---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington 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, 2008
|                                       
|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,
2008.. 201,800,240


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




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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 basis of accounting the registrant has used to prepare the
financial statements included in this filing:

| |             |                                                                                                         |        
| | ----------- | ------------------------------------------------------------------------------------------------------- | -------
| | U.S. GAAP o | International Financial ReportingStandards as issued by the
  International AccountingStandards Board x | Other o

If Other has
been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow:

Item 17 o Item 18 o


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

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# 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 Huntingtons disease, Parkinsons disease, certain
cancers, age-related macular degeneration, Motor Neuron disease, Creutzfeldt-Jakob disease
(the human variant of Mad Cow disease) and age-related cataracts. 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 International Financial Reporting Standards,
or IFRS, as issued by the International Accounting Standards Board, or IASB, which became
effective for our company as of our fiscal year ended June 30, 2006. Our consolidated
financial statements appearing in this annual report comply with both the IFRS and
Australian equivalents to International Financial Reporting Standards, or A-IFRS.

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

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# TABLE OF CONTENTS

|         |    |                                                       | Page
|-------- | -- | ----------------------------------------------------- | ----
|         |    |                                                       |     
|PART I   |    |                                                       | 5   
|        
|ITEM 1.  |    | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 5   
|ITEM 2.  |    | OFFER STATISTICS AND EXPECTED TIMETABLE               | 5   
|ITEM 3.  |    | KEY INFORMATION                                       | 5   
|         | A. | Selected Consolidated Financial Data                  | 5   
|         | B. | Capitalization and Indebtedness                       | 7   
|         | C. | Reasons for the Offer and Use of Proceeds             | 7   
|         | D. | Risk Factors                                          | 7   
|ITEM 4.  |    | INFORMATION ON THE COMPANY                            | 16  
|         | A. | History and Development of the Company                | 16  
|         | B. | Business Overview                                     | 19  
|         | C. | Organizational Structure                              | 29  
|         | D. | Property, Plants and Equipment                        | 29  
|ITEM 4A. |    | UNRESOLVED STAFF COMMENTS                             | 29  
|ITEM 5.  |    | OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 30  
|         | A. | Operating Results                                     | 30  
|         | B. | Liquidity and Capital Resources                       | 38  
|         | C. | Research and Development, Patents and Licenses        | 42  
|         | D. | Trend Information                                     | 45  
|         | E. | Off-Balance Sheet Arrangements                        | 45  
|         | F. | Tabular Disclosure of Contractual Obligations         | 45  
|ITEM 6.  |    | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 46  
|         | A. | Directors and Senior Management                       | 46  
|         | B. | Compensation                                          | 48  
|         | C. | Board Practices                                       | 48  
|         | D. | Employees                                             | 53  
|         | E. | Share Ownership                                       | 53  
|ITEM 7.  |    | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 58  
|         | A. | Major Shareholders                                    | 58  
|         | B. | Related Party Transactions                            | 60  
|         | C. | Interests of Experts and Counsel                      | 60  
|ITEM 8.  |    | FINANCIAL INFORMATION                                 | 60  
|         | A. | Financial Statements and Other Financial Information  | 60  
|         | B. | Significant Changes                                   | 60  
|ITEM 9.  |    | THE OFFER AND LISTING                                 | 60  
|         | A. | Offer and Listing Details                             | 60  
|         | B. | Plan of Distribution                                  | 62  
|         | C. | Markets                                               | 62  
|         | D. | Selling Shareholders                                  | 62  
|         | E. | Dilution                                              | 62  
|         | F. | Expenses of the Issue                                 | 62  

iii

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|           |    |                                                                              | Page
|---------- | -- | ---------------------------------------------------------------------------- | ----
|           |    |                                                                              |     
|ITEM 10.   |    | ADDITIONAL INFORMATION                                                       | 62  
|           | A. | Share Capital                                                                | 62  
|           | B. | Memorandum and Articles of Association                                       | 62  
|           | C. | Material Contracts                                                           | 62  
|           | D. | Exchange Controls                                                            | 65  
|           | E. | Taxation                                                                     | 66  
|           | F. | Dividends and Paying Agents                                                  | 72  
|           | G. | Statement by Experts                                                         | 72  
|           | H. | Documents on Display                                                         | 72  
|           | I. | Subsidiary Information                                                       | 72  
|ITEM 11.   |    | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 73  
|ITEM 12.   |    | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 73  
|          
|PART II    |    |                                                                              | 73  
|          
|ITEM 13.   |    | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 73  
|ITEM 14.   |    | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 73  
|ITEM 15.   |    | CONTROLS AND PROCEDURES                                                      | 73  
|ITEM 15T.  |    | CONTROLS AND PROCEDURES                                                      | 73  
|ITEM 16.   |    | RESERVED                                                                     | 74  
|ITEM 16A.  |    | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 75  
|ITEM 16B.  |    | CODE OF ETHICS                                                               | 75  
|ITEM 16C.  |    | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 75  
|ITEM 16D.  |    | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 76  
|ITEM 16E.  |    | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 76  
|          
|PART III   |    |                                                                              | 76  
|          
|ITEM 17.   |    | FINANCIAL STATEMENTS                                                         | 76  
|ITEM 18.   |    | FINANCIAL STATEMENTS                                                         | 76  
|ITEM 19.   |    | EXHIBITS                                                                     | 76  
|SIGNATURES |    |                                                                              | 80  

iv

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# PART I

|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- | -----------------------------------------------------

Not
applicable.

|ITEM 2. | OFFER
STATISTICS AND EXPECTED TIMETABLE
|------- | ---------------------------------------

Not
applicable.

|ITEM 3. | KEY
INFORMATION
|------- | ---------------

|A. | SELECTED
CONSOLIDATED FINANCIAL DATA
|-- | ------------------------------------

We
prepare our consolidated financial statements in accordance with IFRS, as issued by IASB,
which became effective for our company as of our fiscal year ended June 30, 2006. Under
IFRS 1, First-time Adoption of International Financial Reporting
Standards, or IFRS 1, a company adopting IFRS for the first time is required to
adopt accounting policies that comply with IFRS and related interpretations that are in
effect at the reporting date of its first annual financial statements prepared in
accordance with IFRS, in our case June 30, 2006. IFRS 1 also requires that those policies
be applied as of the date of transition to IFRS, in our case July 1, 2004, and
consistently throughout all periods presented in the first annual financial statements
prepared in accordance with IFRS. The Securities and Exchange Commission permitted
eligible foreign private issuers, such as our company, to present two years rather than
three years of statements of operations, changes in shareholders equity and cash
flow statements prepared in accordance with IFRS for their first year of reporting under
IFRS and as such we have not provided such financial data for the fiscal year ended June
30, 2004. Our consolidated financial statements appearing in this annual report comply
with both the IFRS as issued by IASB and Australian equivalents to International Financial
Reporting Standards, or A-IFRS.

The
following table presents our selected consolidated financial data as of the dates and for
each of the periods indicated. The following selected consolidated financial data as of
June 30, 2008 and 2007 and for the years ended June 30, 2008, 2007 and 2006 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,
2006 and 2005 and for the year ended June 30, 2005 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

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Statement of Operations Data:

|                                                                             |  |                                  |             |      |  |             |   |      |             |   |  |             |  
|---------------------------------------------------------------------------- |  | -------------------------------- | ----------- | ---- |  | ----------- | - | ---- | ----------- | - |  | ----------- | -
|                                                                             |  | Year Ended June 30,              |            
|                                                                             |  |                                  |            
|                                                                             |  | 2008                             |             | 2007 |  | 2006        |   | 2005 |            
|                                                                             |  |                                  |             |      |  |             |   |      |            
|                                                                             |  | (in
A$, except number of shares) |            
|                                                                             |  |                                  |            
|Revenue from continuing operations                                           |  |                                  | 490,943     |      |  | 507,150     |   |      | 762,023     |   |  | 892,135     |  
|Other income                                                                 |  |                                  | 170         |      |  | 287         |   |      | 288,263     |   |  | 1,760,978   |  
|                                                                             |  |                                  |             |      |  |             |   |      |             |   |  |             |  
|Research and
  development expenses                                          |  |                                  | (5,757,168  | )    |  | (4,492,193  | ) |      | (7,613,045  | ) |  | (7,109,839  | )
|Research and
  development expenses - related party                          |  |                                  |            |      |  |            |   |      |            |   |  | (577,757    | )
|Personnel
  expenses                                                         |  |                                  | (5,350,189  | )    |  | (4,554,731  | ) |      | (3,418,008  | ) |  | (5,750,929  | )
|Intellectual
  property expenses                                             |  |                                  | (469,428    | )    |  | (600,232    | ) |      | (466,426    | ) |  | (729,583    | )
|Auditor and
  accounting expenses                                            |  |                                  | (331,950    | )    |  | (260,117    | ) |      | (205,815    | ) |  | (202,032    | )
|Travel
  expenses                                                            |  |                                  | (146,651    | )    |  | (309,997    | ) |      | (212,184    | ) |  | (432,316    | )
|Public
  relations and marketing expenses                                    |  |                                  | (141,337    | )    |  | (215,455    | ) |      | (134,750    | ) |  | (442,920    | )
|Depreciation
  expenses                                                      |  |                                  | (25,349     | )    |  | (58,582     | ) |      | (118,196    | ) |  | (65,223     | )
|Amortization
  expenses                                                      |  |                                  |            |      |  |            |   |      |            |   |  | (83,200     | )
|Other expenses                                                               |  |                                  | (975,404    | )    |  | (1,008,563  | ) |      | (824,625    | ) |  | (1,204,930  | )
|Foreign
  exchange gain (loss)                                               |  |                                  | (402,886    | )    |  | (757,578    | ) |      | 223,454     |   |  | (1,362,572  | )
|Impairment
  of intangible assets                                            |  |                                  |            |      |  |            |   |      |            |   |  | (786,240    | )
|Gain (loss) on fair value of financial
  liabilities                         |  |                                  | (451,429    | )    |  | 607,691     |   |      | 128,715     |   |  | 5,801,397   |  
|Net loss                                                                     |  |                                  | (13,560,678 | )    |  | (11,142,320 | ) |      | (11,590,594 | ) |  | (10,293,031 | )
|Loss per share  basic and diluted                                           |  |                                  | (0.08       | )    |  | (0.08       | ) |      | (0.09       | ) |  | (0.08       | )
|Weighted average number of ordinary shares
  outstanding - basic and diluted |  |                                  | 174,714,146 |      |  | 140,754,495 |   |      | 128,053,601 |   |  | 122,754,061 |  

Balance Sheet Data:

|                                               |  |                |             |      |  |             |   |      |             |   |  |             |  
|---------------------------------------------- |  | -------------- | ----------- | ---- |  | ----------- | - | ---- | ----------- | - |  | ----------- | -
|                                               |  | As at June 30, |            
|                                               |  |                |            
|                                               |  | 2008           |             | 2007 |  | 2006        |   | 2005 |            
|                                               |  |                |             |      |  |             |   |      |            
|                                               |  | (in
A$)        |            
|                                               |  |                |            
|Cash and cash equivalents                      |  |                | 11,219,035  |      |  | 7,409,256   |   |      | 10,013,778  |   |  | 21,453,304  |  
|Working capital*                               |  |                | 9,762,015   |      |  | 5,564,304   |   |      | 7,698,283   |   |  | 18,370,555  |  
|Total assets                                   |  |                | 11,698,313  |      |  | 7,722,185   |   |      | 10,421,146  |   |  | 22,289,159  |  
|Net assets                                     |  |                | 9,866,327   |      |  | 5,612,195   |   |      | 7,800,658   |   |  | 18,536,769  |  
|Issued capital                                 |  |                | 69,842,303  |      |  | 53,988,412  |   |      | 46,274,127  |   |  | 45,838,897  |  
|Share based payment reserves                   |  |                | 6,067,740   |      |  | 4,106,821   |   |      | 2,867,249   |   |  | 2,447,996   |  
|Accumulated deficit during development
  stage |  |                | (66,043,716 | )    |  | (52,483,038 | ) |      | (41,340,718 | ) |  | (29,750,124 | )
|Total equity                                   |  |                | 9,866,327   |      |  | 5,612,195   |   |      | 7,800,658   |   |  | 18,536,769  |  

* Working
capital is the difference between current assets and liabilities.

6

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# 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.

|                      |  |  |               |  |  |              |  |  |        |  |  |        | 
|--------------------- |  |  | ------------- |  |  | ------------ |  |  | ------ |  |  | ------ | 
|Year Ended
  June 30, |  |  | At Period End |  |  | Average Rate |  |  | High   |  |  | Low    | 
|                      |  |  |               |  |  |              |  |  |        |  |  |        | 
|                      |  |  |               |  |  |              |  |  |        |  |  |        | 
|2004                  |  |  | 0.6903        |  |  | 0.7139       |  |  | 0.8005 |  |  | 0.6345 | 
|2005                  |  |  | 0.7620        |  |  | 0.7535       |  |  | 0.7988 |  |  | 0.6852 | 
|2006                  |  |  | 0.7301        |  |  | 0.7478       |  |  | 0.7792 |  |  | 0.7014 | 
|2007                  |  |  | 0.8488        |  |  | 0.7859       |  |  | 0.8521 |  |  | 0.7377 | 
|2008                  |  |  | 0.9615        |  |  | 0.8965       |  |  | 0.9654 |  |  | 0.7672 | 

|                                      |  |  |        |  |  |        |  |  |  |  |  |  | 
|------------------------------------- |  |  | ------ |  |  | ------ |  |  |  |  |  |  | 
|Month                                 |  |  | High   |  |  | Low    |  |  |  |  |  |  | 
|                                      |  |  |        |  |  |        |  |  |  |  |  |  | 
|                                      |  |  |        |  |  |        |  |  |  |  |  |  | 
|April 2008                            |  |  | 0.9541 |  |  | 0.9029 |  |  |  |  |  |  | 
|May 2008                              |  |  | 0.9654 |  |  | 0.9274 |  |  |  |  |  |  | 
|June 2008                             |  |  | 0.9646 |  |  | 0.9327 |  |  |  |  |  |  | 
|July 2008                             |  |  | 0.9849 |  |  | 0.9411 |  |  |  |  |  |  | 
|August 2008                           |  |  | 0.9477 |  |  | 0.8493 |  |  |  |  |  |  | 
|September
  2008 (until September 23) |  |  | 0.8759 |  |  | 0.7800 |  |  |  |  |  |  | 

The noon buying rate on September 24,
2008 was US$0.84 = 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.

7

---

---

# 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.

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.

8

---

---

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

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

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

| |  | slower
than expected patient recruitment;
| | - | -----------------------------------------

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

| |  | unforeseen
safety issues; and
| | - | -----------------------------

| |  | lack
of efficacy or unacceptable toxicity during the clinical trials.
| | - | ---------------------------------------------------------------------

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

Product
development costs to our collaborators and us will increase if we have delays in testing
or approvals or if we need to perform more, 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.

9

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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.

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 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$13,560,678, A$11,142,320 and A$11,590,594 during the fiscal years ended June
30, 2008, 2007 and 2006, respectively. As of June 30, 2008, our accumulated deficit was
A$66,043,716. 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.

10

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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.

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, subject to ongoing appraisal of our manufacturing needs and financial position.
We may not be able to promptly find a replacement manufacturer, if required, without
incurring material additional costs and substantial delays.

11

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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.

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.

12

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

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

| |  | the
receipt and timing of regulatory approvals for the uses that we are studying;
| | - | ---------------------------------------------------------------------------------

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

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

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

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

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

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 and
elsewhere. 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.

13

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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.

# 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$0.18 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$1.21 to a high of US$6.73. 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.

14

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We may fail to maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which
could have a material adverse effect on our operating results, investor confidence in our
reported financial information, and the market price of our ordinary shares and ADRs.

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of
2002, governing internal controls and procedures for financial reporting, which started in
connection with this Annual Report on Form 20-F for the year ended June 30, 2008, have
resulted in increased general and administrative expenses and a diversion of management
time and attention, and we expect these efforts to require the continued commitment of
significant resources. We may identify material weaknesses or significant deficiencies in
our assessments of our internal controls over financial reporting. Failure to maintain
effective internal controls over financial reporting could result in investigations or
sanctions by regulatory authorities, and could have a material adverse effect on our
operating results, investor confidence in our reported financial information, and the
market price of our ordinary shares and ADRs.

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 years ended June 30, 2006 and 2007,
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, 2008. 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 10.E. 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.

# Risks Relating to our
Location in Australia

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

15

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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 or on its website 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 amount 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. In October 2007, we raised A$7,046,624
(before costs) in a private placement of 29.8 million of our ordinary shares to
professional and institutional investors in Australia and the United States at a price of
A$0.285 per ordinary share and three-year options to purchase an additional 4.94 million
ordinary shares at an exercise price of A$0.37 per ordinary share and an additional 4.94
million ordinary shares at an exercise price of A$0.43 per ordinary share. In May 2008, we
raised A$7,250,000 (before costs) in a private placement of 18.13 million of our ordinary
shares to professional investors in Australia and the United States at a price of A$0.40
per ordinary share. Additionally, during the fiscal year ended June 30, 2008, options to
purchase 874,279 ordinary shares were exercised by employees and options to purchase
519,284 ordinary shares were exercised by consultants. No proceeds were received from the
exercise of these options. As at June 30, 2008, we had A$11,219,035 in cash and cash
equivalents and our working capital was A$9,762,015.

16

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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
Huntingtons disease, Parkinsons disease, certain cancers, age-related macular
degeneration, Motor Neuron disease, Creutzfeldt-Jakob disease (the human variant of Mad
Cow disease) and age-related cataracts. 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.

17

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---

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.

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) had been randomized to participate in the
Phase IIa clinical trial, of which 30 patients had 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 had
reviewed the data of over 50 patients and concluded there have been no treatment-related
serious adverse events or withdrawals and that the trial was safe to continue in
accordance with the original protocol. On September 24, 2007, we announced that the
enrollment for the Phase IIa trial had been completed and that we expected to report
results during the first calendar quarter of 2008. On November 29, 2007, we announced that
the DSMB had completed its cycle of safety review meetings and reported to us that of the
59 patients included in the review at that time, there had been no treatment related
serious adverse events or withdrawals. The DSMB confirmed that the trial was safe to
continue. Patient dosing was completed on December 18, 2007 and we announced the formal
completion of the study on January 2, 2008. On February 26, 2008, we publicly released the
top line trial results and announced that the trial primary endpoints of safety and
tolerability were met. We also announced that with respect to the secondary endpoints,
namely biomarker, cognition and behavioral changes, several significant and promising
changes were observed. Specifically, that in the cerebrospinal fluid (CSF), PBT2 treatment
at a 250mg dose resulted in a significant decrease in the target Abeta 42 protein. In
addition, at the 250mg dose, while no significant effect was observed with the ADAS-cog,
two of the four neuropsychological test battery (NTB) tests for improvement in executive
function were significantly improved. Currently, we are considering possible larger scale
Phase IIb trial designs that could be initiated during 2009.

Our
discovery research into the interaction of metals with beta amyloid protein or Abeta
protein, has resulted in the identification of agents which can block the metal binding
site on Abeta thereby preventing the downstream toxicity of Abeta protein on neurons. This
Alzheimers disease therapeutic approach is an alternative and complimentary drug
strategy to our MPACs, which directly compete with Abeta protein by binding metals such as
copper and zinc. Results from several proof of concept compounds were published in the
Proceedings of the National Academy of Sciences journal. Our discovery program is
generating novel forms of this alternative anti-amyloid class of compounds for testing in
animal models and lead identification.

18

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---

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. We have made 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 have been tested
and a mouse monoclonal antibody candidate has been identified for use in a prospective
mouse passive vaccine trial. However, initiation of the trial has been indefinitely
delayed due to difficulties in the scale up and purification of the monoclonal antibody.
We are utilizing the resources of the Mental Health Research Institute and Monash
University to conduct this research.

In
May 2008, we announced that several promising candidate lead MPACs were demonstrating
promising characteristics in animal models of Parkinsons disease. These compounds
are novel agents and have shown good efficacy in the 6-hydroxydopamine and the MPTP animal
models. These models mimic the disease by employing toxins which destroy the substantia
nigra neuronal tissue of the brain, the tissue which is predominantly affected in
Parkinsons disease. To date, several compounds have been shown to help preserve the
substantia nigra tissue and further screening is underway to characterize lead compounds.

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,
2008, our capital expenditures have totaled A$106,793. Since July 1, 2008, we have
incurred A$16,285 in capital expenditures.

|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.

19

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# 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:

| |  | Huntington's
disease;
| | - | ---------------------

| |  | Parkinson's
disease;
| | - | --------------------

| |  | Certain
cancers;
| | - | ----------------

| |  | Age-related
macular degeneration;
| | - | ---------------------------------

| |  | Motor
Neuron disease;
| | - | ---------------------

| |  | Creutzfeldt-Jakob
disease
| | - | -------------------------

| |  | Age-related
cataracts; 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. For
a description of the history and development of our lead MPAC, PBT2 as a therapeutic for
the treatment of Alzheimers disease and our discovery programs in Alzheimers
disease, see Item 4.A. Information on the Company  History and Development of
the Company.

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.

20

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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 researchersbased atthe 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.

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. These two mouse
models mimic the disease by using these toxins to destroy over time the cells of the
substantia nigra, the area of the brain affected in Parkinsons disease, leading to
motor function loss. Based on these positive results with clioquinol in such two mouse
models, we began investigating the efficacy of other selected MPACs in these two models to
screen for possible MPAC candidates as treatment candidates for Parkinsons disease.

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.

# Clinical Trials

For
details regarding clinical trials for our lead compound PBT2 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.

21

---

---

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-prone proteins such as beta-amyloid, á-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.

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. For details regarding our PBT2 clinical trials
see Item 4.A. Information on the Company  History and Development of the
Company.

22

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Patent Portfolio

|                                                                                                                                                                                        |  |                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Invention                                                                                                                                                                               |  | Status                                                                                                                                                              |  | Comments                                                                                                                                                                                                                                                                
|                                                                                                                                                                                        |  |                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                        |  |                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                         
|A method
  for assaying and treating Alzheimers DiseaseFiled: November 12, 1992
  Applicant: The University of MelbourneAssigned to Prana Biotechnology
  Limited                    |  | Patents
  granted in Australia, Europe, Japan and the United States. A patent in Canada
  is allowed.                                                               |  | 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, 2000Applicant: Biomolecular
  Research Institute and University of MelbourneAssigned to Prana
  Biotechnology Limited                |  | Patents in
  Europe, Canada and the United States are undergoing examination. A patent has
  been granted in Australia and examination has been requested in Japan. |  | The
  invention encompasses claims to specific classes of 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, 1994Applicant: The General Hospital
  CorporationLicensed to Prana Biotechnology Limited           |  | Patents have
  been granted in the United States and Japan. A patent has been allowed in
  Canada.                                                                  |  | 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, 1994Applicant:
  The General Hospital CorporationLicensed 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,
  1998Applicant: The General Hospital CorporationLicensed to Prana
  Biotechnology Limited |  | Patents have
  been granted in Australia and United States. Applications are under
  examination in Japan and Europe. A patent has been allowed in 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.                                                    

23

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|                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                    
|Agents for
  use in the treatment of Alzheimers DiseaseFiled: March 11, 1999Applicant:
  The General Hospital CorporationLicensed to Prana Biotechnology Limited                                           |  | Patents have
  been granted in Australia, the United States and Canada. Patent has been
  allowed in Europe and is entering national phases. Examination has been
  requested in Japan. A divisional application has been filed in Canada. |  | 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,
  1999Applicant: The General Hospital CorporationLicensed 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, 2000Applicants: Prana BiotechnologyLimited and
  The General Hospital Corporation                                                                                     |  | A patent has
  been granted in Australia and New Zealand. An application is under
  examination in the United States 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.
|                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                    
|Methods for
  the Identification of Agents that Inhibit or Promote Cataracts and Uses
  thereofFiled: August 18, 2000Applicant: The General Hospital Corporation.
  Licensed to Prana Biotechnology Limited |  | Applications
  in the United States, Canada and Europe are under examination. Examination
  has been requested in Japan. A patent has been granted in Australia and a
  divisional patent has been granted 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 CorporationLicensed to Prana Biotechnology
  Limited                                   |  | Application
  is under examination in the United States.                                                                                                                                                                                   |  | 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, 2003Applicant: Prana
  Biotechnology Limited                                                                                                     |  | Applications
  in the United States, Europe and Australia are pending examination. An
  application in China is under examination. An application in Hong Kong has
  been recorded.                                                        |  | The
  invention encompasses the utility of the 8-hydroxyquinoline MPAC class in the
  treatment of neurodegenerative cognitive changes, particularly Huntingtons
  disease.                                       

24

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|                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                |  |                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                |  |                                                                                                                                                              
|8-Hydroxyquinoline
  derivativesFiled: July 16, 2003Applicant: Prana Biotechnology Limited                                  |  | Applications
  in the United States, Europe, India, China, Australia and Russia are under
  examination. Examination has been requested in Brazil, Japan, South Korea and
  Canada. Examination is pending in Israel and Mexico. Patents in New Zealand,
  Singapore and South Africa have been granted.       |  | 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, 2003Applicant: Prana Biotechnology Limited                               |  | Applications
  in the United States, China, Russia, Canada and Israel are under examination.
  Examination has been requested in Australia, Brazil, Japan and Europe.
  Examination is pending in Mexico and South Korea. Applications have been
  accepted in New Zealand, India, South Africa and Singapore. |  | The
  invention is directed to alternative MPAC chemical structures and their utility
  in the treatment of neurological conditions.                         
|                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                |  |                                                                                                                                                              
|Heterocyclic
  CompoundsFiled: January 4, 2007Applicant: Prana Biotechnology Limited                                        |  | A PCT
  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,
  2005Applicant: Prana Biotechnology Limited                              |  | Applications
  have been filed in Australia, Canada, China, Europe, Israel, Mexico, New
  Zealand, United States, Sth Korea and Sth Africa. Examination has been
  requested in Japan, India, Brazil and Russia. Applications have been granted
  in New Zealand and Singapore.                                |  | 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, 2003Applicant: 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, 1998Applicant: 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.                                                            

25

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|                                                                                                                                            |  |                                                                                                 |  |                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------
|                                                                                                                                            |  |                                                                                                 |  |                                                                                                        
|Pharmaceutical
  compositions of Clioquinol with B12 for therapeutic useFiled: February 13,
  1998Applicant: 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, 1998Applicant: 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, 2007Applicant: 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, 2007Applicant: 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.

26

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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.

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 obsoleteor 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 from those activities will be, subject to
regulation by numerous governmental authorities in Australia, principally the TGA
(Therapeutic Goods Administration), the FDA (Federal Drug Authority) in the United States,
the MHRA (Medicines Control Agency) in the United Kingdom, the MPA (Medical Products
Agency) in Sweden and the EMEA (European Medicines Evaluation Authority). 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.

27

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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.

For
details regarding clinical trials for our lead compound PBT2, 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.

28

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# 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 submitted reports to the IR&D Board in
December 2006 and December 2007 and are required to do so again in 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
|-- | ------------------------------

Our
executive offices are located at 369 Royal Parade, Parkville, Victoria 3052, Australia,
where we occupy approximately 3,800 square feet. The lease for the office space, which
expires on October 31, 2009, has an annual rental of A$108,693.

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.

|ITEM 4A. | UNRESOLVED
STAFF COMMENTS
|-------- | -------------------------

Not
applicable.

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|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 3.D. 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, both of which are currently inactive.

Our
consolidated financial statements appearing in this annual report are prepared in
Australian dollars and in accordance with IFRS as issued by IASB, which became effective
for our company as of our fiscal year ended June 30, 2006. Our consolidated financial
statements appearing in this annual report comply with both IFRS as issued by IASB and
A-IFRS. In this annual report, all references to U.S. dollars or
US$ are to the currency of the United States of America, and all references to
Australian dollars or A$ are to the currency of Australia.

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

# Overview

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

Since
completing our initial public offering and listing process on the ASX on March 28, 2000,
we have concentrated our resources toward the pursuit of our disease targets. Initially we
focused on clinical trials of our 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.

30

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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 have completed two Phase I studies of PBT2
and a Phase IIa clinical trial for PBT2 in patients with Alzheimers disease. For
details regarding our clinical trials see Item 4.A. Information on the Company
 History and Development of the Company.

# Critical Accounting
Policies

We
prepare our financial statements in accordance with IFRS as issued by IASB. 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 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 equity 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

31

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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.

# 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, salaries and benefits paid to employees and officers,
and equity-based payments awarded to directors, officers and employees.

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 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,
employees and consultants.

Public
relations and marketing expenses. Our public relations and marketing expenses consist
of fees paid to outside consultants for services related 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.

| |   |  | 
| | - |  | 
|
|
|
|
| |  |  | 
|
| |  |  | 
|
| |  |  | 
|
| |  |  | 

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.

Gain
(loss) 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.

32

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# Results of Operations

# Year ended June 30, 2008
compared to year ended June 30, 2007

Revenue from continuing
operations

Revenue
from continuing operations decreased to A$490,943 for the year ended June 30, 2008 from
A$507,150 for the year ended June 30, 2007, a decease of A$16,207, or 3%. Revenue from
continuing operations consisted of A$490,943 and A$507,150 in interest income in the years
ended June 30, 2008 and 2007, respectively. The decrease in revenue from continuing
operations in the 2008 fiscal year was primarily attributable to lower interest income as
a result of fluctuations of cash and cash equivalents held during the year.

Other Income

Other
income decreased to A$170 for the year ended June 30, 2008 from A$287 for the year ended
June 30, 2007, a decrease of A$117, or 41%.

Research and development
expenses

Research
and development expenses (including research and development expenses paid to related
parties) increased to A$5,757,168 for the year ended June 30, 2008 from A$4,492,193 for
the year ended June 30, 2007, an increase of A$1,264,975, or 28%. The increase in research
and development expenses in the year ended June 30, 2008 was primarily attributable to the
increased costs associated with the Phase IIa clinical trial. The trial commenced in
December 2006 and was completed in February 2008 and the majority of expenditure related
to the trial was incurred in the latter part of the trial. Additional expenditure was also
incurred in respect of drug discovery. We anticipate that in fiscal year 2009, our
research and development will be primarily directed at our PBT2 compound, such as for
possible larger scale Phase IIb trial designs that we are currently considering.

Personnel expenses

Personnel
expenses increased to A$5,350,189 for the year ended June 30, 2008 from A$4,554,731 for
the year ended June 30, 2007, an increase of A$795,458, or 18%. The increase in personnel
expenses in the 2008 fiscal year was primarily attributable to increased equity-based
compensation in the form of options and shares granted to directors and consultants.  In
the 2008 fiscal year we expensed A$2,237,421 in respect of equity-based payments to
directors, consultants and employees compared to A$1,386,243 in the 2007 fiscal year.
Personnel expenses in the 2008 and 2007 fiscal year include a portion of the total fair
value of options granted to our directors and employees in the previous fiscal years of
A$420,343 and A$192,890, respectively. In addition, in January 2008 employee salaries
increased as part of staff reviews.

Intellectual property
expenses

Intellectual
property expenses decreased to A$469,428 for the year ended June 30, 2008 from A$600,232
for the year ended June 30, 2007, a decease of A$130,804, or 22%. The decrease in
intellectual property expenses in the 2008 fiscal year was primarily due to increased
patent attorney expenses that we incurred in fiscal year 2007 in respect of patents.

33

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Auditor and accounting
expenses

Auditor
and accounting expenses increased to A$331,950 for the year ended June 30, 2008 from
A$260,117 for the year ended June 30, 2007, an increase of A$71,833, or 28%. The increase
in auditor and accounting expenses in the 2008 fiscal year was attributable to additional
auditor fees incurred in connection with a Securities and Exchange Commission review of
our annual report on Form 20-F for the fiscal year ended June 30, 2006 and an amendment to
our annual report on Form 20-F for such period. Additional auditor fees were also incurred
in fiscal year 2008 as a result of replacing our previous independent registered public
accountants.

Travel expenses

Travel
expenses decreased to A$146,651 for the year ended June 30, 2008 from A$309,997 for the
year ended June 30, 2007, a decease of A$163,346, or 53%. The decrease in travel expenses
in the 2008 fiscal year was primarily attributable to decreased overseas business travel
for directors, executives and consultants, among other things, as a result of a reduced
number of Research and Development Advisory Board meetings.

Public relations and
marketing expenses

Public
relations and marketing expenses decreased to A$141,337 for the year ended June 30, 2008
from A$215,455 for the year ended June 30, 2007, a decease of A$74,118, or 34%. The
decrease in public relations and marketing expenses in the 2008 fiscal year was primarily
attributable to a reduction in expenses paid to consultants due to reduced consulting
services received in such period.

Depreciation expenses

Depreciation
expenses decreased to A$25,349 for the year ended June 30, 2008 from A$58,582 for the year
ended June 30, 2007, a decease of A$33,233, or 57%. The decrease in depreciation expenses
in the 2008 fiscal year was primarily attributable to fixed assets being fully depreciated
in fiscal year 2007.

Other expenses

Other
expenses (including other expenses paid to related parties) decreased to A$975,404 for the
year ended June 30, 2008 from A$1,008,563 for the year ended June 30, 2007, a decease of
A$33,159, or 3%. The decrease in other expenses in the 2008 fiscal year was attributable
to a reduction in corporate compliance costs as a result of reduced legal costs and costs
associated with the printing and distribution of our Annual Reports which are now made
available to shareholders electronically. Lease expenses increased following a new lease
agreement being signed, however insurance expenditure reduced as a result of more
competitive premiums.

Foreign exchange gain
(loss)

We
recorded a foreign exchange loss of A$402,886 for the year ended June 30, 2008 compared to
a foreign exchange loss of A$757,578 for the year ended June 30, 2007. In fiscal 2008, we
incurred a foreign exchange loss of $425,794 attributable to the cash balances that we
held in U.S. dollars, a foreign exchange loss of A$8,726 attributable to the cash balances
that were held in Great British Pounds, a foreign exchange loss of A$508 attributable to
cash balances that were held in Euro and a foreign exchange loss of A$31,466 attributable
to foreign currency transactions. 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.

34

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Gain (loss) on fair value
of financial liabilities

We
recorded a loss on fair value of financial liabilities of A$451,429 for the year ended
June 30, 2008 compared to a gain of A$607,691 for the year ended June 30, 2007. The gain
and loss 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.

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.

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.

35

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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 29%. 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.

Public relations &
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.

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
(loss)

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.

36

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Gain (loss) 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 from 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.

# 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
International Accounting Standards and Pronouncements

Certain
new International accounting standards and interpretations have been published that are
not mandatory for June 30, 2008 reporting periods. Based on our assessment, we believe
that the following new standards and interpretations could in the future have an impact on
our consolidated financial statements.

IFRS
8 Operating Segments. IFRS 8 is effective for annual reporting periods commencing on
or after January 1, 2009. IFRS 8 will result in a significant change in the approach to
segment reporting, as it requires adoption of a management approach to
reporting on the financial performance. The information being reported will be based on
what the key decision-makers use internally for evaluating segment performance and
deciding how to allocate resources to operating segments. We have not yet decided if we
will early adopt IFRS 8. Application of IFRS 8 may result in different segments, segment
results and different type of information being reported in the segment note of the
financial report. However, it will not affect any of the amounts recognized in our
consolidated financial statements.

Revised
International Accounting Standard 1, or IAS 1, Presentation of Financial Statements.
The revised IAS 1 that was issued in September 2007 is applicable for annual reporting
periods beginning on or after January 1, 2009. It requires the presentation of a statement
of comprehensive income and makes changes to the statement of changes in equity but will
not affect any of the amounts recognized in our financial statements. If an entity has
made a prior period adjustment or a reclassification of items in the financial statements,
it will also need to disclose a third balance sheet (statement of financial position),
this one being as at the beginning of the comparative period.

Revised
IFRS 3 Business Combinations, IAS 127 Consolidated and Separate Financial Statements.Revised accounting standards for business combinations and consolidated financial
statements were issued in March 2008 and are operative for annual reporting periods
beginning on or after July 1, 2009, but may applied earlier. We have not yet decided when
we will apply the revised standards. However, the new rules generally apply only
prospectively to transactions that occur after the application date of the standard. Their
impact will therefore depend on whether we will enter into any business combinations or
other transactions that affect the level of ownership held in our controlled entities in
the year of initial application. For example, under the new rules:

| |  | all
payments (including contingent consideration) to purchase a business are to be recorded
at fair value at the acquisition date, with contingent payments subsequently remeasured
at fair value through income;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37

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| |  | all
transaction cost will be expensed,
| | - | --------------------------------------

| |  | we
will need to decide whether to continue calculating goodwill based only on our companys
share of net assets or whether to recognize goodwill also in relation to the
non-controlling (minority) interest, and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | when
control is lost, any continuing ownership interest in the entity will be remeasured to
fair value and a gain or loss recognized in profit or loss.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

Amendments
to IFRS 1 and IAS 27 Consolidated and Separate Financial Statements.In May 2008, the
IASB made amendments to IFRS 1 First-time Adoption of International Financial Reporting
Standards and IAS 27 Consolidated and Separate Financial Statements. The new rules will
apply to financial reporting periods commencing on or after January 1, 2009. Amendments to
the corresponding Australian Accounting Standards are expected to be issued shortly. After
application of these revised rules, all dividends received from investments in
subsidiaries, jointly controlled entities or associates will be recognized as revenue,
even if they are paid out of pre-acquisition profits, but the investments may need to be
tested for impairment as a result of the dividend payment. Furthermore, when a new
intermediate parent entity is created in internal reorganizations it will measure its
investment in subsidiaries at the carrying amounts of the net assets of the subsidiary
rather than the subsidiarys fair value.

|B. | LIQUIDITY
AND CAPITAL RESOURCES
|-- | -------------------------------

We
are a development stage company and have had no sales income to date, and as of June 30,
2008 our accumulated deficit totaled A$66,043,716. 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.

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 (A$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 in Australia. 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 options have been
exercised.

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In
October 2007, we raised A$8.5 million (before costs) in a private placement of 29.8
million of our ordinary shares (equivalent to 3.0 million ADRs) to professional and
institutional investors in Australia and the United States at a price of A$0.285 per
ordinary share (approximately US$2.97 per ADR) and three-year options to purchase an
additional 4.94 million (equivalent to 494,000 ADRs) ordinary shares at an exercise price
of A$0.37 per ordinary share (approximately US$3.85 per ADR) and an additional 4.94
million ordinary shares (equivalent to 494,000 ADRs) at an exercise price of A$0.43 per
ordinary share (approximately US$4.48 per ADR).

In
May 2008, we raised A$7.3 million (before costs) in a private placement of 18.13 million
(equivalent to 1.8 million ADRs) of our ordinary shares to professional investors in
Australia and the United States at a price of A$0.40 per ordinary share (approximately
US$4.16 per ADR).

We
had A$11,219,035 of cash and cash equivalents at June 30, 2008, compared to A$7,409,256 at
June 30, 2007.

# Cash Flows

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

| |                                                  | Year ended June 30,
| | ------------------------------------------------ | -------------------
|
|
|
|
| | Net cash used in operating activities            |                    
| | Net cash used in investing activities            |                    
| | Net cash provided by (used in) financing         |                    
| | activities                                       |                    
| | Net decrease in cash and cash equivalents        |                    
| | Cash and cash equivalents at beginning of period |                    
| | Exchange rate adjustments on cash held in        |                    
| | foreign currencies                               |                    
| | Cash and cash equivalents at end of period       |                    

Net
cash used in operating activities was A$9,586,710, A$9,199,750 and A$11,651,215 during the
years ended June 30, 2008, 2007 and 2006, respectively. Our payments to suppliers and
employees during the years ended June 30, 2008, 2007 and 2006 were A$9,962,171,
A$9,726,197 and A$12,647,636, respectively. The increase in payments from the year ended
June 30, 2007 to the year ended June 30, 2008 was primarily due to an increase in research
and development expenditure. 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. During the years ended June 30, 2006, our payments to suppliers and employees
was offset by government grants of A$231,710. During the years ended June 30, 2008, 2007
and 2006, our payments to suppliers and employees was offset by interest income of
A$375,461, A$526,447 and A$764,711, respectively.

Net
cash used in investing activities was A$81,770, A$4,259 and A$55,251 during the years
ended June 30, 2008, 2007 and 2006, respectively.

Net
cash provided by financing activities was A$13,912,568 during the year ended June 30,
2008, compared to net cash provided in financing activities of 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. Cash flows provided by financing activities during the year
ended June 30, 2008 are attributable to private placements of our securities in Australia
and the United States in October 2007 and May 2008.

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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.

We
realized a foreign exchange loss of A$434,309 for the year ended June 30, 2008, compared
to a realized 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. In 2008, the Australian dollar appreciated by 13.3% against the US dollar, while the
Australian dollar depreciated by 16.3% and 9.4% against the US dollar in 2007 and 2006,
respectively.

From
inception to June 30, 2008, our capital expenditures have totaled A$441,711 (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, 2008 of A$69,148. 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, 2008, 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 250,000 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.

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). On June 05, 2008 at the discretion of our Board
of Directors, Mr. Kempler received a salary adjustment for CPI of 4.4% effective July 1,
2008, bringing his base salary up to A$403,402. 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, which milestone was timely met and therefore
we paid such bonus to Mr. Kempler in the 2008 fiscal year; (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.

40

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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 ם 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 are 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
sharesin recognition of our companys achievements and performance. Such
options are 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.Effective January 1, 2008, Ms. Angus received a salary
increase of 9% bringing her annual base salary to A$292,256. In recognition of both her
performance during 2007 and her continued commitment to our mission in recent years, we
granted Ms. Angus options to purchase an additional 500,000 ordinary shares, which were
granted in the 2008 fiscal year. Such options are exercisable for nil consideration on or
before 31 October, 2010. The options were granted under the 2004 ASX Plan.

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 continued to act in accordance with its terms on a month-to-month
periodic lease basis. A deed of renewal of lease was signed in March 2008 for office space
at an annual rental of A$108,693, the lease expires on 31 October 2009.

In
March 2005, we commenced a series of Phase I clinical trials for PBT2 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. In December 2006, we commenced a Phase IIa clinical trial for PBT2
testing in people with Alzheimers disease and we announced the formal completion of
the study on January 2, 2008. On February 26, 2008, we publicly released the top line
trial results and announced that the trial primary endpoints of safety and tolerability
were met. We also announced that with respect to the secondary endpoints, namely
biomarker, cognition and behavioral changes, several significant and promising changes
were observed. Currently, the company is considering possible larger scale Phase IIb trial
designs that could be initiated during 2009. For additional details regarding our clinical
trials see Item 4.A. Information on the Company
 History and Development of the Company.

41

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We
believe our existing cash and cash equivalents as well as anticipated 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
| | - | -------------------------------------------------------------------------------------------

| |  | 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$5,757,168 and A$4,492,193 during the years ended June
30, 2008 and 2007, respectively. Costs associated with patent applications and defense of
patent applications are classified as intellectual property expenses and amounted to
A$469,428 and A$600,232 during the years ended June 30, 2008 and 2007, 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.

42

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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 orrevised in order to strengthen the safety,
efficacy and/or commercial understanding and potential of the compound, which could result
in changes in the cost, duration, prioritization and even outcome of a development
program. Furthermore, the required duration of treatment in clinical trials has an impact
on the duration of a development program for a therapeutic agent and can vary
considerably, from less than a month (for example, antibiotics) to several years (for
example, treatments requiring long-term outcome measures). An appropriate duration of
treatment in clinical trials with our MPACs is yet to be confirmed and will depend on
future clinical results, as well as discussions with regulatory authorities. Once the
duration of such treatment has been determined, the question whether the development
stages must be undertaken sequentially or may be undertaken in parallel can be addressed.
Due to the numerous variables and the uncertain nature of the development of a clinical
compound, we are not able to reasonably estimate the nature, timing and costs of the
future expenditures necessary to complete our research and development projects, the
anticipated completion dates of each project, and when material net cash flows from our
research and development programs will commence.

In
February 2004, we were granted a 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 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. We provided to the University of Melbourne funding in an amount
equal to A$690,500 (exclusive of goods and service tax) for the year running December 2006
to November 2007. We estimate that we will provide to the University of Melbourne funding
in an amount equal to A$704,000 (exclusive of goods and services tax) for the year running
December 2007 to November 2008.

43

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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 by us in full and we retain the rights under this license.

On
January 1, 2001, we entered into another license agreement with GHC, under which 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. Gerolymatos S.A. and GHC.

Under
the terms of a strategic alliance agreement that we entered into with Kendle Pty Ltd., or
Kendle, (formerly known as Synermedica Pty Ltd.), 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 until December 2004.

44

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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. for their services 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 years 2007 and 2008. 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. We did not
pay Kendle International B.V. any amounts for this trial in fiscal year 2008. 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. We
paid Quintiles Limited US$874,135 million and US$2,287,306 million for fiscal years 2007
and 2008, respectively.

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. We paid IDT
A$1,147,272 for fiscal year 2008 for services provided under the two agreements.

On
May 22, 2007, we entered into an agreement with Patheon Inc., or Patheon, 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. We paid Patheon US$259,372
for fiscal year 2008 for services provided under the agreements

|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, 2008.

|                            | Payments due by period
|--------------------------- | ----------------------
|
|
|
|
|Operating lease obligations |                       
|Purchase obligations*       |                       
|                            |                       
|Total                       |                       

---

|* | Purchase
 obligations relate to research and development  contracts only and exclude obligations
under our contracts with     Professor  Ashley Bush, Ms. Dianne Angus and Mr.  Geoffrey
 Kempler.  See Item 5.B.  "Operating and Financial  Review and     Prospects - Liquidity
and Capital Resources" and Note 21 to our consolidated financial statements.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45

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|ITEM 6. | DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|------- | ------------------------------------------

|A. | DIRECTORS
AND SENIOR MANAGEMENT
|-- | -------------------------------

Our
directors and executive officers are as follows:

| | Name                   | Age | Position                                                      
| | ---------------------- | --- | --------------------------------------------------------------
|
|
|
| | Geoffrey P. Kempler    | 53  | Chairman of the Board of Directors and Chief Executive Officer
| |                       
| | Richard Revelins       | 46  | Chief Financial Officer and Secretary                         
| |                       
| | Dianne Angus           | 48  | Chief Operating Officer                                       
| |                       
| | Peter Marks(1)         | 52  | Director                                                      
| |                       
| | Brian D. Meltzer(1)(2) | 54  | Director                                                      
| |                       
| | George W. Mihaly(1)(2) | 55  | Director                                                      

| | 
| | 

| | (1) | Member
of the Audit Committee
| | --- | -----------------------------

| | (2) | Member
of the Remuneration Committee and Nominations Committee
| | --- | --------------------------------------------------------------

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. 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 Mintails Limited and Mining Project
Group Limited, both of which are listed on the ASX, 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.

Dianne
Angus has served as Vice President of Intellectual Property and Licensing of our
company since August 2002, was promoted to Senior Vice President of Business Development,
Intellectual Property and Research in July 2004 and in May 2007 was promoted to Chief
Operating Officer. From 1992 to 2000, Ms. Angus managed the intellectual property,
licensing and biotechnology product development assets of two Australian companies, AMRAD
Corporation Limited and Florigene Limited. At Florigene Limited Ms. Angus was the joint
venture alliance manger with Suntory for three years. From June 2000 to August 2002, Ms.
Angus was Director of Dianne Angus and Associates Pty. Ltd. providing strategic business
development, technology evaluation and intellectual property consulting services to
biotechnology companies. Ms. Angus has worked in the commercial biotechnology sector for
over 16 years directing product valuation, acquisition and product licensing. During her
career, Ms. Angus has managed large and diverse intellectual property portfolios, contract
rights and enforcement. Ms. Angus has negotiated and executed many commercial licenses and
research and product development agreements with entities ranging from Novartis, Monsanto,
Suntory and Du Pont to numerous global research institutes. Ms. Angus has also undertaken
due diligence assessments on several Australian biotechnology companies for investment
brokers. Ms. Angus holds a Bachelor of Science (Education) and Bachelor of Science
(Honours) degree from the University of Melbourne, a Masters degree in Biotechnology from
Monash University, a Graduate Diploma in Intellectual Property Law from Monash University,
a Diploma in Intellectual Property Practice from the Institute of Patent and Trademark
Attorneys of Australia and is a registered Australian patent and trademark attorney.

46

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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 Watermark Global 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 has over 25 years experience in finance, including 12 years at AIDC Ltd and
over 10 years at Babcock & Brown. He is a director of Momentum Ventures Limited,
licensed by the government as an Innovation Investment Fund with venture capital
investments including biotechnology. Mr. Meltzer is a non-executive director on the boards
of a number of private companies. He is also a director on the boards of the
Australia-Israel Chamber of Commerce and the Paraplegic and Quadriplegic Association of
Victoria (Paraquad). Mr. Meltzer is the Chairman of our Audit Committee, Remuneration
Committee and Nomination Committee. Mr. Meltzer holds a Bachelor of Commerce degree and an
MA degree in Economics 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. degree from Monash University,
Australia, M.Sc. degree from           Sydney University and Ph.D. degree from Melbourne
University, and is a fellow of           the Australian Institute of Company Directors.

47

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|B. | COMPENSATION
|-- | ------------

The
following table sets forth all compensation we paid for the year ended June 30, 2008 with
respect to (i) each of our directors during the 2008 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
benefits
| | ------------------------------------------------------------- | ------------------------------------------- | ----------------------------------------------
|
|
|
|
| | Geoffrey P. Kempler                                           |                                             |                                               
| | Peter Marks                                                   |                                             |                                               
| | Brian D. Meltzer                                              |                                             |                                               
| | George W. Mihaly                                              |                                             |                                               
| | All  directors  and  officers  as a  group  (consisting  of 6 |                                             |                                               
| | persons at June 30, 2008)                                     |                                             |                                               

| | 
| | 

| | (1) | Does
not include A$1,801,932 of share-based compensation recorded in fiscal year
          2008.
| | --- | ------------------------------------------------------------------------------------------------

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, 2008, our directors and executive officers as a group, then consisting of six
persons, held options to purchase an aggregate 8,000,000 of our ordinary shares. Of such
options, (i) options to purchase 1,900,000 ordinary shares are currently exercisable for
nil consideration on or before June 30, 2010. Such 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;
(ii) options to purchase 2,200,000 ordinary shares are exercisable for nil consideration
on or before July 31, 2009. Such 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; (iii) options to
purchase 1,250,000 ordinary shares are exercisable for nil consideration on or before
August 7, 2014. Such 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; (iv) options to purchase 2,400,000 ordinary shares are exercisable for $0.30
consideration on or before October 31, 2010. Such options are to be held in escrow until
December 20, 2008; and (v) options to purchase 250,000 ordinary shares are exercisable for
nil consideration on or before October 31, 2010. 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.

See
Item 5.B. 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.

48

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# 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 2009 annual general meeting of shareholders.

# 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.

Our
Board of Directors has determined that each of Messrs. Marks, Meltzer and Dr. 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.

49

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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. 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 through a
sub-committee that it established for this purpose (see Share Plan Committee below).
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.

Share
Plan Committee. In the first quarter of 2005, our Remuneration Committee
established a sub-committee, the Share Plan Committee, which administers our share and ADR
option plans. Messrs. Mihaly and Meltzer are the current members of the Share Plan
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 Research and Development 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:

Dr.
          Jeffrey Cummingsis the Chairman of our Research and DevelopmentAdvisory
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.

50

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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. Professor Orgogozo has extensive
experience in neuroepidemiology and clinical trials. Professor Orgogozos
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. Dr. Ritchies
          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. Professor Tanzis
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). On June 5, 2008 at
the discretion of our Board of Directors, Mr. Kempler received a salary adjustment for CPI
of 4.4% effective July 1, 2008, bringing his base salary up to A$403,402. 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, which milestone was timely
met and therefore we paid such bonus to Mr. Kempler in the 2008 fiscal year; (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 Mr. Kempler 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.

51

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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. Mr. Kempler
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 6.B. 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.

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:

52

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| |  | 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, 2008, we had 13 employees. Of such employees, eight persons were employed in
research and development, three persons in management and administration and two persons
in operations. All such employees were located in Australia.

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 ten 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.

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 23, 2008 regarding the
beneficial ownership of our ordinary shares by each of our directors and executive
officers and by all of our directors and executive officers as a group:

| | Name                              | Number of Ordinary Shares
Beneficially Owned (1) | Percentage of
Ownership (2)
| | --------------------------------- | ------------------------------------------------ | ---------------------------
|
|
|
|
| | Geoffrey P. Kempler               |                                                  |                            
| | Richard Revelins                  |                                                  |                            
| | Dianne Angus                      |                                                  |                            
| | Peter Marks                       |                                                  |                            
| | Brian D. Meltzer                  |                                                  |                            
| | George W. Mihaly                  |                                                  |                            
| | All directors and executive       |                                                  |                            
| | officers as a group (six persons) |                                                  |                            

| | 
| | 

| | * | Less than
1%
| | - | ------------

| | 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 2. | The
percentages shown are based on 202,010,429 ordinary shares issued and
                    outstanding as of September 23, 2008.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

| | 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
3,000,000 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 (i) 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; (ii) 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; and (iii) options                     to purchase 1,000,000 ordinary shares are
exercisable on or before October 31,                     2010 at a price of A$0.30 per
share. The options are held in escrow for one year                     from the date of
grant.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 650,000 ordinary shares, 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 at nil
consideration on or before July                     31, 2009 and are held by Darontack
Pty Ltd, an Australian corporation owned by                     Mr. Revelins. 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. The remaining options to purchase 350,000
ordinary                     shares are exercisable on or before October 31, 2010 at a
price of A$0.30 per                     share and are held by Mr. Revelins spouse.
The options are held in escrow                     for one year from the date of grant.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | Includes
options to purchase 1,500,000 ordinary shares, all of which were
                    granted under the 2004 ASX Plan (as defined below). Of such options,
options to                     purchase 1,250,000 ordinary shares are exercisable for nil
consideration on or                     before August 7, 2014. 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. The remaining options to purchase 250,000                     ordinary shares are
exercisable for nil consideration on or before 31 October,                     2010.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 9. | Includes
options to purchase 950,000 ordinary shares, all of which were granted
                    under the 2004 ASX Plan (as defined below). Of such options, (i)
options to                     purchase 300,000 ordinary shares are exercisable for nil
consideration 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; (ii) options to purchase 300,000 ordinary shares are
                    exercisable for nil consideration 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; and                     (iii) options to purchase 350,000
ordinary shares are exercisable on or before                     31 October, 2010 at a
price of A$0.30 per share. The options are held in escrow                     for one
year from the date of grant.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 11. | Includes
options to purchase 950,000 ordinary shares, all of which were granted
                    under the 2004 ASX Plan (as defined below). Of such options, (i)
options to                     purchase 300,000 ordinary shares are exercisable for nil
consideration 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; (ii) Options to purchase 300,000 ordinary shares are
                    exercisable for nil consideration 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; and                     (iii) options to purchase 350,000
ordinary shares are exercisable on or before                     31 October, 2010 at a
price of A$0.30 per share. The options are held in escrow                     for one
year from the date of grant.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
options to purchase 950,000 ordinary shares, all of which were granted
                    under the 2004 ASX Plan (as defined below). Of such options, (i)
options to                     purchase 300,000 ordinary shares are exercisable for nil
consideration 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; (ii) options to purchase 300,000 ordinary shares are
                    exercisable for nil consideration 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; and                     (iii) options to purchase 350,000
ordinary shares are exercisable on or before                     31 October, 2010 at a
price of A$0.30 per share. The options are held in escrow                     for one
year from the date of grant.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 15. | Of
such shares, 250,000 ordinary shares are held directly by Ms. Angus.
| | --- | -----------------------------------------------------------------------

# Stock 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 and under the 2004 ADS Plan we may issue ADSs. 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), following
which we could issue under the 2004 Plans up to an aggregate 22,000,000 ordinary shares or
ADSs representing 22,000,000 ordinary shares. In December 2007, our shareholders approved
an amendment to the 2004 Plans to provide for the issuance thereunder of an additional
8,000,000 ordinary shares (or ADSs representing 8,000,000 ordinary shares) following which
we may issue under the 2004 Plans up to an aggregate 30,000,000 ordinary shares or ADSs
representing 30,000,000 ordinary shares. Any increase in such maximum number of ordinary
shares or ADSs issuable under the 2004 Plans is subject to shareholder approval.

55

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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
30,000,000 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 30,000,000 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 to
such option may again become available for new option grants under the 2004 ADS Plan.

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

56

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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, 2008, 2007 and 2006, and changes
during the years ended on those dates, is presented below:

|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       |  |  |            |   |   |      | 
|------------------------------------------------------- |  | ------------------- | ---------- | ------------------------------------- | - | ------ |  | ------------------------------------- | ---------- | ------ | - | ------------------------------------- |  |  | ---------- | - | - | ---- | 
|                                                        |  | Year ended June 30, |           
|                                                        |  |                     |           
|                                                        |  | 2008                |            | 2007                                  |   | 2006   | 
|                                                        |  |                     |            |                                       |   |        | 
|                                                        |  | Amount              |            | Weighted
  average
  exercise
  price |   | Amount |  | Weighted
  average
  exercise
  price |            | Amount |   | Weighted
  average
  exercise
  price | 
|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       | 
|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       |  |  |            |   |   |      | 
|Options outstanding at the beginning of the
  year      |  |                     | 13,728,262 |                                       | $ | 0.20   |  |                                       | 8,727,500  |        | $ | 0.36                                  |  |  | 6,500,000  |   | $ | 0.48 | 
|Granted                                                 |  |                     | 4,753,149  |                                       | $ | 0.18   |  |                                       | 5,908,762  |        |   |                                      |  |  | 2,265,000  |   |   |     | 
|Exercised                                               |  |                     | (1,393,563 | )                                     |   |        |  |                                       | (758,000   | )      |   |                                      |  |  |           |   |   |     | 
|Expired                                                 |  |                     | (1,100,000 | )                                     | $ | 0.50   |  |                                       |            |        |   |                                       |  |  |            |   |   |      | 
|Forfeited                                               |  |                     | (2,000,000 | )                                     |   |        |  |                                       | (150,000   | )      |   |                                      |  |  | (37,500    | ) |   |     | 
|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       |  |  |            |   |   |     | 
|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       |  |  |            |   |   |      | 
|Options outstanding at the end of the year              |  |                     | 13,987,848 |                                       | $ | 0.20   |  |                                       | 13,728,262 |        | $ | 0.20                                  |  |  | 8,727,500  |   | $ | 0.36 | 
|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       |  |  |            |   |   |      | 
|Options exercisable at the end of the year              |  |                     | 9,974,332  |                                       | $ | 0.31   |  |                                       | 5,940,000  |        | $ | 0.47                                  |  |  | 4,900,000  |   | $ | 0.64 | 
|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       |  |  |            |   |   |      | 
|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       |  |  |            |   |   |      | 
|Options that may be granted as of the end
  of the year |  |                     | 14,152,150 |                                       |   |        |  |                                       | 6,484,049  |        |   |                                       |  |  | 12,844,061 |   |   |      | 
|                                                        |  |                     |            |                                       |   |        |  |                                       |            |        |   |                                       |  |  |            |   |   |      | 

In
addition, as of June 30, 2008, 2,014,689 ordinary shares have been issued under the ASX
Plan that were not options exercised.

57

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---

|ITEM 7. | MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- | -------------------------------------------------

|A. | MAJOR
SHAREHOLDERS
|-- | ------------------

The
following table sets forth certain information, as of September 23, 2008, 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          |  |                                                     | 20,055,000 | (3)(4)                                        |  | 9.93%
|Jagen Nominees Pty Ltd       |  |                                                     | 15,689,172 | (5)                                           |  | 7.77%
|Balyasny Asset Management LP |  |                                                     | 12,856,682 | (6)                                           |  | 6.36%

---

|(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 202,010,429 ordinary shares issued and
               outstanding as of September 23, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(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
option to purchase 3,000,000 ordinary shares, all of which were granted
               under the 2004 ASX Plan (as defined below). Of such options, (i) options
to                purchase 1,000,000 ordinary shares are exercisable for nil
consideration 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;
(ii) options to purchase 1,000,000 ordinary shares are                exercisable for nil
consideration 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;
and                (iii) options to purchase 1,000,000 ordinary shares are exercisable on
or before                October 31, 2010 at a price of A$0.30 per share. The options are
held in escrow                for one year from the date of grant.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Based
solely upon, and qualified in its entirety with reference to a Notice of
               Change of Interest of Substantial Holder filed by Jagen Nominees Pty Ltd
with                the ASX on May 28, 2008. Includes 280,112 ordinary shares issuable
upon the                exercise of options exercisable for A$0.446 on or before November
30, 2009 held                by Jagen Nominees Pty Ltd. 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) | Based
solely upon, and qualified in its entirety with reference to a Notice of
               Change of Interest of Substantial Holder filed by Balyasny Asset
Management LP                with the ASX on May 23, 2008. Balyasny Asset Management LP
serves as investment                manager to Atlas Master Fund Ltd. Atlas Master Fund
Ltd. holds the voting and                investment powers for the ordinary shares held
by Balyasny Asset Management LP.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

58

---

---

# Significant Changes in
the Ownership of Major Shareholders

Mr.
          Geoffrey Kempler. As of June 30, 2005 and 2006, Geoffrey Kempler, the
          Chairman of our Board of Directors and our Chief Executive Officer,
beneficially           owned 18,055,000 of our ordinary shares, representing
approximately 14.06% and           13.98% of our then outstanding shares, respectively.
During fiscal 2007, we           granted to Mr. Kempler options to purchase 1,000,000
ordinary shares 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. As a result, as of
June 30, 2007, Mr.           Kemplers beneficial ownership increased to 19,055,000
ordinary shares,           representing approximately 12.57% of our then outstanding
shares. During fiscal           year 2008, we granted to Mr. Kempler options to purchase
1,000,000 ordinary           shares that are exercisable on or before October 31, 2010 at
a price of A$0.30           per share. The options are held in escrow for one year from
the date of grant.           As a result, as of June 30, 2008, Mr. Kemplers
beneficial ownership           increased to 20,055,000 ordinary shares, representing
approximately 9.84% of our           then outstanding shares.

AMP
Ltd.On December 15, 2006, AMP Ltd., or AMP, filed with the ASX a Notice of Initial
Substantial Holder, reflecting beneficial ownership of 11,204,482, or 7.78%, of our then
outstanding ordinary shares. On August 31, 2007, AMP filed with the ASX a Notice of Change
of Interest of Substantial Holder, reflecting ownership of 9,641,383, or 6.36%, of our
then outstanding ordinary shares. On November 8, 2007, AMP filed with the ASX a Notice of
Ceasing to be a Substantial Holder.

Jagen
Nominees Pty Ltd. As of September 27, 2007, Jagen Nominees Pty Ltd. beneficially owned
15,409,060, or 10.17% of our then outstanding ordinary shares. On October 19, 2007, Jagen
Nominees Pty Ltd. filed with the ASX a Notice of Change of Interest of Substantial Holder,
reflecting ownership of 15,409,060, or 8.89%, of our then outstanding shares. On May 28,
2008, Jagen Nominees Pty Ltd filed with the ASX a Notice of Change of Interest of
Substantial Holder, reflecting ownership of 15,409,060, or 7.15%, of our then outstanding
shares.

Balyasny
Asset Management L.P..On March 13, 2008, Balyasny Asset Management L.P., or BAM,
filed with the ASX a Notice of Initial Substantial Holder, reflecting beneficial ownership
of 9,263,507, or 5.06%, of our then outstanding ordinary shares. On May 23, 2008, BAM
filed with the ASX a Notice of Change of Interest of Substantial Holder, reflecting
ownership of 12,836,682, or 7.00%, of our then outstanding ordinary shares.

# Major Shareholders
Voting Rights

Our
major shareholders do not have different voting rights.

# Record Holders

As
of September 23, 2008, there were 2,376 holders of record of our ordinary shares,
of which 20 record holders, holding approximately 37.08% 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 32.86% of our ordinary shares as of such date.

59

---

---

|B. | RELATED
PARTY TRANSACTIONS
|-- | --------------------------

None.

|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

Our former
Chief Executive Officer, who also served as a director, has threatened to initiate a claim
against our company arising from his alleged inability to freely transfer shares
underlying certain unexercised ADR options previously granted to him pursuant to our 2004
ADS Plan. We believe, based on the explicit terms of the 2004 ADS Plan and applicable law
and regulations, his allegations to be without merit and we intend to vigorously defend
any such claim if formally asserted.

# 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, 2008.

|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.

60

---

---

|                                   |  |                         |      |     |  |      | 
|---------------------------------- |  | ----------------------- | ---- | --- |  | ---- | 
|                                   |  | Per Ordinary Share (A$) |     
|                                   |  |                         |     
|                                   |  | High                    |      | Low | 
|                                   |  |                         |      |     | 
|                                   |  |                         |      |     | 
|Fiscal Year
  Ended June 30,       |  |                         |      |     |  |      | 
|2004                               |  |                         | 1.18 |     |  | 0.45 | 
|2005                               |  |                         | 0.70 |     |  | 0.13 | 
|2006                               |  |                         | 0.30 |     |  | 0.15 | 
|2007                               |  |                         | 0.80 |     |  | 0.18 | 
|2008                               |  |                         | 0.70 |     |  | 0.23 | 
|                                   |  |                         |      |     |  |      | 
|Fiscal Year
  Ended June 30, 2007: |  |                         |      |     |  |      | 
|First
  Quarter                    |  |                         | 0.80 |     |  | 0.18 | 
|Second
  Quarter                   |  |                         | 0.58 |     |  | 0.35 | 
|Third
  Quarter                    |  |                         | 0.44 |     |  | 0.31 | 
|Fourth
  Quarter                   |  |                         | 0.43 |     |  | 0.32 | 
|                                   |  |                         |      |     |  |      | 
|Fiscal Year
  Ended June 30, 2008: |  |                         |      |     |  |      | 
|First
  Quarter                    |  |                         | 0.35 |     |  | 0.26 | 
|Second
  Quarter                   |  |                         | 0.51 |     |  | 0.23 | 
|Third
  Quarter                    |  |                         | 0.70 |     |  | 0.36 | 
|Fourth
  Quarter                   |  |                         | 0.48 |     |  | 0.38 | 
|                                   |  |                         |      |     |  |      | 
|Month Ended:                       |  |                         |      |     |  |      | 
|March 2008                         |  |                         | 0.62 |     |  | 0.44 | 
|April 2008                         |  |                         | 0.48 |     |  | 0.40 | 
|May 2008                           |  |                         | 0.47 |     |  | 0.38 | 
|June 2008                          |  |                         | 0.47 |     |  | 0.38 | 
|July 2008                          |  |                         | 0.50 |     |  | 0.38 | 
|August 2008                        |  |                         | 0.50 |     |  | 0.39 | 

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          |       | Low | 
|                                   |  |               |       |     | 
|                                   |  |               |       |     |  |      | 
|Fiscal Year
  Ended June 30,       |  |               |       |     |  |      | 
|2004                               |  |               | 10.50 |     |  | 2.95 | 
|2005                               |  |               | 5.19  |     |  | 0.98 | 
|2006                               |  |               | 2.40  |     |  | 1.20 | 
|2007                               |  |               | 4.35  |     |  | 1.21 | 
|2008                               |  |               | 6.73  |     |  | 2.06 | 
|                                   |  |               |       |     |  |      | 
|Fiscal Year
  Ended June 30, 2007: |  |               |       |     |  |      | 
|First
  Quarter                    |  |               | 3.45  |     |  | 1.21 | 
|Second
  Quarter                   |  |               | 4.35  |     |  | 2.15 | 
|Third
  Quarter                    |  |               | 4.35  |     |  | 2.15 | 
|Fourth
  Quarter                   |  |               | 3.38  |     |  | 2.58 | 
|                                   |  |               |       |     |  |      | 
|Fiscal Year
  Ended June 30, 2008: |  |               |       |     |  |      | 
|First
  Quarter                    |  |               | 3.10  |     |  | 2.20 | 
|Second
  Quarter                   |  |               | 4.05  |     |  | 2.06 | 
|Third
  Quarter                    |  |               | 6.73  |     |  | 3.25 | 
|Fourth
  Quarter                   |  |               | 4.45  |     |  | 3.56 | 
|                                   |  |               |       |     |  |      | 
|Month Ended:                       |  |               |       |     |  |      | 
|March 2008                         |  |               | 5.28  |     |  | 3.98 | 
|April 2008                         |  |               | 4.45  |     |  | 3.81 | 
|May 2008                           |  |               | 4.40  |     |  | 3.83 | 
|June 2008                          |  |               | 4.09  |     |  | 3.56 | 
|July 2008                          |  |               | 5.70  |     |  | 3.20 | 
|August 2008                        |  |               | 4.72  |     |  | 3.81 | 

61

---

---

|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.

|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. We provided to the University of Melbourne funding in an amount
equal to A$690,500 (exclusive of goods and service tax) for the year running December 2006
to November 2007. We estimate that we will provide to the University of Melbourne funding
in an amount equal to A$704,000 (exclusive of goods and services tax) for the year running
December 2007 to November 2008.

62

---

---

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.

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 (formerly
known as Synermedica Pty Ltd.) on January 6, 2004, Kendle provided us with consultancy
services in relation to the coordination, planning and management of intellectual
property, research and development, planning, management and commercialization strategy.
Kendle provided 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.

63

---

---

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 years 2007 and 2008. 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. We did not pay Kendle International B.V. any amounts for this trial in
fiscal year 2008. 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 negotiated an extension of the agreement to include Australian sites for the trial.
We paid Quintiles Limited US$967,001 and US$2,287,200 for fiscal years 2007 and 2008,
respectively.

In
June 2007, we entered into two GMP drug manufacture and laboratory development agreements
with 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. We paid IDT A$1,147,272 for fiscal year 2008 for services provided under the two
agreements.

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 250,000 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.

On
May 22, 2007, we entered into an agreement with Patheon 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. We paid Patheon US$259,372 for fiscal year
2008 for services provided under the agreements.

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|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.

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.

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|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.

# 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.

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# 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.

# 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.

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# 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.

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 under 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.

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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, which 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 generally
qualify for the 15 percent rate provided that either: (i) the issuer is entitled to
benefits under the Tax Treaty or (ii) the shares 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. Furthermore, the
reduction does not apply to dividends received from PFICs in any future year, if we are
not treated as a PFIC in any future year. U.S. Holders of ADRs should consult their own
tax advisors regarding the effect of these rules in their particular circumstances.

# Disposition of ADRs

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

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.

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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 years ended June 30,
2006 and 2007, 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, 2008.

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,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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,
| | - | -------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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.

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.

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# 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 make available 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.

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
website (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.

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|ITEM 11. | QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

We
invest our excess cash and cash equivalents in interest-bearing accounts and term 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$300,000 and A$4.3 million in
cash held in U.S. dollars as of June 30, 2008 and 2007, respectively. A hypothetical 8%
adverse movement in end-of-period exchange rates would reduce the cash balance by
approximately A$24,000 and A$344,000, 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. An adverse movement in
end-of-period exchange rates would not have a material impact on our operating results. In
fiscal 2008, the Australian dollar appreciated by 13.28% against the U.S. dollar, while
the Australian dollar depreciated by 9.4% and 16.3% against the U.S. dollar in fiscal
years 2006 and 2007, respectively. As of June 30, 2008, payables in U.S. dollars and other
currencies were immaterial. A hypothetical 8% adverse movement in the U.S., GBP and EUR
exchange rates could increase the cost of these payables by A$1,910.

|ITEM 12. | DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------

Not
applicable.

# PART II

|ITEM 13. | DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------

Not
applicable.

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

Not
applicable.

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

Not
applicable.

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

# Disclosure 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 June 30, 2008,
our disclosure controls and procedures were effective.

73

---

---

# Managements Annual
Report on Internal Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal control over
our financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the companys principal executive and
principal financial officers and effected by the companys board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles and includes those policies
and procedures that:

| |  | Pertain
to the  maintenance of records that in reasonable  detail  accurately and fairly reflect
the transaction               and dispositions of the assets of the company;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use of disposition of the companys assets that could have a material
effect on the financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.

Our
management assessed the effectiveness of our internal control over financial reporting as
of June 30, 2008. In making this assessment, our management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on that assessment, our management concluded that as
of June 30, 2008, our internal control over financial reporting is effective.

This
annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements
report was not subject to attestation by our independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that permit us to
provide only managements report in this annual report.

# Changes in Internal
Control over Financial Reporting

During
the year ended June 30, 2008, 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 16. | RESERVED
|-------- | --------

74

---

---

|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.

|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
PricewaterhouseCoopers, which has served as our principal independent registered public
accounting firm since November 30, 2006.

| |               | Year Ended June 30,
| | ------------- | -------------------
|
|
|
|
| | Audit         |                    
| | Audit-Related |                    
| | Tax           |                    
| | Other         |                    
| |               |                    
| | Total         |                    

Deloitte
Touche Tohmatsu served as our principal independent registered public accounting firm
until November 30, 2006. The fees billed by Deloitte Touche Tohmatsu, as well as the other
member firms of Deloitte Touche Tohmatsu and their respective affiliates, for the 2008 and
2007 fiscal years were A$71,773 and A$110,975, respectively, for audit-related services
provided in connection with a Securities and Exchange Commission review of our annual
report on Form 20-F for the fiscal year ended June 30, 2006 and an amendment to our annual
report on Form 20-F for such period.

# 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.

75

---

---

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

Not
applicable.

|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, 2008.

# PART III

|ITEM 17. | FINANCIAL
STATEMENTS
|-------- | --------------------

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

|ITEM 18. | FINANCIAL
STATEMENTS
|-------- | --------------------

| |                                                                                        | Page
| | -------------------------------------------------------------------------------------- | ----
|
|
|
|
| | Index to Consolidated Financial Statements                                             | F-0 
| | Report of Independent Registered Public Accounting Firm for fiscal years 2008 and 2007 | F-1 
| | Report of Independent Registered Public Accounting Firm for fiscal year 2006           | F-2 
| | Consolidated Balance Sheets                                                            | F-3 
| | Consolidated Income Statements                                                         | F-4 
| | Consolidated Cash Flow Statements                                                      | F-5 
| | Consolidated Statements of Changes in Stockholders' Equity                             | F-6 
| | Notes 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, as amended and restated as of December 21, 2007, among
the Registrant, the Bank of New York, as Depositary, and owners and holders from time to
time of ADRs 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)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

76

---

---

| | 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)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
(13)
| | --- | -------------------------------------------------------------------------------------------------

| | 4.8 | General
Services Agreement dated November 13, 2006, between the Registrant and Quintiles Limited
(14)
| | --- | -----------------------------------------------------------------------------------------------------

| | 4.9 | GMP
30kg  Manufacture  Agreement  dated June 6, 2007,  between the  Registrant  and
 Institute  of Drug                       Technology Australia Limited (15)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.10 | GMP
4kg Manufacture Agreement dated June 6, 2007, between the Registrant and Institute of
Drug Technology Australia Limited (16)
| | ---- | --------------------------------------------------------------------------------------------------------------------------------

| | 4.11 | Purchase
Agreement dated April 27, 2004, among the Registrant and the investors signatory thereto
(3)
| | ---- | -----------------------------------------------------------------------------------------------------

| | 4.12 | Registration
 Rights Agreement dated April 27, 2004,  among the Registrant and the investors
 signatory                       thereto (4)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------

| | 4.13 | Form
of Warrant (5)
| | ---- | -------------------

| | 4.14 | 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)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.15 | Prana
Biotechnology Limited, Employees and Consultants Option Plan 2000 (1)
| | ---- | ---------------------------------------------------------------------------

| | 4.16 | Prana
Biotechnology Limited, 2004 American Depository Share (ADS) Option Plan (10)
| | ---- | ----------------------------------------------------------------------------------

| | 4.17 | Prana
Biotechnology Limited, 2004 Employees', Directors' and Consultants' Share and Option Plan
(11)
| | ---- | ----------------------------------------------------------------------------------------------------

| | 4.18 | Employment
Agreement dated September 21, 2007, among the Registrant and Mr. Kempler (17)
| | ---- | ----------------------------------------------------------------------------------------

| | 4.19 | Employment
Agreement effective as of August 7, 2006 among the Registrant and Dr. Ross Murdoch (12)
| | ---- | --------------------------------------------------------------------------------------------------

| | 4.20 | Letter
Agreements effective as of June 12, 2007 among the Registrant and Ms. Dianne Angus (18)
| | ---- | ----------------------------------------------------------------------------------------------

| | 4.21 | Assignment
and Novation Deed between Commonwealth  Scientific  Industrial and Research Organization
and                       the Biomolecular Research Institute and the Registrant dated
September 10, 2007 (19)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

77

---

---

| | 4.22 | Agreement
 dated  May  22,  2007  by  and  between  the  Registrant  and  Patheon  Inc.  regarding
 the                       formulation, development and manufacture of capsules of PBT2
(22)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 15.1 | 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 the Post-Effective Amendment No. 1 to Form F-6
               Registration Statement filed with the Securities and Exchange Commission
on                December 12, 2007 (File 333-136944).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Incorporated
by reference to Item 1 of our Report on Form 6-K for the month of                April,
2004.
| | --- | ----------------------------------------------------------------------------------------------------------

| | (4) | Incorporated
by reference to Item 2 of our Report on Form 6-K for the month of                April,
2004.
| | --- | ----------------------------------------------------------------------------------------------------------

| | (5) | Incorporated
by reference to Item 3 of our Report on Form 6-K for the month of                April,
2004.
| | --- | ----------------------------------------------------------------------------------------------------------

| | (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.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

| | (11) | Incorporated
by reference to Annexure B to Item 1 of our Report on Form 6-K for                the
month of November, 2004.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

| | (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
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (13) | Filed
as Exhibit 4.7 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------

| | (14) | Filed
as Exhibit 4.8 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------

| | (15) | Filed
as Exhibit 4.9 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------

78

---

---

| | (16) | Filed
as Exhibit 4.10 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (17) | Filed
as Exhibit 4.19 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (18) | Filed
as Exhibit 4.21 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (19) | Filed
as Exhibit 4.22 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (20) | Filed
as Exhibit 4.23 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (21) | Filed
as Exhibit 4.24 to our Annual Report on Form 20-F for the year ended June
               30, 2007, and incorporated herein by reference
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (22) | Filed
as Exhibit 4.25 to our Annual Report on Form 20-F for the year ended June
               30, 2007, 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 years 2008 and 2007 | F-1        
|                                                                                      
|Report of Independent Registered Public Accounting Firm for fiscal year 2006           | F-2        
|                                                                                      
|Consolidated Balance Sheets                                                            | F-3        
|                                                                                      
|Consolidated Income Statements                                                         | F-4        
|                                                                                      
|Consolidated Cash Flow Statements                                                      | F-5        
|                                                                                      
|Consolidated Statements of Changes in Stockholders' Equity                             | F-6        
|                                                                                      
|Notes 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 sheets and the related consolidated income statements, statements of
stockholders equity and cash flows present fairly, in all material respects, the financial
position of Prana Biotechnology Limited (the Company) and its subsidiaries at 30 June
2008 and 30 June 2007 and the results of their operations and their cash flows for the
each of the two years in the period ended June 30, 2008 in conformity with International
Financial Reporting Standards (IFRS) as issued by the International Accounting Standards
Board (IASB). 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 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 audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Melbourne, Australia
25 September 2008

F - 1

---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRMDELOITTE TOUCHE TOHMATSU

# To The Board of
Directors and Shareholders of Prana Biotechnology Limited

We have audited the accompanying consolidated
statements of operations, stockholders equity, and cash flows of Prana Biotechnology
Limited (a company incorporated in Victoria, Australia) and subsidiaries (a development
stage company) (the Company) for the year ended June 30, 2006. These
consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated 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, such consolidated
statements of operations, stockholders equity, and cash flows present fairly, in all
material respects, the results of their operations and their cash flows for the year ended
June 30, 2006, in conformity with Australian Equivalents to International Financial
Reporting Standards and International Financial Reporting Standards as issued by the
International Accounting Standards Board.

The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated 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
consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

As discussed in Note 27 the
accompanying consolidated financial statements for the year ended June 30, 2006 have been
restated.

/s/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSUChartered Accountants
Melbourne, Australia
September 29, 2006 (June 18, 2007 as to the effects of the restatement discussed in Note 27)

F - 2

---

---

# PRANA BIOTECHNOLOGY
LIMITED

CONSOLIDATED BALANCE SHEET
(in Australian dollars, except number of shares)

|                                                     |  | June 30,
|---------------------------------------------------- |  | --------
|
|
|
|
|Current Assets                                       |  |         
|Cash and cash equivalents                            |  |         
|Trade and other receivables                          |  |         
|Other current assets                                 |  |         
|                                                     |  |         
|                                                     |  |         
|Total Current Assets                                 |  |         
|                                                     |  |         
|                                                     |  |         
|Non Current Assets                                   |  |         
|Property and equipment, net of accumulated           |  |         
|depreciation of A$577,251 and A$551,902 respectively |  |         
|Other                                                |  |         
|                                                     |  |         
|                                                     |  |         
|Total Non Current Assets                             |  |         
|                                                     |  |         
|                                                     |  |         
|Total Assets                                         |  |         
|                                                     |  |         
|                                                     |  |         
|Current Liabilities                                  |  |         
|Trade and other payables                             |  |         
|Provisions                                           |  |         
|Financial liabilities                                |  |         
|                                                     |  |         
|                                                     |  |         
|Total Current Liabilities                            |  |         
|                                                     |  |         
|                                                     |  |         
|Non-Current Liabilities                              |  |         
|Financial liabilities                                |  |         
|Provisions                                           |  |         
|                                                     |  |         
|                                                     |  |         
|Total Non-Current Liabilities                        |  |         
|                                                     |  |         
|                                                     |  |         
|Total Liabilities                                    |  |         
|                                                     |  |         
|                                                     |  |         
|Commitments and contingencies                        |  |         
|                                                     |  |         
|                                                     |  |         
|Net Assets                                           |  |         
|                                                     |  |         
|                                                     |  |         
|Equity                                               |  |         
|Issued and unissued capital                          |  |         
|2008: 201,800,240 fully paid ordinary shares         |  |         
|14,279,133 options over fully paid ordinary          |  |         
|shares                                               |  |         
|2007: 151,517,978 fully paid ordinary shares         |  |         
|4,352,893 options over fully paid ordinary           |  |         
|shares                                               |  |         
|Reserves                                             |  |         
|Accumulated deficit during the development stage     |  |         
|                                                     |  |         
|                                                     |  |         
|Total Equity                                         |  |         
|                                                     |  |         

The
accompanying notes are an integral part of the consolidated financial statements.

F - 3

---

---

# PRANA BIOTECHNOLOGY
LIMITED

CONSOLIDATED INCOME STATEMENTS
(in Australian dollars, except number of shares)

|                                                                       |  | Years ended June 30,
|---------------------------------------------------------------------- |  | --------------------
|
|
|
|
|Revenues from continuing operations                                    |  |                     
|Other income                                                           |  |                     
|                                                                       |  |                     
|Research and development expenses                                      |  |                     
|Personnel expenses                                                     |  |                     
|Intellectual property expenses                                         |  |                     
|Auditor and accounting expenses                                        |  |                     
|Travel expenses                                                        |  |                     
|Public relations and marketing expenses                                |  |                     
|Depreciation expenses                                                  |  |                     
|Other expenses                                                         |  |                     
|Foreign exchange gain/(loss)                                           |  |                     
|Gain/(Loss) on fair value of financial liabilities                     |  |                     
|                                                                       |  |                     
|                                                                       |  |                     
|Loss before income tax expense                                         |  |                     
|                                                                       |  |                     
|Income tax expense                                                     |  |                     
|                                                                       |  |                     
|                                                                       |  |                     
|Net loss                                                               |  |                     
|                                                                       |  |                     
|                                                                       |  |                     
|Loss per share (basic and diluted)                                     |  |                     
|                                                                       |  |                     
|                                                                       |  |                     
|Weighted  average  number of ordinary  shares used in computing  basic |  |                     
|and diluted net loss per share                                         |  |                     

The accompanying
notes are an integral part of the consolidated financial statements.

F - 4

---

---

# PRANA BIOTECHNOLOGY
LIMITED

CONSOLIDATED CASH FLOW STATEMENTS
(in Australian dollars)

|                                                             |  | Years Ended June 30
|------------------------------------------------------------ |  | -------------------
|
|
|
|
|Cash Flows from Operating Activities                         |  |                    
|                                                             |  |                    
|Payments to suppliers and employees                          |  |                    
|Interest received                                            |  |                    
|Government grant received                                    |  |                    
|                                                             |  |                    
|                                                             |  |                    
|Net cash flows used in operating activities                  |  |                    
|                                                             |  |                    
|                                                             |  |                    
|Cash Flows from Investing Activities                         |  |                    
|Proceeds from sale of equipment                              |  |                    
|Payment for rental deposits                                  |  |                    
|Payments for purchase of  equipment                          |  |                    
|                                                             |  |                    
|                                                             |  |                    
|Net cash flows used in investing activities                  |  |                    
|                                                             |  |                    
|                                                             |  |                    
|Cash Flows from Financing Activities                         |  |                    
|Proceeds from exercise of options and issue of securities    |  |                    
|Payment of share issue costs                                 |  |                    
|                                                             |  |                    
|                                                             |  |                    
|Net cash flows provided by (used in) financing activities    |  |                    
|                                                             |  |                    
|                                                             |  |                    
|Net increase (decrease) in cash and cash equivalents         |  |                    
|                                                             |  |                    
|Opening cash and cash equivalents brought forward            |  |                    
|Exchange rate  adjustments on cash and cash equivalents held |  |                    
|in foreign currencies                                        |  |                    
|                                                             |  |                    
|                                                             |  |                    
|Closing cash and cash equivalents carried forward            |  |                    
|                                                             |  |                    

The accompanying notes are an
integral part of the consolidated financial statements.

F - 5

---

---

# PRANA BIOTECHNOLOGY
LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in Australian dollars, except for number of shares)

|                         | Notes | Number ofShares | IssuedandunissuedCapital | Reserves | Accumulated
Deficit
During
Development
Stage | TotalEquity
|------------------------ | ----- | --------------- | ------------------------ | -------- | -------------------------------------------- | -----------
|
|
|
|
|Balance, June 30, 2005   |       |                 |                          |          |                                              |            
|Net loss                 |       |                 |                          | 15       |                                              |            
|Non-cash issuance of     |       |                
|shares to consultants    |       |                 |                          | 13(b)    |                                              |            
|Non-cash issuance of     |       |                
|options to consultants   |       |                 |                          | 14(b)    |                                              |            
|Non-cash issuance of     |       |                
|options to directors and |       |                
|employees                |       |                 |                          | 14(b)    |                                              |            
|Amortization of option   |       |                
|expenses                 |       |                 |                          | 14(b)    |                                              |            
|                         |       |                 |                          |          |                                              |            
|Balance, June 30, 2006   |       |                 |                          |          |                                              |            
|Net loss                 |       |                 |                          | 15       |                                              |            
|Issuance of shares in    |       |                
|connection with private  |       |                
|placement, net of costs  |       |                 |                          | 13(b)    |                                              |            
|Issuance of options in   |       |                
|connection with private  |       |                
|placement                |       |                 |                          | 13(c)    |                                              |            
|Non-cash issuance of     |       |                
|shares to consultants    |       |                 |                          | 13(b)    |                                              |            
|Non-cash issuance of     |       |                
|shares to employees      |       |                 |                          | 13(b)    |                                              |            
|Non-cash issuance of     |       |                
|options to consultants   |       |                 |                          | 14(b)    |                                              |            
|Non-cash issuance of     |       |                
|options to directors and |       |                
|employees                |       |                 |                          | 14(b)    |                                              |            
|Issuance of shares in    |       |                
|connection with exercise |       |                 |                          | 13(b) &  |                                              |            
|of options, net of costs |       |                 |                          | 14(b)    |                                              |            
|Amortization of option   |       |                
|expenses                 |       |                 |                          | 14(b)    |                                              |            
|Options forfeited        |       |                 |                          | 14(b)    |                                              |            
|                         |       |                 |                          |          |                                              |            
|Balance, June 30, 2007   |       |                 |                          |          |                                              |            
|                         |       |                
|Net loss                 |       |                 |                          | 15       |                                              |            
|Issuance of shares in    |       |                
|connection with private  |       |                
|placement, net of costs  |       |                 |                          | 13(b)    |                                              |            
|Issuance of options in   |       |                
|connection with private  |       |                
|placement                |       |                 |                          | 13(c)    |                                              |            
|Non-cash issuance of     |       |                
|shares to consultants    |       |                 |                          | 13(b)    |                                              |            
|Non-cash issuance of     |       |                
|options to consultants   |       |                 |                          | 14(b)    |                                              |            
|Non-cash issuance of     |       |                
|options to directors and |       |                
|employees                |       |                 |                          | 14(b)    |                                              |            
|Issuance of shares in    |       |                
|connection with exercise |       |                 |                          | 13(b) &  |                                              |            
|of options, net of costs |       |                 |                          | 14(b)    |                                              |            
|Amortization of option   |       |                
|expenses                 |       |                 |                          | 14(b)    |                                              |            
|Options forfeited        |       |                 |                          | 14(b)    |                                              |            
|                         |       |                 |                          |          |                                              |            
|Balance, June 30, 2008   |       |                 |                          |          |                                              |            
|                         |       |                 |                          |          |                                              |            

The accompanying notes are an
integral part of the consolidated financial statements.

F - 6

---

---

# PRANA BIOTECHNOLOGY
LIMITED

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
U.S. 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 International
Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB), the Corporations Act 2001, Accounting Standards
and Urgent Issues Group Interpretations, and complies with other requirements of the law.
This financial report complies with both IFRS as issued by IASB and Australian equivalents
to International Financial Reporting Standards.

The consolidated entity changed its
accounting policies on July 1, 2005 to comply with IFRS. The transition to IFRS is
accounted for in accordance with IFRS 1: First-time Adoption of International Financial
Reporting Standards(IFRS 1), with July 1, 2004 as the date of transition.

The financial report has been
prepared on the basis of historical cost. Cost is based on the fair value 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 accounting policies set out below
have been applied in preparing the financial statements for the year ended June 30, 2008
and the comparative information presented in these financial statements for the years
ended June 30, 2007 and 2006.

# Critical accounting
estimates, judgments 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.

(a)
          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:

F - 7

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|1. | BACKGROUND
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ---------------------------------------------------------------------

| | 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
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Based
on the best estimate of the consolidated entity, the share price will           reach the
defined level:
| | -- | --------------------------------------------------------------------------------------------------------------

| | >
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 for American
Depository Receipts (ADRs) recorded as financial liabilities under IAS 32
Financial Instruments: Presentation (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 2008, the consolidated entity has
utilized a one year historical ADR price when calculating the volatility of the underlying
ADRs. It is the judgment of the consolidated entity that a one 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 utilizing cash
until its research activities have become marketable. As at 30 June 2008, the consolidated
entity has accumulated losses of $66,043,716 and has incurred negative cash flows from
operations of $9,391,390 in the year ended 30 June 2008. The consolidated entity has
generated AU$7 million (before costs) and AU$7.25 million (before costs) from capital
raising in October 2007 and May 2008 such that its cash position has increased from
AU$7,409,256 at 30 June 2007 to AU$11,219,035 at 30 June 2008.

The Directors believe that the going
concern basis of preparation is appropriate given the following reasons:

| | i) | 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
          $80m 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ii) | Having
carefully assessed the consolidated entitys ability to effectively           manage
expenditures, the Directors believe that the consolidated entity will           continue
to operate as a going concern for at least the period to October 2009           and
therefore that it is appropriate to prepare the financial statements on a           going
concern basis.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 30 June 2008. 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

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 IAS 27: 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 taxDeferred 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

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 periodCurrent 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.

DepreciationDepreciation 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 ReceivablesTrade receivables, loans, and other
receivables are recorded at amortized cost less impairment.

F - 10

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|1. | BACKGROUND
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ---------------------------------------------------------------------

Warrants and OptionsUnder IAS 32, 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 IAS 32 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

 the ability to measure
reliably the expenditure attributable to the intangible asset during its development.

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, 2008 and 2007, Prana had
no capitalized research and development costs.

|(h) | Foreign
Currency Transactions and Balances
|--- | ------------------------------------------

Functional and
Presentation CurrencyItems 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|1. | BACKGROUND
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ---------------------------------------------------------------------

Foreign currency
transactionsAll 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 operationsOn 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 grantsGovernment 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.

F - 12

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|1. | BACKGROUND
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ---------------------------------------------------------------------

|(n) | Issued
and Unissued 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 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:

DirectorsThe 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.

EmployeesThe 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.

ConsultantsThe 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

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 IFRS, comparative
figures have been adjusted to conform with changes in presentation for the current
financial year.

|(u) | New
accounting standards and interpretations
|--- | --------------------------------------------

Certain new International accounting
standards and interpretations have been published that are not mandatory for June 30, 2008
reporting periods. Based on the Companys assessment, it believes that the following
new standards and interpretations could in the future have an impact on its consolidated
financial statements.

| | i) | IFRS
8 Operating Segments. IFRS 8 is effective for annual reporting           periods
commencing on or after January 1, 2009. IFRS 8 will result in a           significant
change in the approach to segment reporting, as it requires adoption           of a management
approach to reporting on the financial performance.           The information being
reported will be based on what the key decision-makers use           internally for
evaluating segment performance and deciding how to allocate           resources to
operating segments. The Company has not yet decided if it will           early adopt IFRS
8. Application of IFRS 8 may result in different segments,           segment results and
different type of information being reported in the segment           note of the
financial report. However, it will not affect any of the amounts           recognized in
the Companys consolidated financial statements.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ii) | Revised
International Accounting Standard 1, or IAS 1, Presentation of           Financial
Statements. The revised IAS 1 that was issued in September 2007 is
          applicable for annual reporting periods beginning on or after January 1, 2009.
          It requires the presentation of a statement of comprehensive income and makes
          changes to the statement of changes in equity but will not affect any of the
          amounts recognized in the Companys financial statements. If an entity has
          made a prior period adjustment or a reclassification of items in the financial
          statements, it will also need to disclose a third balance sheet (statement of
          financial position), this one being as at the beginning of the comparative
          period.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | iii) | Revised
IFRS 3 Business Combinations, IAS 27 Consolidated and Separate           Financial
Statements.Revised accounting standards for business combinations           and
consolidated financial statements were issued in March 2008 and are           operative
for annual reporting periods beginning on or after July 1, 2009, but           may
applied earlier. The Company has not yet decided when it will apply the           revised
standards. However, the new rules generally apply only prospectively to
          transactions that occur after the application date of the standard. Their
impact           will therefore depend on whether the Company will enter into any
business           combinations or other transactions that affect the level of ownership
held in           its controlled entities in the year of initial application. For
example, under           the new rules:
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | all
payments (including contingent consideration) to purchase a business are to be recorded
at fair value at the acquisition date, with contingent payments subsequently remeasured
at fair value through income,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | all
transaction cost will be expensed,
| | - | --------------------------------------

| |  | we
will need to decide whether to continue calculating goodwill based only on the Companys
share of net assets or whether to recognize goodwill also in relation to the
non-controlling (minority) interest, and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | when
control is lost, any continuing ownership interest in the entity will be remeasured to
fair value and a gain or loss recognized in profit or loss.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|1. | BACKGROUND
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ---------------------------------------------------------------------

| | iv) | Amendments
to IFRS 1 and IAS 27 Consolidated and Separate Financial           Statements.In May
2008, the IASB made amendments to IFRS 1 First-time           Adoption of International
Financial Reporting Standards and IAS 27 Consolidated           and Separate Financial
Statements. The new rules will apply to financial           reporting periods commencing
on or after January 1, 2009. Amendments to the           corresponding Australian
Accounting Standards are expected to be issued shortly.           After application of
these revised rules, all dividends received from           investments in subsidiaries,
jointly controlled entities or associates will be           recognized as revenue, even
if they are paid out of pre-acquisition profits, but           the investments may need
to be tested for impairment as a result of the dividend           payment. Furthermore,
when a new intermediate parent entity is created in           internal reorganizations it
will measure its investment in subsidiaries at the           carrying amounts of the net
assets of the subsidiary rather than the           subsidiarys fair value.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | REVENUE
FROM CONTINUING OPERATIONS
|-- | ----------------------------------

|         | Years Ended June 30,
|-------- | --------------------
|
|
|
|
|Interest |                     
|         |                     

|3. | OTHER
INCOME
|-- | ------------

|                     |  |  | 
|-------------------- |  |  | 
|
|
|
|
|Government grant (i) |  |  | 
|Other income         |  |  | 
|                     |  |  | 
|                     |  | 
|Total other income   |  |  | 
|                     |  |  | 

(i)
          On February 18, 2004, the consolidated entity announced a 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
          the consolidated entity met the revenue recognition criteria to record revenue
          of A$288,173. This grant was completed in December 2005.

|4. | EXPENSES
FROM ORDINARY ACTIVITIES
|-- | ---------------------------------

|                                             | Years Ended June 30,
|-------------------------------------------- | --------------------
|
|
|
|
|Research and development                     |                     
|                                             |                     
|                                             |                     
|Personnel expenses                           |                     
|Employees                                    |                     
|Equity based payments - employees            |                     
|Consultants and directors                    |                     
|Equity based payments - consultants and      |                     
|directors                                    |                     
|Defined contribution superannuation expenses |                     
|                                             |                     
|                                             |                     
|Total personnel expense                      |                     
|                                             |                     
|Intellectual property expenses               |                     
|Overseas                                     |                     
|Local                                        |                     
|                                             |                     
|                                             |                     
|Total intellectual property expense          |                     
|                                             |                     
|                                             |                     
|Depreciation of non-current assets           |                     
|Laboratory equipment                         |                     
|Computer equipment                           |                     
|Furniture and fittings                       |                     
|Leasehold improvements                       |                     
|                                             |                     
|                                             |                     
|Total depreciation expense                   |                     
|                                             |                     
|Other expenses                               |                     
|Corporate compliance                         |                     
|Office expenses                              |                     
|Computer expenses                            |                     
|Insurance                                    |                     
|Office rental under operating lease          |                     
|                                             |                     
|                                             |                     
|Total other expenses                         |                     
|                                             |                     

F - 15

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|5. | INCOME
TAX
|-- | ----------

|                                                                     | Years Ended June 30,
|-------------------------------------------------------------------- | --------------------
|
|
|
|
|(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%        |                     
|(2007 & 2006: 30%)                                                   |                     
|Effect of lower tax rates of tax on overseas income                  |                     
|                                                                     |                     
|Add tax effect of:                                                   |                     
|(over) provision of income tax in previous year relating to a        |                     
|correction of estimates 1                                            |                     
|Equity issued for nil consideration                                  |                     
|Research and development tax concession                              |                     
|Gain on fair value of financial liabilities                          |                     
|Other                                                                |                     
|                                                                     |                     
|Deferred tax asset not recognized                                    |                     
|                                                                     |                     
|Income tax expense attributable to loss before income tax            |                     
|                                                                     |                     
|                                                                     |                     
|(b)  Potential deferred tax asset at June 30, 2008, 2007 and 2006 in |                     
|respect of tax losses not brought to account is:                     |                     
|Temporary Differences                                                |                     

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 for the year ended
          June 30, 2007, and the tax return lodged with the Australian Tax Office after
          the filing of the Form 20-F for such period.

|6. | TRADE
AND OTHER RECEIVABLES
|-- | ---------------------------

|                                  | Years Ended June 30,
|--------------------------------- | --------------------
|
|
|
|
|Accrued income                    |                     
|Goods and services tax receivable |                     
|Other debtors                     |                     
|                                  |                     
|                                  |                     
|                                  |                     
|                                  |                     

F - 16

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|7. | OTHER
ASSETS
|-- | ------------

|             | Years Ended June 30,
|------------ | --------------------
|
|
|
|
|Current      |                     
|Prepayments  |                     
|Term Deposit |                     
|             |                     
|             |                     
|             |                     
|             |                     
|Non-current  |                     
|Term Deposit |                     
|             |                     
|             |                     
|             |                     
|             |                     

|8. | PROPERTY
AND EQUIPMENT
|-- | ----------------------

|                              |  | Years Ended June 30,
|----------------------------- |  | --------------------
|
|
|
|Gross carrying amount         |  |                     
|Balance at beginning of year  |  |                     
|Additions                     |  |                     
|Disposals                     |  |                     
|                              |  |                     
|                              |  |                     
|Balance at end of year        |  |                     
|                              |  |                     
|                              |  |                     
|Accumulated depreciation      |  |                     
|Balance at beginning of year  |  |                     
|Disposals                     |  |                     
|Depreciation expense          |  |                     
|                              |  |                     
|                              |  |                     
|Balance at end of year        |  |                     
|                              |  |                     
|                              |  |                     
|Net book value at end of year |  |                     
|                              |  |                     

Aggregate depreciation allocated
during the year is recognized as an expense and disclosed in Note 4.

|                                | Years Ended June 30,
|------------------------------- | --------------------
|
|
|
|
|Laboratory equipment, at cost   |                     
|Less accumulated depreciation   |                     
|                                |                     
|                                |                     
|Total laboratory equipment      |                     
|                                |                     
|                                |                     
|Computer equipment, at cost     |                     
|Less accumulated depreciation   |                     
|                                |                     
|                                |                     
|Total computer equipment        |                     
|                                |                     
|                                |                     
|Furniture and fittings, at cost |                     
|Less accumulated depreciation   |                     
|                                |                     
|                                |                     
|Total furniture and fittings    |                     
|                                |                     
|                                |                     
|Leasehold improvements, at cost |                     
|Less accumulated depreciation   |                     
|                                |                     
|                                |                     
|Total leasehold improvements    |                     
|                                |                     
|                                |                     
|Total                           |                     
|                                |                     

F - 17

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|9. | TRADE
AND OTHER PAYABLES
|-- | ------------------------

|                                          | Years Ended June 30,
|----------------------------------------- | --------------------
|
|
|
|
|Trade creditors                           |                     
|Accrued research and development expenses |                     
|Accrued intellectual property expenses    |                     
|Accrued personnel expenses                |                     
|Accrued audit fees                        |                     
|Accrued marketing expenses                |                     
|Other accrued expenses                    |                     
|                                          |                     
|                                          |                     
|                                          |                     
|                                          |                     

|10. | PROVISIONS
|--- | ----------

|                   |  | Years Ended June 30,
|------------------ |  | --------------------
|
|
|
|
|Current            |  |                     
|Annual leave       |  |                     
|                   |  |                     
|                   |  |                     
|Non-Current        |  |                     
|Long service leave |  |                     
|                   |  |                     

|11. | FINANCIAL
LIABILITIES
|--- | ---------------------

|                   | Years Ended June 30,
|------------------ | --------------------
|
|
|
|
|Current            |                     
|Warrants over ADRs |                     
|                   |                     
|Non-Current        |                     
|Warrants over ADRs |                     

Following a meeting of shareholders
on June 1, 2004, the Company issued 4 million ADRs (1 ADR = 10 ordinary shares) and
warrants to purchase 3 million ADRs to U.S. investors. The U.S. investors acquired the
ADRs at a price of USD 5.00 per ADR and also received a warrant to purchase 3 ADRs for
each 4 ADRs purchased. The issue raised USD 20 million (AUD 28.9 million) before costs.
The warrants are exercisable for ADRs on or before June 4, 2009 at an exercise price of
USD 8.00 per ADR.

Under IAS 32 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, 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 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. At 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 - 18

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|11. | FINANCIAL
LIABILITIES continued
|--- | -------------------------------

As at June 30, 2007, a Gain on Fair
Valuation of Financial Liabilities of $607,691 has been recorded in the Statement of
Operations. As at June 30, 2008, a Loss on Fair Valuation of Financial Liabilities of
$451,429 has been recorded in the Income Statement.

The classification of these
instruments for accounting purposes only. In this regard, the Company has an obligation to
issue its equity instruments, via ADRs, to the warrant holders should they decide to
exercise their warrants and remit USD 8.00 per ADR. The holders of the warrants cannot
require the Company to settle the contracts in cash. The classification of the warrants as
liabilities, does not have an impact on the Companys future liquidity requirements
or ability to continue as a going concern.

|12. | COMMITMENTS
AND CONTINGENCIES
|--- | -----------------------------

The Companys former Chief
Executive Officer, who also served as a director, has threatened to initiate a claim
against the Company arising from his alleged inability to freely transfer shares
underlying certain unexercised ADR options previously granted to him pursuant
to the Companys 2004 ADS Plan. The Company believes, based on the explicit
terms of the 2004 ADS Plan and applicable law and regulations, his allegations to be
without merit and it intends to vigorously defend any such claim if formally asserted.

In respect of expenditure
commitments, refer to note 17.

|13. | ISSUED
CAPITAL
|--- | --------------

|(a) | Issued
Capital
|--- | --------------

|                                        |  | Years Ended June 30,
|--------------------------------------- |  | --------------------
|
|
|
|
|Fully paid ordinary shares              |  |                     
|Options over fully paid ordinary shares |  |                     
|                                        |  |                     
|                                        |  |                     
|                                        |  |                     
|                                        |  |                     

|(b) | Movements
in shares on issue
|--- | ----------------------------

|                         | June 30,
|------------------------ | --------
|
|
|
|
|Beginning of the year    |         
|                         |         
|Movement during the year |         
|                         |         
|                         |         
|End of the year          |         
|                         |         

F - 19

---

---

# PRANA BIOTECHNOLOGY
LIMITED

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 10, 2005          |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|                         |         |       | Capital raising costs                                                      |             |  
|                         |         |       |                                                                            |             |  
|Year ended June 30, 2006 |         |       |                                                                            |             |  
|                         |         |       |                                                                            |             |  
|                         |         |      
|August 31, 2006          |         |       | Shares to investors as part of a private placement                         |             |  
|October 13, 2006         |         |       | Exercise of options                                                        |             |  
|November 29, 2006        |         |       | Shares to investors as part of a private placement                         |             |  
|December 1, 2006         |         |       | Exercise of options                                                        |             |  
|December 28, 2006        |         |       | Shares to investors as part of private placement                           |             |  
|April 16, 2007           |         |       | Exercise of options                                                        |             |  
|May 3, 2007              |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|May 31, 2007             |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|May 31, 2007             |         |       | Non cash share issue to employees                                          |             |  
|May 31, 2007             |         |       | Exercise of options                                                        |             |  
|                         |         |       | Capital raising costs                                                      |             |  
|                         |         |       |                                                                            |             |  
|Year ended June 30, 2007 |         |       |                                                                            |             |  
|                         |         |       |                                                                            |             |  
|                         |         |      
|October 30, 2007         |         |       | Shares to investors as part of a private placement                         |             |  
|December 24, 2007        |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|December 24, 2007        |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|December 24, 2007        |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|February 26, 2008        |         |       | Exercise of options - consultants                                          |             |  
|February 26, 2008        |         |       | Exercise of options - employees                                            |             |  
|February 26, 2008        |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|February 26, 2008        |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|February 26, 2008        |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|March 20, 2008           |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|March 20, 2008           |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|April 2, 2008            |         |       | Exercise of options - employees                                            |             |  
|April 9, 2008            |         |       | Exercise of options - employees                                            |             |  
|May 27, 2008             |         |       | Shares to investors as part of a private placement                         |             |  
|June 2, 2008             |         |       | Non cash share issue in consideration for services provided by consultants |             |  
|June 12, 2008            |         |       | Exercise of options - consultants                                          |             |  
|June 25, 2008            |         |       | Exercise of options - consultants                                          |             |  
|                         |         |       | Capital raising costs                                                      |             |  
|                         |         |       |                                                                            |             |  
|Year ended June 30, 2008 |         |       |                                                                            |             |  
|                         |         |       |                                                                            |             |  

F - 20

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|13. | ISSUED
CAPITAL (continued)
|--- | --------------------------

| | (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:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, May 31, 2007, December 24, 2007, February 26, 2008, March 20, 2008
and June 2,2008
| | ----------------------------------------------------------------------------------------------------------------

| | 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) | 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 employees, 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,
|------------------------ | --------
|
|
|
|
|Beginning of the year    |         
|                         |         
|Movement during the year |         
|                         |         
|                         |         
|End of the year          |         
|                         |         

F - 21

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|13. | ISSUED
CAPITAL (continued)
|--- | --------------------------

Details of option issuances are as follows:

|Date                      | Details | Exercise Price | Number                                            | Fair Value | $
|------------------------- | ------- | -------------- | ------------------------------------------------- | ---------- | -
|
|
|
|
|November 29, 2006         |         |                | Options to investors as part of a capital raising |            |  
|December 28, 2006         |         |                | Options to investors as part of a capital raising |            |  
|                          |         |                |                                                   |            |  
|Year ended June 30, 2007  |         |                |                                                   |            |  
|                          |         |                |                                                   |            |  
|October 30, 2007          |         |                | Options to investors as part of a capital raising |            |  
|October 30, 2007          |         |                | Options to investors as part of a capital raising |            |  
|October 30, 2007          |         |                | Options to investors as part of a capital raising |            |  
|October 30, 2007          |         |                | Options to investors as part of a capital raising |            |  
|October 30, 2007          |         |                | Options to investors as part of a capital raising |            |  
|October 30, 2007          |         |                | Options to investors as part of a capital raising |            |  
|                          |         |                |                                                   |            |  
|Year ended  June 30, 2008 |         |                |                                                   |            |  
|                          |         |                |                                                   |            |  

|(d) | Terms
and conditions of issued capital
|--- | --------------------------------------

Ordinary sharesOrdinary shares have the right to
receive dividends as declared and, in the event of a winding up of 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s shareholders.

OptionsOption holders do not have the right
to receive dividends and are not entitled to vote at a meeting of the Companys
shareholders. Options may be exercised at any time from the date they vest to the date of
their expiration. Share options convert into ordinary shares on a one for one basis on the
date they are exercised.

|(e) | Shares
issued after reporting date
|--- | ----------------------------------

After reporting date the following
equity issues occurred:

|Date          | Details | Notes | Number                            | Issue Price | $
|------------- | ------- | ----- | --------------------------------- | ----------- | -
|
|
|
|
|July 17, 2008 |         |       | Exercise of options - consultants |             |  
|July 30, 2008 |         |       | Exercise of options - consultants |             |  
|              |         |       |                                   |             |  
|              |         |      
|              |         |       |                                   |             |  
|              |         |       |                                   |             |  

|14. | RESERVES
|--- | --------

|(a) | Share
Based Payments
|--- | --------------------

|                                       |  | Years Ended June 30,
|-------------------------------------- |  | --------------------
|
|
|
|
|Options for fully paid ordinary shares |  |                     
|Options for ADRs                       |  |                     
|Warrants for ADRs                      |  |                     
|                                       |  |                     
|                                       |  |                     
|                                       |  |                     
|                                       |  |                     

The share-based payment reserve is
used to recognize the fair value of options and warrants issued to directors, executives,
employees and consultants but not exercised. Amounts are transferred out of the reserve
and into issued capital when the options or warrants are exercised.

F - 22

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|14. | RESERVES
(continued)
|--- | --------------------

|(b) | Movements
in share options over fully paid ordinary shares
|--- | ----------------------------------------------------------

|                          | Years Ended June 30,
|------------------------- | --------------------
|
|
|
|
|Beginning of the year     |                     
|Issued during the year    |                     
|Expired during the year   |                     
|Forfeited during the year |                     
|Amortization of option    |                     
|expenses                  |                     
|Exercised during the      |                     
|year (Note 13(b))         |                     
|                          |                     
|                          |                     
|End of the year           |                     
|                          |                     

Details of option grants are
summarized as follows.

|2006
|----

| | On
August 10, 2005, the Company granted options to purchase 413,000 ordinary shares to an
outside consultant as reward for services rendered to the Company. Such options were
exercisable on or before February 1, 2007 at an exercise price of A$0.50 per option. The
grant was approved by the Companys shareholders at the 2005 Annual General Meeting.
The options expired without being exercised.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 2, 2006, the Company granted options to purchase 890,000 ordinary shares 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 granted options to purchase 1,300,000 ordinary shares 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 were held in escrow 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. The grant was approved by
the Companys shareholders at the 2005 Annual General Meeting.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 30, 2006, the Company granted options to purchase 75,000 ordinary shares 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 granted options to purchase 133,000 ordinary shares 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. The options fair value is A$0.42.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 1, 2006, the Company granted options to purchase 3,200,000 ordinary shares 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. The options fair value is A$0.38.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 1, 2006, the Company granted options to purchase 312,500 ordinary shares 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. The options fair value is A$0.08.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 16, 2007, the Company granted options to purchase 206,478 ordinary shares 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. The options fair value is A$0.40.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 16, 2007, the Company granted options to purchase 39,284 ordinary shares 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. The
options fair value is A$0.40.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|14. | RESERVES
(continued)
|--- | --------------------

| | On
April 16, 2007, the Company granted options to purchase 1,000,000 ordinary shares 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. The options fair value is A$0.48.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 16, 2007, the Company granted options to purchase 40,000 ordinary shares 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. The
options fair value is A$0.36.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | May
31, 2007, the Company granted options to purchase 312,500 ordinary shares 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. The options fair value is A$0.08.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 12, 2007, the Company granted options to purchase 40,000 ordinary shares 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. The
options fair value is $A0.38.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 12, 2007, the Company granted options to purchase 375,000 ordinary shares 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. The
options fair value is $0.34.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 19, 2007, the Company granted options to purchase 250,000 ordinary shares 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. The options fair value is $0.34.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2008
|----

| | On
October 23, 2007, the Company granted options to purchase 431,992 ordinary shares to
consultant in recognition of services rendered to the Company. The options are
exercisable at A$0.37 consideration and expire on October 31, 2010. The option fair value
is A$0.15.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 23, 2007, the Company granted options to purchase 431,992 ordinary shares to
consultant in recognition of services rendered to the Company. The options are
exercisable at A$0.43 consideration and expire on November 30, 2010. The option fair
value is A$0.14.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 28, 2007, the Company granted options to purchase 400,000 ordinary shares to
consultant under the 2004 Employees, Directors and Consultants Share and Option Plan (see
Note 18) in recognition of services rendered to the Company. The options are exercisable
at A$0.285 consideration and expire on December 17, 2008. The option fair value is
A$0.11.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 26, 2008, the Company granted options to purchase 1,131,307 ordinary shares 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 at A$nil consideration and expire on October 31, 2010. The
option fair value is A$0.23.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 26, 2008, the Company granted options to purchase 375,000 ordinary shares to
consultants under the 2004 Employees, Directors and Consultants Share and Option Plan
(see Note 18) in recognition of services rendered to the Company. The options are
exercisable at A$nil consideration and expire on October 31, 2010. The option fair value
is A$0.29.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 14, 2008, the Company granted options to purchase 2,400,000 ordinary shares to
directors and the Companys secretary 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 held in escrow for one year from
the date of grant. The options are exercisable at A$0.30 consideration and expire on
October 31, 2010. The grant was approved by the Companys shareholders at the 2007
Annual General Meeting. The option fair value is $A0.50.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 20, 2008, the Company granted options to purchase 286,842 ordinary shares to
consultants under the 2004 Employees, Directors and Consultants Share and Option Plan
(see Note 18) in recognition of services rendered to the Company. The options are
exercisable at A$nil consideration and expire on October 31, 2010. The option fair value
is A$0.48.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 2, 2008, the Company granted options to purchase 80,000 ordinary shares to
consultants under the 2004 Employees, Directors and Consultants Share and Option Plan
(see Note 18) in recognition of services rendered to the Company. The options are
exercisable at A$nil consideration and expire on October 31, 2010. The option fair value
is A$0.48.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 15, 2008, the Company granted options to purchase 80,000 ordinary shares to
consultants under the 2004 Employees, Directors and Consultants Share and Option Plan
(see Note 18) in recognition of services rendered to the Company. The options are
exercisable at A$nil consideration and expire on October 31, 2010. The option fair value
is A$0.44.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|14. | RESERVES
(continued)
|--- | --------------------

|(c) | Movements
in share options over ADRs
|--- | ------------------------------------

|                       | Years Ended June 30,
|---------------------- | --------------------
|
|
|
|
|Beginning of the year  |                     
|Issued during the year |                     
|                       |                     
|End of the year        |                     
|                       |                     

|(d) | Movement
in warrants over ADRs
|--- | ------------------------------

|                       | Years Ended June 30,
|---------------------- | --------------------
|
|
|
|
|Beginning of the year  |                     
|Issued during the year |                     
|                       |                     
|                       |                     
|End of the year        |                     
|                       |                     

|(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s shareholders. Options and warrants may be exercised at any time from the
date they vest to the date of their expiration. Share options are exercisable into
ordinary shares on a one for one basis on the date they are exercised. Warrants and U.S.
options are exercisable into ADRs, being one warrant or U.S. 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 granted after reporting date.

|15. | ACCUMULATED
DEFICIT DURING DEVELOPMENT STAGE
|--- | --------------------------------------------

|                             | Years Ended June 30,
|---------------------------- | --------------------
|
|
|
|
|Balance at beginning of year |                     
|Net loss for the year        |                     
|                             |                     
|                             |                     
|Balance at end of year       |                     
|                             |                     

F - 25

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|16. | CASH
FLOW INFORMATION
|--- | ---------------------

|                                             | Years Ended June 30,
|-------------------------------------------- | --------------------
|
|
|
|
|(a)  Reconciliation of the net loss to       |                     
|the net cash flows from operations           |                     
|Net loss                                     |                     
|                                             |                     
|Non-cash items                               |                     
|Depreciation of property and equipment       |                     
|Non-cash issue of equity in consideration    |                     
|of operating expenses                        |                     
|Foreign exchange (gain)/loss                 |                     
|Gain/ (Loss) on fair value of financial      |                     
|liabilities                                  |                     
|Loss on sale of non-current asset            |                     
|                                             |                     
|Changes in assets and liabilities            |                     
|Decrease/(increase) in trade and other       |                     
|receivables                                  |                     
|Decrease/(increase) in other current assets  |                     
|(Decrease)/increase in trade and other       |                     
|payables                                     |                     
|Decrease/(increase) in provision for         |                     
|employee entitlements                        |                     
|                                             |                     
|                                             |                     
|Net cash flows used in operating activities  |                     
|                                             |                     
|                                             |                     
|(b)  Reconciliation of cash and cash         |                     
|equivalents                                  |                     
|                                             |                     
|Cash and cash equivalents balance comprises: |                     
|- cash and cash equivalents on hand          |                     
|- term deposit/on call                       |                     
|- commercial bill                            |                     
|                                             |                     
|                                             |                     
|Closing cash and cash equivalents balance    |                     
|                                             |                     

|(c) | Non-cash
financing and investing activities
|--- | -------------------------------------------

During the years ended June 30, 2008,
2007 and 2006, the Company issued shares and options in connection with non-cash
transactions. See Notes 13(b) and 14(b).

|17. | EXPENDITURE
COMMITMENTS
|--- | -----------------------

The Company has a non-cancelable operating
lease contracted for but not capitalized in the financial statements. The Company has
commitments under this contract within one year of $98,812 and between one year and five
years of $33,917. The property lease is a non-cancelable lease with an 18 month term, with
rent payable monthly in advance. Within the lease agreement there is a contingent rental
provision which allows the lease payments to be increased by 3.50% of the rental payments
on an annual basis. An option exists to renew the lease at the end of the 18 month term
for two further terms of 12 months. In 2007, the premises were leased on a separate month
by month 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 one year of $894,566, last year commitments
under research and development contracts within one year were $1,295,265. There are no
research and development contract commitments after one year for the years ended June 30,
2008, 2007 and 2006.

F - 26

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|18. | SHARE
BASED PAYMENTS
|--- | --------------------

|(a) | 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, 2008, equity had been
issued to one former and four current Directors, three Key Management Personnel, 16
employees and 10 consultants under the 2004 Employees, Directors and Consultants Share and
Option Plan. 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. This was further increase to 30 million ordinary shares at the 2007
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 expiration 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
expiration 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,
|------------------------- | --------------------
|
|
|
|
|Beginning of the year     |                     
|Issued during the year    |                     
|Exercised during the year |                     
|Expired during the year   |                     
|Forfeited during the year |                     
|                          |                     
|                          |                     
|Outstanding at year end   |                     
|                          |                     
|                          |                     
|Exercisable at year end   |                     
|                          |                     

The range of exercise prices of
options outstanding at period end is nil to A$0.30. These options have a weighted average
remaining contractual life of two 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$0.38,
A$0.36 and A$0.18 for the years ended June 30, 2008, 2007 and 2006, respectively. The
weighted average assumptions in calculating fair value were as follows:

F - 27

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|18. | SHARE
BASED PAYMENTS (continued)
|--- | --------------------------------

| |  | risk-free
interest rate of 6.63% for 2008 and 6.02% for 2007;
| | - | -------------------------------------------------------------

| |  | no
dividends;
| | - | -------------

| |  | expected
volatility of 234.20% for 2008 and 86% for 2007; and
| | - | -------------------------------------------------------------

| |  | expected
life of two years for 2008 and four years for 2007.
| | - | ------------------------------------------------------------

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 ordinary shares 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.

Options existing in 2004 and 2006 to
purchase 825,000 ordinary shares granted to a consultant outside of the Australian
Employee, Directors and Consultants Share and Option Plan 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,
|------------------------- | --------------------
|
|
|
|
|Beginning of the year     |                     
|Issued during the year 1  |                     
|                          |                     
|                          |                     
|End of the financial year |                     
|                          |                     

1 In the years ended June
30, 2008 and 2007 this includes options to purchase 1,393,563 and 75,800 ordinary shares,
respectively granted 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,
|------------------------- | --------------------
|
|
|
|
|Beginning of the year     |                     
|Issued during the year1   |                     
|                          |                     
|                          |                     
|Outstanding at year end   |                     
|                          |                     
|                          |                     
|Exercisable at year end 1 |                     
|                          |                     

1           These options are exercisable into ADRs (one U.S. option converts to one NASDAQ
          ADR = ten ASX shares)

F - 28

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|18. | SHARE
BASED PAYMENTS (continued)
|--- | --------------------------------

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 granted that have not been
exercised carry no dividend rights or right to vote.

|19. | SUBSEQUENT
EVENTS
|--- | -----------------

No matters or circumstances have
arisen since the end of the financial year which significantly affected or may
significantly affect the operations of the consolidated entity, the results of those
operations, or the state of affairs of the consolidated entity in subsequent financial
years.

|20. | LOSS
PER SHARE
|--- | --------------

|                                           | Years Ended June 30,
|------------------------------------------ | --------------------
|
|
|
|
|Basic and diluted loss per share           |                     
|                                           |                     
|                                           |                     
|Weighted average number of ordinary shares |                     
|on issue used in the calculation of basic  |                     
|and diluted loss per share                 |                     

The options and warrants in place do
not have the effect of diluting the loss per share.

|21. | KEY
MANAGEMENT PERSONNEL COMPENSATION
|--- | -------------------------------------

|(a) | The
Directors of Prana Biotechnology Ltd during the year:
|--- | ---------------------------------------------------------

|                 |                                          
|---------------- | -----------------------------------------
|
|
|
|
|Geoffrey Kempler | Executive Chairman                       
|                 | Chief Executive Officer                  
|Colin Masters    | Executive Director (Resigned 2 July 2007)
|Brian Meltzer    | Non-Executive Director                   
|George Mihaly    | Non-Executive Director                   
|Peter Marks      | Non-Executive Director                   

|(b) | The
Key Management Personnel of Prana Biotechnology Ltd during the year:
|--- | ------------------------------------------------------------------------

|                 |                        
|---------------- | -----------------------
|
|
|
|
|Dianne Angus     | Chief Operating Officer
|Richard Revelins | Company Secretary      
|                 | Chief Financial Officer

|(c) | 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 - 29

---

---

# PRANA BIOTECHNOLOGY
LIMITED

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.

The Companys Remuneration
Policy is not directly based on the Companys performance, rather on industry
practice.

The Companys primary focus is
research activities with a long term objective of developing and commercialising its
research and development results.

The Company envisages its performance
in terms of earnings will remain negative whilst the Company continues in the research
and/or trial phase. Shareholder wealth reflects this speculative and volatile market
sector. This pattern is indicative of the Companys performance over the past 4
years.

The purpose of a performance bonus is
to reward individual performance in line with Company objectives. Consequently,
performance based remuneration is paid to an individual where the individuals
performance clearly contributes to a successful outcome for the Company. This is regularly
measured in respect of performance against key performance indicators
(KPIs).

The Company uses a variety of
KPIs to determine achievement, depending on the role of the Executive being
assessed. These include:

| |  | successful
contract negotiations;
| | - | ---------------------------------

| |  | Company
share price reaching a targeted rate on the ASX or applicable market over a period of
time; or
| | - | ------------------------------------------------------------------------------------------------------

| |  | achievement
of research project milestones within scheduled time and/or budget.
| | - | -------------------------------------------------------------------------------

|                            | Short Term Benefits | Post-Employment | Equity | Total$ 
|--------------------------- | ------------------- | --------------- | ------ | -------
|
|
|
|
|Geoffrey Kempler 1,2,3, & 4 |                     |                 |        | 351,273
|Brian Meltzer 1             |                     |                 |        | 91,743 
|George Mihaly 1             |                     |                 |        | 75,000 
|Peter Marks 1               |                     |                 |        | 75,000 
|                            |                     |                 |        |        
|                            |                     |                
|                            |                     |                 |        | 593,016
|                            |                     |                 |        |        

1 This includes equity
issued as per the Annual General Meetings held on 20 December 2007, 30 November 2006, 30
November 2005 and 30 November 2004. As per IFRS the options with market conditions 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 issued in 2004, 2005 and
2006 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 $1.00 and $0.80
respectively for five consecutive trading days. See the 2007 remuneration table for
valuations of the options approved at the 30 November 2006, 30 November 2005 and 30
November 2004 Annual General Meetings. The value of the options approved at the 20
December 2007 Annual General Meeting were calculated using the Black-Scholes Model
applying the following inputs:

Issued Date: 20 December 2007
Exercise Price: $0.30
Stock Price: $0.50
Years to Expiry: 2.9
Volatility: 387%
Risk-free Interest Rate: 6.82%
Dividend Yield: 0%
Option Price: $0.50

2 On 5 June 2008, Mr. Kempler received a salary increase to $298,964 plus
          10% superannuation for Executive Chairman duties and $67,765 plus 10%
          superannuation for CEO duties. Total package of $366,729 plus 10% superannuation
          which is effective on July 1, 2008. This is an increase from $351,273 plus 10%
          superannuation.

3 In accordance with his employment contract, long service leave has been
          accrued for Mr. Kempler. At June 30, 2008 $12,573 had been accrued to date. No
          amounts have been paid in the June 30, 2008 financial year.

4During the year Mr.
Kempler received a cash bonus of $50,000 in accordance with his employment contract in
relation to a successful capital raising.

F - 30

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|21. | KEY
MANAGEMENT PERSONNEL COMPENSATION (continued)
|--- | -------------------------------------------------

|                         | Short Term Benefits | Post-Employment | Equity | Total$ 
|------------------------ | ------------------- | --------------- | ------ | -------
|
|
|
|
|Geoffrey Kempler 1,2 & 3 |                     |                 |        | 341,515
|Colin Masters 1          |                     |                 |        | 115,000
|Brian Meltzer 1          |                     |                 |        | 96,330 
|George Mihaly 1          |                     |                 |        | 110,000
|Peter Marks 1            |                     |                 |        | 75,000 
|                         |                     |                 |        |        
|                         |                     |                
|                         |                     |                 |        | 737,845
|                         |                     |                 |        |        

1This includes equity
issued as per the Annual General Meetings held on 30 November 2006, 30 November 2005 and
30 November 2004. As per 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
$1.00 and $0.80 respectively for five consecutive trading days.

The option price of options approved
at the 17 November Annual General Meeting was calculated using the Barrier Pricing Model
applying the following inputs:

Grant Date: 17 November 2004
Pricing Model: American
Option Type: Call
Barrier Type: Up and In
Strike Price: $0.00
Spot Price: $0.56
Barrier: $1.00
Days to Expiry: 208
Volatility: 70%
Risk-free Interest Rate: 5.05%
Expected Dividends: $0.00
Option Price: $0.51

The option price of options approved
at the 30 November 2005 Annual General Meeting was calculated using the Barrier Pricing
Model applying the following inputs:

Grant Date: 30 November 2005
Pricing Model: American
Option Type: Call
Barrier Type: Up and In
Strike Price: $0.00
Spot Price: $0.21
Barrier: $1.00
Days to Expiry: 1609
Volatility: 110%
Risk-free Interest Rate: 5.35%
Expected Dividends: $0.00
Option Price: $0.18

F - 31

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|21. | KEY
MANAGEMENT PERSONNEL COMPENSATION (continued)
|--- | -------------------------------------------------

The option price of options approved
at the 30 November 2006 Annual General Meeting was calculated using the Barrier Pricing
Model applying the following inputs:

Grant Date: 30 November 2006
Pricing Model: American
Option Type: Call
Barrier Type: Up and In
Strike Price: $0.00
Spot Price: $0.43
Barrier: $0.80
Days to Expiry: 974
Volatility: 100%
Risk-free Interest Rate: 6.02%
Expected Dividends: $0.00
Option Price: $0.38

2 On 1 February 2007, Mr. Kempler received a salary increase to $286,364
          plus 10% superannuation for Executive Chairman duties and $64,909 plus 10%
          superannuation for CEO duties. Total package of $351,273 plus 10%
          superannuation. This is an increase from $333,636 plus 10% superannuation.

3 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.

|                      | Short Term Benefits | Post-Employment | Equity | Total$ 
|--------------------- | ------------------- | --------------- | ------ | -------
|
|
|
|Richard Revelins      |                     |                 |        | 80,000 
|Dianne Angus 1, 2 & 3 |                     |                 |        | 280,191
|                      |                     |                 |        |        
|                      |                     |                
|                      |                     |                 |        | 360,191
|                      |                     |                 |        |        

1 Ms Angus received a salary increase during the year to $292,256 plus 9%
          superannuation, which is an increase from 268,425 plus 9% superannuation.

2 Ms Angus received
unlisted options during the year. The option prices were calculated using the Barrier
Pricing Model applying the following inputs:

|                            |                               
|--------------------------- | ------------------------------
|
|
|
|
|Grant Date: 5 December 2007 | Barrier: $0.00                
|Pricing Model: American     | Days to Expiry: 1,059         
|Option Type: Call           | Volatility: 79%               
|Barrier Type: Up and In     | Risk-free Interest Rate: 6.46%
|Strike Price: $0.00         | Expected Dividends: $0.00     
|Spot Price: $0.23           | Option Price: $0.23           

3 In accordance with her
employment contract, long service leave has been accrued for Ms Angus. At June 30, 2008
$29,895 had been accrued to date. No amounts have been paid in the June 30, 2008 financial
year.

F - 32

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|21. | KEY
MANAGEMENT PERSONNEL COMPENSATION (continued)
|--- | -------------------------------------------------

|                 | Short Term Benefits | Post-Employment | Equity | Total$ 
|---------------- | ------------------- | --------------- | ------ | -------
|
|
|
|
|Richard Revelins |                     |                 |        | 80,000 
|Ross Murdoch 1   |                     |                 |        | 303,014
|Dianne Angus 2   |                     |                 |        | 258,750
|                 |                     |                 |        |        
|                 |                     |                
|                 |                     |                 |        | 641,764
|                 |                     |                 |        |        

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 and 2008, $6,091 and $29,895 had accrued,
          respectively. 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

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, 2008:

|Directors            | Duration                                                         | Notice Requirements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Termination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Bonus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------- | ---------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Mr. Geoffrey
Kempler | Until termination  
by either party    
Signed 21 September
2007 | For Good Reason Mr.  
Kempler may terminate
with 30 days notice  
Or                   
Without Cause the    
Company may terminate
with 90 days notice  
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
Without Good Reason  
Mr. Kempler may      
terminate with 90    
days notice          
Or                   
With Cause the       
Company may terminate
with 30 days notice |   Pay Mr.           
    Kempler within    
    ninety (90) days  
    of the            
    termination date  
    $1,000,000        
    provided the      
    Company has       
    sufficient        
    capital           
    requirements to   
    fulfill this      
    clause              Accrued           
    entitlements      
    including all     
    unreimbursed
    business expenses  Accelerate
    the vesting of
    any unvested
    options Bonus             
    pro-rate only if  
    termination       
    occurs in 1 st year |   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.  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 bonus  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 bonus  As per Remuneration
    Committee Meeting, 5th
    June 2008, Bonus of
    $100,000 for outstanding
    performance including the
    overseeing of a $A 7.3
    million capital raising
    without incurring the over
    $400K of fees usually
    associated with this.

F - 34

---

---

# PRANA BIOTECHNOLOGY
LIMITED

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, 2008:

|Key Management Personnel | Duration                                                                                                                | Notice Requirements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Termination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Bonus
|------------------------ | ----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----
|                         |                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |      
|Ms Dianne Angus          | Until termination  
by either party    
Signed 2 October   
2006               
Letter Agreement   
signed 12 June 2007 | For Good Reason Ms   
Angus may terminate  
with 30 days notice  
Or                   
Without Cause the    
Company may terminate
with 120 days notice 
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
                     
Without Good Reason  
Ms Angus may         
terminate with 120   
days notice          
Or                   
With Cause the       
Company may terminate
without 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  Permitted to
    keep and/or
    exercise options
    that have vested
    at the time of
    termination  Accrued
    entitlements
    including all
    unreimbursed
    business expenses |      

F - 35

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|22. | AUDITORS'
REMUNERATION
|--- | ----------------------

|                                        | Years Ended June 30,
|--------------------------------------- | --------------------
|
|
|
|
|- audit fees: current year              |                     
|- audit fees: related to the prior year |                     
|- tax fees                              |                     
|- other fees                            |                     
|                                        |                     
|                                        |                     
|                                        |                     
|                                        |                     

PricewaterhouseCoopers was appointed
as the Companys principal independent registered public accounting firm on November
30, 2006. No non-audit services were provided by PricewaterhouseCoopers during the 2007
and 2008 fiscal years.

Deloitte Touche Tohmatsu served as
the Companys principal independent registered public accounting firm until November
30, 2006. The fees billed by Deloitte Touche Tohmatsu, as well as the other member firms
of Deloitte Touche Tohmatsu and their respective affiliates, for the 2008 and 2007 fiscal
years were A$71,773 and A$110,975, respectively, for audit-related services provided in
connection with a Securities and Exchange Commission review of the Companys annual
report on Form 20-F for the fiscal year ended June 30, 2006 and an amendment to its annual
report on Form 20-F for such period.

|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 OrdinaryShares of PranaBiotechnology Ltd | BalanceJuly 1, 2007No. | Received asRemunerationNo. | Received onExercise ofOptionsNo. | Net ChangeOther1No. | BalanceJune 30, 2008No.
|--------------------------------------------------- | ---------------------- | -------------------------- | -------------------------------- | ------------------- | -----------------------
|
|
|
|Geoffrey Kempler                                    |                        |                            |                                  | 17,055,000          |                        
|Colin Masters2                                      |                        |                            |                                  | 184,666             |                        
|Brian Meltzer                                       |                        |                            |                                  | 326,666             |                        
|George Mihaly                                       |                        |                            |                                  | 226,666             |                        
|Peter Marks                                         |                        |                            |                                  | 43,111              |                        
|Richard Revelins                                    |                        |                            |                                  | 20,308              |                        
|Dianne Angus                                        |                        |                            |                                  | -                   |                        
|                                                    |                        |                            |                                  |                     |                        
|                                                    |                        |                           
|                                                    |                        |                            |                                  | 17,856,417          |                        
|                                                    |                        |                            |                                  |                     |                        

|Fully Paid OrdinaryShares of PranaBiotechnology Ltd | BalanceJuly 1, 2006No. | Received asRemunerationNo. | Received onExercise ofOptionsNo. | Net ChangeOther1 No. | BalanceJune 30, 2007No.
|--------------------------------------------------- | ---------------------- | -------------------------- | -------------------------------- | -------------------- | -----------------------
|
|
|
|Geoffrey Kempler                                    |                        |                            |                                  | 17,055,000           |                        
|Colin Masters                                       |                        |                            |                                  | 184,666              |                        
|Brian Meltzer                                       |                        |                            |                                  | 326,666              |                        
|George Mihaly                                       |                        |                            |                                  | 226,666              |                        
|Peter Marks                                         |                        |                            |                                  | 43,111               |                        
|Richard Revelins1                                   |                        |                            |                                  | 92,808               |                        
|Ross Murdoch2                                       |                        |                            |                                  | 50,000               |                        
|Dianne Angus                                        |                        |                            |                                  | -                    |                        
|                                                    |                        |                            |                                  |                      |                        
|                                                    |                        |                           
|                                                    |                        |                            |                                  | 17,978,917           |                        
|                                                    |                        |                            |                                  |                      |                        

1 These options were sold on market.2 The balance at 30 June 2007, is the balance at date of resignation.

F - 36

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise noted)

|23. | RELATED
PARTY TRANSACTIONS (continued)
|--- | --------------------------------------

|Share Options ofPrana Biotechnology Ltd | BalanceJuly 1, 2007No. | Granted asRemunerationNo. | OptionsExercisedNo. | OptionsForfeitedNo. | OptionsExpiredNo | Options VestedDuring 2008fiscal year | BalanceJune 30, 2008No. | TotalVested andExercisableJune 30,2008No. | TotalUnvestedJune 30,2008No.
|--------------------------------------- | ---------------------- | ------------------------- | ------------------- | ------------------- | ---------------- | ------------------------------------ | ----------------------- | ----------------------------------------- | ----------------------------
|
|
|
|
|Geoffrey Kempler                        |                        |                           |                     | 2,000,000           |                  |                                      | 1,000,000               |                                           |                             
|Colin Masters                           |                        |                           |                     | 2,000,000           |                  |                                      | -                       |                                           |                             
|Brian Meltzer                           |                        |                           |                     | 600,000             |                  |                                      | 350,000                 |                                           |                             
|George Mihaly                           |                        |                           |                     | 600,000             |                  |                                      | 350,000                 |                                           |                             
|Peter Marks                             |                        |                           |                     | 600,000             |                  |                                      | 350,000                 |                                           |                             
|Richard Revelins                        |                        |                           |                     | 800,000             |                  |                                      | 350,000                 |                                           |                             
|Dianne Angus                            |                        |                           |                     | 1,250,000           |                  |                                      | 500,000                 |                                           |                             
|                                        |                        |                           |                     |                     |                  |                                      |                         |                                           |                             
|                                        |                        |                          
|                                        |                        |                           |                     | 7,850,000           |                  |                                      | 2,900,000               |                                           |                             
|                                        |                        |                           |                     |                     |                  |                                      |                         |                                           |                             

|Share Options ofPrana Biotechnology Ltd | BalanceJuly 1, 2006No. | Granted asRemunerationNo. | OptionsExercisedNo. | OptionsForfeitedNo. | OptionsExpiredNo | Options VestedDuring 2007fiscal year | BalanceJune 30, 2007No. | TotalVested andExercisableJune 30,2007No. | TotalUnvestedJune 30,2007No.
|--------------------------------------- | ---------------------- | ------------------------- | ------------------- | ------------------- | ---------------- | ------------------------------------ | ----------------------- | ----------------------------------------- | ----------------------------
|
|
|
|
|Geoffrey Kempler                        |                        |                           |                     | 1,000,000           |                  |                                      | 1,000,000               |                                           |                             
|Colin Master                            |                        |                           |                     | 1,000,000           |                  |                                      | 1,000,000               |                                           |                             
|Brian Meltzer                           |                        |                           |                     | 300,000             |                  |                                      | 300,000                 |                                           |                             
|George Mihaly                           |                        |                           |                     | 300,000             |                  |                                      | 300,000                 |                                           |                             
|Peter Marks                             |                        |                           |                     | 300,000             |                  |                                      | 300,000                 |                                           |                             
|Richard Revelins                        |                        |                           |                     | 500,000             |                  |                                      | 300,000                 |                                           |                             
|Ross Murdoch1                           |                        |                           |                     | -                   |                  |                                      | 625,000                 |                                           |                             
|Dianne Angus                            |                        |                           |                     | -                   |                  |                                      | 1,250,000               |                                           |                             
|                                        |                        |                           |                     |                     |                  |                                      |                         |                                           |                             
|                                        |                        |                          
|                                        |                        |                           |                     | 3,400,000           |                  |                                      | 5,075,000               |                                           |                             
|                                        |                        |                           |                     |                     |                  |                                      |                         |                                           |                             

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 - 37

---

---

# PRANA BIOTECHNOLOGY
LIMITED

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
|--- | ---------------------

The Groups activities expose it to a
variety of financial risks including market risk, credit risk and liquidity risk. The
Groups overall risk management program focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the financial performance of
the consolidated entity. Risk management is carried out under policies approved by the
Board of Directors and overseen by the Audit, Risk and Compliance Committee.

|(a) | Market
Risk
|--- | -----------

|(i) | Foreign
Currency Risk
|--- | ---------------------

The Group engages in international
purchase transactions and is exposed to foreign currency risk arising from various
currency exposures, primarily with respect to the Australian dollar. The parent entity
also has exposure to foreign exchange risk in the currency cash reserves it holds to meet
its foreign currency payments. The Group does not make use of derivative financial
instruments to hedge foreign exchange risk.

The following financial assets and
liabilities are subject to foreign currency risk, the currency of the amounts in the table
below are displayed in brackets:

|                                 | Consolidated Entity
|-------------------------------- | -------------------
|
|
|
|
|Cash and cash equivalents ($USD) |                    
|Cash and cash equivalents (EUR) |                    
|Cash and cash equivalents (£GBP) |                    
|Trade and other payables ($USD)  |                    
|Trade and other payables (EUR)  |                    
|Trade and other payables (£GBP)  |                    
|                                 |                    
|Total exposure                   |                    
|                                 |                    

The consolidated entity has conducted
a sensitivity analysis of the Groups exposure to foreign currency risk. The Group is
currently exposed to the US dollar (USD), Euro (EUR) and Great British Pound (GBP). The
sensitivity analysis below is conducted on a currency by currency basis using the same
sensitivity analysis variable, which has been based on the average annual movement in the
AUD/USD exchange rate over the past 5 years based on the year-end spot rates, being 8%.

|                                                 | Consolidated Entity
|------------------------------------------------ | -------------------
|
|
|
|
|Increase/(Decrease) in cash and cash equivalents |                    
|AUD/USD + 8%                                     |                    
|AUD/EUR + 8%                                     |                    
|AUD/GBP + 8%                                     |                    
|                                                 |                    
|AUD/USD - 8%                                     |                    
|AUD/EUR - 8%                                     |                    
|AUD/GBP - 8%                                     |                    
|Increase/(Decrease) in trade and other payables  |                    
|AUD/USD +8%                                      |                    
|AUD/EUR + 8%                                     |                    
|AUD/GBP + 8%                                     |                    
|                                                 |                    
|AUD/USD - 8%                                     |                    
|AUD/EUR - 8%                                     |                    
|AUD/GBP - 8%                                     |                    

F - 38

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|25. | FINANCIAL
INSTRUMENTS (continued)
|--- | ---------------------------------

|(ii) | Interest
Rate Risk
|---- | ------------------

The consolidated entitys exposure
to interest rate risk, which is the risk that a financial instruments value will
fluctuate as a result of changes in market interest rates and the effective weighted
average interest rates on classes of financial assets and financial liabilities.

The consolidated entity exposure to
interest rate risk has not changed since the prior year.

At June 30, 2008, the consolidated
entity had the following cash accounts:

| |  | A$25,554
in Australia dollar cheque accounts at variable interest rates ranging from 0.10% to
6.25% as of June 30, 2008;
| | - | ------------------------------------------------------------------------------------------------------------------------

| |  | A$6,800,000
in a three month term deposit at a fixed interest rate of 7.95% as of June 30, 2008;
| | - | ------------------------------------------------------------------------------------------------

| |  | A$3,950,416
in at call deposit account, earning interest of 7.20% as of June 30, 2008;
| | - | --------------------------------------------------------------------------------------

| |  | US$286,264
(A$298,029) in a US cheque account at a interest rate of 1.43% as of June 30, 2008;
| | - | ----------------------------------------------------------------------------------------------

| |  | GBP$35,075
(A$72,869) in a GBP cheque account at a variable interest rate of 3.57% as of June 30,
2008;
| | - | -------------------------------------------------------------------------------------------------------

| |  | EUR$41,166
(A$67,710) in a EUR cheque account at a variable interest rate of 3.16% as of June 30,
2008;
| | - | -------------------------------------------------------------------------------------------------------

| |  | A$11,064
in a twelve month term deposit at a fixed interest rate of 7.25%which matures on 13
January 2009;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | A$35,164
in a three month term deposit at a fixed interest rate of 6.30%which matures on 11 August
2008;
| | - | --------------------------------------------------------------------------------------------------------

| |  | A$200
in petty cash which does not earn any interest;
| | - | -----------------------------------------------------

| |  | GBP$174
(A$361) in petty cash which does not earn any interest;
| | - | ---------------------------------------------------------------

| |  | SEK$970
(A$169) in petty cash which does not earn any interest;
| | - | ---------------------------------------------------------------

| |  | US$3,575
(A$3,727) in petty cash which does not earn any interest; and
| | - | ----------------------------------------------------------------------

| |  | CA$5
(A$5) in petty cash which does not earn any interest.
| | - | ----------------------------------------------------------

The weighted average interest rate is
7.45% for cash and cash equivalents and 6.53% 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, 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$2,422) 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.

F - 39

---

---

# PRANA BIOTECHNOLOGY
LIMITED

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, 2008               | FloatingInterest Rate | Fixed InterestMaturing in | Non-Interestbearing | Total   | AverageInterest Rate
|--------------------------- | --------------------- | ------------------------- | ------------------- | ------- | --------------------
|
|
|
|
|Financial Assets            |                       |                           |                     |         |                     
|Cash and cash equivalents   |                       |                           |                     | 464,162 |                     
|Trade and other receivables |                       |                           |                     | -       |                     
|Other current assets        |                       |                           |                     | -       |                     
|                            |                       |                           |                     |         |                     
|                            |                       |                          
|                            |                       |                           |                     | 464,162 |                     
|                            |                       |                           |                     |         |                     
|                            |                       |                          
|Financial Liabilities       |                       |                          
|Provisions                  |                       |                           |                     | -       |                     
|Other financial liabilities |                       |                           |                     | -       |                     
|                            |                       |                           |                     |         |                     
|                            |                       |                          
|                            |                       |                           |                     | -       |                     
|                            |                       |                           |                     |         |                     

|June 30, 2007               | FloatingInterest Rate | Fixed InterestMaturing in | Non-Interestbearing | Total   | AverageInterest Rate
|--------------------------- | --------------------- | ------------------------- | ------------------- | ------- | --------------------
|
|
|
|
|Financial Assets            |                       |                           |                     |         |                     
|Cash                        |                       |                           |                     | 453,397 |                     
|Receivables                 |                       |                           |                     | -       |                     
|Other current assets        |                       |                           |                     | -       |                     
|                            |                       |                           |                     |         |                     
|                            |                       |                          
|                            |                       |                           |                     | 453,397 |                     
|                            |                       |                           |                     |         |                     
|                            |                       |                          
|Financial Liabilities       |                       |                          
|Payables                    |                       |                           |                     | -       |                     
|Other financial liabilities |                       |                           |                     | -       |                     
|                            |                       |                           |                     |         |                     
|                            |                       |                          
|                            |                       |                           |                     | -       |                     
|                            |                       |                           |                     |         |                     

F - 40

---

---

# PRANA BIOTECHNOLOGY
LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|25. | FINANCIAL
INSTRUMENTS (continued)
|--- | ---------------------------------

|(b) | Credit
risk
|--- | -----------

Credit risk refers to the risk that a
counterparty will default on its contractual obligations resulting in financial loss to
the consolidated entity. The consolidated entity has no significant concentration of
credit risk and it is not the Companys policy to hedge credit risk.

The Company ensures that surplus cash
is invested with financial institutions of appropriate credit worthiness and limits the
amount of credit exposure to any one counter party.

There has been no significant change
in the consolidated entitys exposure to credit risk since the previous year. The
carrying amount of the consolidated entitys financial assets represent the maximum
credit exposure.

|(c) | Liquidity
Risk
|--- | --------------

Prudent liquidity risk management
implies maintaining sufficient cash and the availability of funding through an adequate
amount of committed credit facilities. The consolidated entity manages liquidity risk by
maintaining sufficient bank balances to fund its operations and the availability of
funding through committed credit facilities.

Management monitors rolling forecasts
of the Groups liquidity reserve on the basis of expected cash flows.

Maturities of Financial
Liabilities

|2008                        | Less than 6 months | 6-12 months | Total contracted cashflows | Carrying amounts
|--------------------------- | ------------------ | ----------- | -------------------------- | ----------------
|
|
|
|
|Consolidated Entity         |                    |             |                            |                 
|                            |                    |             |                            |                 
|                            |                    |            
|Trade and other payables    |                    |             |                            | 849,113         
|Other financial liabilities |                    |             |                            | 772,430         
|                            |                    |            
|Parent                      |                    |            
|                            |                    |            
|Trade and other payables    |                    |             |                            | 848,072         
|Other financial liabilities |                    |             |                            | 772,430         
|                            |                    |            
|2007                        |                    |             |                            |                 
|                            |                    |            
|Consolidated Entity         |                    |            
|                            |                    |            
|Trade and other payables    |                    |             |                            | 1,661,609       
|Other financial liabilities |                    |             |                            | 321,001         
|                            |                    |            
|Parent                      |                    |            
|                            |                    |            
|Trade and other payables    |                    |             |                            | 1,658,663       
|Other financial liabilities |                    |             |                            | 321,001         

|(d) | Capital
Risk Management
|--- | -----------------------

The consolidated entitys
objectives when managing capital are to safeguard the consolidated entitys ability
to continue as a going concern and to maintain an optimal capital structure so as to
maximize shareholder value. In order to maintain or achieve an optimal capital structure,
the consolidated entity may issue new shares or reduce its capital, subject to the
provisions of the Companys constitution. The capital structure of the consolidated
entity consists of equity attributed to equity holders of the consolidated entity,
comprising contributed equity, reserves and accumulated losses disclosed in notes 13, 14
and 15. By monitoring undiscounted cash flow forecasts and actual cash flows provided to
the Board by the Companys Management the Board monitors the need to raise additional
equity from the equity markets.

|(e) | Fair
value Estimation
|--- | ---------------------

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless otherwise noted)

|26. | ADDITIONAL
COMPANY INFORMATION
|--- | ------------------------------

Prana Biotechnology Limited is a
listed public company, incorporated and operating in Australia.

|                        |                            
|----------------------- | ---------------------------
|
|
|
|
|Registered Office       | Principal Place of Business
|Suite 2                 | Level 2                    
|1233 High Street        | 369 Royal Parade           
|Armadale Vic 3143       | Parkville Vic 3052         
|Australia               | Australia                  
|                       
|Tel: +61 (03) 9824 8166 | Tel: +61 (03) 9349 4906    

Note 27. 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 IAS 32, 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.

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.

|                                                 | For the year ended June 30, 2006
|------------------------------------------------ | --------------------------------
|
|
|
|
|Consolidated statement of operations line items: |                                 
|Gain on fair value financial liabilities         |                                 
|Loss before income tax expense                   |                                 
|Net loss                                         |                                 
|Loss per share (basic and diluted)               |                                 

F - 42

---

---

# 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. Kempler
Geoffrey P. KemplerChief Executive Officer
| |  | ------------------------------------------------------------------------------------------------------------------

Dated: September 25, 2008

80

---

---