      been published that are not mandatory for June 30, 2007 reporting
      periods.




*AASB
      7 Financial Instruments: Disclosures and ASSB 2005-10 Amendments to Australian
      Accounting Standards [AASB 132, AASB 101, AASB 114, AASB117, AASB 133, AASB
      139,
      AASB 1, AASB 4, AASB 1023, and AASB 1038] -* AASB
      7
      and AASB 2005-10 are applicable to annual reporting periods beginning on or
      after January 1, 2007. Application of the standards will not effect any of
      the
      amounts recognized in our financial statements, but will impact the type of
      information disclosed in relation to our financial instruments.




*AASB-I
      10 Interim Financial Reporting and Impairment* -
      AASB-I
      10 is applicable to reporting periods commencing on or after November 1, 2006.
      We have not recognized an impairment loss in relation to goodwill in an interim
      reporting period, but subsequently reversed the impairment loss in the annual
      report. Application of the interpretation therefore does not have an impact
      on
      our financial statements.




*Revised
      AASB 101 Presentation of Financial Statements -* A
      revised
      AASB 101 was issued in October 2006 and is applicable to annual reporting
      periods beginning on or after January 1, 2007. Application of the revised
      standard will not have any impact on our financial statements.




*AASB
      2007-4 Amendments to Australian Accounting Standards arising from ED 151 and
      Other Amendments and AASB 2007-7 Amendments to Australian Accounting Standards
      [AASB 1, AASB 2, AASB 4, AASB 5, AASB 107 & AASB 128] -* AASB
      2007-4 is applicable to annual reporting periods beginning on or after July
      1,
      2007. We do not intend to apply any of the new options now available. As a
      consequence, application of the revised standards will not affect any of the
      amounts recognized in the our financial statements, but it may remove some
      of
      the disclosures that are currently required. In relation to the discount rates
      used in the measurement of employee benefit obligations, we have not yet reached
      a conclusion as to whether there is a deep market in corporate bonds in
      Australia and hence have not yet determined the financial effect, if any, on
      the
      obligations from the adoption of AASB 2007-4. This is not expected to have
      a
      material impact on our financial statements.




38


*AASB
      2007 - 7 Amendments to Australian Accounting Standards [AASB 1, AASB 2, AASB
      4,
      AASB 5, AASB 107 & AASB 128]-* AASB
      2007-7 amendments to AASB 1, AASB 2, AASB 4, AASB 5, AASB 107 and AASB 128
      are
      applicable to annual reporting periods beginning on or after July 1, 2007.
      Application of the standards will not affect any of the amounts recognized
      in
      our financial statements, but may impact the type of information disclosed
      in
      relation to the company’s financial statements.




***United
      States Pronouncements***




In
      July
      2006, the Financial Accounting Standards Board, or the FASB, issued
      Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes* ,”
or
      FIN
      48, as an interpretation of SFAS 109. This Interpretation clarifies the
      accounting for uncertainty in income taxes recognized by prescribing a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. This Interpretation also provides guidance on de-recognition of
      tax
      benefits previously recognized and additional disclosures for *unrecognized* tax
      benefits, interest and penalties. The evaluation of a tax position in accordance
      with this Interpretation begins with a determination as to whether it is more
      likely than not that a tax position will be sustained upon examination based
      on
      the technical merits of the position. A tax position that meets the
      more-likely-than-not recognition threshold is then measured at the largest
      amount of benefit that is greater than 50 percent likely of being realized
      upon
      ultimate settlement for recognition in the financial statements. FIN 48 is
      effective no later than fiscal years beginning after December 15, 2006, and
      is
      required to be adopted by us on July 1, 2007. We are currently assessing the
      impact of the adoption of FIN 48.




In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ”
or
      SFAS
      157. SFAS 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles, and expands disclosures
      about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the FASB having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. This Statement is required to be adopted by us on
      July 1, 2008. We are currently assessing the impact of the adoption of this
      Statement.




In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities, Including
      an
      amendment of FASB Statement No. 115* ,”
or
      SFAS 159. This Statement permits entities to measure eligible financial assets,
      financial liabilities and firm commitments at fair value, on an
      instrument-by-instrument basis, that are otherwise not permitted to be accounted
      for at fair value under other generally accepted accounting principles. The
      fair
      value measurement is irrevocable and subsequent changes in fair value must
      be
      recorded in earnings. SFAS 159 is effective for financial statements issued
      for
      fiscal years beginning after November 15, 2007. This Statement is required
      to be
      adopted by us on July 1, 2008. At this time, we believe that the adoption of
      SFAS 159 will not have a material effect on our financial position or results
      of
      operations.




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




We
      are a
      development stage company and have had no sales income to date, and as of June
      30, 2007 our accumulated deficit totaled A$52,483,038. From inception until
      our
      initial public offering in March 2000 we financed our operations primarily
      through borrowings from two of our then 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.




39


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 amount
      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 (approximately A$32 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.




In
      November 2006, we raised approximately A$7.4 million net of issuance costs
      in a
      private placement of our securities to new institutional investors in Australia,
      institutional investors in the United States and one of our founders. The
      private placement was for 21.8 million ordinary shares (equivalent to 2.18
      million ADRs) at a price of A$0.357 per ordinary share (approximately US$2.80
      per ADR). The private placement also involved the acquisition by the investors
      of three-year options to purchase an additional 4.35 million ordinary shares
      (equivalent to 435,000 ADRs) at an exercise price of A$0.446 per ordinary share
      (approximately US$3.40 per ADR). To date, no warrants have been exercised.




On
      September 12, 2006, we issued a notice of special general meeting of
      shareholders, the purpose of which is to obtain shareholder approval to raise
      up
      to A$10 million in a private placement of our ordinary shares in Australia.
      The
      meeting is scheduled for October 15, 2007.




We
      had
      A$7,409,256 of cash and cash equivalents at June 30, 2007, compared to
      A$10,013,778 at June 30, 2006.




**Cash
      Flows**




The
      following table summarizes our cash flows for the periods presented:




**Year
                ended June 30,****2007**
            
            **2006**
            
            **2005**(A$)Net
                cash used in operating activities
            
            
            (9,199,750
            )
            
            (11,651,215
            )
            
            (11,418,813
            )Net
                cash used in investing activities
            
            
            (4,259
            )
            
            (55,251
            )
            
            (50,466
            )Net
                cash provided by (used in) financing activities
            
            
            7,374,725
            
            
            (2,020
            )
            
            4,704,757Net
                decrease in cash and cash equivalents
            
            
            (1,829,284
            )
            
            (11,708,486
            )
            
            (6,764,522
            )Cash
                and cash equivalents at beginning of period
            
            
            10,013,778
            
            
            21,453,304
            
            
            29,580,398Exchange
                rate adjustments on cash held in foreign currencies
            
            
            (775,238
            )
            
            (268,960
            )
            
            (1,362,572
            )Cash
                and cash equivalents at end of period
            
            
            7,409,256
            
            
            10,013,778
            
            
            21,453,304




40


Net
      cash
      used in operating activities was A$9,199,750, A$11,651,215 and A$11,418,813
      during the years ended June 30, 2007, 2006 and 2005, respectively. Our payments
      to suppliers and employees during the years ended June 30, 2007, 2006 and 2005
      were A$9,726,197, A$12,647,636 and A$13,959,679, respectively. The decrease
      in
      payments from the year ended June 30, 2006 to the year ended June 30, 2007
      was
      primarily due to a reduction in research and development expenses. The decrease
      in payments from the year ended June 30, 2005 to the year ended June 30, 2006
      was due to the closure of our U.S. office in August 2005 as well as a reduction
      in interest received on our bank deposits and government grant income. During
      the years ended June 30, 2007, 2006 and 2005, our payments to suppliers and
      employees were offset by government grants of A$nil, A$231,710 and A$532,283,
      respectively, and interest income of A$526,447, A$764,711 and A$883,583,
      respectively. Additionally, during the year ended June 30, 2005, our payments
      to
      suppliers and employers was further offset by A$1,125,000 for research funding
      attributable to our collaboration with Schering A.G. and Neurosciences Victoria
      Ltd. that was concluded in June 2005.




Net
      cash
      used in investing activities was A$4,259, A$55,251 and A$50,466 during the
      years
      ended June 30, 2007, 2006 and 2005, respectively.




Net
      cash
      provided by financing activities was A$7,374,725 during the year ended June
      30,
      2007, compared to net cash used in financing activities of A$2,020 during the
      year ended June 30, 2006, compared to net cash provided by financing activities
      of A$4,704,757 during the year ended June 30, 2005. Cash flows provided by
      financing activities during the year ended June 30, 2007 are attributable to
      a
      private placement in November 2006 of 21.8 million ordinary shares (equivalent
      to 2.18 million ADRs) at a price of A$0.357 per ordinary share (approximately
      US$2.80 per ADR). The private placement also involved the acquisition by the
      investors of three-year options to purchase an additional 4.35 million ordinary
      shares (equivalent to 435,000 ADRs) at an exercise price of A$0.446 per ordinary
      share (approximately US$3.40 per ADR). Cash flows used
      in financing activities during the year ended June 30, 2006 reflected the costs
      associated with the issuance of securities to a consultant in lieu of cash.
      Cash
      flows provided
      by financing activities during the year ended June 30, 2005 reflected the exercise
      of options into ordinary share capital.




We
      realized a foreign exchange loss of A$775,238 for the year ended June 30, 2007,
      compared to a realized foreign exchange gain of A$268,960 for the year ended
      June 30, 2006, compared to a realized foreign exchange loss of A$1,362,572
      for
      the year ended June 30, 2005. In 2006, the Australian dollar depreciated by
      9.4%
      against the U.S. dollar, while the Australian dollar depreciated by 16.3%
      against the U.S. dollar in 2007. In 2005, the Australian dollar appreciated
      by
      4.3% against the U.S. dollar, while the Australian dollar depreciated by 9.4%
      against the U.S. dollar in 2006.




From
      inception to June 30, 2007, our capital expenditures have totaled A$332,941
      (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 depreciated on a straight-line basis over the
      estimated useful lives of three to 20 years, with a net balance at June 30,
      2007
      of A$47,891. 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, 2007, our principal commitments consisted of obligations under our
      agreements with Professor Ashley Bush, Mr. Geoffrey Kempler and Ms Dianne Angus.




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, as a bonus package, 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 to him options to purchase 825,000
      ordinary shares at an exercise price of A$0.50 per share (of which options
      to
      purchase 412,000 ordinary shares were granted during the 2004 fiscal year and
      options to purchase 413,000 ordinary shares were granted during the 2006 fiscal
      year). The shares and options vest in four equal installments on each of the
      six
      months anniversaries following the effective date of the agreement. In addition,
      subject to the achievement of certain milestones, Professor Bush, is entitled
      to
      purchase up to 5,000,000 additional ordinary shares at a price per share that
      is
      10% below the mean market price of our ordinary shares during the 30-day period
      prior to their purchase. Once a milestone has been achieved, up to 2,500
      ordinary shares out of the total tranche of ordinary share to which he becomes
      entitled may be purchased each six months after such achievement. The first
      milestone has been achieved (the publication of results of a Phase II trial)
      and
      as such, Professor Bush is now entitled to purchase up to 1,250,000 ordinary
      shares in accordance with the foregoing terms, of which Professor Bush acquired
      250,000 ordinary shares during the 2007 fiscal year. The ordinary shares issued
      and options granted to Professor Bush under the agreement are subject to certain
      resale restrictions. During the period of 20 years after the effective date
      of
      the agreement, Professor Bush is also entitled to receive royalties equal to
      5%
      of the income that we derive from the exploitation of new intellectual property
      developed by him or contributed to our company though his services pursuant
      to
      the agreement.




41


On
      September 21, 2007, we entered into a new agreement with Mr. Geoffrey Kempler
      in
      connection with his service as our Chief Executive Officer. Under the new
      agreement, we agreed to pay Mr. Kempler a base salary of A$386,400 per annum
      (which may be increased at the discretion of our Board of Directors). Mr Kempler
      is also entitled to the following bonus payments: (i) $50,000 upon a capital
      raising of at least A$7.0 million (before costs) prior to September 30, 2007;
      (ii) $25,000 upon a further capital raising of at least A$12.0 million (before
      costs) anytime in the 2008 financial year; (iii) $25,000 if our company attains
      and sustains a share price above $0.60 for at least four consecutive trading
      days by June 30, 2008; (iv) $10,000 for completion of clinical trial recruitment
      by September 30, 2007; (v) $10,000 for completion of signed statistical analysis
      report by February 29, 2008; (vi) $6,000 for holding regular meetings (minimum
      twice yearly) of the full Research and Development Advisory Board; (vii) $14,000
      for the review and provisions of a written proposal to our board of directors
      of
      our intellectual property portfolio to determine valuable opportunities for
      license, merger and acquisition or divestment by December 31, 2007; and (viii)
      $10,000 for the development of our staff retention strategy and action plan
      by
      October 31, 2007 and implementation of the plan by December 31, 2007.




Under
      the
      agreement with Mr. Kempler, we are required to pay Mr Kempler a termination
      payment of A$1 million if he terminates the contract for good reason or we
      terminate the contract without cause, provided the company has sufficient
      capital resources to fulfill the obligation. See Item 6.C. “Directors, Senior
      Management and Employees - Board Practices - Directors’ Services Contracts.”




Under
      an
      employment agreement we entered into with Ms. Dianne Angus, effective as of
      October 2, 2006, in connection with her appointment as our Senior Vice
      President, Business Development, Intellectual Property and Research, we agreed
      to pay Ms Angus a base salary of A$268,125 per year, plus superannuation
      equivalent to 9% of the base salary (or the percentage stipulated by applicable
      Australian law). In addition, we agreed that we would grant to Ms. Angus options
      to purchase 1,000,000 ordinary shares, which were granted in the 2007 fiscal
      year. Such options will be exercisable for nil consideration on or before August
      7, 2014 and will not be exercisable unless the price of our ordinary shares
      has
      achieved and maintained a minimum value of A$0.40 for five consecutive trading
      days. The options were granted under the 2004 ASX Plan. On June 12, 2007 we
      entered into an amendment to the employment agreement with Ms Angus in
      connection with her appointment as our Chief Operating Officer, effective as
      of
      May 31, 2007. **** All
      entitlements under the October 2, 2006 agreement remain in full force and
      effect. Under the June 12, 2007 agreement, we granted to Ms. Angus options
      to
      purchase an additional 250,000 ordinary shares **** in
      recognition of our company’s achievements and performance. Such options will be
      exercisable for nil consideration on or before August 7, 2014 and will not
      be
      exercisable unless the price of our ordinary shares has achieved and maintained
      a minimum value of A$0.40 for five consecutive trading days. The options were
      granted under the 2004 ASX Plan. If we will terminate the employment agreement
      without cause or if Ms. Angus will terminate the employment agreement with
      good
      reason (as such terms are defined in the agreement) (i) we will pay to Ms.
      Angus, within 90 days of such termination, the sums she would have been entitled
      to receive had she continued to provide services for one year following the
      termination date; and (ii) any unvested options shall be accelerated and will
      become fully vested and she will be entitled to exercise her options during
      the
      remainder of their term **.**




42


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 PBT1. 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 were 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, and 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 P.N.G.
      Such settlement in the total value of A$971,764 was expensed in fiscal year
      2004. Under the settlement agreement we also agreed to pay a sales royalty
      to
      P.N.G. on sales of PBT1 in the United States and Japan and we are entitled
      to
      receive a percentage of P.N.G.’s income on sales of PBT1 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 PBT1.
      P.N.G. is also entitled to receive 2% of our worldwide income from PBT2 and
      any
      other future clioquinol derivative.




We
      were
      party to a three year property lease signed in May 2004 that expired in May
      2007
      under which we leased executive office space at 369 Royal Parade, Parkville,
      Victoria 3052, Australia, at an initial annual rental of A$105,551, which
      increased by 3.5% on a cumulative basis on the May anniversary of the lease.
      Although this lease expired in May 2007, the parties have continued to act
      in
      accordance with its terms on a month-to-month periodic lease basis and are
      currently in the process of negotiating a new lease for the office
      space.




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
      PBT2. In early 2006, we also successfully completed a second Phase I multi-dose
      escalation safety clinical trial of PBT2. On May 5, 2006, we announced that
      we
      received an expert report in respect of the Phase I trials for PBT2. The expert
      report was prepared by Dr. Craig Ritchie, psychiatrist and Director of Mental
      Health Clinical Trials at University College London and a clinical advisor
      to
      our company. Dr. Craig Ritchie concluded that the Phase I results provide the
      confidence needed to move forward to formal Phase II testing in people with
      Alzheimer’s disease. On May 11, 2006, we announced our plans to move forward
      with a Phase IIa clinical trial for PBT2 in patients with Alzheimer’s disease.
      On December 19, 2006 we announced that dosing had commenced in the Phase IIa
      clinical trial. The Phase IIa trial is a three month double-blind,
      placebo-controlled safety and tolerability study of PBT2 in 80 elderly male
      and
      female patients with mild forms of Alzheimer’s disease. Tolerability, safety,
      cerebrospinal fluid and plasma biomarker and cognition endpoints will be
      measured. The Phase IIa clinical trial is expected to be completed by the end
      of
      2007 and report its final findings by the end of first calendar quarter of
      2008.
      For additional details regarding our clinical trials see Item 4.A. “Information
      on the Company - History and Development of the Company.” We anticipate that the
      total expenditures for the Phase IIa program for PBT2 will amount to an
      estimated A$7 Million, however such expenditures may change 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
      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 for at least the next 12
      months; 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




43




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




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$4,492,193 and
      A$7,613,045 during the years ended June 30, 2007 and 2006, respectively. Costs
      associated with patent applications and defense of patent applications are
      classified as intellectual property expenses and amounted to A$600,232 and
      A$466,426 during the years ended June 30, 2007 and 2006, respectively.




Our
      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 and/or clinical 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 4 to the consolidated 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.




44


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
      approximately A$2.7 million of our research and development costs over the
      life
      of such projects and agreed to pay additional milestone payments and royalties
      from discoveries resulting from such projects. 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.




Our
      company is the exclusive licensee of an international patent application in
      the
      name of the General Hospital Corporation 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 having achieved the scientific milestone demonstrating
      that a mouse could generate antibodies that preferentially recognize dimerized
      ‘toxic linked’ forms of beta-amyloid and not the endogenous monomeric form of
      beta amyloid .
      Currently we are undertaking the screening of mouse hybridomas (hybrid cells produced
      by injecting a specific antigen into a mouse, collecting an antibody-producing
      cell from the mouse’s spleen, and fusing it with a long-lived cancerous immune
      cell called a myeloma cell). Individual hybridoma’s are being tested **** to
      try to
      identify a mouse monoclonal antibody candidate for use in a prospective mouse
      passive vaccine trial by the end of 2007. We will be utilizing the resources
      of
      the Mental Health Research Institute and Monash University to conduct this
      research.




In
      2001,
      we were granted a START grant from the Australian IR&D Board 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 over three years 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.




In
      February 2004, we were granted a second START grant from the Australian IR&D
      Board to take our second generation drug candidate for Alzheimer’s disease,
      PBT2, through safety testing and Phase I clinical trials. The research under
      this grant was initially to be completed over a two year period until September
      1, 2005 and such period was subsequently extended until December 2005. Under
      the
      terms of the grant, we received A$1.35 million over the term of the grant for
      up
      to 50% of the project costs related to the toxicology testing program and early
      human trials. Under this second START grant, PBT2 completed advance toxicology
      in December 2004, successfully completed the first Phase I clinical trials
      in
      November 2005 and successfully completed a second Phase I trial in early
      2006.




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 were required to pay the lesser of
      1.5%
      of the net invoice price of products sold or 10% of royalties received from
      any
      license we granted or sub-licensee we appoint to utilize the patents. This
      agreement expired and was superseded by the research funding and intellectual
      property assignment agreement dated December 1, 2000 between us and the
      University of Melbourne.




On
      December 1, 2000, we entered into a
      research funding and intellectual property assignment agreement with the University
      of Melbourne , under
      which the
      University of Melbourne agreed
      to
      conduct certain research
      projects on
      our
      behalf for a sum of
      A$297,000 (inclusive of goods and services tax), each year for a period of
      three
      years .
      In
      consideration for the assignment of rights to intellectual property developed
      by
      the University of Melbourne during the research period, we agreed to pay to
      the
      University of Melbourne royalties equal to 1.5% of the net invoice price of
      all
      products incorporating such intellectual property sold by us or on our behalf,
      or, the lesser of 1.5% of the net invoice price of such products sold by a
      licensee or assignee and 10% of gross revenues received from licensees or
      assignees relating to the exploitation of such intellectual property. Following
      the expiration of this agreement, the parties entered into a second research
      funding and intellectual property assignment agreement, which is deemed to
      have
      commenced as
      of the
      expiration date of the previous agreement on December 1, 2003 and expired on
      December 1, 2006. Following the expiration of this second agreement, the parties
      entered into a third research funding and intellectual property assignment
      agreement, which is deemed to have commenced as of the expiration date of the
      previous agreement on December 1, 2006 and expires on December 1, 2009. The
      financial consideration terms under the original agreement remain unchanged
      by
      the second and third research funding and intellectual property assignment
      agreements. Pursuant to the terms of the original research funding and
      intellectual property assignment agreement, we agreed
      to
      provide the University of Melbourne certain funding for the research projects
      for the second and third research funding and intellectual property assignment
      agreements. We provided
      to the University of Melbourne funding in an
      amount equal to A$600,000 (exclusive of goods and service tax) during each
      of
      the years running December 2004 to November 2005 and December 2005 to November
      2006. During the 2005 fiscal year we also provided the University of Melbourne
      an additional A$1,012,500 in research funding in connection with our licensing
      and research collaboration with Schering A.G. and Neurosciences Victoria Ltd.
      that was concluded in June 2005. We estimate that we will provide to the
      University of Melbourne funding in an amount equal to A$690,500 (exclusive
      of
      goods and services tax) for the year running December 2006 to November 2007.




45


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. On September 10, 2007, BRI, the Commonwealth Scientific and Industrial
      Research Organization, or CSIRO, and us executed an Assignment and Novation
      Deed
      under which BRI assigned to CSIRO all of its rights and obligations under the
      patent assignment agreement, including entitlement to royalties.




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
      (approximately A$228,395) for the 30 month period beginning January 1, 2001
      and
      US$182,000 (approximately A$249,358) 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 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
      PBT1 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, 2007 and 2006, fees earned by Kendle
      amounted to A$429 and A$126,981, respectively. These fees are included in our
      financial statements as Research and development expenses. Dr. George Mihaly,
      a
      director of our company, served as a director of Kendle, formerly known as
      Synermedica Pty Ltd., until December 2004.




46


On
      September 24 2004, we signed a letter of intent to enter into an
      arrangement with Kendle International Inc. to conduct our clioquinol Phase
      II/III Alzheimer disease clinical trial for PBT1, for the value of A$90,000.
      A
      further letter of intent was signed on March 1, 2005 by the parties for the
      provision of prospective clinical research organization, or CRO, services by
      Kendle International Inc., while a final CRO services agreement for the conduct
      of the Phase II/III for PBT1 was being negotiated. This PBT1 trial ceased in
      April 2005. We paid Kendle International Inc. A$48,299 and GPB £79,504 for
      fiscal year 2006. We did not pay Kendle International Inc. any amounts for
      this
      trial in fiscal year 2007.




On
      November 4, 2005, we entered into an agreement with Kendle International B.V.
      to
      conduct the Phase 1 double blind randomized, DOSE escalation study to assess
      the
      safety, tolerability and pharmacokinetics of single and multiple doses of oral
      PBT2 in healthy volunteers.  We paid Kendle International B.V. EUR905,290
      and EUR 849 (approximately A$2,004) for fiscal years 2006 and 2007,
      respectively. Kendle International Inc. is the parent entity of Kendle
      International B.V and Kendle Pty Ltd




In
      November 2006, we entered into a general services agreement with Quintiles
      Limited, a clinical research organization, to perform services relating to
      the
      conduct of the Phase IIa PBT2 clinical trial, including site initiation, patient
      screening and monitoring, data analysis, investigator meetings, statistical
      analysis and clinical trial reporting. The agreement was budgeted for expenses
      of US$1.46 million for seven trial sites in Sweden, and we are currently
      negotiating an extension of the agreement to include Australian sites for the
      trial.




On
      July
      28, 2004, we entered into a settlement agreement with P.N. Gerolymatos S.A.,
      or
      P.N.G., with respect to patent inventorship claims relating to the use of
      clioquinol (PBT1) for use in Alzheimer’s disease. Under the settlement
      agreement, we agreed to pay a sales royalty to P.N.G. on the sales of PBT1
      in
      the United States and Japan, and we are entitled to receive a percentage of
      P.N.G.’s income on sales of PBT1 in the other territories. P.N.G. is also
      entitled to receive 2% of our worldwide income from PBT2. See Item 5B.
“Operating and Financial Review and Prospects - Liquidity and Capital
      Resources.”




**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 as of June 30,
      2007.




Contractual
                Obligations
            
            Payments
                due by periodTotal
            
            less
                than 1 year
            
            1-3years
            
            3-5Years
            
            more
                than 5 yearsOperating
                lease obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Purchase
                obligations*
            
            
            1,295,265
            
            
            1,295,265
            
            
            -
            
            
            -
            
            
            -Total
            
            
            1,295,265
            
            
            1,295,265
            
            
            -
            
            
            -
            
            
            -


*
              Excludes
                  obligations under our contracts with Professor Ashley Bush, Ms.
                  Dianne
                  Angus and Mr. Geoffrey Kempler. See Item 5B. “Operating and Financial
                  Review and Prospects - Liquidity and Capital Resources” and Note 21 to our
                  consolidated financial
                  statements.




47


**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
            
            51
            
            Chairman
                of the Board of Directors and Chief Executive OfficerRichard
                Revelins
            
            44
            
            Chief
                Financial Officer and SecretaryDianne
                Angus
            
            46
            
            Chief
                Operating OfficerPeter
                Marks(1)
            
            51
            
            DirectorBrian
                D. Meltzer(1)(2)
            
            53
            
            DirectorGeorge
                W. Mihaly(1)(2)
            
            53
            
            Director







(1)
            Member
                of the Audit Committee




(2)
            Member
                of the Remuneration Committee and Nominations
                Committee




Professor
      Colin Louis Masters, who was first elected as a member of our Board of Directors
      in December 1999, retired from such position effective July 2, 2007, following
      his appointment as Director of the Mental Health Research Institute of Victoria,
      Australia. Dr. Ross Thomas Murdoch, who served as our President and Chief
      Operating Officer, resigned from such positions on May 31, 2007.




***Geoffrey
      Paul Kempler*** has
      served as Chairman of our Board of Directors since November 1997, between
      November 1997 and August 2004 he served as our Chief Executive Officer, and
      in
      June 2005 he again assumed the position of Chief Executive Officer. Mr. Kempler
      is one of the founders of our company. 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 holds
      a
      B.Sc degree in science from Monash University and Grad. Dip. App. Soc. Psych.
      degree from Swinburne University.




***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 public companies,
      including Peregrine Strategic Limited, as well as Mintails Limited and Mining
      Project Group Limited, all of which are listed on the ASX, and Cangold Inc.,
      a
      company listed on the Canadian Venture Exchange, as well as a number of private
      companies. Mr. Revelins holds a Bachelor of Economics degree from Monash
      University, Melbourne. 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.




48




***Dianne
      Angus*** has
      served as our Chief Operating Officer since May 31, 2007. Prior thereto, Ms.
      Angus served as Vice President of Intellectual Property and Licensing of our
      company from August 2002 and was promoted to Senior Vice President of Business
      Development, Intellectual Property and Research in July 2004. From June 2000
      to
      August 2002, Ms. Angus was a Director of Dianne Angus and Associates Pty Ltd.
      providing strategic business development, technology evaluation and intellectual
      property services to biotechnology companies. 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. While at Florigene Limited, Ms. Angus was the joint venture
      alliance manger with Suntory for three years. Ms. Angus has worked in the
      commercial biotechnology sector for 16 years, directing product valuation,
      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 global research institutes. Ms. Angus has undertaken due diligence
      assessments on several Australian biotechnology companies for investment
      brokers. Ms. Angus holds 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*** has
      served as a
      director of our company since July 2005. Since November 21, 2006, Mr. Marks
      has
      served as Executive Chairman of KarmelSonix Ltd., a medical devices company
      listed on the ASX that is focused on developing and commercializing a range
      of
      devices in the respiratory medicine sector. Mr. Marks is also currently a
      director of Peregrine Corporate Ltd., an Australian based investment bank and
      Microfuze International Plc, an AIM listed company commercializing metal
      diffusion technologies. 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 the equity capital markets group in Melbourne.
      From January 1992 until July 1994, Mr. Marks served as Head of the Melbourne
      Companies Department at the ASX and was a founding Director of Momentum Funds
      Management Pty Ltd, an Australian venture capital firm. From December 1990
      until
      December 1991, Mr. Marks served as director of corporate finance at Burdett
      Buckeridge & Young Ltd. in their Melbourne offices, from August 1988 until
      November 1990, he held senior corporate finance positions at Barings Securities
      Ltd., and from July 1985 until July 1988, he served as an Associate Director
      of
      McIntosh Securities, now Merrill Lynch Australia. In his roles with these
      various financial institutions, Mr. Marks 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. Mr. Marks holds a Bachelor of
      Economics degree, a Bachelor of Law degree 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.




***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. Mr.
      Meltzer has over 20 years experience in finance, including 12 years at AIDC
      Ltd.
      where he was executive director of investment advisory services. Mr. Meltzer
      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 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 also serves
      as
      a director of Waide Pty Ltd., a private company. Dr. Mihaly has had an extensive
      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 24 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 holds a B.Pharm. from
      Monash University, M.Sc. from Sydney University and Ph.D. degree from Melbourne
      University, and is a fellow of the Australian Institute of Company Directors.




49


**B.**  **Compensation**




The
      following table sets forth all compensation we paid for the year ended June
      30,
      2007 with respect to (i) each of our directors during the 2007 fiscal year
      and
      (ii) all of our directors and executive officers as a group:




Salaries,
                fees,
              commissions
                and
              bonuses
                (1)
            
            Pension,
                retirement and other similar
              benefitsGeoffrey
                P. Kempler
            
            
            375,666
            
            
            —Peter
                Marks
            
            
            75,000
            
            
            —Colin
                L. Masters (2)
            
            
            115,000
            
            
            —Brian
                D. Meltzer
            
            
            105,000
            
            
            —George
                W. Mihaly
            
            
            110,000
            
            
            —All
                directors and officers as a group (consisting of 8 persons atJune
                30, 2007) (3)
            
            
            1,470,163
            
            
            —







(1)
            Does
                not include A$1,137,523 of share-based compensation recorded in fiscal
                year 2007 under Financial Accounting Standards Board Statement No.
                123
                (revised 2004), “Share-Based
                Payment.”




(2)
            Professor
                Colin Master, who was first appointed as a director of our company
                in
                December 1999, retired from our Board of Directors effective July
                2,
                2007.




(3)
            Includes
                compensation paid to Professor Colin Master, a former director who
                retired
                from our Board of Directors effective July 2, 2007 and Dr. Ross Murdoch,
                our former President and Chief Operating Officer who resigned from
                such
                office effective May 31, 2007.




In
      accordance with the approval of our shareholders at our 2004 annual general
      meeting of 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.




As
      of
      June 30, 2007, our directors and executive officers as a group, then consisting
      of eight persons, held options to purchase an aggregate 7,850,000 of our
      ordinary shares. Of such options, (i) options to purchase 2,900,000 ordinary
      shares are currently 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. The ordinary shares issued upon exercise of these
      options may not be disposed of without the prior consent of our Board of
      Directors. Following Professor Masters retirement from our Board of Directors
      effective July 2, 2007, options to purchase 1,000,000 ordinary shares expired
      without being exercised; (ii) options to purchase 500,000 ordinary shares are
      exercisable for A$0.50 on or before December 17, 2007; (iii) options to purchase
      3,200,000 ordinary shares are exercisable for nil consideration on or before
      July 31, 2009. These options may not be exercised until and unless the price
      of
      our ordinary shares has achieved and maintained a minimum value of A$0.80 for
      five consecutive trading days. The ordinary shares issued upon exercise of
      these
      options may not be disposed of without the prior consent of our Board of
      Directors. Following Professor Masters retirement from our Board of Directors
      effective July 2, 2007, options to purchase 1,000,000 ordinary shares expired
      without being exercised; and (iv) options to purchase 1,250,000 ordinary shares
      are exercisable for nil consideration on or before Aug 7, 2014. These options
      may not be exercised until and unless the price of our ordinary shares has
      achieved and maintained a minimum value of A$0.40 for five consecutive trading
      days. All such options were granted under our 2004 Employees’, Directors’ &
Consultants’ Share and Option Plan. See Item 6.E. “Directors, Senior Management
      and Employees - Share Ownership - Stock Option Plans.”




50




See
      Item
      5B. “Operating and Financial Review and Prospects - Liquidity and Capital
      Resources,” for details regarding the employment agreements we entered into with
      Mr. Geoffrey Kempler, in connection with his appointment as our Chief Executive
      Officer and Ms. Dianne Angus in connection with her service as our Chief
      Operating Officer.




**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.




**Election
      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.
      Messrs. Marks and Meltzer must retire and may stand for re-election at our
      2008
      annual general meeting of shareholders. Dr. Mihaly must retire and may stand
      for
      re-election at our 2007 annual general meeting of shareholders. Mr. Colin
      Masters, who was first elected as a director of our company in December 1999
      and
      was reelected to serve as a director at our 2006 annual general meeting of
      shareholders, retired from our Board of Directors effective July 2, 2007,
      following his appointment as Director of the Mental Health Research Institute
      of
      Victoria, Australia.




**Non-Executive
      and Independent Directors**




Australian
      law 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. Our Board of Directors currently has four
      directors, of which three are non-executive directors within the meaning of
      the
      ASX Best Practice Guide, and our audit committee consists of such three
      non-executive directors. Accordingly, we currently comply with the foregoing
      recommendations of the ASX Best Practice Guidance.




In
      addition, in general, under NASDAQ Marketplace Rules, 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. On March 30, 2005, we provided NASDAQ with a notice of
      non-compliance with respect to the requirement to maintain a majority of
      independent directors, as defined under NASDAQ Marketplace Rules, and the
      requirement that audit committee members meet the independence standard of
      NASDAQ. Instead, under Australian law and practice, we are not required to
      appoint a certain number of independent directors to our Board of Directors
      or
      audit committee, as described above. However, as of July 2005, we have a
      majority of independent directors, within the meaning of NASDAQ Marketplace
      Rules, on our Board of Directors and our audit committee members meet the
      independence requirements of NASDAQ and the Securities and Exchange Commission.




51


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




**Committees
      of the Board of Directors**




Our
      Board
      of Directors has established the following committees:




***Audit
      Committee*** **.** ** NASDAQ
      Marketplace Rules require us to establish an audit committee comprised of at
      least three members, each of whom is financially literate and satisfies the
      respective “independence” requirements of the Securities and Exchange Commission
      and NASDAQ and one of whom has accounting or related financial management
      expertise at senior levels within a company.




Our
      Audit
      Committee 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, NASDAQ
      Marketplace Rules and ASX Rules. Our Audit Committee is currently composed
      of
      Messrs. Peter Marks, Brian Meltzer and George Mihaly. 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.




***Remuneration
      Committee*** *.* In
      the
      first quarter of 2005, our Board of Directors established 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 established 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.




***Research
      and Development Advisory Board*** **.** Our
      Research and Development 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.
      The
      members of our Scientific Advisory Board are as follows:




52


*Dr.
      Jeffrey Cummings* is
      the
      Chairman of our Research and Development **** Advisory
      Board. Dr. Cummings is the Director and founder of the UCLA Alzheimer‘s Disease
      Center; the Augustus S. Rose Professor of Neurology at UCLA and the Director
      of
      the UCLA Behavioral Neuroscience and Dementia Research Fellowship. Dr. Cummings‘
interests embrace clinical trials and the development of new treatments for
      neurodegenerative disorders and other neurological diseases. He has authored
      or
      edited 20 books and over 450 peer reviewed papers. Dr. Cummings has broad
      interests in dementing disorders, neuropsychiatry, neurotherapeutics and the
      interface of neuroscience and society. The UCLA Alzheimer’s Disease Center has
      an active clinical trials program and fosters imaging, genetics, clinical and
      neuroscience research.




*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.




Professor
      Jean-Marc Orgogozo is the
      Chair of the Department of Neurology and Professor of Neurology at the
      University of Bordeaux, France. He has extensive experience in neuroepidemiology
      and clinical trials. His publications on the amyloid vaccines have helped to
      shape the field of anti-amyloid therapeutics.




Dr.
      Craig
      Ritchie.is the Clinical Research Fellow (Senior), Old Age Psychiatry at Imperial
      College, London. Dr. Ritchie is heavily involved, both clinically and
      academically, in psychiatric disorders of late life, in particular Alzheimer‘s
      disease, Delirium and Schizophrenia. His interest in conducting and assimilating
      evidence from clinical trials is based on his clinical background, having worked
      with elderly patients with dementia for most of his career.




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.




**Directors’
      Service Contracts**




*Our
      Chief Executive Officer* .
      On
      September 21, 2007, we entered into a new agreement with Mr. Geoffrey Kempler
      in
      connection with his service as our Chief Executive Officer. Under the new
      agreement, we agreed to pay Mr. Kempler a base salary of A$386,400 per annum
      (which may be increased at the discretion of our Board of Directors). Mr Kempler
      is also entitled to the following bonus payments: (i) $50,000 upon a capital
      raising of at least A$7.0 million (before costs) prior to September 30, 2007;
      (ii) $25,000 upon a further capital raising of at least A$12.0 million (before
      costs) anytime in the 2008 financial year; (iii) $25,000 if our company attains
      and sustains a share price above $0.60 for at least four consecutive trading
      days by June 30, 2008; (iv) $10,000 for completion of clinical trial recruitment
      by September 30, 2007; (v) $10,000 for completion of signed statistical analysis
      report by February 29, 2008; (vi) $6,000 for holding regular meetings (minimum
      twice yearly) of the full Research and Development Advisory Board; (vii) $14,000
      for the review and provisions of a written proposal to our board of directors
      of
      our intellectual property portfolio to determine valuable opportunities for
      license, merger and acquisition or divestment by December 31, 2007; and (viii)
      $10,000 for the development of our staff retention strategy and action plan
      by
      October 31, 2007 and implementation of the plan by December 31, 2007. Should
      the
      agreement terminate due to death or disability, we shall pay a pro-rata bonus.
      Mr Kempler is also entitled to (i) 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 (ii) 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.




53


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 will
                be
                entitled to: (i) the sum of A$1 million provided we have sufficient
                capital requirements to fulfill this obligation within 90 days of
                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.




*Other* .
      Except
      as set forth above and in Item 6B. “Directors, Senior Management and Employees -
      Compensation,” there are no arrangements or understandings between us and any of
      our subsidiaries, on the one hand, and any of our directors, on the other hand,
      providing for benefits upon termination of their employment or service as
      directors of our company or any of our subsidiaries.




**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 (i)
      any
      acts, receipts, neglect or defaults of any other director or officer for joining
      in any receipt or other act for conformity; (ii) 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; (iii) the inefficiency
      or
      deficiency of any security in or upon which any of our monies shall be invested;
      (iv) any loss or damage arising from bankruptcy, insolvency or tortuous act
      of
      any person with whom any monies, securities or effects shall be deposited;
      (v)
      any loss occasioned by any error of judgment, omission, default or oversight
      on
      the persons part; or (vi) any 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.




54




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
      maintain a directors’ and officers’ liability insurance policy. 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.




**D.**  **Employees**




At
      June
      30, 2007, we had nine employees. Of such employees, three persons were employed
      in research and development, four persons in management and administration
      and
      two persons in operations. All such employees were located in
      Australia.




At
      June
      30, 2006, we had 10 employees. Of such employees, three persons were employed
      in
      research and development, five persons in management and administration and
      two
      persons in operations. All such employees were located in
      Australia.




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. As of June 30, 2005, except for one employee located
      in
      the United States, all of our employees were located in Australia. Such U.S.
      employee ceased working for our company in August 2005.




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 September 24, 2007
      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
                ofOwnership
                (2)Geoffrey
                P. Kempler
            
            19,055,000
            (3)(4)
            
            13%Richard
                Revelins
            
            820,308
            (5)(6)
            
            *Dianne
                Angus
            
            1,250,000
            (7)
            
            *Peter
                Marks
            
            643,111
            (8)(9)
            
            *Brian
                D. Meltzer
            
            926,666
            (10)(11)
            
            *George
                W. Mihaly
            
            826,666
            (12)(13)
            
            *All
                directors and executive officers as a group (six persons)
            
            23,521,751
            (14)
            
            16%


*  Less
      than
      1%




55




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 the above
                table
                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 151,517,978 ordinary shares issued
                and
                outstanding as of September 24,
                2007.




3.
            Includes
                17,055,000 ordinary shares, of which 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
                2,000,000 ordinary shares issuable upon the exercise of options for
                nil
                consideration, all of which were granted under the 2004 ASX Plan
                (as
                defined below). Of such options, options to purchase 1,000,000 ordinary
                shares are exercisable on or before June 30, 2010. Such options may
                not be
                exercised unless the price of our ordinary shares has achieved and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.
                The remaining options to purchase 1,000,000 ordinary shares are
                exercisable on or before July 31, 2009. Such options may not be exercised
                unless the price of our ordinary shares has achieved and maintained
                a
                minimum value of A$0.80 for five consecutive trading
                days.




5.
            Includes
                20,308 ordinary shares, all of which are held by Darontack Pty Ltd.,
                an
                Australian corporation owned by Mr. Revelins.




6.
            Includes
                options to purchase 800,000 ordinary shares, all of which were granted
                under the 2004 ASX Plan (as defined below). Of such options, options
                to
                purchase 500,000 ordinary shares are exercisable at A$0.50 on or
                before
                December 17, 2007, and are held by Darontack Pty Ltd., an Australian
                corporation owned by Mr. Revelins. The remaining options to purchase
                300,000 ordinary shares at nil consideration are exercisable on or
                before
                July 31, 2009 and are also held by Darontack Pty Ltd. These options
                may
                not be exercised unless the price of our ordinary shares has achieved
                and
                maintained a minimum value of A$0.80 for five consecutive trading
                days.




7.
            Includes
                options to purchase 1,250,000 ordinary shares exercisable for nil
                consideration on or before August 7, 2014 granted under the 2004
                ASX Plan
                (as defined below). These options may not be exercised unless the
                price of
                our ordinary shares has achieved and maintained a minimum value of
                A$0.40
                for five consecutive trading days.




8.
            Of
                such shares, 43,111 ordinary shares are held by Lampam Pty Ltd, an
                Australian corporation owned by Mr. Marks.




9.
            Includes
                600,000 ordinary shares issuable upon the exercise of options for
                nil
                consideration, all of which were granted under the 2004 ASX Plan
                (as
                defined below). Of such options, options to purchase 300,000 ordinary
                shares are exercisable on or before June 30, 2010. Such options may
                not be
                exercised unless the price of our ordinary shares has achieved and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.
                The remaining options to purchase 300,000 ordinary shares are exercisable
                on or before July 31, 2009. Such options may not be exercised unless
                the
                price of our ordinary shares has achieved and maintained a minimum
                value
                of A$0.80 for five consecutive trading days..




56




10.
            Of
                such shares, 326,666 ordinary shares are held by RBC Dexia Pty Ltd.,
                a
                superannuation fund of Mr. Meltzer.




11.
            Includes
                600,000 ordinary shares issuable upon the exercise of options for
                nil
                consideration, all of which were granted under the 2004 ASX Plan
                (as
                defined below). Of such options, options to purchase 300,000 ordinary
                shares are exercisable on or before June 30, 2010. Such options may
                not be
                exercised unless the price of our ordinary shares has achieved and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.
                The remaining options to purchase 300,000 ordinary shares are exercisable
                on or before July 31, 2009. Such options may not be exercised unless
                the
                price of our ordinary shares has achieved and maintained a minimum
                value
                of A$0.80 for five consecutive trading days.




12.
            Of
                such shares 166,666 ordinary shares are held directly by Dr. Mihaly,
                52,000 ordinary shares are held by Waide Pty Ltd., an Australian
                corporation owned by Dr. Mihaly, and 4,000 ordinary shares are held
                by
                each of Kieren Mihaly and Warwick Mihaly, Dr. Mihaly’s sons. Dr. Mihaly
                disclaims beneficial ownership of the ordinary shares held by his
                sons,
                Kieren Mihaly and Warwick Mihaly.




13.
            Includes
                600,000 ordinary shares issuable upon the exercise of options for
                nil
                consideration, all of which were granted under the 2004 ASX Plan
                (as
                defined below). Of such options, options to purchase 300,000 ordinary
                shares are exercisable on or before June 30, 2010. Such options may
                not be
                exercised unless the price of our ordinary shares has achieved and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.
                The remaining options to purchase 300,000 ordinary shares are exercisable
                on or before July 31, 2009. Such options may not be exercised unless
                the
                price of our ordinary shares has achieved and maintained a minimum
                value
                of A$0-50 for five consecutive trading days.




14.
            See
                Footnotes (3) - (13).




**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 was 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, could 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 could not be transferred and could not be quoted on the ASX. On June
      30,
      2005, all outstanding options granted under the 2000 Plan expired and 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, or the
      2004
      ASX Plan and the 2004
      American Depository Share (ADS) Option Plan, or the
      2004
      ADS Plan. For the description below, the 2004 ASX Plan and 2004 ADS Plan are
      referred to together as 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
      ADSs
      listed 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.




57




***2004
      ASX Plan.*** The
      purpose of the 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 22,000,000 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.




***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 our company and
      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 ADSs representing up to 22,000,000 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.




58


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.




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.




A
      summary
      of the status of the 2004 Plans as of June 30, 2005, 2006 and 2007, and changes
      during the years ended on those dates, is presented below:




**Year
                ended June 30,****2007**
            
            **2006**
            
            **2005****Amount**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Amount**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Amount**
            
            **Weighted**
              **average**
              **exercise**
              **price**Options
                outstanding at the beginning of the year
            
            
            8,727,500
            
            $
            0.36
            
            
            6,500,000
            
            $
            0.48
            
            
            —
            
            
            —Granted
            
            
            5,908,762
            
            
            —
            
            
            2,265,000
            
            
            —
            
            
            6,500,000
            
            $
            0.48Exercised
            
            
            (758,000
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            (150,000
            )
            
            —
            
            
            (37,500
            )
            
            —
            
            
            —
            
            
            —Options
                outstanding at the end of the year
            
            
            13,728,262
            
            $
            0.20
            
            
            8,727,500
            
            $
            0.36
            
            
            6,500,000
            
            $
            0.48Options
                exercisable at the end of the year
            
            
            5,940,000
            
            $
            0.47
            
            
            4,900,000
            
            $
            0.64
            
            
            4,900,000
            
            $
            0.64Options
                that may be granted as of the end of the year
            
            
            6,484,049
            
            
            
            
            
            12,844,061
            
            
            
            
            
            5,071,561




59






In
      addition, as of June 30, 2007, 1,787,689 ordinary shares have been issued under
      the ASX Plan that were not subject to options.




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




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




The
      following table sets forth certain information, as of September 24, 2007,
      regarding the beneficial ownership by all shareholders known to us to own
      beneficially more than 5% of our ordinary shares.




Name
              
              Number
                  of Ordinary Shares Beneficially Owned (1)
              
              Percentage
                  of Outstanding Ordinary Shares (2)Geoffrey
                  P. Kempler
              
              
              19,055,000(3)(4
              )
              
              13
              %Jagen
                  Nominees Pty Ltd
              
              
              15,689,172(5)(6
              )
              
              10
              %AMP
                  Ltd.
              
              
              10,710,526
                  (7)(8
              )
              
              7
              %







(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 the table
                above
                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 151,517,978 ordinary shares issued
                and
                outstanding as of September 24, 2007.




(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
                2,000,000 ordinary shares issuable upon the exercise of options for
                nil
                consideration, all of which were granted under the 2004 ASX Plan
                (as
                defined below). Of such options, options to purchase 1,000,000 ordinary
                shares are exercisable on or before June 30, 2010. Such options may
                not be
                exercised unless the price of our ordinary shares has achieved and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.
                The remaining options to purchase 1,000,000 ordinary shares are
                exercisable on or before June 30, 2009. Such options may not be exercised
                unless the price of our ordinary shares has achieved and maintained
                a
                minimum value of A$0.80 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.




(6)
            Includes
                280,112 ordinary shares issuable upon the exercise of options exercisable
                for A$0.446 on or before November 30,
                2009.




60




(7)
            Of
                such shares, 5,778,424 ordinary shares are held by Cogent Nominees
                Pty
                Ltd, 2,236,889 ordinary shares are held by AMP Life Ltd., 83,507
                ordinary
                shares are held by JP Morgan Nominees Australia Ltd. and 570,810
                ordinary
                shares are held by National Nominees Ltd.




(8)
            Includes
                2,240,896 ordinary shares issuable upon the exercise of options at
                an
                exercise price of A$0.446 per shares, exercisable on or before November
                30, 2009.




**Major
      Shareholders Voting Rights**




Our
      major
      shareholders do not have different voting rights.




**Record
      Holders**




As
      of
      September 24, 2007, there were 2,226 holders of record of our ordinary shares,
      of which 15 record holders, holding approximately 4% 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 39% 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 provided 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 **.** We
      paid
      Kendle A$577,757 for services it provided to us in fiscal year 2005 until
      December 31, 2004.




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




Not
      applicable.




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




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




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




**Legal
      Proceedings**




We
      are
      not involved in any material legal proceedings.




**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 various factors,
      including our results of operations, financial condition, current and
      anticipated cash needs, future prospects, contractual restrictions and other
      factors 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, 2007.




61




**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 30,2003
            
            
            2.39
            
            
            0.442004
            
            
            1.18
            
            
            0.452005
            
            
            0.70
            
            
            0.132006
            
            
            0.30
            
            
            0.152007
            
            
            0.80
            
            
            0.18Fiscal
                Year Ended June 30, 2007:First
                Quarter
            
            
            0.80
            
            
            0.18Second
                Quarter
            
            
            0.58
            
            
            0.35Third
                Quarter
            
            
            0.44
            
            
            0.31Fourth
                Quarter
            
            
            0.43
            
            
            0.32Fiscal
                Year Ended June 30, 2006:First
                Quarter
            
            
            0.23
            
            
            0.15Second
                Quarter
            
            
            0.30
            
            
            0.16Third
                Quarter
            
            
            0.25
            
            
            0.19Fourth
                Quarter
            
            
            0.24
            
            
            0.16Month
                Ended:March
                2007
            
            
            0.37
            
            
            0.31April
                2007
            
            
            0.37
            
            
            0.32May
                2007
            
            
            0.43
            
            
            0.33June
                2007
            
            
            0.36
            
            
            0.32July
                2007
            
            
            0.35
            
            
            0.30August
                2007
            
            
            0.36
            
            
            0.26





**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:




Per
                ADR (US$)High
            
            LowFiscal
                Year Ended June 30,2003
                (from September 5, 2002)
            
            
            12.80
            
            
            2.962004
            
            
            10.50
            
            
            2.952005
            
            
            5.19
            
            
            0.982006
            
            
            2.40
            
            
            1.202007
            
            
            4.35
            
            
            1.21




62




Fiscal
                Year Ended June 30, 2007:First
                Quarter
            
            
            3.45
            
            
            1.21Second
                Quarter
            
            
            4.35
            
            
            2.15Third
                Quarter
            
            
            4.35
            
            
            2.15Fourth
                Quarter
            
            
            3.38
            
            
            2.58Fiscal
                Year Ended June 30, 2006:First
                Quarter
            
            
            1.73
            
            
            1.20Second
                Quarter
            
            
            2.40
            
            
            1.21Third
                Quarter
            
            
            1.85
            
            
            1.30Fourth
                Quarter
            
            
            1.89
            
            
            1.35Month
                Ended:March
                2007
            
            
            3.00
            
            
            2.40April
                2007
            
            
            3.17
            
            
            2.65May
                2007
            
            
            3.25
            
            
            2.58June
                2007
            
            
            3.24
            
            
            2.82July
                2007
            
            
            3.10
            
            
            2.78August
                2007
            
            
            3.00
            
            
            2.25




**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.




**E.**  **Dilution**




Not
      applicable.




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




Not
      applicable.




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




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




Not
      applicable.




63




**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
      December 1, 2000, we entered into a research funding and intellectual property
      assignment agreement with the University of Melbourne, under which the
      University of Melbourne agreed to conduct certain research projects on our
      behalf for a sum of A$297,000 (inclusive of goods and services tax), each year
      for a period of three years. In consideration for the assignment of rights
      to
      intellectual property developed by the University of Melbourne during the
      research period, we agreed to pay to the University of Melbourne royalties
      equal
      to 1.5% of the net invoice price of all products incorporating such intellectual
      property sold by us or on our behalf, or, the lesser of 1.5% of the net invoice
      price of such products sold by a licensee or assignee and 10% of gross revenues
      received from licensees or assignees relating to the exploitation of such
      intellectual property. Following the expiration of this agreement, the parties
      entered into a second research funding and intellectual property assignment
      agreement, which is deemed to have commenced as of the expiration date of the
      previous agreement on December 1, 2003 and expired on December 1, 2006.
      Following the expiration of this second agreement, the parties entered into
      a
      third research funding and intellectual property assignment agreement, which
      is
      deemed to have **** commenced
      as of the expiration date of the previous agreement on December 1, 2006 and
      expires on December 1, 2009. The financial consideration terms under the
      original agreement remain unchanged by the second and third research funding
      and
      intellectual property assignment agreements. Pursuant to the terms of the
      original research funding and intellectual property assignment agreement, we
      agreed to provide the University of Melbourne certain funding for the research
      projects for the second and third research funding and intellectual property
      assignment agreements. We provided to the University of Melbourne funding in
      an
      amount equal to A$600,000 (exclusive of goods and service tax) during each
      of
      the years running December 2004 to November 2005 and December 2005 to November
      2006. During the 2005 fiscal year we also provided the University of Melbourne
      an additional A$1,012,500 in research funding in connection with our licensing
      and research collaboration with Schering A.G. and Neurosciences Victoria Ltd.
      that was concluded in June 2005. We estimate that we will provide to the
      University of Melbourne funding in an amount equal to A$690,500 (exclusive
      of
      goods and services tax) for the year running December 2006 to November 2007.




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. On September 10, 2007, BRI, the Commonwealth Industrial and Scientific
      Research Organization, or CSIRO, and us executed an Assignment and Novation
      Deed
      under which BRI assigned to CSIRO all of its rights and obligations under the
      patent assignment agreement, including entitlement to royalties.




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 PBT1. 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 were 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, and 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
      P.N.G. Such settlement in the total value of A$971,764 was expensed in fiscal
      year 2004. Under the settlement agreement we also agreed to pay a sales royalty
      to P.N.G. on sales of PBT1 in the United States and Japan and we are entitled
      to
      receive a percentage of P.N.G.’s income on sales of PBT1 in the other
      territories. In April 2005, we announced our decision not to proceed with the
      PBT1 study. P.N.G. is also entitled to receive 2% of our worldwide income from
      PBT2 and any other future clioquinol derivative.




64




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 PBT1 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, 2007 and 2006,
      we
      paid Kendle A$429 and A$126,981, respectively.




On
      September 24 2004, we signed a letter of intent to enter into an
      arrangement with Kendle International Inc. to conduct our clioquinol Phase
      II/III Alzheimer disease clinical trial for PBT1, for the value of A$90,000.
      A
      further letter of intent was signed on March 1, 2005 by the parties for the
      provision of prospective CRO services by Kendle International Inc., while a
      final CRO services agreement for the conduct of the Phase II/III for PBT1 was
      being negotiated. This PBT1 trial ceased in April 2005. We paid Kendle
      International Inc. A$48,299 and GPB £79,504 for fiscal year 2006. We did not pay
      Kendle International Inc. any amounts for this trial in fiscal year 2007.




On
      November 4, 2005, we entered into an agreement with Kendle International B.V.
      to
      conduct the Phase 1 double blind randomized, DOSE escalation study to assess
      the
      safety, tolerability and pharmacokinetics of single and multiple doses of oral
      PBT2 in healthy volunteers.  We paid Kendle International B.V. EUR905,290
      and EUR 849 (approximately A$2,004) for fiscal years 2006 and 2007,
      respectively.  Kendle International Inc. is the parent entity of Kendle
      International B.V and Kendle Pty Ltd .




In
      November 2006, we entered into a general services agreement with Quintiles
      Limited, a clinical research organization, to perform services relating to
      the
      conduct of the Phase IIa PBT2 clinical trial, including site initiation, patient
      screening and monitoring, data analysis, investigator meetings, statistical
      analysis and clinical trial reporting. The agreement was budgeted for expenses
      of US$1.46 million for seven trial sites in Sweden, and we are currently
      negotiating an extension of the agreement to include Australian sites for the
      trial.




In
      June
      2007, we entered into two GMP drug manufacture and laboratory development
      agreements with the Institute for Drug Technology Australia Limited, or IDT,
      to
      undertake the GMP manufacture of an initial 4kg batch and subsequent large
      scale
      manufacture of 30kg of PBT2. IDT is engaged to also undertake process
      development, quality control release testing and stability testing of the final
      drug product before its release. The estimated combined expense of the two
      agreements is approximately A$930,000.




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). In addition, subject to the achievement of certain milestones, Professor
      Bush is entitled to purchase up to 5,000,000 additional ordinary shares at
      a
      price per share that is 10% below the mean market price of our ordinary shares
      during the 30-day period prior to their purchase. Once a milestone has been
      achieved, up to 2,500 ordinary shares out of the total tranche of ordinary
      shares to which he becomes entitled may be purchased each six months after
      such
      achievement. The first milestone has been achieved (the publication of results
      of a Phase II trial) and as such, Professor Bush is now entitled to purchase
      up
      to 1,250,000 ordinary shares in accordance with the foregoing terms, of which
      he
      acquired 250,000 ordinary shares during the 2007 fiscal year. The ordinary
      shares issued and options granted to Professor Bush under the agreement are
      subject to certain resale restrictions. During the period of 20 years after
      the
      effective date of the agreement, Professor Bush is also entitled to receive
      royalties equal to 5% of the income that we derive from the exploitation of
      new
      intellectual property developed by him or contributed to our company though
      his
      services pursuant to the agreement.




65




On
      May
      22, 2007, we entered into an agreement with Patheon Inc., or Patheron, to
      undertake the capsule formulation development and prospective clinical trial
      manufacturing of PBT2 into capsules to support prospective further development
      of PBT2 into a Phase IIb study and/or other secondary clinical applications
      of
      PBT2.  During the year ending December 2007 Patheon will be engaged to
      undertake the preliminary development processes to determine the means for
      encapsulating PBT2 and the stability of the capsules at an estimated cost of
      AU$425,000.  At our option, Patheon may also undertake the actual
      encapsulation of the placebo and PBT2 clinical supplies in the second half
      of
      2008.




**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.




66




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**




The
      following is a discussion of Australian and United States tax consequences
      material to our shareholders. To the extent that the discussion is based on
      tax
      legislation which has not been subject to judicial or administrative
      interpretation, the views expressed in the discussion might not be accepted
      by
      the tax authorities in question or by court. The discussion is not intended,
      and
      should not be construed, as legal or professional tax advice and does not
      exhaust all possible tax considerations.




**Holders
      of our ADSs should consult their own tax advisors as to the United States,
      Australian or other tax consequences of the purchase, ownership and disposition
      of ADSs, including, in particular, the effect of any foreign, state or local
      taxes.**




**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 of the absolute beneficial ownership 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 ADSs for Australian Taxation Purposes**




Holders
      of our ADSs are treated as the owners of the underlying ordinary shares for
      Australian income tax and capital gains tax purposes. Therefore, dividends
      paid
      on the underlying ordinary shares will be treated for Australian tax purposes
      as
      if they were paid directly to the owners of ADSs, and the disposal of ADSs
      will
      be treated for Australian tax purposes as the disposal of the underlying
      ordinary shares. In the following analysis we discuss the application of the
      Australian income tax and capital gains tax rules to non-Australian resident
      holders of ADSs.




67




**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 that are not
      franked or are partly franked and are paid to non-Australian resident
      stockholders are subject to dividend withholding tax, but only to the extent
      the
      dividends are not franked.




Dividends
      paid to a non-resident stockholder are subject to withholding tax at 30%, unless
      the stockholder is a resident of a country with which Australia has a double
      taxation agreement. In accordance with the provisions of the Double Taxation
      Convention between Australia and the United States, the maximum rate of
      Australian tax on unfranked dividends to which a resident of the United States
      is beneficially entitled is 15%, where the U.S. resident holds less than 10%
      of
      the voting rights in our company, or 5% where the US resident holds 10% or
      more
      of the voting rights in our company. The Double Taxation Convention between
      Australia and the United States does not apply to limit the tax rate on
      dividends where the ADSs are effectively connected to a permanent establishment
      or a fixed base carried on by the owner of the ADSs in Australia through which
      the stockholder carries on business or provides independent personal services,
      respectively.




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




Prior
      to
      December 12, 2006, non-Australian resident stockholders would 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 their associates, held 10% or more of our
      issued capital at any time during the five years before the disposal of the
      shares.




From
      December 12, 2006, Australian capital gains derived by non-Australian residents
      in respect of the disposal of capital assets that are not taxable Australian
      property will be disregarded. Non-Australian resident stockholders will not
      be
      subject to Australian capital gains tax on the capital gain made on a disposal
      of our shares, unless they, together with associates, hold 10% or more of our
      issued capital, tested either at the time of disposal or over any continuous
      12
      month period in the 24 months prior to disposal, and the value of the our shares
      at the time of disposal are wholly or principally attributable to Australian
      real property assets.




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 on U.S. residents. 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.




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.




68




**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 applicable would be limited 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 apply to U.S. Holders (as defined below) 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, and 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.




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.




69




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.




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 category income or general category income
      for
      U.S. foreign tax credit purposes. 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 31-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, 2010 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 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.




70




**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.




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 during the taxable year
      ended June 30, 2005, and once again qualified as a PFIC for the taxable year
      ended June 30, 2006, under a literal application of the asset test that looks
      solely to market value. We believe that we will once again qualify as a PFIC
      for
      the taxable year ended June 30, 2007.




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
                your holding period for such ADRs,




71




·
            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 will 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 on the disposition of ADRs with respect to which the mark-to-market
      election is made, is treated as ordinary income or loss (except that loss is
      treated as capital loss to the extent the loss exceeds the net mark-to-market
      gains, if any, that a U.S. Holder included in income with respect to such
      ordinary shares in prior years). However, gain or loss from the disposition
      of
      ordinary shares (as to which a “mark-to-market” election was made) in a year in
      which we are no longer a PFIC, will be capital gain or 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.




72




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.**  **Dividends
      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.




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
      submit reports to the Securities and Exchange Commission on Form 6-K containing
      unaudited financial information for the first six months of each fiscal
      year.




73




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 banks in
      Australia. Our management believes that the financial institutions that hold
      our
      investments are financially sound and accordingly, minimal credit risk exists
      with respect to these investments. 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$4 million and A$5 millions in time deposits held
      in
      U.S. dollars as of June 30, 2007 and 2006, respectively. A hypothetical 10%
      adverse movement in end-of-period exchange rates would reduce the cash balance
      by approximately A$400,000 and A$594,334 respectively.




We
      have
      engaged an external consultant to assist us to optimize our interest returns
      and
      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 **.** As
      of
      June 30, 2007, payables in U.S. dollars and other currencies were not material,
      but as of June 30 2006, we had US$253,213 and EUR$168,428 in payables. A
      hypothetical 10% adverse movement in the U.S. and EUR exchange rates could
      increase the cost of these payables by A$63,656.




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




Not
      applicable.




**PART
      II**




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




Not
      applicable.




74




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




Not
      applicable


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


We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Exchange Act reports 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
      is accumulated and communicated to our chief executive officer and chief
      financial officer to allow timely decisions regarding required disclosure.
      Our
      management, including our chief executive officer and chief financial officer,
      conducted an evaluation of our disclosure controls and procedures, as defined
      under Exchange Act Rule 13a-15(e), 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 US. GAAP
      and the Securities and Exchange Commission accounting requirements, resulting
      in
      a material weakness. A material weakness is a deficiency, or a combination
      of
      deficiencies, in internal control over financial reporting, such that there
      is a
      reasonable possibility that a material misstatement of a company’s annual or
      interim financial statements will not be prevented or detected on a timely
      basis. 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-IFRS and U.S. GAAP.




During
      the year ended June 30, 2007, there were no changes in our internal control
      over
      financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the
      Securities Exchange Act of 1934) that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.




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




Not
      applicable.


**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 by
      rules
      of the Securities and Exchange Commission. 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.




75




**ITEM
        16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES**


**Fees
      Paid to Independent Public Accountants**




The
      following table sets forth, for each of the years indicated, the fees billed
      by
      Deloitte Touche Tohmatsu, which served as our principal independent registered
      public accounting firm until November 30, 2006, as well as the other member
      firms of Deloitte Touche Tohmatsu and their respective affiliates. ****




Year
                Ended June 30,Services
                Rendered
            
            2007
            
            2006Audit
                (1)
            
            
            A$240,800
            
            
            A$202,599Tax
                (2)
            
            
            —
            
            
            A$185Other
                (3)
            
            
            
            
            
            A$3,030Total
            
            
            A$240,800
            
            
            A$205,814







(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.




Effective
      as of November 30, 2006, our shareholders resolved to appoint PricewaterhouseCoopers as our
      principal independent registered public accounting firm. For the fiscal year
      2007, the fees rendered or billed by PricewaterhouseCoopers were $A240,800
      for
      audit services. No non-audit related services were provided by PricewaterhouseCoopers
      during the 2007 fiscal year .




**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. 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. All of the fees described
      above were pre-approved by our Audit Committee.




**ITEM
          16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
          COMMITTEES**




Not
      applicable.




76




**ITEM
          16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
          PURCHASERS**




**Issuer
      Purchase of Equity Securities**




Neither
      we, nor any affiliated purchaser of our company, has purchased any of our
      securities during the year ended June 30, 2007.




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




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





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




PageIndex
                to Consolidated Financial Statements
            
            
            F-0Report
                of Independent Registered Public Accounting Firm for fiscal year
                2007
            
            
            F-1Report
                of Independent Registered Public Accounting Firm for fiscal years
                2006 and
                2005
            
            
            F-2Consolidated
                Balance Sheets
            
            
            F-3Consolidated
                Statements of Operations
            
            
            F-4Consolidated
                Cash Flow Statements
            
            
            F-5Consolidated
                Statements of Changes in Stockholders’ Equity
            
            
            F-6Notes
                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
            Agreement
                for the Assignment of Patents and Intellectual Property Licensing
                dated
                February 8, 2000, between Registrant and the Biomolecular Research
                Institute (1)




4.2
            License
                Agreement dated January 1, 2001, between the Registrant and The General
                Hospital Corporation (1)




4.3
            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)




4.4
            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)




4.5
            Agreement
                to Provide Accounting, Administration, Corporate Advice and Company
                Secretarial Services dated February 23, 2000, between the Registrant
                and
                Malvern Administrative Services (now named The CFO solution) (1)




77




4.6
            Form
                of Second Research Funding and Intellectual Property Assignment Agreement
                dated December 1, 2003, between the Registrant and The University
                of
                Melbourne (7)




4.7
            Third
                Research Funding and Intellectual Property Assignment Agreement dated
                December 2, 2006




4.8
            General
                Services Agreement dated November 13, 2006, between the Registrant
                and
                Quintiles Limited




4.9
            GMP
                30kg Manufacture Agreement dated June 6, 2007, between the Registrant
                and
                Institute of Drug Technology Australia
                Limited




4.10
            GMP
                4kg Manufacture Agreement dated June 6, 2007, between the Registrant
                and
                Institute of Drug Technology Australia Limited




4.11
            Letter
                agreement dated January 6, 2004, between the Registrant and Kendle
                Pty
                Ltd. regarding strategic alliance (8)




4.12
            Purchase
                Agreement dated April 27, 2004, among the Registrant and the investors
                signatory thereto (3)




4.13
            Registration
                Rights Agreement dated April 27, 2004, among the Registrant and the
                investors signatory thereto (4)




4.14
            Form
                of Warrant (5)




4.15
            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 (9)




4.16
            Prana
                Biotechnology Limited,Employees
                and Consultants Option Plan 2000 (1)




4.17
            Prana
                Biotechnology Limited, 2004 American Depository Share (ADS) Option
                Plan
                (10)




4.18
            Prana
                Biotechnology Limited, 2004 Employees’, Directors’ and Consultants’ Share
                and Option Plan (11)




4.19
            Employment
                Agreement dated September 21, 2007, among the Registrant and Mr.
                Kempler




4.20
            Employment
                Agreement effective as of August 7, 2006 among the Registrant and
                Dr. Ross
                Murdoch(12)




4.21
            Letter
                Agreements effective as of June 12, 2007 among the Registrant and
                Ms
                Dianne Angus




4.22
            Assignment
                and Novation Deed between Commonwealth Scientific Industrial and
                Research
                Organization and the Biomolecular Research Institute and the Registrant
                dated September 10, 2007




4.23
            Letter
                of Intent signed between the registrant and Kendle International
                Inc.
                dated September 24, 2004 in relation to clinical research
                services




4.24
            Letter
                of Intent signed between the registrant and Kendle International
                Inc.
                dated March 1, 2005 in relation to clinical research services




4.25
            On
                May 22, 2007 the registrant and Patheon Inc. entered into an agreement
                to
                undertake formulation development and manufacture of capsules of
                PBT2




8.1
            List
                of Subsidiaries of the Registrant




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




78




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




15.2
            Consent
                of PricewaterhouseCoopers, Registered Public Accounting
                Firm




15.2
            Consent
                of Deloitte Touche Tohmatsu, Registered Public Accounting
                Firm







(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 4.7 to our Annual Report on Form 20-F for the year ended
                June
                30, 2006, and incorporated herein by
                reference




(8)
            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.




(9)
            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.




(10)
            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).




(11)
            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).




(12)
            Filed
                as Exhibit 4.17 to our Annual Report on Form 20-F for the year ended
                June
                30, 2006, and incorporated herein by
                reference




79




**PRANA
        BIOTECHNOLOGY LIMITED**
 
 **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Page
                  Number**Report
                  of Independent Registered Public Accounting Firm for fiscal year
                  2007
              F-1Report
                  of Independent Registered Public Accounting Firm for fiscal years
                  2006 and
                  2005
              F-2Consolidated
                  Balance Sheets
              F-3Consolidated
                  Statements of Operations
              F-4Consolidated
                  Cash Flow Statements
              F-5Consolidated
                  Statements of Changes in Stockholders’ Equity
              F-6Notes
                  to Consolidated Financial Statements
              F-7
 
 F-0
 **PRICEWATERHOUSECOOPERS**
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 **To
        The Board of Directors and Shareholders of Prana Biotechnology
        Limited**
 
 In
        our
        opinion, the accompanying consolidated balance sheet and the related
        consolidated statements of operations, shareholders' equity and cash flows
        present fairly, in all material respects, the financial position of Prana
        Biotechnology Limited (the Company) and its subsidiaries (a development stage
        enterprise) at June 30, 2007, and the results of their operations and
        their cash flows for the year then ended and, cumulatively, for the period
        from July 1, 2006 (date of first period covered by our audit)
        to June 30, 2007 in conformity with Australian Equivalents to
        International Financial Reporting Standards (A-IFRS). 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 audit. We
        conducted our audit of these statements in accordance with the 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. An audit
        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, and evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
  A-IFRS
        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 27 to the consolidated financial
        statements.
 /s/
        PricewaterhouseCoopers LLP
 PricewaterhouseCoopers
        LLP
 Melbourne,
        Australia
 27
        September 2007
  F-1
 
 **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **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 balance sheet of Prana Biotechnology
        Limited (a company incorporated in Victoria, Australia) and subsidiaries
        (a
        development stage company) (the “Company”) as of June 30, 2006 and the related
        consolidated statements of operations, stockholders' equity, and cash flows
        for
        each of the two years in the period ended June 30, 2006. 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, 2006, and the results of their operations and their cash flows
        for each of the two years in the period ended June 30, 2006, in conformity
        with
        the Australian Equivalents to International Financial Reporting
        Standards.
 
 The
        Australian Equivalents to International Financial Reporting Standards 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 27 to the consolidated financial
        statements.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 1 to the financial
        statements, the Company's recurring losses from operations and negative cash
        flows from operations raise substantial doubt about its ability to continue
        as a
        going concern. Management's plans concerning these matters are also described
        in
        Note 1. The financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 As
        discussed in Note 29, the accompanying financial statements as of June 30,
        2006
        and for each of the two years in the period ended June 30, 2006 have been
        restated.
 
 
 /s/
        Deloitte Touche Tohmatsu
 **DELOITTE
        TOUCHE TOHMATSU**
 Chartered
        Accountants
 
 Melbourne,
        Australia
 September
        29, 2006 (June 18, 2007 as to the effects of the restatement discussed in
        Note
        29)
  F-2
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **CONSOLIDATED
        BALANCE SHEET**
 **(in
        Australian dollars, except number of shares)**
 **June
                    30,**Notes
                
                **2007**
                
                **2006****Current
                    Assets**Cash
                    and cash equivalents
                
                
                
                
                
                7,409,256
                
                
                10,013,778Trade
                    and other receivables
                
                
                6
                
                
                96,499
                
                
                194,161Other
                    current assets
                
                
                7
                
                
                168,539
                
                
                110,832**Total
                    Current Assets**
                
                
                
                
                
                7,674,294
                
                
                10,318,771**Non
                    Current Assets**Property
                    and equipment, net of accumulated
                  depreciation
                    of A$551,902 and A$501,614 respectively
                
                
                8
                
                
                47,891
                
                
                102,375**Total
                    Non Current Assets**
                
                
                
                
                
                47,891
                
                
                102,375**Total
                    Assets**
                
                
                
                
                
                7,722,185
                
                
                10,421,146**Current
                    Liabilities**Trade
                    and other payables
                
                
                9
                
                
                1,661,609
                
                
                1,538,358Provisions
                
                
                10
                
                
                77,465
                
                
                76,672**Total
                    Current Liabilities**
                
                
                
                
                
                1,739,074
                
                
                1,615,030**Non-Current
                    Liabilities**Financial
                    liabilities
                
                
                11
                
                
                321,001
                
                
                928,692Provisions
                
                
                10
                
                
                49,915
                
                
                76,766**Total
                    Non-Current Liabilities**
                
                
                
                
                
                370,916
                
                
                1,005,458**Total
                    Liabilities**
                
                
                
                
                
                2,109,990
                
                
                2,620,488Commitments
                    and contingencies
                
                
                12**Net
                    Assets**
                
                
                
                
                
                5,612,195
                
                
                7,800,658**Equity**Issued
                    and unissued capital
                  2007:
                    151,517,978 fully paid ordinary shares
                  4,352,893
                    options over fully paid ordinary shares
                  2006:
                    128,144,260 fully paid ordinary shares
                
                
                13
                
                
                53,988,412
                
                
                46,274,127Reserves
                
                
                14
                
                
                4,106,821
                
                
                2,867,249Accumulated
                    deficit during the development stage
                
                
                15
                
                
                (52,483,038
                )
                
                (41,340,718
                )**Total
                    Equity**
                
                
                
                
                
                5,612,195
                
                
                7,800,658
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-3
  ****PRANA
        BIOTECHNOLOGY LIMITED****
 **(A
          Development Stage Enterprise)**
 **CONSOLIDATED
        STATEMENT OF OPERATIONS**
 **(in
        Australian dollars, except number of shares)**
 
 **Years
                  ended********June
                  30,**Notes
              
              **2007**
              
              **2006**
              
              **2005**Revenues
                  from continuing operations
              
              
              2
              
              
              507,150
              
              
              762,023
              
              
              892,135Other
                  income
              
              
              3
              
              
              287
              
              
              288,263
              
              
              1,760,978Research
                  and development expenses
              
              
              4
              
              
              (4,492,193
              )
              
              (7,613,045
              )
              
              (7,109,839
              )Research
                  and development expenses - related party
              
              
              4
              
              
              -
              
              
              -
              
              
              (577,757
              )Personnel
                  expenses
              
              
              4
              
              
              (4,554,731
              )
              
              (3,418,008
              )
              
              (5,750,929
              )Intellectual
                  property expenses
              
              
              4
              
              
              (600,232
              )
              
              (466,426
              )
              
              (729,583
              )Auditor
                  and accounting expenses
              
              
              22
              
              
              (260,117
              )
              
              (205,815
              )
              
              (202,032
              )Travel
                  expenses
              
              
              
              
              
              (309,997
              )
              
              (212,184
              )
              
              (432,316
              )Marketing
                  expenses
              
              
              
              
              
              (215,455
              )
              
              (134,750
              )
              
              (442,920
              )Depreciation
                  expenses
              
              
              4
              
              
              (58,582
              )
              
              (118,196
              )
              
              (65,223
              )Amortization
                  expenses
              
              
              4
              
              
              -
              
              
              -
              
              
              (83,200
              )Other
                  expenses
              
              
              4
              
              
              (1,008,563
              )
              
              (824,625
              )
              
              (1,204,930
              )Foreign
                  exchange gain/(loss)
              
              
              
              
              
              (757,578
              )
              
              223,454
              
              
              (1,362,572
              )Impairment
                  of intangible assets
              
              
              
              
              
              -
              
              
              -
              
              
              (786,240
              )Gain
                  on fair value of financial liabilities
              
              
              
              
              
              607,691
              
              
              128,715
              
              
              5,801,397**Loss
                  before income tax expense**
              
              
              
              
              
              (11,142,320
              )
              
              (11,590,594
              )
              
              (10,293,031
              )**Income
                  tax expense**
              
              
              5
              
              
              -
              
              
              -
              
              
              -**Net
                  loss**
              
              
              15
              
              
              (11,142,320
              )
              
              (11,590,594
              )
              
              (10,293,031
              )**Loss
                  per share (basic and diluted)**
              
              
              20
              
              
              (0.08
              )
              
              (0.09
              )
              
              (0.08
              )Weighted
                  average number of ordinary shares used in computing basic and diluted
                  net
                  loss per share
              
              
              
              
              
              140,754,495
              
              
              128,053,601
              
              
              122,754,061
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-4
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
 **CONSOLIDATED
        CASH FLOW STATEMENTS**
 **(in
        Australian dollars)**
 
 **Years
                  Ended June 30**Notes
              
              **2007**
              
              **2006**
              
              **2005****Cash
                  Flows from Operating Activities**Payments
                  to suppliers and employees
              
              
              
              
              
              (9,726,197
              )
              
              (12,647,636
              )
              
              (13,333,739
              )Payments
                  to suppliers and employees - related party
              
              
              
              
              
              -
              
              
              -
              
              
              (625,940
              )Interest
                  received
              
              
              
              
              
              526,447
              
              
              764,711
              
              
              883,583Government
                  grant received
              
              
              
              
              
              -
              
              
              231,710
              
              
              532,283Neuroscience
                  Victoria monies received
              
              
              
              
              
              -
              
              
              -
              
              
              1,125,000Net
                  cash flows (used in) operating activities
              
              
              16(a
              )
              
              (9,199,750
              )
              
              (11,651,215
              )
              
              (11,418,813
              )**Cash
                  Flows from Investing Activities**Proceeds
                  from sale of equipment
              
              
              
              
              
              300
              
              
              375
              
              
              -Payments
                  for purchase of equipment
              
              
              
              
              
              (4,559
              )
              
              (55,626
              )
              
              (50,466
              )Net
                  cash flows (used in) investing activities
              
              
              
              
              
              (4,259
              )
              
              (55,251
              )
              
              (50,466
              )**Cash
                  Flows from Financing Activities**Proceeds
                  from exercise of options and issue of securities
              
              
              
              
              
              7,783,486
              
              
              -
              
              
              4,753,333Payment
                  of share issue costs
              
              
              
              
              
              (408,761
              )
              
              (2,020
              )
              
              (48,576
              )Net
                  cash flows (used in) / provided by financing activities
              
              
              
              
              
              7,374,725
              
              
              (2,020
              )
              
              4,704,757Net
                  (decrease) in cash and cash equivalents
              
              
              
              
              
              (1,829,284
              )
              
              (11,708,486
              )
              
              (6,764,522
              )Opening
                  cash and cash equivalents brought forward
              
              
              
              
              
              10,013,778
              
              
              21,453,304
              
              
              29,580,398Exchange
                  rate adjustments on cash and cash equivalents held in foreign
                  currencies
              
              
              
              
              
              (775,238
              )
              
              268,960
              
              
              (1,362,572
              )**Closing
                  cash and cash equivalents carried forward**
              
              
              16(b
              )
              
              7,409,256
              
              
              10,013,778
              
              
              21,453,304
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 F-5
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
 
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
 **(in
        Australian dollars, except for number of shares)**
  **Notes**
              
              **Number
                  of Shares**
              
              **Issued
                  and unissued Capital**
              
              **Reserves**
              
              **Accumulated**
                **Deficit
                  During Development Stage**
              
              **Total
                  Equity****Balance,
                  June 30, 2004**
              
              
              
              115,984,380
              
              40,681,945
              
              -
              
              (19,457,093)
              
              21,224,852Net
                  loss
              
              
              15
              
              
              -
              
              
              -
              
              
              -
              
              
              (10,293,031
              )
              
              (10,293,031
              )Issuance
                  of shares in connection with exercise of options, net of
                  costs
              
              
              13(b)
              
              
              9,506,666
              
              
              4,145,811
              
              
              -
              
              
              -
              
              
              4,145,811Non-cash
                  issuance of shares to consultants and directors
              
              
              13(b)
              
              
              478,214
              
              
              255,141
              
              
              -
              
              
              -
              
              
              255,141Non-cash
                  issuance of shares for settlement of litigation
              
              
              13(b)
              
              
              1,350,000
              
              
              756,000
              
              
              -
              
              
              -
              
              
              756,000Non-cash
                  issuance of options to directors and employees
              
              
              14(b)
                  & (c)
              
              
              -
              
              
              -
              
              
              1,704,734
              
              
              -
              
              
              1,704,734Non-cash
                  issuance of options to consultants
              
              
              14(b)
              
              
              -
              
              
              -
              
              
              289,699
              
              
              -
              
              
              289,699Non-cash
                  issuance of warrants to consultants
              
              
              14(d)
              
              
              -
              
              
              -
              
              
              453,563
              
              
              -
              
              
              453,563**Balance,
                  June 30, 2005**
              
              
              
              
              
              127,319,260
              
              
              45,838,897
              
              
              2,447,996
              
              
              (29,750,124
              )
              
              18,536,769Net
                  loss
              
              
              15
              
              
              -
              
              
              -
              
              
              
              
              
              (11,590,594
              )
              
              (11,590,594
              )Non-cash
                  issuance of shares to consultants
              
              
              13(b)
              
              
              825,000
              
              
              435,230
              
              
              -
              
              
              -
              
              
              435,230Non-cash
                  issuance of options to consultants
              
              
              14(b)
              
              
              -
              
              
              -
              
              
              181,550
              
              
              -
              
              
              181,550Non-cash
                  issuance of options to directors and employees
              
              
              14(b)
              
              
              -
              
              
              -
              
              
              76,470
              
              
              -
              
              
              76,470Amortization
                  of option expenses
              
              
              14(b)
              
              
              -
              
              
              -
              
              
              161,233
              
              
              -
              
              
              161,233**Balance,
                  June 30, 2006**
              
              
              
              
              
              128,144,260
              
              
              46,274,127
              
              
              2,867,249
              
              
              (41,340,718
              )
              
              7,800,658Net
                  loss
              
              
              15
              
              
              -
              
              
              -
              
              
              -
              
              
              (11,142,320
              )
              
              (11,142,320
              )Issuance
                  of shares in connection with private placement, net of
                  costs
              
              
              13(b)
              
              
              22,014,468
              
              
              6,108,868
              
              
              -
              
              
              -
              
              
              6,108,868Issuance
                  of options in connection with private placement
              
              
              13(c)
              
              
              -
              
              
              1,262,339
              
              
              -
              
              
              -
              
              
              1,262,339Non-cash
                  issuance of shares to consultants
              
              
              13(b)
              
              
              481,250
              
              
              194,579
              
              
              -
              
              
              -
              
              
              194,579Non-cash
                  issuance of shares to employees
              
              
              13(b)
              
              
              120,000
              
              
              45,600
              
              
              -
              
              
              -
              
              
              45,600Non-cash
                  issuance of options to consultants
              
              
              14(b)
              
              
              -
              
              
              -
              
              
              163,701
              
              
              -
              
              
              163,701Non-cash
                  issuance of options to directors and employees
              
              
              14(b)
              
              
              -
              
              
              -
              
              
              989,721
              
              
              -
              
              
              989,721Issuance
                  of shares in connection with exercise of options, net of
                  costs
              
              
              13(b)
                  & 14(b)
              
              
              758,000
              
              
              102,899
              
              
              (106,739
              )
              
              -
              
              
              (3,840
              )Amortization
                  of option expenses
              
              
              14(b)
              
              
              -
              
              
              -
              
              
              195,839
              
              
              -
              
              
              195,839Options
                  forfeited
              
              
              14(b)
              
              
              -
              
              
              -
              
              
              (2,950
              )
              
              -
              
              
              (2,950
              )**Balance,
                  June 30, 2007**
              
              
              
              
              
              151,517,978
              
              
              53,988,412
              
              
              4,106,821
              
              
              (52,483,038
              )
              
              5,612,195
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-6
 
 P **RANA
          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 and its controlled entities: Prana Biotechnology Inc.
        and
        Prana Biotechnology UK Limited (referred to collectively as “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.
 
 **Financial
        Reporting Framework**
 
 The
        financial report is a general purpose financial report, which has been prepared
        in accordance with the *Corporations
        Act 2001* ,
        Accounting Standards and Urgent Issues Group Interpretations, and complies
        with
        other requirements of the law. Accounting Standards include Australian
        equivalents to International Financial Reporting Standards (‘A-IFRS’).
        Compliance with A-IFRS ensure that the consolidated financial statements
        and
        notes of the consolidated entity comply with International Financial Reporting
        Standards (‘IFRS’).
 
 The
        financial report has been prepared on the basis of historical cost. Cost
        is
        based on the fair values of the consideration given in exchange for
        assets.
 
 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
        consolidated entity changed its accounting policies on July 1, 2005 to comply
        with A-IFRS. The transition to A-IFRS is accounted for in accordance with
        Accounting Standard AASB 1: *First-time
        Adoption of Australian Equivalents to International Financial Reporting
        Standards* (“AASB
        1”), with July 1, 2004 as the date of transition.
 
 The
        accounting policies set out below have been applied in preparing the financial
        statements for the year ended June 30, 2007, the comparative information
        presented in these financial statements for the years ended June 30, 2006
        and
        2005.
 
 **Critical
        accounting estimates and judgments**
 
 (a)
        Critical accounting estimates and assumptions
 
 Estimates
        and judgments are continually evaluated and are based on historical experience
        and other factors, including expectations of future events that may have
        a
        financial impact on the entity and that are believed to be reasonable under
        the
        circumstances.
 
 The
        consolidated entity makes estimates and assumptions concerning the future.
        The
        resulting accounting estimates will, by definition, seldom equal the related
        actual results. The estimates and assumptions that have a significant risk
        of
        causing a material adjustment to the carrying amounts of assets and liabilities
        within the next financial year are discussed below.
 
 Valuation
        of options with market vesting conditions
 
 The
        consolidated entity has issued options over ordinary shares that are exercisable
        once the listed share price reaches a defined level for a specified number
        of
        consecutive trading days.
 
 The
        consolidated entity considers the target share price that must be attained
        in
        order to exercise the awards to be a market condition.
 
 The
        Company is unable to predict the ultimate success of research and development
        activities and the corresponding effect on the listed share price. However,
        the
        following assumptions have been made when valuing the options in relation
        to
        these market conditions:
  1)
        The market condition will be met as the listed
        share price will reach the defined share price during the life of the option;
        and
  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)**
  2)
        Based
        on the best estimate of the consolidated entity, the share price will reach
        the
        defined level:
 >
        A$0.50 at December 31, 2007
 >
        A$0.80 at June 30, 2009
 >
        A$1.00 at June 30, 2010
 
 (b)
        Critical judgments in applying the entity’s accounting policies
 
 Use
        of
        volatility period in valuing warrant liabilities
 
 Warrants
        and options over American Depository Receipts ("ADRs") recorded as financial
        liabilities under AASB 132 (see note 11) are measured at fair value using
        a
        Black-Scholes valuation model. At each reporting date the options and warrants
        are recorded at fair value with the corresponding difference being recorded
        in
        the income statement as a gain or loss.
 
 In
        using
        the Black-Scholes model to fair value these options and warrants for financial
        year 2007, the consolidated entity has utilized a two year historical ADR
        price
        when calculating the volatility of the underlying ADRs. It is the judgment
        of
        the consolidated entity that a two year period provides the most appropriate
        history of ADR price over which a reasonable volatility input can be
        calculated.
 
 **Going
        Concern Basis**
 
 The
        consolidated entity is a development stage medical biotechnology company
        and as
        such expects to be utilising cash until its research activities have become
        marketable. As at June 30, 2007, the consolidated entity has accumulated
        losses
        of $52,483,038 and has incurred negative cash flows from operations of
        $9,199,750 in the year ended June 30, 2007. The consolidated entity has
        generated $7.78 million (before costs) from a capital raising in December
        2006.
        The cash position has reduced from $10,013,778 at June 30, 2006 to $7,409,256
        at
        June 30, 2007.
 
 The
        consolidated entity has sufficient resources to fund the completion of the
        current Phase IIa clinical trial investigating the safety and tolerability
        of
        PBT2 for the treatment of Alzheimer’s Disease. The results of this trial are
        expected in the 1st quarter of the 2008 calendar year. However, to progress
        planned non-clinical trial activities of the consolidated entity for at least
        the next 12 months, additional funds will be required (see below in relation
        to
        shareholder approval for capital raising.)
 
 Since
        inception, the consolidated entity has been able to raise funds to pursue
        its
        research programs. To date, the consolidated entity has raised in excess
        of $64m
        (before costs) through the issue of equity and warrants, before costs. The
        directors believe that there is a reasonable expectation that they can raise
        additional funding to enable the consolidated entity to continue to pursue
        the
        current business objectives. The Company has issued a Notice of Meeting seeking
        shareholder approval to raise up to $10 million (before costs). To date,
        the
        Company has applications totaling $7 million (before costs). The meeting
        is
        scheduled to be held on October 15, 2007.
 
 Having
        carefully assessed the uncertainties relating to the likelihood and timing
        of
        securing additional funding and the consolidated entity’s ability to effectively
        manage expenditure, the directors believe that the consolidated entity will
        continue to operate as a going concern for the foreseeable future. These
        financial statements have therefore been prepared on a going concern basis
        which
        contemplates the continuity of normal business activities and the realization
        of
        assets and settlement of liabilities in the ordinary course of business.
 
 At
        this
        time, the directors are of the opinion that no asset is likely to be realized
        for an amount less than the amount at which it is recorded in the Balance
        Sheet
        at June 30, 2007. Accordingly, no adjustments have been made to the financial
        report relating to the recoverability and classification of the asset carrying
        amounts or the classification of liabilities that might be necessary should
        the
        consolidated entity not continue as a going concern.
  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)**
 
 **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.
 
 **(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 and its subsidiaries as defined in Accounting Standard AASB 127: *Consolidated
        and Separate Financial Statements* .
        Consistent accounting policies are employed in the preparation and presentation
        of the consolidated financial statements.
 
 In
        preparing the consolidated financial statements, all inter-company balances
        and
        transactions, and unrealized profits/losses arising within the consolidated
        entity are eliminated in full.
 
 **(b)**
              **Income
                  Tax**
  Current
        tax
  Current
        tax is calculated by reference to the amount of income taxes payable or
        recoverable in respect of the taxable profit or loss for the period. It is
        calculated using tax rates and tax laws that have been enacted or substantively
        enacted by reporting date. Current tax for current and prior periods is
        recognized as a liability (or asset) to the extent that it is unpaid (or
        refundable).
 
 Deferred
        tax
  Deferred
        tax is accounted for using the comprehensive balance sheet liability method
        in
        respect of temporary differences arising from differences between the carrying
        amount of assets and liabilities in the financial statements and the
        corresponding tax base of those items.
 
 In
        principle, deferred tax liabilities are recognized for all taxable temporary
        differences. Deferred tax assets are recognized to the extent that it is
        probable that sufficient taxable amounts will be available against which
        deductible temporary differences or unused tax losses and tax offsets can
        be
        utilized. However, deferred tax assets and liabilities are not recognized
        if the
        temporary differences giving rise to them arise from the initial recognition
        of
        assets and liabilities (other than as a result of a business combination)
        which
        affects neither taxable income nor accounting profit or loss.
 
 Deferred
        tax liabilities are recognized for taxable temporary differences arising
        on
        investments in subsidiaries except where the consolidated entity is able
        to
        control the reversal of the temporary differences and it is probable that
        the
        temporary differences will not reverse in the foreseeable future. Deferred
        tax
        assets arising from deductible temporary differences associated with these
        investments are only recognized to the extent that it is probable that there
        will be sufficient taxable profits against which to utilize the benefits
        of the
        temporary differences and they are expected to reverse in the foreseeable
        future.
  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)**
 
 Deferred
        tax assets and liabilities are measured at the tax rates that are expected
        to
        apply to the period(s) when the asset and liability giving rise to them are
        realized or settled, based on tax rates (and tax laws) that have been enacted
        or
        substantively enacted by reporting date. The measurement of deferred tax
        liabilities and assets reflects the tax consequences that would follow from
        the
        manner in which the consolidated entity expects, at the reporting date, to
        recover or settle the carrying amount of its assets and
        liabilities.
 
 Deferred
        tax assets and liabilities are offset when they relate to income taxes levied
        by
        the same taxation authority and the Company/consolidated entity intends to
        settle its current tax assets and liabilities on a net basis.
 
 Current
        and deferred tax for the period
  Current
        and deferred tax is recognized as an expense or income in the statement of
        operations, except when it relates to items credited or debited directly
        to
        equity, in which case the deferred tax is also recognized directly in equity,
        or
        where it arises from the initial accounting for a business combination, in
        which
        case it is taken into account in the determination of goodwill.
 
 The
        consolidated entity has significant unused tax losses and as such a significant
        deferred tax asset; however, the deferred tax asset has not been recognized,
        as
        it is not probable that future taxable profit will be available against which
        the unused losses and unused tax credits can be utilized, given the nature
        of
        the consolidated entity’s business (research and development) and its history of
        losses.
 
 **(c)**
              **Property
                  and equipment**
  Property
        and equipment is measured on the cost basis less accumulated depreciation
        and
        impairment and consists of laboratory equipment, computer equipment, furniture
        and fittings and leasehold improvements attributable to Prana’s premises at
        Parkville, Victoria, Australia. Cost includes expenditure that is directly
        attributable to the acquisition of the item.
 
 Depreciation
  Depreciation
        is provided on a straight line basis so as to write off the net cost or other
        revalued amount of each asset over its expected useful life.
 
 The
        following estimated useful lives, ranging from three to 20 years, are used
        in
        the calculation of depreciation:
 Furniture
                    and fittings
                
                
                5-33
                %Computer
                    equipment
                
                
                33
                %Laboratory
                    equipment
                
                
                10-33
                %
 
 Leasehold
        improvements are depreciated over the shorter of the lease term and useful
        life.
 
 The
        depreciation method, residual values and useful lives are reviewed, and adjusted
        if appropriate, at each annual reporting period.
 
 **(d)**
              **Leased
                  Assets**
  Leased
        assets classified as finance leases are recognized as assets. The amount
        initially brought to account is the present value of minimum lease
        payments.
 
 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.
 
 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.
 
 Leases
        in
        which a significant proportion of the risks and rewards of ownership are
        not
        transferred to the Company as lessee are classified as operating leases.
 
 Operating
        lease payments are recognized as an expense on a straight-line basis over
        the
        lease term, except where another systematic basis is more representative
        of the
        time pattern in which economic benefits from the leased assets are consumed.
 
 **(e)**
              **Financial
                  Instruments**
  Loans
        and Receivables
  Trade
        receivables, loans, and other receivables are recorded at amortized cost
        less
        impairment.
  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)**
 
 Warrants
        and Options
  Under
        AASB 132, options and warrants issued other than for goods or services that
        are
        exercisable in a currency other than the functional currency of the Company
        and
        meet the definition of a liability are recorded as financial liabilities
        rather
        than equity. Refer to accounting policy (p) share-based payments for the
        accounting policy for warrants and options issued as share-based payments
        for
        goods or services.
 
 Warrants
        and options recorded as financial liabilities under AASB 132 are valued at
        fair
        value using the Black-Scholes model. The expected life used in the model
        has
        been adjusted, based on management’s best estimate, for the effects of
        non-transferability, exercise restrictions, and behavioural considerations.
        At
        each reporting date, the options and warrants are revalued to their current
        fair
        value, with the difference in fair value recorded in the statement of
        operations.
 
 **(f)**
              **Impairment
                  of Assets**
  At
        each
        reporting date, the consolidated entity reviews the carrying amounts of its
        tangible and intangible assets to determine whether there is any indication
        that
        those assets have been impaired. If any such indication exists, the recoverable
        amount of the asset is estimated to determine the extent of the impairment
        loss
        (if any).
 
 Where
        the
        asset does not generate cash flows that are independent from other assets,
        the
        consolidated entity estimates the recoverable amount of the cash-generating
        unit
        to which the asset belongs.
 
 Intangible
        assets not yet available for use are tested for impairment annually and whenever
        there is an indication that the asset may be impaired.
 
 Recoverable
        amount is the higher of fair value less costs to sell and value in use. In
        assessing value in use, the estimated future cash flows are discounted to
        their
        present value using a pre-tax discount rate that reflects current market
        assessments of the time value of money and the risks specific to the asset
        for
        which the estimates of future cash flows have not been adjusted.
 
 If
        the
        recoverable amount of an asset (or cash-generating unit) is estimated to
        be less
        than its carrying amount, the carrying amount of the asset (or cash-generating
        unit) is reduced to its recoverable amount. An impairment loss is recognized
        in
        profit or loss immediately.
 
 Where
        an
        impairment loss subsequently reverses, the carrying amount of the asset (or
        cash-generating unit) is increased to the revised estimate of its recoverable
        amount, but only to the extent that the increased carrying amount does not
        exceed the carrying amount that would have been determined had no impairment
        loss been recognized for the asset (or cash-generating unit) in prior years.
        A
        reversal of an impairment loss is recognized in profit or loss
        immediately.
 
 **(g)**
              **Intangibles
                  - Research and Development**
  Expenditure
        during the research phase of a project is recognized as an expense when
        incurred. Where no internally generated intangible assets can be recognized,
        development expenditure is recognized as an expense in the period as incurred.
        Development costs are capitalized if and only if, all of the following are
        demonstrated:
 ·
              the
                  technical feasibility of completing the intangible asset so that
                  it will
                  be available for use or sale;  ·
              the
                  intention to complete the intangible asset and use or sell
                  it;  ·
              the
                  ability to use or sell the intangible
                  asset;  ·
              how
                  the intangible asset will generate probable future economic
                  benefits;  ·
              the
                  availability of adequate technical, financial and other resources
                  to
                  complete the development and to use or sell the intangible asset;
                  and
 Internally-generated
        intangible assets (capitalized development costs) are stated at cost less
        accumulated amortization and impairment, and are amortized on a straight-line
        basis over their useful lives over a maximum of five years.
 
 At
        June
        30, 2007 and 2006, Prana had no capitalized research and development costs.
 
 **(h)**
              **Foreign
                  Currency Transactions and
                  Balances**
  Functional
        and Presentation Currency
  Items
        included in the financial statements of each of the consolidated entity's
        entities are measured using the currency of the primary economic environment
        in
        which the entity operates (the functional currency). The consolidated financial
        statements are presented in Australian dollars, which is Prana's functional
        and
        presentation currency.
  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)**
  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. Foreign
        currency monetary items at reporting date are translated at the exchange
        rate
        existing at reporting date. Non-monetary assets and liabilities carried at
        fair
        value that are denominated in foreign currencies are translated at the rates
        prevailing at the date when the fair value was determined.
 
 Exchange
        differences are recognized in profit or loss in the period in which they
        arise
        except for exchange differences on monetary items receivable from or payable
        to
        a foreign operation for which settlement is neither planned or likely to
        occur,
        which form part of the net investment in a foreign operation, are recognized
        in
        the foreign currency translation reserve and recognized in profit or loss
        on
        disposal of the net investment.
 
 Foreign
        operations
  On
        consolidation, the assets and liabilities of the consolidated entity’s overseas
        operations are translated at exchange rates prevailing at the reporting date.
        Income and expense items are translated at the average exchange rates for
        the
        period unless exchange rates fluctuate significantly. Exchange differences
        arising, if any, are recognized in the foreign currency translation reserve,
        and
        recognized in profit or loss on disposal of the foreign operations.
 
 **(i)**
              **Employee
                  Benefits**
  Provision
        is made for the consolidated entity’s liability for employee benefits arising
        from services rendered by employees to reporting date. Employee benefits
        that
        are expected to be settled within one year have been measured at the amounts
        expected to be paid when the liability is settled, plus related on-costs.
        Employee benefits payable later than one year have been measured at the present
        value of the estimated future cash outflows to be made for those
        benefits.
 
 **(j)**
              **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.
 
 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.
 
 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 virtually certain that recovery will be received and the amount of the
        receivable can be measured reliably.
 
 **(k)**
              **Cash
                  and cash equivalents**
  Cash
        and
        cash equivalents includes cash on hand, deposits held at call with banks
        and
        other short-term highly liquid investments with original maturities of three
        months or less.
 
 **(l)**
              **Revenue**
  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. Revenue is made
        up
        of interest income which is recognized as earned when collectibility is
        reasonably assured.
 
 **(m)**
              **Other
                  income**
  Other
        income is recognized to the extent that it is probable that the economic
        benefits will flow to the entity and the income can be reliably measured.
 
 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.
        Other income 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. Income for each milestone achieved is fixed up
        front.
 
 Corporate
        partner income
  Corporate
        partner income is comprised of amounts earned under agreements with Schering
        A.G. and Neuroscience Victoria Ltd. for certain research and development
        activities. Income is 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-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)**
 **(n)**
              **Share
                  Capital**
  Ordinary
        share capital is recognized as the fair value of the consideration received
        by
        the Company. Any transaction costs arising on the issue of ordinary shares
        are
        recognized directly in equity as a reduction of the share proceeds
        received.
 
 **(o)**
              **Trade
                  and other payables**
  Trade
        payables and other payables are recognized when the consolidated entity becomes
        obliged to make future payments resulting from the purchase of goods or
        services. These amounts are unsecured.
 
 **(p)**
              **Share-based
                  payments**
  Equity-settled
        share-based payments granted after November 7, 2002 that were unvested as
        of
        January 1, 2005 are measured at fair value. The measurement date is determined
        for share-based payments issued to directors, employees and consultants as
        follows:
  Directors
  The
        issue
        of share-based payments to directors is subject to approval by shareholders
        as
        per ASX Listing Rule 10.11. The measurement date for share-based payments
        issued
        to directors is the grant date, being the date at which the share-based payments
        are approved by shareholders.
 
 Employees
  The
        issue
        of share-based payments to employees may be subject to shareholder approval
        per
        ASX Listing Rule 7.1 which prohibits the issue of more than 15% of the Company’s
        shares in a 12 month period without shareholder approval. The measurement
        date
        for share-based payments issued to employees is the grant date, being the
        date
        at which a shared understanding of the terms and conditions of the arrangement
        is reached. However, if an issue to an employee is subject to shareholder
        approval because it exceeds the 15% threshold per ASX Listing Rule 7.1, then
        the
        measurement date of these share-based payments is the date at which the
        share-based payments are approved by shareholders.
 
 Consultants
  The
        issue
        of share-based payments to consultants may be subject to shareholder approval
        per ASX Listing Rule 7.1 which prohibits the issue of more than 15% of the
        Company’s shares in a 12 month period without shareholder approval. The
        measurement date for share-based payments issued to consultants who provide
        services considered to be similar to employees is deemed to be the date at
        which
        a shared understanding of the terms and conditions of the arrangement is
        reached. The measurement date for share-based payments issued to consultants
        who
        provide services considered to be differentiated from those provided by
        employees is deemed to be the date at which the entity obtains the goods
        or the
        counterparty renders the service. If a service period applies and the work
        is
        continually provided over the service period, and if the share price of the
        Company does not change significantly during the service period, then the
        average share price, volatility and risk-free rate over the service period
        are
        used in calculating the value of the share-based payments issued. However,
        if
        the underlying share price of the Company does change significantly during
        the
        service period, then the value of share-based payments are calculated at
        each
        individual date that goods and services are provided, using the actual valuation
        inputs at that date. Shares issued to consultants for services are recorded
        as
        non-cash compensation and are recognized at either the fair value of the
        services rendered, or if this cannot be reasonably estimated, the fair value
        of
        the underlying equity instruments issued.
 
 The
        fair
        value of options is measured by use of a Black Scholes model (for options
        without market conditions) or the Barrier Pricing model (for options with
        market
        conditions). The expected life used in the model has been adjusted, based
        on
        management’s best estimate, for the effects of non-transferability, exercise
        restrictions, and behavioral considerations.
 
 The
        fair
        value of shares is based on the quoted market price of the Company’s
        shares.
 
 The
        fair
        value determined at the measurement date of the equity-settled shared based
        payments is expensed on a straight line basis over the vesting period, based
        on
        the consolidated entity’s estimate of share-based payments that will eventually
        vest.
 
 The
        fair
        value of share-based awards with market conditions is expensed on a straight
        line basis over the period in which the Company determines the defined market
        condition will be achieved. This period is estimated by the Company at the
        grant
        date of the corresponding share-based awards. If the market conditions are
        met
        in advance of the period initially estimated, the awards are considered to
        have
        vested and the corresponding expense is accelerated as the Company will receive
        no further benefit from the services. If the market conditions are met
        subsequent to the period initially estimated, no amendment is made to the
        expense recognized. Similarly, if the market conditions are not met prior
        to the
        expiration of the awards, no adjustment is made in respect of the expense
        recognized for the anticipated number of share-based payments expected to
        vest.
  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)**
 **(q)**
              **Loss
                  per share**
  Basic
        loss per share is determined by dividing the net loss after income tax expense
        by the weighted average number of ordinary shares outstanding during the
        financial 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.
 
 **(r)**
              **Goods
                  and Services Tax (GST)**
  Revenues,
        expenses and assets are recognized net of the amount of GST, except where
        the
        amount of GST incurred is not recoverable from the taxation authority. In
        these
        circumstances the GST is recognized as part of the cost of acquisition of
        the
        asset or as part of an item of expense. Receivables and payables in the balance
        sheet are shown inclusive of GST.
 
 The
        net
        amount of GST recoverable from, or payable to, the taxation authority is
        included as part of receivables or payables.
 
 Cash
        flows are included in the statement 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.
 
 **(s)**
              **Trade
                  and other receivables**
  Trade
        and
        other receivables are recognized initially at fair value and subsequently
        measured at amortized cost using the effective interest rate method less
        provision for impairment.
 
 **(t)**
              **Comparative
                  figures**
  When
        required by Accounting Standards, comparative figures have been adjusted
        to
        conform with changes in presentation for the current financial
        year.
 
 **(u)**
              **New
                  accounting standards and
                  interpretations**
  Certain
        new accounting standards and UIG interpretations have been published that
        are
        not mandatory for June 30, 2007 reporting periods. The consolidated entity’s
        assessment of the impact of these new standards and interpretations is only
        relevant to the below:
 
 i)
              AASB
                  7 Financial Instruments: Disclosures and ASSB 2005-10 Amendments
                  to
                  Australian Accounting Standards [AASB 132, AASB 101, AASB 114,
                  AASB117,
                  AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023, and AASB 1038] AASB
                  7 and
                  AASB 2005-10 are applicable to annual reporting periods beginning
                  on or
                  after January 1, 2007. The consolidated entity has not adopted
                  the
                  standards early. Application of the standards will not affect any
                  of the
                  amounts recognized in the financial statements, but will impact
                  the type
                  of information disclosed in relation to the consolidated entity's
                  and the
                  parent entity's financial
                  instruments.
 
 ii)
              AASB-I
                  10 Interim Financial Reporting and Impairment AASB-I 10 is applicable
                  to
                  reporting periods commencing on or after November 1, 2006. The
                  consolidated entity has not recognized an impairment loss in relation
                  to
                  goodwill in an interim reporting period but subsequently reversed
                  the
                  impairment loss in the annual report. Application of the interpretation
                  therefore does not have an impact on the consolidated entity's
                  or parent
                  entity's financial statements.
 
 iii)
              Revised
                  AASB 101 Presentation of Financial Statements - A revised AASB
                  101 was
                  issued in October 2006 and is applicable to annual reporting periods
                  beginning on or after January 1, 2007. The company has not adopted
                  the
                  standard early. Application of the revised standard will not have
                  any
                  impact on the company's financial
                  statements.
 
 iv)
              AASB
                  2007-4 Amendments to Australian Accounting Standards arising from
                  ED 151
                  and Other Amendments and AASB 2007-7 Amendments to Australian Accounting
                  Standards [AASB 1, AASB 2, AASB 4, AASB 5, AASB 107 & AASB 128] - AASB
                  2007-4 is applicable to annual reporting periods beginning on or
                  after
                  July 1, 2007. The company does not intend to apply any of the new
                  options
                  now available. As a consequence, application of the revised standards
                  will
                  not affect any of the amounts recognised in the financial statements,
                  but
                  it may remove some of the disclosures that are currently required.
                  In
                  relation to the discount rates used in the measurement of employee
                  benefit
                  obligations, the company has not yet reached a conclusion as to
                  whether
                  there is a deep market in corporate bonds in Australia and hence
                  has not
                  yet determined the financial effect, if any, on the obligations
                  from the
                  adoption of AASB 2007-4. This is not expected to be material for
                  the
                  company.
 
 v)
              AASB
                  2007 - 7 Amendments to Australian Accounting Standards [AASB 1,
                  AASB 2,
                  AASB 4, AASB 5, AASB 107 & AASB 128]- AASB 2007-7 amendments to AASB
                  1, AASB 2, AASB 4, AASB 5, AASB 107 and AASB 128 are applicable
                  to annual
                  reporting periods beginning on or after July 1, 2007. The company
                  has not
                  adopted the standards early. Application of the standards will
                  not affect
                  any of the amounts recognised in the financial statements, but
                  may impact
                  the type of information disclosed in relation to the company’s financial
                  statements.
  F-14
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****2.****REVENUE
                  FROM CONTINUING OPERATIONS**Interest
              
              
              507,150
              
              
              762,023
              
              
              892,135**3.****OTHER
                  INCOME**Government
                  grant (i)
              
              
              -
              
              
              288,173
              
              
              629,692Corporate
                  partner revenues (ii)
              
              
              -
              
              
              -
              
              
              1,125,000Other
                  income
              
              
              287
              
              
              90
              
              
              6,286Total
                  other income
              
              
              287
              
              
              288,263
              
              
              1,760,978
 
 (i)
        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 year ended June 30, 2005 the consolidated entity met the revenue recognition
        criteria to record income of A$101,689. This grant was completed in January
        2005.
 
 **3.**  **OTHER
        INCOME (continued)**
 
 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, 2006 and 2005, the consolidated entity met the revenue recognition criteria
        to record revenue of A$288,173 and A$528,003, respectively. This grant was
        completed in December 2005.
 
 (ii)
        In
        March 2003, Prana entered into various agreements with Schering A.G. and
        Neuroscience Victoria Ltd. For certain research and development activities.
        The
        income under these agreements is recognized as earned on a straight line
        basis
        over the lives of the relevant agreements. These agreements ceased June 30,
        2005.
  F-15
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****4.****EXPENSES
                  FROM ORDINARY ACTIVITIES**Research
                  and development expenseResearch
                  and development
              
              
              4,492,193
              
              
              7,613,045
              
              
              7,109,839Research
                  and development - related parties
              
              
              -
              
              
              -
              
              
              577,757Total
                  research and development expense4,492,193
              
              
              7,613,045
              
              
              7,687,596Personnel
                  expensesEmployees
              
              
              1,416,070
              
              
              1,578,934
              
              
              1,516,077Equity
                  based payments - employees
              
              
              753,484
              
              
              54,662
              
              
              -Consultants
                  and directors
              
              
              1,559,528
              
              
              1,432,371
              
              
              1,640,861Equity
                  based payments - consultants and directors
              
              
              825,649
              
              
              352,041
              
              
              2,593,991Total
                  personnel expense4,554,731
              
              
              3,418,008
              
              
              5,750,929Intellectual
                  property expensesOverseas
              
              
              229,256
              
              
              259,848
              
              
              357,590Local
              
              
              370,976
              
              
              206,578
              
              
              371,993Total
                  intellectual property expense600,232
              
              
              466,426
              
              
              729,583Depreciation
                  of non-current assetsLaboratory
                  equipment
              
              
              11,581
              
              
              36,432
              
              
              22,367Computer
                  equipment
              
              
              22,757
              
              
              30,135
              
              
              33,306Furniture
                  and fittings
              
              
              3,068
              
              
              7,434
              
              
              4,219Leasehold
                  improvements
              
              
              21,176
              
              
              44,195
              
              
              5,331Total
                  depreciation expense58,582
              
              
              118,196
              
              
              65,223Amortization
                  expensesCore
                  intellectual property
              
              
              -
              
              
              -
              
              
              83,200Total
                  amortization expense-
              
              
              -
              
              
              83,200Other
                  expensesCorporate
                  compliance
              
              
              231,883
              
              
              129,466
              
              
              429,616Office
                  expenses
              
              
              606,443
              
              
              475,957
              
              
              515,869Computer
                  expenses
              
              
              22,328
              
              
              25,470
              
              
              28,592Insurance
              
              
              147,909
              
              
              192,917
              
              
              191,705Other
              
              
              -
              
              
              815
              
              
              39,148Total
                  other expenses1,008,563
              
              
              824,625
              
              
              1,204,930
   F-16
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****5.****INCOME
                  TAX**(a)The
                  prima facie tax on net (loss) before tax is reconciled to the income
                  tax
                  is as follows:Prima
                  facie tax income on net (loss) before income tax at 30%(2006
                  & 2005: 30%)
              
              
              (3,342,696
              )
              
              (3,477,178
              )
              
              (3,087,909
              )Effect
                  of lower tax rates of tax on overseas income
              
              
              442
              
              
              (4,142
              )
              
              4,567Add
                  tax effect of:(over)
                  provision of income tax in previous year relating to a correction
                  of
                  estimates1
              
              
              (2,697,461
              )
              
              (1,304,611
              )
              
              (2,258,204
              )Equity
                  issued for nil consideration
              
              
              473,740
              
              
              122,011
              
              
              778,197Research
                  and development tax concession
              
              
              (434,117
              )
              
              -
              
              
              -Gain
                  on fair value of financial liabilities
              
              
              (182,307
              )
              
              (38,615
              )
              
              (1,740,419
              )Other
              
              
              2,452
              
              
              2,848
              
              
              4,665Deferred
                  tax asset not recognized
              
              
              6,179,947
              
              
              4,699,687
              
              
              6,299,103Income
                  tax expense attributable to loss before income tax-
              
              
              -
              
              
              -(b)Potential
                  deferred tax asset at June 30, 2007, 2006 and 2005 in respect of
                  tax
                  losses not brought to account is:
              
              
              22,693,134
              
              
              16,529,172
              
              
              11,700,174Temporary
                  Differences
              
              
              392,720
              
              
              376,735
              
              
              506,046
 
 1 This is
        the result of the difference between the accounting estimate included in
        the
        prior year’s tax note, as disclosed in the Form 20-F, and the tax return lodged
        with the Australian Tax Office, of which the Form 20-F is filed prior to
        the
        actual tax return.
 
 **Years
                  Ended June 30,****2007**
              
              **2006****6.****TRADE
                  AND OTHER RECEIVABLES**Accrued
                  income
              
              
              26,498
              
              
              119,457Goods
                  and services tax receivable
              
              
              70,001
              
              
              73,006Other
                  debtors
              
              
              -
              
              
              1,69896,499
              
              
              194,161
 
 **Years
                  Ended June 30,****2007**
              
              **2006****7.****OTHER
                  CURRENT ASSETS**Prepayments
              
              
              122,903
              
              
              68,453Term
                  Deposit
              
              
              45,636
              
              
              42,379168,539
              
              
              110,832
 
  F-17
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Years
                  Ended June 30,**Notes
              
              **2007**
              
              **2006****8.****PROPERTY
                  AND EQUIPMENT**Gross
                  carrying amountBalance
                  at beginning of year
              
              
              
              
              
              603,989
              
              
              556,989Additions
              
              
              
              
              
              4,559
              
              
              55,626Disposals
              
              
              
              
              
              (8,755
              )
              
              (8,626
              )Balance
                  at end of year
              
              
              
              
              
              599,793
              
              
              603,989Accumulated
                  depreciationBalance
                  at beginning of year
              
              
              
              
              
              (501,614
              )
              
              (390,775
              )Disposals
              
              
              
              
              
              8,294
              
              
              7,357Depreciation
                  expense
              
              
              4
              
              
              (58,582
              )
              
              (118,196
              )Balance
                  at end of year
              
              
              
              
              
              (551,902
              )
              
              (501,614
              )Net
                  book value at end of year
              
              
              
              
              
              47,891
              
              
              102,375
 
 Aggregate
        depreciation allocated during the year is recognized as an expense and disclosed
        in Note 4.
 
 **Years
                  Ended June 30,****2007**
              
              **2006**Laboratory
                  equipment, at cost
              
              
              368,960
              
              
              368,960Less
                  accumulated depreciation
              
              
              (362,720
              )
              
              (351,139
              )Total
                  laboratory equipment
              
              
              6,240
              
              
              17,821Computer
                  equipment, at cost
              
              
              116,013
              
              
              120,209Less
                  accumulated depreciation
              
              
              (101,750
              )
              
              (87,287
              )Total
                  computer equipment
              
              
              14,263
              
              
              32,922Furniture
                  and fittings, at cost
              
              
              43,421
              
              
              43,421Less
                  accumulated depreciation
              
              
              (16,138
              )
              
              (13,070
              )Total
                  furniture and fittings
              
              
              27,283
              
              
              30,351Leasehold
                  improvements, at cost
              
              
              71,399
              
              
              71,399Less
                  accumulated depreciation
              
              
              (71,294
              )
              
              (50,118
              )Total
                  leasehold improvements
              
              
              105
              
              
              21,281Total
              
              
              47,891
              
              
              102,375
 
  F-18
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 
 **Years
                  Ended June 30,****2007**
              
              **2006****9.****TRADE
                  AND OTHER PAYABLES**Trade
                  creditors
              
              
              459,989
              
              
              952,145Accrued
                  research and development expenses
              
              
              767,572
              
              
              242,113Accrued
                  intellectual property expenses
              
              
              46,173
              
              
              14,764Accrued
                  personnel expenses
              
              
              45,091
              
              
              20,894Accrued
                  audit fees
              
              
              190,000
              
              
              111,213Accrued
                  marketing expenses
              
              
              56,769
              
              
              14,531Other
                  accrued expenses
              
              
              96,015
              
              
              67,698Amounts
                  payable to Directors
              
              
              -
              
              
              115,0001,661,609
              
              
              1,538,358
 
 **Years
                  Ended June 30,**Notes
              
              **2007**
              
              **2006****10.****PROVISIONS**CurrentAnnual
                  leave
              
              
              18
              
              
              77,465
              
              
              76,672Non-CurrentLong
                  service leave
              
              
              18
              
              
              49,915
              
              
              76,766
  **Years
                  Ended June 30,****2007**
              
              **2006****11.****FINANCIAL
                  LIABILITIES**Warrants
                  over ADRs
              
              
              321,001
              
              
              928,692
 
 Following
        a meeting of shareholders on June 1, 2004, the Company issued 4 million ADRs
        (1
        ADR = 10 ordinary shares) and 3 million warrants to US investors. The US
        investors acquired the ADRs at a price of USD 5.00 per ADR with a 3 or 4
        attaching warrant. The issue raised USD 20 million (AUD 28.9 million) before
        costs. The warrants are convertible to ADRs on or before June 4, 2009 at
        an
        exercise price of USD 8.00 per warrant.
 
 Under
        the
        historical version of Australian Generally Accepted Accounting Principles,
        as
        applicable for the Company at June 2004, the USD 20 million was recorded
        in
        Issued Capital in an amount reflecting the proceeds received. No value was
        attributed to the warrants. Upon the conversion to A-IFRS on July 1, 2005,
        the
        accounting treatment within the financial statements was not
        altered.
 
 Following
        a review of the financial statements in December 2006, the Company has
        identified that the incorrect accounting treatment of this transaction has
        occurred under A-IFRS.
 
 Under
        AASB 132 paragraph 11, the warrants associated with this transaction are
        required to be classified as a Financial Liability, as opposed to Issued
        Capital, as a result of the warrants being exercisable in a foreign currency,
        that is a currency, different to the functional currency of the
        Company.
 
 During
        2005 the International Financial Reporting Interpretations Committee ("IFRIC")
        noted that based on the existing wording of IAS 32 (the International Financial
        Reporting Standards equivalent to AASB 132), any contract entered into by
        an
        entity to exchange a fixed number of its own equity instruments for a fixed
        amount of cash that is denominated in a foreign currency is a Financial
        Liability and not an equity instrument. The IFRIC discussed and questioned
        whether this was the appropriate and intended outcome of the standard, and
        consequently submitted a proposal to the International Accounting Standards
        Board ("IASB") to amend IAS 32. As the IASB declined to make such an amendment
        to the standard, the IFRIC conclusion that instruments as described above
        should
        be classified as Financial Liabilities continues to stand.
 
 As
        a
        consequence, on initial recognition the fair value of the warrants was required
        to be recognized as a Financial Liability at their fair value, reducing the
        Issued Capital recorded. Each reporting date the Financial Liability
        representing the warrants is required to be revalued to fair value with the
        movement in the fair value recorded in the Statement of Operations.
  F-19
    **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **11.**  **FINANCIAL
        LIABILITIES continued**
 
 At
        June
        30, 2006 as a result of the correction previously presented non-current
        Financial Liabilities are increased by $928,692, Issued Capital decreased
        by
        $8,823,548 and Accumulated Losses decreased by $7,894,856. As at June 30,
        2007,
        a Gain on Fair Valuation of Financial Liabilities of $607,691 has been recorded
        in the Statement of Operations.
 
 The
        basic
        and diluted loss per share of the Company for the period ended 30 June 2006
        has
        decreased by 0.10 cents to 9.05 cents.
 
 The
        correction impacts the measurement and classification of these instruments
        for
        accounting purposes only. All of the material terms and conditions of these
        contracts have been correctly and appropriately disclosed in prior period
        financial statements. In this regard, the Company has an obligation to issue
        its
        equity instruments, via ADR's, to the warrant holders should they decide
        to
        exercise their warrants and remit USD 8.00 per ADR. The holders of the warrants
        cannot force the Company to settle the contracts in cash. Consequently, despite
        the revised classification of the warrants as liabilities, they do not impact
        on
        the Company's cashflows.
 
 **12.** **COMMITMENTS
            AND CONTINGENCIES**
  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.
 
 In
        respect of expenditure commitments on leases, refer to note 17.
 
 **Years
                  Ended June 30,**Notes
              
              **2007**
              
              **2006**
              
              **2005****13.****ISSUED
                  CAPITAL****(a)****Issued
                  Capital**Fully
                  paid ordinary shares
              
              
              13(b)
              
              
              52,726,073
              
              
              46,274,127
              
              
              45,838,897Options
                  over fully paid ordinary shares
              
              
              13(c)
              
              
              1,262,339
              
              
              -
              
              
              -53,988,412
              
              
              46,274,127
              
              
              45,838,897
 **(b)**  **Movements
          in shares on issue**
  **June
                    30,**************************************
                ********
                ****
                **2007**
                ****
                **2006**
                ****
                **2005**
                ********
                ****
                **Number
                    of Shares**
                ****
                **$**
                ****
                **Number
                    of Shares**
                ****
                **$**
                
                **Number
                    of Shares**
                ****
                **$**Beginning
                    of the year
                
                
                128,144,260
                
                
                46,274,127
                
                
                127,319,260
                
                
                45,838,897
                
                
                115,984,380
                
                
                40,681,945Movement
                    during the year
                
                
                23,373,718
                
                
                6,451,946
                
                
                825,000
                
                
                435,230
                
                
                11,334,880
                
                
                5,156,952End
                    of the year
                
                
                151,517,978
                
                
                52,726,073
                
                
                128,144,260
                
                
                46,274,127
                
                
                127,319,260
                
                
                45,838,897
  F-20
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **13.**  **ISSUED
        CAPITAL (continued)**
 
 Details
        of share issuances are as follows:
 **Date**
                
                **Details**
                
                **Notes**
                
                **Number**
                
                **Issue
                    Price**
                
                **$**August
                    9, 2004
                
                Non-cash
                    share issue in settlement of litigation
                
                (iii)
                
                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
                
                (ii)
                
                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
                
                (iv)
                
                -
                
                -
                
                (611,339
                )Year
                    ended
                  June
                    30, 2005
                
                
                
                
                
                11,334,880
                
                
                
                5,156,952August
                    10, 2005
                
                Non
                    cash share issue in consideration for services provided by
                    consultants
                
                (i)
                
                825,000
                
                0.53
                
                437,250Capital
                    raising costs
                
                
                
                -
                
                -
                
                (2,020
                )Year
                    ended
                  June
                    30, 2006
                
                
                
                
                
                825,000
                
                
                
                435,230August
                    31, 2006
                
                Shares
                    to investors as part of a private placement
                
                (i)
                
                250,000
                
                0.1725
                
                43,125October
                    13, 2006
                
                Exercise
                    of options
                
                
                
                80,000
                
                -
                
                33,200November
                    29, 2006
                
                Shares
                    to investors as part of a private placement
                
                
                
                15,616,246
                
                0.30
                
                4,669,257December
                    1, 2006
                
                Exercise
                    of options
                
                
                
                15,000
                
                -
                
                6,225December
                    28, 2006
                
                Shares
                    to investors as part of private placement
                
                
                
                6,148,222
                
                0.30
                
                1,808,764April
                    16, 2007
                
                Exercise
                    of options
                
                
                
                38,000
                
                -
                
                15,770May
                    3, 2007
                
                Non
                    cash share issue in consideration for services provided by
                    consultants
                
                (i)
                
                200,000
                
                0.48
                
                96,000May
                    31, 2007
                
                Non
                    cash share issue in consideration for services provided by
                    consultants
                
                (i)
                
                281,250
                
                0.36
                
                99,779May
                    31, 2007
                
                Non
                    cash share issue to employees
                
                (iv)
                
                120,000
                
                0.38
                
                45,600May
                    31, 2007
                
                Exercise
                    of options
                
                
                
                625,000
                
                -
                
                51,544Capital
                    raising costs
                
                
                
                -
                
                -
                
                (417,318
                )Year
                    ended
                  June
                    30, 2007
                
                
                
                
                
                23,373,718
                
                
                
                6,451,946
  (i)
              Shares
                  issued to consultants for services are recorded as non-cash compensation
                  and are recognized at either the fair value of the services rendered,
                  or
                  if this cannot be reasonably estimated, the fair value of the underlying
                  equity instruments issued. Shares issued to consultants have been
                  valued
                  as outlined below:
 
 September
        16, 2004
  The
        fair
        value of the services was based on an arms length transaction with the
        consultant which was contractually agreed at a value of US$30,000 to be settled
        via the issue of shares.
 
 February
        21, 2005
  The
        fair
        value of the services was based on an arms length transaction with the
        consultant which was contractually agreed at a value of US$75,000 to be settled
        via the issue of shares.
 
 August
        10, 2005
  The
        services provided by this consultant were documented in a consultancy agreement
        which outlined remuneration in the form of an annual fee, milestone fees
        and
        share based compensation in the form of shares and options. The equity-based
        compensation is not linked to any particular milestone or element of the
        services to be provided under the terms of the agreement.
 
 F-21
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **13.**  **ISSUED
        CAPITAL (continued)**
 
 Given
        the
        extended period of consultant involvement and associated milestones, the
        Company
        determined there were no comparable service examples against which to benchmark
        the value of the consultants’ services. Additionally, there was no distinction
        between the portion of the services which gave rise to the cash entitlements
        and
        the portion that gave rise to share and option entitlements. As the Company
        could not reliably estimate the fair value of the services received, the
        Company
        determined that it was appropriate to measure the services at the fair value
        of
        the underlying equity instruments issued.
 
 August
        31, 2006, May 3, 2007 and May 31, 2007
 
 The
        services provided by these consultants were documented in consultancy agreements
        which outlined remuneration in the form of an annual fee and share based
        compensation in the form of shares. The equity-based compensation is not
        linked
        to any particular milestone or element of the services to be provided under
        the
        terms of the agreements.
 
 Given
        the
        extended period of consultants involvement and associated milestones, the
        Company determined there were no comparable service examples against which
        to
        benchmark the value of the consultants’ services. Additionally, there was no
        distinction between the portion of the services which gave rise to the cash
        entitlements and the portion that gave rise to share entitlements. As the
        Company could not reliably estimate the fair value of the services received,
        the
        Company determined that it was appropriate to measure the services at the
        fair
        value of the underlying equity instruments issued.
 
 (ii)
              The
                  base fee for three of the Company’s directors was paid by the issue of
                  83,333 shares each as approved at the 2004 Annual General
                  Meeting.
 
 (iii)
              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.
 
 (iv)
              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 the Company with the June 2004 US capital
                  raising
                  and the exercise of options.
 
 (v)
              Shares
                  issued to employees for services are recorded as non-cash compensation
                  and
                  are recognized at the fair value of the services rendered, or if
                  this
                  cannot be reasonably estimated, the fair value of the underlying
                  equity
                  instruments issued. Shares issued to employees have been valued
                  as
                  outlined below:
 
 May
        31, 2007
  The
        shares issued to this employee were issued in recognition of past services
        and
        were outside of the employees, employment contract. Under the employment
        contract the employee received a salary and equity issues. As this equity
        issue
        was not for a particular service, the Company could not reliably estimate
        the
        fair value of the service received. The Company has therefore determined
        that it
        was appropriate to measure the services at the fair value of the underlying
        equity instruments issued.
 **(c)**  **Movements
          in options on issue**
  **June
                    30,****2007**
                
                **2006**
                
                **2005****Number
                    of Options**
                
                **$**
                ****
                **Number
                    of Options**
                ****
                **$**
                ****
                **Number
                    of Options**
                ****
                **$**Beginning
                    of the year
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Movement
                    during the year
                
                
                4,352,893
                
                
                1,262,339
                
                
                -
                
                
                -
                
                
                -
                
                
                -End
                    of the year
                
                
                4,352,893
                
                
                1,262,339
                
                
                -
                
                
                -
                
                
                -
                
                
                -
  F-22
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **13.**  **ISSUED
        CAPITAL (continued)**
 
 Details
        of option issuances are as follows:
 **Date**
                
                **Details**
                
                **Number**
                
                **Issue
                    Price**
                
                **$**November
                    29, 2006
                
                Options
                    to investors as part of a capital raising
                
                3,123,248
                
                0.29
                
                905,743December
                    28, 2006
                
                Options
                    to investors as part of a capital raising
                
                1,229,645
                
                0.29
                
                356,596Year
                    ended
                  June
                    30, 2007
                
                
                
                4,352,893
                
                
                
                1,262,339
  **(d)
                  Terms and conditions of issued capital**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.OptionsOption
                  holders do not have the right to receive dividends and are not
                  entitled to
                  vote at a meeting of the Company. Options 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.
 
 **(e)****Shares
                  issued after reporting
                  date**
 
 There
        have been no shares or options issued after reporting date.
 
 **Years
                  Ended June 30,**Notes
              
              **2007**
              
              **2006**
              
              **2005****14.****RESERVES****(a)****Share
                  Based Payments**Options
                  over fully paid ordinary shares
              
              
              14(b)
              
              
              2,137,824
              
              
              898,252
              
              
              478,999Options
                  over ADRs
              
              
              14(c)
              
              
              1,515,434
              
              
              1,515,434
              
              
              1,515,434Warrants
                  over ADRs
              
              
              14(d)
              
              
              453,563
              
              
              453,563
              
              
              453,5634,106,821
              
              
              2,867,249
              
              
              2,447,996
 
 The
        share
        based payment reserve arises on the grant of options and/or issuance of warrants
        to directors, executives, consultants or employees. Amounts are transferred
        out
        of the reserve and into issued capital when the options and/or warrants are
        exercised.
 
 **(b)**  **Movements
        in share options over fully paid ordinary shares**
 **Years
                    Ended June 30,****2007**
                
                **2006**
                
                **2005****Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**Beginning
                    of the year
                
                
                5,752,500
                
                
                898,252
                
                
                3,312,000
                
                
                478,999
                
                
                21,269,167
                
                
                -Issued
                    during the year
                
                
                5,908,762
                
                
                1,153,422
                
                
                2,678,000
                
                
                258,020
                
                
                2,700,000
                
                
                478,999Expired
                    during the year
                
                
                (825,000
                )
                
                -
                
                
                (200,000
                )
                
                -
                
                
                (11,150,501
                )
                
                -Forfeited
                    during the year
                
                
                (150,000
                )
                
                (2,950
                )
                
                (37,500
                )
                
                -
                
                
                -
                
                
                -Amortization
                    of option expenses
                
                
                -
                
                
                195,839
                
                
                -
                
                
                161,233
                
                
                -
                
                
                -Exercised
                    during the year (Note 13(b))
                
                
                (758,000
                )
                
                (106,739
                )
                
                -
                
                
                -
                
                
                (9,506,666
                )
                
                -End
                    of the year
                
                
                9,928,262
                
                
                2,137,824
                
                
                5,752,500
                
                
                898,252
                
                
                3,312,000
                
                
                478,999
 F-23
 
 **PRANA
              BIOTECHNOLOGY LIMITED**
 **(A
              Development Stage Enterprise)**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
              otherwise
              noted)**
 **14.**  **RESERVES
        (continued)**
 
 Details
        of option issuances are summarized as follows.
 
 2005
  ·
              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 18) in consideration for services rendered
                  to the
                  Company. Of the 600,000 options, 400,000 options vested immediately
                  and
                  200,000 options vest quarterly over a one-year vesting period.
                  The options
                  are exercisable until December 17, 2007 at an exercise price of
                  A$0.50 per
                  option.
 ·
              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 18) 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
                  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 18) as reward for services rendered to the
                  Company.
                  Such options vested immediately and are exercisable on or before
                  December
                  17, 2007 at an exercise price of A$0.50 per option.
 
 2006
  ·
              On
                  August 10, 2005, the Company issued 413,000 options to an outside
                  consultant as reward for services rendered to the Company. Such
                  options
                  are exercisable on or before February 1, 2007 at an exercise price
                  of
                  A$0.50 per option. This issue was approved by shareholders at the
                  2005
                  Annual General Meeting.
 ·
              On
                  February 2, 2006, the Company issued 890,000 options to employees
                  under
                  the 2004 Employees, Directors and Consultants Share and Option
                  Plan (see
                  Note 18) in recognition of future contributions to the growth and
                  success
                  of the Company. The options 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.
 ·
              On
                  February 2, 2006, the Company issued 1,300,000 options to directors
                  under
                  the 2004 Employees, Directors and Consultants Share and Option
                  Plan (see
                  Note 18) in recognition of future contributions to the growth and
                  success
                  of the Company. The options are escrowed for one year from 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 2005 Annual General Meeting.
 ·
              On
                  June 30, 2006, the Company issued 75,000 options to an employee
                  under the
                  2004 Employees, Directors and Consultants Share and Option Plan
                  (see Note
                  18) in recognition of future contributions to the growth and success
                  of
                  the Company. The options 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.
 
 2007
  ·
              On
                  October 13, 2006, the Company issued 133,000 options to employees
                  under
                  the 2004 Employees, Directors and Consultants Share and Option
                  Plan (see
                  Note 18) in recognition of future contributions to the growth and
                  success
                  of the Company. The options are exercisable once the ASX share
                  price
                  reaches A$0.40 for five consecutive trading days. The options are
                  exercisable at A$nil consideration and expire on July 31, 2008.
 ·
              On
                  December 1, 2006, the Company issued 3,200,000 options to directors
                  and an
                  employee under the 2004 Employees, Directors and Consultants Share
                  and
                  Option Plan (see Note 18) in recognition of future contributions
                  to the
                  growth and success of the Company. The options are exercisable
                  once the
                  ASX share price reaches A$0.80 for five consecutive trading days.
                  The
                  options are exercisable at A$nil consideration and expire on July
                  31,
                  2009.
 ·
              On
                  December 1, 2006, the Company issued 312,500 options to an employee
                  under
                  the 2004 Employees, Directors and Consultants Share and Option
                  Plan (see
                  Note 18) in recognition of future contributions to the growth and
                  success
                  of the Company. The options are exercisable once the ASX share
                  price
                  reaches A$0.40 for five consecutive trading days. The options are
                  exercisable at A$nil consideration and expire on August 7, 2014.
 ·
              On
                  April 16, 2007, the Company issued 206,478 options to employees
                  under the
                  2004 Employees, Directors and Consultants Share and Option Plan
                  (see Note
                  18) in recognition of future contributions to the growth and success
                  of
                  the Company. The options are exercisable once the ASX share price
                  reaches
                  A$0.50 for five consecutive trading days. The options are exercisable
                  at
                  A$nil consideration and expire on December 31, 2011.
 ·
              On
                  April 16, 2007, the Company issued 39,284 options to an outside
                  consultant
                  under the 2004 Employees, Directors and Consultants Share and Option
                  Plan
                  (see Note 18) in consideration for services rendered to the Company.
                  The
                  options are exercisable once the ASX share price reaches A$0.50
                  for five
                  consecutive trading days. The options are exercisable at A$nil
                  consideration and expire on December 31, 2011.
 ·
              On
                  April 16, 2007, the Company issued 1,000,000 options to an employee
                  under
                  the 2004 Employees, Directors and Consultants Share and Option
                  Plan (see
                  Note 18) in recognition of future contributions to the growth and
                  success
                  of the Company. The options are exercisable once the ASX share
                  price
                  reaches A$0.40 for five consecutive trading days. The options are
                  exercisable at A$nil consideration and expire on August 7, 2014.
  F-24
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **14.**  **RESERVES
        (continued)**
 
 ·
              On
                  April 16, 2007, the Company issued 40,000 options to an outside
                  consultant
                  under the 2004 Employees, Directors and Consultants Share and Option
                  Plan
                  (see Note 18) in consideration for services rendered to the Company.
                  The
                  options are exercisable once the ASX share price reaches A$0.40
                  for five
                  consecutive trading days. The options are exercisable at A$nil
                  consideration and expire on August 7, 2014.
 ·
              May
                  31, 2007, the Company issued 312,500 options to an employee under
                  the 2004
                  Employees, Directors and Consultants Share and Option Plan (see
                  Note 18)
                  in recognition of future contributions to the growth and success
                  of the
                  Company. The options are exercisable once the ASX share price reaches
                  A$0.40 for five consecutive trading days. The options are exercisable
                  at
                  A$nil consideration and expire on August 7, 2014.
 ·
              On
                  June 12, 2007, the Company issued 40,000 options to an outside
                  consultant
                  under the 2004 Employees, Directors and Consultants Share and Option
                  Plan
                  (see Note 18) in consideration for services rendered to the Company.
                  The
                  options are exercisable once the ASX share price reaches A$0.40
                  for five
                  consecutive trading days. The options are exercisable at A$nil
                  consideration and expire on August 7, 2014.
 ·
              On
                  June 12, 2007, the Company issued 375,000 options to outside consultants
                  under the 2004 Employees, Directors and Consultants Share and Option
                  Plan
                  (see Note 18) in consideration for services rendered to the Company.
                  The
                  options are exercisable once the ASX share price reaches A$0.50
                  for five
                  consecutive trading days. The options are exercisable at A$nil
                  consideration and expire on December 31, 2011.
 ·
              On
                  June 19, 2007, the Company issued 250,000 options to an employee
                  under the
                  2004 Employees, Directors and Consultants Share and Option Plan
                  (see Note
                  18) in recognition of future contributions to the growth and success
                  of
                  the Company. The options are exercisable once the ASX share price
                  reaches
                  A$0.40 for five consecutive trading days. The options are exercisable
                  at
                  A$nil consideration and expire on August 7, 2014.
 
 **(c)**  **Movements
        in share options over ADRs**
 **Years
                    Ended June 30,****2007**
                
                **2006**
                
                **2005****Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Options**
                
                **Comp.**
                  **Expense
                    ($)**Beginning
                    of the year
                
                
                380,000
                
                
                1,515,434
                
                
                380,000
                
                
                1,515,434
                
                
                -
                
                
                -Issued
                    during the year
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                380,000
                
                
                1,515,434End
                    of the year
                
                
                380,000
                
                
                1,515,434
                
                
                380,000
                
                
                1,515,434
                
                
                380,000
                
                
                1,515,434
  Details
        of option issuances are summarized as follows.
 
 2005
  On
        December 17, 2004, the Company issued 380,000 options to a director under
        the
        2004 ADS Option Plan (see Note 18) as per his employment contract. The options
        vested on June 14, 2005 following an agreement between Jonas Alsenas and
        the
        Company on Jonas Alsenas 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 ordinary shares). This issue was approved
        by shareholders at the 2004 Annual General Meeting.
 
 **(d)**  **Movement
        in warrants**
 **Years
                    Ended June 30,****2006**
                
                **2005****Number
                    of Warrants**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Warrants**
                
                **Comp.**
                  **Expense
                    ($)**
                
                **Number
                    of Warrants**
                
                **Comp.**
                  **Expense
                    ($)**Beginning
                    of the year
                
                
                320,000
                
                
                453,563
                
                
                320,000
                
                
                453,563
                
                
                -
                
                
                -Issued
                    during the year
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                320,000
                
                
                453,563End
                    of the year
                
                
                320,000
                
                
                453,563
                
                
                320,000
                
                
                453,563
                
                
                320,000
                
                
                453,563
 F-25
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **14.**  **RESERVES
        (continued)**
 
 Details
        of warrant issuances are summarized as follows.
 
 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 2004 US
        capital raising. The resulting compensation expense was accounted for as
        an
        issuance cost and therefore recorded as a deduction of issued capital in
        the
        Statements of Shareholders’ Equity. The warrants are convertible to 320,000 ADRs
        (3,200,000 ordinary shares) at an exercise price of US$8.00 per warrant on
        or
        before June 4, 2009.
 
 **(e)
                  Terms and conditions of reserves**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 ADRs,
                  being one warrant or US option for one ADR, which equals ten ordinary
                  shares, on the date they are
                  exercised.
 
 In
        Australia, there is not a set number of authorized shares, shares are not
        reserved for the exercise of options, and shares do not have a par value.
 
 **(f)****Options
                  and warrants issued after reporting
                  date**
 
 There
        have been no options or warrants issued after reporting date.
 
 **Years
                  Ended June 30,****2007**
              
              **2006****15.****ACCUMULATED
                  DEFICIT DURING DEVELOPMENT STAGE**Balance
                  at beginning of year
              
              
              (41,340,718
              )
              
              (29,750,124
              )Net
                  loss for the year
              
              
              (11,142,320
              )
              
              (11,590,594
              )Balance
                  at end of year
              
              
              (52,483,038
              )
              
              (41,340,718
              )
 
 F-26
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****16.****CASH
                  FLOW STATEMENT****(a)****Reconciliation
                  of the net loss to the net cash flows from
                  operations**Net
                  loss
              
              
              (11,142,320
              )
              
              (11,590,594
              )
              
              (10,293,031
              )**Non-cash
                  items**Depreciation
                  of property and equipment
              
              
              58,582
              
              
              118,196
              
              
              65,223Amortization
                  of intangible assets
              
              
              -
              
              
              -
              
              
              83,200Non-cash
                  issue of equity in consideration of operating expenses
              
              
              1,579,132
              
              
              856,503
              
              
              2,144,191Foreign
                  exchange (gain)/loss
              
              
              775,238
              
              
              (268,960
              )
              
              1,362,572Impairment
                  of core intellectual property
              
              
              -
              
              
              -
              
              
              786,240Gain/
                  (Loss) on fair value of financial liabilities
              
              
              (607,691
              )
              
              (128,715
              )
              
              (5,801,397
              )Loss
                  on sale of non-current asset
              
              
              161
              
              
              894
              
              
              -**Changes
                  in assets and liabilities**Decrease/(increase)
                  in trade and other receivables
              
              
              97,662
              
              
              (19,685
              )
              
              (81,559
              )Decrease/(increase)
                  in other current assets
              
              
              (57,707
              )
              
              384,333
              
              
              (422,396
              )(Decrease)/increase
                  in trade and other payables
              
              
              123,251
              
              
              (1,032,823
              )
              
              665,231Decrease/(increase)
                  in provision for employee entitlements
              
              
              (26,058
              )
              
              29,636
              
              
              72,913Net
                  cash flows used in operating activities
              
              
              (9,199,750
              )
              
              (11,651,215
              )
              
              (11,418,813
              )**(b)****Reconciliation
                  of cash and cash equivalents**Cash
                  and cash equivalents balance comprises:-
                  cash and cash equivalents on hand
              
              
              456,193
              
              
              684,006
              
              
              1,163,077-
                  term deposit/on call
              
              
              6,953,063
              
              
              6,829,772
              
              
              11,290,227-
                  commercial bill
              
              
              -
              
              
              2,500,000
              
              
              9,000,000Closing
                  cash and cash equivalents balance
              
              
              7,409,256
              
              
              10,013,778
              
              
              21,453,304
 
 **(c)**  **Non-cash
        financing and investing activities**
 
 During
        the years ended June 30, 2007, 2006 and 2005, the Company issued shares,
        options
        and warrants in connection with non-cash transactions. See Notes 13(b), 14(b),
        14(c) and 14(d).
 
 **17.**  **EXPENDITURE
        COMMITTMENTS**
 
 The
        Company has no commitments under non-cancelable operating leases as at the
        year
        end or date of this report. The Company leases premises on a monthly rolling
        agreement. Details in relation to commitments under employee service agreements
        with Directors and Key Management Personnel are outlined in note
        21.
 
 The
        Company has commitments under Research and Development contracts within 1
        year
        of $1,295,265. There are no Research and Development contract commitments
        after
        1 year.
  F-27
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Years
                  Ended June 30,**Notes
              
              **2007**
              
              **2006****18.****EMPLOYEE
                  ENTITLEMENTS AND SUPERANNUATION COMMITMENTS****(a)****Employee
                  Entitlements**The
                  aggregate employee entitlement liability is composed of:Provisions
                  (current)
              
              10
              
              77,465
              
              76,672Provisions
                  (non-current)
              
              10
              
              49,915
              
              76,766Number
                  of employees: 10 (2006: 14 employees)
              
              
              
              127,380
              
              153,438
 
 **(b)**  **Employee
        and Consultant Plans**
 
 At
        the
        Annual General Meeting held on November 17, 2004, the shareholders approved
        the
        establishment of Employee and Consultant Plans designed to reward directors,
        employees and/or consultants for their contributions to the Company. The
        plans
        are to be used as a method of retaining key personnel for the growth and
        development of the Company. 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, 2007, equity
        had
        been issued to one director under the 2004 ADS Option Plan and five directors,
        10 consultants and 14 employees 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 up to 12 million
        ordinary shares under the plans. This was increased to 22 million ordinary
        shares at the 2005 Annual General Meeting. 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 2004 Employees,
        Directors and Consultants Share and Option Plan as follows:
 **Years
                    Ended June 30,****2007**
                
                **2006**
                
                **2005****Number
                    of Options**
                
                **Weighted
                    Average Exercise Price ($)**
                
                **Number
                    of Options**
                
                **Weighted
                    Average Exercise Price ($)**
                
                **Number
                    of Options**
                
                **Weighted
                    Average Exercise Price ($)**Beginning
                    of the year
                
                
                4,927,500
                
                
                0.11
                
                
                2,700,000
                
                
                0.20
                
                
                -
                
                
                -Issued
                    during the year
                
                
                5,908,762
                
                
                nil
                
                
                2,265,000
                
                
                nil
                
                
                2,700,000
                
                
                0.20Exercised
                    during the year
                
                
                (758,000
                )
                
                nil
                
                
                -
                
                
                -
                
                
                -
                
                
                -Forfeited
                    during the year
                
                
                (150,000
                )
                
                nil
                
                
                (37,500
                )
                
                nil
                
                
                -
                
                
                -Outstanding
                    at year end
                
                
                9,928,262
                
                
                0.06
                
                
                4,927,500
                
                
                0.11
                
                
                2,700,000
                
                
                0.20Exercisable
                    at year end
                
                
                2,140,000
                
                
                0.26
                
                
                1,100,000
                
                
                0.50
                
                
                1,100,000
                
                
                0.50
 
 The
        range
        of exercise prices of options outstanding at period end is nil to A$0.50.
        These
        options have a weighted average remaining contractual life of three years.
        The
        weighted average fair value of options granted during the period was determined
        in accordance with note 1(p) as A$0.36, A$0.18 and A$0.36 for the years ended
        June 30, 2007, 2006 and 2005, respectively. The weighted average assumptions
        in
        calculating fair value were as follows:
 F-28
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **18.****EMPLOYEE
                    ENTITLEMENTS AND SUPERANNUATION COMMITMENTS
                    (continued)**
 
 ·
                risk-free
                    interest rate of 6.02% for 2007, 5.31% for 2006 and 5.12% for
                    2005;
   ·
                no
                    dividends;
 ·
              expected
                  volatility of 86% for 2007, 117% for 2006 and 67% for 2005;
                  and
 ·
              expected
                  life of four years for 2007, three years for 2006 and two years
                  for
                  2005.
  *Risk−free
        interest rate* -
        This is
        the government bond rate (having a term that most closely resembles the expected
        life of the option) in effect at the grant date. The Australian government
        bond
        rate has been used for options which convert to full paid ordinary shares
        and
        the U.S. government bond rate has been used for options which convert to
        ADRs.
 
 *Dividend
        yield* -
        Prana
        has never declared or paid dividends on its common stock and does not anticipate
        paying any dividends in the foreseeable future.
 
 *Expected
        volatility* -
        Prana
        estimates expected volatility based on historical volatility over the estimated
        life of the option and other factors.
 
 *Expected
        life* -
        This is
        the period of time that the options granted are expected to remain outstanding.
        This estimate is based primarily on historical trend of option holders to
        exercise their option near the date of expiry. As a result the expected life
        is
        considered to equal the period from grant date to expiry date.
 
 In
        2004
        and 2006 there were a total of 825,000 options issued to a consultant outside
        of
        the Australian Employee, Directors and Consultants Share and Option Plan
        . These
        options expired in the year ended June 30, 2007.
 
 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,****2007**
              
              **2006**
              
              **2005****Number
                  of Shares**
              
              **Number
                  of Shares**
              
              **Number
                  of Shares**Beginning
                  of the year
              
              
              428,439
              
              
              428,439
              
              
              -Issued
                  during the year1
              
              
              1,359,250
              
              
              -
              
              
              428,439End
                  of the financial year
              
              
              1,787,689
              
              
              428,439
              
              
              428,439
 
 1 In
        the
        year ended June 30, 2007 this includes 758,000 options issued under the 2004
        Employees, Directors and Consultants Share and Option Plan that were exercised.
 
 Information
        with respect to the number of options granted under the 2004 ADS Option Plan
        as
        follows:
 
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****Number
                  of Options**
              
              **Weighted
                  Average Exercise Price ($)**
              
              **Number
                  of Options**
              
              **Weighted
                  Average Exercise Price ($)**
              
              **Number
                  of Options**
              
              **Weighted
                  Average Exercise Price ($)**Beginning
                  of the year
              
              
              380,000
              
              $
              US5.00
                  (A$5.89
              )
              
              380,000
              
              $
              US5.00
                  (A$6.85
              )
              
              -
              
              
              -Issued
                  during the year1
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              380,000
              
              $
              US5.00
                  (A$6.57
              )Outstanding
                  at year end
              
              
              380,000
              
              $
              US5.00
                  (A$5.89
              
              
              380,000
              
              $
              US5.00
                  (A$6.85
              )
              
              380,000
              
              $
              US5.00
                  (A$6.57
              )Exercisable
                  at year end1
              
              
              380,000
              
              $
              US5.00
                  (A$5.89
              
              
              380,000
              
              $
              US5.00
                  (A$6.85
              )
              
              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)
 
 F-29
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **18.**  **EMPLOYEE
        ENTITLEMENTS AND SUPERANNUATION COMMITMENTS (continued)**
 
 The
        range
        of exercise prices of options outstanding at period end is US$5.00 for all
        options. These options have a weighted average remaining contractual life
        of
        five and a half years. The weighted average fair value of options granted
        during
        the period was determined in accordance with note 1(p) as A$3.99 for the
        year
        ended June 30, 2005. No options were issued in the year ended June 30, 2007
        and
        2006. The weighted average assumptions in calculating fair value were as
        follows:
 
 ·
              risk-free
                  interest rate of 5.4% for 2005;
 ·
              no
                  dividends;
 ·
              expected
                  volatility of 74% for 2005; and
 ·
              expected
                  life of eight years for 2005.
 
 The
        benefit to executives, employees, director and consultants is recognized
        in the
        financial statements over the period in which the services are provided.
        Refer
        to notes 13, 14 and 21 for further information.
 
 Options
        issued carry no dividend rights or right to vote.
 
 **19.**
              **SUBSEQUENT
                  EVENTS**
 
 On
        September 12, 2007 the Company issued a Notice of Meeting seeking shareholder
        approval for the issue of shares and options to raise up to A$10 million.
        The
        meeting is scheduled for October 15, 2007.
 
 Other
        than as discussed above, 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,****2007**
              
              **2006**
              
              **2005****20.****LOSS
                  PER SHARE**Basic
                  and diluted loss per share
              
              
              (0.08
              )
              
              (0.09
              )
              
              (0.08
              )Weighted
                  average number of ordinary shares on issue used in the calculation
                  of
                  basic and diluted loss per share
              
              
              140,754,495
              
              
              128,053,601
              
              
              122,754,061
 
 The
        options and warrants in place do not have the effect of diluting the loss
        per
        share.
 
 **21.****KEY
                  MANAGEMENT PERSONNEL COMPENSATION**(a)The
                  Key Management Personnel of Prana Biotechnology Ltd during the
                  year:Geoffrey
                  Kempler
              Executive
                  Chairman
                Chief
                  Executive OfficerColin
                  Masters
              Executive
                  Director
              Resigned
                  2 July 2007Brian
                  Meltzer
              Non-Executive
                  DirectorGeorge
                  Mihaly
              Non-Executive
                  DirectorPeter
                  Marks
              Non-Executive
                  DirectorRoss
                  Murdoch
              President
                  and Chief Operating Officer
              Resigned
                  31 May 2007Dianne
                  Angus
              Senior
                  Vice President of Business Development, IP and Research
                Chief
                  Operating Officer (Change of Role May 31, 2007)Richard
                  Revelins
              Company
                  Secretary
                Chief
                  Financial Officer
 
 (b)  Key
        Management Personnel Remuneration
 
 Remuneration
        of all Key Management Personnel 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.
  F-30
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **21.**  **KEY
        MANAGEMENT PERSONNEL COMPENSATION (continued)**
 
 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.
 
 Short
                  Term Benefits
              
              Post-Employment
              
              Equity2007
                Directors’
                  Remuneration
              
              Base
                  Fee
                $
              
              Bonus
                $
              
              Superannuation
                Contribution
                $
              
              Options
                $
              
              Total
                $Geoffrey
                  Kempler1,3
                  & 4
              
              
              341,515
              
              
              -
              
              
              34,151
              
              
              178,030
              
              
              553,696Colin
                  Masters2&3
              
              
              115,000
              
              
              -
              
              
              -
              
              
              126,358
              
              
              241,358Brian
                  Meltzer1&3
              
              
              96,330
              
              
              -
              
              
              8,670
              
              
              53,408
              
              
              158,408George
                  Mihaly1&3
              
              
              110,000
              
              
              -
              
              
              -
              
              
              53,408
              
              
              163,408Peter
                  Marks2&3
              
              
              75,000
              
              
              -
              
              
              -
              
              
              37,907
              
              
              112,907737,845
              
              
              -
              
              
              42,821
              
              
              449,111
              
              
              1,229,777
 
 1 This
        equity was issued as per the AGM held on November 17, 2004. As per A-IFRS
        the
        options issued to Directors were valued at grant date and are being expensed
        over the anticipated life of the options. As a result, the value does not
        reflect the current market price of the Company’s shares. The Board believes
        that if the options were valued in today’s market, they would have minimal
        intrinsic value given the market condition attached to the options that the
        share price must reach A$1.00 for five consecutive trading days. See 2006
        remuneration table for valuation.
 
 2 This
        equity was issued as per the AGM held on November 30, 2005. As per A-IFRS
        the
        options issued to Directors were valued at grant date and are being expensed
        over the anticipated life of the options. As a result, the value does not
        reflect the current market price of the Company’s shares. The Board believes
        that if the options were valued in today’s market, they would have minimal
        intrinsic value given the market condition attached to the options that the
        share price must reach A$1.00 for five consecutive trading days. See 2006
        remuneration table for valuation.
 
 3 This
        equity was issued as per the AGM held on November 30, 2006. As per A-IFRS
        the
        options issued to Directors were valued at grant date and are being expensed
        over the anticipated life of the options. As a result, the value does not
        reflect the current market price of the Company’s shares. The Board believes
        that if the options were valued in today’s market, they would have minimal
        intrinsic value given the market condition attached to the options that the
        share price must reach A$0.80 for five consecutive trading days.
 
 4 On
        February 1, 2007 Mr Kempler received a salary increase to $351,273 plus 10%
        superannuation, an increase from $333,636 plus 10% superannuation.
 
 5 In
        accordance with his employment contract, long service leave has been accrued
        for
        Mr Kempler. At June 30, 2007 $18,163 had been accrued to date. No amounts
        have
        been paid in the June 30, 2007 financial year.
 
 The
        option price for the options issued were calculated using the Barrier Pricing
        Model applying the following inputs:
 
 Grant
        Date: November 30, 2006
 Pricing
        Model: American
 Option
        Type: Call
 Barrier
        Type: Up and In
 Strike
        Price: A$0.00
 Spot
        Price: A$0.43
 Barrier:
        A$0.80
 Days
        to
        Expiry: 974
 Volatility:
        100%
 Risk-free
        Interest Rate: 6.02%
 Expected
        Dividends: A$0.00
 Option
        Price: A$0.38
  F-31
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **21.**  **KEY
        MANAGEMENT PERSONNEL COMPENSATION (continued)**
 
 Short
                  Term Benefits
              
              Post-Employment
              
              Equity2006
                Directors’
                  Remuneration
              
              Base
                  Fee
                $
              
              Bonus
                $
              
              Superannuation
                Contribution
                $
              
              Options
                $
              
              Total
                $Geoffrey
                  Kempler1
                  & 3
              
              
              334,545
              
              
              100,000
              
              
              33,455
              
              
              92,770
              
              
              560,770Colin
                  Masters2
              
              
              115,000
              
              
              -
              
              
              -
              
              
              16,775
              
              
              131,775Brian
                  Meltzer1
              
              
              97,569
              
              
              -
              
              
              7,431
              
              
              27,831
              
              
              132,831George
                  Mihaly1
              
              
              105,000
              
              
              -
              
              
              -
              
              
              27,831
              
              
              132,831Peter
                  Marks2
              
              
              75,000
              
              
              -
              
              
              -
              
              
              5,033
              
              
              80,033727,114
              
              
              100,000
              
              
              40,886
              
              
              170,240
              
              
              1,038,240
 
 1 This
        equity was issued as per the AGM held on November 17, 2004. As per A-IFRS
        the
        options issued to Directors were valued at grant date and are being expensed
        over the anticipated life of the options. As a result, the value does not
        reflect the current market price of the Company’s shares. The Board believes
        that if the options were valued in today’s market, they would have minimal
        intrinsic value given the market condition attached to the options that the
        share price must reach A$1.00 for five consecutive trading days.
 
 The
        option price for the options issued were calculated using the Barrier Pricing
        Model applying the following inputs:
 
 Grant
        Date: November 17, 2004
 Pricing
        Model: American
 Option
        Type: Call
 Barrier
        Type: Up and In
 Strike
        Price: A$0.00
 Spot
        Price: A$0.56
 Barrier:
        A$1.00
 Days
        to
        Expiry: 2008
 Volatility:
        70%
 Risk-free
        Interest Rate: 5.05%
 Expected
        Dividends: A$0.00
 Option
        Price: A$0.51
 
 2 This
        equity was issued as per the AGM held on November 30, 2005. As per A-IFRS
        the
        options issued to Directors were valued at grant date and are being expensed
        over the anticipated life of the options. As a result, the value does not
        reflect the current market price of the Company’s shares. The Board believes
        that if the options were valued in today’s market, they would have minimal
        intrinsic value given the market condition attached to the options that the
        share price must reach A$1.00 for five consecutive trading days. The option
        price was calculated using the Barrier Pricing Model applying the following
        inputs:
 
 Grant
        Date: November 30, 2005
 Pricing
        Model: American
 Option
        Type: Call
 Barrier
        Type: Up and In
 Strike
        Price: A$0.00
 Spot
        Price: A$0.21
 Barrier:
        A$1.00
 Days
        to
        Expiry: 1609
 Volatility:
        110%
 Risk-free
        Interest Rate: 5.35%
 Expected
        Dividends: A$0.00
 Option
        Price: A$0.18
 
 3 Mr
        Kempler achieved a bonus milestone, the successful completion of the Phase
        1
        trial for PBT-2 as set out in his employment contract. There is a potential
        for
        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.
  F-32
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **21.**  **KEY
        MANAGEMENT PERSONNEL COMPENSATION (continued)**
 
 Short
                  Term Benefits
              
              Post-Employment
              
              Equity2007
                Executives’
                  Remuneration
              
              Base
                  Fee
                $
              
              Bonus
                $
              
              Superannuation
                Contribution
                $
              
              Options
                $
              
              Shares
                $
              
              Total
                $Richard
                  Revelins
              
              
              80,000
              
              
              -
              
              
              -
              
              
              25,613
              
              
              -
              
              
              105,613Ross
                  Murdoch1
              
              
              303,014
              
              
              -
              
              
              24,445
              
              
              51,544
              
              
              45,600
              
              
              424,603Dianne
                  Angus2
              
              
              258,750
              
              
              -
              
              
              23,288
              
              
              565,655
              
              
              -
              
              
              847,693641,764
              
              
              -
              
              
              47,733
              
              
              642,812
              
              
              45,600
              
              
              1,377,909
 
 1 On
        May
        31, 2007, Dr Murdoch ceased his employment with the Company. The base fee
        includes unused annual leave. Dr Murdoch received 120,000 ordinary shares
        valued
        at the market share price at date of grant, of $0.38 per ordinary share.
        Dr
        Murdoch also received options. The option price was calculated using the
        Barrier
        Pricing Model applying the following inputs:
  Grant
        Date: 7 August 2006
 Pricing
        Model: American
 Option
        Type: Call
 Barrier
        Type: Up and In
 Strike
        Price: $0.00
 Spot
        Price: $0.30
 Barrier:
        $0.40
 Days
        to
        Expiry: 31
 Volatility:
        88%
 Risk-free
        Interest Rate: 5.89%
 Expected
        Dividends: $0.00
 Option
        Price: $0.08
 
 2 Ms Angus
        received a salary increase to A$268,125 plus 9% superannuation. Ms Angus
        contracted working days increased from four to five days per week. In accordance
        with her employment contract, long service leave has been accrued for Ms
        Angus.
        At June 30, 2007, $6,091 had been accrued to date. No amounts have been paid
        in
        the June 30, 2007 financial year. Ms Angus received two tranches of options.
        The
        option prices were calculated using the Barrier Pricing Model applying the
        following inputs:
  Tranche
        1
 Grant
        Date: 2 October 2006
 Pricing
        Model: American
 Option
        Type: Call
 Barrier
        Type: Up and In
 Strike
        Price: $0.00
 Spot
        Price: $0.48
 Barrier:
        $0.40
 Days
        to
        Expiry: 5
 Volatility:
        23%
 Risk-free
        Interest Rate: 5.87%
 Expected
        Dividends: $0.00
 Option
        Price: $0.48
 
 Tranche
        2
 Grant
        Date: 12 June 2007
 Pricing
        Model: American
 Option
        Type: Call
 Barrier
        Type: Up and In
 Strike
        Price: $0.00
 Spot
        Price: $0.35
 Barrier:
        $0.40
 Days
        to
        Expiry: 2555
 Volatility:
        82%
 Risk-free
        Interest Rate: 6.38%
 Expected
        Dividends: $0.00
 Option
        Price: $0.34
  F-33
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **21.**  **KEY
        MANAGEMENT PERSONNEL COMPENSATION (continued)**
 
 Short
                  Term Benefits
              
              Post-Employment
              
              Equity2006
                Executives’
                  Remuneration
              
              Base
                  Fee
                $
              
              Bonus
                $
              
              Superannuation
                Contribution
                $
              
              Options
                $
              
              Shares
                $
              
              Total
                $Richard
                  Revelins
              
              
              80,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              80,000Ross
                  Murdoch1
              
              
              285,000
              
              
              -
              
              
              25,650
              
              
              -
              
              
              -
              
              
              310,650Dianne
                  Angus2
              
              
              185,048
              
              
              -
              
              
              16,654
              
              
              -
              
              
              -
              
              
              201,702550,048
              
              
              -
              
              
              42,304
              
              
              -
              
              
              -
              
              
              592,352
 
 1 On
        January 1, 2006, Dr Murdoch received a salary increase to A$295,000 plus
        9%
        superannuation.
 
 2 On
        January 1, 2006, Ms Angus received a salary increase to A$195,000 plus 9%
        superannuation. Ms Angus received additional remuneration in recognition
        of
        additional hours worked over her contracted 4 days per week.
 
 F-34
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **21.**  **KEY
        MANAGEMENT PERSONNEL COMPENSATION (continued)**
 
 The
        following Director was under contract at June 30, 2007:
 Duration
                
                Notice
                    Requirements
                
                Termination
                
                Bonus/
                    Equity EntitlementsMr
                    Geoffrey Kempler
                
                Until
                    termination by either party
                  
                  Signed
                    September 21, 2007
                
                For
                    Good Reason Mr. Kempler may terminate with
                  30
                    days notice
                
                *Paya
                    termination payment of A$1 million provided the company has sufficient
                    capital resources to fulfil the obligation
                  
                  *Accrued
                    entitlements, bonuses and equity issues
                  
                  *Accelerate
                    the vesting of any unvested options
                
                The
                    Company will pay Mr Kempler a:
                  
                  ·Bonus
                    of $50,000 following a capital raising of at least A$7m (before
                    costs)
                    prior to 30 September 2007.
                  
                  ·Bonus
                    of $25,000 following a further capital raising of at least A$12m
                    (before
                    costs) anytime in the 2008 financial year.Without
                    Good Reason Mr. Kempler may terminate with
                  90
                    days notice
                
                *Bonus
                    pro-rated only if termination occurs in 1styear
                  
                  *Accrued
                    entitlements, bonuses and equity issues
                  
                  *Permitted
                    to exercise any unvested options to purchase shares that pre-existed
                    in
                    contract
                
                ·Bonus
                    of $25,000 for attaining a share price above $0.60 for at least
                    four
                    consecutive trading days by 30 June 2008
                  
                  ·Bonus
                    of $50,000 for implementation of the following:
                  
                  ·Completion
                    of clinical trial recruitment by 30 September 2007 - $10K bonus
                  
                  ·Completion
                    of signed Statistical Analysis Report by 29 February 2008 - $10K
                    bonus
                  
                  ·Regular
                    meetings (minimum twice yearly) of the full Integrated Advisory
                    Board -
                    $6K bonusWithout
                    Cause the Company may terminate with
                  90
                    days notice
                
                *Paya
                    termination payment of A$1 million
                  
                  *Accrued
                    entitlements, bonuses and equity issues
                  
                  *Accelerate
                    the vesting of any unvested options
                
                ·Review
                    and provide written proposal to the board of Prana’s Intellectual Property
                    Portfolio to determine other value add opportunities for license,
                    merger
                    and acquisition or divestment by 31 December 2007 - $14K bonus
                  
                  ·Develop
                    Prana staff retention strategy and action plan by 31 October
                    2007 and
                    implement by 31 December 2007 - $10K bonusWith
                    Good Reason the company may terminate with
                  30
                    days notice
                
                *Bonus
                    pro-rated only if termination occurs in 1styear
                  
                  *Accrued
                    entitlements, bonuses and equity issues
                  
                  *Permitted
                    to exercise any unvested options to purchase shares that pre-existed
                    in
                    contract
 
 F-35
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **21.**  **KEY
        MANAGEMENT PERSONNEL COMPENSATION (continued)**
  The
        following Senior Executives were under contract during the financial year
        ended
        June 30, 2007:
 Duration
                
                Notice
                    Requirements
                
                Termination
                
                Bonus/
                    Equity EntitlementsDr
                    Ross Murdoch
                
                Until
                    termination by either party
                  
                  Signed
                    August 7, 2006
                  
                  Resigned
                    May 31, 2004
                
                For
                    Good Reason Dr Murdoch may terminate with
                  30
                    days notice
                
                *
                    Pay remuneration entitlements up to May 29, 2008 or if termination
                    occurs
                    after May 29, 2007, then 1 year from the time of termination
                    (less any
                    payout made for the notice period). The Company can elect to
                    pay such sum
                    as cash, equity in the Company or as a combination of both cash
                    and
                    equity.
                  
                  *
                    Accrued entitlements
                  
                  *
                    Accelerate the vesting of any unvested options
                
                1,250,000
                    options exercisable at A$nil on or before August 7, 2014 provided
                    that the
                    share price reaches A$0.40 for five consecutive trading days.
                    25% of the
                    options vest on August 7, 2006, 25% vest on May 29, 2007, 25%
                    vest on May
                    29, 2008 and the remaining 25% vest on May 29, 2009.Without
                    Good Reason Dr Murdoch may terminate with 120 days notice
                
                *
                    Permitted to keep and/or exercise options that have vested at
                    the time of
                    terminationWithout
                    Cause the Company may terminate with
                  120
                    days notice
                
                *
                    Pay remuneration entitlements up to May 29, 2008 or if termination
                    occurs
                    after May 29, 2007, then 1 year from the time of termination
                    (less any
                    payout made for the notice period). The Company can elect to
                    pay such sum
                    as cash, equity in the Company or as a combination of both cash
                    and
                    equity.
                  
                  *
                    Accrued entitlements
                  
                  *
                    Accelerate the vesting of any unvested options
 F-36
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **21.**  **KEY
        MANAGEMENT PERSONNEL COMPENSATION (continued)**
 Duration
                
                Notice
                    Requirements
                
                Termination
                
                Equity
                    EntitlementsWith
                    Cause the Company may terminate without notice
                
                *
                    Permitted to keep and/or exercise options that have vested at
                    the time of
                    termination.Ms
                    Dianne Angus
                
                Until
                    termination by either party
                  
                  Signed
                    October 2, 2006
                  
                  Amendment
                    signed June 12, 2007
                
                For
                    Good Reason Ms Angus may terminate with
                  30
                    days notice
                
                *
                    Pay remuneration entitlements 1 year from the time of termination
                    (less
                    any payout made for the notice period). The Company can elect
                    to pay such
                    sum as cash, equity in the Company or as a combination of both
                    cash and
                    equity.
                  
                  *
                    Accrued entitlements including all unreimbursed business
                    expenses
                  
                  *
                    Accelerate the vesting of any unvested options
                
                1,000,000
                    options upon signing. The options are exercisable at A$nil on
                    or before
                    August 7, 2014 provided that the share price reached A$0.40 for
                    five
                    consecutive trading days.
                  
                  250,000
                    options exercisable at A$nil on or before August 7, 2014 provided
                    that the
                    share price reaches A$0.40 for five consecutive trading days.Without
                    Good Reason Ms Angus may terminate with
                  120
                    days notice
                
                *
                    Permitted to keep and/or exercise options that have vested at
                    the time of
                    termination
                  
                  *
                    Accrued entitlements including all unreimbursed business
                    expensesWithout
                    Cause the Company may terminate with
                  120
                    days notice
                
                *
                    Pay remuneration entitlements 1 year from the time of termination
                    (less
                    any payout made for the notice period). The Company can elect
                    to pay such
                    sum as cash, equity in the Company or as a combination of both
                    cash and
                    equity.
                  
                  *
                    Accrued entitlements including all unreimbursed business
                    expenses
                  
                  *
                    Accelerate the vesting of any unvested optionsWith
                    Cause the Company may terminate without notice
                
                *
                    Accrued entitlements including all unreimbursed business
                    expenses
                  
                  *
                    Permitted to keep and/or exercise options that have vested at
                    the time of
                    termination.
  F-37
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****22.****AUDITORS’
                  REMUNERATION**Amounts
                  received or due and receivable for:-
                  audit fees1
              
              
              240,800
              
              
              202,600
              
              
              175,481-
                  tax fees
              
              
              -
              
              
              185
              
              
              11,631-
                  other fees
              
              
              -
              
              
              3,030
              
              
              14,920240,800
              
              
              205,815
              
              
              202,032
  1 An
        additional $19,317 was paid to the prior auditors during the year ended June
        30,
        2007
 
 **23.** **RELATED
            PARTY TRANSACTIONS**
 
 **a.**  **Equity
        Interests in Subsidiaries**
  Prana
        owns 100% of its subsidiaries, Prana Biotechnology Inc and Prana Biotechnology
        UK Ltd.
 
 **b.**  **Key
        Management Personnel Remuneration**
  Details
        of key management personnel remuneration is disclosed in note 21 to the
        financial statements.
 
 **c.**  **Key
        Management Personnel Equity Holdings**
 
 Fully
                  Paid Ordinary Shares of Prana Biotechnology Ltd
              
              Balance
                  July 1, 2006
              
              Received
                  as Remuneration
              
              Received
                  on Exercise of Options
              
              Net
                  Change Other2
              
              Balance
                June
                  30, 2007No.
              
              No.
              
              No.
              
              No.
              
              No.Geoffrey
                  Kempler
              
              
              17,055,000
              
              
              -
              
              
              -
              
              
              -
              
              
              17,055,000Colin
                  Masters
              
              
              184,666
              
              
              -
              
              
              -
              
              
              -
              
              
              184,666Brian
                  Meltzer
              
              
              326,666
              
              
              -
              
              
              -
              
              
              -
              
              
              326,666George
                  Mihaly
              
              
              226,666
              
              
              -
              
              
              -
              
              
              -
              
              
              226,666Peter
                  Marks
              
              
              43,111
              
              
              -
              
              
              -
              
              
              -
              
              
              43,111Richard
                  Revelins
              
              
              92,808
              
              
              -
              
              
              -
              
              
              (72,500
              )
              
              20,308Ross
                  Murdoch1
              
              
              50,000
              
              
              120,000
              
              
              625,000
              
              
              -
              
              
              795,000Dianne
                  Angus
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -17,978,917
              
              
              120,000
              
              
              625,000
              
              
              (72,500
              )
              
              18,651,417
 
 Fully
                  Paid Ordinary Shares of Prana Biotechnology Ltd
              
              Balance
                  July 1, 2005
              
              Received
                  as Remuneration
              
              Received
                  on Exercise of Options
              
              Net
                  Change Other2
              
              Balance
                June
                  30, 2006No.
              
              No.
              
              No.
              
              No.
              
              No.Geoffrey
                  Kempler
              
              
              17,055,000
              
              
              -
              
              
              -
              
              
              -
              
              
              17,055,000Colin
                  Masters
              
              
              184,666
              
              
              -
              
              
              -
              
              
              -
              
              
              184,666Brian
                  Meltzer
              
              
              326,666
              
              
              -
              
              
              -
              
              
              -
              
              
              326,666George
                  Mihaly
              
              
              226,666
              
              
              -
              
              
              -
              
              
              -
              
              
              226,666Peter
                  Marks
              
              
              43,111
              
              
              -
              
              
              -
              
              
              -
              
              
              43,111Richard
                  Revelins
              
              
              42,808
              
              
              -
              
              
              -
              
              
              50,000
              
              
              92,808Ross
                  Murdoch
              
              
              50,000
              
              
              -
              
              
              -
              
              
              -
              
              
              50,000Dianne
                  Angus
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -17,928,917
              
              
              -
              
              
              -
              
              
              50,000
              
              
              17,978,917
 
 1 The
        balance at 30 June 2007, is the balance at date of resignation.
  2 These
        options were acquired or sold on market
 
 F-38
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **23.**  **RELATED
        PARTY TRANSACTIONS (continued)**
 
 Share
                  Options of
                Prana
                  Biotechnology Ltd
              
              Balance
                July
                  1, 2006
                No.
              
              Granted
                  as Remuneration
                No.
              
              Options
                  Exercised
                No.
              
              Options
                  Sold
                No.
              
              Options
                  Expired
                No
              
              Balance
                June
                  30, 2007
                No.
              
              Total
                  Exercisable
                June
                  30, 2007
                No.
              
              Total
                  Not
                Exercisable
                  June 30, 2007
                No.Geoffrey
                  Kempler
              
              
              1,000,000
              
              
              1,000,000
              
              
              -
              
              
              -
              
              
              -
              
              
              2,000,000
              
              
              -
              
              
              2,000,000Colin
                  Master
              
              
              1,000,000
              
              
              1,000,000
              
              
              -
              
              
              -
              
              
              -
              
              
              2,000,000
              
              
              -
              
              
              2,000,000Brian
                  Meltzer
              
              
              300,000
              
              
              300,000
              
              
              -
              
              
              -
              
              
              -
              
              
              600,000
              
              
              -
              
              
              600,000George
                  Mihaly
              
              
              300,000
              
              
              300,000
              
              
              -
              
              
              -
              
              
              -
              
              
              600,000
              
              
              -
              
              
              600,000Peter
                  Marks
              
              
              300,000
              
              
              300,000
              
              
              -
              
              
              -
              
              
              -
              
              
              600,000
              
              
              -
              
              
              600,000Richard
                  Revelins
              
              
              500,000
              
              
              300,000
              
              
              -
              
              
              -
              
              
              -
              
              
              800,000
              
              
              500,000
              
              
              300,000Ross
                  Murdoch1
              
              
              -
              
              
              625,000
              
              
              (625,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Dianne
                  Angus
              
              
              -
              
              
              1,250,000
              
              
              -
              
              
              -
              
              
              -
              
              
              1,250,000
              
              
              1,000,000
              
              
              250,0003,400,000
              
              
              5,075,000
              
              
              (625,000
              )
              
              -
              
              
              -
              
              
              7,850,000
              
              
              1,500,000
              
              
              6,350,000
  Share
                  Options of
                Prana
                  Biotechnology Ltd
              
              Balance
                July
                  1, 2005
                No.
              
              Granted
                  as Remuneration
                No.
              
              Options
                  Exercised
                No.
              
              Options
                  Sold
                No.
              
              Options
                  Expired
                No
              
              Balance
                June
                  30, 2006
                No.
              
              Total
                  Exercisable
                June
                  30, 2006
                No.
              
              Total
                  Not
                Exercisable
                  June 30, 2006
                No.Geoffrey
                  Kempler
              
              
              1,000,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000,000
              
              
              -
              
              
              1,000,000Colin
                  Master
              
              
              -
              
              
              1,000,000
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000,000
              
              
              -
              
              
              1,000,000Brian
                  Meltzer
              
              
              300,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              300,000
              
              
              -
              
              
              300,000George
                  Mihaly
              
              
              300,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              300,000
              
              
              -
              
              
              300,000Peter
                  Marks
              
              
              -
              
              
              300,000
              
              
              -
              
              
              -
              
              
              -
              
              
              300,000
              
              
              -
              
              
              300,000Richard
                  Revelins
              
              
              500,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              500,000
              
              
              500,000
              
              
              -Ross
                  Murdoch
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Dianne
                  Angus
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -2,100,000
              
              
              1,300,000
              
              
              -
              
              
              -
              
              
              -
              
              
              3,400,000
              
              
              500,000
              
              
              2,900,000
  1 The
        balance at 30 June 2007, is the balance at date of resignation.
 
 For
        further information on equity entitlements under employment contracts, refer
        to
        note 21.
 
 F-39
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **24.**  **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.
 
 **25.**  **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, 2007, the consolidated entity had the following cash accounts:
 
 ·
              US$3,462,460
                  (A$4,080,163) in a 29 day term deposit at a fixed interest rate
                  of 5.15%
                  which matured on 13 July 2007;
 ·
              A$2,872,900
                  in at call deposit account, earning interest of
                  6.15%
 ·
              A$210,406
                  in Australia dollar cheque accounts at variable interest rates
                  ranging
                  from 4.67% to 5.20% as of June 30,
                  2007
 ·
              US$149,998
                  (A$176,758) in a US cheque account at a interest rate of 4.64%
                  as of June
                  30, 2007
 ·
              GBP$12,795
                  (A$30,215) in a GBP cheque account at a variable interest rate
                  of 4.48% as
                  of June 30, 2007;
 ·
              EUR$22,680
                  (A$36,018) in a EUR cheque account at a variable interest rate
                  of 3.33% as
                  of June 30, 2007;
 ·
              A$10,398
                  in a twelve month term deposit at a fixed interest rate of 6.40%which
                  matures on 13 January 2008;
 ·
              A$35,238
                  in a four month term deposit at a fixed interest rate of 6.30%which
                  matures on 17 October 2007;
 ·
              A$200
                  in petty cash which does not earn any
                  interest;
 ·
              SEK$970
                  (A$167) in petty cash which does not earn any
                  interest;
 ·
              US$2,000
                  (A$2,357) in petty cash which does not earn any interest;
                  and
 ·
              CA$65
                  (A$72) in petty cash which does not earn any interest.
 
 The
        weighted average interest rate is 4.57%for cash and cash equivalents and
        6.32%
        for terms deposits over three months 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, 2006, the consolidated entity had the following cash accounts:
 
 ·
              US$4,217,217
                  (A$5,778,009) in a 30 day term deposit at a fixed interest rate
                  of 4.98%
                  which matured on July 7, 2006;
 ·
              A$1,051,763
                  in at call deposit account, earning interest of
                  5.65%;
 ·
              A$242,285
                  in Australia dollar cheque accounts at variable interest rates
                  ranging
                  from 4.75% to 5.80% as of June 30,
                  2006;
 ·
              US$120,667
                  (A$165,326) in a US cheque account at a interest rate of 4.44%
                  as of June
                  30, 2006;
 ·
              GBP$12,255
                  (A$30,495) in a GBP cheque account at a variable interest rate
                  of 2.90% as
                  of June 30, 2006;
 ·
              EUR$142,758
                  (A$245,487) in a EUR cheque account at a variable interest rate
                  of 2.09%
                  as of June 30, 2006;
 ·
              A$2,500,000
                  in a 32 day commercial bill with a fixed interest rate of 5.82%
                  which
                  matured on July 24, 2006;
 ·
              A$32,379
                  in a seven month term deposit at a fixed interest rate of 5.50%
                  which
                  matures on July 17, 2006;
 ·
              A$10,000
                  in a 180 day term deposit at a fixed interest rate of 4.00% which
                  matures
                  on July 17, 2006; and
 ·
              A$413
                  in petty cash which does not earn any interest.
 
 The
        weighted average interest rate is 5.19% for cash and cash equivalents and
        5.15%
        for terms deposits over 3 months and apart from usual variances in general
        rates
        of interest the consolidated entity is not exposed to any significant interest
        rate risk.
  F-40
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **25.**  **FINANCIAL
        INSTRUMENTS (continued)**
 
 Receivables
        and payables are non-interest bearing.
 
 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, 2007**
              
              **Floating**
                **Interest
                  Rate**
              
              **Fixed
                  Interest**
                **Maturing
                  in**
              
              **Non-Interest
                  bearing**
              
              **Total**
              
              **Average
                  Interest Rate****1
                  year**
                **or
                  less**
              
              **1-5
                  years**Financial
                  AssetsCash
              
              
              453,397
              
              
              6,953,063
              
              
              -
              
              
              2,796
              
              
              7,409,256
              
              
              4.57
              %Receivables
              
              
              -
              
              
              -
              
              
              -
              
              
              96,499
              
              
              96,499Other
                  current assets
              
              
              -
              
              
              45,636
              
              
              -
              
              
              122,903
              
              
              168,539
              
              
              6.32
              %453,397
              
              
              6,998,699
              
              
              -
              
              
              222,198
              
              
              7,674,294Financial
                  LiabilitiesPayables
              
              
              -
              
              
              -
              
              
              -
              
              
              1,661,609
              
              
              1,661,609Provisions
              
              
              -
              
              
              -
              
              
              -
              
              
              321,001
              
              
              321,001Other
                  financial liabilities
              
              
              -
              
              
              -
              
              
              -
              
              
              127,380
              
              
              127,380-
              
              
              -
              
              
              -
              
              
              2,109,990
              
              
              2,109,990
 
 **June
                  30, 2006**
              
              **Floating**
                **Interest
                  Rate**
              
              **Fixed
                  Interest**
                **Maturing
                  in**
              
              **Non-Interest
                  bearing**
              
              **Total**
              
              **Average
                  Interest Rate****1
                  year**
                **or
                  less**
              
              **1-5
                  years**Financial
                  AssetsCash
              
              
              683,593
              
              
              9,329,772
              
              
              -
              
              
              413
              
              
              10,013,778
              
              
              5.19
              %Receivables
              
              
              -
              
              
              -
              
              
              -
              
              
              194,161
              
              
              194,161Other
                  current assets
              
              
              -
              
              
              42,379
              
              
              -
              
              
              68,453
              
              
              110,832
              
              
              5.15
              %683,593
              
              
              9,372,151
              
              
              -
              
              
              263,027
              
              
              10,318,771Financial
                  LiabilitiesPayables
              
              
              -
              
              
              -
              
              
              -
              
              
              1,538,358
              
              
              1,538,358Provisions
              
              
              -
              
              
              -
              
              
              -
              
              
              153,438
              
              
              153,438Other
                  financial liabilities
              
              
              -
              
              
              -
              
              
              -
              
              
              928,692
              
              
              928,692-
              
              
              -
              
              
              -
              
              
              2,620,488
              
              
              2,620,488
 
 **(c)**  **Fair
        values**
  The
        carrying amount of financial assets and financial liabilities recorded in
        the
        financial statements represents their respective fair values, determined
        in
        accordance with the accounting policies disclosed in Note 1 to the financial
        statements.
  F-41
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **25.**  **FINANCIAL
        INSTRUMENTS (continued)**
 
 **(d)**  **Credit
        risk**
  Financial
        assets, which potentially expose the consolidated entity to concentrations
        of
        credit risk, consist primarily of cash and cash equivalents and term deposits
        over three months. The consolidated entity’s cash and cash equivalents and term
        deposits over three months are placed with high credit quality financial
        institutions. Accordingly, the Directors believe the consolidated entity
        has no
        significant concentration of credit risk.
 
 **26.**  **ADDITIONAL
        COMPANY INFORMATION**
 
 Prana
        Biotechnology Limited is a listed public company, incorporated and operating
        in
        Australia.
 Registered
                    Office
                Principal
                    Place of BusinessSuite
                    2
                  1233
                    High Street
                  Armadale
                    Vic 3143
                  Australia
                  
                  Tel:
                    +61 (03) 9824 8166
                Level
                    2
                  369
                    Royal Parade
                  Parkville
                    Vic 3052
                  Australia
                  
                  Tel:
                    +61 (03) 9349 4906
  F-42
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP**
 
 The
        financial statements have been prepared in accordance with A-IFRS, 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-IFRS and US GAAP.
 
 Reconciliation
        of net loss
 
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005**Net
                  loss in accordance with A-IFRS
              
              
              
              
              
              (11,142,320
              )
              
              (11,590,594
              )
              
              (10,293,031
              )*US
                  GAAP adjustments*:Share-based
                  compensation
              
              
              (a)Options
                  issued to consultants for services rendered
              
              
              
              
              
              -
              
              
              -
              
              
              196,389Options
                  issued to directors and employees for services
                Rendered
              
              
              
              
              
              -
              
              
              -
              
              
              1,686,905Shares
                  issued to consultants and directors for services
                Rendered
              
              
              
              
              
              -
              
              
              -
              
              
              (186,995
              )Intangible
                  assets - Capitalised patent costs
              
              
              (b)Costs
                  capitalised under US GAAP but expensed
                under
                  A-IFRS
              
              
              
              
              
              -
              
              
              -
              
              
              284,924Amortisation
                  expense attributable to above
              
              
              
              
              
              -
              
              
              -
              
              
              (307,806
              )Impairment
                  of costs capitalised under US GAAP
                but
                  expensed under A-IFRS
              
              
              
              
              
              -
              
              
              -
              
              
              (3,378,418
              )Deferred
                  tax effect of US GAAP adjustments
              
              
              (c)
              
              
              -
              
              
              -
              
              
              -Net
                  loss in accordance with US GAAP
              
              
              
              
              
              (11,142,320
              )
              
              (11,590,594
              )
              
              (11,998,032
              )Loss
                  per share in accordance with US GAAP:Basic
                  and diluted
              
              
              
              
              
              0.08
              
              
              (0.09
              )
              
              (0.10
              )Weighted
                  average shares - basic and diluted
              
              
              
              
              
              140,754,495
              
              
              128,053,601
              
              
              122,754,061
 
 Reconciliation
        of shareholders’ equity
 
 Following,
        the adoption of A-IFRS, the Company has concluded there are no significant
        accounting principle differences with respect to the Company when applying
        both
        A-IFRS and US GAAP. The following is a summary of total equity prepared in
        accordance with US GAAP, which is the same as the total equity prepared in
        accordance with A-IFRS.
 
 **Years
                  Ended June 30,****2007**
              
              **2006**Total
                  equity in accordance with A-IFRS
              
              
              5,612,195
              
              
              7,800,658*US
                  GAAP adjustments*:
              
              
              -
              
              
              -Total
                  equity in accordance with US GAAP
              
              
              5,612,195
              
              
              7,800,658
 
 F-43
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 Roll
        forward analysis of shareholders’ equity under US GAAP
 
 Certain
        adjustments recorded directly to total equity differ in classification when
        applying A-IFRS and US GAAP. These classification differences do not result
        in a
        difference between total equity when prepared under both A-IFRS and US GAAP.
        The
        classification differences are described below:
 
 **Years
                  Ended June 30,****2007**
              
              **2006**Balance
                  in accordance with US GAAP, beginning of year
              
              7,800,658
              
              18,536,769Issuance
                  of shares in connection with private placement, net of issue
                  costs
              
              6,108,868
              
              -Issuance
                  of shares in connection with exercise of options, net of issue
                  costs
              
              (3,840)
              
              -Issuance
                  of options in connection with private placement
              
              1,262,339
              
              -Issuance
                  of options to consultants for services rendered
              (a)
              163,701
              
              194,351Issuance
                  of options to directors and employees for services
                  rendered
              (a)
              1,182,610
              
              224,902Issuance
                  of shares to consultants and directors for services
                  rendered
              (a)
              240,179
              
              435,230Net
                  loss in accordance with US GAAP
              
              (11,142,320)
              
              (11,590,594)Balance
                  in accordance with US GAAP, end of year
              
              5,612,195
              
              7,800,658
 
 **a.**
              **Share-based
                  compensation**
 
 As
        described in Note 1(p), the Company adopted AASB 2. In accordance with the
        transitional provisions of AASB 2, the Standard has been applied retrospectively
        to all share-based payments granted / issued after November 7, 2002 and that
        were not yet vested as of January 1, 2005.
 
 Through
        June 30, 2005, the Company accounted for options granted to employees and
        directors under U.S. GAAP using the intrinsic value method in accordance
        with
        Accounting Principles Board Opinion No. 25: *Accounting
        for Stock Issued to Employees* (“APB
        25”) and related interpretations to measure employee stock compensation. Under
        APB 25, compensation expense was recognized to the extent that the quoted
        market
        price of the stock exceeded the exercise price of the options at the measurement
        date, and was charged to earnings ratably over the vesting period. For options
        that vest upon the achievement of a target stock price, compensation expense
        was
        recognized when the target is achieved.
 
 The
        following table illustrates the effect on U.S. GAAP net loss and loss per
        share
        if the Company had applied the fair value recognition provisions of Statements
        of Financial Accounting Standards ("SFAS") No. 123: *Accounting
        for Stock Based Compensation* ("SFAS
        123") to stock-based employee compensation for the year ended June 30,
        2005.
 
 **June
                  30, 2005**U.S.
                  GAAP net loss, as reported
              
              
              (11,998,032
              )Add:
                  Stock-based employee compensation expense included in U.S. GAAPreported
                  net loss
              
              
              17,829Deduct:
                  Total stock-based employee compensation expense determined
                  underfair
                  value based method
              
              
              (1,708,925
              )U.S.
                  GAAP pro forma net loss
              
              
              (13,689,128
              )U.S.
                  GAAP basic and diluted loss per share-
                  As reported
              
              
              (0.10
              )-
                  Pro forma
              
              
              (0.11
              )
  Additionally,
        through June 30, 2005, Prana accounted for options granted to consultants
        under
        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") under US GAAP. Under
        SFAS 123 and EITF 96-18, compensation cost was calculated based on the estimated
        fair value of the options measured on the date the services were completed
        by
        the respective consultants.
 
 F-44
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 Through
        June 30, 2005, the Company also accounted for shares issued consultants and
        directors under U.S. GAAP in accordance with SFAS 123 and EITF 96-18.
        Accordingly, compensation cost was based on the quoted market price of the
        shares measured on the date the services were completed.
 
 Effective
        July 1, 2005, for U.S. GAAP purposes the Company adopted SFAS No. 123(R), *Share-Based
        Payment* (“SFAS
        123R”) which replaces SFAS 123 and supersedes APB 25. Under the modified
        prospective method of SFAS 123R, the Company applies SFAS 123R for equity-based
        compensation awards (or portion thereof): (i) granted on or after July 1,
        2005;
        (ii) modified on or after July 1, 2005; and (iii) not yet vested as of July
        1,
        2005. Such equity-based compensation awards are measured based on the fair
        value
        using the Black-Scholes model (for options without market conditions) or
        Barrier
        Pricing model (for options with market conditions). The compensation is
        recognized as an expense in the statement of operations over the requisite
        service period. Prior periods have not been restated.
 
 As
        a
        result of adopting SFAS 123R on July 1, 2005, the Company ’s U.S. GAAP loss
        before income taxes and net loss for the year ended June 30, 2006 was A$76,469
        higher than if the Company had continued to account for share-based compensation
        to employees and directors under APB 25. The impact of adopting SFAS 123R
        did
        not have a material impact on basic and diluted loss per share, cash flows
        from
        operating activities and cash flows from financing activities for the year
        ended
        June 30, 2006.
 
 Total
        U.S. GAAP share-based compensation costs charged to the statement of operations
        was A$1,579,133, A$406,703 and A$444,075 for the years ended June 30, 2007,
        2006
        and 2005, respectively. No income tax benefits were recognized and no
        compensation cost was capitalized as part of property and equipment during
        the
        periods presented.
  The
        retrospective transition provision of AASB 2 and the modified prospective
        transition provision of SFAS 123R give rise to GAAP differences in share−based
        compensation for the year ended June 30, 2005. There are no U.S. GAAP
        reconciling items attributable to share−based compensation for the year ended
        June 30, 2007 and 2006 as the impact on compensation cost resulting from
        differences in the standards, such as the determination of the measurement
        date
        for share−based payments made to nonemployees, is de minimis.
 
 **b.**
              **Intangible
                  assets - Capitalised patent
                  costs**
 
 Under
        A-IFRS, patent costs are recognized at cost less accumulated amortization
        and
        impairment, provided the costs meet the criteria for recognition as an
        intangible asset (see Note 1(g)). Patent costs that do not meet the criteria
        for
        recognition as an intangible asset are expensed as incurred. At June 30,
        2007,
        2006 and 2005, Prana had no capitalized patent costs under A-IFRS.
 
 For
        U.S.
        GAAP purposes, up until December 31, 2004, all costs associated with the
        acquisition of patents, legal costs incurred in connection with successful
        patent defenses and costs associated with successful patent applications
        deemed
        to be recoverable from the future development of products were capitalized
        and
        amortized on a straight−line basis over the estimated useful life of 15 years.
        Such capitalized 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, Prana changed its U.S. GAAP accounting policy
        and
        expenses all patent costs as incurred.
 
 As
        a
        result of the cancellation of a clinical study for the PBT−1 compound in April
        2005 due to toxicity issues, the consolidated entity reviewed the carrying
        value
        of the U.S. GAAP capitalized patent costs and resolved to impair the capitalized
        costs to the fair value of A$nil based on estimated future discounted cash
        flows.
 
 For
        the
        year ended June 30, 2007 and 2006, there are no GAAP differences in respect
        to
        intangible assets. In the future, GAAP differences may arise to the extent
        that
        development costs meet the criteria for capitalization under A-IFRS (as
        development costs are expensed as incurred under U.S. GAAP).
 
 **c.**
              **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-45
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 **d.**
              **Classification
                  differences**
 
 Under
        A-IFRS, the consolidated entity classifies interest income as revenue. Under
        US
        GAAP, interest income is classified as non-operating income.
 
 Under
        A-IFRS, amortisation of intangible assets used in research and development
        projects is reported in amortisation expense. Under US GAAP, amortisation
        of
        intangible assets used in research and development projects is reported in
        research and development expense.
 
 **e.**
              **Additional
                  US GAAP disclosures**
 
 *Share-based
        compensation*
  The
        following table summarizes the activity of share options issued to directors
        and
        employees during the years ended June 30, 2007, 2006 and 2005:
 
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****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
              
              
              4,327,500
              
              
              0.06
              
              
              2,100,000
              
              
              0.12
              
              
              409,667
              
              
              0.50Granted
              
              
              5,414,478
              
              
              -
              
              
              2,265,000
              
              
              nil
              
              
              2,100,000
              
              
              0.12Exercised
              
              
              (758,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              (150,000
              )
              
              -
              
              
              (37,500
              )
              
              nil
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (409,667
              )
              
              0.50Outstanding
                  at end of year (a)
              
              
              8,833,978
              
              
              0.03
              
              
              4,327,500
              
              
              0.06
              
              
              2,100,000
              
              
              0.12Exercisable
                  at end of year (b)
              
              
              1,500,000
              
              
              0.17
              
              
              500,000
              
              
              0.50
              
              
              500,000
              
              
              0.50
   (a)
              Of
                  the 8,833,978 options outstanding as of June 30, 2007, 8,333,978
                  options
                  have an exercise price of A$nil and a remaining weighted average
                  contractual life of three years and a weighted average intrinsic
                  value of
                  A$0.35. The remaining 500,000 options have an exercise price of
                  A$0.50
                  with a remaining weighted average contractual life of six months
                  and a
                  weighted average intrinsic value of A$nil. The weighted average
                  contractual life of the 8,833,978 options outstanding is 3
                  years.
 (b)
              Of
                  the 1,500,000 options exercisable as of June 30, 2007, 1,000,000
                  options
                  have an exercise price of A$nil and a remaining weighted average
                  contractual life of seven years and a weighted average intrinsic
                  value of
                  A$0.48. The remaining 500,000 options have an exercise price of
                  A$0.50
                  with a remaining weighted average contractual life of six months
                  and a
                  weighted average intrinsic value of A$nil. The weighted average
                  contractual life of the 1,500,000 options exercisable is four
                  years.
 
 The
        weighted average grant date fair value of the options issued to directors
        and
        employees under the 2004 Employees, Directors and Consultants Share and Option
        Plan during the years ended June 30, 2007, 2006 and 2005 is A$0.38, A$0.18
        and
        A$0.44, 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 6.0% for 2007, 5.3% for 2006 and 5.2% for
                  2005;
 ·
              no
                  dividends;
 ·
              expected
                  volatility of 85.6% for 2007, 117.2% for 2006 and 65.7% for 2005;
                  and
 ·
              expected
                  life of four years for 2007, four years for 2006 and five years
                  for
                  2005.
 
 *Risk−free
        interest rate* -
        This is
        the government bond rate (having a term that most closely resembles the expected
        life of the option) in effect at the grant date. The Australian government
        bond
        rate has been used for options which convert to full paid ordinary shares
        and
        the U.S. government bond rate has been used for options which convert to
        ADRs.
 
 *Dividend
        yield* -
        Prana
        has never declared or paid dividends on its common stock and does not anticipate
        paying any dividends in the foreseeable future.
 
 *Expected
        volatility* -
        Prana
        estimates expected volatility based on historical volatility over the estimated
        life of the option and other factors.
 
 F-46
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 *Expected
        life* -
        This is
        the period of time that the options granted are expected to remain outstanding.
        This estimate is based primarily on historical trend of option holders to
        exercise their option near the date of expiry. As a result the expected life
        is
        considered to equal the period from grant date to expiry date.
 
 The
        following table summarizes the activity of share options issued to directors
        under the 2004 ADS Option Plan (adopted on November 17, 2004) during the
        years
        ended June 30, 2007, 2006 and 2005. Each option is exercisable for one ADR
        which
        equals ten shares. No options have been issued under the 2004 ADS Option
        Plan in
        the year ended June 30, 2007 and 2006.
 
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****Number
                  of options**
                **over
                  ADRs**
              
              **Weighted
                  average exercise price ($)**
              
              **Number
                  of options**
                **over
                  ADRs**
              
              **Weighted
                  average exercise price ($)**
              
              **Number
                  of options**
                **over
                  ADRs**
              
              **Weighted
                  average exercise price ($)**Outstanding
                  at beginning of year
              
              
              380,000
              
              $
              US5.00
              
              
              380,000
              
              $
              US5.00
              
              
              -
              
              
              -Granted
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              380,000
              
              $
              US5.00Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  at end of year (c)
              
              
              380,000
              
              $
              US5.00
                  (A$5.89
              )
              
              380,000
              
              $
              US5.00
                  (A$6.85
              )
              
              380,000
              
              $
              US5.00
                  (A$6.57
              )Exercisable
                  at end of year (c)
              
              
              380,000
              
              $
              US5.00
                  (A$5.89
              )
              
              380,000
              
              $
              US5.00
                  (A$6.85
              )
              
              380,000
              
              $
              US5.00
                  (A$6.57
              )
   (c)
              All
                  380,000 options outstanding and exercisable as of June 30, 2007
                  have an
                  exercise price of US$5.00 (A$5.89) and a remaining weighted average
                  contractual life of five and half years and a weighted average
                  intrinsic
                  value of nil.
 
 The
        grant
        date fair value of the options issued to directors under the 2004 ADS Option
        Plan during the year ended June 30, 2005 was 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.
 
 The
        methodology for developing each of the assumptions is the same as that described
        above.
  F-47
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
          TO US GAAP (continued)**
  The
        following table summarizes the activity of share
        options issued to consultants during the year ended June 30, 2006 and
        2005:
 
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****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
              
              
              1,425,000
              
              
              0.50
              
              
              1,212,000
              
              
              0.50
              
              
              1,109,500
              
              
              0.35Granted
              
              
              494,284
              
              
              -
              
              
              413,000
              
              
              0.50
              
              
              600,000
              
              
              0.50Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              (825,000
              )
              
              0.50
              
              
              (200,000
              )
              
              0.50
              
              
              (497,500
              )
              
              0.52Outstanding
                  at end of year (d)
              
              
              1,094,284
              
              
              0.27
              
              
              1,425,000
              
              
              0.50
              
              
              1,212,000
              
              
              0.50Exercisable
                  at end of year (e)
              
              
              640,000
              
              
              0.47
              
              
              1,425,000
              
              
              0.50
              
              
              1,045,333
              
              
              0.50
   (d)
              Of
                  the 1,094,284 options outstanding as of June 30, 2007, 600,000
                  options
                  have an exercise price of A$0.50 and a remaining weighted average
                  contractual life of six months and a weighted average intrinsic
                  value of
                  A$nil. The remaining 494,284 options have an exercise price of
                  A$nil with
                  a remaining average contractual life of five years and a weighted
                  average
                  intrinsic value of A$0.35. The weighted average contractual life
                  of the
                  1,094,284 options outstanding is two years and eight months.
 (e)
              Of
                  the 640,000 options exercisable as of June 30, 2007, 600,000 options
                  have
                  an exercise price of A$0.50 with a remaining weighted average contractual
                  life of six months and a weighted average intrinsic value of A$nil.
                  The
                  remaining 40,000 options have an exercise price of A$nil and a
                  remaining
                  weighted average contractual life of seven years and a weighted
                  average
                  intrinsic value of A$0.36.
 
 The
        weighted average grant date fair value of options issued to consultants during
        the years ended June 30, 2007, 2006 and 2005 is A$0.34 and A$0.27, respectively.
        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 6.3% for 2007, 5.0% for 2006 and 4.9% for
                  2005;
 ·
              no
                  dividends;
 ·
              expected
                  volatility of 87% for 2007, 68% for 2006 and 62% for 2005;
                  and
 ·
              expected
                  life of five years for 2007 , two years for 2006 and
                  2005.
 
 During
        the years ended June 30, 2007, 2006 and 2005, the Company granted 481,250,
        825,000 and 1,578,215 shares to consultants, respectively, with a weighted
        average grant date fair value of A$0.40, A$0.56 and A$0.57, respectively.
 
 During
        the year ended June 30, 2005, the Company granted 249,999 shares to directors
        with a weighted average grant date fair value of A$0.48. No shares were granted
        to directors during the year ended June 30, 2007 and 2006. During the year
        ended
        June 30, 2007, the Company granted 120,000 shares to an employee, with a
        weighted average grant date fair value of A$0.38.
 
 The
        following table summarizes the activity of warrants granted to consultants
        during the years ended June 30, 2007, 2006 and 2005:
 
 **Years
                  Ended June 30,****2007**
              
              **2006**
              
              **2005****Number
                  of options**
              
              **Weighted
                  average exercise price (USD$)**
              
              **Number
                  of options**
              
              **Weighted
                  average exercise price (USD$)**
              
              **Number
                  of options**
              
              **Weighted
                  average exercise price (USD$)**Outstanding
                  at beginning of year
              
              
              320,000
              
              
              8.00
              
              
              320,000
              
              
              8.00
              
              
              -
              
              
              -Granted
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              320,000
              
              
              8.00Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  at end of year (e)
              
              
              320,000
              
              
              8.00
              
              
              320,000
              
              
              8.00
              
              
              320,000
              
              
              8.00Exercisable
                  at end of year (e)
              
              
              320,000
              
              
              8.00
                  (A$9.43
              )
              
              320,000
              
              
              8.00
                  (A$10.96
              )
              
              320,000
              
              
              8.00
                  (A$10.51
              )
  F-48
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 (f)
              All
                  320,000 warrants outstanding and exercisable as of June 30, 2007
                  have an
                  exercise price of USD$8.00 with a remaining weighted average contractual
                  life of three years and a weighted average intrinsic value of
                  nil.
 
 The
        weighted average grant date fair value of warrants issued to consultants
        during
        the years ended June 30, 2005 is A$1.42. The fair value was estimated at
        the
        date of grant using the Black-scholes model with the following weighted average
        assumptions:
  ·
              risk-free
                  interest rate of 3.5%;
 ·
              no
                  dividends;
 ·
              expected
                  volatility of 71%; and
 ·
              expected
                  life of four and a half years.
 
 3,000,000
        warrants were issued as part of the June 2004 capital raising. These warrants
        have been recorded as a financial liability - see note 11. These warrants
        are
        exercisable on or before June 4, 2009 at an exercise price of USD$8.00. These
        warrants are convertible to one ADR which is equal to ten ordinary fully
        paid
        shares.
 
 The
        following table summarizes the activity of share options issued to consultants
        under the Employee and Consultants Option Plan 2000 (adopted on November
        22,
        2000) during the year ended June 30, 2005. Each option was exercisable for
        one
        ordinary share. No options have been issued under the Employee and Consultants
        Option Plan 2000 for the years ended June 30, 2007 and 2006 as all options
        issued under the plan expired on June 30, 2005.
 
 **Year
                  ended June 30, 2005****Number
                  of options**
                **over
                  Ordinary Shares**
              
              **Weighted
                  average exercise price (A$)**Outstanding
                  at beginning of year
              
              
              437,500
              
              
              0.50Granted
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Expired
              
              
              (437,500
              )
              
              0.50Forfeited
              
              
              -
              
              
              -Outstanding
                  at end of year
              
              
              -
              
              
              -Exercisable
                  at end of year
              
              
              -
              
              
              -
 
 At
        June
        30, 2007 there were options on issue that could not be exercised until the
        share
        price reached:
  ·
              A$1.00
                  for at least five consecutive trading days
 The
        Company has made the assumption that this market condition will not be reached
        until June 30, 2010. As a result, the expense related to these options is
        being
        recognized over the period from date of grant until June 30, 2010, a weighted
        average period of five years. At June 30, 2007 there was A$698,464 of total
        unrecognized compensation cost related to these awards yet to be expensed.
  ·
              A$0.80
                  for at least five consecutive trading days
 The
        Company has made the assumption that this market condition will not be reached
        until June 30, 2009. As a result, the expense related to these options is
        being
        recognized over the period from date of grant until June 30, 2009, a weighted
        average period of two and half years. At June 30, 2007 there was A$946,507
        of
        total unrecognized compensation cost related to these awards yet to be expensed.
  ·
              A$0.50
                  for at least five consecutive trading days
 The
        Company has made the assumption that this market condition will not be reached
        until December 31, 2007. As a result, the expense related to these options
        is
        being recognized over the period from date of grant until December 31, 2007,
        a
        weighted average period of nine months. At June 30, 2007 there was A$45,630
        of
        total unrecognized compensation cost related to these awards yet to be expensed.
 
 *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-IFRS.
  F-49
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
  The
          components of A-IFRS income (loss) before income tax expense consisted
          of the
          following for the years ended June 30, 2007, 2006 and 2005:
 
 **Years
                  ended June 30,****2007**
              
              **2006**
              
              **2005**Australia
              
              
              (11,139,374
              )
              
              (11,664,476
              )
              
              (10,217,734
              )Foreign
              
              
              (2,946
              )
              
              73,882
              
              
              (75,297
              )
 
 The
        components of the US GAAP deferred tax assets and liabilities as of June
        30,
        2007, 2006 and 2005 are as follows:
 
 **June
                  30,****2007**
              
              **2006****1**Deferred
                  tax assetsNet
                  operating loss carryforwards
              
              
              22,300,414
              
              
              16,529,172Foreign
                  exchange losses
              
              
              150,592
              
              
              268,960Section
                  40-880 deductions
              
              
              215,538
              
              
              -Provision
                  accruals
              
              
              (9,883
              )
              
              46,031Other
              
              
              36,473
              
              
              61,744Total
                  gross deferred tax assets
              
              
              22,693,134
              
              
              16,905,907Deferred
                  tax liability
              
              
              -
              
              
              -Net
                  deferred tax asset
              
              
              22,693,134
              
              
              16,905,907Valuation
                  allowance
              
              
              (22,693,134
              )
              
              (16,905,907
              )Net
                  recorded deferred taxes
              
              
              -
              
              
              -
 
 As
        of
        June 30, 2007, the Company has net operating loss carryforwards in Australia
        of
        A$75,643,779 that may be carried forward indefinitely and net operating loss
        carryforwards in the United States of A$2,946 that can be carried forward
        for 20
        years.
 
 *Recently
        issued but not yet adopted accounting pronouncements*
 
 In
        July
        2006, the Financial Accounting Standards Board, or the FASB issued
        Interpretation No. 48, *“Accounting
        for Uncertainty in Income Taxes”* or FIN
        48 as an interpretation of SFAS 109. This Interpretation clarifies the
        accounting for uncertainty in income taxes recognized by prescribing a
        recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return. This Interpretation also provides guidance on de-recognition
        of tax
        benefits previously recognized and additional disclosures for unrecognized
        tax
        benefits, interest and penalties. The evaluation of a tax position in accordance
        with this Interpretation begins with a determination as to whether it is
        more
        likely than not that a tax position will be sustained upon examination based
        on
        the technical merits of the position. A tax position that meets the
        more-likely-than-not recognition threshold is then measured at the largest
        amount of benefit that is greater than 50 percent likely of being realized
        upon
        ultimate settlement for recognition in the financial statements. FIN 48 is
        effective no later than fiscal years beginning after December 15, 2006, and
        is
        required to be adopted by the consolidated entity on July 1, 2007. The
        consolidated entity is currently assessing the impact of the adoption of
        FIN
        48.
 
 In
        September 2006, the FASB issued SFAS No. 157, *“Fair
        Value Measurements* ”
or
        SFAS
        157. SFAS 157 defines fair value, establishes a framework for measuring fair
        value in generally accepted accounting principles, and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the FASB having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. SFAS 157 is effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and interim periods
        within those fiscal years. This Statement is required to be adopted by the
        consolidated entity on July 1, 2008. The consolidated entity is currently
        assessing the impact of the adoption of this Statement.
 
 F-50
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 In
        February 2007, the FASB issued SFAS No. 159, *“The
        Fair Value Option for Financial Assets and Financial Liabilities, Including
        an
        amendment of FASB Statement No. 115”* or SFAS
        159. This Statement permits entities to measure eligible financial assets,
        financial liabilities and firm commitments at fair value, on an
        instrument-by-instrument basis, that are otherwise not permitted to be accounted
        for at fair value under other generally accepted accounting principles. The
        fair
        value measurement is irrevocable and subsequent changes in fair value must
        be
        recorded in earnings. SFAS 159 is effective for financial statements issued
        for
        fiscal years beginning after November 15, 2007. This Statement is required
        to be
        adopted by the consolidated entity on July 1, 2008. At this time, management
        reasonably believes that the adoption of SFAS 159 will not have a material
        effect on the consolidated entity's financial position or results of
        operations.
  **f.**
              **Development
                  Stage**
 
 The
        Company meets the definition of a development stage enterprise under SFAS
        No. 7,
“Accounting and Reporting by Development Stage Enterprises” (“SFAS 7”). The
        following additional disclosures, prepared on an A-IFRS basis considering
        the
        AASB 1 exemptions, are required in accordance with SFAS 7:
 
 Cumulative
        consolidated statement of operations from the inception of the development
        stage
        (November 11, 1997) to June 30, 2007 - A-IFRS basis:
  **Period
                  from inception of development stage**
                **(November
                  11, 1997) to June 30, 2007**Revenues
                  from continuing operations
              
              
              3,080,219Other
                  income
              
              
              6,657,232Research
                  and development expenses
              
              
              (28,582,837
              )Research
                  and development expenses - related party
              
              
              (2,289,419
              )Personnel
                  expenses
              
              
              (19,378,832
              )Intellectual
                  property expenses
              
              
              (6,178,770
              )Auditor
                  and accounting fees
              
              
              (1,157,351
              )Travel
                  expenses
              
              
              (1,742,343
              )Public
                  relations and marketing expenses
              
              
              (1,493,418
              )Depreciation
                  expenses
              
              
              (567,554
              )Amortization
                  expenses
              
              
              (461,760
              )Other
                  expenses
              
              
              (5,750,097
              )Other
                  expenses - related party
              
              
              (1,000,048
              )Foreign
                  exchange loss
              
              
              (1,334,367
              )Impairment
                  of intangible assets
              
              
              (786,240
              )Gain
                  on fair value of financial liabilities
              
              
              8,502,547**Loss
                  before income tax expense**
              
              
              (52,483,038
              )**Income
                  tax expense**
              
              
              -**Net
                  loss**
              
              
              (52,483,038
              )
  F-51
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
  **27.**  **RECONCILIATION
          TO US GAAP (continued)**
 
 Cumulative
        consolidated cash flow statement form the inception of the development stage
        (November 11, 1997) to June 30, 2007 - A-IFRS basis:
 **Period
                    from inception of development stage**
                  **(November
                    11, 1997) to**
                  **June
                    30, 2007****Cash
                    Flows from Operating Activities**Payments
                    to suppliers and employees
                
                (55,480,069
                )Payments
                    to suppliers and employees - related party
                
                
                
                
                
                (2,531,889
                )Interest
                    received
                
                
                
                
                
                3,032,571Government
                    grant received
                
                
                
                
                
                3,354,228NASDAQ
                    reimbursements received
                
                231,304Neuroscience
                    Victoria monies received
                
                3,093,750Net
                    cash flows (used in) operating activities
                
                
                
                
                
                (48,300,105
                )**Cash
                    Flows from Investing Activities**Proceeds
                    from sale of equipment
                
                
                
                
                
                675Payments
                    for purchase of equipment
                
                
                
                
                
                (417,174
                )Net
                    cash flows (used in) investing activities
                
                
                
                
                
                (416,499
                )**Cash
                    Flows from Financing Activities**Proceeds
                    from issue of shares
                
                
                
                
                
                54,638,051Payment
                    of share issue costs
                
                
                
                
                
                (4,077,835
                )Proceeds
                    from exercise of options
                
                
                
                
                
                9,812,471Payment
                    for underwriting costs
                
                
                
                
                
                (144,000
                )Repayment
                    of borrowings
                
                
                
                
                
                (2,038,728
                )Net
                    cash flows provided by financing activities
                
                
                
                
                
                58,189,959Net
                    decrease in cash and cash equivalents
                
                
                
                
                
                9,473,355Opening
                    cash and cash equivalents brought forward
                
                
                
                
                
                -Exchange
                    rate adjustments on cash and cash equivalents held in foreign
                    currencies
                
                
                
                
                
                (2,064,099
                )**Closing
                    cash and cash equivalents carried forward**
                
                
                16(b
                )
                
                7,409,256
 
 F-52
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 Equity
        issuances from the inception of the development stage (November 11, 1997)
        to
        June 30, 2007 - A-IFRS basis:
 
 **Date**
              
              
              
              **Number
                  of**
                **Shares**
              
              **Issued**
                **Capital****Balance,
                  November 11, 1997 (Inception)**
              
              -
              
              -November
                  11, 1997
              
              Issuance
                  of shares to founders
              
              20
              
              20**Balance,
                  June 30, 1998**
              
              20
              
              20**Balance,
                  June 30, 1999**
              
              20
              
              20December
                  23, 1999
              
              297
                  for 1 share split
              
              5,920
              
              -June
                  1, 2000
              
              Issuance
                  of shares in connection with private placement
              
              960
              
              960July
                  1, 2000
              
              5,000
                  for 1 share split
              
              34,493,100
              
              -Issuance
                  of shares in connection with initial public offering, net of issue
                  costs
              
              16,000,000
              
              7,470,863Issuance
                  of shares in connection with exercise of options
              
              5,000
              
              2,500**Balance,
                  June 30, 2000**
              
              50,505,000
              
              7,474,343February
                  15, 2001
              
              Issuance
                  of shares in connection with private placements, net of issue
                  costs
              
              6,666,666
              
              4,745,599April
                  4, 2001
              
              Non-cash
                  issuance of shares to consultants
              
              50,000
              
              20,000June
                  27, 2001Non-cash
                  issuance of shares to consultants
              
              38,600
              
              28,950**Balance,
                  June 30, 2001**
              
              57,260,266
              
              12,268,892February
                  4, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              134,000
              
              67,000February
                  12, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              2,000
              
              1,000February
                  22, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              76,000
              
              38,000February
                  27, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              40,000
              
              20,000March
                  6, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              90,000
              
              45,000March
                  8, 2002
              
              Non-cash
                  issuance of shares to consultants
              
              164,835
              
              115,384March
                  8, 2002Non-cash
                  issuance of shares to consultants
              
              26,959
              
              28,846March
                  12, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              82,690
              
              41,346March
                  12, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              190,000
              
              95,000March
                  14, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              10,000
              
              5,000March
                  20, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              12,000
              
              6,000March
                  21, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              100,000
              
              50,000March
                  25, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              3,000
              
              1,500April
                  9, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              8,000
              
              4,000April
                  9, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              24,500
              
              12,250April
                  10, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              2,500
              
              1,250April
                  11, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              2,500
              
              1,250April
                  11, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              100,000
              
              50,000May
                  10, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              100,000
              
              50,000
  F-53
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 May
                  23, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              180,000
              
              90,000June
                  16, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              3,500
              
              1,750**Balance,
                  June 30, 2002**
              
              58,612,750
              
              12,993,468August
                  7, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              4,000
              
              2,000October
                  7, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              13,274
              
              6,637July
                  13, 2002
              
              Non-cash
                  issuance of shares to consultants
              
              13,550
              
              27,371September
                  18, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              32,000
              
              16,000September
                  30, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              25,000
              
              12,500October
                  15, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              20,081
              
              10,040November
                  20, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              113,000
              
              56,500November
                  22, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              33,072
              
              16,536November
                  25, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              7,000
              
              3,500December
                  4, 2002
              
              Non-cash
                  issuance of shares to consultants
              
              15,318
              
              26,653December
                  12, 2002
              
              Issuance
                  of shares in connection with exercise of options
              
              50,000
              
              25,000January
                  8, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              50,000
              
              25,000January
                  22, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              2,620
              
              1,310January
                  30, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              9,700
              
              4,850January
                  30, 2003
              
              Non-cash
                  issuance of shares to consultants
              
              118,101
              
              115,739February
                  14, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              499,403
              
              249,702February
                  20, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              483,746
              
              241,873February
                  28, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              2,530,483
              
              1,265,242March
                  5, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              3,107,891
              
              1,553,945March
                  15, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              25,000
              
              12,500April
                  3, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              421,314
              
              210,657Underwriting
                  costs
              
              
              
              (144,000)**Balance,
                  June 30, 2003**
              
              66,187,303
              
              16,733,023August
                  11, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              50,000
              
              25,000August
                  13, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              25,000
              
              12,500August
                  27, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              16,000
              
              8,000August
                  27, 2003
              
              Non-cash
                  issuance of shares to consultants
              
              70,768
              
              49,538August
                  29, 2003
              
              Issuance
                  of shares in connection with exercise of options
              
              34,000
              
              17,000September
                  16, 2003
              
              Issue
                  of shares in connection with private placements, net of
                  costs
              
              7,102,853
              
              4,675,019January
                  12, 2004
              
              Non-cash
                  issuance of shares to directors
              
              249,999
              
              120,000January
                  12, 2004
              
              Non-cash
                  issuance of shares to consultants
              
              67,955
              
              43,491February
                  20, 2004
              
              Non-cash
                  issuance of shares to consultants
              
              155,502
              
              85,526April
                  8, 2004
              
              Issuance
                  of shares in connection with exercise of options
              
              200,000
              
              140,000April
                  15, 2004
              
              Issuance
                  of shares in connection with exercise of options
              
              100,000
              
              70,000April
                  16, 2004
              
              Issuance
                  of shares in connection with exercise of options
              
              200,000
              
              100,000April
                  16, 2004
              
              Issuance
                  of shares in connection with exercise of options
              
              200,000
              
              140,000April
                  20, 2004
              
              Issuance
                  of shares in connection with exercise of options
              
              300,000
              
              150,000April
                  22, 2004
              
              Issuance
                  of shares in connection with exercise of options
              
              200,000
              
              100,000May
                  10, 2004
              
              Non-cash
                  issuance of shares to consultants
              
              825,000
              
              684,750
  F-54
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **27.**  **RECONCILIATION
        TO US GAAP (continued)**
 
 June
                  1, 2004
              
              Issuance
                  of shares in connection with private placements, net of
                  costs
              
              40,000,000
              
              17,520,098Expired
                  options
              
              
              
              8,000**Balance,
                  June 30, 2004**
              
              115,984,380
              
              40,681,945August
                  9, 2004
              
              Non-cash
                  issuance of shares for settlement of litigation
              
              1,350,000
              
              756,000September
                  16, 2004
              
              Non-cash
                  issuance of shares to consultants
              
              49,775
              
              39,616December
                  8, 2004
              
              Issuance
                  of shares in connection with exercise of options, net of
                  costs
              
              9,506,666
              
              4,145,811December
                  17, 2004
              
              Non-cash
                  issuance of shares to directors
              
              249,999
              
              118,703February
                  21, 2005
              
              Non-cash
                  issuance of shares to consultants
              
              178,440
              
              96,822**Balance,
                  June 30, 2005**
              
              127,319,260
              
              45,838,897August
                  10, 2005
              
              Issuance
                  of shares in connection with exercise of options, net of issue
                  costs
              
              825,000
              
              435,230**Balance,
                  June 30, 2006**
              
              128,144,260
              
              46,274,127August
                  30, 2006
              
              Issuance
                  of shares in connection with private placement, net of
                  costs
              
              250,000
              
              43,125October
                  13, 2006
              
              Exercise
                  of options, net of costs
              
              80,000
              
              31,880November
                  29, 2006
              
              Issuance
                  of shares in connection with private placement, net of
                  costs
              
              15,616,246
              
              4,256,979November
                  29, 2006
              
              Issuance
                  of options in connection with private placement
              
              -
              
              905,743December
                  1, 2006
              
              Exercise
                  of options, net of costs
              
              15,000
              
              4,905December
                  28, 2006
              
              Issuance
                  of shares in connection with private placement, net of
                  costs
              
              6,148,222
              
              1,808,764December
                  28, 2006
              
              Issuance
                  of options in connection with private placement
              
              -
              
              356,596April
                  16, 2007
              
              Exercise
                  of options, net of costs
              
              38,000
              
              14,569May
                  3, 2007
              
              Non-cash
                  issuance of shares to consultants, net of costs
              
              200,000
              
              94,800May
                  31, 2007
              
              Non-cash
                  issuance of shares to consultants, net of costs
              
              281,250
              
              99,779May
                  31, 2007
              
              Non-cash
                  issuance of shares to employees
              
              120,000
              
              45,600May
                  31, 2007
              
              Exercise
                  of options, net of costs
              
              625,000
              
              51,545**Balance,
                  June 30, 2007**
              
              151,517,978
              
              53,988,412
  F-55
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Note
        28. U.S. GAAP Condensed Financial Information**
 
 The
        following financial information is the audited U.S.
        GAAP
        condensed financial information of Prana as of and for the years ended June
        30,
        2007, 2006 and 2005.
 
 **CONDENSED
                  CONSOLIDATED**
                **BALANCE
                  SHEET**(in
                  Australian dollars)**June
                  30, 2007**
              
              **June
                  30, 2006****Current
                  assets**Cash
                  and cash equivalents
              
              
              7,409,256
              
              
              10,013,778Trade
                  and other receivables
              
              
              96,499
              
              
              194,161Other
                  current assets
              
              
              168,539
              
              
              110,832**Total
                  current assets**
              
              
              7,674,294
              
              
              10,318,771Property
                  and equipment, net
              
              
              47,891
              
              
              102,375**Total
                  assets**
              
              
              7,722,185
              
              
              10,421,146**Liabilities**Trade
                  and other payables
              
              
              1,661,609
              
              
              1,538,358Current
                  provisions
              
              
              77,465
              
              
              76,672**Total
                  current liabilities**
              
              
              1,739,074
              
              
              1,615,030Financial
                  liabilities
              
              
              321,001
              
              
              928,692Non-current
                  provisions
              
              
              49,915
              
              
              76,766Commitments
                  and contingencies
              
              
              -
              
              
              -**Stockholders’
                  equity**Common
                  stock
              
              
              -
              
              
              -Additional
                  paid-in capital
              
              
              62,274,842
              
              
              53,320,985Accumulated
                  deficit during the development stage
              
              
              (56,662,647
              )
              
              (45,520,327
              )**Total
                  stockholders’ equity**
              
              
              5,612,195
              
              
              7,800,658**Total
                  liabilities and stockholders’ equity**
              
              
              7,722,185
              
              
              10,421,146
  F-56
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Note
        28. U.S. GAAP Condensed Financial Information (continued)**
 
 **CONDENSED
        CONSOLIDATED STATEMENT OF OPERATIONS**
 (in
        Australian dollars, except number of shares)
  **Year
                  ended June 30, 2007**
              
              **Year
                  ended June 30, 2006**
              
              **Year
                  ended June 30, 2005**Other
                  income:Government
                  grants
              
              
              -
              
              
              288,173
              
              
              629,692Corporate
                  partner income
              
              
              -
              
              
              -
              
              
              1,125,000Other
              
              
              287
              
              
              90
              
              
              6,286288,263
              
              
              1,760,978Operating
                  expenses:Research
                  and development
              
              
              (5,092,425
              )
              
              (8,083,208
              )
              
              (7,659,390
              )Research
                  and development - related parties
              
              
              -
              
              
              -
              
              
              (577,757
              )General
                  and administrative
              
              
              (6,407,445
              )
              
              (4,909,841
              )
              
              (6,688,164
              )Foreign
                  currency gain/(loss), net
              
              
              (757,578
              )
              
              223,454
              
              
              (1,362,572
              )Impairment
                  of intangible assets
              
              
              -
              
              
              -
              
              
              (4,164,659
              )Gain
                  on fair value of financial liabilities
              
              
              607,691
              
              
              128,715
              
              
              5,801,397Total
                  operating expenses
              
              
              (11,649,757
              )
              
              (12,640,880
              )
              
              (14,651,145
              )Loss
                  from operations
              
              
              (11,649,470
              )
              
              (12,352,617
              )
              
              (12,890,167
              )Non-operating
                  income:Interest
                  income
              
              
              507,150
              
              
              762,023
              
              
              892,135Loss
                  before income tax expense
              
              
              (11,142,320
              )
              
              (11,590,594
              )
              
              (11,998,032
              )Income
                  tax expense
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              (11,142,320
              )
              
              (11,590,594
              )
              
              (11,998,032
              )**Loss
                  per share (basis and diluted)**
              
              
              (0.08
              )
              
              (0.09
              )
              
              (0.10
              )**Weighted
                  average number of ordinary shares used in computing basic and diluted
                  net
                  loss per share**
              
              
              140,754,495
              
              
              128,053,601
              
              
              122,754,061
 
 **Note
        29. Restatement**
 
 **(a)**
              **Background**
  On
        June
        1, 2004, upon approval of Prana’s shareholders, the Company issued 4,000,000
        ADRs to institutional and professional investors at a price of US$5.00 per
        ADR
        in a private placement in the United States, or an aggregate US$20 million
        before issuance costs. The private placement also involved the acquisition
        by
        the Company’s investors of warrants to purchase an additional 3,000,000 ADRs at
        an exercise price of US$8.00 per ADR on or before June 4, 2009. Each ADR
        represents ten ordinary shares.
  **(b)**
              **A-IFRS**
 
 In
        accordance with the generally accepted accounting principles in Australia
        that
        applied to Prana at June 1, 2004, the US$20 million that the Company received
        at
        the closing of the private placement was recorded as Issued Capital. No value
        was attributed to the warrants. Upon the Company’s adoption of the A-IFRS on
        July 1, 2005, the accounting treatment of the private placement reflected
        in the
        Company’s audited financial statements for the fiscal year ended June 30, 2005
        was not altered.
  Following
        a review of the interim financial statements for the six months ended December
        31, 2006 by the Company’s auditors, the Company identified that the treatment of
        the accounting for the private placement was incorrect under A-IFRS. Under
        AASB
        132, the warrants associated with the private placement must be classified
        as a
        financial liability, as opposed to equity, as a result of the warrants being
        exercisable in a currency that is not the functional currency of the company.
        As
        a result, upon initial recognition, the fair value of the warrants should
        be
        recognized as a financial liability at their fair value, reducing the Issued
        Capital that was previously recorded. Each reporting period, the fair value
        of
        the outstanding warrants is revalued using the Black Scholes Model. When
        the
        fair value of the outstanding warrants increases or decreases, the difference
        is
        recorded as a gain or loss, as applicable, on the fair value of financial
        liabilities.
  F-57
  **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Note
        29. Restatement(continued)**
  The
        correction impacts the measurement and classification of these instruments
        for
        accounting purposes only. All of the material terms and conditions of the
        warrants have been correctly and appropriately disclosed in prior period
        financial statements. The warrant holders cannot require us to settle the
        warrants in cash. Accordingly, the revised classification of the warrants
        as a
        financial liability does not have an impact on our future liquidity requirements
        or ability to continue as a going concern.
 
 **As
                  of and for the years ended June 30,****2006**
              
              **2005****As
                  previously reported**
              
              **As
                  restated**
              
              **As
                  previously reported**
              
              **As
                  restated****(in
                  Australian dollars)****Consolidated
                  balance sheet line items:**Financial
                  liabilities
              
              
              -
              
              
              928,692
              
              
              -
              
              
              1,057,407Total
                  liabilities
              
              
              1,691,796
              
              
              2,620,488
              
              
              2,694,983
              
              
              3,752,390Net
                  assets
              
              
              8,729,350
              
              
              7,800,658
              
              
              19,594,176
              
              
              18,536,769Issued
                  capital*
              
              
              55,097,675
              
              
              46,274,127
              
              
              54,662,445
              
              
              45,838,897Accumulated
                  deficit during the development stage*
              
              
              (49,235,574
              )
              
              (41,340,718
              )
              
              (37,516,265
              )
              
              (29,750,124
              )Total
                  equity
              
              
              8,729,350
              
              
              7,800,658
              
              
              19,594,176
              
              
              18,536,769
 
 *
              Upon
                  the conversion to A-IFRS on July 1, 2004, the Issued Capital was
                  reduced
                  by $8,823,548 and accumulated deficit during the development stage
                  was
                  reduced by $1,964,744 as a result of the warrants being treated
                  under
                  A-IFRS as financial liabilities.
 
 **Consolidated
                  statement of operations line items:**Gain
                  on fair value financial liabilities
              
              
              -
              
              
              128,715
              
              
              -
              
              
              5,801,397Loss
                  before income tax expense
              
              
              (11,719,309
              )
              
              (11,590,594
              )
              
              (16,094,428
              )
              
              (10,293,031
              )Net
                  loss
              
              
              (11,719,309
              )
              
              (11,590,594
              )
              
              (16,094,428
              )
              
              (10,293,031
              )Loss
                  per share
                (basic
                  and diluted)
              
              
              (0.09
              )
              
              (0.09
              )
              
              (0.13
              )
              
              (0.08
              )
 
 **(c)**
              **US
                  GAAP**
 
 In
        accordance with US GAAP that applied to our company at June 1, 2004, the
        US$20
        million that we received at the closing of the private placement should have
        been recorded as a financial liability. However, no value was attributed
        to the
        warrants and they were treated as issued capital.
  Following
        a review of the interim financial statements for the six months ended December
        31, 2006 by our auditors, we have identified that the treatment of the
        accounting for the private placement was incorrect under US GAAP. Under SFAS
        No.
        133: *Accounting
        for Derivatives Instruments and Hedging Activities* ,
        as
        amended, and Emerging Issues Task Force Issue No. 01-6: *The
        Meaning of "Indexed to a Company's Own Stock* ,
        the
        warrants associated with the private placement should have been classified
        as a
        financial liability, as opposed to equity, as a result of the warrants being
        exercisable in a currency that is not the functional currency of our company.
        As
        a result, upon initial recognition, the fair value of the warrants should
        be
        recognized as a financial liability at their fair value, reducing the issued
        capital that was previously recorded. Each reporting period, the fair value
        of
        the outstanding warrants is revalued using the Black Scholes Model. When
        the
        fair value of the outstanding warrants increases or decreases, the difference
        is
        recorded as a gain or loss, as applicable, on the fair value of financial

        liabilities.
  The
        correction impacts the measurement and classification of these instruments
        for
        accounting purposes only. All of the material terms and conditions of the
        warrants have been correctly and appropriately disclosed in prior period
        financial statements. The warrant holders cannot require us to settle the
        warrants in cash. Accordingly, the revised classification of the warrants
        as a
        financial liability does not have an impact on our future liquidity requirements
        or ability to continue as a going concern.
  F-58
 **PRANA
          BIOTECHNOLOGY LIMITED**
 **(A
          Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **Note
        29. Restatement (continued)**
 
 **As
                  of and for the years ended June 30,****2006**
              
              **2005****As
                  previously reported**
              
              **As
                  restated**
              
              **As
                  previously reported**
              
              **As
                  restated**(in
                  Australian dollars)**Consolidated
                  balance sheet line items:**Financial
                  liabilities
              
              
              -
              
              
              928,692
              
              
              -
              
              
              1,057,407Total
                  liabilities
              
              
              1,691,796
              
              
              2,620,488
              
              
              2,694,983
              
              
              3,752,390Additional
                  paid-in capital*
              
              
              62,144,533
              
              
              53,320,985
              
              
              61,290,050
              
              
              52,466,502Accumulated
                  deficit during the development stage*
              
              
              (53,415,183
              )
              
              (45,520,327
              )
              
              (41,695,874
              )
              
              (33,929,733
              )Total
                  stockholder’s equity
              
              
              8,729,350
              
              
              7,800,658
              
              
              19,594,176
              
              
              18,536,769Total
                  liabilities and stockholder’s equity
              
              
              10,421,146
              
              
              10,421,146
              
              
              22,289,159
              
              
              22,289,159
 
 *
              Under
                  U.S. GAAP, on July 1, 2004, the Issued Capital was reduced by $8,823,548
                  and accumulated deficit during the development stage was reduced
                  by
                  $1,964,744 as a result of the warrants being treated as financial
                  liabilities.
 
 **Consolidated
                  statement of operations line items:**Gain
                  on fair value financial liabilities
              
              
              -
              
              
              128,715
              
              
              -
              
              
              5,801,397Loss
                  from operations
              
              
              (12,481,332
              )
              
              (12,352,617
              )
              
              (18,691,564
              )
              
              (12,890,167
              )Loss
                  before income tax expense
              
              
              (11,719,309
              )
              
              (11,590,594
              )
              
              (17,799,429
              )
              
              (11,998,032
              )Net
                  loss
              
              
              (11,719,309
              )
              
              (11,590,594
              )
              
              (17,799,429
              )
              
              (11,998,032
              )Loss
                  per share
                (basic
                  and diluted)
              
              
              (0.09
              )
              
              (0.09
              )
              
              (0.15
              )
              
              (0.10
              )
 
 F-59


**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 report on its behalf.




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




Dated:
      September 27, 2007




80