**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**





**FORM
      20-F**





o
            
            **REGISTRATION
                STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
                ACT
                OF 1934**




**OR**


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




**For
      the fiscal year ended June 30, 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:




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


(Title
      of
      Class)





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







**INTRODUCTION**




Prana
      Biotechnology Limited was incorporated under the laws of the Commonwealth of
      Australia on November 11, 1997. Our mission is to develop therapeutic drugs
      designed to treat the underlying causes of degeneration of the brain and the
      eye
      as the aging process progresses, initially focusing on Alzheimer’s disease.
      Other potential applications for our therapies include age-related cataracts,
      Huntington disease, Creutzfeldt-Jakob disease (the human variant of Mad Cow
      disease), Motor Neuron disease and Parkinson’s disease. The principal listing of
      our ordinary shares and listed options to purchase our ordinary shares is on
      the
      Australian Stock Exchange. Since September 5, 2002, our American Depository
      Receipts, or ADRs, have traded on the NASDAQ Capital Market under the symbol
      “PRAN.” The Bank of New York, acting as depositary, issues our ADRs, each of
      which evidences an American Depositary Share, which in turn represents ten
      of
      our ordinary shares. We have two wholly-owned subsidiaries, Prana Biotechnology
      Inc. and Prana Biotechnology UK Limited, incorporated in the United States
      and
      the United Kingdom, respectively, in August 2004. As used in this annual report,
      the terms “we,” “us,” “our” and “Prana” mean Prana Biotechnology Limited and its
      subsidiaries, unless otherwise indicated.




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




Our
      consolidated financial statements appearing in this annual report are prepared
      in Australian dollars and in accordance with the Australian equivalents to
      International Financial Reporting Standards adopted by the Australian Financial
      Reporting Council on January 1, 2005, which became effective for our company
      as
      of our fiscal year ended June 30, 2006. In this annual report, all references
      to
“U.S. dollars” or “US$” are to the currency of the United States of America, and
      all references to “Australian dollars” or “A$” are to the currency of Australia.




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




Except
      for the historical information contained in this annual report, the statements
      contained in this annual report are “forward-looking statements” within the
      meaning of Section 27A of the Securities Act of 1933, as amended, and Section
      21E of the Securities Exchange Act of 1934, as amended, and the Private
      Securities Litigation Reform Act of 1995, as amended, with respect to our
      business, financial condition and results of operations. Such forward-looking
      statements reflect our current view with respect to future events and financial
      results. We urge you to consider that statements which use the terms
“anticipate,” “believe,” “do not believe,” “expect,” “plan,” “intend,”
“estimate,” and similar expressions are intended to identify forward-looking
      statements. We remind readers that forward-looking statements are merely
      predictions and therefore inherently subject to uncertainties and other factors
      and involve known and unknown risks that could cause the actual results,
      performance, levels of activity, or our achievements, or industry results,
      to be
      materially different from any future results, performance, levels of activity,
      or our achievements expressed or implied by such forward-looking statements.
      Readers are cautioned not to place undue reliance on these forward-looking
      statements, which speak only as of the date hereof. Except as required by
      applicable law, including the securities laws of the United States, we undertake
      no obligation to publicly release any update or revision to any forward-looking
      statements to reflect new information, future events or circumstances, or
      otherwise after the date hereof. We have attempted to identify significant
      uncertainties and other factors affecting forward-looking statements in the
      Risk
      Factors section that appears in Item 3.D. “Key Information-Risk
      Factors.”


ii




**TABLE
      OF CONTENTS**


Page**PART
                I**
            
            
            
            **5****ITEM
                1.**
            ****
            **IDENTITY
                OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS**
            
            **5****ITEM
                2.**
            ****
            **OFFER
                STATISTICS AND EXPECTED TIMETABLE**
            
            **5****ITEM
                3.**
            ****
            **KEY
                INFORMATION**
            
            **5**A.
            
            Selected
                Financial Data
            
            5B.
            
            Capitalization
                and Indebtedness
            
            8C.
            
            Reasons
                for the Offer and Use of Proceeds
            
            8D.
            
            Risk
                Factors
            
            8**ITEM
                4.**
            ****
            **INFORMATION
                ON THE COMPANY**
            
            **19**A.
            
            History
                and Development of the Company
            
            19B.
            
            Business
                Overview
            
            22C.
            
            Organizational
                Structure
            
            34D.
            
            Property,
                Plants and Equipment
            
            34**ITEM
                4A.**
            ****
            **UNRESOLVED
                STAFF COMMENTS**
            
            **34****ITEM
                5.**
            ****
            **OPERATING
                AND FINANCIAL REVIEW AND PROSPECTS**
            
            **34**A.
            
            Operating
                Results
            
            35B.
            
            Liquidity
                and Capital Resources
            
            45C.
            
            Research
                and Development, Patents and Licenses
            
            50D.
            
            Trend
                Information
            
            54E.
            
            Off-Balance
                Sheet Arrangements
            
            54F.
            
            Tabular
                Disclosure of Contractual Obligations
            
            54**ITEM
                6.**
            ****
            **DIRECTORS,
                SENIOR MANAGEMENT AND EMPLOYEES**
            
            **55**A.
            
            Directors
                and Senior Management
            
            55B.
            
            Compensation
            
            58C.
            
            Board
                Practices
            
            59D.
            
            Employees
            
            64E.
            
            Share
                Ownership
            
            65**ITEM
                7.**
            ****
            **MAJOR
                SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**
            
            **70**A.
            
            Major
                Shareholders
            
            70B.
            
            Related
                Party Transactions
            
            71C.
            
            Interests
                of Experts and Counsel
            
            71**ITEM
                8.**
            ****
            **FINANCIAL
                INFORMATION**
            
            **71**A.
            
            Financial
                Statements and Other Financial Information
            
            71B.
            
            Significant
                Changes
            
            72**ITEM
                9.**
            ****
            **THE
                OFFER AND LISTING**
            
            **72**A.
            
            Offer
                and Listing Details
            
            72B.
            
            Plan
                of Distribution
            
            74C.
            
            Markets
            
            74




iii




D.
            
            Selling
                Shareholders
            
            74E.
            
            Dilution
            
            74F.
            
            Expenses
                of the Issue
            
            74**ITEM
                10.**
            ****
            **ADDITIONAL
                INFORMATION**
            
            **74**A.
            
            Share
                Capital
            
            74B.
            
            Memorandum
                and Articles of Association
            
            74C.
            
            Material
                Contracts
            
            74D.
            
            Exchange
                Controls
            
            76E.
            
            Taxation
            
            77F.
            
            Dividends
                and Paying Agents
            
            85G.
            
            Statement
                by Experts
            
            85H.
            
            Documents
                on Display
            
            86I.
            
            Subsidiary
                Information
            
            86**ITEM
                11.**
            ****
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**
            ****
            **86****ITEM
                12.**
            ****
            **DESCRIPTION
                OF SECURITIES OTHER THAN EQUITY SECURITIES**
            ****
            **87****PART
                II**
            ****
            ****
            ****
            **87****ITEM
                13.**
            ****
            **DEFAULTS,
                DIVIDEND ARREARAGES AND DELINQUENCIES**
            ****
            **87****ITEM
                14.**
            ****
            **MATERIAL
                MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                PROCEEDS**
            ****
            **87****ITEM
                15.**
            ****
            **CONTROLS
                AND PROCEDURES**
            ****
            **87****ITEM
                16.**
            ****
            **RESERVED**
            ****
            **88****ITEM
                16A.**
            ****
            **AUDIT
                COMMITTEE FINANCIAL EXPERT**
            ****
            **88****ITEM
                16B.**
            ****
            **CODE
                OF ETHICS**
            ****
            **88****ITEM
                16C.**
            ****
            **PRINCIPAL
                ACCOUNTANT FEES AND SERVICES**
            ****
            **88****ITEM
                16D.**
            ****
            **EXEMPTIONS
                FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**
            ****
            **89****ITEM
                16E.**
            ****
            **PURCHASES
                OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                PURCHASERS**
            ****
            **89****ITEM
                17.**
            ****
            **FINANCIAL
                STATEMENTS**
            ****
            **89****ITEM
                18.**
            ****
            **FINANCIAL
                STATEMENTS**
            ****
            **90****ITEM
                19.**
            ****
            **EXHIBITS**
            ****
            **90****SIGNATURES**
            ****
            ****
            ****
            **93**




iv




**PART
      I**




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




Not
      applicable.




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




Not
      applicable.




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




**A.**  **SELECTED
        CONSOLIDATED
        FINANCIAL
        DATA**




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




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




The
      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.




5




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.




**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
            )
            
            -
            
            
            -
            
            
            -Net
                loss
            
            
            (11,719,309
            )
            
            (16,094,428
            )
            
            -
            
            
            -
            
            
            -Loss
                per share - basic and diluted
            
            
            (0.09
            )
            
            (0.13
            )
            
            -
            
            
            -
            
            
            -Weighted
                average number of ordinary shares outstanding - basic and
                diluted
            
            
            128,053,601
            
            
            122,754,061
            
            
            -
            
            
            -
            
            
            -*U.S.
                GAAP:*Net
                loss
            
            
            (11,719,309
            )
            
            (17,799,429
            )
            
            (9,208,199
            )
            
            (3,244,397
            )
            
            (4,728,019
            )Loss
                per share - basic and diluted
            
            
            (0.09
            )
            
            (0.15
            )
            
            (0.12
            )
            
            (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




6





**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
            
            
            8,729,350
            
            
            19,594,176
            
            
            -
            
            
            -
            
            
            -Issued
                capital
            
            
            55,097,675
            
            
            54,662,445
            
            
            -
            
            
            -
            
            
            -Share
                based payment reserves
            
            
            2,867,249
            
            
            2,447,996
            
            
            -
            
            
            -
            
            
            -Accumulated
                deficit during   development stage
            
            
            (49,235,574
            )
            
            (37,516,265
            )
            
            -
            
            
            -
            
            
            -Total
                equity
            
            
            8,729,350
            
            
            19,594,176
            
            
            -
            
            
            -
            
            
            -*U.S.
                GAAP:*Total
                assets
            
            
            10,421,146
            
            
            22,289,159
            
            
            34,197,794
            
            
            7,944,306
            
            
            7,231,703Accumulated
                deficit during   development stage
            
            
            (53,415,183
            )
            
            (41,695,874
            )
            
            (24,108,881
            )
            
            (14,900,682
            )
            
            (11,656,285
            )Contributed
                equity
            
            
            62,144,533
            
            
            61,290,050
            
            
            55,593,837
            
            
            22,278,765
            
            
            18,372,088Total
                equity
            
            
            8,729,350
            
            
            19,594,176
            
            
            31,484,956
            
            
            7,378,083
            
            
            6,715,803




**Exchange
      Rate Information**




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




Year
              Ended
                June 30,
            
            At
                Period End
            
            Average
                Rate
            
            High
            
            Low2002
            
            0.5614
            
            0.5682
            
            0.5747
            
            0.48582003
            
            0.6713
            
            0.5623
            
            0.6729
            
            0.52802004
            
            0.6903
            
            0.7139
            
            0.8005
            
            0.63452005
            
            0.7620
            
            0.7535
            
            0.7988
            
            0.68522006
            
            0.7301
            
            0.7478
            
            0.7792
            
            0.7014









Month
            
            High
            
            LowApril
                2006
            
            0.7604
            
            0.7109May
                2006
            
            0.7792
            
            0.7465June
                2006
            
            0.7652
            
            0.7269July
                2006
            
            0.7674
            
            0.7377August
                2006
            
            0.7715
            
            0.7551September
                2006
            
            0.7720
            
            0.7463





The
      noon
      buying rate on September 29, 2006 was US$0.7499 = A$1.00.


7




**B.**  **CAPITALIZATION
        AND
        INDEBTEDNESS**




Not
      applicable.


**C.**  **REASONS
        FOR
        THE
        OFFER
        AND
        USEOF
        PROCEEDS**




Not
      applicable.


**D.**  **RISK
        FACTORS**




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




***Risks
      Related To Our Business***




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




We
      are a
      development stage company at an early stage in the development of our
      pharmaceutical products that are designed to treat the underlying causes of
      degeneration of the brain and the eye as the aging process progresses. We have
      not sufficiently advanced the development of any of our products, including
      our
      current lead product candidate, 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.




**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;




8




·
            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.




9




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.




10


**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.




**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.




11


**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$11,719,309 and
      A$16,094,428 during the fiscal years ended June 30, 2006 and 2005, respectively.
      As of June 30, 2006, our accumulated deficit was A$49,235,574. We may never
      be
      able to achieve or maintain profitability.




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




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




·
            obtain
                and maintain patents to protect our own products and
                technologies;




·
            obtain
                licenses to the patented technologies of third
                parties;




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




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




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




12




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.**




13




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




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




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




We
      know
      that competitors are developing or manufacturing various technologies or
      products for the treatment of diseases that we have targeted for product
      development. Some of these competitive products use therapeutic approaches
      that
      compete directly with our 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;




14




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




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




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




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




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




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




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




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




15




**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;




·
            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;




16




·
            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.




17




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




Holders
      of our ADRs who are U.S. residents face income tax risks. There is a
      substantial risk that we are a passive foreign investment company, commonly
      referred to as PFIC. Our treatment as a PFIC could result in a reduction in
      the
      after-tax return to the holders of our ADRs and would likely cause a reduction
      in the value of such ADRs.  For U.S. federal income tax purposes, we will
      be classified as a PFIC for any taxable year in which either (i) 75% or more
      of
      our gross income is passive income, or (ii) at least 50% of the average value
      of
      all of our assets for the taxable year produce or are held for the production
      of
      passive income.  For this purpose, cash is considered to be an asset, which
      produces passive income. As a result of our substantial cash position and the
      decline in the value of our stock, we believe that we became a PFIC during
      the
      taxable year ended June 30, 2005, and 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.




18




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




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




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




**A.**  **HISTORYAND
      DEVELOPMENTOF
      THECOMPANY**




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




From
      our
      inception until our initial public offering registering our shares on the
      Australian Stock Exchange, or ASX, on March 28, 2000, we financed our operations
      with loans from two of our then directors, totaling A$2,038,728. On March 28,
      2000, we sold 16,000,000 of our ordinary shares and 8,000,000 options to
      purchase our ordinary shares in an initial public offering. We received net
      proceeds of A$7,474,323 from the sale of shares and exercise of options. On
      February 15, 2001, we completed a private placement of 6,666,666 ordinary shares
      to institutional investors at a price per share of A$0.75 and received net
      proceeds of A$4,745,599 from the private placement. During the years ended
      June
      30, 2003 and 2002, we received net proceeds of A$3,569,792 and A$580,345,
      respectively, for the exercise of 7,427,584 and 1,160,690 options (including
      the
      conversion of 7,289,310 listed options in March 2003), which funds were added
      to
      our working capital. In September 2003, we raised an additional A$4,675,019
      (net
      of issuance costs) through a private placement of 7,102,853 ordinary shares
      to
      institutional and accredited investors at a subscription price of A$0.70 per
      share. In April 2004, we raised A$26,352,147 (net of issuance costs) in a
      private placement in the United States (which was held in escrow pending receipt
      of the requisite approval of the transaction by our shareholders that was
      obtained on June 1, 2004), through the sale of 4,000,000 ADRs to institutional
      and accredited investors at a price of US$5.00 per ADR and five-year warrants
      to
      purchase 3,000,000 ADRs at an exercise price of US$8.00 per ADR. In the fiscal
      year ended June 30, 2004, we also received net proceeds of A$757,166 for the
      exercise of options to purchase 1,325,000 ordinary shares, which funds were
      added to our working capital. Additionally, during the fiscal year ended June
      30, 2004 we issued ordinary shares for nil consideration at a cost of A$3,167
      which was subtracted from our working capital. In the fiscal year ended June
      30,
      2005, we received net proceeds of A$4,753,333 from the exercise of options
      to
      purchase 9,506,666 ordinary shares, which funds were added to our working
      capital. No options were exercised in the fiscal year ended June 30,
      2006. **** As
      at
      June 30, 2006, we had A$10,013,778 in cash and cash equivalents and our working
      capital was A$8,780,413. ****




19




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




Since
      completing our initial public offering and listing process on the ASX on March
      28, 2000, we have concentrated our resources toward the pursuit of our disease
      targets. Initially we focused on clinical trials of our PBT-1 compound as a
      therapeutic for the treatment of Alzheimer’s disease 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 mutagenicity. 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. 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 PBT-2, our lead candidate for the potential treatment of Alzheimer's disease.
      Unlike
      PBT-1, PBT-2 has a structure that does not contain iodine and is therefore
      not
      capable of forming the di-iodo impurity that has been associated with a
      mutagenic potential. PBT-2, the result of rational drug design, was designed
      “from the ground up” to fulfill very specific criteria. It was designed to be
      orally bioavailable and to cross the blood brain barrier. PBT-2 was selected
      from several hundred compounds that had been developed by us at such time and
      has demonstrated significant effectiveness in both pre-clinical in vitro and
      in
      vivo testing and has been designed to have an improved safety and efficacy
      profile compared to PBT-1. In February 2004, we were awarded a second research
      and development START grant of A$1.35 million to take PBT-2 through safety
      testing and Phase I clinical trials for Alzheimer’s disease. Initial preclinical
      toxicology testing for PBT-2 was completed and in March 2005, we commenced
      a
      series of Phase I clinical trials at a facility associated with the Utrecht
      University Hospital in Utrecht, the Netherlands. On November 7, 2005, we
      announced the successful completion of the first Phase I trial for 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 with little difference in the incidence of adverse
      events between those receiving PBT-2 and those receiving the placebo.
      Additionally, the pharmacokinetic analysis demonstrated that the drug exposure
      increased predictably and in a linear manner, both of which are strong
      characteristics for a development candidate. Concurrent findings in a
      pre-clinical mouse model indicate that PBT-2 passes into the brain 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).




20




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. Ritchie reported that the
      two
      Phase I studies indicate that PBT-2 is generally well tolerated at doses to
      800mg, that in both studies there were no differences of clinical significance
      in overall rates of adverse effects between PBT-2 and the placebo groups and
      there appears to be no relationship between dose and rate of adverse effects.
      Of
      the adverse effects that were seen, the vast majority of these were thought
      to
      be unrelated to PBT-2 treatment and of the few that were possibly related,
      they
      appeared mild and self limiting. 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. The data from the two studies indicate that
      after oral administration, in healthy human volunteers, PBT-2 is rapidly
      absorbed (Tmax < 3hrs), achieves good blood levels (in the micromolar range),
      is primarily metabolized to PBT-2-glucuronide and is renally cleared. PBT-2
      exposure increases with increasing single doses, with relatively little
      accumulation on repeat dosing. Dosing in the clinical trials did not exceed
      800mg. once daily for seven days. The terminal elimination rate (apparent
      clearance) appeared relatively consistent across all doses tested. PBT-2 appears
      well tolerated in both male and females and there appears little, if any, age
      difference in the tolerability or pharmacokinetics (absorption, distribution,
      metabolism, and excretion) of PBT-2. The most common adverse effects noted
      were
      headache, gastrointestinal disturbance and somnolence. Dosing did not appear
      to
      reach the maximum tolerated dose for healthy volunteers.




21




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 Phase IIa study is a randomized,
      double-blind, placebo-controlled design, in which Alzheimer’s disease patients
      will receive three months of either one of two oral doses of PBT-2, or placebo.
      In addition to examining safety and tolerability, the study will investigate
      the
      ability of PBT-2 to affect multiple cerebrospinal fluid, or CSF biomarkers,
      and
      blood biomarkers of Alzheimer’s disease during the treatment period. Outcomes
      will include measures of CSF a-beta and tau levels as well as neurocognitive
      and
      behavioral changes. 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.




Our
      company is the exclusive licensee of an international patent application in
      the
      name of the General Hospital Corporation directed to a novel target for an
      Alzheimer's disease vaccine. The Commonwealth Government of Australia provided
      us with A$227,252 Biotechnology Innovation Fund, or BIF, grant for the initial
      proof of concept stage of this research. The
      research under this BIF grant finished at the end of January 2005 having
      achieved the scientific milestone demonstrating that a mouse could generate
      antibodies that preferentially recognize dimerized ‘toxic linked’ forms of
      beta-amyloid and not the endogenous monomeric form of beta amyloid .
      Currently we are undertaking the screening of mouse hybridomas ( hybrid
      cells produced
      by injecting a specific antigen into a mouse, collecting an antibody-producing
      cell from the mouse’s spleen, and fusing it with a long-lived cancerous immune
      cell called a myeloma cell). Individual hybridoma 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.




Since
      inception, we have not been required to invest material amounts for capital
      expenditures since our development efforts have taken place at research
      facilities operated by institutions with whom we have relationships. In the
      three fiscal years ended June 30, 2006 our capital expenditures have totaled
      A$240,453. **** We
      have
      not incurred any material capital expenditures since July 1, 2006. ****




**B.**  **BUSINESSOVERVIEW**




**Prana’s
      Background**




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




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




22




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




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




**Research
      Institutions**




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




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




·
            The
                University of Melbourne, Department of
                Pathology;




·
            The
                Mental Health Research Institute;
                and




·
            The
                Biomolecular Research Institute in Melbourne.




Work
      conducted at the first two of these institutions demonstrated that clioquinol,
      codenamed PBT-1, had potential efficacy for the treatment of Alzheimer’s
      disease. Our research efforts led to the development of a novel MPAC within
      the
      same chemical class as PBT-1, PBT-2, a low molecular weight chemical entity
      that
      demonstrates a significant preclinical improvement over PBT-1, and a portfolio
      of approximately 300
      MPAC
      molecules in total (approximately 200 of which are of the same chemical class
      as
      PBT-1 and the remaining MPACs are of other chemical classes). Our research
      program aims to find further and potentially more effective preferred compounds
      for the treatment of Alzheimer’s disease as well as for our other major disease
      indications (such as Parkinson’s disease and Huntington’s disease).




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




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




·
            Age-related
                cataracts;




·
            Parkinson’s
                disease;




23




·
            Huntington’s
                disease; and




·
            other
                neurodegenerative diseases.




***Alzheimer’s
      Disease*** *.* Research
      is ongoing to increase our understanding of the neuropathology of Alzheimer’s
      disease. Our research continues to focus on the structure and function of
      beta-amyloid and its precursor, and protein structural studies specifically
      around the sites of interaction between metals, metal complexes and our MPACs
      and the significant proteins in Alzheimer’s disease such as APP and
      beta-amyloid. For a description of the history and development of our lead
      PBT-2
      compound as a therapeutic for the treatment of Alzheimer’s disease see Item 4A.
“Information on the Company - History and Development of the Company.”




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




***Parkinson's
      Disease*** *.* Parkinson’s
      disease is another crippling disease of the aging population. It causes a
      progressive slowing of movement, tremor and the loss of fine motor control.
      Increasingly, dementia is being recognized as a significant component of
      Parkinson’s disease. Existing therapies may provide some short term symptomatic
      relief but do not address the underlying cause of the disease. We believe that
      our platform technology may affect the aggregation of the proteins concerned
      and
      may provide a pathway for reversing the disease. Parkinson’s disease is believed
      to affect between 11 to 14 people per 100,000 and the incidence increases to
      44
      people per 100,000 for people aged over 50. It has been reported that
      approximately four million people suffer from Parkinson’s disease worldwide.




Our
      Melbourne research team is working on the key protein (alpha-synuclein) that
      aggregates to form the diagnostic marker of this disease. We believe that the
      aggregated form of this protein is susceptible to the same therapeutic strategy
      that is being used for Alzheimer’s disease, and laboratory tests are in progress
      to confirm this approach. The molecules already developed as part of the
      Alzheimer’s disease program are being tested and validated as prospective agents
      for the treatment of Parkinson’s disease, together with agents arising from the
      current chemistry synthetic program. Experimental animal models are being
      developed and integrated into the rationale drug design screening regime. During
      2005, we entered into a contractual arrangement with the Integrative
      Neuroscience Facility based at the Howard Florey Institute in Melbourne to
      assist in the examination of the effect of MPACs administered to the
      6-hydroxydopamine (PD) mouse model of the disease, which concluded with positive
      results. In addition, groups unrelated to us have published data that
      demonstrates the usefulness of clioquinol in treating the symptoms of
      Parkinson’s disease generated in the alternative MPTP
      (1-methyl-4-phenyl-1,2,3,6-tetrahydropyridine) mouse model of the disease.
      Based
      on these positive results with clioquinol in such two mouse models , we plan
      to
      investigate the efficacy of other selected MPACs in these models to screen
      for
      possible MPAC candidates as treatment candidates for Parkinson’s disease.




24




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




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




**Clinical
      Trials**




In
      2003,
      PBT-2 successfully completed in-house preclinical screening and was selected
      by
      us as a development candidate. At such time, we initiated the initial
      preclinical toxicology testing required to support initial human trials, which
      was successfully completed in early 2005. In March 2005, we commenced a series
      of Phase I clinical trials at a facility associated with the Utrecht University
      Hospital in Utrecht, the Netherlands. On November 7, 2005, we announced the
      successful completion of the first Phase I trial for PBT-2. In early 2006,
      we
      also successfully completed a second Phase I multi-dose escalation safety
      clinical trial of PBT-2. 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. 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 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. For additional details regarding
      our
      clinical trials see Item 4.A. “Information on the Company - History and
      Development of the Company.” No assurance can be given that future clinical
      studies will commence, or if initiated will be completed and prove to be
      successful, or that we will be able to commercialize drugs based on our
      beta-amyloid theory of Alzheimer’s disease.




**Rational
      Drug Design**




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




25




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




A
      series
      of *in
      vitro* assays
      have been established to screen compounds developed by our medicinal chemistry
      group. From early 2002, a program was initiated by our medicinal chemistry
      group
      to undertake preliminary *in
      vivo* pharmacology and kinetic studies of the new compounds demonstrating activity
      in
      the *in
      vitro* screens.
      We perform in *vivo* modeling
      for our lead compound candidates for Alzheimer’s disease with transgenic mice
      expressing a similar phenotype to human Alzheimer’s disease. Similarly, a
      transgenic mouse carrying a mutated Huntingtin gene is used to model
      Huntington’s disease and mice treated with neuronal toxins to produce the
      Parkinson’s phenotype are used to model Parkinson’s disease. Based on the
      results of these studies, lead compounds are selected by our medicinal chemistry
      group for formal pre-clinical studies. Data generated by these *in
      vitro* and *in
      vivo* screens
      are incorporated into our medicinal chemistry program to further refine
      development strategies for new compounds.




PBT-2,
      our current lead MPAC product candidate, was selected from this “rationally
      designed” pipeline in 2003 and is the first such new and specifically designed
      compound to move into formal development. It has
      been built “from the ground up” to fulfill very specific criteria. It was
      designed so that it will be orally bioavailable and cross the blood brain
      barrier. PBT-2 was selected from several hundred compounds that had been
      developed by us at such time. It has been designed to have an improved safety
      and pharmacokinetic profile and has demonstrated significant effectiveness
      in
      both pre-clinical *in
      vitro* and *in
      vivo* testing.  PBT-2
      has
      completed initial preclinical toxicology testing and in March 2005, we commenced
      a series of Phase I clinical trials at a facility associated with the Utrecht
      University Hospital in Utrecht, the Netherlands. On November 7, 2005, we
      announced the successful completion of the first Phase I trial for PBT-2. In
      early 2006, we also successfully completed a second Phase I multi-dose
      escalation safety clinical trial of PBT-2. 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. 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 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. For additional details regarding
      our
      clinical trials see Item 4.A. “Information on the Company - History and
      Development of the Company.”




26




**Patent
      Portfolio**




**Invention**
            
            **Status**
            
            **Comments**“A
                method for assaying and treating Alzheimer’s Disease”
              Filed: 
                November 12, 1992
              Applicant: 
                The University of Melbourne
              Assigned
                to Prana Biotechnology Limited
            
            Patents
                granted in Australia, Europe, Japan and the United States. Application
                in
                Canada is under examination. A divisional patent in is under appeal
                the
                United States.
            
            The
                invention includes claims directed to the use of specified modulators
                of
                cation interaction with amyloid precursor protein and the use of
                these
                agents in the treatment of Alzheimer’s disease. Granted European claims
                include the use of zinc binding agents for oral administration in
                the
                treatment of Alzheimer’s disease.“Beta
                amyloid peptide inhibitors”
              Filed: 
                July 21, 2000
              Applicant:Biomolecular
                Research Institute and University of Melbourne
              Assigned
                to Prana Biotechnology Limited
            
            International
                (PCT) application has entered national phase in Europe, Canada, Japan
                and
                the United States. A patent has been granted in Australia and examination
                is expected in the other jurisdictions.
            
            The
                invention encompasses claims to agents capable of inhibiting binding
                of
                specified metal ions to the N-terminus of beta-amyloid and the use
                of
                these agents in the treatment of amyloid related conditions including
                Alzheimer’s disease.“An*in
                vitro*system for determining the formation of AbAmyloid”
              Filed:
                October 19, 1994
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Patents
                have been granted in the United States and Japan. Further patent
                applications in Japan and Canada have examinations
                requested.
            
            The
                invention is directed to an assay for the formation of beta-amyloid
                in a
                biological sample and inhibitors of beta-amyloid
                formation.“A
                diagnostic assay for Alzheimer’s Disease”
              Filed: 
                October 19, 1994
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Two
                patents granted in the United States and one patent granted in Canada.
            
            The
                invention is directed to an antibody based diagnostic assay for the
                detection and quantification of beta-amyloid species.“Identification
                of agents for use in the treatment of Alzheimer’s Disease”
              Filed:
                March 11, 1998
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Patents
                have been granted in Australia and United States. Applications are
                under
                examination in Japan, Europe and Canada.
            
            The
                invention is directed to the use of specified metal binding agents
                to
                reduce beta-amyloid mediated neurotoxicity and assays to identify
                agents
                capable of modifying neurotoxic properties of beta-amyloid.“Use
                of Clioquinol for the therapy of Alzheimer’s Disease”
              Filed:
                April 6, 2005
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            U.S.
                continuation application is currently under examination.
            
            The
                invention includes claims directed to the use of clioquinol for the
                treatment of Alzheimer’s disease and clioquinol pharmaceutical
                compositions.




27




“Agents
                for use in the treatment of Alzheimer’s Disease”
              Filed: 
                March 11, 1999
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Patents
                granted in Australia and the United States. A further U.S. continuation
                application is under examination. Examination is pending in Canada
                and
                Japan. Patent has been allowed in Europe and is entering national
                phases
                in the United Kingdom, Ireland, Germany, France, Italy and
                Belgium.
            
            The
                invention is directed to compositions containing clioquinol and known
                metal binding agents and their use in the treatment of amyloid related
                diseases.“Method
                for Screening drugs useful for treating Alzheimer’s Disease”
              Filed:
                April 29, 1999
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Continuation-in-part
                patent has been granted in the United States and a further U.S. divisional
                patent application is under examination.
            
            The
                invention is primarily directed to specified assays that identify
                agents
                capable of modifying the neurotoxic properties of beta-amyloid.“Neurotoxic
                Oligomers”
              Filed:
                June 28, 2000
              Applicants: 
                Prana Biotechnology Limited and The General Hospital
                Corporation
            
            International
                (PCT) application has entered national phase. Patent has been granted
                in
                Australia. An application is under examination in the United States,
                New
                Zealand and China. Applications in Canada and Japan await request
                for
                examination. An application in Europe is pending
                examination.
            
            The
                invention is directed to an immunotherapy strategy using tyrosine
                cross-linked protein aggregates. The approach may be used in the
                treatment
                of Alzheimer’s disease and other amyloid related
                conditions.“Methods
                for the Identification of Agents that Inhibit or Promote Cataracts
                and
                Uses thereof”
              Filed:
                August 18, 2000
              Applicant:
                The General Hospital Corporation.
              Licensed
                to Prana Biotechnology Limited
            
            International
                (PCT) application has entered national phase. Applications in the
                United
                States, Australia and Europe are under examination. Applications
                in Japan
                and Canada await request for examination.
            
            The
                invention is directed to assays for the detection of agents useful
                in the
                treatment of age-related cataracts and a method of treatment utilizing
                specified metal chelators.“Methods
                of screening for inhibitors of Alzheimer’s disease”
              Filed:
                December 12, 2000
              Applicant:
                The General Hospital Corporation
              Licensed
                to Prana Biotechnology Limited
            
            Application
                has entered national phase in the United States and claims for examination
                have been elected.
            
            The
                invention encompasses claims to the identification of agents functioning
                as copper agonists and the use the agents in the treatment of amyloid
                related conditions including Alzheimer’s disease.“Treatment
                of Neurodegenerative Conditions”
              Filed:
                April 3, 2003
              Applicant:
                Prana Biotechnology Limited
            
            Applications
                have entered national phase in the United States, China and Australia.
                Each await request for examination.
            
            The
                invention encompasses the utility of the 8-hydroxyquinoline MPAC
                class in
                the treatment of neurodegenerative cognitive changes.“8-Hydroxyquinoline
                derivatives”
              Filed:
                July 16, 2003
              Applicant:
                Prana Biotechnology Limited
            
            International
                (PCT) application has entered national phase in the United States,
                Europe,
                China, Japan, Australia, Canada and eight other global
                jurisdictions.
            
            The
                invention is directed to chemical structures of the 8-hydroxyquinoline
                MPAC class and their utility in the treatment of neurological
                conditions.




28




“Neurologically-Active
                Compounds”
              Filed:
                October 3 , 2003
              Applicant:
                Prana Biotechnology Limited
            
            International
                (PCT) Application has entered national phase in the United States,
                Europe,
                China, Japan, Australia, Canada and eights other global
                jurisdictions.
            
            The
                invention is directed to alternative MPAC chemical structures and
                their
                utility in the treatment of neurological conditions.“Neurologically-
                Active Compounds”
              Filed:
                April 1, 2005
              Applicant:
                Prana Biotechnology Limited
            
            International
                (PCT) application designating, United States, Europe, China, Japan,
                Australia, Canada and eight other global jurisdictions.
            
            The
                invention is directed to ‘F4’ MPAC chemical structures and their utility
                in the treatment of neurological conditions.“Use
                of Phanquinone for the treatment of Alzheimer’s Disease”.
              Filed:
                October 19, 2000
              Applicant:
                Prana Biotechnology Limited
            
            Patent
                has been granted in the United States. An application in Japan is
                under
                examination.
            
            This
                invention is directed to the use of Phanquinone for the treatment
                of
                Alzheimer’s disease.‘Use
                of Phanquinone for the treatment of memory impairment”.
              Filed:
                April 3, 2003
              Applicant:
                Prana Biotechnology Limited
            
            Patent
                has been granted in the United States. An application in Japan is
                under
                examination.
            
            This
                invention is directed to the use of Phanquinone for the treatment
                of
                memory impairment.“Use
                of Clioquinol for the treatment of Alzheimer’s Disease”.
              Filed:
                February 13, 1998
              Applicant:
                Prana Biotechnology Limited
            
            Patent
                has been granted in the United States. An application in Japan is
                under
                examination.
            
            This
                invention is directed to the use of clioquinol for the treatment
                of
                Alzheimer’s disease.“Pharmaceutical
                compositions of Clioquinol with B12 for therapeutic use”.
              Filed:
                February 13, 1998
              Applicant:
                Prana Biotechnology Limited.
            
            Patent
                has been granted in the United States. An application in Japan is
                under
                examination.
            
            This
                invention is directed to clioquinol pharmaceutical compositions comprising
                B12.“Use
                of Clioquinol for the treatment of Parkinson’s Disease”.
              Filed:
                13 February 1998
              Applicant:
                Prana Biotechnology Limited.
            
            Patent
                in the United States has been granted. An application in Japan is
                under
                examination.
            
            This
                invention is directed to the use of clioquinol for the treatment
                of
                Parkinson’s disease.“A
                method of prophylaxis or treatment of cardiovascular indications”
              Filed:
                24 August 2005
              Applicant:
                Prana Biotechnology Limited
            
            Australian
                Provisional application has been filed.
            
            This
                invention is directed to MPAC compounds for the treatment of
                cardiovascular disease.“A
                method of prophylaxis or treatment and agents for same”. Filed: 22 June
                2006
              Applicant:
                Prana Biotechnology Limited
            
            Australian
                Provisional application has been filed.
            
            This
                invention is directed to MPAC compounds for treating selected
                cancers.





29


**Patent
      Matters**




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




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




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




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


30




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




**Competition**




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




**Regulatory
      Considerations**




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




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


31




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




We
      completed the initial preclinical toxicology testing of PBT-2 that is required
      to move a compound into human trials and in March 2005, we commenced a series
      of
      Phase I clinical trials at a facility associated with the Utrecht University
      Hospital in Utrecht, the Netherlands. On November 7, 2005, we announced the
      successful completion of the first Phase I trial for PBT-2. In early 2006,
      we
      also successfully completed a second Phase I multi-dose escalation safety
      clinical trial of PBT-2. 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. 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 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. For additional details regarding
      our
      clinical trials see Item 4.A. “Information on the Company - History and
      Development of the Company.”




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




During
      the course of clinical trials and toxicology studies, product candidates may
      exhibit unforeseen and unacceptable drug-related toxicities or side effects.
      If
      any unacceptable toxicities or side effects were to occur, we may, or regulatory
      authorities may require us to, interrupt, limit, delay or abort the development
      of our potential products. In addition, unacceptable toxicities could ultimately
      prevent the clearance of our product candidates by the TGA or the FDA for any
      or
      all targeted indications. Even after being cleared by the TGA or the FDA, any
      of
      our products may later be shown to be unsafe or not to have its purported
      effect, thereby preventing widespread use or requiring withdrawal from the
      market. We cannot make any assurances that PBT-2 or any other development or
      product candidate will be safe or effective when administered to
      patients.




32




**Manufacturing
      and Raw Materials**




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




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




**Government
      Grants**




In
      May
      2003, we announced that the Australian Industry Research and Development Board,
      or IR&D Board, approved our application for funding under the Biotechnology
      Innovation Fund (BIF) grant
      in
      the amount of A$227,252 for research into the development of an immunotherapy
      for Alzheimer’s disease. The research under this grant finished at the end of
      January 2005 having achieved the scientific milestone demonstrating that a
      mouse
      could generate antibodies that preferentially recognize dimerized ‘toxic linked’
forms of beta-amyloid and not the endogenous monomeric form of beta
      amyloid .




In
      the
      first quarter of 2004, we were granted a START grant from the IR&D Board to
      support further development of PBT-2 and other Alzheimer’s disease research up
      to an amount of A$1.35 million. The grant was payable, in arrears, on the
      achievement of pre-specified milestones. The
      research under this grant was initially
      to be completed over a two year period and such period was subsequently extended
      until the end of 2005. This grant was completed in December 2005 and we have
      received the entire amount of this grant.




33




**Commercial
      Collaboration**




In
      August
      2003, utilizing the grant we received from the Commonwealth Government of
      Australia under the BIF, we entered into an agreement with Prima Biotechnology
      Limited, or Prima, through its collaborative research partner, the Macfarlane
      Burnet Institute for Medical Research and Public Health ,
      known
      as the Burnet Research Institute at Austin, together with the University of
      Melbourne and the Mental Health Research Institute, to undertake proof of
      concept research for our prospective Alzheimer’s disease vaccine target. This
      collaboration enabled us to access Prima’s adjuvant vaccine technology, known as
      DCtag, in the design of candidate vaccine fragments. Under the terms of our
      contractual relationship with Prima, we retained all intellectual property
      rights to our monoclonal antibodies that were used for the collaboration. In
      May
      2006, we terminated our research collaboration with Prima due to a delay in
      reaching certain milestones.




**C.**  ****O****RGANIZATIONAL****S****TRUCTURE****




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




**D.**  ****P****ROPERTY****,
      P****LANTS****A****ND****E****QUIPMENT****




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




We
      are
      party to a three year property lease signed in May 2004 that provides executive
      office space at 369 Royal Parade, Parkville, Victoria 3052, Australia, at an
      initial annual rental of A$105,551, which is increased by 3.5% on a cumulative
      basis on the May anniversary of the lease.




**ITEM
      4A.** ****U****NRESOLVED****S****TAFF****C****OMMENTS****




Not
      applicable.




**ITEM
      5.**  ****O****PERATING****A****ND****F****INANCIAL****R****EVIEW****A****ND****P****ROSPECTS****





*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.*




34




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 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$” are
      to the currency of the United States of America, and all references to
“Australian dollars” or “A$” are to the currency of Australia.




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




**Overview**




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


35




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.




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.


36




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 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.




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.


37




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.




38




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




**As
                of and for the years ended June 30,****2006**
            
            **2005**Net
                loss in accordance with:A-IFRS
            
            
            (11,719,309
            )
            
            (16,094,428
            )U.S.
                GAAP
            
            
            (11,719,309
            )
            
            (17,799,429
            )Total
                equity in accordance with:A-IFRS
            
            
            8,729,350
            
            
            19,594,176U.S.
                GAAP
            
            
            8,729,350
            
            
            19,594,176




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.


39




*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.




·
            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.




40




**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.




*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.


41




*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.




**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.




*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.




42




*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.


43




*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.


44




**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****A****ND****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$49,235,574. 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.




45




**Cash
      Flows**




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




**Year
                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.




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.




46




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 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.


47




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.


48




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.




49




**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****A****ND****D****EVELOPMENT****,
      P****ATENTS****A****ND****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.




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.


50




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.


51




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.


52




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.




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.


53


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.




Contractual
                Obligations
            
            Payments
                due by periodTotal
            
            less
                than 1 year
            
            1-3years
            
            3-5
              years
            
            more
                than 5 yearsOperating
                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.




54




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




**A.**  **D** **IRECTORS** **A** **ND** **S** **ENIOR** **M** **ANAGEMENT**




Our
      directors and executive officers are as follows:




Name
            
            Age
            
            PositionGeoffrey
                P. Kempler
            
            51
            
            Chairman
                of the Board of Directors and Chief Executive OfficerRoss
                Thomas Murdoch
            
            41
            
            President
                and Chief Operating OfficerRichard
                Revelins
            
            44
            
            Chief
                Financial Officer and SecretaryDianne
                Angus
            
            46
            
            Senior
                Vice President ofBusiness Development,Intellectual
                Propertyand ResearchPeter
                Marks(1)
            
            50
            
            DirectorColin
                L. Masters(3)
            
            59
            
            DirectorBrian
                D. Meltzer(1)(2)
            
            53
            
            DirectorGeorge
                W. Mihaly(1)(2)
            
            53
            
            Director







(1)
      Member of the Audit Committee




(2)
      Member of the Remuneration Committee and Nominations Committee




(3)
      Chairman of the Scientific Advisory Board. Professor Ashley Ian Bush and
      Professor Rudolph Emile Tanzi are also members of the Scientific Advisory
      Board.




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




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


55




***Richard
      Revelins*** has
      served as our Company Secretary since February 2000 and was appointed Chief
      Financial Officer of our company in June 2004. Mr. Revelins is an executive
      director and principal of Peregrine Corporate Limited, an Australian-based
      investment bank. Mr. Revelins has held senior positions in international
      merchant banks and is currently a director of a number of public companies,
      including, Peregrine Strategic Limited and X-ploration Limited, as well as
      Atlas
      Iron Limited, Mintails Limited, Eleckra Mines Limited, Mining Project Group
      Limited, all of which are listed on the ASX, and Cangold Inc., a company listed
      on the Canadian Venture Exchange, as well as a number of private companies.
      Mr.
      Revelins has a Bachelor of Economics degree from Monash University, Melbourne.
      Mr. Revelins serves as our Chief Financial Officer on a part-time basis and
      devotes approximately one to two work days a week to such position.




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




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


56




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




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




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




57




**B.**  **C** **OMPENSATION**






The
      following table sets forth all compensation we paid to each of our directors
      and
      with respect to all of our directors and executive officers as a group for
      the
      year ended June 30, 2006:




Salaries,
                fees,
              commissions
                and
              bonuses
            
            Pension,
                retirement and other similar
              benefitsGeoffrey
                P. Kempler
            
            
            A$434,545
            (1)
            
            A$33,455Peter
                Marks
            
            
            A$75,000
            
            
            —Colin
                L. Masters
            
            
            A$115,000
            
            
            —Brian
                D. Meltzer
            
            
            A$97,569
            
            
            A$7,431George
                W. Mihaly
            
            
            A$105,000
            
            
            —All
                directors and officers as a group, consisting of eight persons atJune
                30, 2006
            
            
            A$1,377,162
            
            
            A$83,190









(1)
            Under
                an employment agreement we entered into with Mr. Geoffrey Kempler,
                Mr.
                Kempler was entitled to a bonus of A$100,000 for achievement of the
                satisfactory completion of a successful Phase I trial within the
                time
                frame specified by our company’s strategic plan determined by our Board of
                Directors in the 2006 fiscal year. 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. This bonus has been included
                in the
                above table. See Item 5B. “Operating and Financial Review and Prospects -
                Liquidity and Capital Resources.”




In
      accordance with the approval of our shareholders at our 2004 annual general
      meeting of shareholders, the aggregate amount available per annum for the
      remuneration of our non-executive directors for their services (payable in
      cash,
      ordinary shares or options) is A$1,250,000. During the fiscal year ended June
      30, 2006, we paid to each of our non-executive directors an annual director
      service fee of A$40,000 and additional fees for their services as members of
      committees of our Board of Directors.




As
      of
      June 30, 2006, our directors and executive officers as a group, then consisting
      of eight persons, held options to purchase an aggregate 3,400,000 of our
      ordinary shares. Of such options, options to purchase 2,900,000 ordinary shares
      are currently exercisable for nil consideration on or before June 30, 2010.
      These options may not be exercised until and unless the price of our ordinary
      shares has achieved and maintained a minimum value of A$1.00 for five
      consecutive trading days. The ordinary shares issued upon exercise of these
      options may not be disposed of without the prior consent of our Board of
      Directors. The remaining options to purchase 500,000 ordinary shares are
      exercisable for A$0.50 on or before December 17, 2007. Of the foregoing options,
      options to purchase 2,100,000 ordinary shares were granted during the 2005
      fiscal year and options to purchase 1,300,000 ordinary shares were granted
      during the 2006 fiscal year under our 2004 Employees’, Directors’ &
Consultants’ Share and Option Plan. See Item 6.E. “Directors, Senior Management
      and Employees - Share Ownership - Stock Option Plans.”


58




See
      Item
      5B. “Operating and Financial Review and Prospects - Liquidity and Capital
      Resources,” for details regarding the employment agreements we entered into with
      Mr. Geoffrey Kempler, in connection with his appointment as our Chief Executive
      Officer and Dr. Ross Murdoch in connection with his services as our President
      and Chief Operating Officer.




**C.**  ****B****OARD****P****RACTICES****




**Introduction**




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




**Election
      of Directors**




Directors
      are elected at our annual general meeting of shareholders. Under our
      Constitution, the term of office of our directors are staggered, such that
      at
      every annual general meeting of shareholders one-third, rounded down to the
      nearest whole number, of the directors, except a Managing Director, must retire
      from office and may offer himself/herself for re-election. No director, except
      a
      Managing Director, shall retain office for a period in excess of three years
      without submitting for re-election. Under Australian law, directors who have
      reached the age of 72 must stand for re-election annually. Our Board of
      Directors has the power to appoint any person to be a director, either to fill
      a
      vacancy or as an additional director (provided that the total number of
      directors does not exceed the maximum allowed by law), and any director so
      appointed may hold office only until the next annual general meeting when he
      or
      she shall be eligible for election. Mr. Kempler is our Managing Director. Dr.
      Masters must retire and may stand for re-election at our 2006 annual general
      meeting of shareholders that is expected to be held on November 30, 2006.
      Messrs. Marks, Meltzer and Mihaly must retire and may stand for re-election
      at
      our 2008 annual general meeting of shareholders. In light of the one-third
      director rotation requirement, one of our directors (not including our Managing
      Director) will be required to retire and stand for re-election at our 2007
      annual general meeting of shareholders.




**Non-Executive
      and Independent Directors**




Australian
      law does not require a company to appoint a certain number of independent
      directors to its board of directors or audit committee. However, under the
      ASX
      Best Practice Guide, the ASX recommends, but does not require, that a ASX-listed
      company have a majority of independent directors on its board of directors
      and
      that the audit committee be comprised of independent directors, within the
      meaning of the rules of the ASX. Our Board of Directors currently has five
      directors, of which three are non-executive directors within the meaning of
      the
      ASX Best Practice Guide, and our audit committee consists of such three
      non-executive directors. Accordingly, we currently comply with the foregoing
      recommendations of the ASX Best Practice Guidance.


59




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




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




**Directors’
      Service Contracts**




We
      do not
      have any service contracts with our directors, other than the agreement that
      we
      entered into with Mr. Kempler, the Chairman of our Board of Directors, in
      connection with his appointment as our Chief Executive Officer. There are no
      arrangements or understandings between us and any of our directors for benefits
      upon termination of their service.




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


60




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




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




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




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




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




The
      agreement contains customary confidentiality provisions.


61




**Indemnification
      of Directors and Officers**




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




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




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




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




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




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




**Committees
      of the Board of Directors**




Our
      Board
      of Directors has established the following committees:




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




62




Our
      Audit
      Committee currently consists of three board members, each of whom satisfies
      the
“independence” requirements of the Securities and Exchange Commission, NASDAQ
      Marketplace Rules and ASX Rules. Our Audit Committee is currently composed
      of
      Messrs. Peter Marks, Brian Meltzer and George Mihaly. Our Board of Directors
      has
      determined that Mr. Brian Meltzer qualifies as a financial expert. The audit
      committee meets at least four times per year.




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




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




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




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


63




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




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




**D.**  **EMPLOYEES**




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




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




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




As
      of
      June 30, 2005, except for one employee located in the United States, all of
      our
      employees were located in Australia. Such U.S. employee ceased working for
      our
      company in August 2005. As of June 30, 2006 and 2004 all of our employees were located
      in Australia . ****




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


64




**E.**  **SHARE
      OWNERSHIP**




**Beneficial
      Ownership of Executive Officers and Directors**




The
      following table sets forth certain information as of September 21, 2006
      regarding the beneficial ownership of our ordinary shares by each of our
      directors and executive officers and by all of our directors and executive
      officers as a group:




Name
              
              Number
                  of Ordinary Shares
                Beneficially
                  Owned (1)
              
              Percentage
                  of
                Ownership
                  (2)Geoffrey
                  P. Kempler
              
              18,055,000
              (3)(4)
              
              14.06%Richard
                  Revelins
              
              592,808
              (5)(6)
              
              *Ross
                  T. Murdoch
              
              50,000
              (7)
              
              *Dianne
                  Angus
              
              -
              
              
              *Peter
                  Marks
              
              343,111
              (8)(9)
              
              *Colin
                  L. Masters
              
              1,184,666
              (10)(11)
              
              *Brian
                  D. Meltzer
              
              626,666
              (12)(13)
              
              *George
                  W. Mihaly
              
              526,666
              (14)(15)
              
              *All
                  directors and executive officers as a group (eight persons)
              
              21,378,917
              (16)
              
              16.65%




*  Less
        than
        1%




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




(2)
            The
                percentages shown are based on 128,394,260 ordinary shares issued
                and
                outstanding as of September 21,
                2006.




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




(4)
            Includes
                1,000,000 ordinary shares issuable upon the exercise of currently
                exercisable options for nil consideration on or before June 30, 2010
                granted under the 2004 ASX Plan (as defined below). These options
                may not
                be exercised unless the price of our ordinary shares has achieved
                and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.




(5)
            Held
                by Darontack Pty Ltd., an Australian corporation owned by Mr. Revelins.




65




(6)
            Includes
                options to purchase 500,000 ordinary shares exercisable at A$0.50
                on or
                before December 17, 2007 granted under the 2004 ASX Plan (as defined
                below), held by Darontack Pty Ltd., an Australian corporation owned
                by Mr.
                Revelins.




(7)
            Such
                shares are held by Angela Murdoch, Dr. Murdoch’s wife. Dr. Murdoch
                disclaims beneficial ownership of the ordinary shares held by his
                wife
                Angela Murdoch.




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




(9)
            Includes
                options to purchase 300,000 ordinary shares at nil consideration
                on or
                before June 30, 2010 granted under the 2004 ASX Plan (as defined
                below).
                These options may not be exercised unless the price of our ordinary
                shares
                has achieved and maintained a minimum value of A$1.00 for five consecutive
                trading days.




(10)
            Of
                such shares,****166,666
                ordinary shares are held directly by Dr. Masters,****16,000
                ordinary shares are held by Helen Masters, Dr. Masters’ wife, 1,000
                ordinary shares are held by Seth Masters, Dr. Masters’ son, and 1,000
                ordinary shares are held by Kate Masters, Dr. Masters’ daughter. Dr.
                Masters disclaims beneficial ownership of the ordinary shares held
                by his
                wife, Helen Masters, and children, Seth Masters and Kate
                Masters.




(11)
            Includes
                options to purchase 1,000,000 ordinary shares at nil consideration
                on or
                before June 30, 2010 granted under the 2004 ASX Plan. These options
                may
                not be exercised unless the price of our ordinary shares has achieved
                and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.




(12)
            Of
                such shares, 326,666 ordinary shares are held by Navon Pty Ltd.,
                an
                Australian corporation owned by Mr. Meltzer.




(13)
            Includes
                300,000 ordinary shares issuable upon the exercise of currently
                exercisable options for nil consideration on or before June 30, 2010
                granted under the 2004 ASX Plan (as defined below). These options
                may not
                be exercised unless the price of our ordinary shares has achieved
                and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.




(14)
            Of
                such shares 166,666 ordinary shares are held directly by Dr. Mihaly,
                52,000 ordinary shares are held of record by Waide Pty Ltd., an Australian
                corporation owned by Dr. Mihaly, and 4,000 ordinary shares are held
                by
                each of Kieren Mihaly and Warwick Mihaly, Dr. Mihaly’s sons. Dr. Mihaly
                disclaims beneficial ownership of the ordinary shares held by his
                sons,
                Kieren Mihaly and Warwick Mihaly.




(15)
            Includes
                300,000 ordinary shares issuable upon the exercise of currently
                exercisable options for nil consideration on or before June 30, 2010
                granted under the 2004 ASX Plan (as defined below). These options
                may not
                be exercised unless the price of our ordinary shares has achieved
                and
                maintained a minimum value of A$1.00 for five consecutive trading
                days.




(16)
            See
                Footnotes (3) - (15).




66




**Stock
      Option Plans**




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




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




On
      June
      30, 2005, all outstanding options granted under the 2000 Plan expired and we
      do
      not intend to grant any further options under the 2000 Plan.




***2004
      Option Plans***




In
      November 2004, we adopted the 2004
      Employees’, Directors’ and Consultants’ Share and Option Plan (the
      “2004 ASX Plan”) and the 2004
      American Depository Share (ADS) Option Plan (the
      “2004 ADS Plan”; and together with the 2004 ASX Plan, the “2004 Plans”). Under
      the 2004 ASX Plan we may issue ordinary shares traded on the ASX, and under
      the
      2004 ADS Plan we may issue American Depository Shares (“ADSs”) listed on the
      NASDAQ Capital Market. We were initially authorized to issue under the 2004
      Plans up to an aggregate 12,000,000 ordinary shares or ADSs representing
      12,000,000 ordinary shares. In November 2005, our shareholders approved an
      amendment to the 2004 Plans to provide for the issuance thereunder of an
      additional 10,000,000 ordinary shares (or ADSs representing 10,000,000 ordinary
      shares), so that we may issue under the 2004 Plans up to an aggregate 22,000,000
      ordinary shares or ADSs representing 22,000,000 ordinary shares. Any increase
      in
      such maximum number of ordinary shares or ADSs issuable under the 2004 Plans
      is
      subject to shareholder approval.




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




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




67




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




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




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




68




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




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




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




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




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




69




In
      addition, as of June 30, 2006, 428,439 ordinary shares have been issued under
      the ASX Plan that were not subject to options.




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




**A.**  **MAJOR
      SHAREHOLDERS**




The
      following table sets forth certain information, as of September 21, 2006,
      regarding the beneficial ownership by all shareholders known to us to own
      beneficially more than 5% of our ordinary shares.




Name
            
            Number
                of Ordinary Shares Beneficially Owned (1)
            
            Percentage
                of Outstanding Ordinary Shares (2)Geoffrey
                P. Kempler
            
            18,055,000
            (3)(4)
            
            14.06%Jagen
                Nominees Pty Ltd
            
            14,008,500
            (5)
            
            10.91%







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




(2)
            The
                percentages shown are based on 128,394,260 ordinary shares issued
                and
                outstanding as of September 21, 2006.




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




70




(4)
            Includes
                1,000,000 ordinary shares issuable upon the exercise of options,
                  exercisable for nil consideration on or before June 30, 2010 granted
                under
                the 2004 ASX Plan. These options may not be exercised until December
                17,
                2005 and thereafter, only if the price of our ordinary shares has
                achieved
                and maintained a minimum value of A$1.00 for five consecutive trading
                days.




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




**Major
      Shareholders Voting Rights**




Our
      major
      shareholders do not have different voting rights.




**Record
      Holders**




As
      of
      September 21, 2006, there were 2,158 holders of record of our ordinary shares,
      of which seven record holders, holding approximately 0.25% of our ordinary
      shares, had registered addresses in the United States .
      These
      numbers are not representative of the number of beneficial holders of our shares
      nor are they representative of where such beneficial holders reside, since
      many
      of these ordinary shares were held of record by brokers or other nominees.
      The
      majority of trading by our U.S. investors is done by means of ADRs that are
      held
      of record by ANZ Nominees Ltd., which held 46.03% of our ordinary shares as
      of
      such date.




**B.**  **RELATED
      PARTY
      TRANSACTIONS**




Dr.
      Mihaly served as a director of Kendle, formerly known as Synermedica Pty Ltd.,
      until December 2004. Kendle provides analysis and review of the
      commercialization of our technology, intellectual property management and
      clinical trial management and monitoring. An ongoing agreement at normal
      commercial rates that is terminable at will exists between us and Kendle, with
      costs incurred on a daily basis **.** We
      paid
      Kendle A$379,045 for services it provided to us in fiscal year 2004 and
      A$577,757 for services it provided to us in fiscal year 2005 until December
      31,
      2004.




Aroma
      Science, a company owned by Mr. Kempler, provided us with computer,
      administration and meeting facilities. We paid Aroma Science A$81,470 for its
      services in the fiscal year ended June 30, 2004. These services have ceased
      to
      be provided to us since our Australian office moved to new premises in June
      2004.




See
      Note
      21 to the consolidated financial statements.




**C.**  ****I****NTERESTS********OF****E****XPERTS****A****ND****C****OUNSEL****




Not
      applicable.




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


**A.**  **FINANCIALSTATEMENTSANDOTHERFINANCIALINFORMATION**




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


71




**Legal
      Proceedings**




We
      are
      not involved in any material legal proceedings.




**Dividend
      Distribution Policy**




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




**B.**  **SIGNIFICANTCHANGES**




There
      have been no significant changes in the operation or financial condition of
      our
      company since June 30, 2006.




**ITEM
        9.** **THE OFFER AND LISTING**
  **A.**  **OFFERAND
        LISTINGDETAILS**




**Australian
      Stock Exchange**




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




Per
                Ordinary Share (A$)High
            
            LowFiscal
                Year Ended June 30,2002
            
            2.60
            
            
            0.502003
            
            2.39
            
            
            0.442004
            
            1.18
            
            
            0.452005
            
            0.70
            
            
            0.132006
            
            0.30
            
            
            0.15Fiscal
                Year Ended June 30, 2006:First
                Quarter
            
            0.23
            
            
            0.15Second
                Quarter
            
            0.30
            
            
            0.16Third
                Quarter
            
            0.245
            
            
            0.19Fourth
                Quarter
            
            0.24
            
            
            0.16Fiscal
                Year Ended June 30, 2005:First
                Quarter
            
            0.69
            
            
            0.49Second
                Quarter
            
            0.70
            
            
            0.51Third
                Quarter
            
            0.60
            
            
            0.43Fourth
                Quarter
            
            0.48
            
            
            0.13Month
                Ended:March
                2006
            
            0.22
            
            
            0.19April
                2006
            
            0.24
            
            
            0.16May
                2006
            
            0.225
            
            
            0.16June
                2006
            
            0.215
            
            
            0.16July
                2006
            
            0.49
            
            
            0.18August
                2006
            
            0.385
            
            
            0.26




72





**NASDAQ
      Capital Market**




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




Per
                ADR (US$)High
            
            LowFiscal
                Year Ended June 30,2003
                (from September 5, 2002)
            
            
            12.80
            
            
            2.962004
            
            
            10.50
            
            
            2.952005
            
            
            5.19
            
            
            0.982006
            
            
            2.40
            
            
            1.20Fiscal
                Year Ended June 30, 2006:First
                Quarter
            
            
            1.73
            
            
            1.20Second
                Quarter
            
            
            2.40
            
            
            1.21Third
                Quarter
            
            
            1.85
            
            
            1.30Fourth
                Quarter
            
            
            1.89
            
            
            1.35Fiscal
                Year Ended June 30, 2005:First
                Quarter
            
            
            5.19
            
            
            3.40Second
                Quarter
            
            
            5.05
            
            
            3.70Third
                Quarter
            
            
            4.99
            
            
            3.36Fourth
                Quarter
            
            
            3.55
            
            
            0.98Month
                Ended:March
                2006
            
            
            1.69
            
            
            1.30April
                2006
            
            
            1.89
            
            
            1.43May
                2006
            
            
            1.75
            
            
            1.45June
                2006
            
            
            1.89
            
            
            1.35July
                2006
            
            
            3.05
            
            
            1.35August
                2006
            
            
            3.06
            
            
            2.05




73




**B.**  **PLANOF
      DISTRIBUTION**




Not
      applicable.




**C.**  **MARKETS**




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




**D.** **SELLING
      SHAREHOLDERS**




Not
      applicable.




**E.**  **DILUTION**




Not
      applicable.




**F.**  **EXPENSESOFTHE
      ISSUE**




Not
      applicable.




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




**A.**  **SHARE
      CAPITAL**




Not
      applicable.




**B.** **MEMORANDUMAND
      ARTICLESOF
      ASSOCIATION******




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




**C.**  **MATERIAL
      CONTRACTS**




Effective
      as of December 1, 2003, we entered into a research funding and intellectual
      property assignment agreement with the University of Melbourne under which
      the
      University of Melbourne agrees to conduct certain research projects on our
      behalf. The agreement is for a period of three years and expires in December
      2006. 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. In addition, 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 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.




74




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




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




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.”




Under
      the
      terms of a strategic alliance agreement that we entered into with Kendle dated
      January 6, 2004, Kendle provides us with consultancy services in relation to
      the
      co-ordination, planning and management of intellectual property, research and
      development, planning, management and commercialization strategy. Kendle
      provides its services to us at a rate of A$70 to A$210 per hour, depending
      on
      the seniority of the consultant. For the years ended June 30, 2006 and 2005,
      we
      paid Kendle A$126,981 and A$878,226, respectively.




75


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$48,229 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.




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




**D.**  **EXCHANGE
      CONTROLS**




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




**The
      Foreign Acquisitions and Takeovers Act 1975**




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




76




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




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




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




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




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




**E.**  **TAXATION**




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




77




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




**AUSTRALIAN
      TAX
      CONSEQUENCES**




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




**Nature
      of ADSs for Australian Taxation Purposes**




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




**Taxation
      of Dividends**




Australia
      operates a dividend imputation system under which dividends may be declared
      to
      be ‘franked’ to the extent of tax paid on company profits. Fully franked
      dividends are not subject to dividend withholding tax. Dividends that are not
      franked or are partly franked and are paid to non-Australian resident
      stockholders are subject to dividend withholding tax, but only to the extent
      the
      dividends are not franked.




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




78




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




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




Under
      a
      proposed amendment to Australian tax law that is currently before Federal
      Parliament, if enacted, the exemption for non-resident stockholders would be
      extended. If enacted in the current draft form, non-Australian resident
      stockholders will not be subject to Australian capital gains tax on the capital
      gain made on a disposal of our shares, unless they, together with associates,
      hold 10% or more of our issued capital, tested either at the time of disposal
      or
      over any continuous 12 month period in the 24 months prior to disposal, and
      the
      value of our shares at the time of disposal are wholly or principally
      attributable to Australian real property assets.




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




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




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




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




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




79




**Dual
      Residency**




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




**Stamp
      Duty**




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




**Australian
      Death Duty**




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




**Goods
      and Services Tax**




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




**UNITEDSTATESFEDERALINCOME
      TAX
      CONSEQUENCES** ****




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




80




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




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




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




**Taxation
      of Dividends**




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




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




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




81




Subject
      to certain limitations, “qualified dividend income” received by a noncorporate
      U.S. Holder in tax years beginning on or before December 31, 2010 will be
      subject to tax at a reduced maximum tax rate of 15 percent. Distributions
      taxable as dividends paid on the underlying shares represented by the ADRs
      should qualify for the 15 percent rate provided that either: (i) we are entitled
      to benefits under the Tax Treaty or (ii) the ADRs are readily tradable on an
      established securities market in the United States and certain other
      requirements are met. We believe that we are entitled to benefits under the
      Tax
      Treaty and that the ADRs currently are readily tradable on an established
      securities market in the United States. However, no assurance can be given
      that
      the ADRs will remain readily tradable. The rate reduction does not apply unless
      certain holding period requirements are satisfied. With respect to the ADRs,
      the
      U.S. Holder must have held such ADRs for at least 61 days during the 121-day
      period beginning 60 days before the ex-dividend date. The rate reduction also
      does not apply to dividends received from passive foreign investment companies,
      see discussion below, or in respect of certain hedged positions or in certain
      other situations. The legislation enacting the reduced tax rate contains special
      rules for computing the foreign tax credit limitation of a taxpayer who receives
      dividends subject to the reduced tax rate. U.S. Holders of ADRs should consult
      their own tax advisors regarding the effect of these rules in their particular
      circumstances.




**Disposition
      of ADRs**




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




82




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




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




**Passive
      Foreign Investment Companies**




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




For
      U.S.
      federal income tax purposes, we will be classified as a PFIC for any taxable
      year in which either (i) 75% or more of our gross income is passive income,
      or
      (ii) at least 50% of the average value of all of our assets for the taxable
      year
      produce or are held for the production of passive income. For this purpose,
      cash
      is considered to be an asset which produces passive income. Passive income
      generally includes dividends, interest, royalties, rents, annuities and the
      excess of gains over losses from the disposition of assets which produce passive
      income. As a result of our substantial cash position and the decline in the
      value of our stock, we believe that we became a PFIC during the taxable year
      ended June 30, 2005, and will once again qualify as a PFIC for the taxable
      year
      ended June 30, 2006, under a literal application of the asset test that looks
      solely to market value.




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




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




83


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




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




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




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




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




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




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




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




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




If
      the
      ADRs are considered “marketable stock” and if you elect to “mark-to-market” your
      ADRs, you would not be subject to the rules described above. Instead, you will
      generally include in income any excess of the fair market value of the ADRs
      at
      the close of each tax year over your adjusted basis in the ADRs. If the fair
      market value of the ADRs had depreciated below your adjusted basis at the close
      of the tax year, you may generally deduct the excess of the adjusted basis
      of
      the ADRs over its fair market value at that time. However, such deductions
      generally would be limited to the net mark-to-market gains, if any, that you
      included in income with respect to such ADRs in prior years. Income recognized
      and deductions allowed under the mark-to-market provisions, as well as any
      gain
      or loss on the disposition of ADRs with respect to which the mark-to-market
      election is made, is treated as ordinary income or loss (except that loss is
      treated as capital loss to the extent the loss exceeds the net mark-to-market
      gains, if any, that a U.S. Holder included in income with respect to such
      ordinary shares in prior years). However, gain or loss from the disposition
      of
      ordinary shares (as to which a “mark-to-market” election was made) in a year in
      which we are no longer a PFIC, will be capital gain or loss. Our ADRs should
      be
      considered “marketable stock” if they traded at least 15 days during each
      calendar quarter of the relevant calendar year in more than de minimis
      quantities.




84




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




**Backup
      Withholding and Information Reporting**




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




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




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




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




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




**F.**  **DIVIDENDSAND
      PAYINGAGENTS**




Not
      applicable.




**G.**  **STATEMENTBY
      EXPERTS**




Not
      applicable.


85




**H.**  **DOCUMENTSON
      DISPLAY**




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




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




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




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




**I.**  **SUBSIDIARY
      INFORMATION**




Not
      applicable.




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




We
      invest
      our excess cash in interest-bearing accounts and time deposits with banks in
      Australia **.** Our
      management believes that the financial institutions that hold our investments
      are financially sound and accordingly, minimal credit risk exists with respect
      to these investments. Certain of our cash equivalents are subject to interest
      rate risk. Due to the short duration and conservative nature of these
      instruments, we do not believe that we have a material exposure to interest
      rate
      risk. Our major market risk is changes in foreign exchange rates as we have
      approximately A$5,943,335 million in time deposits held in U.S. dollars as
      of
      June 30, 2006. A hypothetical 10% adverse movement in end-of-period exchange
      rates would reduce the cash balance by approximately A$594,334.




86




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




We
      conduct our activities almost exclusively in Australia. However, we are required
      to make certain payments in U.S. dollars and other currencies. A hypothetical
      10% adverse movement in end-of-period exchange rates could have a material
      impact on our operating results. At June 30, 2006, we had US$253,213 and
      EUR$168,428 in payables. A hypothetical 10% adverse movement in the U.S. and
      EUR
      exchange rates could increase the cost of these payables by
      A$63,656.




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




Not
      applicable.




**PART
      II**




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




Not
      applicable.




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




Not
      applicable




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




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




87




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




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


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




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


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




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


**Fees
      Paid to Principal Accountants**




The
      following table sets forth, for each of the years indicated, the fees paid
      to
      our principal independent registered public accounting firm, Deloitte
      Touche Tohmatsu, the other member firms of Deloitte Touche Tohmatsu and their
      respective affiliates.





Year
                Ended June 30,2006
            
            2005Services
                Rendered
            
            Fees
            
            FeesAudit
                (1)
            
            
            A$202,599
            
            
            A$175,481Audit-related
            
            
            —
            
            
            —Tax
                (2)
            
            
            A$185
            
            
            A$11,631Other
                (3)
            
            
            A$3,030
            
            
            A$14,920Total
            
            
            A$205,814
            
            
            A$202,032





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


88




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





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





****   **Pre-Approval
      Policies and Procedures**




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




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




Not
      applicable.




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


**Issuer
      Purchase of Equity Securities**




Neither
      we, nor any affiliated purchaser of our company, has purchased any of our
      securities during the year ended June 30, 2006.




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




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


89





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





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


90




4.7
            
            Form
                of Second Research Funding and Intellectual Property Assignment Agreement
                dated December 1, 2003, between the Registrant and The University
                of
                Melbourne4.8
            
            Letter
                agreement dated January 6, 2004, between the Registrant and Kendle
                Pty
                Ltd. regarding strategic alliance (7)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
                Murdoch8.1
            
            List
                of Subsidiaries of the Registrant12.1
            
            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




91







(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.




(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.




92


**PRANA
      BIOTECHNOLOGY LIMITED**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





F-0





**[LETTERHEAD
      OF DELOITTE TOUCHE TOHMATSU]**




**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.


/s/
      Deloitte Touche Tohmatsu


**DELOITTE
      TOUCHE TOHMATSU**




CCA
        MOTTERSHEAD
 Partner




Chartered
      Accountants


Melbourne,
      Australia


29
      September 2006




F-1




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


**CONSOLIDATED
      BALANCE SHEET**


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





**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**Provisions
            
            
            10
            
            
            76,766
            
            
            45,200**Total
                Non-Current Liabilities**
            
            
            
            
            
            76,766
            
            
            45,200**Total
                Liabilities**
            
            
            
            
            
            1,691,796
            
            
            2,694,983Commitments
                and contingencies
            
            
            11**Net
                Assets**
            
            
            
            
            
            8,729,350
            
            
            19,594,176**Equity**Issued
                capital
              2006:
                128,144,260 fully paid ordinary shares
              2005:
                127,319,260 fully paid ordinary shares
            
            
            12
            
            
            55,097,675
            
            
            54,662,445Reserves
            
            
            13
            
            
            2,867,249
            
            
            2,447,996Accumulated
                deficit during the development stage
            
            
            14
            
            
            (49,235,574
            )
            
            (37,516,265
            )**Total
                Equity**
            
            
            
            
            
            8,729,350
            
            
            19,594,176




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)**





**Years
                ended********June
                30,**Notes
            
            **2006**
            
            **2005**Revenues
            
            
            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
            )**Loss
                before income tax expense**
            
            
            
            
            
            (11,719,309
            )
            
            (16,094,428
            )**Income
                tax expense**
            
            
            5
            
            
            -
            
            
            -**Net
                loss**
            
            
            14
            
            
            (11,719,309
            )
            
            (16,094,428
            )**Loss
                per share**
              **(basic
                and diluted)**
            
            
            19
            
            
            (0.09
            )
            
            (0.13
            )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,**Notes
            
            **2006**
            
            **2005****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)**




**Notes**
            
            **Number
                of Shares**
            
            **Issued
                Capital**
            
            **Share
                Based Payment Reserve**
            
            **Accumulated**
              **Deficit
                During Development Stage**
            
            **Total****Balance,
                June 30, 2004**
            
            
            
            
            
            115,984,380
            
            
            49,505,493
            
            
            -
            
            
            (21,421,837
            )
            
            28,083,656Net
                loss
            
            
            14
            
            
            -
            
            
            -
            
            
            -
            
            
            (16,094,428
            )
            
            (16,094,428
            )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
            
            
            54,662,445
            
            
            2,447,996
            
            
            (37,516,265
            )
            
            19,594,176Net
                loss
            
            
            14
            
            
            -
            
            
            -
            
            
            
            
            
            (11,719,309
            )
            
            (11,719,309
            )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
            
            
            55,097,675
            
            
            2,867,249
            
            
            (49,235,574
            )
            
            8,729,350





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 have accumulated losses
      of $49,235,574, and have incurred negative cash flows from operations of
      $11,651,215, in the current year. The consolidated entity have 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 do not have sufficient cash resources to fund their
      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 have been able to raise funds
                to
                advance their research processes. To date, the consolidated entity
                have
                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 going concerns 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 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 intercompany 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.





**(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.





**Consolidated****Effect
                of A-IFRS on the balance sheet as at July 1, 2004**
            
            
            
            **Superseded
                Policies 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**Provisions
            
            
            
            
            
            8,292
            
            
            -
            
            
            8,292**Total
                Non-current Liabilities**
            
            8,292
            
            
            -
            
            
            8,292Commitments
                and Contingencies**Total
                Liabilities**
            
            
            
            
            
            2,712,839
            
            
            -
            
            
            2,712,839**Net
                assets**
            
            
            
            
            
            38,702,559
            
            
            (10,618,903
            )
            
            28,083,656**Equity**Issued
                capital
            
            
            
            
            
            49,505,493
            
            
            -
            
            
            49,505,493Reserves
            
            
            (b)
            
            
            14,661,942
            
            
            (14,661,942
            )
            
            -Accumulated
                deficit during the development stage
            
            
            (d)
            
            
            (25,464,876
            )
            
            4,043,039
            
            
            (21,421,837
            )**Total
                Equity**
            
            
            
            
            
            38,702,559
            
            
            (10,618,903
            )
            
            28,083,656




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)**





**Consolidated****Effect
                of A-IFRS on the balance sheet as at June 30,
                2005**
            
            
            
            **Superseded
                Policies 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**Provisions
            
            
            
            
            
            45,200
            
            
            -
            
            
            45,200**Total
                Non-Current Liabilities**
            
            45,200
            
            
            -
            
            
            45,200Commitments
                and Contingencies**Total
                Liabilities**
            
            
            
            
            
            2,694,983
            
            
            -
            
            
            2,694,983**Net
                Assets**
            
            
            
            
            
            19,594,176
            
            
            -
            
            
            19,594,176**Equity**Issued
                capital
            
            
            (a)
            
            
            55,405,707
            
            
            (743,262
            )
            
            54,662,445Reserves
            
            
            (a)
                & (b)
            
            
            14,661,942
            
            
            (12,213,946
            )
            
            2,447,996Accumulated
                deficit during the development stage
            
            
            (d)
            
            
            (50,473,473
            )
            
            12,957,208
            
            
            (37,516,265
            )**Total
                Equity**
            
            
            
            
            
            19,594,176
            
            
            -
            
            
            19,594,176


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)**





**Consolidated****Effect
                of A-IFRS on the statement of operations for the financial year ended
                June
                30, 2005**
            
            
            
            **Superseded
                Policies****1**
            
            **Adjustment
                on introduction 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
            )**LOSS
                BEFORE INCOME TAX EXPENSE**
            
            (25,008,597
            )
            
            8,914,169
            
            
            (16,094,428
            )**INCOME
                TAX EXPENSE**
            
            
            
            
            
            -
            
            
            -
            
            
            -**NET
                LOSS**
            
            
            
            
            
            (25,008,597
            )
            
            8,914,169
            
            
            (16,094,428
            )




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 *Financial
      Instruments: Disclosure and Presentation* and
      AASB
      139 *Financial
      Instruments: Recognition and Measurement* to July
      1, 2005. This standard had nil effect on the financial statements of the
      consolidated entity.





(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
            )Total
                adjustment to accumulated deficit
            
            
            12,957,208
            
            
            4,043,039





(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%)
            
            
            (3,515,793
            )
            
            (4,828,328
            )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
            
            
            778,197Other
            
            
            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)
            
            
            55,097,675
            
            
            54,662,445Warrants
                over ADRs
            
            
            11(c)
            
            
            -
            
            
            -55,097,675
            
            
            54,662,445





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




**June
                    30,****2006**
                
                **2005****Number
                    of Shares**
                
                $
                
                **Number
                    of Shares**
                
                **$**Beginning
                    of the year
                
                
                127,319,260
                
                
                54,662,445
                
                
                115,984,380
                
                
                49,505,493Movement
                    during the year
                
                
                825,000
                
                
                435,230
                
                
                11,334,880
                
                
                5,156,952End
                    of the year
                
                
                128,144,260
                
                
                55,097,675
                
                
                127,319,260
                
                
                54,662,445





Details
      of share issuances are as follows:


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





(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)**  **Movement
      in warrants**


**Years
                  Ended June 30,****2006**
              
              **2005****Number
                  of Warrants**
              
              **Comp.**
                **Expense
                  ($)**
              
              **Number
                  of Warrants**
              
              **Comp.**
                **Expense
                  ($)**Beginning
                  of the year
              
              
              3,000,000
              
              
              -
              
              
              3,000,000
              
              
              -Issued
                  during the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -End
                  of the year
              
              
              3,000,000
              
              
              -
              
              
              3,000,000
              
              
              -





**(d)
                Terms and conditions of contributed equity**Ordinary
                sharesOrdinary
                shares have the right to receive dividends as declared and, in the
                event
                of winding up the Company, to participate in the proceeds from the
                sale of
                all surplus assets in proportion to the number of and amounts paid
                up on
                shares held. Ordinary shares entitle their holder to one vote, either
                in
                person or by proxy, at a meeting of the Company.Options
                and warrantsOption
                holders and warrant holders do not have the right to receive dividends
                and
                are not entitled to vote at a meeting of the Company. Options and
                warrants
                may be exercised at any time from the date they vest to the date
                of their
                expiry. Share options convert into ordinary shares on a one for one
                basis
                on the date they are exercised. Warrants and US options convert into
                ADRs,
                being one warrant or US option for one ADR, which equals ten ordinary
                shares, on the date they are
                exercised.





**(e)****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
            
            
            12(b
            )
            
            898,252
            
            
            478,999Options
                over ADRs
            
            
            12(c
            )
            
            1,515,434
            
            
            1,515,434Warrants
                over ADRs
            
            
            12(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
                  of Options**
              
              **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 11(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
                    of Options**
                
                **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
            
            
            (37,516,265
            )
            
            (21,421,837
            )Net
                loss for the year
            
            
            (11,719,309
            )
            
            (16,094,428
            )Balance
                at end of year
            
            
            (49,235,574
            )
            
            (37,516,265
            )


**15.****CASH
                FLOW STATEMENT****(a)****Reconciliation
                of the net loss to the net cash flows from
                operations**Net
                loss
            
            
            (11,719,309
            )
            
            (16,094,428
            )**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
            
            
            -
            
            
            786,240Loss
                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
      COMMITTMENTS**





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**




**Years
                Ended June 30,**Notes
            
            **2006**
            
            **2005****(a)****Employee
                Entitlements**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**




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





**Years
                Ended June 30,****2006**
            
            **2005****19.****LOSS
                PER SHARE**Basic
                and diluted loss per share
            
            
            (0.09
            )
            
            (0.13
            )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
                Director        Appointed 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.





Post-EmploymentShort
                Term Benefits
            
            Superannuation
            
            Equity2006
              Directors’
                Remuneration
            
            Base
                Fee
              $
            
            Bonus
              $
            
            Contribution
              $
            
            Options
              $
            
            Total
              $Geoffrey
                Kempler1
                & 3
            
            
            334,545
            
            
            100,000
            
            
            33,455
            
            
            92,770
            
            
            560,770Colin
                Masters2
            
            
            115,000
            
            
            -
            
            
            -
            
            
            16,775
            
            
            131,775Brian
                Meltzer1
            
            
            97,569
            
            
            -
            
            
            7,431
            
            
            27,831
            
            
            132,831George
                Mihaly1
            
            
            105,000
            
            
            -
            
            
            -
            
            
            27,831
            
            
            132,831Peter
                Marks2
            
            
            75,000
            
            
            -
            
            
            -
            
            
            5,033
            
            
            80,033727,114
            
            
            100,000
            
            
            40,886
            
            
            170,240
            
            
            1,038,240




1 This
      equity was issued as per the AGM held on November 17, 2004. As per 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
            
            Post-EmploymentBase
                Fee
            
            Superannuation
            
            Equity
            
            Termination2005
              Directors’
                Remuneration
            
            Cash
              $
            
            Shares
              $
            
            Contribution
              $
            
            Options
              $
            
            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)





Post-EmploymentShort
                Term Benefits
            
            Superannuation
            
            Equity2006
              Executives’
                Remuneration
            
            Base
                Fee
              $
            
            Bonus
              $
            
            Contribution
              $
            
            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.





Post-EmploymentShort
                Term Benefits
            
            Superannuation
            
            Equity2005
              Executives’
                Remuneration
            
            Base
                Fee
              $
            
            Bonus
              $
            
            Contribution
              $
            
            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
                
                Signed
                  June 15, 2005
              
              For
                  Good Reason Mr. Kempler may terminate with
                30
                  days notice
              
              *pay
                  remuneration entitlements up to June 1, 2010
                *accrued
                  entitlements, bonuses and equity issues
                *accelerate
                  the vesting of any unvested options
              
              The
                  Company will pay Mr Kempler a bonus in the amount of A$100,000
                  for
                  achievement of the satisfactory completion of a successful Phase
                  One trial
                  within the timeframe specified by the Company Strategic Plan (achieved
                  financial year 2006) and a further A$100,000 bonus for the satisfactory
                  completion of a proof of concept study such as a Phase Two (A)
                  trial on
                  efficacy and dosage.
              
              Entitlement
                  under contract at 2005 AGM not exercised.Without
                  Good Reason Mr. Kempler may terminate with
                90
                  days notice
              
              *Bonus
                  pro-rated only if termination occurs in 1styearWithout
                  Cause the Company may terminate with
                90
                  days notice
              
              *pay
                  remuneration entitlements up to June 1, 2010
                *accrued
                  entitlements, bonuses and equity issues
                *accelerate
                  the vesting of any unvested optionsWith
                  Cause the Company may terminate without notice
              
              *Bonus
                  pro-rated only if termination occurs in 1styear




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
                
                Signed
                  August 7, 2006
              
              For
                  Good Reason Dr Murdoch may terminate with
                30
                  days notice
              
              *
                  pay remuneration entitlements up to 29 May 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
              
              Nil.
              
              1,250,000
                  options with zero exercise 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. The options will expire 8 years from date of grant, being
                  August 7,
                  2014 and can not be exercised until the share price achieves a
                  minimum
                  value of A$0.40 for five consecutive trading days..Without
                    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
                  terminationWithout
                  Cause the Company may terminate with
                120
                  days notice
              
              *
                  pay remuneration entitlements up to May 29, 2008 or if termination
                  occurs
                  after May 29, 2007, then 1 year from the time of termination (less
                  any
                  payout made for the notice period). The Company can elect to pay
                  such sum
                  as cash, equity in the Company or as a combination of both cash
                  and
                  equity.
                *
                  accrued entitlements
                *
                  accelerate the vesting of any unvested optionsWith
                  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)**


**As
                of and For the Years Ended June 30,****2006**
            
            **2005****21.****AUDITORS’
                REMUNERATION**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.




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





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





Fully
                Paid Ordinary Shares of
              Prana
                Biotechnology Ltd
            
            Balance
                July 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
            
            Balance
                July 1, 2004
            
            Received
                as Remuneration
            
            Received
                on Exercise of Options
            
            Net
                Change Other
            
            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
            
            Balance
              July
                1, 2005
              No.
            
            Granted
                as Remuneration
              No.
            
            Options
                Exercised
              No.
            
            Options
                Sold
              No.
            
            Options
                Expired
              No
            
            Balance
              June
                30, 2006
              No.
            
            Total
                Exercisable
              June
                30, 2006
              No.
            
            Total
                Not
              Exercisable
                June 30, 2006
              No.Geoffrey
                Kempler
            
            
            1,000,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,000,000
            
            
            -
            
            
            1,000,000Colin
                Master
            
            
            -
            
            
            1,000,000
            
            
            -
            
            
            -
            
            
            -
            
            
            1,000,000
            
            
            -
            
            
            1,000,000Brian
                Meltzer
            
            
            300,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            300,000
            
            
            -
            
            
            300,000George
                Mihaly
            
            
            300,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            300,000
            
            
            -
            
            
            300,000Peter
                Marks
            
            
            -
            
            
            300,000
            
            
            -
            
            
            -
            
            
            -
            
            
            300,000
            
            
            -
            
            
            300,000Richard
                Revelins
            
            
            500,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            500,000
            
            
            500,000
            
            
            -Ross
                Murdoch
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Dianne
                Angus
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -2,100,000
            
            
            1,300,000
            
            
            -
            
            
            -
            
            
            -
            
            
            3,400,000
            
            
            500,000
            
            
            2,900,000




Share
                Options of
              Prana
                Biotechnology Ltd
            
            Balance
              July
                1, 2004
              No.
            
            Granted
                as Remuneration
              No.
            
            Options
                Exercised
              No.
            
            Options
                Sold
              No.
            
            Options
                Expired
              No
            
            Balance
              June
                30, 2005
              No.
            
            Total
                Exercisable
              June
                30, 2005
              No.
            
            Total
                Not
              Exercisable
                June 30, 2005
              No.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-Interest
                bearing**
            
            **Total**
            
            **Average
                Interest 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
            
            
            153,438-
            
            
            -
            
            
            -
            
            
            1,691,796
            
            
            1,691,796





**June
                30, 2005**
            
            **Floating**
              **Interest
                Rate**
            
            **Fixed
                Interest**
              **Maturing
                in**
            
            **Non-Interest
                bearing**
            
            **Total**
            
            **Average
                Interest Rate****1
                year**
              **or
                less**
            
            **1-5
                years**Financial
                AssetsCash
            
            
            1,162,877
            
            
            20,290,227
            
            
            -
            
            
            200
            
            
            21,453,304
            
            
            4.57
            %Receivables
            
            
            -
            
            
            -
            
            
            -
            
            
            174,476
            
            
            174,476
            
            
            -1,162,877
            
            
            20,290,227
            
            
            -
            
            
            174,676
            
            
            21,627,780Financial
                LiabilitiesPayables
            
            
            -
            
            
            -
            
            
            -
            
            
            2,571,181
            
            
            2,571,181
            
            
            -Provisions
            
            
            -
            
            
            -
            
            
            -
            
            
            123,802
            
            
            123,802
            
            
            --
            
            
            -
            
            
            -
            
            
            2,694,983
            
            
            2,694,983





**(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)**


**23.**  **FINANCIAL
      INSTRUMENTS (continued)**





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




Financial
      assets, which potentially expose the consolidated entity to concentrations
      of
      credit risk, consist primarily of cash and 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 ParadeArmadaleVic3143
            
            ParkvilleVic3052Australia
            
            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




**Years
                Ended June 30,****2006**
            
            **2005**Net
                loss in accordance with A-IFRS
            
            
            
            
            
            (11,719,309
            )
            
            (16,094,428
            )*US
                GAAP adjustments*:Share-based
                compensation
            
            
            (a
            )Options
                issued to consultants for services rendered
            
            
            
            
            
            -
            
            
            196,389Options
                issued to directors and employees for servicesrendered
            
            
            
            
            
            -
            
            
            1,686,905Shares
                issued to consultants and directors for servicesrendered
            
            
            
            
            
            -
            
            
            (186,995
            )Intangible
                assets - Capitalised patent costs
            
            
            (b
            )Costs
                capitalised under US GAAP but expensedunder
                A-IFRS
            
            
            
            
            
            -
            
            
            284,924Amortisation
                expense attributable to above
            
            
            
            
            
            -
            
            
            (307,806
            )Impairment
                of costs capitalised under US GAAPbut
                expensed under A-IFRS
            
            
            
            
            
            -
            
            
            (3,378,418
            )Deferred
                tax effect of US GAAP adjustments
            
            
            (c
            )
            
            **-**
            
            
            **-**Net
                loss in accordance with US GAAP
            
            
            
            
            
            (11,719,309
            )
            
            (17,799,429
            )Loss
                per share in accordance with US GAAP:Basic
                and diluted
            
            
            
            
            
            (0.09
            )
            
            (0.15
            )Weighted
                average shares - basic and diluted
            
            
            
            
            
            128,053,601
            
            
            122,754,061





Reconciliation
      of shareholders’ equity




**Years
                Ended June 30,****2006**
            
            **2005**Total
                equity in accordance with A-IFRS
            
            
            
            
            
            8,729,350
            
            
            19,594,176*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
            
            
            
            
            
            8,729,350
            
            
            19,594,176




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





**Years
                Ended June 30,****2006**
            
            **2005**Balance
                in accordance with US GAAP, beginning of year
            
            
            
            
            
            19,594,176
            
            
            31,484,956Issuance
                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
            
            
            
            
            
            (11,719,309
            )
            
            (17,799,429
            )Balance
                in accordance with US GAAP, end of year
            
            
            
            
            
            8,729,350
            
            
            19,594,176





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





As
      described in Note 1(s), Prana adopted AASB 2: *Share-Based
      Payment* .
      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
            
            
            (17,799,429
            )Add:
                Stock-based employee compensation expense included in U.S. GAAPreported
                net loss
            
            
            17,829Deduct:
                Total stock-based employee compensation expense determined underfair
                value based method
            
            
            (1,708,925
            )U.S.
                GAAP pro forma net loss
            
            
            (19,490,525
            )U.S.
                GAAP basic and diluted loss per share-
                As reported
            
            
            (0.15
            )-
                Pro forma
            
            
            (0.16
            )





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
                average exercise price ($)**
            
            **Number
                of options**
            
            **Weighted
                average exercise 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
                of options**
            
            **Weighted
                average exercise price ($)**
            
            **Number
                of options**
            
            **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
                of warrants**
            
            **Weighted
                average exercise price (USD$)**
            
            **Number
                of warrants**
            
            **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. No compensation
      expense has been recognised for these warrants which 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
            
            
            (11,793,191
            )
            
            (16,019,131
            )Foreign
            
            
            73,882
            
            
            (75,297
            )(11,719,309
            )
            
            (16,094,428
            )





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 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.


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)**





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:




**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
            )**Loss
                before income tax expense**
            
            
            (49,235,574
            )**Income
                tax expense**
            
            
            -**Net
                loss**
            
            
            (49,235,574
            )




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:





**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
            
            26,343,646Expired
                options
            
            
            
            8,000**Balance,
                June 30, 2004**
            
            115,984,380
            
            49,505,493





August
                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
            
            54,662,445August
                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
            
            55,097,675




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)





**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
            
            
            2,649,783Non-current
                provisions
            
            
            76,766
            
            
            45,200**Total
                liabilities**
            
            
            1,691,796
            
            
            2,694,983Commitments
                and contingencies
            
            
            -
            
            
            -**Stockholders’
                equity**Common
                stock
            
            
            -
            
            
            -Additional
                paid-in capital
            
            
            62,144,533
            
            
            61,290,050Accumulated
                deficit during the development stage
            
            
            (53,415,183
            )
            
            (41,695,874
            )**Total
                stockholders’ equity**
            
            
            8,729,350
            
            
            19,594,176**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)





**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
            )Total
                operating expenses
            
            
            (12,769,595
            )
            
            (20,452,542
            )Loss
                from operations
            
            
            (12,481,332
            )
            
            (18,691,564
            )Non-operating
                income:Interest
                income
            
            
            762,023
            
            
            892,135Loss
                before income tax expense
            
            
            (11,719,309
            )
            
            (17,799,429
            )Income
                tax expense
            
            
            -
            
            
            -Net
                loss
            
            
            (11,719,309
            )
            
            (17,799,429
            )**Loss
                per share (basis and diluted)**
            
            
            (0.09
            )
            
            (0.15
            )**Weighted
                average number of ordinary shares used in computing basic and diluted
                net
                loss per share**
            
            
            128,053,601
            
            
            122,754,061




F-55


**SIGNATURES**




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


Prana
                Biotechnology LimitedDated: September
              29,
              2006
            By:
            /s/
              Geoffrey P. KemplerGeoffrey
                P. KemplerChief
                Executive Officer




93