**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**





**FORM
      20-F/A**


**Amendment
      No. 1**





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, 2006**




**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,
              2006**
            **128,144,260**




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




Yes o
      No x









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




Yes
o
      No x




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




Yes x No o





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




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





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




Item
      17 o Item 18
x




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




Yes o
      No x





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









**EXPLANATORY
      NOTE**





This
      Amendment No. 1 on Form 20-F/A is being filed solely to amend Items 3A & 3D,
      5, 15 and 18 of Prana Biotechnology Limited’s Annual Report on Form 20-F for the
      fiscal year ended June 30, 2006, which was filed on September 29, 2006, to
      reflect the restatement discussed below. The risk factor captioned “We have a
      history of operating losses and may not achieve or maintain profitability in
      the
      future” in Item 3D has been revised to reflect the impact of the restatement.




On
      June
      1, 2004, upon approval of our shareholders, we issued 4,000,000 American
      Depositary Receipts, or 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 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.




Upon
      our
      adoption of the Australian equivalents to International Financial Reporting
      Standards, or A-IFRS, on July 1, 2005, the accounting treatment of the private
      placement reflected in our audited financial statements for the fiscal year
      ended June 30, 2006 was recorded as Issued Capital. No value was attributed
      to
      the warrants. .




Following
      a review of the interim financial statements for the six months ended December
      31, 2006 by our new auditors, we have identified that the treatment of the
      accounting for the private placement was incorrect under A-IFRS. Under
      Australian Accounting Standard Board 132, or AASB 132, “Financial Instruments:
      Disclosure and Presentation,” 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 our company. As a result, upon initial recognition, the fair value
      of the warrants should be recognized as a financial liability at their fair
      value, reducing the Issued Capital that was previously recorded. Each reporting
      period, the fair value of the outstanding warrants is revalued using the Black
      Scholes Model. When the fair value of the outstanding warrants increases or
      decreases, the difference is recorded as a gain or loss, as applicable, on
      the
      fair value of financial liabilities.




As
      a
      result of the correction, as of the fiscal year ended June 30, 2006, previously
      presented non-current financial liabilities have increased by A$928,692
      (US$678,038), issued capital has decreased by A$8,823,548 (US$6,442,072) and
      accumulated losses have decreased by A$7,894,856 (US$5,764,034). Also, as a
      result of the correction, for and as of the fiscal year ended June 30, 2005,
      previously presented non-current financial liabilities have increased by
      A$1,057,407 (US$772,013), issued capital has decreased by A$8,823,548
      (US$6,442,072) and accumulated losses have decreased by A$7,766,141
      (US$5,670,060). The basic and diluted loss per share for the fiscal year ended
      June 30, 2006 has decreased to A$0.09 (US$0.07). The basic and diluted loss
      per
      share for the fiscal year ended June 30, 2005 has decreased to A$0.08 (US$0.06).
      See Note 28 to our audited consolidated financial statements included elsewhere
      herein.




Under
      accounting principles generally accepted in the United States, or U.S. GAAP,
      in
      accordance with the Financial Accounting Standards Board Statement of Financial
      Accounting Standards No. 133, “Accounting for Derivatives Instruments and
      Hedging Activities,” as amended by Emerging Issues Task Force Issue No. 01-6,
“The Meaning of “Indexed to a Company’s Own Stock,” the warrants associated with
      the private placement should have been classified as a financial liability,
      as
      opposed to equity, as a result of the warrants being exercisable in a currency
      that is not the functional currency of our company. As a result of the
      restatement under A-IFRS, there is no adjustment required under U.S. GAAP.
      The
      accumulated losses under US GAAP decreased by A$7,894,856 (US$5,764,034) and
      A$7,766,141 (US$5,670,060), total equity decreased and total liabilities
      increased by A$928,692 (US$678,038) and A$1,057,407 (US$772,013) for the fiscal
      years ended June 30, 2006 and 2005, respectively. The basic and diluted loss
      per
      share for the fiscal years ended June 30, 2006 did not change but for the fiscal
      year ended June 30, 2005 it decreased to A$0.10 (US$0.08). See Note 28 to our
      audited consolidated financial statements included elsewhere herein.




ii




The
      foregoing translations of Australian dollar amounts into U.S. dollars have
      been
      made at 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 on June 30, 2006 (US$0.73= A$1.00).




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.




This
      Amendment is not intended to revise other information presented in the
      Registrant's Annual Report on Form 20-F for the fiscal year ended June 30,
      2006
      as originally filed and all such other information in the original filing,
      which
      remains unchanged.




This
      Amendment does not reflect events occurring after the filing of the original
      Form 20-F and does not modify or update the disclosure therein in any way other
      than as required to reflect the amendments discussed above. As a result, this
      Amendment continues to speak as of September 29, 2006.




iii




**TABLE
      OF CONTENTS**






PagePART
                    I
                
                
                
                1ITEM
                    3.
                
                KEY
                    INFORMATION
                
                1A.  
                       Selected Consolidated Financial Data
                
                1D.   
                      Risk Factors
                
                3ITEM
                    5.
                
                OPERATING
                    AND FINANCIAL REVIEW AND PROSPECTS
                
                11A.Operating
                      Results
                
                12B. Liquidity
                      and Capital Resources
                
                20C.Research
                      and Development, Patents and Licenses
                
                23D.    
                      Trend Information
                
                26E.Off-Balance
                      Sheet Arrangements
                
                26F.Tabular
                      Disclosure of Contractual Obligations
                
                26PART
                    II
                
                
                
                27ITEM
                    15.
                
                CONTROLS
                    AND PROCEDURES
                
                27ITEM
                    18.
                
                FINANCIAL
                    STATEMENTS
                
                28ITEM
                    19.
                
                EXHIBITS
                
                28SIGNATURES
                
                
                
                31
  iv


**PART
      I**




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




**A.**
              **S****ELECTED****C****ONSOLIDATED****F****INANCIAL****D****ATA**




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




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




The
      Securities and Exchange Commission, or SEC, has adopted a one-time accommodation
      that permits 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. Our first annual consolidated
      financial statements prepared under A-IFRS (which is complaint with IFRS) are
      for the fiscal year ended June 30, 2006 and this annual report on Form 20-F
      has
      been prepared in reliance on such SEC accommodation.




A-IFRS
      differ in certain significant respects from generally accepted accounting
      principles in the United States, or U.S. GAAP. Please refer to Note 26 to our
      consolidated financial statements included in this annual report for a
      description of the differences between A-IFRS and U.S. GAAP as they relate
      to
      us, and a reconciliation of net loss and total equity for the periods and as
      of
      the dates therein indicated.




The
      selected consolidated financial data as of and for the years ended June 30,
      2006
      and 2005 have been derived from our audited consolidated financial statements
      and notes thereto included elsewhere in this annual report. The selected
      consolidated financial data as of and for the years ended June 30, 2004, 2003
      and 2002 have been derived from our audited consolidated financial statements
      and notes thereto which are not included in this annual report.




1




**Statement
        of Operations Data:**




**Year
                Ended June 30,****2006(*)**
            
            
            **2005
                (*)**
            
            
            **2004****(*)**
            
            
            **2003**
            
            
            **2002**(in
                A$, except number of shares)A-IFRS:Revenue
            
            
            762,023
            
            
            892,135
            
            
            -
            
            
            -
            
            
            -Other
                income
            
            
            288,263
            
            
            1,760,978
            
            
            -
            
            
            -
            
            
            -Research
                and development expenses
            
            
            (7,613,045
            )
            
            (7,109,839
            )
            
            -
            
            
            -
            
            
            -Research
                and development expenses - related party
            
            
            -
            
            
            (577,757
            )Personnel
                expenses
            
            
            (3,418,008
            )
            
            (5,750,929
            )
            
            -
            
            
            -
            
            
            -Intellectual
                property expenses
            
            
            (466,426
            )
            
            (729,583
            )
            
            -
            
            
            -
            
            
            -Audit
                fees
            
            
            (205,815
            )
            
            (202,032
            )
            
            -
            
            
            -
            
            
            -Travel
                expenses
            
            
            (212,184
            )
            
            (432,316
            )
            
            -
            
            
            -
            
            
            -Marketing
                expenses
            
            
            (134,750
            )
            
            (442,920
            )
            
            -
            
            
            -
            
            
            -Depreciation
                expenses
            
            
            (118,196
            )
            
            (65,223
            )
            
            -
            
            
            -
            
            
            -Amortization
                expenses
            
            
            -
            
            
            (83,200
            )
            
            -
            
            
            -
            
            
            -Other
                expenses
            
            
            (824,625
            )
            
            (1,204,930
            )
            
            -
            
            
            -
            
            
            -Other
                expenses - related party
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Foreign
                exchange gain (loss)
            
            
            223,454
            
            
            (1,362,572
            )
            
            -
            
            
            -
            
            
            -Impairment
                of intangible assets
            
            
            -
            
            
            (786,240
            )
            
            -
            
            
            -
            
            
            -Gain
                on fair value of financial liabilities
            
            
            128,715
            
            
            (5,801,397
            
            
            -
            
            
            -
            
            
            -Net
                loss
            
            
            (11,590,594
            )
            
            (10,293,031
            )
            
            -
            
            
            -
            
            
            -Loss
                per share - basic and diluted
            
            
            (0.09
            )
            
            (0.08
            )
            
            -
            
            
            -
            
            
            -Weighted
                average number of ordinary shares outstanding - basic and
                diluted
            
            
            128,053,601
            
            
            122,754,061
            
            
            -
            
            
            -
            
            
            -*U.S.
                GAAP:*Net
                loss
            
            
            (11,590,594
            )
            
            (11,998,032
            )
            
            (7,243,455
            )
            
            (3,244,397
            )
            
            (4,728,019
            )Loss
                per share - basic and diluted
            
            
            (0.09
            )
            
            (0.10
            )
            
            (0.09
            )
            
            (0.05
            )
            
            (0.08
            )Weighted
                average number of ordinary shares outstanding - basic and
                diluted
            
            
            128,053,601
            
            
            122,754,061
            
            
            75,701,818
            
            
            61,131,313
            
            
            57,623,389







(*) As
      restated. The A-IFRS financial information as of and for the years ended June
      30, 2006 and 2005 and the U.S. GAAP financial information as of and for the
      years ended June 30, 2006, 2005 and 2004 has been restated. See Note 28 to
      our
      audited consolidated financial statements included herein for a description
      and
      summary of the significant effects of the restatement.




2




**Balance
                Sheet Data:**




**As
                at June 30,****2006****(*)**
            
            **2005****(*)**
            
            **2004****(*)**
            
            **2003**
            
            **2002**(in
                  A$ )*A-IFRS:*Cash
                and cash equivalents
            
            
            10,013,778
            
            
            21,453,304
            
            
            -
            
            
            -
            
            
            -Working
                capital
            
            
            8,780,413
            
            
            19,427,962
            
            
            -
            
            
            -
            
            
            -Total
                assets
            
            
            10,421,146
            
            
            22,289,159
            
            
            -
            
            
            -
            
            
            -Net
                assets
            
            
            7,800,658
            
            
            18,536,769
            
            
            -
            
            
            -
            
            
            -Issued
                capital
            
            
            46,274,127
            
            
            45,838,897
            
            
            -
            
            
            -
            
            
            -Reserves
            
            
            2,867,249
            
            
            2,447,996
            
            
            -
            
            
            -
            
            
            -Accumulated
                deficit during   development stage
            
            
            (41,340,718
            )
            
            (29,750,124
            )
            
            -
            
            
            -
            
            
            -Total
                equity
            
            
            7,800,658
            
            
            18,536,769
            
            
            -
            
            
            -
            
            
            -*U.S.
                GAAP:*Total
                assets
            
            
            10,421,146
            
            
            22,289,159
            
            
            34,197,794
            
            
            7,944,306
            
            
            7,231,703Accumulated
                deficit during   development stage
            
            
            (45,520,327
            )
            
            (33,929,733
            )
            
            (22,144,137
            )
            
            (14,900,682
            )
            
            (11,656,285
            )Contributed
                equity
            
            
            53,320,985
            
            
            52,466,502
            
            
            46,770,289
            
            
            22,278,765
            
            
            18,372,088Total
                equity
            
            
            7,800,658
            
            
            18,536,769
            
            
            24,626,152
            
            
            7,378,083
            
            
            6,715,803







(*) As
      restated. The A-IFRS financial information as of and for the years ended June
      30, 2006 and 2005 and the U.S. GAAP financial information as of and for the
      years ended June 30, 2006, 2005 and 2004 has been restated. See Note 28 to
      our
      audited consolidated financial statements included herein for a description
      and
      summary of the significant effects of the restatement.




**D.**
              **R****ISK****F****ACTORS**




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




***Risks
      Related To Our Business***




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




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




3




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




We
      have
      been unprofitable to date and expect to incur losses over the next several
      years
      as we expand our drug discovery and development programs and pre-clinical
      testing and as we conduct clinical trials of our product candidates. We may
      not
      have sufficient financial resources available to us to meet our actual operating
      expenses and capital requirements after March 2007. 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 our operations,
      including our research and development activities, which could have a material
      adverse effect on our business, financial condition and results of operations.




Our
      failure to raise additional capital before March 2007 would have a material
      adverse effect on our company’s ability to continue as a going concern and to
      achieve its business objectives. Our auditors have included a going concern
      uncertainty paragraph in their report. The accompanying financial statements
      do
      not include any adjustments relating to the recoverability of the carrying
      amount of recorded assets or the amount of liabilities that might result should
      we be unable to continue as a going concern.




**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.




4




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
      PBT-2 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 PBT-2 or any future pharmaceutical product will be completed
      or
      commercialized, whether funded by us, as part of a collaboration or through
      a
      grant.




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




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




**We
      will not be able to commercialize our PBT-2 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 PBT-2 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
      PBT-2
      compound as a therapeutic for Alzheimer’s disease 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 PBT-1 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.




5




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




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




We
      may be
      required to enter into contracting arrangements with third parties to
      manufacture PBT-2 and any 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 supplier of our lead compound, PBT-2, and could incur
      significant costs and delays if we are unable to promptly find a replacement.**




We
      typically rely on a single manufacturer to develop Good Manufacturing Practice
      (GMP) synthetic processes for our lead compounds. Our lead compound, PBT-2,
      is
      manufactured by the Institute of Drug Technology Limited. We intend to continue
      this relationship and this approach with further compounds if the relationship
      remains financially viable. We may not be able to promptly find a replacement
      manufacturer, if required, without incurring material additional costs and
      substantial delays.




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




We
      have
      incurred losses in every period since we began operations in 1997. We expect
      to
      continue to incur additional operating losses over at least the next several
      years and to increase our cumulative losses substantially as we expand our
      research and development and pre-clinical activities and commence additional
      clinical trials of PBT-2. We reported net losses of A$11,590,594 and
      A$10,293,031 during the fiscal years ended June 30, 2006 and 2005, respectively.
      As of June 30, 2006, our accumulated deficit was A$41,340,718. 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




6




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




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




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




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




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




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




**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.




7




**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 PBT-2 product candidate. Our ability to further
      develop our products may be adversely affected if any of our competitors were
      to
      succeed in obtaining regulatory approval for their competitive products sooner
      than us.




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




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




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




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




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




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




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




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




8




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




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




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




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




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




***Risks
      Relating to Our Securities***




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




The
      market price for our securities, like that of the securities of other
      pharmaceutical and biotechnology companies, has fluctuated substantially and
      may
      continue to be highly volatile in the future. During the last two fiscal years,
      the market price for our ordinary shares on the Australian Stock Exchange has
      ranged from as low as A$0.13 to a high of A$0.70 and the market price of our
      American Depositary Shares on the NASDAQ Capital Market has ranged from as
      low
      as US$0.98 to a high of US$5.05. 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;




9




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




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




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




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




·
            litigation;




·
            economic
                and other external factors; and




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




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




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




As
      a
      result of changes to the laws, regulations and standards relating to accounting,
      corporate governance and public disclosure, the costs of being a public company
      in general have increased in recent years. The Sarbanes-Oxley Act of 2002
      requires changes in some of our corporate governance and securities disclosure
      or compliance practices. We expect that the on-going implementation of these
      regulations will further increase our legal compliance costs and will make
      some
      activities more time consuming. We are presently evaluating and monitoring
      regulatory developments and cannot estimate the magnitude of additional costs
      we
      may incur as a result of such developments. Effective as of our fiscal year
      ending June 30, 2008, we will be required to implement Section 404 of the
      Sarbanes-Oxley Act of 2002, which governs internal controls and procedures
      for
      financial reporting. The compliance with respect to the requirement to provide
      an auditor’s attestation report on internal control over financial may be
      subject to additional relief granted by the Securities and Exchange Commission.
      We expect that we will need to expend significant management time and financial
      resources to comply with the applicable requirements. This and other enacted
      and
      proposed legislation may increase the fees of our professional advisors and
      our
      insurance premiums.




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




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




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




Holders
      of our ADRs who are U.S. residents face income tax risks. There is a
      substantial risk that we are a passive foreign investment company, commonly
      referred to as PFIC. Our treatment as a PFIC could result in a reduction in
      the
      after-tax return to the holders of our ADRs and would likely cause a reduction
      in the value of such




10






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 will once again qualify as a PFIC during the taxable year ended June
      30, 2006, under a literal application of the asset test described above, which
      looks solely to the market value.  If we are classified as a PFIC for U.S.
      federal income tax purposes, highly complex rules would apply to U.S. holders
      owning ADRs.  Accordingly, you are urged to consult your tax advisors
      regarding the application of such rules. United States residents should
      carefully read “Item 10E. Additional Information - Taxation, United States
      Federal Income Tax Consequences” for a more complete discussion of the U.S.
      federal income tax risks related to owning and disposing of our
      ADRs.




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




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




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




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




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




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




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




**ITEM
              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.*




11




You
      should read the following discussion and analysis in conjunction with our
      consolidated financial statements and the notes thereto included in this annual
      report. Our consolidated financial statements have been prepared in accordance
      with A-IFRS. The SEC has adopted an accommodation permitting eligible foreign
      private issuers, such as our company to file 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. The fiscal year 2006 is our first year of operating under A-IFRS
      (which is compliant with IFRS) and this annual report on Form 20-F/A has been
      prepared in reliance on such SEC accommodation. As a result, the operating
      and
      financial review that follows covers the fiscal year 2006 and the comparable
      financial year 2005.




**A.**
            **O****PERATING****R****ESULTS**




**Background**




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




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




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




**Overview**




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




Since
      completing our initial public offering and listing process on the ASX on March
      28, 2000, we have concentrated our resources toward the pursuit of our disease
      targets. Initially we focused on clinical trials of our PBT-1 compound as a
      therapeutic for the treatment of Alzheimer’s disease and in early August 2003,
      our PBT-2 compound was announced as a new lead metal protein attenuating
      compound, or MPAC, molecule for Alzheimer’s disease.




On
      April
      11, 2005, we announced that we would not proceed with the scheduled Phase II/III
      study of PBT-1 and that we had re-evaluated our further work on the PBT-1
      program. As part of our effort to manufacture Good Manufacturing Practice (GMP)
      grade PBT-1 clinical trial material, we 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 PBT-1 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
      PBT-1 had been impaired and the carrying value was written-off.




12




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, PBT-2. We completed two Phase I studies of PBT-2 (for
      details see Item 4A. “Information on the Company - History and Development of
      the Company”) and on May 11, 2006, we announced our plans to move forward with a
      Phase IIa clinical trial for PBT-2 in patients with Alzheimer’s disease. The
      study, to be conducted in several sites in Sweden, will evaluate the safety
      and
      tolerability of PBT-2, as well as measures of the drug’s mechanism of action and
      indicators of potential efficacy in Alzheimer’s disease. The study is expected
      to commence enrollment in the fourth quarter of 2006, subject to final
      regulatory approval, and assuming such start date, results are expected to
      be
      reported by the end of 2007.




**Recently
      Issued Accounting Pronouncements Applicable To Us**




***Australian
      Pronouncements***




On
      July
      3, 2002, the Australian Financial Reporting Council announced that Australia
      would adopt International Financial Reporting Standards, or IFRS, under which
      we
      are required to prepare consolidated financial statements that comply with
      the
      Australian equivalents to IFRS, or A-IFRS, for reporting periods beginning
      on or
      after January 1, 2005. Accordingly, our first annual consolidated financial
      statements prepared under A-IFRS are for the fiscal year ended June 30, 2006
      included in this annual report. Comparative figures for the fiscal year ended
      June 30, 2005 have been adjusted to reflect such change in accounting policies.




In
      applying A-IFRS, we relied on an exception to such accounting standards with
      respect to the valuation of options issued to employees and directors. Under
      AASB Standard No. 2, the fair value of share options issued to employees and
      directors is determined at grant date and expensed over the expected vesting
      period of the options.  Upon transition to A-IFRS, we elected not to
      retrospectively recognize share based payments that were granted before November
      7, 2002 and share based payments granted after November 7, 2002 that vested
      before January 1, 2005.  As a result of this election, we did not apply a
      Black Scholes or Barrier Pricing Model to the affected equity.  Had we
      elected to retrospectively recognize the value of this equity, the issued
      capital, share based payments reserve and the accumulated deficit would have
      increased.  This would not have had any effect on the overall total equity
      of our company.




The
      impact of the transition to A-IFRS on our results and financial position are
      described in Note 1(s) to our consolidated financial statements.




***United
      States Pronouncements***




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




We
      adopted the modified prospective method of SFAS 123(R) effective July 1, 2005 in
      which
      compensation cost is recognized beginning with the effective date (a) based
      on
      the requirements of SFAS 123(R) for all share-based payments granted after
      the
      effective date and (b) based on the requirements of SFAS 123 for all awards
      granted to employees prior to the effective date of SFAS 123(R) that remain
      unvested on the effective date.




13




Prior
      to
      July 1, 2005, as permitted by SFAS 123, we accounted for share-based payments
      to
      employees using Accounting Principles Board, or APB, Opinion No. 25, “Accounting
      for Stock Issued to Employees,” the intrinsic value method, or APB No. 25.
      Accordingly, the adoption of the SFAS 123(R) fair value method may have
      significant impact on our results of operations, although it will have no impact
      on our overall financial position. Had we adopted SFAS 123(R) in prior periods,
      the impact of SFAS 123(R) would have increased our loss by $A1,708,925. As
      a
      result of adopting SFAS 123(R) on July 1, 2005, our U.S. GAAP loss before income
      taxes and net loss for the year ended June 30, 2006 was A$76,469 higher than
      if
      we had continued to account for share-based compensation to employees and
      directors under APB No. 25.




In
      May
      2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections,”
or SFAS 154, a replacement of APB Opinion No. 20 “Accounting Changes and SFAS
      No. 3 “Reporting Accounting Changes in Interim Financial Statements,” effective
      for fiscal years beginning after December 15, 2005, and was required to be
      adopted by our company as of fiscal year beginning June 30, 2006. SFAS 154
      changes the requirements for the accounting for and reporting of a voluntary
      change in accounting principle as well as the changes required by an accounting
      pronouncement which does not include specific transition provisions. At this
      time our management reasonably believes that the adoption of SFAS 154 will
      not
      have a material effect on our financial position or results of
      operations.




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




In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Qualifying
      Misstatements in Current Year Financial Statements,” or SAB 108, which provides
      interpretive guidance on the consideration of the effects of prior year
      misstatements in quantifying current year misstatements for the purpose of
      a
      materiality assessment. SAB
      108
      is effective for companies with fiscal years ending after November 15, 2006
      and is required to be adopted by our company as of our fiscal year ended June
      30, 2007. However, early application is encouraged in any report for an interim
      period of the first fiscal year ending after November 15, 2006, filed after
      the publication of this guidance. We are currently assessing the impact of
      the
      adoption of SAB 108.




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




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




14




**As
                of and for the years ended June 30,****2006**(*)
            
            **2005**(*)Net
                loss in accordance with:A-IFRS
            
            
            (11,590,594
            )
            
            (10,293,031
            )U.S.
                GAAP
            
            
            (11,590,594
            )
            
            (11,998,032
            )Total
                equity in accordance with:A-IFRS
            
            
            7,800,658
            
            
            18,536,769U.S.
                GAAP
            
            
            7,800,658
            
            
            18,536,769





*
            As
                restated. The A-IFRS financial information as of and for the years
                ended
                June 30, 2006 and 2005 and the U.S. GAAP financial information as
                of and
                for the years ended June 30, 2006, 2005 and 2004 has been restated.
                See
                Note 28 to our audited consolidated financial statements included
                herein
                for a description and summary of the significant effects of the
                restatement.




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




**Critical
      Accounting Policies**




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




*Recoverable
      amount of non-current assets* .
      Each
      reporting period, our Board of Directors assesses the recoverable amount of
      all
      non-current assets to ensure its carrying value does not exceed its recoverable
      amount. Where the carrying amount of a non-current asset is greater than its
      recoverable amount, the asset is revalued down to its recoverable amount.
      Recoverable amount is the higher of fair value less costs to sell and value
      in
      use. In assessing value in use, the estimated future cash flows are discounted
      to their present value using a pre-tax discount rate that reflects current
      market assessments of the time value of money and the risks specific to the
      asset for which the estimates of future cash flows have not been adjusted.




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




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




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




15




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




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




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




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




**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, s hare-based
      payments, and
      payments for benefits provided to our employees and officers for their
      services.




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




*Audit
      fees.* Our
      audit
      fees consist of the fees paid to our auditors for services related to annual
      reports and interim reports filed or submitted in Australia and the United
      States.




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




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




16




*Depreciation
      expense* .
      Depreciation of property and equipment is provided on a straight-line basis
      over
      the estimated useful lives of three to 14 years.




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





*Amortization
      expense* .
      Prior
      to the impairment of our core intellectual property relating to PBT-1 as of
      June
      30, 2005, amortization of our core intellectual property was provided on a
      straight-line basis over the estimated useful lives of 15 years.




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




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




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




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




*Gain
      (loss) on fair value of financial liabilities.* Each
      reporting period, the fair value of the outstanding warrants issued to investors
      in connection with our private placement in the United States in June 2004
      is
      revalued using the Black Scholes Model. 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. When
      the
      fair value of the outstanding warrants increases or decreases, the difference
      will be recorded as a gain or loss, as applicable, on the fair value of
      financial liabilities.




**Results
      of Operations**




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




*Revenues*




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




*Other
      Income*




Other
      income decreased to A$288,263 for the year ended June 30, 2006 from A$1,760,978
      for the year ended June 30, 2005, a decrease of A$1,472,715, or 83.6%. Other
      income in the year ended June 30, 2006 consisted of A$288,173 government grant
      income. Other income in the year ended June 30, 2005 consisted of A$629,692
      government grant income and A$1,125,000 received under the licensing and
      research collaboration we entered into with Schering A.G. and Neurosciences
      Victoria Ltd. in March 2003. The decrease in other income in the 2006 fiscal
      year was attributable to the reduction in funding from Schering A.G. and
      Neurosciences Victoria Ltd. due to the completion of the contracts in connection
      with our collaboration with Schering A.G and Neurosciences Ltd in June 2005.




17




*Research
      and development expenses*




Research
      and development expenses (including research and development expenses paid
      to
      related parties) remained substantially consistent at A$7,613,045 for the year
      ended June 30, 2006 from A$7,687,596 for the year ended June 30, 2005. Research
      and development expenses in the year ended June 30, 2005 consisted of expenses
      related to clinical trials for our PBT-1 compound as a treatment for Alzheimer’s
      disease that ceased in April 2005 and A$911,250 of expenses associated with
      our
      licensing and research collaboration with Schering A.G. and Neurosciences
      Victoria Ltd. that was concluded in June 2005. Research and development expenses
      in the year ended June 30, 2006 consisted of expenses associated with two
      clinical trials for our PBT-2 lead compound and the pre-clinical programs for
      our other compounds. In fiscal year 2007, our research and development will
      be
      primarily directed at PBT-2, including the Phase IIa clinical trial for PBT-2.
      In addition, further expenditure is expected in developing our other potential
      lead compounds at a pre-clinical level.




*Personnel
      expenses*




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




*Intellectual
      property expenses*




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




*Audit
      fees*




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




*Travel
      expenses*




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




*Marketing
      expenses*




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




18




*Depreciation
      expenses*




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




*Amortization
      expenses*




We
      recorded amortization expenses relating to PBT-1 core intellectual property
      of
      A$83,200 for the year ended June 30, 2005. As a result of the impairment of
      the
      carrying value of our core intellectual property relating to PBT-1 to nil
      recoverable amount on June 30, 2005, we did not incur any amortization expenses
      relating to our intellectual property in the 2006 fiscal year. ****




*Other
      expenses*




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




*Foreign
      exchange gain (losses)*




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




*Impairment
      of intangible assets*




Impairment
      of intangible assets was A$786,240 for the year ended June 30, 2005. This was
      a
      one-off non-cash expense incurred as a result of our decision to impair the
      core
      intellectual property carrying value to nil recoverable amount based on expected
      future discounted cash flows. The impairment occurred following the announcement
      in April 2005 regarding the cessation of the PBT-1 clinical trial due to
      toxicity issues and the decision to continue research into PBT-2 as the lead
      compound. The core intellectual property related primarily to externally
      acquired patents for PBT-1.




*Gain
      on fair value of financial liabilities.*




The
      gain
      on fair value of financial liabilities was A$128,715 for the year ended June
      30,
      2006 compared to a gain of A$5,801,397 for the year ended June 30, 2005. The
      gains relate to the change in fair value of the five-year warrants to purchase
      an aggregate 3,000,000 ADRs at an exercise price of US$8.00 per ADR that were
      issued in connection with our private placement of securities in the United
      States in April 2004. The decrease in the gain on fair value of financial
      liabilities in the 2006 fiscal year is primarily as a result of the movements
      in
      the market price of our ADRs.




19




**Inflation
      and Seasonality**




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




**B.**
            **L****IQUIDITY
                  AND****C****APITAL****R****ESOURCES**




We
      are a
      development stage company and have had no sales income to date, and as of June
      30, 2006 our accumulated deficit totaled A$41,340,718. 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 ($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.




We
      had
      A$10,013,778 of cash and cash equivalents at June 30, 2006, compared to
      A$21,453,304 at June 30, 2005.




**Cash
      Flows**




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




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




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




20




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




Net
      cash
      used in financing activities was A$2,020 during the year ended June 30, 2006
      compared to net cash provided by financing activities of A$4,704,757 during
      the
      year ended June 30, 2005. Cash flows used
      in financing activities during the year ended June 30, 2006 reflected the costs
      associated with the issuance of shares to a consultant in lieu of cash. Cash
      flows provided
      by financing activities during the year ended June 30, 2005 reflected the exercise
      of options into ordinary share capital.




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




From
      inception to June 30, 2006, our capital expenditures have totaled A$328,382
      (including A$200,000 of noncash expenditures), consisting of computer equipment,
      furniture and fixtures, fit-out costs and laboratory equipment that is being
      used in connection with our research at the University of Melbourne. Capital
      expenditures for equipment are being depreciated on a straight-line basis over
      the estimated useful lives of three to 14 years, with a net balance at June
      30,
      2006 of A$102,375. 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, 2006, our principal commitments consisted of obligations under our
      agreements with Professor Ashley Bush, Mr. Geoffrey Kempler and Dr. Ross
      Murdoch. Under the ten year contract we entered into with Professor Ashley
      Bush
      in January, 2004, effective as of February 1, 2003, we agreed to pay Professor
      Bush a consulting fee of US$100,000 per year increasing on the anniversary
      of
      the agreement by the U.S. consumer price index. We also agreed, as a bonus
      package, to issue to Professor Bush 1,650,000 ordinary shares (of which 825,000
      ordinary shares were issued during the 2004 fiscal year and 825,000 ordinary
      shares were issued during the 2006 fiscal year) and to grant to him options
      to
      purchase 825,000 ordinary shares at an exercise price of A$0.50 per share (of
      which options to purchase 412,000 ordinary shares were granted during the 2004
      fiscal year and options to purchase 413,000 ordinary shares were granted during
      the 2006 fiscal year). The shares and options vest in four equal installments
      on
      each of the six months anniversaries following the effective date of the
      agreement. In addition, subject to the achievement of certain milestones,
      Professor Bush, is entitled to purchase up to 5,000,000 additional ordinary
      shares at a price per share that is 10% below the mean market price of our
      ordinary shares during the 30-day period prior to their purchase. Once a
      milestone has been achieved, up to 2,500 ordinary shares out of the total
      tranche of ordinary share to which he becomes entitled may be purchased each
      six
      months after such achievement. The first milestone has been achieved (the
      publication of results of a Phase II trial) and as such, Professor Bush is
      now
      entitled to purchase up to 1,250,000 ordinary shares in accordance with the
      foregoing terms. The ordinary shares issued and options granted to Professor
      Bush under the agreement are subject to certain resale restrictions. During
      the
      period of twenty 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
      June 15, 2005, we entered into an agreement with Geoffrey Kempler in connection
      with his appointment as our Chief Executive Officer. Under this contract, we
      agreed to pay Mr. Kempler a base salary of A$367,000 per annum (which may be
      increased at the discretion of the Board of Directors), a A$100,000 bonus upon
      satisfactory completion of a successful Phase I trial for PBT-2 and an
      additional A$100,000 upon satisfactory completion of a Phase II efficacy study.
      The Phase I trial for PBT-2 was successfully completed during the year ended
      June 30, 2006 and as such, the A$100,000 bonus is now payable. Under the
      agreement with Mr. Kempler, we are required to continue to remunerate him in
      accordance with its terms until June 1, 2010 if he terminates the contract
      for
      good




21




reason
      or
      we terminate the contract without cause. See Item 6.C. “Directors, Senior
      Management and Employees - Board Practices - Election of Directors” Under an
      employment agreement we entered into with Dr. Ross Murdoch, effective as of
      August 7, 2006, in connection with his services as our President and Chief
      Operating Officer, we agreed to pay Dr. Murdoch a base salary of A$295,000
      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 Dr. Murdoch options to purchase 1,250,000 ordinary shares, 25% of
      which
      will be fully vested upon grant (the effective date of the agreement) and the
      remaining options shall vest in three equal installments on each of the one
      year
      anniversaries from May 29, 2006. The options will be exercisable for nil
      consideration on or before August 7, 2014 and will not be exercisable unless
      the
      price of our ordinary shares has achieved and maintained a minimum value of
      A$0.40 for five consecutive trading days. These options will be granted under
      the 2004 ASX Plan. We have also agreed that if we will terminate the agreement
      without cause or if Dr. Murdoch will terminate the agreement with good reason
      (as such terms are defined in the agreement) (i) we will pay to Dr. Murdoch,
      within 90 days of such termination, the sums he would have been entitled to
      receive had he continued to provide services until May 29, 2008, or, if
      termination occurs after May 29, 2007, had he 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 he will be entitled to exercise
      his
      options during the remainder of their term.




On
      July
      28, 2004, we and The General Hospital Corporation of Massachusetts settled
      all
      outstanding litigation with P.N. Gerolymatos S.A., or P.N.G., regarding the
      exploitation rights to certain patents relating to pharmaceutical compositions
      and uses of clioquinol, or PBT-1. Pursuant to the settlement agreement, all
      patent oppositions in Europe and Australia were withdrawn and the law suits
      then
      pending before the U.S. District Court for the District of Columbia and the
      Court of Athens in Greece 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 PBT-1 in the United States and Japan and we are entitled
      to
      receive a percentage of P.N.G.’s income on sales of PBT-1 in the other
      territories. In April 2005, we announced to the market our decision not to
      proceed with supporting the initiation of the PLACQUE study evaluating PBT-1.
      P.N.G. is also entitled to receive 2% of our worldwide income from PBT-2.




Our
      remaining commitment under a three year lease for our principal office that
      expires in 2007 is A$92,726.




In
      March
      2005, we commenced a series of Phase I clinical trials for our current principal
      product candidate PBT-2 at a facility associated with the Utrecht University
      Hospital in Utrecht, the Netherlands. On November 7, 2005, we announced the
      successful completion of the Phase I trial for PBT-2, a double blind,
      placebo-controlled single dose escalation study, conducted on 55 healthy, male
      volunteers between the ages of 18 and 50, which was designed to evaluate the
      safety, tolerability and pharmacokinetics (absorption, distribution, metabolism,
      and excretion) of PBT-2. Data from the study shows that PBT-2 was well
      tolerated. Additionally, the pharmacokinetic analysis demonstrated that the
      drug
      exposure increased predictably and in a linear manner, both of which are strong
      characteristics for a development candidate. Concurrent findings in a
      pre-clinical mouse model indicate that PBT-2 passes into the brain of mice
      with
      more extensively than its predecessor, PBT-1. In early 2006, we also
      successfully completed a second Phase I multi-dose escalation safety clinical
      trial of PBT-2 in 32 elderly, healthy, male and female volunteers (45 to 75
      years). On May 5, 2006, we announced that we received an expert report in
      respect of the Phase I trials for PBT-2. The expert report was prepared by
      Dr.
      Craig Ritchie, psychiatrist and Director of Mental Health Clinical Trials at
      University College London and a clinical advisor to our company. Dr. Craig
      Ritchie concluded that the Phase I results provide the confidence needed to
      move
      forward to formal Phase II testing in people with Alzheimer’s disease. For
      additional details regarding our clinical trials see Item 4.A. “Information on
      the Company - History and Development of the Company.” We anticipate that
      expenditures for the Phase II program for PBT-2 will amount to A$5,501,000
      however such expenditures may change due to numerous factors. For information
      on
      such factors, see Item 5.C. “Operating and Financial Review and Prospects -
      Research and Development, Patents and Licenses.” We expect to fund such
      expenditures from our working capital.




22




We
      believe our existing cash and cash equivalents as well as anticipated cash
      flow
      from government grants, interest income and potential option exercises will
      be
      sufficient to support our current operating plan to March 31, 2007; 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.




Our
      failure to raise additional capital before March 2007 would have a material
      adverse effect on our company’s ability to continue as a going concern and to
      achieve its business objectives. Our auditors have included a going concern
      uncertainty paragraph in their report. The accompanying financial statements
      do
      not include any adjustments relating to the recoverability of the carrying
      amount of recorded assets or the amount of liabilities that might result should
      we be unable to continue as a going concern.




**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.**
            **R****ESEARCH
                  AND****D****EVELOPMENT****,
                  P****ATENTS
                  AND****L****ICENSES**




Our
      primary activity since incorporation in 1997 has been the acquisition and
      development of patents as well as research and development of our core
      technology. Research and development expenses amounted to A$7,613,045 and
      A$7,687,596 during the years ended June 30, 2006 and 2005, respectively. Costs
      associated with patent applications and defense of patent applications are
      classified as intellectual property expenses and amounted to A$466,426 and
      A$729,583 during the years ended June 30, 2006 and 2005, 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.




23




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




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




Our
      company is the exclusive licensee of an international patent application in
      the
      name of the General Hospital Corporation directed to a novel target for an
      Alzheimer’s disease vaccine. The
      Commonwealth Government of
      Australia provided us with a A$227,252 BIF grant for the initial proof of
      concept stage of this research. The research under this BIF grant finished
      at
      the end of January 2005 having achieved the scientific milestone demonstrating
      that a mouse could generate antibodies that preferentially recognize dimerized
      ‘toxic linked’ forms of beta-amyloid and not the endogenous monomeric form of
      beta amyloid .
      Currently we are undertaking the screening of mouse hybridomas (hybrid cells produced
      by injecting a specific antigen into a mouse, collecting an antibody-producing
      cell from the mouse’s spleen, and fusing it with a long-lived cancerous immune
      cell called a myeloma cell). Individual hybridoma cells will be cloned and
      tested **** to
      try to
      identify a mouse monoclonal antibody candidate for use in a prospective mouse
      passive vaccine trial during 2007. We will be utilizing the resources of the University
      of Melbourne and the Mental Health Research Institute, and possibly other
      institutes, to conduct this research.




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




In
      February 2004, we were granted a second START grant from the Australian IR&D
      Board to take our second generation drug candidate for Alzheimer’s disease,
      PBT-2, through safety testing and Phase I clinical trials. The research under
      this grant was initially to be completed over a two year period until September
      1, 2005 and such period was subsequently extended until December 2005. Under
      the
      terms of the grant, we received A$1.35 million over the term of the grant for
      up
      to 50% of the project costs related to the toxicology testing program and early
      human trials. Under this second START grant, PBT-2 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.




24




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 expires in
      December 2006. The financial consideration terms under the original agreement
      remain unchanged by the second research funding and intellectual property
      assignment agreement. In addition, pursuant to the terms of the second research
      funding and intellectual property assignment agreement, we agreed
      to
      provide the University of Melbourne certain funding for the research projects.
      We have
      provided or will provide to the University of Melbourne funding in an
      amount equal to A$600,000 (exclusive of goods and service tax) during each
      of
      the years running December 2004 to November 2005 and December 2005 to November
      2006. During the 2005 fiscal year we also provided the University of Melbourne
      an additional A$1,012,500 in research funding in connection with our licensing
      and research collaboration with Schering A.G. and Neurosciences Victoria Ltd.
      that was concluded in June 2005.




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




Under
      the
      terms of a license agreement between us and The General Hospital Corporation
      of
      Massachusetts, or GHC, we were required to pay GHC a total of US$166,590
      (approximately A$228,395) for the 30 month period beginning January 1, 2001
      and
      US$182,000 (approximately A$249,358) for a period of 30 months from August
      1,
      2001 for the right to use the results of research under a license for certain
      patent rights. These obligations have been satisfied.




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




25




Under
      the
      terms of a strategic alliance agreement that we entered into with Kendle Pty
      Ltd., or Kendle, on January 6, 2004, Kendle provides us with consultancy
      services in relation to the coordination, planning and management of
      intellectual property, research and development, planning, management and
      commercialization strategy. Kendle provides its services to us at an hourly
      rate
      ranging from A$70 to A$210 an hour, depending on the seniority of the
      consultant. For the years ended June 30, 2006 and 2005, fees earned by Kendle
      amounted to A$126,981 and A$878,226, respectively. These fees are included
      in
      our financial statements as Patents, research and development expense. Dr.
      George Mihaly, a director of our company, served as a director of Kendle,
      formerly known as Synermedica Pty Ltd., until December 2004.




We
      entered into an arrangement with Kendle International Inc. to conduct our
      clioquinol Phase II/III Alzheimer disease clinical trial for PBT-1.  We
      paid Kendle International Inc. A$229,040 and GPB £200,156 (approximately
      A$498,068) and A$48,299 and GPB £79,504 (approximately A$197,838) for fiscal
      years 2005 and 2006, respectively.  This trial has now ceased. 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 PBT-2
      in
      healthy volunteers.  We paid Kendle International B.V. EUR323,657
      (approximately A$556,561) and EUR905,290 (approximately A$1,556,737) for fiscal
      years 2005 and 2006, respectively.  Kendle International Inc. is the parent
      entity of Kendle International B.V and Kendle Pty Ltd.




On
      July
      28, 2004, we entered into a settlement agreement with P.N. Gerolymatos S.A.,
      or
      P.N.G., with respect to patent inventorship claims relating to the use of
      clioquinol (PBT-1) for use in Alzheimer’s disease. Under the settlement
      agreement, we agreed to pay a sales royalty to P.N.G. on the sales of PBT-1
      in
      the United States and Japan, and we are entitled to receive a percentage of
      P.N.G.’s income on sales of PBT-1 in the other territories. P.N.G. is also
      entitled to receive 2% of our worldwide income from PBT-2. See Item 5B.
“Operating and Financial Review and Prospects - Liquidity and Capital
      Resources.”




**D.**
            **T****REND****I****NFORMATION**




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.**
            **O****FF****-B****ALANCE****S****HEET****A****RRANGEMENTS**




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.**
            **T****ABULAR****D****ISCLOSURE********OF****C****ONTRACTUAL****O****BLIGATIONS**




The
      following table summarizes our minimum contractual obligations as of June 30,
      2006 and the effect we expect them to have on our liquidity and cash flow in
      future periods.




Payments
                due by periodContractual
                Obligations
            
            Total
            
            less
                than 1 year
            
            1-3years
            
            3-5
              years
            
            more
                than 5yearsOperating
                lease obligations
            
            
            A$92,726
            
            
            A$92,726
            
            
            —
            
            
            —
            
            
            —Purchase
                obligations*
            
            
            A$2,152,887
            
            
            A$787,704
            
            
            A$1,365,183
            
            
            —
            
            
            ——
            
            
            —Total
            
            
            A$2,245,613
            
            $
            880,430
            
            
            A$1,365,183
            
            
            —
            
            
            —





*
            Includes
                obligations under our contracts with Professor Ashley Bush, Dr. Ross
                Murdoch and Mr. Geoffrey Kempler. See Item 5B. “Operating and Financial
                Review and Prospects - Liquidity and Capital Resources” and Note 16 to our
                consolidated financial statements.




26




**PART
      II**




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




Subsequent
      to the filing of our consolidated financial statements on Form 20-F for the
      year
      ended June 30, 2006 it was identified that, upon our adoption of A-IFRS, we
      had
      inaccurately recorded the liability associated with the warrants issued in
      connection with a private placement of our securities in the United States
      on
      June 1, 2004. This transaction was also been incorrectly treated under U.S.GAAP.
      As a result, we restated our consolidated financial statements as of and for
      the
      years ended June 30, 2006 and 2005 with respect to A-IFRS and U.S. GAAP
      financial information.




Background
      to the restatement and reclassification




On
      June
      1, 2004, upon approval of our shareholders, we 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
      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.




Upon
      our
      adoption of A-IFRS on July 1, 2005, the accounting treatment of the private
      placement reflected in our audited financial statements for the fiscal year
      ended June 30, 2006 was recorded as Issued Capital. No value was attributed
      to
      the warrants.




Following
      a review of the interim financial statements for the six months ended December
      31, 2006 by our new auditors, we have identified that the treatment of the
      accounting for the private placement was incorrect under A-IFRS. Under
      Australian Accounting Standard Board 132, or AASB 132, “Financial Instruments:
      Disclosure and Presentation,” 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 into a currency that is not the functional
      currency of our company. As a result, upon initial recognition, the fair value
      of the warrants should be recognized as a financial liability at their fair
      value, reducing the Issued Capital that was previously recorded. Each reporting
      period, the fair value of the outstanding warrants is revalued using the Black
      Scholes Model. When the fair value of the outstanding warrants increases or
      decreases, the difference is recorded as a gain or loss, as applicable, on
      the
      fair value of financial liabilities.




Evaluation
      of Disclosure Controls and Procedures




In
      connection with the preparation of our Annual Report on Form 20-F for the year
      ended June 30, 2006 that was filed on September 29, 2006, our chief executive
      officer and chief financial officer concluded that our disclosure controls
      and
      procedures were ineffective as of June 30, 2006 and that we have insufficient
      accounting personnel that have sufficient knowledge and experience in U.S.
      GAAP
      and the SEC accounting requirements. Our chief executive officer and chief
      financial officer further concluded that the accounting personnel who prepare
      our financial statements will need to be trained on the application of U.S.
      GAAP
      accounting pronouncements and standardized reconciliation templates will need
      to
      be improved to assist in the reconciliation process between A−IFRS and U.S.
      GAAP.




Subsequent
      to such evaluation, in connection with the restatement effected on this Form
      20-F/A, under the supervision of our chief executive officer and chief financial
      officer, we have re-evaluated our disclosure controls and procedures as of
      June
      30, 2006. Based upon that re-evaluation, our chief executive officer and chief
      financial officer have again concluded that our disclosure controls
      and procedures
      were ineffective as of such date, and identified an additional material weakness
      in our internal control over financial reporting with respect to the accounting
      treatment of the issuance of equity exercisable into foreign currencies. We
      have
      identified the need that should similar transactions be completed in the future,
      additional research should be undertaken before accounting treatment is
      resolved.




27




Except
      as
      disclosed herein, there has been no change in our internal control over
      financial reporting that occurred during the period covered by this annual
      report that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.




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




PageIndex
                to Consolidated Financial Statements
            
            F-0Report
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheets (as restated)
            
            F-2Consolidated
                Statements of Operations (as restated)
            
            F-3Consolidated
                Cash Flow Statements
            
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity (as restated)
            
            F-5Notes
                to Consolidated Financial Statements
            
            F-6




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




Index
      to
      Exhibits




Exhibit
            
            Description1.1
            
            Constitution
                of Registrant (1)2.1
            
            Deposit
                Agreement dated March 23, 2001, among the Registrant and the Bank
                of New
                York, as Depositary, and owners and holders of American Depositary
                Receipts issued thereunder, including the Form of American Depositary
                Receipts (2)4.1
            
            Agreement
                for the Assignment of Patents and Intellectual Property Licensing
                dated
                February 8, 2000, between Registrant and the Biomolecular Research
                Institute (1)4.2
            
            License
                Agreement dated January 1, 2001, between the Registrant and The General
                Hospital Corporation (1)4.3
            
            Variation
                Agreement dated August 8, 2001, between the Registrant and The General
                Hospital Corporation, which amends the License Agreement dated January
                1,
                2001, between the parties (1)4.4
            
            Second
                Amendment to Exclusive License Agreement dated January 1, 2001, between
                the Registrant and The General Hospital Corporation, dated March
                15, 2004,
                between the between the Registrant and The General Hospital Corporation
                (6)4.5
            
            Agreement
                for Services dated February 7, 2000, between the Registrant and Prof.
                Colin Masters (1)4.6
            
            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)4.7
            
            Form
                of Second Research Funding and Intellectual Property Assignment Agreement
                dated December 1, 2003, between the Registrant and The University
                of
                Melbourne *4.8
            
            Letter
                agreement dated January 6, 2004, between the Registrant and Kendle
                Pty
                Ltd. regarding strategic alliance
                (7)




28




4.9
            
            Purchase
                Agreement dated April 27, 2004, among the Registrant and the investors
                signatory thereto (3)4.10
            
            Registration
                Rights Agreement dated April 27, 2004, among the Registrant and the
                investors signatory thereto (4)4.11
            
            Form
                of Warrant (5)4.12
            
            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 (8)4.13
            
            Prana
                Biotechnology Limited, Employees and Consultants Option Plan 2000
                (1)4.14
            
            Prana
                Biotechnology Limited, 2004 American Depository Share (ADS) Option
                Plan
                (9)4.15
            
            Prana
                Biotechnology Limited, 2004 Employees’, Directors’ and Consultants’ Share
                and Option Plan (10)4.16
            
            Employment
                Agreement dated June 15, 2005, among the Registrant and Mr. Kempler
                (11)4.17
            
            Employment
                Agreement effective as of August 7, 2006 among the Registrant and
                Dr. Ross
                Murdoch *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 amended12.2
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
                of the Securities Exchange Act, as amended13.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200213.2
            
            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
                200215.1
            
            Consent
                of Deloitte Touche Tohmatsu, Independent Registered Public Accounting
                Firm





*
            Previously
                filed.




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




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




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




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




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




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




(7)
            Filed
                as Exhibit 4.13 to our Annual Report on Form 20-F for the year ended
                June
                30, 2004, and incorporated herein by
                reference.




29




(8)
            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.




(9)
            Incorporated
                by reference to Annexure A to Item 1 of our Report on Form 6-K for
                the
                month of November, 2004 (File No. 000-49843).




(10)
            Incorporated
                by reference to Annexure B to Item 1 of our Report on Form 6-K for
                the
                month of November, 2004 (File No. 000-49843).




(11)
            Filed
                as Exhibit 4.25 to our Annual Report on Form 20-F for the year ended
                June
                30, 2005, and incorporated herein by
                reference.





30




**PRANA
      BIOTECHNOLOGY LIMITED**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page
                Number**Report
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets (as restated)
            F-2Consolidated
                Statements of Operations (as restated)
            F-3Consolidated
                Cash Flow Statements
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity (as
                restated)
            F-5Notes
                to Consolidated Financial Statements
            F-6





F-0




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**


**DELOITTE
      TOUCHE TOHMATSU**





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





We
      have
      audited the accompanying consolidated balance sheets of Prana Biotechnology
      Limited (a company incorporated in Victoria, Australia) and subsidiaries (a
      development stage company) (the “Company”) as of June 30, 2006 and 2005 and the
      related consolidated statements of operations, stockholders' equity, and cash
      flows for each of the two years in the period ended June 30, 2006. These
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company's internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements present fairly, in all material
      respects, the financial position of Prana Biotechnology Limited and subsidiaries
      as of June 30, 2006 and 2005, and the results of their operations and their
      cash
      flows for each of the two years in the period ended June 30, 2006, in conformity
      with the Australian Equivalents to International Financial Reporting
      Standards.





The
      Australian Equivalents to International Financial Reporting Standards vary
      in
      certain significant respects from accounting principles generally accepted
      in
      the United States of America. Information relating to the nature and effect
      of
      such differences is presented in Note 26 to the consolidated financial
      statements.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company's recurring losses from operations and negative cash
      flows from operations raise substantial doubt about its ability to continue
      as a
      going concern. Management's plans concerning these matters are also described
      in
      Note 1. The financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





As
      discussed in Note 28, the accompanying financial statements as of and for the
      years ended June 30, 2006 and 2005 have been restated.








/s/
      Deloitte Touche Tohmatsu


**DELOITTE
      TOUCHE TOHMATSU**


Chartered
      Accountants





Melbourne,
      Australia


September
      29, 2006 (June 18, 2007 as to the effects of the restatement discussed in Note
      28)





F-1


**PRANA
      BIOTECHNOLOGY LIMITED**


**(A
      Development Stage Enterprise)**




**CONSOLIDATED
      BALANCE SHEET**


**(in
      Australian dollars, except number of shares)**





**As
                Restated (see note 28)****June
                30,**Notes
            
            **2006**
            
            **2005****Current
                Assets**Cash
                and cash equivalents
            
            
            
            
            
            10,013,778
            
            
            21,453,304Trade
                and other receivables
            
            
            6
            
            
            194,161
            
            
            174,476Other
                current assets
            
            
            7
            
            
            110,832
            
            
            495,165**Total
                Current Assets**
            
            
            
            
            
            10,318,771
            
            
            22,122,945**Non
                Current Assets**Property
                and equipment, net of accumulateddepreciation
                of A$508,972 and A$390,776 respectively
            
            
            8
            
            
            102,375
            
            
            166,214**Total
                Non Current Assets**
            
            
            
            
            
            102,375
            
            
            166,214**Total
                Assets**
            
            
            
            
            
            10,421,146
            
            
            22,289,159**Current
                Liabilities**Trade
                and other payables
            
            
            9
            
            
            1,538,358
            
            
            2,571,181Provisions
            
            
            10
            
            
            76,672
            
            
            78,602**Total
                Current Liabilities**
            
            
            
            
            
            1,615,030
            
            
            2,649,783**Non-Current
                Liabilities**Financial
                Liabilities
            
            
            24
            
            
            928,692
            
            
            1,057,407Provisions
            
            
            10
            
            
            76,766
            
            
            45,200**Total
                Non-Current Liabilities**
            
            
            
            
            
            1,005,458
            
            
            1,102,607**Total
                Liabilities**
            
            
            
            
            
            2,620,488
            
            
            3,752,390Commitments
                and contingencies
            
            
            11**Net
                Assets**
            
            
            
            
            
            7,800,658
            
            
            18,536,769**Equity**Issued
                capital
              2006:
                128,144,260 fully paid ordinary shares
              2005:
                127,319,260 fully paid ordinary shares
            
            
            12
            
            
            46,274,127
            
            
            45,838,897Reserves
            
            
            13
            
            
            2,867,249
            
            
            2,447,996Accumulated
                deficit during the development stage
            
            
            14
            
            
            (41,340,718
            )
            
            (29,750,124
            )**Total
                Equity**
            
            
            
            
            
            7,800,658
            
            
            18,536,769





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




F-2


**PRANA
      BIOTECHNOLOGY LIMITED**


**(A
      Development Stage Enterprise)**


**CONSOLIDATED
      STATEMENT OF OPERATIONS** 1


**(in
      Australian dollars, except number of shares)**





**As
                Restated (see note 28)****Years
                ended********June
                30,****2006**
            
            **2005**NotesRevenues
            
            
            2
            
            
            762,023
            
            
            892,135Other
                income
            
            
            3
            
            
            288,263
            
            
            1,760,978Research
                and development expenses
            
            
            4
            
            
            (7,613,045
            )
            
            (7,109,839
            )Research
                and development expenses - related party
            
            
            4
            
            
            -
            
            
            (577,757
            )Personnel
                expenses
            
            
            4
            
            
            (3,418,008
            )
            
            (5,750,929
            )Intellectual
                property expenses
            
            
            4
            
            
            (466,426
            )
            
            (729,583
            )Audit
                fees
            
            
            21
            
            
            (205,815
            )
            
            (202,032
            )Travel
                expenses
            
            
            
            
            
            (212,184
            )
            
            (432,316
            )Marketing
                expenses
            
            
            
            
            
            (134,750
            )
            
            (442,920
            )Depreciation
                expenses
            
            
            4
            
            
            (118,196
            )
            
            (65,223
            )Amortization
                expenses
            
            
            4
            
            
            -
            
            
            (83,200
            )Other
                expenses
            
            
            4
            
            
            (824,625
            )
            
            (1,204,930
            )Other
                expenses - related party
            
            
            
            
            
            -
            
            
            -Foreign
                exchange gain/(loss)
            
            
            
            
            
            223,454
            
            
            (1,362,572
            )Impairment
                of intangible assets
            
            
            
            
            
            -
            
            
            (786,240
            )Gain
                on fair value of financial liabilities
            
            
            
            
            
            128,715
            
            
            5,801,397**Loss
                before income tax expense**
            
            
            
            
            
            (11,590,594
            )
            
            (10,293,031
            )**Income
                tax expense**
            
            
            5
            
            
            -
            
            
            -**Net
                loss**
            
            
            14
            
            
            (11,590,594
            )
            
            (10,293,031
            )**Loss
                per share**
              **(basic
                and diluted)**
            
            
            19
            
            
            (0.09
            )
            
            (0.08
            )Weighted
                average number of ordinary shares used in computing basic and diluted
                net
                loss per share
            
            
            
            
            
            128,053,601
            
            
            122,754,061





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





1 On July
      1, 2004, the consolidated entity’s accounting policies changed to comply with
      the introduction of Australian Equivalents to International Financial Reporting
      Standards (“A-IFRS”). Please see Note 1(s) to the Consolidated Financial
      Statements for further information. The SEC has permitted eligible foreign
      private issuers, such as Prana to file two years rather than three years for
      the
      statement of operations, cash flow statement and statement of changes in
      stockholders’ equity when filing their first annual report under IFRS.




F-3


**PRANA
      BIOTECHNOLOGY LIMITED**


**(A
      Development Stage Enterprise)**


**CONSOLIDATED
      CASH FLOW STATEMENT** 1


**(in
      Australian dollars)**





**Years
                Ended June 30,****2006**
            
            **2005**Notes**Cash
                Flows from Operating Activities**Payments
                to suppliers and employees
            
            (12,647,636
            )
            
            (13,333,739
            )Payments
                to suppliers and employees - related party
            
            
            
            
            
            -
            
            
            (625,940
            )Interest
                received
            
            
            
            
            
            764,711
            
            
            883,583Government
                grant received
            
            
            
            
            
            231,710
            
            
            532,283Neuroscience
                Victoria monies received
            
            -
            
            
            1,125,000Net
                cash flows used in operating activities
            
            
            15
                (a
            )
            
            (11,651,215
            )
            
            (11,418,813
            )**Cash
                Flows from Investing Activities**Proceeds
                from sale of equipment
            
            
            
            
            
            375
            
            
            -Payments
                for purchase of equipment
            
            
            
            
            
            (55,626
            )
            
            (50,466
            )Net
                cash flows used in investing activities
            
            
            
            
            
            (55,251
            )
            
            (50,466
            )**Cash
                Flows from Financing Activities**Proceeds
                from exercise of options
            
            
            
            
            
            -
            
            
            4,753,333Payment
                of share issue costs
            
            
            
            
            
            (2,020
            )
            
            (48,576
            )Net
                cash flows (used in) / provided by financing activities
            
            
            
            
            
            (2,020
            )
            
            4,704,757Net
                (decrease) in cash and cash equivalents
            
            
            
            
            
            (11,708,486
            )
            
            (6,764,522
            )Opening
                cash and cash equivalents brought forward
            
            
            
            
            
            21,453,304
            
            
            29,580,398Exchange
                rate adjustments on cash and cash equivalents held in foreign
                currencies
            
            268,960
            
            
            (1,362,572
            )**Closing
                cash and cash equivalents carried forward**
            
            
            15
                (b
            )
            
            10,013,778
            
            
            21,453,304




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





1 On July
      1, 2004, the consolidated entity’s accounting policies changed to comply with
      the introduction of Australian Equivalents to International Financial Reporting
      Standards (“A-IFRS”). Please see Note 1(s) to the Consolidated Financial
      Statements for further information. The SEC has permitted eligible foreign
      private issuers, such as Prana to file two years rather than three years for
      the
      statement of operations, cash flow statement and statement of changes in
      stockholders’ equity when filing their first annual report under IFRS.





F-4


**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY** 1


**(in
      Australian dollars, except for number of shares)**





**As
                Restated (see note 28)****Notes**
            
            **Number
                of Shares**
            
            **Issued
                Capital**
            
            **Share
                Based Payment Reserve**
            
            **Accumulated**
              **Deficit
                During Development Stage**
            
            **Total****Balance,
                June 30, 2004**
            
            
            
            115,984,380
            
            40,681,945
            
            -
            
            (19,457,093)
            
            21,224,852Net
                loss
            
            
            14
            
            
            -
            
            
            -
            
            
            -
            
            
            (10,293,031
            )
            
            (10,293,031
            )Issuance
                of shares in connection with exercise of options, net of issue
                costs
            
            
            12(b
            )
            
            9,506,666
            
            
            4,145,811
            
            
            -
            
            
            -
            
            
            4,145,811Non-cash
                issuance of shares to consultants and directors
            
            
            12(b
            )
            
            478,214
            
            
            255,141
            
            
            -
            
            
            -
            
            
            255,141Non-cash
                issuance of shares for settlement of litigation
            
            
            12(b
            )
            
            1,350,000
            
            
            756,000
            
            
            -
            
            
            -
            
            
            756,000Non-cash
                issuance of options to directors and employees
            
            
            13(b)
                & (c
            )
            
            -
            
            
            -
            
            
            1,704,734
            
            
            -
            
            
            1,704,734Non-cash
                issuance of options to consultants
            
            
            13(b
            )
            
            -
            
            
            -
            
            
            289,699
            
            
            -
            
            
            289,699Non-cash
                issuance of warrants to consultants
            
            
            13(d
            )
            
            -
            
            
            -
            
            
            453,563
            
            
            -
            
            
            453,563**Balance,
                June 30, 2005**
            
            
            
            
            
            127,319,260
            
            
            45,838,897
            
            
            2,447,996
            
            
            (29,750,124
            )
            
            18,536,769Net
                loss
            
            
            14
            
            
            -
            
            
            -
            
            
            
            
            
            (11,590,594
            )
            
            (11,590,594
            )Non-cash
                issuance of shares to consultants
            
            
            12(b
            )
            
            825,000
            
            
            435,230
            
            
            -
            
            
            -
            
            
            435,230Non-cash
                issuance of options to consultants
            
            
            13(b
            )
            
            -
            
            
            -
            
            
            181,550
            
            
            -
            
            
            181,550Non-cash
                issuance of options to directors and employees
            
            
            13(b
            )
            
            -
            
            
            -
            
            
            76,470
            
            
            -
            
            
            76,470Amortization
                of option expenses
            
            
            13(b
            )
            
            -
            
            
            -
            
            
            161,233
            
            
            -
            
            
            161,233**Balance,
                June 30, 2006**
            
            
            
            
            
            128,144,260
            
            
            46,274,127
            
            
            2,867,249
            
            
            (41,340,718
            )
            
            7,800,658





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





1 On July
      1, 2004, the consolidated entity’s accounting policies changed to comply with
      the introduction of Australian Equivalents to International Financial Reporting
      Standards (“A-IFRS”). Please see Note 1(s) to the Consolidated Financial
      Statements for further information. The SEC has permitted eligible foreign
      private issuers, such as Prana to file two years rather than three years for
      the
      statement of operations, cash flow statement and statement of changes in
      stockholders’ equity when filing their first annual report under IFRS.





F-5




**PRANA
      BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**




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




**1.**
            **BACKGROUND
                AND SUMMARY OF SIGNIFICANT ACCOUNTING
                POLICIES**





**Background**





Prana
      Biotechnology Limited and its controlled entities: Prana Biotechnology Inc.
      and
      Prana Biotechnology UK Limited (referred to collectively as “Prana” or the
“consolidated entity”) is a development stage enterprise engaged in the research
      and development of therapeutic drugs designed to treat the underlying cause
      of
      degeneration of the brain and the eye as the aging process progresses. Prana
      Biotechnology Limited (the “Company”), the parent entity was incorporated on
      November 11, 1997 in Melbourne, Australia. The UK and US subsidiaries were
      incorporated in August 2004.





**Financial
      Reporting Framework**





The
      financial report is a general purpose financial report, which has been prepared
      in accordance with the *Corporations
      Act 2001* ,
      Accounting Standards and Urgent Issues Group Interpretations, and complies
      with
      other requirements of the law. Accounting Standards include Australian
      equivalents to International Financial Reporting Standards (‘A-IFRS’).
      Compliance with A-IFRS ensure that the consolidated financial statements and
      notes of the consolidated entity comply with International Financial Reporting
      Standards (‘IFRS’).





The
      financial report has been prepared on the basis of historical cost. Cost is
      based on the fair values of the consideration given in exchange for
      assets.





In
      the
      application of A-IFRS management is required to make judgments, estimates and
      assumptions about carrying values of assets and liabilities that are not readily
      apparent from other sources. The estimates and associated assumptions are based
      on historical experience and various other factors that are believed to be
      reasonable under the circumstance, the results of which form the basis of making
      the judgments. Actual results may differ from these estimates. The estimates
      and
      underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
      estimates are recognized in the period in which the estimate is revised if
      the
      revision affects only that period, or in the period of the revision and future
      periods if the revision affects both current and future periods.





Judgments
      made by management in the application of A-IFRS that have significant effects
      on
      the financial statements and estimates with a significant risk of material
      adjustments in the next year are disclosed, where applicable, in the relevant
      notes to the financial statements.





Accounting
      policies are selected and applied in a manner which ensures that the resulting
      financial information satisfies the concepts of relevance and reliability,
      thereby ensuring that the substance of the underlying transactions or other
      events is reported.





The
      consolidated entity changed its accounting policies on July 1, 2005 to comply
      with A-IFRS. The transition to A-IFRS is accounted for in accordance with
      Accounting Standard AASB 1: *First-time
      Adoption of Australian Equivalents to International Financial Reporting
      Standards* ,
      with
      July 1, 2004 as the date of transition. An explanation of how the transition
      from superseded policies to A-IFRS has affected the consolidated entity's
      financial position, financial performance and cash flows is discussed in Note
      1(s).





The
      accounting policies set out below have been applied in preparing the financial
      statements for the year ended June 30, 2006, the comparative information
      presented in these financial statements for the year ended June 30, 2005, and
      in
      the preparation of the opening A-IFRS balance sheet at July 1, 2004 (as
      disclosed in Note 1(s)), the consolidated entity's date of
      transition.





**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 2006, the consolidated entity has accumulated losses
      of $41,340,718, and has incurred negative cash flows from operations of
      $11,651,215, in the current year. The consolidated entity has also experienced
      a
      reduction from its cash position of $21,453,304 as at 30 June 2005 to
      $10,013,778 as at 30 June 2006.





Although
      the consolidated entity does not have sufficient cash resources to fund its
      current level of activities for at least the next 12 months, and there are
      uncertainties as to the exact timing and form of additional fund raising, the
      directors believe that there is a reasonable expectation that they can raise
      additional cash resources and or reduce operating costs during the 2007 fiscal
      year. These financial statements have, therefore, been prepared on a going
      concern basis which contemplates the continuity of normal business activities
      and the realization of assets and settlement of liabilities in the ordinary
      course of business.




F-6


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**


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





·
            The
                most recently prepared cash flow forecasts prepared by management
                and
                reviewed by the directors indicate that the consolidated entity will
                have
                sufficient cash to meet their current operating requirements until
                at
                least March 2007, being the expected signing date of the Director’s
                Declaration for the half-year ending 31 December
                2006.


·
            Since
                inception, the consolidated entity has been able to raise funds to
                advance
                their research processes. To date, the consolidated entity has raised
                in
                excess of $55 million in equity and are presently in discussions
                with
                various potential institutional investors as well as corporate partners
                in
                relation to potential partnering and licensing opportunities. These
                potential relationships would further enable the consolidated entity
                to
                continue their current business objectives.


·
            In
                the event that additional funding is not obtained, the consolidated
                entity
                may have to significantly reduce their expenditure on research and
                development programs and other costs.





Having
      carefully assessed the uncertainties relating to the likelihood of securing
      additional funding and the consolidated entity’s ability to effectively manage
      their expenditures, the directors believe that the consolidated entity will
      continue to operate as a going concern for the foreseeable future and therefore
      that it is appropriate to prepare the financial statements on a going concern
      basis.





Notwithstanding
      the above, there is significant uncertainty as to whether the consolidated
      entity can continue as going concerns. If the consolidated entity are unable
      to
      continue as going concerns they may be required to realize their assets and
      extinguish their liabilities other than in the normal course of business and
      at
      amounts different to those stated in the financial statements.





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 going concerns.





**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.




F-7


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**


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





Prana
      will continue to review the need to seek additional funding through public
      and
      private financing and/or through collaboration or other arrangements with
      corporate partners. The consolidated entity cannot be certain that it will
      be
      able to raise any required funding or capital, on favorable terms or at all,
      or
      that it will be able to establish corporate collaborations on acceptable terms,
      if at all. If the consolidated entity is unable to obtain such additional
      funding or capital, it may be required to reduce the scope of its development
      plans.





Prana’s
      experience in exploiting its technology is limited. The consolidated entity
      cannot be certain that its operations will be profitable in the short-term,
      or
      at all. If Prana fails in any of its efforts to establish or expand its
      business, the results of operations, financial condition and liquidity of the
      consolidated entity could be materially adversely affected. The consolidated
      entity cannot be certain that it will be able to obtain or retain any permits
      required by the consolidated entity to market, sell and deliver its technology.
      Any of these factors could result in the cessation of Prana’s operations.





**Significant
      Accounting Policies**





Accounting
      policies are selected and applied in a manner which ensures that the resulting
      financial information satisfies the concepts of relevance and reliability,
      thereby ensuring that the substance of the underlying transactions or other
      events is reported.





The
      following significant accounting policies have been adopted in the preparation
      and presentation of the financial report.





**(a)**
            **Principles
                of consolidation**




The
      consolidated financial statements are prepared by combining the financial
      statements of all the entities that comprise the consolidated entity, being
      the
      Company and its subsidiaries as defined in Accounting Standard AASB 127: *Consolidated
      and Separate Financial Statements* .
      Consistent accounting policies are employed in the preparation and presentation
      of the consolidated financial statements.





In
      preparing the consolidated financial statements, all inter-company balances
      and
      transactions, and unrealized profits/losses arising within the consolidated
      entity are eliminated in full.





**(b)**
            **Income
                Tax**




Current
      tax




Current
      tax is calculated by reference to the amount of income taxes payable or
      recoverable in respect of the taxable profit or loss for the period. It is
      calculated using tax rates and tax laws that have been enacted or substantively
      enacted by reporting date. Current tax for current and prior periods is
      recognized as a liability (or asset) to the extent that it is unpaid (or
      refundable).





Deferred
      tax




Deferred
      tax is accounted for using the comprehensive balance sheet liability method
      in
      respect of temporary differences arising from differences between the carrying
      amount of assets and liabilities in the financial statements and the
      corresponding tax base of those items.





In
      principle, deferred tax liabilities are recognized for all taxable temporary
      differences. Deferred tax assets are recognized to the extent that it is
      probable that sufficient taxable amounts will be available against which
      deductible temporary differences or unused tax losses and tax offsets can be
      utilized. However, deferred tax assets and liabilities are not recognized if
      the
      temporary differences giving rise to them arise from the initial recognition
      of
      assets and liabilities (other than as a result of a business combination) which
      affects neither taxable income nor accounting profit or loss.





Deferred
      tax liabilities are recognized for taxable temporary differences arising on
      investments in subsidiaries except where the consolidated entity is able to
      control the reversal of the temporary differences and it is probable that the
      temporary differences will not reverse in the foreseeable future. Deferred
      tax
      assets arising from deductible temporary differences associated with these
      investments are only recognized to the extent that it is probable that there
      will be sufficient taxable profits against which to utilize the benefits of
      the
      temporary differences and they are expected to reverse in the foreseeable
      future.




F-8


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**




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





Deferred
      tax assets and liabilities are measured at the tax rates that are expected
      to
      apply to the period(s) when the asset and liability giving rise to them are
      realized or settled, based on tax rates (and tax laws) that have been enacted
      or
      substantively enacted by reporting date. The measurement of deferred tax
      liabilities and assets reflects the tax consequences that would follow from
      the
      manner in which the consolidated entity expects, at the reporting date, to
      recover or settle the carrying amount of its assets and
      liabilities.





Deferred
      tax assets and liabilities are offset when they relate to income taxes levied
      by
      the same taxation authority and the Company/consolidated entity intends to
      settle its current tax assets and liabilities on a net basis.





Current
      and deferred tax for the period




Current
      and deferred tax is recognized as an expense or income in the statement of
      operations, except when it relates to items credited or debited directly to
      equity, in which case the deferred tax is also recognized directly in equity,
      or
      where it arises from the initial accounting for a business combination, in
      which
      case it is taken into account in the determination of goodwill.





The
      consolidated entity has significant unused tax losses and as such a significant
      deferred tax asset; however, the deferred tax asset has not been recognized,
      as
      it is not probable that future taxable profit will be available against which
      the unused losses and unused tax credits can be utilized, given the nature
      of
      the consolidated entity’s business (research and development) and its history of
      losses.





**(c)**
            **Property
                and equipment**




Property
      and equipment is measured on the cost basis less accumulated depreciation and
      impairment and consists of laboratory equipment, computer equipment, furniture
      and fittings and leasehold improvements attributable to Prana’s premises at
      Parkville, Victoria, Australia. Cost includes expenditure that is directly
      attributable to the acquisition of the item.





Depreciation




Depreciation
      is provided on a straight line basis so as to write off the net cost or other
      revalued amount of each asset over its expected useful life.





The
      following estimated useful lives, ranging from three to 14 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.





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.





F-9


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**




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





**(e)**
            **Financial
                Instruments**





Loans
      and Receivables




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





Warrants
      and Options




Under
      AASB 132: *Financial
      Instruments: Disclosure and Presentation* (“AASB
      132”), options and warrants issued for other than for goods or services that are
      exercisable in a currency other than the functional currency of the Company
      and
      meet the definition of a liability are recorded as financial liabilities rather
      than equity. Refer to accounting policy (p) Share-based payments for the
      accounting policy for warrants and options issued as share-based payments for
      goods or services.





Warrants
      and options recorded as financial liabilities under AASB 132 are valued at
      fair
      value using the Black-Scholes model. The expected life used in the model has
      been adjusted, based on management’s best estimate, for the effects of
      non-transferability, exercise restrictions, and behavioral 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, 2006 and 2005, Prana had no capitalized research and development costs.




F-10


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**


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




**(h)**
            **Foreign
                Currency Transactions and
                Balances**




Foreign
      currency transactions




All
      foreign currency transactions during the financial year are brought to account
      using the exchange rate in effect at the date of the transaction. Foreign
      currency monetary items at reporting date are translated at the exchange rate
      existing at reporting date. Non-monetary assets and liabilities carried at
      fair
      value that are denominated in foreign currencies are translated at the rates
      prevailing at the date when the fair value was determined.





Exchange
      differences are recognized in profit or loss in the period in which they arise
      except for exchange differences on monetary items receivable from or payable
      to
      a foreign operation for which settlement is neither planned or likely to occur,
      which form part of the net investment in a foreign operation, are recognized
      in
      the foreign currency translation reserve and recognized in profit or loss on
      disposal of the net investment.





Foreign
      operations




On
      consolidation, the assets and liabilities of the consolidated entity’s overseas
      operations are translated at exchange rates prevailing at the reporting date.
      Income and expense items are translated at the average exchange rates for the
      period unless exchange rates fluctuate significantly. Exchange differences
      arising, if any, are recognized in the foreign currency translation reserve,
      and
      recognized in profit or loss on disposal of the foreign operations.





**(i)**
            **Employee
                Benefits**




Provision
      is made for the consolidated entity's liability for employee benefits arising
      from services rendered by employees to reporting date. Employee benefits that
      are expected to be settled within one year have been measured at the amounts
      expected to be paid when the liability is settled, plus related on-costs.
      Employee benefits payable later than one year have been measured at the present
      value of the estimated future cash outflows to be made for those
      benefits.





**(j)**
            **Provisions**




Provisions
      are recognized when the consolidated entity has a present obligation, the future
      sacrifice of economic benefits is probable, and the amount of the provision
      can
      be measured reliably.





The
      amount recognized as a provision is the best estimate of the consideration
      required to settle the present obligation at reporting date, taking into account
      the risks and uncertainties surrounding the obligation. Where a provision is
      measured using the cash flows estimated to settle the present obligation, its
      carrying amount is the present value of those cash flows.





When
      some
      or all of the economic benefits required to settle a provision are expected
      to
      be recovered from a third party, the receivable is recognized as an asset if
      it
      is virtually certain that recovery will be received and the amount of the
      receivable can be measured reliably.





**(k)**
            **Cash
                and cash equivalents**




Cash
      and
      cash equivalents includes cash on hand, deposits held at call with banks, other
      short-term highly liquid investments with original maturities of three months
      or
      less.





**(l)**
            **Revenue**




Revenue
      is recognized to the extent that it is probable that the economic benefits
      will
      flow to the entity and the revenue can be reliably measured. Revenue is made
      up
      of interest income which is recognized as earned when collectibility is
      reasonably assured.





**(m)**
            **Other
                income**




Other
      income is recognized to the extent that it is probable that the economic
      benefits will flow to the entity and the income can be reliably measured.





Government
      grants




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




F-11


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**




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




Corporate
      partner income




Corporate
      partner income is comprised of amounts earned under agreements with Schering
      A.G. and Neuroscience Victoria Ltd. for certain research and development
      activities. Income is recognized as earned on a straight line basis over the
      lives of the relevant agreements. The straight line basis is considered
      appropriate as the agreements do not contain clearly defined milestones. Such
      agreements are performed on a "best efforts" basis with no guarantee of either
      technological or commercial success.





**(n)**
            **Share
                Capital**




Ordinary
      share capital is recognized as the fair value of the consideration received
      by
      the Company. Any transaction costs arising on the issue of ordinary shares
      are
      recognized directly in equity as a reduction of the share proceeds
      received.





**(o)**
            **Trade
                and other payables**




Trade
      payables and other payables are recognized when the consolidated entity becomes
      obliged to make future payments resulting from the purchase of goods or
      services.





**(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 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 behavioral 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 the
      consolidated entity’s estimate of shares that will eventually vest.





**(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.





F-12


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**




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





**(s)**
            **Adoption
                of Australian Equivalents to International Financial Reporting Standards**




The
      consolidated entity is required to prepare financial statements that comply
      with
      A-IFRS for annual reporting periods beginning on or after January 1, 2005.
      Accordingly, this is Prana's first annual financial report prepared under
      A-IFRS.





An
      explanation of how the transition from superseded policies to A-IFRS has
      affected the consolidated entity's balance sheet and statement of operations
      is
      set out in the following tables and notes that accompany the
      tables.





**As
                Restated (see note 28)****Consolidated****Effect
                of A-IFRS on the balance sheet as at July 1, 2004**
            
            
            
            **SupersededPolicies
                at**
              **July
                1, 2004****1**
            
            **Adjustment
                on introduction of**
              **A-IFRS**
            
            **A-IFRS
                at**
              **July
                1, 2004****Note**
            
            **$**
            
            **$**
            
            **$****Current
                Assets**Cash
                and cash equivalents
            
            
            
            
            
            29,580,398
            
            
            —
            
            
            29,580,398Trade
                and other receivables
            
            
            
            
            
            92,917
            
            
            —
            
            
            92,917Other
                current assets
            
            
            
            
            
            72,769
            
            
            —
            
            
            72,769**Total
                current assets**
            
            
            
            
            
            29,746,084
            
            
            —
            
            
            29,746,084**Non-current
                assets**Property
                and equipment
            
            
            
            
            
            180,971
            
            
            —
            
            
            180,971Intangible
                assets
            
            
            (b
            )
            
            11,488,343
            
            
            (10,618,903
            )
            
            869,440**Total
                Non-Current Assets**
            
            
            
            
            
            11,669,314
            
            
            (10,618,903
            )
            
            1,050,411**Total
                Assets**
            
            
            
            
            
            41,415,398
            
            
            (10,618,903
            )
            
            30,796,495**Current
                Liabilities**Trade
                and other payables
            
            
            
            
            
            2,661,950
            
            
            —
            
            
            2,661,950Provisions
            
            
            
            
            
            42,597
            
            
            —
            
            
            42,597**Total
                Current Liabilities**
            
            
            
            
            
            2,704,547
            
            
            —
            
            
            2,704,547**Non-current
                liabilities**Financial
                liabilities
            
            
            (c
            )
            
            —
            
            
            6,858,804
            
            
            6,858,804Provisions
            
            
            
            
            
            8,292
            
            
            —
            
            
            8,292**Total
                Non-current Liabilities**
            
            8,292
            
            
            6,858,804
            
            
            6,867,096Commitments
                and Contingencies**Total
                Liabilities**
            
            
            
            
            
            2,712,839
            
            
            6,858,804
            
            
            9,571,643**Net
                assets**
            
            
            
            
            
            38,702,559
            
            
            (17,477,707
            )
            
            21,224,852**Equity**Issued
                capital
            
            
            (c
            )
            
            49,505,493
            
            
            (8,823,548
            )
            
            40,681,945Reserves
            
            
            (b
            )
            
            14,661,942
            
            
            (14,661,942
            )
            
            —Accumulated
                deficit during the development stage
            
            
            (d
            )
            
            (25,464,876
            )
            
            6,007,783
            
            
            (19,457,093
            )**Total
                Equity**
            
            
            
            
            
            38,702,559
            
            
            (17,477,707
            )
            
            21,224,852






1
            Reported
                financial results as at June 30, 2004




F-13


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**


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





**As
                Restated (see note 28)****Consolidated****Effect
                of A-IFRS on the balance sheet as at June 30,
                2005**
            
            
            
            **SupersededPolicies
                at**
              **June
                30, 2005****1**
            
            **Adjustment
                on introduction of**
              **A-IFRS**
            
            **A-IFRS
                at**
              **June
                30, 2005****Note**
            
            **$**
            
            **$**
            
            **$****Current
                Assets**Cash
                and cash equivalents
            
            
            
            
            
            21,453,304
            
            
            —
            
            
            21,453,304Trade
                and other receivables
            
            
            
            
            
            174,476
            
            
            —
            
            
            174,476Other
                current assets
            
            
            
            
            
            495,165
            
            
            —
            
            
            495,165**Total
                Current Assets**
            
            
            
            
            
            22,122,945
            
            
            —
            
            
            22,122,945**Non-Current
                Assets**Property
                and equipment
            
            
            
            
            
            166,214
            
            
            —
            
            
            166,214**Total
                Non-Current Assets**
            
            
            
            
            
            166,214
            
            
            —
            
            
            166,214**Total
                Assets**
            
            
            
            
            
            22,289,159
            
            
            —
            
            
            22,289,159**Current
                Liabilities**Trade
                and other payables
            
            
            
            
            
            2,571,181
            
            
            —
            
            
            2,571,181Provisions
            
            
            
            
            
            78,602
            
            
            —
            
            
            78,602**Total
                Current Liabilities**
            
            
            
            
            
            2,649,783
            
            
            —
            
            
            2,649,783**Non-Current
                Liabilities**Financial
                liabilities
            
            
            (c
            )
            
            —
            
            
            1,057,407
            
            
            1,057,407Provisions
            
            
            
            
            
            45,200
            
            
            —
            
            
            45,200**Total
                Non-Current Liabilities**
            
            45,200
            
            
            1,057,407
            
            
            1,102,607Commitments
                and Contingencies**Total
                Liabilities**
            
            
            
            
            
            2,694,983
            
            
            1,057,407
            
            
            3,752,390**Net
                Assets**
            
            
            
            
            
            19,594,176
            
            
            (1,057,407
            )
            
            18,536,769**Equity**Issued
                capital
            
            
            (a)
                & (c
            )
            
            55,405,707
            
            
            (9,566,810
            )
            
            45,838,897Reserves
            
            
            (a)
                & (b
            )
            
            14,661,942
            
            
            (12,213,946
            )
            
            2,447,996Accumulated
                deficit during the development stage
            
            
            (d
            )
            
            (50,473,473
            )
            
            20,723,349
            
            
            (29,750,124
            )**Total
                Equity**
            
            
            
            
            
            19,594,176
            
            
            (1,057,407
            )
            
            18,536,769






1
            Reported
                financial results as at June 30,
                2005





F-14


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**




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





**As
                Restated (see note 28)****Consolidated****Effect
                of A-IFRS on the statement of operations for the financial year ended
                June
                30, 2005**
            
            
            
            **SupersededPolicies****1**
            
            **Adjustment
                onintroduction of**
              **A-IFRS**
            
            **A-IFRS****Note**
            
            **$**
            
            **$**
            
            $Revenue
            
            
            (e
            )
            
            2,653,113
            
            
            (1,760,978
            )
            
            892,135Other
                income
            
            
            (e
            )
            
            —
            
            
            1,760,978
            
            
            1,760,978Research
                and development expenses
            
            
            
            
            
            (7,109,839
            )
            
            —
            
            
            (7,109,839
            )Research
                and development expenses - related party
            
            
            
            
            
            (577,757
            )
            
            —
            
            
            (577,757
            )Personnel
                expenses
            
            
            (a
            )
            
            (4,046,195
            )
            
            (1,704,734
            )
            
            (5,750,929
            )Intellectual
                property expenses
            
            
            
            
            
            (729,583
            )
            
            —
            
            
            (729,583
            )Audit
                fees
            
            
            
            
            
            (202,032
            )
            
            —
            
            
            (202,032
            )Travel
                expenses
            
            
            
            
            
            (432,316
            )
            
            —
            
            
            (432,316
            )Marketing
                expenses
            
            
            
            
            
            (442,920
            )
            
            —
            
            
            (442,920
            )Depreciation
                expense
            
            
            
            
            
            (65,223
            )
            
            —
            
            
            (65,223
            )Amortization
                expenses
            
            
            (b
            )
            
            (1,100,004
            )
            
            1,016,804
            
            
            (83,200
            )Other
                expenses
            
            
            
            
            
            (1,204,930
            )
            
            —
            
            
            (1,204,930
            )Foreign
                exchange gain/(loss)
            
            
            (b
            )
            
            (1,362,572
            )
            
            —
            
            
            (1,362,572
            )Impairment
                of intangible assets
            
            
            
            
            
            (10,388,339
            )
            
            9,602,099
            
            
            (786,240
            )Gain
                on fair value of financial liabilities
            
            
            (c
            )
            
            —
            
            
            5,801,397
            
            
            5,801,397**LOSS
                BEFORE INCOME TAX EXPENSE**
            
            (25,008,597
            )
            
            14,715,566
            
            
            (10,293,031
            )**INCOME
                TAX EXPENSE**
            
            
            
            
            
            —
            
            
            —
            
            
            —**NET
                LOSS**
            
            
            
            
            
            (25,008,597
            )
            
            14,715,566
            
            
            (10,293,031
            )


1
            Reported
                financial results for the year ended June 30,
                2005





Explanatory
      Notes to the Financial Statements





The
      following explanatory notes relate to the financial statements above and
      describe the differences between the accounting policies under A-IFRS and the
      previous treatment of those items under the Superseded Policies.





(a)
      Share-based Payments




Under
      the
      Superseded Policies, the consolidated entity did not recognize an expense for
      share-based compensation granted to employees and directors. Under A-IFRS,
      the
      fair value of share options granted to employees and directors is determined
      at
      grant date and expensed over the expected vesting period of the options. As
      permitted under A-IFRS first time adoption, the consolidated entity did not
      retrospectively recognize share-based payments that were granted before November
      7, 2002 and share based payments granted after November 7, 2002 that vested
      before January 1, 2005.





For
      the
      financial year ended June 30, 2005, under A-IFRS reserves increased by
      A$1,704,734 and an additional personnel expense of the same amount was
      recognized in the statement of operations in relation to the options issued
      during the year.





Under
      A-IFRS, a share based payment reserve arises on the grant of share options
      and
      warrants. Previously these amounts were allocated to issued capital. At June
      30,
      2005, a further A$743,262 previously included in issued capital was moved into
      the share based payments reserve under A-IFRS.




F-15




**PRANA
      BIOTECHNOLOGY LIMITED**


**(A
      Development Stage Enterprise)**




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





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





(b)
      Intangible Assets




Under
      the
      Superseded Policies, the consolidated entity revalued the acquired research
      and
      development costs to fair value in December 1999. Under A-IFRS the revaluation
      is permissible only if there is an active market for the asset. As a
      consequence, upon transition to A-IFRS on July 1, 2004, intangible assets
      decreased by A$10,208,582 (net of accumulated amortization) with an associated
      decrease in the asset revaluation reserve of A$14,661,942 and accumulated losses
      of A$4,453,360.





Under
      A-IFRS internally generated intangible assets from expenditure on research
      activities are not recognizable. As a consequence, upon transition to A-IFRS
      at
      July 1, 2004 intangible assets decreased by A$410,321 (net of accumulated
      amortization) with a corresponding increase in accumulated losses.





As
      a
      result of the above transition adjustments, the carrying value of the intangible
      assets at July 1, 2004 was AS$869,440.





Under
      AASB 1 Prana has not elected to take the option to fair value the intangible
      assets at July 1, 2004.





The
      impact of the above transition adjustments to A-IFRS for the financial year
      ended June 30, 2005, is that the amortization expense decreased by A$1,016,804
      and the impairment of intangible assets by A$9,602,099, which reverses a portion
      of the impairment recorded under Superseded Policies given that a portion of
      the
      asset was already derecognized under A-IFRS. In addition, the asset revaluation
      reserve at June 30, 2005 decreased by A$14,661,942.





(c)
      Financial Instruments




The
      directors have elected not to apply the first-time adoption exemption available
      to the consolidated entity to defer the date of transition of AASB 132 and
      AASB
      139 *Financial
      Instruments: Recognition and Measurement* to July
      1, 2005.





The
      warrants issued to the US investors as part of the June 2004 capital raising
      are
      required to be reclassified as financial liabilities under AASB 132 as a result
      of their exercise price being in a currency other than the consolidated entity’s
      functional currency. These warrants have been valued using the Black-Scholes
      Model which incorporates the market value of Prana’s ADRs at balance date. As a
      consequence, upon the transition to A-IFRS at July 1, 2004 financial liabilities
      increased by A$6,858,804 with a reduction in issued capital of A$8,823,548
      and
      an increase in accumulated losses of A$1,964,744.





The
      impact of the above transition adjustment to A-IFRS for the financial year
      ended
      June 30, 2005 is that the financial liabilities decreased to A$1,057,407 with
      a
      decrease in accumulated losses of A$7,766,141. The effect on the statement
      of
      operations for the year ended June 30, 2005 was a gain on fair value of
      financial liabilities of A$5,801,397.





(d)
      Accumulated Deficit during the Development Stage




The
      effect of the above adjustments on accumulated deficit during the development
      stage is as follows:





June
                30, 2005
            
            July
                1, 2004A$
            
            A$Expensing
                of share-based payments (a)
            
            
            (1,704,734
            )
            
            -Derecognition
                of revaluation (b)
            
            
            14,661,942
            
            
            14,661,942Derecognition
                of intangible assets (b)
            
            
            -
            
            
            (10,618,903
            )Recognition
                of financial liabilities (c)
            
            
            7,766,141
            
            
            1,964,744Total
                adjustment to accumulated deficit
            
            
            20,723,349
            
            
            6,007,783





(e)
      Revenue




Under
      the
      Superseded Policies, the consolidated entity recorded as revenue all of the
      consolidated entity’s inflows. Under A-IFRS, the consolidated entity’s revenue
      represents interest income, with the remaining inflows of the consolidated
      entity (being government grants and corporate partner revenues) classified
      as
      other income. At June 30, 2005, this reduced revenue by A$1,760,978 and
      increased other income by the same amount.





(f)
      Effect of A-IFRS on the Cash Flow Statement




There
      are
      no material differences between the Cash Flow Statement presented under A-IFRS
      and the Cash Flow Statement presented under the Superseded Policies for the
      year
      ended June 30, 2005.




F-16


**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**




**Years
                Ended June 30,****2006**
            
            **2005****2.****REVENUE**Interest
            
            
            762,023
            
            
            892,135**3.****OTHER
                INCOME**Government
                grant (i)
            
            
            288,173
            
            
            629,692Corporate
                partner revenues (ii)
            
            
            -
            
            
            1,125,000Other
                income
            
            
            90
            
            
            6,286Total
                other income
            
            
            288,263
            
            
            1,760,978




(i)
      On
      May 5, 2003, the consolidated entity announced a Biotechnology Innovation Fund
      grant of A$227,252 from the Australian Industry Research and Development Board
      to research the development of an immunotherapy from Alzheimer’s Disease. During
      the year ended June 30, 2005 the consolidated entity met the revenue recognition
      criteria to record income of A$101,689. This grant was completed in January
      2005.





On
      February 18, 2004, the consolidated entity announced a further START grant
      of
      A$1.35 million from the Australian Industry Research and Development Board
      to
      take its second generation drug candidate for Alzheimer’s disease, PBT-2,
      through safety testing and Phase 1 Clinical Trials. During the years ended
      June
      30, 2006 and 2005, the consolidated entity met the revenue recognition criteria
      to record revenue of A$288,172 and A$528,003, respectively.





(ii)
      In
      March 2003, Prana entered into various agreements with Schering A.G. and
      Neuroscience Victoria Ltd. for certain research and development activities.
      The
      income under these agreements is recognized as earned on a straight line basis
      over the lives of the relevant agreements. These agreements ceased June 30,
      2005.





**Years
                Ended June 30,****2006**
            
            **2005****4.****EXPENSES
                FROM ORDINARY ACTIVITIES**Research
                and development expenseResearch
                and development
            
            
            7,613,045
            
            
            7,109,839Research
                and development - related parties
            
            
            -
            
            
            577,757Total
                research and development expense
            
            
            7,613,045
            
            
            7,687,596Personnel
                expensesEmployees
            
            
            1,578,934
            
            
            1,516,077Equity
                based payments - employees
            
            
            54,662
            
            
            -Consultants
                and directors
            
            
            1,432,371
            
            
            1,640,861Equity
                based payments - consultants and directors
            
            
            352,041
            
            
            2,593,991Total
                personnel expense
            
            
            3,418,008
            
            
            5,750,929Intellectual
                property expensesOverseas
            
            
            259,848
            
            
            357,590Local
            
            
            206,578
            
            
            371,993Total
                intellectual property expense
            
            
            466,426
            
            
            729,583




F-17




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**




**4.** **EXPENSES
      FROM ORDINARY ACTIVITIES continued**





**Years
                Ended June 30,****2006**
            
            **2005**Depreciation
                of non-current assetsLaboratory
                equipment
            
            
            36,432
            
            
            22,367Computer
                equipment
            
            
            30,135
            
            
            33,306Furniture
                and fittings
            
            
            7,434
            
            
            4,219Leasehold
                improvements
            
            
            44,195
            
            
            5,331Total
                depreciation expense
            
            
            118,196
            
            
            65,223Amortization
                expensesCore
                intellectual property
            
            
            -
            
            
            83,200Total
                amortization expense
            
            
            -
            
            
            83,200Other
                expensesCorporate
                compliance
            
            
            129,466
            
            
            429,616Office
                expenses
            
            
            475,957
            
            
            515,869Computer
                expenses
            
            
            25,470
            
            
            28,592Insurance
            
            
            192,917
            
            
            191,705Other
            
            
            815
            
            
            39,148Total
                other expenses
            
            
            824,625
            
            
            1,204,930





**5.****INCOME
                TAX**




(a)The
                prima facie tax on net (loss) before tax is reconciled to the income
                tax
                is as follows:Prima
                facie tax income on net (loss) before income tax at 30% (2005:
                30%)
            
            
            (3,477,178
            )
            
            (3,087,909
            )Effect
                of lower tax rates of tax on overseas income
            
            
            (4,142
            )
            
            4,567Add
                tax effect of:(Over)
                provision of income tax in previous year
            
            
            (1,304,611
            )
            
            (2,258,204
            )Equity
                issued for nil consideration
            
            
            122,011
            
            
            778,197Gain
                on fair value of financial liabilities
            
            
            (38,615
            )
            
            (1,740,419
            )Other
            
            
            2,848
            
            
            4,665Deferred
                tax asset not recognized
            
            
            4,699,687
            
            
            6,299,103Income
                tax expense attributable to loss before income tax
            
            
            -
            
            
            -(b)Potential
                deferred tax asset at June 30, 2006 and 2005 in respect of tax losses
                not
                brought to account is:
            
            
            16,529,172
            
            
            11,700,174Temporary
                Differences
            
            
            376,735
            
            
            506,046




F-18




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**


**June
                30,**Notes
            
            **2006**
            
            **2005****6.****TRADE
                AND OTHER RECEIVABLES**Accrued
                income
            
            
            
            
            
            119,457
            
            
            48,123Goods
                and services tax receivable
            
            
            
            
            
            73,006
            
            
            53,439Other
                debtors
            
            
            
            
            
            1,698
            
            
            72,914194,161
            
            
            174,476





**7.****OTHER
                CURRENT ASSETS**Prepayments
            
            
            68,453
            
            
            495,165Term
                Deposit A$
            
            
            42,379
            
            
            -110,832
            
            
            495,165





**8.****PROPERTY
                AND EQUIPMENT**Gross
                carrying amountBalance
                at beginning of year
            
            
            
            
            
            556,989
            
            
            506,523Additions
            
            
            
            
            
            55,626
            
            
            50,466Disposals
            
            
            
            
            
            (8,626
            )
            
            -Balance
                at end of year
            
            
            
            
            
            603,989
            
            
            556,989Accumulated
                depreciationBalance
                at beginning of year
            
            
            
            
            
            (390,775
            )
            
            (325,552
            )Disposals
            
            
            
            
            
            7,357
            
            
            -Depreciation
                expense
            
            
            3
            
            
            (118,196
            )
            
            (65,223
            )Balance
                at end of year
            
            
            
            
            
            (501,614
            )
            
            (390,775
            )Net
                book value at end of year
            
            
            
            
            
            102,375
            
            
            166,214




Aggregate
      depreciation allocated during the year is recognized as an expense and disclosed
      in Note 3.




F-19




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**


**8.****PROPERTY
                AND EQUIPMENT continued**





**June
                30,**Notes
            
            **2006**
            
            **2005**Property
                and equipment, at cost
            
            
            
            
            
            368,960
            
            
            325,899Less
                accumulated depreciation
            
            
            
            
            
            (351,139
            )
            
            (314,707
            )Total
                property and equipment
            
            
            
            
            
            17,821
            
            
            11,192Computer
                equipment, at cost
            
            
            
            
            
            120,209
            
            
            116,652Less
                accumulated depreciation
            
            
            
            
            
            (87,287
            )
            
            (64,510
            )Total
                computer equipment
            
            
            
            
            
            32,922
            
            
            52,142Furniture
                and fittings, at cost
            
            
            
            
            
            43,421
            
            
            43,039Less
                accumulated depreciation
            
            
            
            
            
            (13,070
            )
            
            (5,636
            )Total
                furniture and fittings
            
            
            
            
            
            30,351
            
            
            37,403Leasehold
                improvements, at cost
            
            
            
            
            
            71,399
            
            
            71,399Less
                accumulated depreciation
            
            
            
            
            
            (50,118
            )
            
            (5,922
            )Total
                leasehold improvements
            
            
            
            
            
            21,281
            
            
            65,477Total
            
            
            
            
            
            102,375
            
            
            166,214





**9.****TRADE
                AND OTHER PAYABLES**Trade
                creditors
            
            
            
            
            
            952,145
            
            
            1,235,320Accrued
                research and development expenses
            
            
            
            
            
            242,113
            
            
            171,031Accrued
                intellectual property expenses
            
            
            
            
            
            14,764
            
            
            32,586Accrued
                personnel expenses
            
            
            
            
            
            20,894
            
            
            683,482Accrued
                audit fees
            
            
            
            
            
            111,213
            
            
            116,220Accrued
                PR and marketing expense
            
            
            
            
            
            14,531
            
            
            50,737Other
                accrued expenses
            
            
            
            
            
            67,698
            
            
            200,342Deferred
                revenue
            
            
            
            
            
            -
            
            
            56,463Amounts
                payable to Directors
            
            
            
            
            
            115,000
            
            
            25,0001,538,358
            
            
            2,571,181**10.****PROVISIONS**CurrentAnnual
                leave
            
            
            17
            
            
            76,672
            
            
            78,602Non-CurrentLong
                service leave
            
            
            17
            
            
            76,766
            
            
            45,200





**11.**
              **COMMITMENTS
                  AND CONTINGENCIES**


The
      consolidated entity is not involved in any legal or arbitration proceedings
      and,
      so far as directors are aware, no such proceedings are pending or threatened
      against the consolidated entity.





In
      respect of expenditure commitments on leases and employment contracts, refer
      to
      note 16.




F-20




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**


**June
                30,**Notes
            
            **2006**
            
            **2005****12.****ISSUED
                CAPITAL****(a)****Issued
                Capital**Fully
                paid ordinary shares
            
            
            11(b
            )
            
            46,274,127
            
            
            45,838,89746,274,127
            
            
            45,838,897





**(b)****Movements
                in shares on issue**




**June
                30,****2006**
            
            
            **2005****Number
                of**
              **Shares**
            
            
            **$**
            
            
            **Number
                of**
              **Shares**
            
            
            **$**Beginning
                of the year
            
            
            127,319,260
            
            
            45,838,897
            
            
            115,984,380
            
            
            40,681,945Movement
                during the year
            
            
            825,000
            
            
            435,230
            
            
            11,334,880
            
            
            5,156,952End
                of the year
            
            
            128,144,260
            
            
            46,274,127
            
            
            127,319,260
            
            
            45,838,897





Details
      of share issuances are as follows:




**Date**
            
            
            **Details**
            
            
            **Notes**
            
            
            **Number**
            
            
            **Issue
                Price**
            
            
            **$**August
                9, 2004
            
            
            Non-cash
                share issue in settlement of litigation
            
            
            (iii
            )
            
            1,350,000
            
            
            0.56
            
            
            756,000September
                16, 2004
            
            
            Non-cash
                share issue in consideration for services provided by
                consultants
            
            
            (i
            )
            
            49,775
            
            
            0.82
            
            
            40,816December
                8, 2004
            
            
            Exercise
                of options
            
            
            
            
            
            9,506,666
            
            
            0.50
            
            
            4,753,333December
                17, 2004
            
            
            Non-cash
                share issue to directors
            
            
            (ii
            )
            
            249,999
            
            
            0.48
            
            
            120,000February
                21, 2005
            
            
            Non-cash
                share issue in consideration for services provided by
                consultants
            
            
            (i
            )
            
            178,440
            
            
            0.55
            
            
            98,142Capital
                raising costs
            
            
            (iv
            )
            
            -
            
            
            -
            
            
            (611,339
            )Year
                endedJune
                30, 2005
            
            
            
            
            
            
            
            
            11,334,880
            
            
            
            
            
            5,156,952August
                10, 2005
            
            
            Non
                cash share issue in consideration for services provided by
                consultants
            
            
            (i
            )
            
            825,000
            
            
            0.53
            
            
            437,250Capital
                raising costs
            
            
            
            
            
            
            
            
            -
            
            
            -
            
            
            (2,020
            )Year
                endedJune
                30, 2006
            
            
            
            
            
            
            
            
            825,000
            
            
            
            
            
            435,230





(i)
            The
                consolidated entity recognized non-cash compensation expense for
                shares
                issued in consideration for services provided by consultants based
                on
                either the directors’ valuation of the services rendered or the shares
                issued.





(ii)
            The
                base fee for three of the Company’s directors was paid by the issue of
                83,333 shares each as approved at the 2004 Annual General
                Meeting.





(iii)
            The
                Company settled a litigation dispute with P.N. Gerolymatos via the
                issue
                of 1,350,000 shares valued as of the date the settlement agreement
                was
                signed.





(iv)
            The
                capital raising costs incurred in fiscal year 2005 include the issue
                of
                warrants to a consultant as part of the US capital raising that occurred
                in June 2004. Capital raising costs also include the issue of options
                to a
                consultant that assisted Prana with the June 2004 US capital raising
                and
                the exercise of options.




F-21




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**


**12.** **ISSUED
      CAPITAL (continued)**





**(c)      
                Terms and conditions of contributed equity**Ordinary
                sharesOrdinary
                shares have the right to receive dividends as declared and, in the
                event
                of winding up the Company, to participate in the proceeds from the
                sale of
                all surplus assets in proportion to the number of and amounts paid
                up on
                shares held. Ordinary shares entitle their holder to one vote, either
                in
                person or by proxy, at a meeting of the
                Company.





**(d)****Shares
                issued after reporting date**





**Date**
            
            **Details**
            
            **Number**
            
            **Issue
                Price**
            
            **Comp.
                Expense ($)**August
                31, 2006
            
            
            Issued
                to a consultant
            
            
            250,000
            
            
            0.1725
            
            
            43,125250,000
            
            
            
            
            
            43,125




**June
                30,****2006**
            
            
            **2005****13.****RESERVES****(a)****Share
                Based Payments**Options
                over fully paid ordinary shares
            
            
            13(b
            )
            
            898,252
            
            
            478,999Options
                over ADRs
            
            
            13(c
            )
            
            1,515,434
            
            
            1,515,434Warrants
                over ADRs
            
            
            13(d
            )
            
            453,563
            
            
            453,5632,867,249
            
            
            2,447,996





The
      share
      based payment reserve arises on the grant of options and/or issuance of warrants
      to directors, executives, consultants or employees. Amounts are transferred
      out
      of the reserve and into issued capital when the options and/or warrants are
      exercised.




F-22




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**


**13.** **RESERVES
      (continued)**





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




**Years
                Ended June 30,****2006**
            
            **2005****Number
                ofOptions**
            
            **Comp.**
              **Expense
                ($)**
            
            **Number
                of Options**
            
            **Comp.**
              **Expense
                ($)**Beginning
                of the year
            
            
            3,312,000
            
            
            478,999
            
            
            21,269,167
            
            
            -Issued
                during the year
            
            
            2,678,000
            
            
            258,020
            
            
            2,700,000
            
            
            478,999Expired
                during the year
            
            
            (200,000
            )
            
            -
            
            
            (11,150,501
            )
            
            -Forfeited
                during the year
            
            
            (37,500
            )
            
            -
            
            
            -
            
            
            -Amortization
                of option expenses
            
            
            -
            
            
            161,233
            
            
            -
            
            
            -Exercised
                during the year (Note 12(b))
            
            
            -
            
            
            
            
            
            (9,506,666
            )
            
            -End
                of the year
            
            
            5,752,500
            
            
            898,252
            
            
            3,312,000
            
            
            478,999





Details
      of option issuances are summarized as follows.





2005




·
            On
                December 17, 2004, the Company issued 600,000 options to outside
                consultants under the 2004 Employees, Directors and Consultants Share
                and
                Option Plan (see Note 17) in consideration for services rendered
                to the
                Company. Of the 600,000 options, 400,000 options vested immediately
                and
                200,000 options vest quarterly over a one-year vesting period. The
                options
                are exercisable until December 17, 2007 at an exercise price of A$0.50
                per
                option.




·
            On
                December 17, 2004, the Company issued 1,600,000 options to directors
                under
                the 2004 Employees, Directors and Consultants Share and Option Plan
                (see
                Note 17) in recognition of future contributions to the growth and
                success
                of the Company. The options are escrowed for one year from the date
                of
                grant and are exercisable once the ASX share price reaches A$1.00
                for five
                consecutive trading days. The options are exercisable at A$nil
                consideration and expire on June 30, 2010. This issue was approved
                by
                shareholders at the 2004 Annual General Meeting.




·
            On
                February 21, 2005, the Company issued 500,000 options to the Company
                Secretary under the 2004 Employees, Directors and Consultants Share
                and
                Option Plan (see Note 17) as reward for services rendered to the
                Company.
                Such options vested immediately and are exercisable on or before
                December
                17, 2007 at an exercise price of A$0.50 per option.




2006




·
            On
                August 10, 2005, the Company issued 413,000 options to an outside
                consultant as reward for services rendered to the Company. Such options
                are exercisable on or before February 1, 2007 at an exercise price
                of
                A$0.50 per option. This issue was approved by shareholders at the
                2005
                Annual General Meeting.




·
            On
                February 2, 2006, the Company issued 890,000 options to employees
                under
                the 2004 Employees, Directors and Consultants Share and Option Plan
                (see
                Note 17) in recognition of future contributions to the growth and
                success
                of the Company. The options are exercisable once the ASX share price
                reaches A$1.00 for five consecutive trading days. The options are
                exercisable at A$nil consideration and expire on June 30, 2010.




·
            On
                February 2, 2006, the Company issued 1,300,000 options to directors
                under
                the 2004 Employees, Directors and Consultants Share and Option Plan
                (see
                Note 17) in recognition of future contributions to the growth and
                success
                of the Company. The options are escrowed for one year from date of
                grant
                and are exercisable once the ASX share price reaches A$1.00 for five
                consecutive trading days. The options are exercisable at A$nil
                consideration and expire on June 30, 2010. This issue was approved
                by
                shareholders at the 2005 Annual General Meeting.




·
            On
                June 30, 2006, the Company issued 75,000 options to an employee under
                the
                2004 Employees, Directors and Consultants Share and Option Plan (see
                Note
                17) 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.




F-23




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
 **13.** **RESERVES
        (continued)**





**(c)** **Movements
      in share options over ADRs**




**Years
                Ended June 30,****2006**
            
            **2005****Number
                of Options**
            
            
            **Comp.**
              **Expense
                ($)**
            
            
            **Number
                ofOptions**
            
            
            **Comp.**
              **Expense
                ($)**Beginning
                of the year
            
            
            380,000
            
            
            1,515,434
            
            
            -
            
            
            -Issued
                during the year
            
            
            -
            
            
            -
            
            
            380,000
            
            
            1,515,434End
                of the year
            
            
            380,000
            
            
            1,515,434
            
            
            380,000
            
            
            1,515,434





Details
      of option issuances are summarized as follows.





2005




On
      December 17, 2004, the Company issued 380,000 options to a director under the
      2004 ADS Option Plan (see Note 17) as per his employment contract. The options
      vested on June 14, 2005 following an agreement between Jonas Alsenas and the
      Company on Jonas Alsenas stepping down as CEO and director of the Company and
      are exercisable at US$5.00. The options expire on December 17, 2012 and upon
      exercise convert to ADRs (1 ADR = 10 ordinary shares). This issue was approved
      by shareholders at the 2004 Annual General Meeting.




**(d)** **Movement
      in warrants**




**Years
                Ended June 30,****2006**
            
            
            **2005****Number
                of Warrants**
            
            
            **Comp.**
              **Expense
                ($)**
            
            
            **Number
                of Warrants**
            
            
            **Comp.**
              **Expense
                ($)**Beginning
                of the year
            
            
            320,000
            
            
            453,563
            
            
            -
            
            
            -Issued
                during the year
            
            
            -
            
            
            -
            
            
            320,000
            
            
            453,563End
                of the year
            
            
            320,000
            
            
            453,563
            
            
            320,000
            
            
            453,563





Details
      of warrant issuances are summarized as follows.





2005




On
      December 17, 2004, the Company issued 320,000 warrants to an outside consultant
      in consideration for services rendered to the Company for the June 2004 US
      capital raising. The resulting compensation expense was accounted for as an
      issuance cost and therefore recorded as a deduction of issued capital in the
      Statements of Shareholders’ Equity. The warrants are convertible to 320,000 ADRs
      (3,200,000 ordinary shares) at an exercise price of US$8.00 per warrant on
      or
      before June 4, 2009.




**(e)     
                Terms and conditions of contributed equity**Options
                and warrantsOption
                holders and warrant holders do not have the right to receive dividends
                and
                are not entitled to vote at a meeting of the Company. Options and
                warrants
                may be exercised at any time from the date they vest to the date
                of their
                expiry. Share options convert into ordinary shares on a one for one
                basis
                on the date they are exercised. Warrants and US options convert into
                ADRs,
                being one warrant or US option for one ADR, which equals ten ordinary
                shares, on the date they are
                exercised.





In
      Australia, there is not a set number of authorized shares, shares are not
      reserved for the exercise of options, and shares do not have a par value.




F-24




**PRANA
      BIOTECHNOLOGY LIMITED**


**(A
      Development Stage Enterprise)**




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




**13.** **RESERVES
      (continued)**





**(f)****Options
                and warrants issued after reporting date**





There
      have been no options or warrants issued after reporting date.




**June
                30,****2006**
            
            **2005****14.****ACCUMULATED
                DEFICIT DURING DEVELOPMENT STAGE**Balance
                at beginning of year
            
            
            (29,750,124
            )
            
            (19,457,093
            )Net
                loss for the year
            
            
            (11,590,594
            )
            
            (10,293,031
            )Balance
                at end of year
            
            
            (41,340,718
            )
            
            (29,750,124
            )





**15.****CASH
                FLOW STATEMENT****(a)****Reconciliation
                of the net loss to the net cash flows from
                operations**Net
                loss
            
            
            (11,590,594
            )
            
            (10,293,031
            )**Non-cash
                items**Depreciation
                of plant and equipment
            
            
            118,196
            
            
            65,223Amortization
                of intangible assets
            
            
            -
            
            
            83,200Non-cash
                issue of equity in consideration of operating expenses
            
            
            856,503
            
            
            2,144,191Foreign
                exchange (gain)/loss
            
            
            (268,960
            )
            
            1,362,572Impairment
                of core intellectual property
            
            
            -
            
            
            786,240Gain
                on fair value of financial liabilities
            
            
            (128,715
            )
            
            (5,801,397
            )Loss
                on sale of non-current asset
            
            
            894
            
            
            -**Changes
                in assets and liabilities**Increase
                in trade and other receivables
            
            
            (19,685
            )
            
            (81,559
            )Decrease/(increase)
                in other current assets
            
            
            384,333
            
            
            (422,396
            )(Decrease)/increase
                in trade and other payables
            
            
            (1,032,823
            )
            
            665,231Increase
                in provision for employee entitlements
            
            
            29,636
            
            
            72,913Net
                cash flows used in operating activities
            
            
            (11,651,215
            )
            
            (11,418,813
            )**(b)****Reconciliation
                of cash and cash equivalents**Cash
                and cash equivalents balance comprises:-
                cash and cash equivalents on hand
            
            
            684,006
            
            
            1,163,077-
                term deposit/on call
            
            
            6,829,772
            
            
            11,290,227-
                commercial bill
            
            
            2,500,000
            
            
            9,000,000Closing
                cash and cash equivalents balance
            
            
            10,013,778
            
            
            21,453,304





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





During
      the years ended June 30, 2006 and 2005, the Company issued shares, options
      and
      warrants in connection with non-cash transactions. See Notes 12(b), 13(b),
      13(c)
      and 13(d).




F-25




**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted**




**16.**
            **EXPENDITURE
                COMMITMENTS**





The
      Company moved premises in June 2004 and entered into an operating lease for
      a
      three year period totaling A$306,781, including rent increases by 3.5% per
      annum. Outgoing costs are set yearly by the landlord.





Future
      minimum lease payments under the office lease are as follows as of June 30,
      2006:





Fiscal
                year2005
            
            
            105,9112006
            
            
            110,7492007
            
            
            92,726Thereafter
            
            
            -Total
            
            
            309,386





Refer
      to
      note 20 in respect of employment contracts with Mr. Geoffrey Kempler and Dr.
      Ross Murdoch.




**17.**
              **EMPLOYEE
                  ENTITLEMENTS AND SUPERANNUATION
                  COMMITMENTS**


**(a)**  **Employee
        Entitlements**


**Years
                Ended June 30,**Notes
            
            **2006**
            
            **2005**The
                aggregate employee entitlement liability is composed of:Provisions
                (current)
            
            
            
            
            
            76,672
            
            
            78,602Provisions
                (non-current)
            
            
            
            
            
            76,766
            
            
            45,20010
            
            
            153,438
            
            
            123,802Number
                of employees: 14 (2005: 17 employees)





**(b)**  **Employee
      and Consultants Option Plans**




At
      the
      Annual General Meeting held on November 22, 2000, shareholders approved the
      establishment of the Employee and Consultants Option Plan 2000 designed to
      reward directors, employees and consultants for their contributions to the
      Company. It was also proposed as a method of retaining key personnel, for the
      growth and development of the Company’s intellectual property rights. The
      options could not be transferred and were not quoted on the ASX. At June 30,
      2005, there were no directors, seven employees (including three executives),
      and
      five consultants participating in the Scheme. All options were issued with
      an
      exercise price of A$0.50 and expired on June 30, 2005. No further options will
      be issued under this plan.




F-26


**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **17.**
                **EMPLOYEE
                    ENTITLEMENTS AND SUPERANNUATION COMMITMENTS
                    (continued)**




At
      the
      Annual General Meeting held on November 17, 2004, the shareholders approved
      the
      establishment of new Employee and Consultant Plans designed to reward directors,
      employees and/or consultants for their contributions to the Company. As per
      the
      previous plan, the new plans are to be used as a method of retaining key
      personnel for the growth and development of the Company’s. 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, 2006, equity had been issued to one previous director while a director
      under the 2004 ADS Option Plan and five directors, three consultants and 12
      employees under the 2004 Employees, Directors and Consultants Share and Option
      Plan. At the 2004 Annual General Meeting shareholders authorized the Company
      to
      issue in aggregate up to 12 million ordinary shares under the plans. This was
      increased to 22 million ordinary shares at the 2005 Annual General Meeting.
      The
      Share Plan Committee, a sub-committee of the Remuneration Committee administers
      the Plans and is able to change the terms of the equity issued under them from
      the default terms.





Under
      the
      2004 ADS Option Plan, the default exercise price must equal or exceed the fair
      value of the ADS on the date the options are awarded. The option expiry date
      cannot exceed ten years from the date the options were awarded. The default
      vesting conditions are 25% per year on the date the options were awarded.





Under
      the
      2004 Employees, Directors and Consultants Share and Option Plan, the default
      exercise price must be equal or less than the market value of the ordinary
      shares on ASX on the date of grant. The option expiry date cannot exceed ten
      years from the date the options were granted. The default vesting conditions
      are
      25% per year on the date the options were granted.





Information
      with respect to the number of options granted under the Employee and Consultants
      Option Plan 2000 is as follows:




**Years
                Ended June 30,****2006**
            
            
            **2005****Number
                of Options**
            
            
            **Exercise
                Price ($)**
            
            
            **Number
                of Options**
            
            
            **Exercise
                Price ($)**Beginning
                of the year
            
            
            -
            
            
            -
            
            
            897,167
            
            
            0.50Issued
                during the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
                during the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -Expired
                during the year
            
            
            -
            
            
            -
            
            
            (897,167
            )
            
            0.50End
                of the year
            
            
            -
            
            
            
            
            
            -





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,****2006**
            
            
            **2005****Number
                of Options**
            
            
            **Exercise
                Price ($)**
            
            
            **Number
                of Options**
            
            
            **Exercise
                Price ($)**Beginning
                of the year
            
            
            2,700,000
            
            
            0.50
            
            
            -
            
            
            -Issued
                during the year
            
            
            2,265,000
            
            
            nil
            
            
            1,600,000
            
            
            -Issued
                during the year
            
            
            -
            
            
            -
            
            
            1,100,000
            
            
            0.50Forfeited
                during the year
            
            
            (37,500
            )
            
            nil
            
            
            -
            
            
            -End
                of the financial year
            
            
            4,927,500
            
            
            
            
            
            2,700,000





F-27


**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted**


**17.**
              **EMPLOYEE
                  ENTITLEMENTS AND SUPERANNUATION COMMITMENTS
                  (continued)**


Information
      with respect to the number of shares issued under the 2004 Employees, Directors
      and Consultants Share and Option Plan as follows:





**Years
                Ended June 30,****2006**
            
            **2005****Number
                of Shares**
            
            **Number
                of Shares**Beginning
                of the year
            
            
            428,439
            
            
            -Issued
                during the year
            
            
            -
            
            
            428,439End
                of the financial year
            
            
            428,439
            
            
            428,439





Information
      with respect to the number of options granted under the 2004 ADS Option Plan
      as
      follows:




**Years
                Ended June 30,****2006**
            
            **2005****Number
                of Options**
            
            **Exercise
                Price ($)**
            
            **Number
                of Options**
            
            **Exercise
                Price ($)**Beginning
                of the year
            
            
            380,000
            
            
            US$5.00
                (A$6.85
            )
            
            -
            
            
            -Issued
                during the year1
            
            
            -
            
            
            -
            
            
            380,000
            
            
            US$5.00
                (A$6.57
            )End
                of the year1
            
            
            380,000
            
            
            
            
            
            380,000




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





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 note 20 for further information.





Options
      issued carry no dividend rights or right to vote.





**18.**
            **SUBSEQUENT
                EVENTS**




In
      November 2006, the Company raised A$7.7 million (before costs) through the
      issue
      of 21,764,468 shares and 4,352,893 options, exercisable at A$0.446 on or before
      November 30, 2009 to professional investors.





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




**19.**
              **LOSS
                  PER SHARE**


**Years
                Ended June 30,****2006**
            
            **2005**Basic
                and diluted loss per share
            
            
            (0.09
            )
            
            (0.08
            )Weighted
                average number of ordinary shares on issue used in the calculation
                of
                basic and diluted loss per share
            
            
            128,053,601
            
            
            122,754,061





The
      options and warrants in place do not have the effect to dilute the loss per
      share.




F-28


**PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **20.**
                **KEY
                    MANAGEMENT PERSONNEL
                    COMPENSATION**


(a)The
                Key Management Personnel of Prana Biotechnology Ltd during the
                year:




Geoffrey
                Kempler
            
            Executive
                Chairman
              Chief
                Executive OfficerColin
                Masters
            
            Executive
                DirectorBrian
                Meltzer
            
            Non-Executive
                DirectorGeorge
                Mihaly
            
            Non-Executive
                DirectorPeter
                Marks
            
            Non-Executive
                DirectorAppointed
                July 29, 2005Ross
                Murdoch
            
            President
                and Chief Operating OfficerDianne
                Angus
            
            Senior
                Vice President of Business Development, IP and ResearchRichard
                Revelins
            
            Company
                Secretary
              Chief
                Financial Officer





(b)  Key
      Management Personnel Remuneration





Remuneration
      of all Key Management Personnel of the Company is determined by the Board
      following recommendation by the Remuneration Committee.





The
      Company is committed to remunerating Senior Executives in a manner that is
      market competitive and consistent with ‘Best Practice’ including the interests
      of Shareholders. Remuneration packages are based on fixed and variable
      components, determined by the Executive’s position, experience and performance,
      and may be satisfied via cash or equity.





Non-executive
      Directors are remunerated out of the aggregate amount approved by Shareholders
      and at a level that is consistent with industry standards. Non-executive
      Directors do not receive performance based bonuses and prior Shareholder
      approval is required to participate in any issue of equity. No retirement
      benefits are payable other than statutory superannuation, if applicable.





Short
                Term Benefits
            
            Post-
              Employment2006
              Directors’
                Remuneration
            
            Base
                Fee
              $
            
            Bonus
              $
            
            Superannuation
              Contribution
              $
            
            Equity
                Options$
            
            Total
              $Geoffrey
                Kempler1
                & 3
            
            
            334,545
            
            
            100,000
            
            
            33,455
            
            
            92,770
            
            
            560,770Colin
                Masters2
            
            
            115,000
            
            
            -
            
            
            -
            
            
            16,775
            
            
            131,775Brian
                Meltzer1
            
            
            97,569
            
            
            -
            
            
            7,431
            
            
            27,831
            
            
            132,831George
                Mihaly1
            
            
            105,000
            
            
            -
            
            
            -
            
            
            27,831
            
            
            132,831Peter
                Marks2
            
            
            75,000
            
            
            -
            
            
            -
            
            
            5,033
            
            
            80,033727,114
            
            
            100,000
            
            
            40,886
            
            
            170,240
            
            
            1,038,240




1 This
      equity was issued as per the AGM held on November 17, 2004. As per Australian
      accounting standards the options issued to Directors were valued at grant date
      and are being expensed over the anticipated life of the options. As a result,
      the value does not reflect the current market price of the Company’s shares. The
      Board believes that if the options were valued in today’s market, they would
      have minimal intrinsic value given the market condition attached to the options
      that the share price must reach A$1.00 for five consecutive trading days.





2 This
      equity was issued as per the AGM held on November 30, 2005. As per Australian
      accounting standards the options issued to Directors were valued at grant date
      and are being expensed over the anticipated life of the options. As a result,
      the value does not reflect the current market price of the Company’s shares. The
      Board believes that if the options were valued in today’s market, they would
      have minimal intrinsic value given the market condition attached to the options
      that the share price must reach A$1.00 for five consecutive trading days. The
      option price was calculated using the Barrier Pricing Model applying the
      following inputs:




F-29




**PRANA
      BIOTECHNOLOGY LIMITED**


**(A
      Development Stage Enterprise)**




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


**20.**
            **KEY
                MANAGEMENT PERSONNEL COMPENSATION
                (continued)**





Issue
      Date: February 2, 2006


Pricing
      Model: American


Option
      Type: Call


Barrier
      Type: Up and In


Strike
      Price: A$0.00


Spot
      Price: A$0.21


Barrier:
      A$1.00


Days
      to
      Expiry: 1609


Volatility:
      110%


Risk-free
      Interest Rate: 5.35%


Expected
      Dividends: A$0.00


Option
      Price: A$0.18





3 Mr
      Kempler achieved a bonus milestone, the successful completion of the Phase
      1
      trial for PBT-2 as set out in his employment contract. There is a potential
      for
      a further A$100,000 bonus for the satisfactory completion of a proof of concept
      study such as a Phase Two (A) trial on efficacy and dosage.


Short
                  Term Benefits
                Base
                  Fee
            
            Post-
              Employment2005
              Directors’
                Remuneration
            
            Cash
              $
            
            Shares
              $
            
            Superannuation
              Contribution
              $
            
            Equity
                  Options
              $
            
            Termination
                Benefits
              $
            
            Total
              $Geoffrey
                Kempler3
            
            
            262,197
            
            
            -
            
            
            26,220
            
            
            49,562
            
            
            -
            
            
            337,979Colin
                Masters1
            
            
            75,000
            
            
            40,000
            
            
            -
            
            
            -
            
            
            -
            
            
            115,000Brian
                Meltzer1
                & 3
            
            
            50,000
            
            
            40,000
            
            
            -
            
            
            14,869
            
            
            -
            
            
            104,869George
                Mihaly1
                & 3
            
            
            75,000
            
            
            40,000
            
            
            -
            
            
            14,869
            
            
            -
            
            
            129,869Jonas
                Alsenas2
                & 3
            
            
            264,092
            
            
            -
            
            
            -
            
            
            1,515,434
            
            
            432,266
            
            
            2,211,792726,289
            
            
            120,000
            
            
            26,220
            
            
            1,594,734
            
            
            432,266
            
            
            2,899,509




1 The
      base
      fee includes the issue of 83,333 shares each as approved at the 2004 AGM valued
      at A$40,000 at date of issue.





2 Payment
      relates to Jonas Alsenas stepping down as CEO per the Separation Agreement
      and
      General Release.





3 This
      equity was issued as per the AGM held on November 17, 2004. As per Australian
      accounting standards 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 dues 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
      (A$1.00 share price for five consecutive trading days) or the exercise price
      of
      the options.





The
      option price for the options issued to Mr Geoffrey Kempler, Mr Brian Meltzer
      and
      Dr George Mihaly were calculated using the Barrier Pricing Model applying the
      following inputs:





Issue
      Date: December 17, 2004


Pricing
      Model: American


Option
      Type: Call


Barrier
      Type: Up and In


Strike
      Price: A$0.00


Spot
      Price: A$0.56


Barrier:
      A$1.00


Days
      to
      Expiry: 2008


Volatility:
      70%


Risk-free
      Interest Rate: 5.05%


Expected
      Dividends: A$0.00


Option
      Price: A$0.51




F-30




**PRANA
      BIOTECHNOLOGY LIMITED**


**(A
      Development Stage Enterprise)**




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


**20.**
            **KEY
                MANAGEMENT PERSONNEL COMPENSATION
                (continued)**





The
      option price for Dr Jonas Alsenas was calculated using the Black-Scholes Model
      applying the following inputs:





Issue
      Date: December 17, 2004


Exercise
      Price: USD$5.00


Stock
      Price: USD$4.75


Years
      to
      Expiry: 8


Volatility:
      59%


Risk-free
      Interest Rate: 3.85%:


Dividend
      Yield: 0%


Option
      Price: USD$3.08 (AUD$3.99)





Short
                Term Benefits
            
            Post-Employment2006
              Executives’
                Remuneration
            
            Base
                Fee
              $
            
            Bonus
              $
            
            Superannuation
              Contribution
              $
            
            Equity
                  Options
              $
            
            Total
              $Richard
                Revelins
            
            
            80,000
            
            
            -
            
            
            -
            
            
            -
            
            
            80,000Ross
                Murdoch1
            
            
            285,000
            
            
            -
            
            
            25,650
            
            
            -
            
            
            310,650Dianne
                Angus2
            
            
            185,048
            
            
            -
            
            
            16,654
            
            
            -
            
            
            201,702550,048
            
            
            -
            
            
            42,304
            
            
            -
            
            
            592,352




1 On
      January 1, 2006, Dr Murdoch received a salary increase to A$295,000 plus 9%
      superannuation.





2 On
      January 1, 2006, Ms Angus received a salary increase to A$195,000 plus 9%
      superannuation. Ms Angus received additional remuneration in recognition of
      additional hours worked over her contracted 4 days per week.





Short
                Term Benefits
            
            Post-
              Employment2005
              Executives’
                Remuneration
            
            Base
                Fee
              $
            
            Bonus
              $
            
            Superannuation
              Contribution
              $
            
            Equity
                  Options
              $
            
            Total
              $Richard
                Revelins1
            
            
            60,000
            
            
            -
            
            
            -
            
            
            110,000
            
            
            170,000Ross
                Murdoch2
            
            
            275,000
            
            
            -
            
            
            24,750
            
            
            -
            
            
            299,750Dianne
                Angus2,3&4
            
            
            170,000
            
            
            10,000
            
            
            16,200
            
            
            2,670
            
            
            198,870505,000
            
            
            10,000
            
            
            40,950
            
            
            112,670
            
            
            668,620




1 The
      equity amount relates to 500,000 options issued to Mr Revelins for his services
      as Chief Financial Officer, valued at grant date. The option price was
      calculated using the Black-Scholes Model applying the following
      inputs:





Issue
      Date: February 21, 2005


Exercise
      Price: A$0.50


Stock
      Price: A$0.53


Years
      to
      Expiry: 3


Volatility:
      52%


Risk-free
      Interest Rate: 5.47%:


Dividend
      Yield: 0%


Option
      Price: A$0.22





2 No
      equity was received by these executives during the year.





3 The
      equity amount relates to equity issued in the year ended June 30, 2004 that
      vested on August 1, 2004.





4 Base Fee
      includes additional house worked above 4 days per week and a bonus was paid
      in
      recognition of additional work not otherwise remunerated in respect of the
      PBT1
      patent dispute and clinical trial advancement.




F-31




**PRANA
      BIOTECHNOLOGY LIMITED**


**(A
      Development Stage Enterprise)**




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


**20.**
            **KEY
                MANAGEMENT PERSONNEL COMPENSATION
                (continued)**





The
      following Director was under contract at June 30, 2006:


Duration
              
              Notice
                  Requirements
              
              Termination
              
              Bonus
                Entitlements
              
              Equity
                EntitlementsGeoffrey
                  Kempler
              
              Until
                  termination by
                either
                  party
              
              For
                  Good Reason Mr.
                Kempler
                  may
              
              *pay
                  remuneration entitlements up to
              
              The
                  Company
                will
                  pay Mr
              
              Entitlement
                under
                  contractSigned
                  June 15, 2005
              
              terminate
                  with
                30
                  days notice
              
              June
                  1, 2010
                *accrued
              
              Kempler
                  a bonus
                in
                  the amount of
              
              at
                  2005 AGM
                  not
                    exercised.entitlements,
                  bonuses
                and
                  equity issues
                *accelerate
                  the
                vesting
                  of any
                unvested
                options
              
              A$100,000
                  for
                achievement
                  of
                the
                  satisfactory
                completion
                  of a
                successful
                  Phase
                One
                  trial withinWithout
                  Good
                Reason
                  Mr. Kempler
                may
                  terminate with
                90
                  days notice
              
              *Bonus
                  pro-rated
                only
                  if termination
                occurs
                  in
                1styear
              
              the
                  timeframe
                specified
                  by the
                Company
                Strategic
                  PlanWithout
                  Cause the
                Company
                  may
                terminate
                  with
                90
                  days notice
              
              *pay
                  remuneration entitlements up to
                June
                  1, 2010
                *accruedentitlements,
                bonuses
                  and
              
              (achieved
                financial
                  year
                2006)
                  and a
                further
                A$100,000
                  bonusequity
                  issues
                *accelerate
                  the
                vesting
                  of any
                unvested
                options
              
              for
                  the
                satisfactory
                completion
                  of a
                proof
                  of concept
                study
                  such as aWith
                  Cause the
                Company
                  may
                terminate
                  without
                notice
              
              *Bonus
                  pro-rated
                only
                  if termination
                occurs
                  in 1styear
              
              Phase
                  Two (A).
                trial
                  on
                efficacy
and
                dosage
 F-32
  **PRANA
        BIOTECHNOLOGY LIMITED**
 **(A
        Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
  **20.**
              **KEY
                  MANAGEMENT PERSONNEL COMPENSATION
                  (continued)**
 
 The
        following Senior Executives were under contract at June 30, 2006:
 
 Duration
              
              Notice
                  Requirements
              
              Termination
              
              Bonus
                Entitlements
              
              Equity
                EntitlementsRoss
                  Murdoch
              
              Until
                  termination by either party
              
              For
                  Good Reason Dr Murdoch may
              
              *
                  pay remuneration entitlements up to 29 May 2008
              
              Nil.
              
              1,250,000
                  options with zero exerciseSigned
                  August 7, 2006
              
              terminate
                  with
                30
                  days notice
              
              or
                  if termination occurs after May 29, 2007, then 1 year from the
                  time of
                  termination (less any payout made for the notice period). The Company
                  can
                  elect to pay such sum as cash, equity in the Company or as a combination
                  of both cash and equity.
                *
                    accrued entitlements
                  *
                    accelerate the vesting
                  of
                    any unvested
                  options
              
              
              
              price,
                  25% vest on August 7, 2006, 25% will vest on May 29, 2007, 25%
                  on May 29,
                  2008 and the remaining 25% on May 29,
                2009.
                  Theoptions
                will
                  expireWithout
                  Good Reason Dr Murdoch may terminate with
                120
                  days notice
              
              *accrued
                  entitlements
                *
                  permitted to keep and/or exercise options that have vested at the
                  time of
                  termination
              
              
              
              8
                  years from date of
                grant,
                  being August 7, 2014 and can not
                be
                  exercised
                until
                  theWithout
                  Cause the Company may terminate with
                120
                  days notice
              
              *
                  pay remuneration entitlements up to May 29, 2008 or if termination
                  occurs
                  after May 29, 2007, then 1 year from the time of termination (less
                  any
                  payout made for the notice period). The Company can elect to pay
                  such sum
                  as cash, equity in the Company or as a combination of both cash
                  and
                  equity.
                *
                  accrued entitlements
                *
                  accelerate the vesting of any unvested options
              
              
              
              share price achieves a minimum value of A$0.40 for five consecutive
                  trading daysWith
                  Cause the Company may terminate without notice
              
              *accrued
                  entitlements
                *
                  permitted to keep and/or exercise options that have vested at the
                  time of
                  termination
 F-33


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**




**21.**
            **AUDITORS’
                REMUNERATION**





**As
                of and For the Years Ended June 30,****2006**
            
            **2005**Amounts
                received or due and receivable for:-
                audit fees
            
            
            202,600
            
            
            175,481-
                tax fees
            
            
            185
            
            
            11,631-
                other fees
            
            
            3,030
            
            
            14,920205,815
            
            
            202,032






**22.**
            **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 20 to the
      financial statements.





**c.**
            **Key
                Management Personnel Equity
                Holdings**




Fully
                  Paid Ordinary Shares of Prana Biotechnology Ltd
              
              BalanceJuly
                  1, 2005
              
              Received
                  as Remuneration
              
              Received
                  on Exercise of Options
              
              Net
                  Change Other1
              
              Balance
                June
                  30, 2006
              
              Balance
                  held NominallyNo.
              
              No.
              
              No.
              
              No.
              
              No.
              
              No.Geoffrey
                  Kempler
              
              
              17,055,000
              
              
              —
              
              
              —
              
              
              —
              
              
              17,055,000
              
              
              —Colin
                  Masters
              
              
              184,666
              
              
              —
              
              
              —
              
              
              —
              
              
              184,666
              
              
              —Brian
                  Meltzer
              
              
              326,666
              
              
              —
              
              
              —
              
              
              —
              
              
              326,666
              
              
              —George
                  Mihaly
              
              
              226,666
              
              
              —
              
              
              —
              
              
              —
              
              
              226,666
              
              
              —Peter
                  Marks
              
              
              43,111
              
              
              —
              
              
              —
              
              
              —
              
              
              43,111
              
              
              —Richard
                  Revelins
              
              
              42,808
              
              
              —
              
              
              —
              
              
              50,000
              
              
              92,808
              
              
              —Ross
                  Murdoch
              
              
              50,000
              
              
              —
              
              
              —
              
              
              —
              
              
              50,000
              
              
              —Dianne
                  Angus
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —17,928,917
              
              
              —
              
              
              —
              
              
              50,000
              
              
              17,978,917
              
              
              —
 
 Fully
                  Paid Ordinary Shares of Prana Biotechnology Ltd
              
              BalanceJuly
                  1, 2004
              
              Received
                  as Remuneration
              
              Received
                  on Exercise of Options
              
              Net
                  ChangeOther
              
              Balance
                June
                  30, 2005
              
              Balance
                  held NominallyNo.
              
              No.
              
              No.
              
              No.
              
              No.
              
              No.Geoffrey
                  Kempler
              
              
              17,055,000
              
              
              —
              
              
              —
              
              
              —
              
              
              17,055,000
              
              
              —Colin
                  Masters
              
              
              101,333
              
              
              83,333
              
              
              —
              
              
              —
              
              
              184,666
              
              
              —Brian
                  Meltzer
              
              
              243,333
              
              
              83,333
              
              
              —
              
              
              —
              
              
              326,666
              
              
              —George
                  Mihaly
              
              
              143,333
              
              
              83,333
              
              
              —
              
              
              —
              
              
              226,666
              
              
              —Richard
                  Revelins
              
              
              42,808
              
              
              —
              
              
              —
              
              
              —
              
              
              42,808
              
              
              —Ross
                  Murdoch
              
              
              50,000
              
              
              —
              
              
              —
              
              
              —
              
              
              50,000
              
              
              —Dianne
                  Angus
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —17,635,807
              
              
              249,999
              
              
              —
              
              
              —
              
              
              17,885,806
              
              
              —




1
            These
                options were acquired on market





F-34




**PRANA
      BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**




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





**22.**
            **RELATED
                PARTY TRANSACTIONS
                (continued)**




Share
                  Options of
                Prana
                  Biotechnology Ltd
              
              BalanceJuly
                  1, 2005
                No.
              
              Granted
                  as Remuneration
                No.
              
              Options
                  Exercised
                No.
              
              Options
                  Sold
                No.
              
              Options
                  Expired
                No
              
              Balance
                June
                  30, 2006
                No.
              
              Total
                  Exercisable
                June
                  30, 2006
                No.
              
              Total
                  Not
                Exercisable
                  June 30, 2006
                No.Geoffrey
                  Kempler
              
              
              1,000,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,000,000
              
              
              —
              
              
              1,000,000Colin
                  Master
              
              
              —
              
              
              1,000,000
              
              
              —
              
              
              —
              
              
              —
              
              
              1,000,000
              
              
              —
              
              
              1,000,000Brian
                  Meltzer
              
              
              300,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              300,000
              
              
              —
              
              
              300,000George
                  Mihaly
              
              
              300,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              300,000
              
              
              —
              
              
              300,000Peter
                  Marks
              
              
              —
              
              
              300,000
              
              
              —
              
              
              —
              
              
              —
              
              
              300,000
              
              
              —
              
              
              300,000Richard
                  Revelins
              
              
              500,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              500,000
              
              
              500,000
              
              
              —Ross
                  Murdoch
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Dianne
                  Angus
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —2,100,000
              
              
              1,300,000
              
              
              —
              
              
              —
              
              
              —
              
              
              3,400,000
              
              
              500,000
              
              
              2,900,000
  Share
                  Options of
                Prana
                  Biotechnology Ltd
              
              Balance
                July
                  1, 2004
                No.
              
              Granted
                  as Remuneration
                No.
              
              Options
                  Exercised
                No.
              
              OptionsSold
                No.
              
              Options
                  Expired
                No
              
              Balance
                June
                  30, 2005
                No.
              
              Total
                  Exercisable
                June
                  30, 2005
                No.
              
              Total
                  Not
                Exercisable
                  June 30, 2005
                No.Geoffrey
                  Kempler
              
              
              9,167,500
              
              
              1,000,000
              
              
              —
              
              
              (7,290,000
              )
              
              (1,877,500
              )
              
              1,000,000
              
              
              -
              
              
              1,000,000Colin
                  Master
              
              
              1,000,000
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,000,000
              )
              
              —
              
              
              -
              
              
              -Brian
                  Meltzer
              
              
              300,000
              
              
              300,000
              
              
              —
              
              
              (300,000
              )
              
              —
              
              
              300,000
              
              
              -
              
              
              300,000George
                  Mihaly
              
              
              300,000
              
              
              300,000
              
              
              —
              
              
              —
              
              
              (300,000
              )
              
              300,000
              
              
              -
              
              
              300,000Richard
                  Revelins
              
              
              50,000
              
              
              500,000
              
              
              —
              
              
              —
              
              
              (50,000
              )
              
              500,000
              
              
              500,000
              
              
              -Ross
                  Murdoch
              
              
              281,667
              
              
              —
              
              
              —
              
              
              —
              
              
              (281,667
              )
              
              —
              
              
              -
              
              
              -Dianne
                  Angus
              
              
              88,000
              
              
              —
              
              
              —
              
              
              —
              
              
              (88,000
              )
              
              —
              
              
              -
              
              
              -11,187,167
              
              
              2,100,000
              
              
              —
              
              
              (7,590,000
              )
              
              (3,597,167
              )
              
              2,100,000
              
              
              500,000
              
              
              1,600,000





For
      further information on equity entitlements under employment contracts, refer
      to
      note 20.




F-35




**PRANA
      BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**




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




**23.**
            **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.





**24.**
            **FINANCIAL
                INSTRUMENTS**





**(a)**  **Significant
      accounting policies**




Details
      of the significant accounting policies and methods adopted, including the
      criteria for recognition, the basis of measurement and the basis on which
      revenues and expenses are recognized, in respect of each class of financial
      asset, financial liability and equity instrument are disclosed in Note 1 to
      the
      financial statements.





**(b)**  **Interest
      rate risk**




The
      consolidated entity has cash on deposit which is professionally managed by
      external parties to optimize the impact of interest rate fluctuations pursuant
      to conservative investment guidelines.





At
      June
      30, 2006, the consolidated entity had the following cash accounts:





·
            US$4,217,217
                (A$5,778,009) in a 30 day term deposit at a fixed interest rate of
                4.98%
                which matured on July 7, 2006;


·
            A$1,051,763
                in at call deposit accounts, earning interest of
                5.65%;


·
            A$242,285
                in Australia dollar cheque accounts at variable interest rates ranging
                from 4.75% to 5.80% as of June 30,
                2006;


·
            US$120,667
                (A$165,326) in a US cheque account at a interest rate of 4.44% as
                of June
                30, 2006;


·
            GBP$12,255
                (A$30,495) in a GBP cheque account at a variable interest rate of
                2.90% as
                of June 30, 2006;


·
            EUR$142,758
                (A$245,487) in a EUR cheque account at a variable interest rate of
                2.09%
                as of June 30, 2006;


·
            A$2,500,000
                in a 32 day commercial bill with a fixed interest rate of 5.82% which
                matured on July 24, 2006;


·
            A$32,379
                in a seven month term deposit at a fixed interest rate of 5.50% which
                matures on July 17, 2006;


·
            A$10,000
                in a 180 day term deposit at a fixed interest rate of 4.00% which
                matures
                on July 17, 2006; and


·
            A$413
                in petty cash which does not earn any interest.





The
      weighted average interest rate is 2.60% for cash and cash equivalents and 5.34%
      for terms deposits over 3 months and apart from usual variances in general
      rates
      of interest the consolidated entity is not exposed to any significant interest
      rate risk.





At
      June
      30, 2005, the consolidated entity had the following cash accounts:





·
            US$5,077,088
                (A$6,667,232) in a 31 day term deposit at a fixed interest rate of
                2.88%
                which matured on July 11, 2005;


·
            A$4,591,636
                in at call deposit accounts, earning interest of
                5.40%;


·
            A$194,880
                in Australia dollar cheque accounts at variable interest rates ranging
                from 4.28% to 4.60% as of June 30,
                2005;


·
            US$445,783
                (A$585,402) in various US cheque accounts at variable interest rates
                from
                0% to 2.80% as of June 30, 2005;


·
            GBP$161,425
                (A$382,595) in a GBP cheque account at a variable interest rate of
                2.90%
                as of June 30, 2005;


·
            A$9,000,000
                in a 30 day commercial bill with a fixed interest rate of 5.57% which
                matured on July 29, 2005; and


·
            A$31,359
                in a six month term deposit at a fixed interest rate of 4.50% which
                matures on November 17, 2005;


·
            $200
                in petty cash which does not earn any interest.





The
      weighted average interest rate is 4.57% and apart from usual variances in
      general rates of interest the consolidated entity is not exposed to any
      significant interest rate risk.





Receivables
      and payables are non-interest bearing.




F-36


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**


**24.**
            **FINANCIAL
                  INSTRUMENTS
                  (continued)**





The
      consolidated entity’s exposure to interest rates and the effective weighted
      average interest rate for classes of financial assets and liabilities is set
      out
      below:





**June
                30, 2006**
            
            **Floating**
              **Interest
                Rate**
            
            **Fixed
                Interest**
              **Maturing
                in**
            
            **Non-Interestbearing**
            
            **Total**
            
            **AverageInterest
                Rate****1
                year**
              **or
                less**
            
            **1-5
                years**Financial
                AssetsCash
            
            
            683,593
            
            
            9,329,772
            
            
            —
            
            
            413
            
            
            10,013,778
            
            
            2.60
            %Receivables
            
            
            —
            
            
            -
            
            
            —
            
            
            194,161
            
            
            194,161Other
                current assets
            
            
            —
            
            
            42,379
            
            
            —
            
            
            —
            
            
            42,379
            
            
            5.15
            %683,593
            
            
            9,372,151
            
            
            —
            
            
            194,574
            
            
            10,250,318Financial
                LiabilitiesPayables
            
            
            —
            
            
            —
            
            
            —
            
            
            1,538,358
            
            
            1,538,358Provisions
            
            
            —
            
            
            —
            
            
            —
            
            
            153,438
            
            
            153,438Other
                financial liabilities
            
            
            —
            
            
            —
            
            
            —
            
            
            928,692
            
            
            928,692—
            
            
            —
            
            
            —
            
            
            2,620,488
            
            
            2,620,488





**June
                30, 2005**
            
            **Floating**
              **Interest
                Rate**
            
            **Fixed
                Interest**
              **Maturing
                in**
            
            **Non-Interestbearing**
            
            **Total**
            
            **AverageInterest
                Rate****1
                year**
              **or
                less**
            
            **1-5
                years**Financial
                AssetsCash
            
            
            1,162,877
            
            
            20,290,227
            
            
            —
            
            
            200
            
            
            21,453,304
            
            
            4.57
            %Receivables
            
            
            —
            
            
            —
            
            
            —
            
            
            174,476
            
            
            174,476
            
            
            —1,162,877
            
            
            20,290,227
            
            
            —
            
            
            174,676
            
            
            21,627,780Financial
                LiabilitiesPayables
            
            
            —
            
            
            —
            
            
            —
            
            
            2,571,181
            
            
            2,571,181
            
            
            —Provisions
            
            
            —
            
            
            —
            
            
            —
            
            
            123,802
            
            
            123,802
            
            
            —Other
                financial liabilities
            
            
            —
            
            
            —
            
            
            —
            
            
            1,057,407
            
            
            1,057,407—
            
            
            —
            
            
            —
            
            
            3,752,390
            
            
            3,752,390





**(c)**  **Fair
      values**




The
      carrying amount of financial assets and financial liabilities recorded in the
      financial statements represents their respective fair values, determined in
      accordance with the accounting policies disclosed in Note 1 to the financial
      statements.




F-37


**PRANA
            BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
            otherwise
            noted)**
 **24.**
              **FINANCIAL
                    INSTRUMENTS
                    (continued)**





**(d)**  **Credit
      risk**




Financial
      assets, which potentially expose the consolidated entity to concentrations
      of
      credit risk, consist primarily of cash and cash equivalents and term deposits
      over three months. The consolidated entity’s cash and cash equivalents and term
      deposits over three months are placed with high credit quality financial
      institutions. Accordingly, the Directors believe the consolidated entity has
      no
      significant concentration of credit risk.





**25.**
            **ADDITIONAL
                COMPANY INFORMATION**





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





Registered
                Office
            
            Principal
                Place of BusinessSuite
                2
            
            Level
                21233
                High Street
            
            369
                Royal ParadeArmadale
                Vic 3143
            
            Parkville
                Vic 3052Australia
            
            AustraliaTel:
                +61 (03) 9824 8166
            
            Tel:
                +61 (03) 9349 4906


F-38


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**


**26.**
            **RECONCILIATION
                TO US GAAP**




The
      financial statements have been prepared in accordance with A-IFRS, which differ
      in certain significant respects from accounting principles generally accepted
      in
      the United States of America (“US GAAP”). The following is a summary of the
      adjustments to net loss and total equity required when reconciling such amounts
      recorded in the financial statements to the corresponding amounts in accordance
      with US GAAP, considering the differences between A-IFRS and US GAAP.





Reconciliation
      of net loss




**As
                Restated (see note 28)****Years
                Ended June 30,****2006**
            
            **2005**Net
                loss in accordance with A-IFRS
            
            
            
            
            
            (11,590,594
            )
            
            (10,293,031
            )*US
                GAAP adjustments*:Share-based
                compensation
            
            
            (a
            )Options
                issued to consultants for services rendered
            
            
            
            
            
            —
            
            
            196,389Options
                issued to directors and employees for services
              Rendered
            
            
            
            
            
            —
            
            
            1,686,905Shares
                issued to consultants and directors for services
              Rendered
            
            
            
            
            
            —
            
            
            (186,995
            )Intangible
                assets - Capitalised patent costs
            
            
            (b
            )Costs
                capitalised under US GAAP but expensed
              under
                A-IFRS
            
            
            
            
            
            —
            
            
            284,924Amortisation
                expense attributable to above
            
            
            
            
            
            —
            
            
            (307,806
            )Impairment
                of costs capitalised under US GAAP
              but
                expensed under A-IFRS
            
            
            
            
            
            —
            
            
            (3,378,418
            )Deferred
                tax effect of US GAAP adjustments
            
            
            (c
            )
            
            —
            
            
            —Net
                loss in accordance with US GAAP
            
            
            
            
            
            (11,590,594
            )
            
            (11,998,032
            )Loss
                per share in accordance with US GAAP:Basic
                and diluted
            
            
            
            
            
            (0.09
            )
            
            (0.10
            )Weighted
                average shares - basic and diluted
            
            
            
            
            
            128,053,601
            
            
            122,754,061





Reconciliation
      of shareholders’ equity




**As
                Restated (see note 28)****Years
                Ended June 30,****2006**
            
            **2005**Total
                equity in accordance with A-IFRS
            
            
            
            
            
            7,800,658
            
            
            18,536,769*US
                GAAP adjustments*:
            
            
            
            
            
            —
            
            
            —Share-based
                compensation
            
            
            (a
            )
            
            —
            
            
            —Intangible
                assets - Capitalised patent costs
            
            
            (b
            )
            
            —
            
            
            —Deferred
                tax effect of US GAAP adjustments
            
            
            (c
            )
            
            —
            
            
            —Total
                equity in accordance with US GAAP
            
            
            
            
            
            7,800,658
            
            
            18,536,769




F-39


**PRANA
            BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
            otherwise
            noted)**


**26.**
            **RECONCILIATION
                TO US GAAP (continued)**





Roll
      forward analysis of shareholders’ equity under US GAAP





**As
                Restated (see note 28)****Years
                Ended June 30,****2006**
            
            **2005**Balance
                in accordance with US GAAP, beginning of year
            
            
            
            
            
            18,536,769
            
            
            24,626,152Issuance
                of shares in connection with exercise of options, net ofissue
                costs
            
            
            
            
            
            —
            
            
            4,708,574Issuance
                of options to consultants for services rendered
            
            
            (a
            )
            
            194,351
            
            
            (15,890
            )Issuance
                of options to directors and employees for services
                rendered
            
            
            (a
            )
            
            224,902
            
            
            17,829Issuance
                of shares to consultants and directors for services
                rendered
            
            
            (a
            )
            
            435,230
            
            
            442,136Issuance
                of shares for legal settlement
            
            
            
            
            
            —
            
            
            756,000Net
                loss in accordance with US GAAP
            
            
            
            
            
            (11,590,594
            )
            
            (11,998,032
            )Balance
                in accordance with US GAAP, end of year
            
            
            
            
            
            7,800,658
            
            
            18,536,769





**a.**
            **Share-based
                compensation**





As
      described in Note 1(s), Prana adopted AASB 2. In accordance with the
      transitional provisions of AASB 2, the Standard has been applied retrospectively
      to all share-based payments granted / issued after November 7, 2002 and that
      were not yet vested as of January 1, 2005.





Through
      June 30, 2005, Prana accounted for options granted to employees and directors
      under U.S. GAAP using the intrinsic value method in accordance with Accounting
      Principles Board Opinion No. 25: *Accounting
      for Stock Issued to Employees* (“APB
      25”) and related interpretations to measure employee stock compensation. Under
      APB 25, compensation expense was recognized to the extent that the quoted market
      price of the stock exceeded the exercise price of the options at the measurement
      date, and was charged to earnings ratably over the vesting period. For options
      that vest upon the achievement of a target stock price, compensation expense
      was
      recognized when the target is achieved.





The
      following table illustrates the effect on U.S. GAAP net loss and loss per share
      if Prana had applied the fair value recognition provisions of Statements of
      Financial Accounting Standards ("SFAS") No. 123: *Accounting
      for Stock Based Compensation* ("SFAS
      123") to stock-based employee compensation for the year ended June 30,
      2005.




F-40


**PRANA
              BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
              otherwise
              noted)**
 **26.**
              **RECONCILIATION
                  TO US GAAP
                  (continued)**





**June
                30, 2005**U.S.
                GAAP net loss, as reported
            
            
            (11,998,032
            )Add:
                Stock-based employee compensation expense included in U.S. GAAP
              reported
                net loss
            
            
            17,829Deduct:
                Total stock-based employee compensation expense determined under
              fair
                value based method
            
            
            (1,708,925
            )U.S.
                GAAP pro forma net loss
            
            
            (13,689,128
            )U.S.
                GAAP basic and diluted loss per share-
                As reported
            
            
            (0.10
            )-
                Pro forma
            
            
            (0.11
            )




Additionally,
      through June 30, 2005, Prana accounted for options granted to consultants under
      SFAS 123 and Emerging Issues Task Force Issue No. 96−18: Accounting for Equity
      Instruments That Are Issued to Other than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services ("EITF 96−18") under US GAAP. Under
      SFAS 123 and EITF 96-18, compensation cost was calculated based on the estimated
      fair value of the options measured on the date the services were completed
      by
      the respective consultants.





Through
      June 30, 2005, Prana also accounted for shares issued consultants and directors
      under U.S. GAAP in accordance with SFAS 123 and EITF 96-18. Accordingly,
      compensation cost was based on the quoted market price of the shares measured
      on
      the date the services were completed.





Effective
      July 1, 2005, for U.S. GAAP purposes Prana adopted SFAS No. 123(R), *Share-Based
      Payment* (“SFAS
      123R”) which replaces SFAS 123 and supersedes APB 25. Under the modified
      prospective method of SFAS 123R, Prana applies SFAS 123R for equity-based
      compensation awards (or portion thereof): (i) granted on or after July 1, 2005;
      (ii) modified on or after July 1, 2005; and (iii) not yet vested as of July
      1,
      2005. Such equity-based compensation awards are measured based on the fair
      value
      using the Black-Scholes model (for options without market conditions) or Barrier
      Pricing model (for options with market conditions). The compensation is
      recognized as an expense in the statement of operations over the requisite
      service period. Prior periods have not been restated.





As
      a
      result of adopting SFAS 123R on July 1, 2005, Prana’s U.S. GAAP loss before
      income taxes and net loss for the year ended June 30, 2006 was A$76,469 higher
      than if Prana had continued to account for share-based compensation to employees
      and directors under APB 25. The impact of adopting SFAS 123R did not have a
      material impact on basic and diluted loss per share, cash flows from operating
      activities and cash flows from financing activities for the year ended June
      30,
      2006.





Total
      U.S. GAAP share-based compensation costs charged to the statement of operations
      was A$1,046,159 and A$444,075 for the years ended June 30, 2006 and 2005,
      respectively. No income tax benefits were recognized and no compensation cost
      was capitalized as part of property and equipment during the periods presented.




The
      retrospective transition provision of AASB 2 and the modified prospective
      transition provision of SFAS 123R give rise to GAAP differences in share−based
      compensation for the ended June 30, 2005. There are no U.S. GAAP reconciling
      items attributable to share−based compensation for the year ended June 30, 2006
      as the impact on compensation cost resulting from differences in the standards,
      such as the determination of the measurement date for share−based payments made
      to nonemployees, is de minimis.




F-41


**PRANA
              BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
              otherwise
              noted)**
 **26.**
              **RECONCILIATION
                  TO US GAAP (continued)**


**b.**
            **Intangible
                assets - Capitalised patent
                costs**





Under
      A-IFRS, patent costs are recognized at cost less accumulated amortization and
      impairment, provided the costs meet the criteria for recognition as an
      intangible asset (see Note 2(g)). Patent costs that do not meet the criteria
      for
      recognition as an intangible asset are expensed as incurred. At June 30, 2006
      and 2005, Prana had no capitalized patent costs under A-IFRS.





For
      U.S.
      GAAP purposes, up until December 31, 2004, all costs associated with the
      acquisition of patents, legal costs incurred in connection with successful
      patent defenses and costs associated with successful patent applications deemed
      to be recoverable from the future development of products were capitalized
      and
      amortized on a straight−line basis over the estimated useful life of 15 years.
      Such capitalized costs are tested for recoverability whenever events or
      circumstances indicate that the carrying amount of the costs may not be
      recoverable. All other costs associated with patents were expensed as incurred.
      Effective January 1, 2005, Prana changed its U.S. GAAP accounting policy and
      expenses all patent costs as incurred.





As
      a
      result of the cancellation of a clinical study for the PBT−1 compound in April
      2005 due to toxicity issues, the consolidated entity reviewed the carrying
      value
      of the U.S. GAAP capitalized patent costs and resolved to impair the capitalized
      costs to the fair value of A$nil based on estimated future discounted cash
      flows.





For
      the
      year ended June 30, 2006, there are no GAAP differences in respect to intangible
      assets. In the future, GAAP differences may arise to the extent that development
      costs meet the criteria for capitalization under A-IFRS (as development costs
      are expensed as incurred under U.S. GAAP).





**c.**
            **Deferred
                tax effect of US GAAP
                adjustments**





The
      deferred tax effect of US GAAP adjustments is A$nil because it is more likely
      than not that the net deferred tax asset will not be realized, and accordingly,
      the consolidated entity has recorded a 100% valuation allowance against the
      net
      deferred tax asset.




F-42


**PRANA
              BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
              otherwise
              noted)**
 **26.**
              **RECONCILIATION
                  TO US GAAP (continued)**


**d.**
            **Classification
                differences**





Under
      A-IFRS, the consolidated entity classifies interest income as revenue. Under
      US
      GAAP, interest income is classified as non-operating income.





Under
      A-IFRS, amortisation of intangible assets used in research and development
      projects is reported in depreciation and amortisation expense. Under US GAAP,
      amortisation of intangible assets used in research and development projects
      is
      reported in research and development expense.




**e.**
            **Additional
                US GAAP disclosures**





*Share-based
      compensation*


The
      following table summarizes the activity of share options issued to directors
      under the 2004 Employees, Directors and Consultants Share and Option Plan
      (adopted on November 17, 2004) during the years ended June 30, 2006 and
      2005:




**Years
                  Ended June 30,****2006**
              
              **2005****Number
                  of**
                **options**
              
              **Weighted
                  averageexercise price ($)**
              
              **Number
                  ofoptions**
              
              **Weighted
                  averageexercise price ($)**Outstanding
                  at beginning of year
              
              
              2,100,000
              
              
              0.12
              
              
              409,667
              
              
              0.50Granted
              
              
              2,265,000
              
              
              nil
              
              
              2,100,000
              
              
              0.12Exercised
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfeited
              
              
              (37,500
              )
              
              nil
              
              
              —
              
              
              —Expired
              
              
              —
              
              
              —
              
              
              (409,667
              )
              
              0.50Outstanding
                  at end of year (a)
              
              
              4,327,500
              
              
              0.06
              
              
              2,100,000
              
              
              0.12Exercisable
                  at end of year (b)
              
              
              500,000
              
              
              0.50
              
              
              500,000
              
              
              0.50




(a)
            Of
                the 4,327,500 options outstanding as of June 30, 2006, 3,827,500
                options
                have an exercise price of A$nil and a remaining contractual life
                of four
                years. The remaining 500,000 options have an exercise price of A$0.50
                with
                a remaining contractual life of one and half
                years.




(b)
            The
                500,000 options exercisable as of June 30, 2006, have an exercise
                price of
                A$0.50 with a remaining contractual life of one and half
                years.




F-43


**PRANA
                BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
                otherwise
                noted)**
 **26.**
                **RECONCILIATION
                    TO US GAAP
                    (continued)**





The
      weighted average grant date fair value of the options issued to directors under
      the 2004 Employees, Directors and Consultants Share and Option Plan during
      the
      years ended June 30, 2006 and 2005 is A$0.18 and A$0.44, respectively. The
      fair
      value was estimated at the date of the grant using the Black-Scholes option
      pricing model for options without market conditions and the Barrier option
      pricing model was used for options with market conditions, with the following
      weighted average assumptions:





·
            risk-free
                interest rate of 5.3% for 2006 and 5.2% for
                2005;


·
            no
                dividends;


·
            expected
                volatility of 117.2% for 2006 and 65.7% for 2005;
                and


·
            expected
                life of four years for 2006 and five years for
                2005.





*Risk−free
      interest rate* -
      This is
      the government bond rate (having a term that most closely resembles the expected
      life of the option) in effect at the grant date. The Australian government
      bond
      rate has been used for options which convert to full paid ordinary shares and
      the U.S. government bond rate has been used for options which convert to ADRs.





*Dividend
      yield* -
      Prana
      has never declared or paid dividends on its common stock and does not anticipate
      paying any dividends in the foreseeable future.





*Expected
      volatility* -
      Prana
      estimates expected volatility based on historical volatility over the estimated
      life of the option and other factors.





*Expected
      life* -
      This is
      the period of time that the options granted are expected to remain outstanding.
      This estimate is based primarily on historical trend of option holders to
      exercise their option near the date of expiry. As a result the expected life
      is
      considered to equal the period from grant date to expiry date.





The
      following table summarizes the activity of share options issued to directors
      under the 2004 ADS Option Plan (adopted on November 17, 2004) during the years
      ended June 30, 2006 and 2005. Each option is exercisable for one ADR which
      equals ten shares. No options have been issued under the 2004 ADS Option Plan
      in
      the year ended June 30, 2006.





**Year
                ended June 30, 2006**
            
            **Year
                ended June 30, 2005****Number
                of options**
              **over
                ADRs**
            
            **Weighted
                average exercise price ($)**
            
            **Number
                of options**
              **over
                ADRs**
            
            **Weighted
                average exercise price ($)**Outstanding
                at beginning of year
            
            
            380,000
            
            
            US$5.00
            
            
            —
            
            
            —Granted
            
            
            —
            
            
            —
            
            
            380,000
            
            
            US$5.00Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Expired
            
            
            —
            
            
            
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at end of year (c)
            
            
            380,000
            
            
            US$5.00
                (A$6.85
            )
            
            380,000
            
            
            US$5.00
                (A$6.57
            )Exercisable
                at end of year (c)
            
            
            380,000
            
            
            US$5.00
                (A$6.85
            )
            
            380,000
            
            
            US$5.00
                (A$6.57
            )




(c)
            All
                380,000 options outstanding and exercisable as of June 30, 2006 have
                an
                exercise price of US$5.00 (A$6.85) and a remaining contractual life
                of six
                and half years.




The
      grant
      date fair value of the options issued to directors under the 2004 ADS Option
      Plan during the year ended June 30, 2005 was A$3.99. The fair value was
      estimated at the date of the grant using the Black-Scholes option pricing model
      with the following weighted average assumptions:




·
            risk-free
                interest rate of 5.4%;


·
            no
                dividends;


·
            expected
                volatility of 73.6%; and


·
            expected
                life of eight years.





The
      methodology for developing each of the assumptions is the same as that described
      above.




F-44


**PRANA
                  BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless
                  otherwise
                  noted)**
 **26.**
                  **RECONCILIATION
                      TO US GAAP (continued)**


The
      following table summarizes the activity of share options issued to consultants
      during the year ended June 30, 2006 and 2005:





**Years
                Ended June 30,****2006**
            
            **2005****Number
                ofoptions**
            
            **Weighted
                average exercise price ($)**
            
            **Number
                ofoptions**
            
            **Weighted
                average exercise price ($)**Outstanding
                at beginning of year
            
            
            1,212,000
            
            
            0.50
            
            
            1,109,500
            
            
            0.35Granted
            
            
            413,000
            
            
            0.50
            
            
            600,000
            
            
            0.50Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            —
            
            
            —Expired
            
            
            (200,000
            )
            
            0.50
            
            
            (497,500
            )
            
            0.52Outstanding
                at end of year (d)
            
            
            1,425,000
            
            
            0.50
            
            
            1,212,000
            
            
            0.50Exercisable
                at end of year (d)
            
            
            1,425,000
            
            
            0.50
            
            
            1,045,333
            
            
            0.50




(d)
            All
                1,425,000 options outstanding and exercisable as of June 30, 2006,
                have an
                exercise price of A$0.50 with an average remaining contractual life
                of one
                year.




The
      weighted average grant date fair value of options issued to consultants during
      the years ended June 30, 2006 and 2005 is A$0.34 and A$0.27, respectively.
      The
      fair value was estimated at the date of the grant using the Black-Scholes option
      pricing model with the following weighted average assumptions:





·
            risk-free
                interest rate of 5.0% for 2006 and 4.9% for
                2005;


·
            no
                dividends;


·
            expected
                volatility of 68% for 2006 and 62% for 2005;
                and


·
            expected
                life of two years for 2006 and
                2005.





During
      the years ended June 30, 2006 and 2005, the Company granted 825,000 and
      1,578,215 shares to consultants, respectively, with a


a
      weighted average grant date fair value of A$0.56 and A$0.57, respectively.




F-45




**PRANA
      BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**




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


**26.**
            **RECONCILIATION
                TO US GAAP (continued)**




During
      the year ended June 30, 2005, the Company granted 249,999 shares to directors
      with a weighted average grant date fair value of A$0.48. No shares were granted
      to directors during the year ended June 30, 2006.





The
      following table summarizes the activity of warrants granted to consultants
      during the year ended June 30, 2005:





**Years
                Ended June 30,****2006**
            
            **2005****Number
                ofwarrants**
            
            **Weighted
                average exercise price (USD$)**
            
            **Number
                ofwarrants**
            
            **Weighted
                average exercise price (USD$)**Outstanding
                at beginning of year
            
            
            320,000
            
            
            8.00
            
            
            —
            
            
            —Granted
            
            
            —
            
            
            —
            
            
            320,000
            
            
            8.00Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —
            
            
            —
            
            
            —Expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at end of year (e)
            
            
            320,000
            
            
            8.00
            
            
            320,000
            
            
            8.00Exercisable
                at end of year (e)
            
            
            320,000
            
            
            8.00
                (A$10.96
            )
            
            320,000
            
            
            8.00
                (A$10,51
            )




(e)
            All
                320,000 warrants outstanding and exercisable as of June 30, 2006
                have an
                exercise price of USD$8.00 with a remaining contractual life of three
                years.




The
      weighted average grant date fair value of warrants issued to consultants during
      the years ended June 30, 2005 is A$1.42. The fair value was estimated at the
      date of grant using the Black-scholes model with the following weighted average
      assumptions:


·
            risk-free
                interest rate of 3.5%;


·
            no
                dividends;


·
            expected
                volatility of 71%; and


·
            expected
                life of four and a half years.





3,000,000
      warrants were issued as part of the June 2004 capital raising. These warrants
      have been recorded as a financial liability - see notes 24 and 28. These
      warrants are exercisable on or before June 4, 2009 at an exercise price of
      USD$8.00. These warrants are convertible to one ADR which is equal to ten
      ordinary fully paid shares.





The
      following table summarizes the activity of share options issued to directors
      and
      employees under the Employee and Consultants Option Plan 2000 (adopted on
      November 22, 2000) during the year ended June 30, 2005. Each option was
      exercisable for one ordinary share. No options have been issued under the
      Employee and Consultants Option Plan 2000 for the year ended June 30, 2006
      as
      all options issued under the plan expired on June 30, 2005.





**Year
                ended June 30, 2005****Number
                of options**
              **over
                Ordinary Shares**
            
            **Weighted
                average exercise price (A$)**Outstanding
                at beginning of year
            
            
            459,667
            
            
            0.50Granted
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —Expired
            
            
            (459,667
            )
            
            0.50Forfeited
            
            
            —
            
            
            —Outstanding
                at end of year
            
            
            —
            
            
            —Exercisable
                at end of year
            
            
            —
            
            
            —




F-46


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
 **26.**
                **RECONCILIATION
                    TO US GAAP (continued)**


The
      following table summarizes the activity of share options issued to consultants
      under the Employee and Consultants Option Plan 2000 (adopted on November 22,
      2000) during the year ended June 30, 2005. Each option was exercisable for
      one
      ordinary share. No options have been issued under the Employee and Consultants
      Option Plan 2000 for the year ended June 30, 2006 as all options issued under
      the plan expired on June 30, 2005.





**Year
                ended June 30, 2005****Number
                of options**
              **over
                Ordinary Shares**
            
            **Weighted
                average exercise price (A$)**Outstanding
                at beginning of year
            
            
            437,500
            
            
            0.50Granted
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —Expired
            
            
            (437,500
            )
            
            0.50Forfeited
            
            
            —
            
            
            —Outstanding
                at end of year
            
            
            —
            
            
            —Exercisable
                at end of year
            
            
            —
            
            
            —




*Income
      tax*


The
      consolidated entity has adopted SFAS No. 109: *Accounting
      for Income Taxes* (“SFAS
      109”) for US GAAP purposes. SFAS 109 requires a “liability approach” to
      accounting for income taxes, which as it applies to the consolidated entity,
      is
      very similar to that adopted under A-IFRS.





F-47


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **26.**
                  **RECONCILIATION
                      TO US GAAP (continued)**


The
      components of A-IFRS income (loss) before income tax expense consisted of the
      following for the years ended June 30, 2006 and 2005:





**Years
                ended June 30,****2006**
            
            **2005**Australia
            
            
            (11,664,476
            )
            
            (10,217,734
            )Foreign
            
            
            73,882
            
            
            (75,297
            )(11,590,594
            )
            
            (10,293,031
            )





The
      components of the US GAAP deferred tax assets and liabilities as of June 30,
      2006 and 2005 are as follows:





**June
                30,****2006**
            
            **2005**Deferred
                tax assetsNet
                operating loss carryforwards
            
            
            16,529,172
            
            
            11,700,174Foreign
                exchange losses
            
            
            268,960
            
            
            410,951Provision
                accruals
            
            
            46,031
            
            
            37,141Other
            
            
            61,744
            
            
            57,954Total
                gross deferred tax assets
            
            
            16,905,907
            
            
            12,206,220Deferred
                tax liability
            
            
            —
            
            
            —Net
                deferred tax asset
            
            
            16,905,907
            
            
            12,206,220Valuation
                allowance
            
            
            (16,905,907
            )
            
            (12,206,220
            )Net
                recorded deferred taxes
            
            
            —
            
            
            —





As
      of
      June 30, 2006, the Company has net operating loss carryforwards in Australia
      of
      A$56,353,023 that may be carried forward indefinitely and net operating loss
      carryforwards in the United States of A$1,415 that can be carried forward for
      20
      years.





*Recently
      issued but not yet adopted accounting pronouncements*





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154: *Accounting
      Changes and Error Corrections* (“
SFAS
      154”), a replacement of APB Opinion No. 20: *Accounting
      Changes* and SFAS
      No. 3: *Reporting
      Accounting Changes in Interim Financial Statements* ,
      effective for fiscal years beginning after December 15, 2005 (fiscal 2007 for
      Prana). SFAS 154 changes the requirements for the accounting for and reporting
      of a voluntary change in accounting principle as well as the changes required
      by
      an accounting pronouncement which does not include specific transition
      provisions. At this time management reasonably believes that the adoption of
      SFAS 154 will not have a material effect on the consolidated entity’s financial
      position or results of operations.





In
      July 2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* ”
(“FIN
      48”) as an interpretation of SFAS 109. This Interpretation clarifies the
      accounting for uncertainty in income taxes recognized by prescribing a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. This Interpretation also provides guidance on de-recognition of
      tax
      benefits previously recognized and additional disclosures for unrecognized
      tax
      benefits, interest and penalties. The evaluation of a tax position in accordance
      with this Interpretation begins with a determination as to whether it is more
      likely than not that a tax position will be sustained upon examination based
      on
      the technical merits of the position. A tax position that meets the
      more-likely-than-not recognition threshold is then measured at the largest
      amount of benefit that is




F-48


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**
 **26.**
                **RECONCILIATION
                    TO US GAAP (continued)**


greater
      than 50 percent likely of being realized upon ultimate settlement for
      recognition in the financial statements. FIN 48 is effective no later than
      fiscal years beginning after December 15, 2006, and is required to be
      adopted by the consolidated entity on July 1, 2007. The consolidated entity
      is
      currently assessing the impact of the adoption of FIN 48.





In
      September 2006, the Securities and Exchange Commission (the “SEC”) issued
      Staff Accounting Bulletin No. 108 ,*Considering
      the Effects of Prior Year Misstatements when Qualifying Misstatements in Current
      Year Financial Statements*(“SAB
      108”)which
      provides interpretive guidance on the consideration of the effects of prior
      year
      misstatements in quantifying current year misstatements for the purpose of
      a
      materiality assessment. SAB
      108
      is effective for companies with fiscal years ending after November 15, 2006
      and is required to be adopted by the Company in fiscal 2007. However, early
      application is encouraged in any report for an interim period of the first
      fiscal year ending after November 15, 2006, filed after the publication of
      this guidance. The consolidated entity is currently assessing the impact of
      the
      adoption of SAB 108.





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





**f.**
            **Development
                Stage**





The
      Company meets the definition of a development stage enterprise under SFAS No.
      7,
“Accounting and Reporting by Development Stage Enterprises” (“SFAS 7”). The
      following additional disclosures, prepared on an A-IFRS basis considering the
      AASB 1 exemptions, are required in accordance with SFAS 7:





Cumulative
      consolidated statement of operations from the inception of the development
      stage
      (November 11, 1997) to June 30, 2006 - A-IFRS basis:




**As
                Restated(see note 28)****Period
                from inception of development stage**
              **(November
                11, 1997) to June 30, 2006**Revenues
            
            
            2,573,069Other
                income
            
            
            6,656,945Research
                and development expenses
            
            
            (24,090,644
            )Research
                and development expenses - related party
            
            
            (2,289,419
            )Personnel
                expenses
            
            
            (14,824,101
            )Intellectual
                property expenses
            
            
            (5,578,538
            )Auditor
                fees
            
            
            (897,234
            )Travel
                expenses
            
            
            (1,432,346
            )Public
                relations and marketing expenses
            
            
            (1,277,963
            )Depreciation
                expenses
            
            
            (508,972
            )Amortization
                expenses
            
            
            (461,760
            )Other
                expenses
            
            
            (4,741,534
            )Other
                expenses - related party
            
            
            (242,470
            )Foreign
                exchange loss
            
            
            (1,334,367
            )Impairment
                of intangible assets
            
            
            (786,240
            )Gain
                on fair value of financial liabilities
            
            
            7,894,856**Loss
                before income tax expense**
            
            
            (41,340,718
            )**Income
                tax expense**
            
            
            —**Net
                loss**
            
            
            (41,340,718
            )




F-49


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **26.**
                  **RECONCILIATION
                      TO US GAAP (continued)**


Cumulative
      consolidated cash flow statement form the inception of the development stage
      (November 11, 1997) to June 30, 2006 - A-IFRS basis:





**Period
                from inception of development stage**
              **(November
                11, 1997)to June 30, 2006****Cash
                Flows from Operating Activities**Payments
                to suppliers and employees
            
            (45,753,872
            )Payments
                to suppliers and employees - related party
            
            
            
            
            
            (2,531,889
            )Interest
                received
            
            
            
            
            
            2,506,124Government
                grant received
            
            
            
            
            
            3,354,228NASDAQ
                reimbursements received
            
            231,304Neuroscience
                Victoria monies received
            
            3,093,750Net
                cash flows used in operating activities
            
            
            
            
            
            (39,100,355
            )**Cash
                Flows from Investing Activities**Proceeds
                from sale of equipment
            
            
            
            
            
            375Payments
                for purchase of equipment
            
            
            
            
            
            (412,615
            )Net
                cash flows used in investing activities
            
            
            
            
            
            (412,240
            )**Cash
                Flows from Financing Activities**Proceeds
                from issue of shares
            
            
            
            
            
            46,854,565Payment
                of share issue costs
            
            
            
            
            
            (3,669,074
            )Proceeds
                from exercise of options
            
            
            
            
            
            9,812,471Payment
                for underwriting costs
            
            
            
            
            
            (144,000
            )Repayment
                of borrowings
            
            
            
            
            
            (2,038,728
            )Net
                cash flows provided by financing activities
            
            
            
            
            
            50,815,234Net
                decrease in cash and cash equivalents
            
            
            
            
            
            11,302,639Opening
                cash and cash equivalents brought forward
            
            
            
            
            
            —Exchange
                rate adjustments on cash and cash equivalents held in foreign
                currencies
            
            (1,288,861
            )**Closing
                cash and cash equivalents carried forward**
            
            
            15
                (b
            )
            
            10,013,778




F-50


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **26.**
                  **RECONCILIATION
                      TO US GAAP (continued)**
 Equity
        issuances from the inception of the development stage (November 11, 1997)
        to
        June 30, 2006 - A-IFRS basis:





**As
                Restated (see note 28)****Date**
            
            
            
            **Number
                of Shares**
            
            **Issued
                Capital****Balance,
                November 11, 1997 (Inception)**
            
            -
            
            -November
                11, 1997
            
            Issuance
                of shares to founders
            
            20
            
            20**Balance,
                June 30, 1998**
            
            20
            
            20**Balance,
                June 30, 1999**
            
            20
            
            20December
                23, 1999
            
            297
                for 1 share split
            
            5,920
            
            -June
                1, 2000
            
            Issuance
                of shares in connection with private placement
            
            960
            
            960July
                1, 2000
            
            5,000
                for 1 share split
            
            34,493,100
            
            -Issuance
                of shares in connection with initial public offering, net of issue
                costs
            
            16,000,000
            
            7,470,863Issuance
                of shares in connection with exercise of options
            
            5,000
            
            2,500**Balance,
                June 30, 2000**
            
            50,505,000
            
            7,474,343February
                15, 2001
            
            Issuance
                of shares in connection with private placements, net of issue
                costs
            
            6,666,666
            
            4,745,599April
                4, 2001
            
            Non-cash
                issuance of shares to consultants
            
            50,000
            
            20,000June
                27, 2001
            
            Non-cash
                issuance of shares to consultants
            
            38,600
            
            28,950**Balance,
                June 30, 2001**
            
            57,260,266
            
            12,268,892February
                4, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            134,000
            
            67,000February
                12, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            2,000
            
            1,000February
                22, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            76,000
            
            38,000February
                27, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            40,000
            
            20,000March
                6, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            90,000
            
            45,000March
                8, 2002
            
            Non-cash
                issuance of shares to consultants
            
            164,835
            
            115,384March
                8, 2002
            
            Non-cash
                issuance of shares to consultants
            
            26,959
            
            28,846March
                12, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            82,690
            
            41,346March
                12, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            190,000
            
            95,000March
                14, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            10,000
            
            5,000March
                20, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            12,000
            
            6,000March
                21, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            100,000
            
            50,000March
                25, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            3,000
            
            1,500April
                9, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            8,000
            
            4,000April
                9, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            24,500
            
            12,250April
                10, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            2,500
            
            1,250April
                11, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            2,500
            
            1,250April
                11, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            100,000
            
            50,000May
                10, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            100,000
            
            50,000




F-51


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **26.**
                  **RECONCILIATION
                      TO US GAAP
                      (continued)**





May
                23, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            180,000
            
            90,000June
                16, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            3,500
            
            1,750**Balance,
                June 30, 2002**
            
            58,612,750
            
            12,993,468August
                7, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            4,000
            
            2,000October
                7, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            13,274
            
            6,637July
                13, 2002
            
            Non-cash
                issuance of shares to consultants
            
            13,550
            
            27,371September
                18, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            32,000
            
            16,000September
                30, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            25,000
            
            12,500October
                15, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            20,081
            
            10,040November
                20, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            113,000
            
            56,500November
                22, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            33,072
            
            16,536November
                25, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            7,000
            
            3,500December
                4, 2002
            
            Non-cash
                issuance of shares to consultants
            
            15,318
            
            26,653December
                12, 2002
            
            Issuance
                of shares in connection with exercise of options
            
            50,000
            
            25,000January
                8, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            50,000
            
            25,000January
                22, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            2,620
            
            1,310January
                30, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            9,700
            
            4,850January
                30, 2003
            
            Non-cash
                issuance of shares to consultants
            
            118,101
            
            115,739February
                14, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            499,403
            
            249,702February
                20, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            483,746
            
            241,873February
                28, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            2,530,483
            
            1,265,242March
                5, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            3,107,891
            
            1,553,945March
                15, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            25,000
            
            12,500April
                3, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            421,314
            
            210,657Underwriting
                costs
            
            
            
            (144,000)**Balance,
                June 30, 2003**
            
            66,187,303
            
            16,733,023August
                11, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            50,000
            
            25,000August
                13, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            25,000
            
            12,500August
                27, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            16,000
            
            8,000August
                27, 2003
            
            Non-cash
                issuance of shares to consultants
            
            70,768
            
            49,538August
                29, 2003
            
            Issuance
                of shares in connection with exercise of options
            
            34,000
            
            17,000September
                16, 2003
            
            Issue
                of shares in connection with private placements, net of
                costs
            
            7,102,853
            
            4,675,019January
                12, 2004
            
            Non-cash
                issuance of shares to directors
            
            249,999
            
            120,000January
                12, 2004
            
            Non-cash
                issuance of shares to consultants
            
            67,955
            
            43,491February
                20, 2004
            
            Non-cash
                issuance of shares to consultants
            
            155,502
            
            85,526April
                8, 2004
            
            Issuance
                of shares in connection with exercise of options
            
            200,000
            
            140,000April
                15, 2004
            
            Issuance
                of shares in connection with exercise of options
            
            100,000
            
            70,000April
                16, 2004
            
            Issuance
                of shares in connection with exercise of options
            
            200,000
            
            100,000April
                16, 2004
            
            Issuance
                of shares in connection with exercise of options
            
            200,000
            
            140,000April
                20, 2004
            
            Issuance
                of shares in connection with exercise of options
            
            300,000
            
            150,000April
                22, 2004
            
            Issuance
                of shares in connection with exercise of options
            
            200,000
            
            100,000May
                10, 2004
            
            Non-cash
                issuance of shares to consultants
            
            825,000
            
            684,750




F-52


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**
 **26.**
                  **RECONCILIATION
                      TO US GAAP (continued)**


June
                  1, 2004
              
              Issuance
                  of shares in connection with private placements, net of
                  costs
              
              40,000,000
              
              17,520,098Expired
                  options
              
              
              
              8,000**Balance,
                  June 30, 2004**
              
              115,984,380
              
              40,681,945August
                  9, 2004
              
              Non-cash
                  issuance of shares for settlement of litigation
              
              1,350,000
              
              756,000September
                  16, 2004
              
              Non-cash
                  issuance of shares to consultants
              
              49,775
              
              39,616December
                  8, 2004
              
              Issuance
                  of shares in connection with exercise of options, net of
                  costs
              
              9,506,666
              
              4,145,811December
                  17, 2004
              
              Non-cash
                  issuance of shares to directors
              
              249,999
              
              118,703February
                  21, 2005
              
              Non-cash
                  issuance of shares to consultants
              
              178,440
              
              96,822**Balance,
                  June 30, 2005**
              
              127,319,260
              
              45,838,897August
                  10, 2005
              
              Issuance
                  of shares in connection with exercise of options, net of issue
                  costs
              
              825,000
              
              435,230**Balance,
                  June 30, 2006**
              
              128,144,260
              
              46,274,127




F-53


**PRANA
        BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
        noted)**


**Note
      27. U.S. GAAP Condensed Financial Information**





The
      following financial information is the audited U.S.
      GAAP
      condensed financial information of Prana as of and for the years ended June
      30,
      2006 and 2005.





**CONDENSED
      CONSOLIDATED BALANCE SHEET**


(in
      Australian dollars)





**As
                Restated (see note 28)****June
                30, 2006**
            
            **June
                30, 2005****Current
                assets**Cash
                and cash equivalents
            
            
            10,013,778
            
            
            21,453,304Trade
                and other receivables
            
            
            194,161
            
            
            174,476Other
                current assets
            
            
            110,832
            
            
            495,165**Total
                current assets**
            
            
            10,318,771
            
            
            22,122,945Property
                and equipment, net
            
            
            102,375
            
            
            166,214**Total
                assets**
            
            
            10,421,146
            
            
            22,289,159**Liabilities**Trade
                and other payables
            
            
            1,538,358
            
            
            2,571,181Current
                provisions
            
            
            76,672
            
            
            78,602**Total
                current liabilities**
            
            
            1,615,030
            
            
            2,649,783Financial
                liabilities
            
            
            928,692
            
            
            1,057,407Non-current
                provisions
            
            
            76,766
            
            
            45,200**Total
                liabilities**
            
            
            2,620,488
            
            
            3,752,390Commitments
                and contingencies
            
            
            —
            
            
            —**Stockholders’
                equity**Common
                stock
            
            
            —
            
            
            —Additional
                paid-in capital
            
            
            53,320,985
            
            
            52,466,502Accumulated
                deficit during the development stage
            
            
            (45,520,327
            )
            
            (33,929,733
            )**Total
                stockholders’ equity**
            
            
            7,800,658
            
            
            18,536,769**Total
                liabilities and stockholders’ equity**
            
            
            10,421,146
            
            
            22,289,159




F-54


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**


**Note
      27. U.S. GAAP Condensed Financial Information continued**





**CONDENSED
      CONSOLIDATED STATEMENT OF OPERATIONS**


(in
      Australian dollars, except number of shares)





**As
                Restated (see note 28)****Year
                ended June 30, 2006**
            
            **Year
                ended June 30, 2005**Other
                income:Government
                grants
            
            
            288,173
            
            
            629,692Corporate
                partner income
            
            
            —
            
            
            1,125,000Other
            
            
            90
            
            
            6,286288,263
            
            
            1,760,978Operating
                expenses:Research
                and development
            
            
            (8,083,208
            )
            
            (7,659,390
            )Research
                and development - related parties
            
            
            —
            
            
            (577,757
            )General
                and administrative
            
            
            (4,909,841
            )
            
            (6,688,164
            )Foreign
                currency gain/(loss), net
            
            
            223,454
            
            
            (1,362,572
            )Impairment
                of intangible assets
            
            
            —
            
            
            (4,164,659
            )Gain
                on fair value of financial liabilities
            
            
            128,715
            
            
            5,801,397Total
                operating expenses
            
            
            (12,640,880
            )
            
            (14,651,145
            )Loss
                from operations
            
            
            (12,352,617
            )
            
            (12,890,167
            )Non-operating
                income:Interest
                income
            
            
            762,023
            
            
            892,135Loss
                before income tax expense
            
            
            (11,590,594
            )
            
            (11,998,032
            )Income
                tax expense
            
            
            —
            
            
            —Net
                loss
            
            
            (11,590,594
            )
            
            (11,998,032
            )**Loss
                per share (basis and diluted)**
            
            
            (0.09
            )
            
            (0.10
            )**Weighted
                average number of ordinary shares used in computing basic and diluted
                net
                loss per share**
            
            
            128,053,601
            
            
            122,754,061





**Note
      28. Restatement**





**(a)**
            **Background**




On
      June
      1, 2004, upon approval of Prana’s shareholders, the Company issued 4,000,000
      ADRs to institutional and professional investors at a price of US$5.00 per
      ADR
      in a private placement in the United States, or an aggregate US$20 million
      before issuance costs. The private placement also involved the acquisition
      by
      the Company’s investors of warrants to purchase an additional 3,000,000 ADRs at
      an exercise price of US$8.00 per ADR on or before June 4, 2009. Each ADR
      represents ten ordinary shares.




**(b)**
            **A-IFRS**





In
      accordance with the generally accepted accounting principles in Australia that
      applied to Prana at June 1, 2004, the US$20 million that the Company received
      at
      the closing of the private placement was recorded as Issued Capital. No value
      was attributed to the warrants. Upon the Company’s adoption of the A-IFRS on
      July 1, 2005, the accounting treatment of the private placement reflected in
      the
      Company’s audited financial statements for the fiscal year ended June 30, 2005
      was not altered.




Following
      a review of the interim financial statements for the six months ended December
      31, 2006 by the Company’s auditors, the Company identified that the treatment of
      the accounting for the private placement was incorrect under A-IFRS. Under
      AASB
      132, the warrants associated with the private placement must be classified
      as a
      financial liability, as opposed to equity, as a result of the warrants being
      exercisable in a currency that is not the functional currency of the company.
      As
      a result, upon initial recognition, the fair value of the warrants should be
      recognized as a financial liability at their fair value, reducing the Issued
      Capital that was previously recorded. Each reporting period, the fair value
      of
      the outstanding warrants is revalued using the Black Scholes Model. When the
      fair value of the outstanding warrants increases or decreases, the difference
      is
      recorded as a gain or loss, as applicable, on the fair value of financial
      liabilities.




F-55


**PRANA
          BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - in Australian dollars (unless otherwise
          noted)**


The
      correction impacts the measurement and classification of these instruments
      for
      accounting purposes only. All of the material terms and conditions of the
      warrants have been correctly and appropriately disclosed in prior period
      financial statements. The warrant holders cannot require us to settle the
      warrants in cash. Accordingly, the revised classification of the warrants as
      a
      financial liability does not have an impact on our future liquidity requirements
      or ability to continue as a going concern.




**As
                of and for the years ended June 30,****2006**
            
            **2005****As
                previously reported**
            
            **As
                restated**
            
            **As
                previously reported**
            
            **As
                restated****(in
                Australian dollars)****Consolidated
                balance sheet line items:**Financial
                liabilities
            
            
            —
            
            
            928,692
            
            
            —
            
            
            1,057,407Total
                liabilities
            
            
            1,691,796
            
            
            2,620,488
            
            
            2,694,983
            
            
            3,752,390Net
                assets
            
            
            8,729,350
            
            
            7,800,658
            
            
            19,594,176
            
            
            18,536,769Issued
                capital*
            
            
            55,097,675
            
            
            46,274,127
            
            
            54,662,445
            
            
            45,838,897Accumulated
                deficit during the development stage*
            
            
            (49,235,574
            )
            
            (41,340,718
            )
            
            (37,516,265
            )
            
            (29,750,124
            )Total
                equity
            
            
            8,729,350
            
            
            7,800,658
            
            
            19,594,176
            
            
            18,536,769





*
            Upon
                the conversion to A-IFRS on July 1, 2004, the Issued Capital was
                reduced
                by $8,823,548 and accumulated deficit during the development stage
                was
                reduced by $1,964,744 as a result of the warrants being treated under
                A-IFRS as financial liabilities.





**Consolidated
                statement of operations line items:**Gain
                on fair value financial liabilities
            
            
            —
            
            
            128,715
            
            
            —
            
            
            5,801,397Loss
                before income tax expense
            
            
            (11,719,309
            )
            
            (11,590,594
            )
            
            (16,094,428
            )
            
            (10,293,031
            )Net
                loss
            
            
            (11,719,309
            )
            
            (11,590,594
            )
            
            (16,094,428
            )
            
            (10,293,031
            )Loss
                per share
              (basic
                and diluted)
            
            
            (0.09
            )
            
            (0.09
            )
            
            (0.13
            )
            
            (0.08
            )




F-56


**PRANA
      BIOTECHNOLOGY LIMITED(A Development Stage Enterprise)**




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




**(c)**
            **US
                GAAP**





In
      accordance with US GAAP that applied to our company at June 1, 2004, the US$20
      million that we received at the closing of the private placement should have
      been recorded as a financial liability. However, no value was attributed to
      the
      warrants and they were treated as issued capital.




Following
      a review of the interim financial statements for the six months ended December
      31, 2006 by our auditors, we have identified that the treatment of the
      accounting for the private placement was incorrect under US GAAP. Under SFAS
      No.
      133: *Accounting
      for Derivatives Instruments and Hedging Activities* ,
      as
      amended, and Emerging Issues Task Force Issue No. 01-6: *The
      Meaning of "Indexed to a Company's Own Stock* ,
      the
      warrants associated with the private placement should have been classified
      as a
      financial liability, as opposed to equity, as a result of the warrants being
      exercisable in a currency that is not the functional currency of our company.
      As
      a result, upon initial recognition, the fair value of the warrants should be
      recognized as a financial liability at their fair value, reducing the issued
      capital that was previously recorded. Each reporting period, the fair value
      of
      the outstanding warrants is revalued using the Black Scholes Model. When the
      fair value of the outstanding warrants increases or decreases, the difference
      is
      recorded as a gain or loss, as applicable, on the fair value of financial
      liabilities.




The
      correction impacts the measurement and classification of these instruments
      for
      accounting purposes only. All of the material terms and conditions of the
      warrants have been correctly and appropriately disclosed in prior period
      financial statements. The warrant holders cannot require us to settle the
      warrants in cash. Accordingly, the revised classification of the warrants as
      a
      financial liability does not have an impact on our future liquidity requirements
      or ability to continue as a going concern.




**As
                of and for the years ended June 30,****2006**
            
            **2005****As
                previously reported**
            
            **As
                restated**
            
            **As
                previously reported**
            
            **As
                restated****(in
                Australian dollars)****Consolidated
                balance sheet line items:**Financial
                liabilities
            
            
            —
            
            
            928,692
            
            
            —
            
            
            1,057,407Total
                liabilities
            
            
            1,691,796
            
            
            2,620,488
            
            
            2,694,983
            
            
            3,752,390Additional
                paid-in capital*
            
            
            62,144,533
            
            
            53,320,985
            
            
            61,290,050
            
            
            52,466,502Accumulated
                deficit during the development stage*
            
            
            (53,415,183
            )
            
            (45,520,327
            )
            
            (41,695,874
            )
            
            (33,929,733
            )Total
                stockholder’s equity
            
            
            8,729,350
            
            
            7,800,658
            
            
            19,594,176
            
            
            18,536,769Total
                liabilities and stockholder’s equity
            
            
            10,421,146
            
            
            10,421,146
            
            
            22,289,159
            
            
            22,289,159





*
            Under
                U.S. GAAP, on July 1, 2004, the Issued Capital was reduced by $8,823,548
                and accumulated deficit during the development stage was reduced
                by
                $1,964,744 as a result of the warrants being treated as financial
                liabilities.




**Consolidated
                statement of operations line items:**Gain
                on fair value financial liabilities
            
            
            —
            
            
            128,715
            
            
            —
            
            
            5,801,397Loss
                from operations
            
            
            (12,481,332
            )
            
            (12,352,617
            )
            
            (18,691,564
            )
            
            (12,890,167
            )Loss
                before income tax expense
            
            
            (11,719,309
            )
            
            (11,590,594
            )
            
            (17,799,429
            )
            
            (11,998,032
            )Net
                loss
            
            
            (11,719,309
            )
            
            (11,590,594
            )
            
            (17,799,429
            )
            
            (11,998,032
            )Loss
                per share
              (basic
                and diluted)
            
            
            (0.09
            )
            
            (0.09
            )
            
            (0.15
            )
            
            (0.10
            )




F-57








**SIGNATURES**




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




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




Dated:
      June 18, 2007




31