---

---

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, 2009

# 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)

Geoffrey Kempler,
Chief Executive OfficerLevel 2, 369 Royal Parade, Parkville, Victoria 3052, Australia
+61 3 9349 4906 (phone) ; +61 3 9348 0377 (fax)
(Name, telephone, e-mail and/or facsimile number and address of company contact person)

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

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

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, 2009.....................202,710,473



---

---

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

Yeso 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 has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).

Yes o No o

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

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

Indicate by check mark which basis
of accounting the registrant has used to prepare the financial statements included in
this filing:

|            |                                  |        
|----------- | -------------------------------- | -------
|
|
|
|
|U.S. GAAP o | International Financial          | Other o
|            | Reporting Standards as issued by
|            | the International Accounting    
|            | Standards Board x               

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

Item 17  o Item 18 o

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

Yes o No  x

This Annual Report on Form 20-F is
incorporated by reference into our Registration Statement on Form S-8 (File No.
333-153669).

ii

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# INTRODUCTION

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

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

Our
consolidated financial statements appearing in this annual report are prepared in
Australian dollars and in accordance with the International Financial Reporting Standards,
or IFRS, as issued by the International Accounting Standards Board, or IASB, which became
effective for our company as of our fiscal year ended June 30, 2006. Our consolidated
financial statements appearing in this annual report comply with both the IFRS and
Australian equivalents to International Financial Reporting Standards, or A-IFRS.

In
this annual report, all references to U.S. dollars or US$ are to
the currency of the United States of America, and all references to Australian
dollars or A$ are to the currency of Australia.

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

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

iii

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# TABLE OF CONTENTS

|         |    |                                                       | Page
|-------- | -- | ----------------------------------------------------- | ----
|
|
|
|
|PART I   |    |                                                       | 6   
|        
|ITEM 1.  |    | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 6   
|ITEM 2.  |    | OFFER STATISTICS AND EXPECTED TIMETABLE               | 6   
|ITEM 3.  |    | KEY INFORMATION                                       | 6   
|         | A. | Selected Consolidated Financial Data                  | 6   
|         | B. | Capitalization and Indebtedness                       | 8   
|         | C. | Reasons for the Offer and Use of Proceeds             | 8   
|         | D. | Risk Factors                                          | 8   
|ITEM 4.  |    | INFORMATION ON THE COMPANY                            | 16  
|         | A. | History and Development of the Company                | 16  
|         | B. | Business Overview                                     | 17  
|         | C. | Organizational Structure                              | 30  
|         | D. | Property, Plants and Equipment                        | 31  
|ITEM 4A. |    | UNRESOLVED STAFF COMMENTS                             | 31  
|ITEM 5.  |    | OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 31  
|         | A. | Operating Results                                     | 31  
|         | B. | Liquidity and Capital Resources                       | 40  
|         | C. | Research and Development, Patents and Licenses        | 42  
|         | D. | Trend Information                                     | 43  
|         | E. | Off-Balance Sheet Arrangements                        | 43  
|         | F. | Tabular Disclosure of Contractual Obligations         | 43  
|ITEM 6.  |    | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 44  
|         | A. | Directors and Senior Management                       | 44  
|         | B. | Compensation                                          | 46  
|         | C. | Board Practices                                       | 48  
|         | D. | Employees                                             | 51  
|         | E. | Share Ownership                                       | 51  
|ITEM 7.  |    | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 56  
|         | A. | Major Shareholders                                    | 56  
|         | B. | Related Party Transactions                            | 58  
|         | C. | Interests of Experts and Counsel                      | 58  
|ITEM 8.  |    | FINANCIAL INFORMATION                                 | 58  
|         | A. | Financial Statements and Other Financial Information  | 58  
|         | B. | Significant Changes                                   | 58  
|ITEM 9.  |    | THE OFFER AND LISTING                                 | 59  
|         | A. | Offer and Listing Details                             | 59  
|         | B. | Plan of Distribution                                  | 60  
|         | C. | Markets                                               | 60  
|         | D. | Selling Shareholders                                  | 60  
|         | E. | Dilution                                              | 60  
|         | F. | Expenses of the Issue                                 | 60  
|ITEM 10. |    | ADDITIONAL INFORMATION                                | 60  
|         | A. | Share Capital                                         | 60  
|         | B. | Memorandum and Articles of Association                | 60  
|         | C. | Material Contracts                                    | 62  
|         | D. | Exchange Controls                                     | 64  
|         | E. | Taxation                                              | 65  
|         | F. | Dividends and Paying Agents                           | 71  
|         | G. | Statement by Experts                                  | 71  
|         | H. | Documents on Display                                  | 71  
|         | I. | Subsidiary Information                                | 72  
|         |    |                                                       |     

iv

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|           |                                                                              |   
|---------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|ITEM 11.   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 72
|ITEM 12.   | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 72
|          
|PART II    |                                                                              | 72
|          
|ITEM 13.   | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 72
|ITEM 14.   | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 72
|ITEM 15.   | CONTROLS AND PROCEDURES                                                      | 72
|ITEM 16.   | RESERVED                                                                     | 73
|ITEM 16A.  | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 73
|ITEM 16B.  | CODE OF ETHICS                                                               | 74
|ITEM 16C.  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 74
|ITEM 16D.  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 74
|ITEM 16E.  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 74
|ITEM 16F.  | CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT                                | 75
|ITEM 16G.  | CORPORATE GOVERNANCE                                                         | 75
|ITEM 17.   | FINANCIAL STATEMENTS                                                         | 75
|ITEM 18.   | FINANCIAL STATEMENTS                                                         | 75
|ITEM 19.   | EXHIBITS                                                                     | 75
|SIGNATURES |                                                                              | 78

v

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# PART I

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

Not
applicable.

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

Not
applicable.

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

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

We
prepare our consolidated financial statements in accordance with IFRS, as issued by IASB,
which became effective for our company as of our fiscal year ended June 30, 2006. Under
IFRS 1, First-time Adoption of International Financial Reporting Standards, or
IFRS 1, a company adopting IFRS for the first time is required to adopt accounting
policies that comply with IFRS and related interpretations that are in effect at the
reporting date of its first annual financial statements prepared in accordance with IFRS,
in our case June 30, 2006. Our consolidated financial statements appearing in this annual
report comply with both the IFRS as issued by IASB and Australian equivalents to
International Financial Reporting Standards, or A-IFRS.

The
following table presents our selected consolidated financial data as of the dates and for
each of the periods indicated. The following selected consolidated financial data as of
June 30, 2009 and 2008 and for the years ended June 30, 2009, 2008 and 2007 have been
derived from our audited consolidated financial statements and notes thereto included
elsewhere in this annual report. The selected consolidated financial data as of June 30,
2007, 2006 and 2005 and for the years ended June 30, 2006 and 2005 have been derived from
our audited consolidated financial statements and notes thereto which are not included in
this annual report.

The
selected consolidated financial data set forth below should be read in conjunction with
and are qualified entirely by reference to Item 5. Operating and Financial Review
and Prospects and our consolidated financial statements and notes thereto included
elsewhere in this annual report.

# Statement of Operations
Data:

|                                    | Year Ended June 30,
|----------------------------------- | -------------------
|
|
|
|
|Revenue from continuing operations. |                    
|Other income                        |                    
|                                    |                    
|Research and development expenses   |                    
|Research and development expenses   |                    
|- related party                     |                    
|Personnel expenses                  |                    
|Intellectual property expenses      |                    
|Auditor and accounting expenses     |                    
|Travel expenses                     |                    
|Public relations and marketing      |                    
|expenses                            |                    
|Depreciation expenses               |                    
|Amortization expenses               |                    
|Other expenses                      |                    
|Foreign exchange gain (loss)        |                    
|Impairment of intangible assets     |                    
|Gain (loss) on fair value of        |                    
|financial liabilities               |                    
|Net loss                            |                    
|Loss per share - basic and diluted  |                    
|Weighted average number of          |                    
|ordinary shares outstanding -       |                    
|basic and diluted                   |                    

6

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Balance Sheet Data:

|                             | As at June 30,
|---------------------------- | --------------
|
|
|
|
|Cash and cash equivalents    |               
|Working capital*             |               
|Total assets                 |               
|Net assets                   |               
|Issued capital               |               
|Share based payment reserves |               
|Accumulated deficit during   |               
|development stage            |               
|Total equity                 |               

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

# Exchange Rate Information

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

|Year
Ended June 30, | At Period End | Average Rate | High | Low   
|------------------- | ------------- | ------------ | ---- | ------
|
|
|
|
|2005                |               |              |      | 0.7620
|2006                |               |              |      | 0.7301
|2007                |               |              |      | 0.8488
|2008                |               |              |      | 0.9615
|2009                |               |              |      | 0.8048

|Month                               | High | Low
|----------------------------------- | ---- | ---
|
|
|
|
|April 2009                          |      |    
|May 2009                            |      |    
|June 2009                           |      |    
|July 2009                           |      |    
|August 2009                         |      |    
|September 2009 (until September 21) |      |    

The noon buying rate on September 22,
2009 was US$0.8638 = A$1.00.

7

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|B. | CAPITALIZATION
AND INDEBTEDNESS
|-- | -------------------------------

Not
applicable.

|C. | REASONS
FOR THE OFFER AND USE OF PROCEEDS
|-- | -----------------------------------------

Not
applicable.

|D. | RISK
FACTORS
|-- | ------------

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

# Risks Related To Our
Business

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

We
have been unprofitable to date and expect to incur losses over the next several years as
we expand our drug discovery and development programs and pre-clinical testing and as we
conduct clinical trials of our product candidates. Our actual cash requirements may vary
materially from those now planned and will depend upon numerous factors, including:

| |  | the
continued progress of our research and development programs;
| | - | ----------------------------------------------------------------

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

| |  | the
cost, timing and outcome of regulatory submissions and approvals;
| | - | ---------------------------------------------------------------------

| |  | determinations
as to the commercial potential of our product candidates;
| | - | ------------------------------------------------------------------------

| |  | our
ability to successfully expand our contract manufacturing services;
| | - | -----------------------------------------------------------------------

| |  | our
ability to establish and maintain collaborative arrangements; and
| | - | ---------------------------------------------------------------------

| |  | the
status and timing of competitive developments.
| | - | --------------------------------------------------

We
anticipate that we will require substantial additional funds within the next 12 months 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, 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 licensing of our assets or 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 license our assets or
establish new strategic alliances or other arrangements with corporate partners on
acceptable terms, or at all. The current global economic climate could adversely impact
our ability to obtain such funding, license our assets or enter into alliances or other
arrangements with corporate partners. Any shortfall in funding could result in our having
to curtail or cease our operations, including our research and development activities,
which would be expected to have a material adverse effect on our business, financial
condition and results of operations.

8

---

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

Our
ongoing research and development activities are, and the production and marketing of our
pharmaceutical product candidates derived from such activities will be, subject to
regulation by numerous governmental authorities in Australia, principally the Therapeutics
Goods Administration, or TGA; 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. Governmental agencies may
not grant regulatory approval due to matters arising form pre-clinical animal toxicology,
safety pharmacology, drug formulation and purity, clinical side effect or patient risk
profile, medical contraindications. Failure or delay 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 product candidates.

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 which are designed to treat the underlying causes of degeneration of the brain
and the eye as the aging process progresses. We have not sufficiently advanced the
development of any of our products, including our current lead product candidate, PBT2, to
market or generate revenues from their commercial application. Our current or any future
product candidates, if successfully developed, may not generate sufficient or sustainable
revenues to enable us to be profitable.

We will not be able to
commercialize our PBT2 therapeutic compound for Alzheimers disease or any future
product candidates if we fail to adequately demonstrate their safety, efficacy and
superiority over existing therapies.

Before
obtaining regulatory approvals for the commercial sale of any of our pharmaceutical
products, we must demonstrate through pre-clinical testing and clinical studies that our
PBT2 product candidate is safe and effective for use in humans for each target indication.
Conducting pre-clinical testing and clinical studies is an expensive, protracted and
time-consuming process. Likewise, results from early clinical trials may not be predictive
of results obtained in large-scale, later-stage clinical testing. In addition, even though
a potential drug product shows promising results in clinical trials, regulatory
authorities may not grant the necessary approvals without sufficient safety and efficacy
data.

We
may not be able to undertake further clinical trials of our PBT2 compound as a therapeutic
compound for Alzheimers disease or other indications and any future product
candidate (including one that may emerge from our vaccine program), or to demonstrate the
safety and efficacy or superiority of any of these product candidates over existing
therapies or other therapies under development, or enter into any collaborative
arrangement to commercialize our current or future product candidates on terms acceptable
to us, or at all. For example, in April 2005, we ceased clinical trials of our PBT1
compound as a treatment for Alzheimers disease. Clinical trial results that show
insufficient safety and efficacy could have a material adverse effect on our business,
financial condition and results of operations.

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

We
have incurred losses in every period since we began operations in 1997. We expect to
continue to incur additional operating losses over at least the next several years and to
increase our cumulative losses substantially as we expand our research and development and
pre-clinical activities and commence additional clinical trials of PBT2. We reported net
losses of A$7,522,789, A$13,560,678 and A$11,142,320 during the fiscal years ended June
30, 2009, 2008 and 2007, respectively. As of June 30, 2009, our accumulated deficit was
A$73,566,505. We may never be able to achieve or maintain profitability.

9

---

---

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

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

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

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

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

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

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

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

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

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

We
may not be able to progress with the development of our current or any future
pharmaceutical product candidates to a stage that will attract a suitable collaborative
partner for the development of any current or future pharmaceutical product candidates.
The projects initially specified in connection with any such collaboration and any
associated funding may change or be discontinued as a result of changing interests of
either the collaborator or us, and any such change may change the budget for the projects
under the collaboration. Additionally, our research may not lead to the discovery of
additional product candidates, and any of our current and future product candidates may
not be successfully developed, prove to be safe and efficacious in clinical trials, meet
applicable regulatory standards and receive regulatory approval, be capable of being
produced in commercial quantities at reasonable costs, or be successfully or profitably
marketed, either by us or a collaborative partner.The products we develop may not
be able to penetrate the potential market for a particular therapy or indication or gain
market acceptance among health care providers, patients and third-party payers. We cannot
predict if or when the development of PBT2 or any future pharmaceutical product will be
completed or commercialized, whether funded by us, as part of a collaboration or through a
grant.

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

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

10

---

---

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

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

| |  | obtain
and maintain patents to protect our own products and technologies;
| | - | -------------------------------------------------------------------------

| |  | obtain
licenses to the patented technologies of third parties;
| | - | --------------------------------------------------------------

| |  | operate
without infringing on the proprietary rights of third parties; and
| | - | --------------------------------------------------------------------------

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

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

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

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

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

We
may not be able to manufacture sufficient quantities of PBT2 or any other development or
product candidates in a cost-effective or timely manner. Manufacturing includes the
production, formulation and stability testing of an active pharmaceutical ingredient. Any
delays in production would delay our pre-clinical and human clinical trials, which could
have a material adverse effect on our business, financial condition and operations.

We
may be required to enter into contracting arrangements with third parties to manufacture
PBT2 and any other development or product candidates for large-scale, pre-clinical 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.

11

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

We are dependent upon a sole
manufacturer of our lead compound, PBT2, and on a sole manufacturer to encapsulate the
compound and could incur significant costs and delays if we are unable to promptly find a
replacement for either of them.

We
typically rely on a single manufacturer to develop Good Manufacturing Practice (GMP)
synthetic processes for our lead compounds. Our lead compound, PBT2, has been manufactured
to date by the Institute of Drug Technology Australia Limited. During late 2008, we
transferred our PBT2 drug substance manufacturing process technology to Dr. Reddys
Laboratories Limited based in Hyderabad, India to enable future and efficient large scale
manufacture of PBT2 for any future prospective large scale clinical trial. We also rely on
a sole manufacturer, Patheon Inc., to encapsulate PBT2. We intend to continue this
approach, subject to ongoing appraisal of our manufacturing needs and financial position.
We may not be able to promptly find a replacement manufacturer, if required, without
incurring material additional costs and substantial delays.

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

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

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

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

We
know that competitors are developing or manufacturing various technologies or products for
the treatment of diseases that we have targeted for product development. Some of these
competitive products use therapeutic approaches that compete directly with our PBT2
product candidate. Our ability to further develop our products may be adversely affected
if any of our competitors were to succeed in obtaining regulatory approval for their
competitive products sooner than us.

12

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

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

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

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

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

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

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

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

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

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

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

13

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

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

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

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

# 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$0.12 to a
high of A$0.69 and the market price of our American Depositary Shares on the NASDAQ
Capital Market has ranged from as low as US$1 to a high of US$6.73. The market price for
our securities has been affected by both broad market developments and announcements
relating to actual or potential developments concerning products under development. We
believe that the following factors, in addition to other risk factors described above and
elsewhere in this annual report, will continue to significantly affect the market price of
our ordinary shares:

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

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

| |  | announcements
of technological innovations or new commercial products by us and our competitors;
| | - | ------------------------------------------------------------------------------------------------

| |  | determinations
regarding our patent applications, patents and those of others;
| | - | ------------------------------------------------------------------------------

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

14

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| |  | 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.
Market fluctuations, as well as general political and economic conditions, such as a
recession, interest rate or currency rate fluctuations, could adversely affect the market
price of our securities.

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 that produces passive income.
As a result of our substantial cash position and the decline in the value of our stock, we
believe that we became a PFIC during the taxable year ended June 30, 2005, and once again
qualified as a PFIC during the taxable years ended June 30, 2006, 2007, 2008 and 2009,
under a literal application of the asset test described above, which looks solely to
market value. We believe that we will once again qualify as a PFIC during the taxable year
ended June 30, 2010. If we are classified as a PFIC for U.S. federal income tax purposes,
highly complex rules would apply to U.S. holders owning ADRs. Accordingly, you are urged
to consult your tax advisors regarding the application of such rules. United States
residents should carefully read Item 10.E. Additional Information  Taxation,
United States Federal Income Tax Consequences for a more complete discussion of the
U.S. federal income tax risks related to owning and disposing of our ADRs.

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

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

# Risks Relating to our
Location in Australia

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

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

15

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

As
a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are
permitted to follow certain home country corporate governance practices instead of certain
requirements of The NASDAQ Marketplace Rules. As an Australian company listed on the
NASDAQ Capital Market, we may follow home country practice with regard to, among other
things, the composition of the board of directors, director nomination process,
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. A foreign private issuer that elects to follow a
home country practice instead of NASDAQ requirements, must submit to NASDAQ in advance 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.
Accordingly, our shareholders may not be afforded the same protection as provided under
NASDAQs corporate governance rules.

|ITEM 4. |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------

|A. | HISTORY
AND DEVELOPMENT OF THE COMPANY
|-- | --------------------------------------

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

Our
mission is to develop therapeutic drugs designed to treat the underlying causes of
degeneration of the brain and the eye as the aging process progresses, initially focusing
on Alzheimers disease. Other potential applications for our therapies include
Huntingtons disease, Parkinsons disease, certain cancers, age-related macular
degeneration, Motor Neuron disease, Creutzfeldt-Jakob disease (the human variant of Mad
Cow disease) and age-related cataracts. Our technology is the outcome of many years of
intense research from some of the leading scientists in the world in the area of
age-related degenerative diseases.

Since
completing our initial public offering and listing process of our ordinary shares on the
ASX on March 28, 2000, we have concentrated our resources toward the pursuit of our
disease targets. Initially we focused on clinical trials of our proof of concept compound,
PBT1, as a therapeutic for the treatment of Alzheimers disease. On April 11, 2005,
we announced that we would not proceed with the Phase II/III study as we had found
unacceptably high levels of a di-iodo-8-hydroxyquinoline impurity that could potentially
alter the risk of side-effects and mutagenicity. We considered methods to reduce the
levels of the di-iodo impurity, however, we reached the conclusion that attempts to reduce
the impurity to required levels were not likely to be successful in a timely, commercially
viable manner and that further development of PBT1 for the treatment of Alzheimers
disease was not appropriate.

16

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On
June 16, 2005, we announced that we had completed a review of our strategic development
programs and we reaffirmed our commitment to PBT2, our current lead candidate for the
potential treatment of Alzheimers disease. PBT2 was announced as a new lead metal
protein attenuating compound, or MPAC, molecule for Alzheimers disease in early
August 2003. PBT2 is the result of rational drug design. It was built from the
ground up to fulfill very specific criteria. It was designed so that it will be
orally bioavailable and cross the blood brain barrier. PBT2 was selected from over 300
compounds that had been developed by us at such time on the basis of its significant
effectiveness in both pre-clinical in vitro and in vivo testing. It was
designed to have an improved safety and efficacy profile compared to PBT1. Phase I trials
for PBT2 were completed by February 2006 in healthy young and aged volunteers and
demonstrated that the drug was well tolerated and suitable for Phase II clinical
development. During 2007, a Phase IIa clinical study was undertaken in elderly patients
with Alzheimers disease over three months. The top line results were announced in
February 2008, including the primary endpoints of safety and tolerability being met
together with several secondary endpoints in biomarker and cognition endpoints also being
met. In July 2008, the results of the Phase IIa trial were published in The Lancet
Neurology journal. The key findings included that PBT2 was well tolerated, with the
safety profile of PBT2 being similar to that of the placebo, that the level of Abeta in
the cerebrospinal fluid was significantly lowered and that two measures of executive
cognitive function were improved in patients on the higher dose of PBT2. Also in July
2008, the results of extensive pre-clinical research findings for PBT2 were published in
the journal Neuron.The key findings included the demonstration that PBT2 could
rapidly improve cognition in transgenic mice, prevent the formation of toxic soluble Abeta
oligomers, lower the Abeta levels in the brain of transgenic mice and protect neurons from
the toxic effect of Abeta at the synapses between neurons enabling improved
neurotransmission. For details regarding clinical trials for PBT2, our lead compound, see
Item 4.B. Information on the Company  Business Overview  Clinical Trials
for Our Lead Compound.

In
March 2009, we published further data on the impact of PBT2 on synapses in transgenic
animal models. The findings demonstrated that PBT2 could prevent the loss of synapses in
these Alzheimer disease animal models, indicating that PBT2 has a potent neuroprotective
effect on neurons, consistent with the observation that PBT2 can improve cognitive
performance in impaired transgenic animals.

In
late July 2008, we received the findings from a report commissioned by us from U.S.-based
clinical researchers on the suitability of PBT2 for Huntingtons disease. The report
detailed the relevance of animal modeling experiments done with PBT2, its demonstrated
mode of action in the brains of Huntingtons disease model mice and its promising
safety and efficacy findings in the recently completed Alzheimers disease Phase IIa
study with PBT2. The report concluded that PBT2 was recommended to proceed to clinical
trials in Huntingtons disease research participants.

In
August 2009, a key patent protecting our clinical drug asset PBT2 was granted in Europe by
the European Patent Office. The patent entitled 8-Hydroxyquinoline derivatives
covers the composition of matter of selected families of 8-Hydroxyquinoline compounds,
including PBT2, and the uses of such compounds for the treatment of neurological diseases,
including Alzheimers disease and Huntingtons disease. The European patent has
a 20 year term expiring on July 16, 2023, with a possible extension of the term of up to
five additional years under supplementary protection provisions. Also in August 2009, we
received a notice of allowance from the United States Patent and Trade Mark Office for our
key patent protecting our clinical drug asset PBT2. The patent is due to be granted by the
end of the 2009 calendar year. The U.S. patent, which is also entitled
8-Hydroxyquinoline derivatives, covers the composition of matter of selected
families of 8-Hydroxyquinoline compounds, including PBT2. This patent has been granted in New Zealand, Singapore, South Africa and Russia and
patent applications are pending in Australia, Brazil, Canada, China, India, Israel, Japan,
South Korea and Mexico. Registration of the patent in Hong Kong has also been processed.

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,
2009, our capital expenditures have totaled A$141,577. Since July 1, 2009, we have
incurred A$3,241 in capital expenditures.

|B. | BUSINESS
OVERVIEW
|-- | -----------------

# Pranas Background

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

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

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

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

# Research Institutions

The
intellectual property owned by our company has been developed at several internationally
recognized institutional research facilities and through a team of scientists employed by
our company who are based at the University of Melbourne:

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

| |  | The
University of Melbourne, Department of Pathology;
| | - | -----------------------------------------------------

| |  | The
Mental Health Research Institute in Melbourne; and
| | - | ------------------------------------------------------

| |  | The
Biomolecular Research Institute in Melbourne.
| | - | -------------------------------------------------

Work
conducted at the first three of these institutions demonstrated that clioquinol, codenamed
PBT1, had potential efficacy for the treatment of Alzheimers disease. Our research
efforts led to the development of a novel MPAC within the same chemical class as PBT1,
PBT2, a low molecular weight chemical entity that demonstrates a significant pre-clinical
improvement over PBT1, and a library of approximately 500 MPAC molecules in total
(approximately 200 of which are of the same chemical class as PBT1 with the remaining
MPACs 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 Huntingtons
disease, Parkinsons disease, certain cancers and age-related macular degeneration).

# Platform Technology and
Research Programs

We
regard our intellectual property as a platform technology since we believe
that it addresses the causes of a broad spectrum of age-related diseases based on the
interrelationship of metals and proteins. To date, the majority of our research efforts
have been directed at research into potential therapeutics for the treatment of
Alzheimers disease. Published data together with our initial findings have provided
strong indications that the pathology for other certain age-related and degenerative
disorders may also be based on the inter-relationship between certain metals and proteins,
and we believe that the platform technology may also be applicable for: Huntingtons
disease; Parkinsons disease; certain cancers; age-related macular degeneration;
Motor Neuron disease; Creutzfeldt-Jakob disease; age-related cataracts; and other
neurodegenerative diseases.

Alzheimers
Disease. Research is ongoing to increase our understanding of the
neuropathology of Alzheimers disease. Our research continues to focus on the
structure and function of beta-amyloid and its precursor, and protein structural studies
specifically around the sites of interaction between metals, metal complexes and our MPACs
and the significant proteins in Alzheimers disease, such as Amyloid Precusor Protein
and beta-amyloid. PBT2, our lead compound from our MPAC library for Alzheimers
disease, has been extensively tested in both in vitro and in vivo animal
models for its ability to reduce both the amount of Abeta and its toxic effects in the
brain. Results of the research, which were published in the journal Neuron in July
2008, demonstrate that PBT2 can rapidly improve cognition in transgenic mice, prevent the
formation of toxic soluble Abeta oligomers, lower the Abeta levels in the brain of
transgenic mice and protect neurons from the toxic effect of Abeta at the synapses (the
space) between neurons, enabling improved neurotransmission. Experimental work during 2008
and 2009 has shown that PBT2 can also prevent the loss of neuronal synapses, a feature of
the brain degeneration associated with Alzheimers disease. For a description of the
history and development of our lead MPAC, PBT2, as a therapeutic for the treatment of
Alzheimers disease, see Item 4.B. Information on the Company  Business
Overview  Clinical Trials for Our Lead Compound.

18

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Our
research into the interaction of metals with Abeta protein has resulted in the
identification of agents which can block the metal binding site on Abeta thereby
preventing the downstream toxicity of Abeta protein on neurons. This therapeutic approach
to Alzheimers disease is an alternative and complimentary drug strategy to our
MPACs, which directly compete with Abeta protein by binding metals such as copper and
zinc. Results from several proof-of-concept compounds were published in the Proceedings of
the National Academy of Sciences Journal in May 2008. In addition to their use as
Alzheimer disease therapeutics, these amyloid binding compounds may also have potential as
novel imaging agents, binding Abeta in the brain. Our discovery program is generating
novel forms of this alternative anti-amyloid class of compounds for testing in animal
models as either therapeutic or diagnostic agents.

Metals,
in particular copper, may cause Abeta protein to form specific toxic oligomers that
inhibit normal neurotransmission in the brain. Accordingly, these toxic oligomers present
a novel immunological target for vaccine research. Since 2004, we have undertaken a
program to create a monoclonal antibody that only recognizes specific forms of the toxic
Abeta oligomers and not other forms of Abeta protein. A candidate monoclonal antibody has
been identified and will be tested for its efficacy and safety in a prospective mouse
passive vaccine trial. However, initiation of the trial has been indefinitely delayed due
to difficulties in the scale up and purification of the monoclonal antibody. We will be
utilizing the resources of the Mental Health Research Institute to conduct a prospective
mouse passive vaccine trial.

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

U.S.-based
researchers have presented the effects of clioquinol in an animal model of
Huntingtons disease, showing evidence of improved behavior, motor skills and
inhibition of the abnormal form of the huntingtin protein. Based on these findings, we
have tested several proprietary MPACs in collaboration with researchersbased atthe Veterans Affairs Medical Center and the Department of Neurology, University of
California, San Francisco, under a collaborative research agreement. PBT2 has shown good
efficacy in the R6/2 mouse model of Huntingtons disease.

In
late July 2008, we received the findings from a report commissioned by us from U.S.-based
clinical researchers on the suitability of PBT2 for Huntingtons disease. The report
detailed the relevance of animal modeling experiments done with PBT2, its demonstrated
mode of action in the brains of Huntingtons disease model mice and its promising
safety and efficacy findings in the recently completed Alzheimers disease Phase IIa
study with PBT2. The report concluded that PBT2 was recommended to proceed to clinical
trials in Huntingtons disease research participants.

Parkinsons
Disease.Parkinsons disease, another crippling disease of the aging
population, causes a progressive slowing of movement, tremor and the loss of fine motor
control due to the death of substantia nigracells in the brain. The substantia
nigra cells produce the neurotransmitter, dopamine in the brain which is required for
normal motor coordination. Increasingly, dementia is also being recognized as a
significant component of Parkinsons disease. Existing therapies, such as
dopaminergic agents, may provide some short-term symptomatic relief, but do not address
the underlying cause of the disease. We believe that our platform technology may affect
the aggregation of the proteins concerned and may provide a pathway for reversing the
disease. Parkinsons disease ranks among the most common late life neurodegenerative
diseases.

During
2005, we entered into a contractual arrangement with the Integrative Neuroscience Facility
based at the Howard Florey Institute in Melbourne to assist in the examination of the
effect of MPACs administered to the 6-hydroxydopamine (PD) mouse model of the disease,
which concluded with positive results. In addition, groups unrelated to us have published
data that demonstrates the usefulness of clioquinol in treating the symptoms of
Parkinsons disease generated in the alternative MPTP
(1-methyl-4-phenyl-1,2,3,6-tetrahydropyridine) mouse model of the disease. These two mouse
models mimic the disease by using these toxins to destroy over time the cells of the
substantia nigra, the area of the brain affected in Parkinsons disease, leading to
motor function loss. Based on these positive results with clioquinol in such two mouse
models, we began investigating the efficacy of other selected MPACs in these two models to
screen for possible MPAC candidates as treatment candidates for Parkinsons disease.
Currently, we have identified six potential compound leads that demonstrate the ability to
rescue the substantia nigra neuronal cells in both models of Parkinsons
disease, that otherwise perish over time as the disease progresses. Final characterization
and selection of a clinical development lead compound is underway.

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Brain
Cancer. We have initiated a program of research into the potential use of
selected MPACs from our library for use in the treatment of brain cancer, in particular
the most prevalent and deadly form of the disease, Glioblastoma multiforme, or GBM.
Patients with GBM have a very poor prognosis upon diagnosis with an estimated median
survival of approximately 12 months. The most commonly prescribed treatments are
chemotoxic agents together with radiation therapy, which confer a median survival increase
of several months. There is an increasing body of published evidence that there are
elevated levels of copper in tumors leading to increased cellular oxidative stress.
Several of our MPACs that demonstrate potent toxicity against human gliomablastoma cell
lines and yet remain untoxic to normal brain cells are being tested in mouse models of
GBM. We believe that MPACs with a strong ability to deliver copper into tumor cells will
promote their death, and we are currently investigating this in vivo.

# Clinical Trials for Our
Lead Compound

In
February 2005, we were awarded a research and development START grant of A$1.35 million to
take PBT2 through safety testing and Phase I clinical trials for Alzheimers disease.
Formal pre-clinical toxicology testing for PBT2 was completed and in March 2005, we
commenced a series of Phase I clinical trials at a facility associated with the Utrecht
University Hospital in Utrecht, the Netherlands. On November 7, 2005, we announced the
successful completion of the first Phase I trial for PBT2, a double blind,
placebo-controlled single dose escalation study, conducted on 55 healthy, male volunteers
between the ages of 18 and 50, which was designed to evaluate the safety, tolerability and
pharmacokinetics of PBT2. Data from the study shows that PBT2 was well tolerated with
little difference in the incidence of adverse events between those receiving PBT2 and
those receiving the placebo. Additionally, the pharmacokinetic analysis demonstrated that
the drug exposure increased/decreased predictably and in a linear manner, both of which
are desirable characteristics for a central nervous system drug. Concurrent findings in a
pre-clinical mouse model indicate that PBT2 passes into the brain more extensively than
its predecessor, PBT1. On February 7, 2006 we announced the completion of the second Phase
I safety clinical trial for PBT2. This trial was a multi-dose escalation trial of PBT2
conducted in elderly, healthy, male and female volunteers completed in December 2005.
Volunteers were dosed at a selected dose for seven days, the dose range was from 200mg to
800mg per day. Both Phase I trials demonstrated that PBT2 was well tolerated and suitable
for progression to Phase II trials in Alzheimer patients.

In
parallel to such clinical studies, chronic pre-clinical animal toxicology studies and the
development work for GMP manufacture of PBT2 required for Phase II clinical studies was
conducted and completed by the third calendar quarter of 2006. On July 20, 2006, while
preparations for the Phase IIa clinical trial were underway, we announced key pre-clinical
efficacy findings with PBT2 demonstrating that PBT2 could rapidly enhance memory function
within five days of dosing in an Alzheimer mouse model, improve synaptic function and
significantly reduce soluble beta-amyloid protein levels in mouse models of
Alzheimers disease in acute 24 hour experiments. On October 5, 2006, we announced
the grant of approval from the Swedish Medical Products Agency (a Swedish regulatory
authority) to undertake a Phase IIa clinical trial in elderly patients with mild Alzheimer
disease in Sweden. On December 19, 2006, we announced that dosing had commenced in the
Phase IIa clinical trial. The Phase IIa trial is a three month double-blind,
placebo-controlled safety and tolerability study of PBT2 in 80 elderly male and female
patients with mild forms of Alzheimers disease. Tolerability, safety, cerebrospinal
fluid and plasma biomarker and cognition endpoints will be measured. On August 6, 2007, we
announced that 55 patients (of the planned 80) had been randomized to participate in the
Phase IIa clinical trial, of which 30 patients had completed the trial, and that the
independent Data Safety Monitoring Board, or DSMB, appointed by us upon the recommendation
of Dr. Craig Ritchie and Quintiles Limited for the Phase IIa clinical trial of PBT2 had
reviewed the data of over 50 patients and concluded there have been no treatment-related
serious adverse events or withdrawals and that the trial was safe to continue in
accordance with the original protocol. On September 24, 2007, we announced that the
enrollment for the Phase IIa trial had been completed and that we expected to report
results during the first calendar quarter of 2008. On November 29, 2007, we announced that
the DSMB had completed its cycle of safety review meetings and reported to us that of the
59 patients included in the review at that time, there had been no treatment-related
serious adverse events or withdrawals. The DSMB confirmed that the trial was safe to
continue. Patient dosing was completed on December 18, 2007, and we announced the formal
completion of the study on January 2, 2008. On February 26, 2008, we publicly released the
top line trial results and announced that the trial primary endpoints of safety and
tolerability were met. We also announced that with respect to the secondary endpoints,
namely biomarker, cognition and behavioral changes, several significant and promising
changes were observed. Specifically, that in the cerebrospinal fluid (CSF), PBT2 treatment
at a 250mg dose resulted in a significant decrease in the target Abeta 42 protein. In
addition, at the 250mg dose, while no significant effect was observed with the ADAS-cog,
two of the four neuropsychological test battery (NTB) tests for improvement in executive
function were significantly improved. In July 2008, the results of the Phase IIa trial
were published in The Lancet Neurology journal. The key findings included the
demonstration that PBT2 could rapidly improve cognition in transgenic mice, prevent the
formation of toxic soluble Abeta oligomers, lower the Abeta levels in the brain of
transgenic mice and protect neurons from the toxic effect of Abeta at the synapses between
neurons enabling improved neurotransmission. Also in July 2008, the results of extensive
pre-clinical research findings for PBT2 were published in the journal Neuron.The
key findings included the demonstration that PBT2 could rapidly improve cognition in
transgenic mice, prevent the formation of toxic soluble Abeta oligomers, lower the Abeta
levels in the brain of transgenic mice and protect neurons from the toxic effect of Abeta
at the synapses between neurons enabling improved neurotransmission. Currently, we are
considering possible larger scale Phase IIb trial designs that could be initiated during
the first half of 2010.

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# Rational Drug Design

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

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

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

PBT2,
our current Alzheimers disease lead MPAC product candidate, was selected from this
rationally designed pipeline in 2003 and is the first such new and
specifically designed compound to move into formal development. It has been built
from the ground up to fulfill very specific criteria. It was designed so that
it will be orally bioavailable and cross the blood brain barrier. PBT2 was selected from
several hundred compounds that had been developed by us at such time. It has been designed
to have an improved safety and pharmacokinetic profile and has demonstrated significant
effectiveness in both pre-clinical in vitro and in vivo testing. For details
regarding our PBT2 clinical trials see above in this Item 4.B. Information on the
Company  Business Overview  Clinical Trials for Our Lead Compound.

MPACs
from different chemical classes to that of PBT1 and PBT2, with different structural
characteristics have shown differential behavior in screens for neurological disorders
other than Alzheimers disease. For example, over the last few years we have
generated a series of MPACs differentiated for their ability to be efficacious in animal
models of Parkinsons disease. Currently we have identified six potential compound
leads that demonstrate the ability to rescue the substantia nigra neuronal cells in
both models of Parkinsons disease, which otherwise perish over time as the disease
progresses. Final characterization and selection of a clinical development lead compound
is underway. In addition, another series of chemically differentiated MPACs have shown
promise in vitroassays of the brain cancer Glioblatoma multiforme and animal
modeling is underway.

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# Patents and Licenses

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.

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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.

Patent Portfolio

The
following table presents our portfolio of patent and patents applications, including their
status and a brief description of the respective inventions.

|Patent | Status | Invention
|------ | ------ | ---------

|"A method for assaying and
treating Alzheimer's Disease"
Filed: November 12, 1992
Applicant: The University of
Melbourne
Assigned to Prana Biotechnology
Limited | Patents have been granted in
Australia, Europe, Japan, Canada
and the United States. | The invention includes claims directed to
the use of specified modulators in the
treatment of Alzheimer's disease. Granted
European claims include the use of zinc
binding agents for oral administration in
the treatment of Alzheimer's disease.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|"Beta amyloid peptide inhibitors"
Filed: July 21, 2000
Applicant: Biomolecular Research
Institute and University of
Melbourne
Assigned to Prana Biotechnology
Limited | A patent has been granted in
Australia.  Patents in Europe,
Canada and the United States are
undergoing examination.
Examination has been requested in
Japan. | The invention encompasses claims to
specific classes of agents capable of
inhibiting binding of specified metal ions
to the N-terminus of beta-amyloid and the
use of these agents in the treatment of
amyloid related conditions including
Alzheimer's disease.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|"Neurotoxic Oligomers"
Filed: June 28, 2000
Applicants: Prana Biotechnology
Limited and The General Hospital
Corporation | A patent has been granted in
Australia and New Zealand.  A
Notice of Allowance has been issued
in the United States. An
application is under examination in
the United States and Europe.
Examination has been requested in
Canada, China and Japan. | 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 of screening for
inhibitors of Alzheimer's Disease"
Filed: December 12, 2000
Applicant: The General Hospital
Corporation
Licensed to Prana Biotechnology
Limited | An application is under examination
in the United States. | The invention encompasses claims to the
identification of agents functioning as
copper agonists and the use the agents in
the treatment of amyloid related conditions
including Alzheimer's disease.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|"Treatment of Neurodegenerative
Conditions"
Filed: April 3, 2003
Applicant: Prana Biotechnology
Limited | An application in Europe is pending
examination.  An application in
Hong Kong has been recorded.  An
application in Australia is under
examination. Applications in China
and the United States have lapsed. | The invention encompasses the utility of
the 8-hydroxyquinoline MPAC class in the
treatment of neurodegenerative cognitive
changes, particularly Huntington's disease.
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|Patent | Status | Invention
|------ | ------ | ---------

|"8-Hydroxyquinoline derivatives"
Filed: July 16, 2003
Applicant: Prana Biotechnology
Limited | Patents have been granted in
Europe, New Zealand, Russia,
Singapore and South Africa.  A
Notice of Allowance has been issued
in the United States.  A patent has
been accepted in Australia.  A
patent in Hong Kong has been
registered. Applications in India,
Israel and China are under
examination. Examination has been
requested in Brazil, Japan, South
Korea and Canada. Examination is
pending in Mexico. | The invention is directed to chemical
structures of the 8-hydroxyquinoline MPAC
class and their utility in the treatment of
neurological conditions.
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------

|"Neurologically-Active Compounds"
Filed: October 3, 2003
Applicant: Prana Biotechnology
Limited | Applications in the United States,
China, Russia, Canada, Europe,
Australia and Israel are under
examination. Examination has been
requested in Brazil, Japan, Mexico
and South Korea. Applications have
been accepted in New Zealand,
India, South Africa and Singapore.
A patent in Hong Kong has been
processed. | 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 | Applications have been filed in
Australia, Canada, China, Europe,
Israel, Mexico, the United States
and South Korea. Examination has
been requested in Japan, India,
Brazil, New Zealand and Russia. A
patent has been granted in
Singapore and South Africa. A
patent in Hong Kong has been
processed. | 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. A Notice of
Allowance has been issued in the
United States for a second Patent.
An application in Japan is under
examination. | This invention is directed to the use of
Phanquinone for the treatment of
Alzheimer's disease.
|---------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------

|"Use of Phanquinone for the
treatment of memory impairment"
Filed: April 3, 2003
Applicant: Prana Biotechnology
Limited | Patent has been granted in the
United States. An application in
Japan is under examination. | This invention is directed to the use of
Phanquinone for the treatment of age
related memory impairment.
|----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------

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|Patent | Status | Invention
|------ | ------ | ---------

|"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: 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 Parkinson's
disease.
|----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------

|"Method of treatment and
prophylaxis and agents useful for
same"
Filed: April 13, 2007
Applicant: Prana Biotechnology
Limited | Applications have been filed in
Australia, Canada, China, Europe,
Israel, New Zealand, the United
States, South Korea, South Africa,
Japan, India, Brazil and Singapore. | This invention is directed to MPAC
compounds for the treatment of age-related
macular degeneration.
|----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------

|"A method of prophylaxis or
treatment and agents for same"
Filed:  June 22, 2007
Applicant: Prana Biotechnology
Limited | Applications have been filed in
Australia, Canada, China, Europe,
the United States and Japan. | This invention is directed to MPAC
compounds for treating certain cancers.
|----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------

|"Compounds for therapy and
diagnosis"
Filed: December 5, 2008
Applicant: Prana Biotechnology
Limited | A complete international (PCT)
application has been filed. | This invention is directed to anti-amyloid
(metallo-complexes) compounds for the
treatment of Alzheimer's disease.
|---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------

Prior Patents

In
December 2006, we elected to terminate the license for the following patent which was
granted to us under the January 1, 2001 license agreement that we entered into with The
General Hospital Corporation of Massachusetts, or GHC, and as result, the patent case was
returned to GHC:

| |  | Use
of Clioquinol for the therapy of Alzheimers Disease filed January 4, 1999.
| | - | ---------------------------------------------------------------------------------

In
March 2009, we elected to terminate the licenses for the following patents which were
granted to us under the January 1, 2001 license agreement that we entered into with GHC,
and as result, the applicable patent cases were returned to GHC:

| |  | An
in vitro system for determining the formation of Ab Amyloid filed October
19, 1994.
| | - | ----------------------------------------------------------------------------------------

25

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| |  | A
diagnostic assay for Alzheimers Disease filed October 19, 1994.
| | - | --------------------------------------------------------------------

| |  | Identification
of agents for use in the treatment of Alzheimers Disease filed March 11,
1998.
| | - | ------------------------------------------------------------------------------------------------

| |  | Agents
for use in the treatment of Alzheimers Disease filed March 11, 1999.
| | - | ------------------------------------------------------------------------------

| |  | Method
for Screening drugs useful for treating Alzheimers Disease filed April 29,
1999.
| | - | ------------------------------------------------------------------------------------------

| |  | Methods
for the Identification of Agents that Inhibit or Promote Cataracts and Uses thereof filed
August 18, 2000.
| | - | --------------------------------------------------------------------------------------------------------------------

Patents and License
Agreements

On
May 7, 1999, we entered into a patent assignment and license agreement with The University
of Melbourne. The agreement provided for the assignment to us of various patents and
patent rights to us comprised of an international patent application (PCT application)
entitled, A method of assaying and treating Alzheimer Disease. The patent
application matured into national phase prosecution in Australia, Canada, Europe, Japan
and the United States and selected claims from this application have been granted in
Australia, Canada, Europe, Japan and the United States. The invention is directed to a
method for assaying for Alzheimers disease and to a method for treating the disease
by modulating divalent or trivalent cation and/or heparin interaction in a patient with
Amyloid Precusor Protein, or APP. The technologies or products that may arise from the
invention include therapeutic agents such as zinc binding agents that modulate processing
of APP, as well as a screening assay for Alzheimers disease to determine the amount
of various forms of APP in the circulatory system of a human compared to a control sample
to determine presence of the disease. 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 appointed to utilize
the patents.

On
February 8, 2000, we entered into a patent assignment and intellectual property licensing
agreement with The Biomolecular Research Institute, or BRI, under which two patent
applications were assigned to us. One is an international patent application (PCT
application) entitled Beta-Amyloid Peptide Inhibitors which has matured into
national phase prosecution in Canada, Europe, Japan and the United States and a patent has
been granted in Australia. The invention is directed to compounds which block the metal
binding site on Beta-Amyloid. The technologies or products that may arise from this
invention include metallo-based compounds as therapeutics or preventative treatments for
Alzheimers disease. The other patent is an Australian provisional application, which
has matured into a patent application in the United States entitled Method of
Screening for inhibitors of Alzheimers Disease. The invention is directed to
the use of copper agonist compounds to treat or prevent Alzheimers disease. The
technologies or products that may arise from this invention include using copper agonists
to reduce the processing of APP into beta-amyloid and methods of detecting compounds which
can act as copper agonists for use in therapy. 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. To date, we paid a
total of $350,000 under the agreement, all of which amount was paid in 2000. On September
10, 2007, we, BRI and the Commonwealth Scientific and Industrial Research Organization, or
CSIRO, executed an Assignment and Novation Deed under which BRI assigned to CSIRO all of
its rights and obligations under the patent assignment agreement, including entitlement to
royalties.

On
January 1, 2001, we entered into a license agreement with GHC, under which we licensed
from GHC the patents described below. The agreement was subsequently amended on August 8,
2001 and March 15, 2004. Under the agreement, as amended, the license for a particular
patent expires at the end of the term of the patent rights under the respective patent. In
general, the anticipated patent expiration date is 20 years from the filing date of the
respective patent application. Under the agreement, we agreed to pay GHC a total of
U.S.$166,590 in monthly installments over a 30 month period beginning January 1, 2001 and
U.S.$182,000 in monthly installments over a 30 month period beginning August 1, 2001 for
the right to use the results of research under the license. Such obligations have been
satisfied by us in full, and we retain the rights under this license.

26

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| |  | Use
of clioquinol for the therapy of Alzheimers Disease. This patent application
was filed on January 4, 1999 in the United States. The patent is expected to expire on
January 4, 2019. The invention is directed to the use of Clioquinol as treatment for
Azheimers disease and the technology is limited to the specific use of Clioquinol
as a therapeutic agent. The license provides for potential payments to GHC of an
aggregate U.S$1.5 million, in accordance with the following milestones: (i) U.S.$500,000
upon the submission of a registration dossier in the United States or Europe; and (ii)
U.S.$1.0 million upon the first approval of a product arising from the invention. The
milestones have not been met to date. We terminated the license for this patent and the
patent case was returned to GHC in December 2006 after the patent entitled Use of
Clioquinol for the treatment of Alzheimers Disease was assigned to us from
P.N. Gerolymatos S.A. pursuant to the terms of the settlement agreement that we entered
into on July 28, 2004. For a description of the foregoing settlement agreement see Item
10.C. Additional Information  Material Contracts.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Agents
for Use in the treatment of Alzheimers Disease. This international patent
application (PCT application) was filed on March 11, 1999 and matured into national phase
prosecution in Australia, Canada, Europe, Hong Kong and the United States. The patent is
expected to expire on March 11, 2019. The invention is directed to compositions
containing Clioquinol and known metal binding agents and their combined use in the
treatment of amyloid related diseases, including Alzheimers disease. The technology
is limited to the specific use of Clioquinol combined with a metal chelator chosen from
one of bathocuproine, bathophenanthroline, DTPA, EDTA, EGTA, penicillamine, TETA or TPEN
and pharmaceutical compositions containing such agents. The license provides for
potential payments to GHC of an aggregate U.S$1.5 million, in accordance with the
following milestones: (i) U.S.$500,000 upon the submission of a registration dossier in
the United States or Europe; and (ii) U.S.$1.0 million upon the first approval of a
product arising from the invention. The milestones have not been met to date. We
terminated the license for this patent and the patent case was returned to GHC as of
March 2009.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | An
in vitro system for determining formation of Aâ Amyloid. This
international patent application (PCT application) was filed on October 19, 1994 and
matured into national phase prosecution in Canada, Japan and the United States. The
patent is expected to expire on October 19, 2014. The invention is directed to an assay
for the formation of beta-amyloid in a biological sample and inhibitors of that
formation. The technology encompasses various assays for detection of amyloid screening
candidate agents for their ability to prevent or reverse the formation of amyloid in
vitro, as well as kits which are used in those methods. One specific product relates
to a rapid analytical method for detection amyloid formation in a biological fluid, which
involves a series of steps, resulting in a diagnostic. A second product relates to a
method for determining whether a compound inhibits the formation amyloid, also by a
series of similar steps, i.e. a method for identifying a drug candidate. The license
provides for potential payments to GHC of an aggregate U.S$200,000, subject to and upon
the first approval of a product arising from the invention. The milestone has not been
met to date. We terminated the license for this patent and the patent case was returned
to GHC as of March 2009.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
diagnostic assay for Alzheimers Disease. This international patent
application (PCT application) was filed on October 19, 1994 and matured into national
phase prosecution in Canada and the United States. The patent is expected to expire on
October 19, 2014. The invention is directed to an antibody based diagnostic assay for the
detection and quantification of beta-amyloid species. The technology encompasses various
assays and kits for detecting and/or quantifying Abeta in a candidate solution. This
assay is based on Abeta strongly binding zinc and copper in a pH dependent manner on a
zinc- or copper-treated microwell plate. The assay could be utilized as a diagnostic for
Alzheimers disease. The license provides for potential payments to GHC of an
aggregate U.S.$200,000, subject to and upon the first approval of a product arising from
the invention. The milestone has not been met to date. We terminated the license for this
patent and the patent case was returned to GHC as of March 2009.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Identification
of agents for use in the treatment of Alzheimers Disease.This international
patent application (PCT application) was filed on March 11, 1998 and matured into
national phase prosecution in the Australia, Canada, Europe, Japan and the United States.
The patent is expected to expire on March 11, 2018. 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.
Products arising from the invention include various assays for the identification and
administration of agents useful in the treatment of Alzheimers disease, as measured
by their ability to reduce H2O2 and other free radicals. The technology also includes a
method of treating amyloidosis by administering a metal chelator such as bathocuproine,
bathophenanthroline, penacillamine, TETA or TPEN. The license provides for potential
payments to GHC of an aggregate U.S.$200,000, subject to and upon the first approval of a
product arising from the invention. The milestone has not been met to date. We terminated
the license for this patent and the patent case was returned to GHC as of March 2009.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Method
of screening for drugs useful in treating Alzheimers Disease.This
international patent application (PCT application) was filed on April 29, 1999 and
matured into national phase prosecution in Australia, Canada, Europe, Japan and the
United States. The patent is expected to expire on April 29, 2019. The invention is
primarily directed to specified assays that identify agents capable of modifying the
neurotoxic properties of beta-amyloid. The patent and products arising from the invention
are substantially related to the patent described immediately above entitled Identification
of agents for use in the treatment of Alzheimers Diseaseand the majority of
claims in this case were abandoned in favor of the patent described immediately above. We
terminated the license for this patent and the patent case was returned to GHC as of
March 2009.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Neurotoxic
Oligomers. This international patent application (PCT application) was filed on
June 28, 2000 and matured into national phase prosecution in Canada, China, Europe, Japan
and the United States. Patents have been granted in Australia and New Zealand. The patent
is expected to expire on June 28, 2020. The invention is directed to a novel target for
an Alzheimers disease vaccine. The technologies or products that may arise from
this invention include toxic dimerized full length or fragments of beta-amyloid as active
vaccines for Alzheimers disease or antibodies to these beta-amyloid fragments as
passive vaccines for Alzheimers disease. The license provides for potential
payments to GHC of an aggregate U.S.$1.5 million, in accordance with the following
milestones: (i) U.S.$500,000 upon the submission of a registration dossier in the United
States or Europe; and (ii) U.S.$1.0 million upon the first approval of a product arising
from the invention. The milestones have not been met to date.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Methods
for the identification of Agents that Inhibit or Promote Cataracts and Uses thereof. This
international patent application (PCT application) was filed on August 18, 2000 and
matured into national phase prosecution in Australia, Canada, Europe, Japan and the
United States. The patent is expected to expire on August 18, 2020. 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. The technologies
arising from this invention include various methods for the identification of agents to
be used in the treatment of cataracts. In addition, the use of known chelators such as
bathocuproine, bathophenanthroline, triethylenetetramine, diethylenetriaminepentaacetic
acid, penicillamine, clioquinol and DFO, also derivatives, homologues and analogues. The
license provides for potential payments to GHC of an aggregate U.S.$1.5 million, in
accordance with the following milestones: (i) U.S.$500,000 upon the submission of a
registration dossier in the United States or Europe; and (ii) U.S.$1.0 million upon the
first approval of a product arising from the invention. The milestones have not been met
to date. We terminated the license for this patent, and the patent case was returned to
GHC as of March 2009.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
license agreement with GHC also provides us with the non-exclusive right to use materials,
substances and information that were used by GHC in research sponsored by us. In
consideration of the license, we are required to pay GHC royalties of 1.5% of the net
sales price of products sold utilizing patents exclusively licensed to us. We are also
required to pay certain milestone payments upon submission of a registered dossier to a
registration authority in the United States or Europe and first product approval in the
United States or Europe, to be reduced from the royalties. In addition, we are obligated
to pay GHC 1.5% of any and all non-royalty payments, including license fees, received from
our affiliates. On March 15, 2004, the exclusive license was amended so that we are
required to pay GHC the royalties payable to it for any future exploitation of rights to
certain U.S. patents relating to PBT1 regardless of the inventorship determination, as
required under the settlement agreement among us, P.N. Gerolymatos S.A. and GHC.

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# 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 from those activities will be, subject to
regulation by numerous governmental authorities in Australia, principally the TGA
(Therapeutic Goods Administration), the FDA (Federal Drug Authority) in the United States,
the MHRA (Medicines Control Agency) in the United Kingdom and the EMEA (European Medicines
Evaluation Authority). Prior to marketing, any therapeutic product developed must undergo
rigorous pre-clinical testing and clinical trials, as well as an extensive regulatory
approval process mandated by the TGA and, to the extent that any of our pharmaceutical
products under development are marketed abroad, by foreign regulatory agencies, including
the FDA, EMEA and MHRA.

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

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

For
details regarding clinical trials for our lead compound PBT2, see Item 4.B.
Information on the Company  Business Overview  Clinical Trials for Our
Lead Compound. We cannot make any assurances that we will be able to enter into a
collaborative arrangement with a large pharmaceutical or biotechnology company to
commercialize PBT2. Nor can we make any assurances that once clinical trials are completed
by us or a collaborative partner, we will be able to submit as scheduled a marketing
approval request to the applicable governmental regulatory authority, or that such request
and application will be reviewed and cleared by such governmental authority in a timely
manner, or at all. Although we intend to make use of fast-track and abbreviated regulatory
approval programs when possible and commercially appropriate, we cannot be certain that we
will be able to obtain the clearances and approvals necessary for clinical testing or for
manufacturing and marketing our pharmaceutical products candidates.

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

# Historical Collaborative
Efforts

In
August 2003, utilizing the grant we received from the Commonwealth Government of Australia
under the Biotechnology Innovation Fund, or 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. Under the terms of the agreement, we are required to pay Prima royalties
equal to 5% of any income that we may receive upon commercialization of the monoclonal
antibodies. In May 2006, we terminated our collaboration with Prima due to a delay in
reaching certain milestones, subject to our surviving obligation to pay royalties. The
scientists who worked on the project on behalf of Prima have since been hired by Monash
University, and we have retained their services to characterize selective monoclonal
antibodies under a research agreement that we entered into with Monash University in
January 2007.

# Manufacturing and Raw
Materials

We
have used third party manufacturers to produce the primary drug product (API) and
secondary drug forms for our large-scale, pre-clinical and clinical PBT2 trials, and we
expect that we will use third party manufacturers for any future product candidates. We
cannot make any assurances that we will be able to manufacture sufficient quantities of
PBT2 or any other development or product candidate in a cost-effective or timely manner.
Any delays in production would delay our pre-clinical and human clinical trials, which
could have a material adverse effect on our business, financial condition and results of
operations. We also cannot make any assurances that we will be able to enter into
collaborative or contracting arrangements on acceptable terms with third party
manufacturers that will meet our requirements for quality, quantity and timeliness.

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

|C. | ORGANIZATIONAL
STRUCTURE
|-- | ------------------------

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

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|D. | PROPERTY,
PLANTS AND EQUIPMENT
|-- | ------------------------------

Our
executive offices are located at 369 Royal Parade, Parkville, Victoria 3052, Australia,
where we occupy approximately 3,800 square feet. The lease for the office space, which
expires on October 31, 2010, has an annual rental of A$108,693 for the period through
October 31, 2009 and A$114,901 for the period through October 31, 2010.

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

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

Not
applicable.

|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

The
following discussion and analysis includes certain forward-looking statements with respect
to the business, financial condition and results of operations of our company. The words
estimate, project, intend, expect and
similar expressions are intended to identify forward-looking statements within the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially from those
contemplated by such forward-looking statements, including those risk factors contained in
Item 3.D. of this annual report. You should read the following discussion and analysis in
conjunction with our consolidated financial statements and the notes thereto included in
this annual report.

|A. | OPERATING
RESULTS
|-- | -----------------

# Background

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

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

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

# Overview

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

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Since
completing our initial public offering and listing process on the ASX on March 28, 2000,
we have concentrated our resources toward the pursuit of our disease targets. Initially we
focused on clinical trials of our PBT1 compound as a therapeutic for the treatment of
Alzheimers disease, which we ceased in April 2005 due to an unacceptably high level
of an impurity found in the compound. In early August 2003, our PBT2 compound was
announced as a new lead metal protein attenuating compound, or MPAC, molecule for
Alzheimers disease. We have completed two Phase I studies of PBT2 and a Phase IIa
clinical trial for PBT2 in patients with Alzheimers disease.For details
regarding clinical trials for our lead compound PBT2, see Item 4.B. Information on
the Company  Business Overview  Clinical Trials for Our Lead Compound.

# Critical Accounting
Policies

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

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

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

Other
income recognition. We recognize other income to the extent that it is probable that
the economic benefits will flow to us and the other income can be reliably measured.
Reimbursements of expenses are recognized as income when the reimbursement is received and
the related expenses have been incurred.

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

# Significant Costs and
Expenses

Research
and development expenses. Our research and development expenses consist primarily of
compensation and related costs for expenses for testing facilities and payments under our
research, pre-clinical and clinical developmental agreements. Research and development
expenses also include costs associated with the acquisition and development of patents,
which have been expensed subsequent to December 1999.

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Personnel
expenses. Our personnel expenses consist of directors fees, consultancy fees
paid to clinicians and scientists, salaries and benefits paid to employees and officers,
and equity-based payments awarded to directors, officers and employees.

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

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

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

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

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

| |  |  |  
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| |  |  | 

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

Foreign
exchange gain (loss). Foreign exchange gain (loss) includes the net unrealized gain or
loss on cash balances held in foreign currencies (primarily U.S. dollars, British Pounds
and Euros) as well as net realized gains and losses on foreign currency transactions.

Gain
(loss) on fair value of financial liabilities. Each reporting period, we are required
to revalue financial liabilities. We recorded financial liabilities attributable to
warrants that were issued to the investors in our private placement in the United States
in June 2004. The warrants, which expired on June 4, 2009, permitted the investors to
purchase an aggregate 3,000,000 ADRs at an exercise price of US$8.00 per ADR. Because the
warrants were exercisable in a currency that is not the functional currency of our
company, they are required to be classified as a financial liability. When the fair value
of the outstanding warrants increased or decreased, the difference was recorded as a gain
or loss, as applicable, on the fair value of financial liabilities.The warrants
expired without being exercised.

# Results of Operations

# Year ended June 30, 2009
compared to year ended June 30, 2008

Revenue from continuing
operations

Revenue
from continuing operations decreased to A$428,154 for the year ended June 30, 2009 from
A$490,943 for the year ended June 30, 2008, a decrease of A$62,789, or 13%. Revenue from
continuing operations consisted of A$428,154 and A$490,943 in interest income for the
years ended June 30, 2009 and 2008, respectively. The decrease in revenue from continuing
operations in the 2009 fiscal year is primarily attributable to lower interest income as a
result of a reduction in cash and cash equivalents.

33

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Other Income

We
did not have other income for the year ended June 30, 2009. We had other income of A$170
for the year ended June 30, 2008.

Research and development
expenses

Research
and development expenses (including research and development expenses paid to related
parties) decreased to A$2,215,358 for the year ended June 30, 2009 from A$5,757,168 for
the year ended June 30, 2008, a decrease of A$3,541,810, or 62%. The decrease in research
and development expenses in the 2009 fiscal year is primarily attributable to most costs
associated with the Phase IIa clinical trial being expended in the 2008 fiscal year. The
trial commenced in December 2006 and was completed in February 2008. We anticipate that in
fiscal year 2010, our research and development expenditure will be primarily directed at
possible Phase II studies of PBT2 for the treatment of Alzheimers disease and
Huntingtons disease. In addition, we also intend to investigate lead MPAC candidate
compounds for Parkinsons disease and brain cancer models, the effect of our
monoclonal antibody in models of Alzheimers disease, and the behavior of our
metal-based amyloid binding compounds as amyloid imaging agents.

Personnel expenses

Personnel
expenses decreased to A$3,832,804 for the year ended June 30, 2009 from A$5,350,189 for
the year ended June 30, 2008, a decrease of A$1,517,385, or 28%. The decrease in personnel
expenses in the 2009 fiscal year is primarily attributable to decreased equity-based
compensation in the form of options and shares issued to directors, employees and
consultants. In the 2009 fiscal year, we expensed A$1,305,471 in respect of equity-based
payments to directors, consultants and employees compared to A$2,237,421 in the 2008
fiscal year. Personnel expenses in the 2009 and 2008 fiscal years include a portion of the
total fair value of options granted to our directors and employees in the previous fiscal
years of A$516,432 and A$420,343, respectively. The decrease in personnel expense in the
2009 fiscal year is also due to a decrease in consulting and director fees for such
period.

Intellectual property
expenses

Intellectual
property expenses increased to A$1,107,534 for the year ended June 30, 2009 from A$469,428
for the year ended June 30, 2008, anincreaseof A$638,106, or 136%. The
increasein intellectual property expenses in the 2009 fiscal year was due to two
international (PCT) patent applications maturing into numerous national phase patent
office filings globally and continuing patent prosecution forour MPAC chemistry
patent cases, including the 8-hydroxyquinoline patent case and immunotherapy patent case,
which are in advanced patent prosecution stages. In addition, in 2009 we incurred
increased legal expenses in connection with the potential licensing of our MPAC assets.

Auditor and accounting
expenses

Auditor
and accounting expenses decreased to A$129,998 for the year ended June 30, 2009 from
A$331,950 for the year ended June 30, 2008, a decrease of A$201,952, or 61%. The decrease
in auditor and accounting expenses in the 2009 fiscal year is primarily attributable to
additional auditor fees incurred during the 2008 fiscal year in connection with a
Securities and Exchange Commission, or SEC, review of our annual report on Form 20-F for
the fiscal year ended June 30, 2006 and responding to the comments of the SEC staff. In
addition, we renegotiated our independent auditors fees for the 2009 fiscal year,
resulting in a $A70,000 decrease in audit fees compared to the 2008 fiscal year audit.

Travel expenses

Travel
expenses increased to A$195,251 for the year ended June 30, 2009 from A$146,651 for the
year ended June 30, 2008, an increase of A$48,600, or 33%. The increase in travel expenses
in the 2009 fiscal year is primarily attributable to increased overseas travel by
executives for company business meetings and by executives and consultants in connection
with their attendance at the International Conference on Alzheimers Disease (ICAD)
in July 2008.

34

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Public relations and
marketing expenses

Public
relations and marketing expenses increased to A$222,679 for the year ended June 30, 2009
from A$141,337 for the year ended June 30, 2008, an increase of A$81,342, or 58%. Our
public relations and marketing expenses consist primarily of costs relating to our
U.S.-based investor relations consultants. The increase in public relations and marketing
expenses in the 2009 fiscal year is primarily attributable to an increase in the fees paid
to our U.S.-based investor relations consultants.

Depreciation expenses

Depreciation
expenses increased to A$34,190 for the year ended June 30, 2009 from A$25,349 for the year
ended June 30, 2008, an increase of A$8,841, or 35%. The increase in depreciation expenses
in the 2009 fiscal year is primarily attributable to additional computer equipment in the
aggregate amount of A$31,474 that we purchased during the 2009 fiscal year combined with
the acceleration of depreciation for obsolete computer equipment.

Other expenses

Other
expenses (including other expenses paid to related parties) increased to A$978,757 for the
year ended June 30, 2009 from A$975,404 for the year ended June 30, 2008, an increase of
A$3,353, or 0.3%. The increase in other expenses in the 2009 fiscal year is primarily
attributable to an increase in corporate compliance costs as a result of increased legal
fees.

Foreign exchange gain
(loss)

We
recorded a foreign exchange loss of A$6,723 for the year ended June 30, 2009 compared to a
foreign exchange loss of A$402,886 for the year ended June 30, 2008. In the 2009 fiscal
year, the Australian dollar appreciated against the U.S. dollar, while the Australian
dollar depreciated against the U.S. dollar in the 2008 fiscal year. In fiscal 2009, we
incurred a foreign exchange gain of A$5,536 attributable to the cash balances that we held
in U.S. dollars, a foreign exchange gain of A$5,893 attributable to the cash balances that
were held in British Pounds, a foreign exchange gain of A$4,072 attributable to cash
balances that were held in Euros and a foreign exchange loss of A$21,654 attributable to
foreign currency transactions. In fiscal 2008, we incurred a foreign exchange loss of
A$425,794 attributable to the cash balances that we held in U.S. dollars, a foreign
exchange loss of A$8,726 attributable to the cash balances that were held in British
Pounds, a foreign exchange loss of A$508 attributable to cash balances that were held in
Euros and a foreign exchange gain of A$31,466 attributable to foreign currency
transactions.

Gain (loss) on fair value
of financial liabilities

We
recorded a gain on fair value of financial liabilities of A$772,430 for the year ended
June 30, 2009 compared to a loss on fair value of financial liabilities of A$451,429 for
the year ended June 30, 2008, attributable to the warrants that were issued in connection
with our private placement of securities in the United States in June 2004 that expired on
June 4, 2009. The gain and loss on fair value of financial liabilities is attributable to
the changes in the market price of our ADRs and the volatility of the ADR market price.

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

Revenue from continuing
operations

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

35

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Other Income

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

Research and development
expenses

Research
and development expenses (including research and development expenses paid to related
parties) increased to A$5,757,168 for the year ended June 30, 2008 from A$4,492,193 for
the year ended June 30, 2007, an increase of A$1,264,975, or 28%. The increase in research
and development expenses in the year ended June 30, 2008 was primarily attributable to the
increased costs associated with the Phase IIa clinical trial. The trial commenced in
December 2006 and was completed in February 2008 and the majority of expenditure related
to the trial was incurred in the latter part of the trial. Additional expenditure was also
incurred in respect of drug discovery.

Personnel expenses

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

Intellectual property
expenses

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

Auditor and accounting
expenses

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

Travel expenses

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

36

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Public relations and
marketing expenses

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

Depreciation expenses

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

Other expenses

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

Foreign exchange gain
(loss)

We
recorded a foreign exchange loss of A$402,886 for the year ended June 30, 2008 compared to
a foreign exchange loss of A$757,578 for the year ended June 30, 2007. In fiscal
2008, we incurred a foreign exchange loss of $425,794 attributable to the cash balances
that we held in U.S. dollars, a foreign exchange loss of A$8,726 attributable to the cash
balances that were held in British Pounds, a foreign exchange loss of A$508 attributable
to cash balances that were held in Euros and a foreign exchange loss of A$31,466
attributable to foreign currency transactions. In fiscal 2007, we incurred a foreign
exchange loss of $763,797 attributable to the cash balances that we held in U.S. dollars,
a foreign exchange loss of A$6,499 attributable to the cash balances that were held in
British Pounds, a foreign exchange loss of A$7,839 attributable to cash balances that were
held in Euros and a foreign exchange gain of A$20,554 attributable to foreign currency
transactions.

Gain (loss) on fair value
of financial liabilities

We
recorded a loss on fair value of financial liabilities of A$451,429 for the year ended
June 30, 2008 compared to a gain of A$607,691 for the year ended June 30, 2007
attributable to the warrants that were issued in connection with our private placement of
securities in the United States in June 2004. The gain and loss on fair value of financial
liabilities is attributable to the changes in the market price of our ADRs and the
volatility of the ADR market price.

# 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.

# 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.

37

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# Recently Issued
International Accounting Standards and Pronouncements

Certain
new International accounting standards and interpretations have been published that are
not mandatory for June 30, 2009 reporting periods. Based on our assessment, we believe
that the following new standards and interpretations could in the future have an impact on
our consolidated financial statements.

IAS
23 (Amendment), Borrowing costs (effective for annual periods beginning on or
after January 1, 2009 and applicable to our company effective July 1, 2009). The
amendment requires an entity to capitalize borrowing costs directly attributable to the
acquisition, construction or production of a qualifying asset (one that takes a
substantial period of time to get ready for use or sale) as part of the cost of that
asset. The option of immediately expensing those borrowing costs will be removed. IAS 23
(Amendment) is not expected to have an impact on our financial statements as we have no
qualifying assets.

IAS
1 (Revised), Presentation of financial statements (effective for annual
periods beginning on or after January 1, 2009 and applicable to our company effective July
1, 2009).The revised standard will prohibit the presentation of items of
income and expenses (that is, non-owner changes in equity) in the statement of
changes in equity, requiring non-owner changes in equity to be presented
separately from owner changes in equity. All non-owner changes in equity will be required
to be shown in a performance statement, but entities can choose whether to present one
performance statement (the statement of comprehensive income) or two statements (the
income statement and statement of comprehensive income). Where entities restate or
reclassify comparative information, they will be required to present a restated balance
sheet as at the beginning comparative period in addition to the current requirement to
present balance sheets at the end of the current period and comparative period. These
amendments are only expected to affect the presentation of our financial statements and
will not have a direct impact on the measurement and recognition of amounts disclosed in
the financial statements. We anticipate that we will present a single Statement of
Comprehensive Income rather than two separate statements due to the minimum number of
items expected to be classified as Other Comprehensive Income.

IFRS
2 (Amendment), Share-based payment (effective for annual periods beginning on
or after January 1, 2009 and applicable to our company effective July 1, 2009). The
amended standard deals with vesting conditions and cancellations. It clarifies that
vesting conditions are service conditions and performance conditions only. Other features
of a share-based payment are not vesting conditions. These features would need to be
included in the grant date fair value for transactions with employees and others providing
similar services; they would not impact the number of awards expected to vest or valuation
there of subsequent to grant date. All cancellations, whether by us or by other parties,
should receive the same accounting treatment. We have share-based payment arrangements
with vesting conditions as defined under this standard; therefore these amendments are not
expected to have any impact on our financial statements.

IAS
32 (Amendment), Financial instruments: Presentation, and IAS 1 (Amendment),
Presentation of financial statements  Puttable financial instruments and
obligations arising on liquidation (effective for annual periods beginning on or
after January 1, 2009 and applicable to our company effective July 1, 2009). The
amended standards require entities to classify puttable financial instruments and
instruments, or components of instruments that impose on the entity an obligation to
deliver to another party a pro rata share of the net assets of the entity only on
liquidation as equity, provided the financial instruments have particular features and
meet specific conditions. These amendments are not expected to have any impact on our
financial statements as we have not issued puttable financial instruments as defined by
the amendments.

IAS
27 (Revised), Consolidated and separate financial statements (effective for
annual periods beginning on or after January 1, 2009 and applicable to our company
effective July 1, 2009). The revised standard requires the effects of all
transactions with non-controlling interests to be recorded in equity if there is no change
in control and these transactions will no longer result in goodwill or gains and losses.
The standard also specifies the accounting when control is lost. Any remaining interest in
the entity is re-measured to fair value, and a gain or loss is recognized in profit or
loss. We began to apply IAS 27 (Revised) prospectively to transactions with
non-controlling interests from July 1, 2009.

IFRS
3 (Revised), Business combinations (effective for annual periods beginning on
or after January 1, 2009 and applicable to our company effective July 1, 2009). The
revised standard continues to apply the acquisition method to business combinations, with
some significant changes. For example, all payments to purchase a business are to be
recorded at fair value at the acquisition date, with contingent payments classified as
debt subsequently re-measured through the income statement. There is a choice on an
acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree
either at fair vale or at the non-controlling interests proportionate share of the
acquirees net assets. All acquisition-related costs should be expensed. We began to
apply IFRS 3 (Revised) prospectively to all business combinations from July 1, 2009. These
amendments are only expected to affect the presentation of our financial statements and
will not have a direct impact on the measurement and recognition of amounts disclosed in
the financial statements. These amendments are not expected to have any impact on our
financial statements as we do not have any business combinations.

38

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IAS
23 (Amendment), Borrowing costs (effective for annual periods beginning on or
after January 1, 2009 and applicable to our company effective July 1, 2009). The
amendment is part of the IASBs annual improvements project published in May 2008.
The definition of borrowing costs has been amended so that interest expense is calculated
using the effective interest method defined in IAS 39 Financial instruments:
Recognition andmeasurement. This eliminates the inconsistency of terms between
IAS 39 and IAS 23.

IAS
28 (Amendment), Investments in associates (and consequential amendments to IAS
32, Financial Instruments: Presentation, and IFRS 7, Financial
instruments: Disclosures) (effective for annual periods beginning on or after
January 1, 2009 and applicable to our company effective July 1, 2009). The amendment
is part of the IASBs annual improvements project published in May 2008. An
investment in an associate is treated as a single asset for the purposes of impairment
testing. Any impairment loss is not allocated to specific assets included within the
investment, for example, goodwill. Reversals of impairment are recorded as an adjustment
to the investment balance to the extent that the recoverable amount of the associate
increases. We have two inactive subsidiaries and do not have any jointly controlled
entities or associates and therefore our financial statements are not expected to be
impacted by this standard change.

IAS
19 (Amendment), Employee benefits (effective for annual periods beginning on
or after January 1, 2009 and applicable to our company effective July 1, 2009). The
amendment is part of the IASBs annual improvements project published in May 2008.
The amendment clarifies that a plan amendment that results in a change in the extent to
which benefit promises are affected by future salary increases is a curtailment, while an
amendment that changes benefits attributable to past service gives rise to a negative past
service cost if it results in a reduction in the present value of the defined benefit
obligation. The definition of return on plan assets has been amended to state that plan
administration costs are deducted in the calculation of return on plan assets only to the
extent that such costs have been excluded from measurement of the defined benefit
obligation. The distinction between short term and long term employee benefits will be
based on whether benefits are due to be settled within or after 12 months of employee
service being rendered. IAS 37, Provisions, contingent liabilities and contingent
assets, requires contingent liabilities to be disclosed, not recognized. IAS 19
has been amended to be consistent.

IAS
1 (Amendment), Presentation of financial statements effective for annual
periods beginning on or after January 1, 2009 and applicable to our company effective July
1, 2009). The amendment is part of the IASBs annual improvements project
published in May 2008. The amendment clarifies that some rather than all financial assets
and liabilities classified as held for trading in accordance with IAS 39,
Financial instruments: Recognition and measurement are examples of
current assets and liabilities respectively. IAS 39 (Amendment) is not expected to have an
impact on our financial statements.

There
are a number of minor amendments to IFRS 7, Financial instruments:
Disclosures, IAS 8, Accounting policies, changes in accounting
estimates and errors, IAS 10, Events after the reporting
period, IAS 18, Revenue and IAS 34, Interim financial
reporting, which are part of the IASBs annual improvements project
published in May 2008 (not addressed above). These amendments are unlikely to have an
impact on our financial statements and have therefore have not been described in further
detail.

IFRIC
16, Hedges of a net investment in a foreign operation (effective for annual
periods beginning on or after January 1, 2009 and applicable to our company effective July
1, 2009). IFRIC 16 clarifies the accounting treatment in respect of net investment
hedging. This includes the fact that net investment hedging relates to differences in
functional currency not presentation currency, and hedging instruments may be held
anywhere in the group. The requirements of IAS 21, The effects of changes in
foreign exchange rates, apply to the hedged item. IFRIC 16 is not expected to
have a material impact on our financial statements.

39

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

We
are a development stage company and have had no sales income to date, and as of June 30,
2009 our accumulated deficit totaled A$73,566,505. 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. During the period of 2001 to
2006, we were awarded government grants in the aggregate amount of A$3.3 million; we have
not received any government grants since 2006.

In
March 2003, we completed the conversion of our 7,289,310 outstanding listed options into
ordinary shares. As a result of the conversion, we received approximately A$3.5 million in
net proceeds, which were added to our working capital. In September 2003, we raised an
additional approximately A$4.7 million, net of issuance costs, through a private placement
of 7.1 million ordinary shares to institutional and accredited investors at a subscription
price of A$0.70 per share.

In
April 2004, we raised approximately US$20 million before issuance costs (A$26.4 million
net of issuance costs) in a private placement in the United States (which amount was held
in escrow pending receipt of the requisite approval of the transaction by our shareholders
that was obtained on June 1, 2004). The private placement was for 4,000,000 ADRs to
institutional and professional investors at a price of US$5.00 per ADR. The private
placement also involved the acquisition by the investors of five-year warrants to purchase
an additional 3,000,000 ADRs at an exercise price of US$8.00 per ADR, all of which expired
without being exercised on June 4, 2009. In December 2004, we raised approximately A$4.7
million in net proceeds through the exercise of options to purchase 9,506,666 ordinary
shares having an exercise price of A$0.50 per share.

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

In
October 2007, we raised A$8.5 million (before costs) in a private placement of 29.8
million of our ordinary shares (equivalent to 3.0 million ADRs) to professional and
institutional investors in Australia and the United States at a price of A$0.285 per
ordinary share (approximately US$2.97 per ADR) and three-year options to purchase an
additional 4.94 million ordinary shares (equivalent to 494,000 ADRs) at an exercise price
of A$0.37 per ordinary share (approximately US$3.85 per ADR) and an additional 4.94
million ordinary shares (equivalent to 494,000 ADRs) at an exercise price of A$0.43 per
ordinary share (approximately US$4.48 per ADR). To date, no options have been exercised.

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

In
December 2008, we raised A$114,000 (before costs) from the exercise of options previously
granted to a consultant. The options were exercised at $A0.285 per ordinary share
(approximately US$4.43 per ADR).

On
September 8, 2009, we entered into a private placement agreement with one of our
institutional shareholders in the United States, under which we will raise an aggregate
A$6.0 million before costs (approximately A$5.7 million net of costs) in a private
placement of our ordinary shares to such investor. Of such amount, A$3.0 million was paid
at the closing of the private placement on September 11, 2009 and an additional A$3.0
million will be paid on or before September 30, 2009. The private placement was for 30
million ordinary shares (equivalent to three million ADRs) at a price of A$0.20 per share
(A$2.0 per ADR). We also agreed to grant the investor, subject to shareholder approval,
options to purchase 10 million ordinary shares (equivalent to one million ADRs) at an
exercise price of A$0.30 per share (A$3.0 per ADR) that will expire four years after the
date of the issuance of the shares in the private placement. If shareholder approval is
not obtained for the option grant, the options will be granted at such time that
shareholder approval is no longer required for the issuance under the rules of the
ASX. For additional information regarding the terms of the private placement, see Item
10.C. Additional Information  Material Contracts.

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From
inception to June 30, 2009, our capital expenditures have totaled A$491,096 (including
A$200,000 of noncash expenditures), consisting of computer equipment, furniture and
fixtures, fit-out costs and laboratory equipment that is being used in connection with our
research at the University of Melbourne. Capital expenditures for equipment are
depreciated on a straight-line basis over the estimated useful lives of three to 20 years,
with a net balance at June 30, 2009 of A$71,150. 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.

We
had A$4,304,977 of cash and cash equivalents at June 30, 2009, compared to A$11,219,035 at
June 30, 2008. We believe our existing cash and cash equivalents, the proceeds from
our A$6.0 million (before costs) private placement in September 2009, as well as
anticipated interest income and potential option exercises will be sufficient to support
our current operating plan for at least the next 12 months; however, we have based this
estimate on assumptions that may prove to be incorrect. Our future funding requirements
will depend on many factors, including, but not limited to:

| |  | costs
and timing of obtaining regulatory approvals;
| | - | ---------------------------------------------------

| |  | the
costs and timing of obtaining, enforcing and defending our patent and intellectual
property;
| | - | ------------------------------------------------------------------------------------------------

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

| |  | the
progress and number of our research programs in development.
| | - | ----------------------------------------------------------------

We
anticipate that we will require substantial additional funds in order to achieve our
long-term goals and complete the research and development of our current principal
pharmaceutical product candidate. In addition, we will require additional funds to pursue
regulatory clearances, and defend our intellectual property rights, establish commercial
scale manufacturing facilities, develop marketing and sales capabilities and fund
operating expenses. We intend to seek such additional funding through public or private
financings and/or through licensing of our assets or 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 license our assets or establish new strategic alliances or other
arrangements with corporate partners on acceptable terms, or at all. The current global
economic climate could adversely impact our ability to obtain such funding and license our
assets or enter into alliances or other arrangements with corporate partners. Any
shortfall in funding could result in our having to curtail or cease our operations,
including our research and development activities, which would be expected to have a
material adverse effect on our business, financial condition and results of operations.

Cash Flows

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

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

41

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Net
cash used in operating activities was A$6,994,174, A$9,391,390 and A$9,199,750 during the
years ended June 30, 2009, 2008 and 2007, respectively. Our payments to suppliers and
employees during the years ended June 30, 2009, 2008 and 2007 were A$7,511,372,
A$9,766,851 and A$9,726,197, respectively. The decrease from the year ended June 30, 2008
to the year ended June 30, 2009 was primarily due to decrease in research and development
expenditure. The increase in payments from the year ended June 30, 2007 to the year ended
June 30, 2008 was primarily due to an increase in research and development expenditure.
During the years ended June 30, 2009, 2008 and 2007, our payments to suppliers and
employees was offset by interest income of A$517,198, A$375,461 and A$526,447,
respectively.

Net
cash used in investing activities was A$36,192, A$81,770 and A$4,259 during the years
ended June 30, 2009, 2008 and 2007, respectively. Cash flows used for investing activities
was primarily attributable to payments for the purchase of property and equipment for the
years ended June 30, 2009, 2008 and 2007.

Net
cash provided by financing activities was A$100,807, A$13,717,248 and A$7,374,725 for the
years ended June 30, 2009, 2008 and 2007. Cash flows provided by financing activities
during the year ended June 30, 2009 are attributable to a consultant exercising options to
purchase 400,000 ordinary shares at an exercise price of A$0.285 per share (after costs).
Cash flows provided by financing activities during the year ended June 30, 2008 are
attributable to private placements of our ordinary shares in Australia and the United
States in October 2007 and May 2008. Cash flows provided by financing activities during
the year ended June 30, 2007 are attributable to a private placement in November 2006 of
21.8 million ordinary shares (equivalent to 2.18 million ADRs) at a price of A$0.357 per
ordinary share (approximately US$2.80 per ADR). The private placement also involved the
acquisition by the investors of three-year options to purchase an additional 4.35 million
ordinary shares (equivalent to 435,000 ADRs) at an exercise price of A$0.446 per ordinary
share (approximately US$3.40 per ADR).

We
realized a foreign exchange gain of A$15,501 for the year ended June 30, 2009. We realized
foreign exchange losses of A$434,309 and A$775,238 for the years ended June 30, 2008 and
2007, respectively. In 2008 and 2007, the Australian dollar depreciated against the U.S.
dollar by 11% and 12%, respectively, while the Australian dollar appreciated against the
U.S. dollar by 16% in 2009.

|C. | RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES
|-- | ----------------------------------------------

Early
in our companys history, our activities were primarily focused on the acquisition
and development of patents to enable the research and development of our core technology.
In January 2001, we entered into an exclusive license agreement with the General Hospital
Corporation to access patented technologies that could be of assistance in the discovery
and characterization of lead compounds (see Item 4.B. Information on the Company
 Business Overview  Patents and License Agreements). This license also
provided us access to PBT1 (clioquinol) for drug development in Alzheimers disease.
To build a cost effective research and development company, in December 2000 we entered
into an agreement with the University of Melbourne to conduct on our behalf certain
research programs in Alzheimers disease and other neurological disorders, to
undertake basic mechanistic research on our compounds and conduct screens to assess
therapeutic utility of our compounds (see Item 10 Additional Information 
Material Contracts). In recent years, we increased our practice of building valuable
research collaborations with institutes based in Australia, the United States, the United
Kingdom and other countries to enable us to investigate a variety of therapeutic
indications including Huntingtons disease, cancers, Parkinsons disease and
age-related macular degeneration. These collaborative arrangements ensure that we work
with well-respected laboratories with specific expertise in screening and animal modeling
of relevance to the particular indication, without incurring ongoing administrative and
personnel costs. We maintain in-house patent counsel and research and development project
expertise to coordinate these research collaborations.

42

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---

When
a lead compound is identified as suitable for clinical development, we establish a project
team to coordinate all pre-clinical and clinical development and manufacturing activities.
Typically, we engage a clinical research organization to manage patient recruitment, data
management and trial conduct and reporting, as was the case with the development of our
lead compound PBT2 through Phase I and Phase II development. All clinical, pre-clinical,
clinical development and manufacturing of our compounds is performed in compliance with
the appropriate governing authorities and standards (for example, the International
Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals
for Human Use).

Research
and development expenses amounted to A$2,215,358, A$5,757,168 and A$4,492,193 during the
years ended June 30, 2009, 2008 and 2007, respectively. Costs associated with patent
applications and defense of patent applications are classified as intellectual property
expenses and amounted to A$1,107,534, A$469,428 and A$600,232 during the years ended June
30, 2009, 2008 and 2007, respectively.

Our
research and development expenses consist primarily of compensation and related costs for
research and development personnel, expenses for testing facilities and payments under our
research and/or clinical agreements. Research and development expenses also include costs
associated with the acquisition and development of patents subsequent to December 1999. We
do not maintain accounting systems to accurately track research and development costs on
an individual project basis because a significant portion of our historic research and
development expenses benefited our two major research and development projects, and
therefore were not tracked individually by project; rather, we tracked these costs by the
type of costs incurred. Such costs are charged to operations as incurred. See Note 3 to
the consolidated financial statements. 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.

|D. | TREND
INFORMATION
|-- | -----------------

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

|E. | OFF-BALANCE
SHEET ARRANGEMENTS
|-- | ------------------------------

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

|F. | TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|-- | ---------------------------------------------

The
following table summarizes our minimum contractual obligations as of June 30, 2009.

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

---

|*
Purchase obligations relate solely to our patents and license agreements described under
Item 4.B. Information on the Company  Business Overview  Patents and
License Agreements. and our research and development agreement described under Item
10 Additional Information  Material Contracts. Purchase obligations
exclude obligations under our employment agreements with Mr. Geoffrey Kempler, our Chief
Executive Officer, and Ms. Dianne Angus, our Chief Operating Officer (see Item 6.C. Operating
and Financial Review and Prospects  Compensation) and our consulting
agreement with Professor Ashley Bush (see Item 10. Additional Information  Material
Contracts). See Note 20 to our consolidated financial statements.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43

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

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

Our
directors and executive officers are as follows:

|Name                   | Age | Position                                                      
|---------------------- | --- | --------------------------------------------------------------
|
|
|
|
|Geoffrey P. Kempler    | 54  | Chairman of the Board of Directors and Chief Executive Officer
|                      
|Richard Revelins       | 47  | Chief Financial Officer and Secretary                         
|                      
|Dianne Angus           | 49  | Chief Operating Officer                                       
|                      
|Peter Marks(1)         | 53  | Director                                                      
|                      
|Brian D. Meltzer(1)(2) | 55  | Director                                                      
|                      
|George W. Mihaly(1)(2) | 56  | Director                                                      

---

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

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

Geoffrey
Paul Kempler has served as the Chairman of our Board of Directors since November 1997,
between November 1997 and August 2004 he served as our Chief Executive Officer, and in
June 2005 he again assumed the position of Chief Executive Officer. Mr. Kempler is one of
the founders of our company. Mr. Kempler is a qualified psychologist. Mr. Kempler, who has
extensive experience in investment and business development, has been responsible for the
implementation of our strategic plan and the commercialization of our technology. Mr.
Kempler holds a B.Sc degree in science from Monash University and Grad. Dip. App. Soc.
Psych. degree from Swinburne University.

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

Dianne
Angus has served as our Chief Operating Office since May 2007. Ms. Angus joined our
company in August 2002, initially serving as our Vice President of Intellectual Property
and Licensing, she was promoted to Senior Vice President of Business Development,
Intellectual Property and Research in July 2004 and served in that position until being
promoted to her current position in May 2007. From 1992 to 2000, Ms Angus managed the
intellectual property, licensing and biotechnology product development assets of two
Australian companies, AMRAD Corporation Limited and Florigene Limited. At Florigene Ms.
Angus was the joint venture alliance manger with Suntory for 3 years. From June 2000 to
August 2002, Ms Angus was Director of Dianne Angus and Associates Pty. Ltd. providing
strategic business development, technology evaluation and intellectual property consulting
services to biotechnology companies. Ms. Angus has worked in the commercial biotechnology
sector for over 17 years directing product valuation, acquisition and product licensing.
During her career, Ms. Angus has managed large and diverse intellectual property
portfolios, contract rights and enforcement. Ms Angus has negotiated and executed many
commercial licenses and research and product development agreements with entities ranging
from Novartis, Monsanto, Suntory and Du Pont to numerous global research institutes. Ms.
Angus has also undertaken due diligence assessments on several Australian biotechnology
companies for investment brokers. Ms. Angus holds a Bachelor of Science (Education) and
Bachelor of Science (Honours) degree from the University of Melbourne, a Masters degree in
Biotechnology from Monash University, a Graduate Diploma in Intellectual Property Law from
Monash University, a Diploma in Intellectual Property Practice from the Institute of
Patent and Trademark Attorneys of Australia and is a registered Australian Patent and
Trade Mark Attorney.

44

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Peter
Marks has served as a director of our company since July 2005. Since November 21,
2006, Mr. Marks has also served as Executive Chairman of KarmelSonix Ltd, a medical
devices company listed on the ASX that is focused on developing and commercializing a
range of devices in the respiratory and medicine space. Mr. Marks is currently also a
director of Peregrine Corporate Limited, an Australian-based investment bank, and
Watermark Global Plc, an AIM listed company, which commercializes the treatment and
recycling of acid mine drainage water from South African mines. 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 ASX and was founding Director of Momentum Funds Management Pty
Ltd, an Australian venture capital firm. From December 1990 until December 1991, Mr. Marks
served as Director of Corporate Finance at Burdett Buckeridge & Young Ltd in their
Melbourne offices, from August 1988 until November 1990, he held senior corporate finance
positions at Barings Securities Ltd, and from July 1985 until July 1988, he served as an
Associate Director of McIntosh Securities, now Merrill Lynch Australia. In his roles with
these various financial institutions, Mr. Marks was responsible for advising a substantial
number of listed and unlisted companies on issues ranging from corporate and company
structure, to valuations, business strategies, acquisitions and international
opportunities. Mr. Marks holds a Bachelor of Economics degree, a Bachelor of Law degree
and Graduate Diploma in Commercial Law from Monash University in Melbourne, Australia, and
an MBA degree from the Scottish School of Business at the University of Edinburgh.

Brian
Derek Meltzer has served as a director of our company since December 1999. Mr. Meltzer
has over 30 years experience in economics, finance and investment banking. 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 board of directors of a number of private companies. Mr.
Meltzer is also a director on the board of directors of the Australian-Israel Chamber of
Commerce and the Paraplegic and Quadriplegic Association of Victoria (Paraquad). Mr.
Meltzer is Chairman of our Audit Committee, Remuneration Committee and Nomination
Committee. Mr. Meltzer holds a Bachelor of Commerce degree from the University of Auckland
and a Master of Economics degree from Monash University.

Dr.
          George William Mihaly has served as director of our company since December
          1999. Dr. Mihaly also serves as a director of Waide Pty Ltd., a private
company.           Dr Mihaly has had an extensive 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 to the
          pharmaceutical industry. Synermedica merged with the global consultant research
          organization Kendle International Inc. in April 2000 and Dr Mihaly continued as
          Managing Director of the merged entity in Australia (now called Kendle Pty Ltd)
          until December 2004. Over the course of the last 24 years in academia and
          industry, Dr Mihaly has amassed extensive experience in both the science and
          logistics of setting up, monitoring, managing and evaluating results from Phase
          I, II, III and IV clinical trials. Dr. Mihaly holds a B.Pharm. from Monash
          University, M.Sc. degree from Sydney University and Ph.D. degree from Melbourne
          University, and is a fellow of the Australian Institute of Company Directors.

45

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

The
following table sets forth all compensation we paid for the year ended June 30, 2009 with
respect to each of our executive officers and directors during the 2009 fiscal year.

| |                         | Salaries,
fees,
commissions
and
bonuses (1) | Pension,
retirement
and other
similar
benefits
| | ----------------------- | ------------------------------------------- | ----------------------------------------------
|
|
|
|
| | Geoffrey P. Kempler (2) | A $                                         | 329,896                                       
| | Richard Revelins        | A $                                         | 66,667                                        
| | Dianne Angus            | A $                                         | 318,559                                       
| | Peter Marks             | A $                                         | 45,833                                        
| | Brian D. Meltzer        | A $                                         | 75,000                                        
| | George W. Mihaly        | A $                                         | 62,500                                        

| | 
| | 

| | (1) | Does
not include A$497,321 of expenses attributable to equity-based compensation
               recorded in fiscal year 2009.
| | --- | -----------------------------------------------------------------------------------------------------------------------------

| | (2) | Mr.
          Kempler has elected to reduce his compensation from the beginning of May 2009,
          and has also elected to not accept a A$100,000 incentive bonus to which he is
          entitled until further notice.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
accordance with the approval of our shareholders at our 2004 annual general meeting of
shareholders, the aggregate amount available per annum for the remuneration of our
non-executive directors for their services (payable in cash, ordinary shares or options)
is A$1,250,000.

As
of June 30, 2009, our directors and executive officers as a group, then consisting of six
persons, held options to purchase an aggregate 8,194,837 of our ordinary shares. Of such
options, (i) options to purchase 1,900,000 ordinary shares are currently exercisable for
nil consideration on or before June 30, 2010. Such options may not be exercised until and
unless the price of our ordinary shares has achieved and maintained a minimum value of
A$1.00 for five consecutive trading days. The ordinary shares issued upon exercise of
these options may not be disposed of without the prior consent of our Board of Directors;
(ii) options to purchase 2,200,000 ordinary shares are exercisable for nil consideration
on or before July 31, 2009. Such options may not be exercised until and unless the price
of our ordinary shares has achieved and maintained a minimum value of A$0.80 for five
consecutive trading days. The ordinary shares issued upon exercise of these options may
not be disposed of without the prior consent of our Board of Directors; (iii) options to
purchase 1,444,837 ordinary shares are exercisable for nil consideration on or before
August 7, 2014. Such options may not be exercised until and unless the price of our
ordinary shares has achieved and maintained a minimum value of A$0.40 for five consecutive
trading days; (iv) options to purchase 2,400,000 ordinary shares are exercisable for $0.30
consideration on or before October 31, 2010. Such options were held in escrow until
December 20, 2008; and (v) options to purchase 250,000 ordinary shares are exercisable for
nil consideration on or before October 31, 2010.All such options were granted
under our 2004 Employees, Directors & Consultants Share and Option
Plan. See Item 6.E. Directors, Senior Management and Employees  Share
Ownership  Stock Option Plans.

Agreement
with Chief Executive Officer. On September 21, 2007, we entered into an agreement with
Mr. Geoffrey Kempler, a director, in connection with his employment as our Chief Executive
Officer. Under the agreement, we agreed to pay Mr. Kempler a base salary of A$386,400 per
annum (which may be increased at the discretion of our Board of Directors). On June 5,
2008 at the discretion of our Board of Directors, Mr. Kempler received a salary adjustment
for CPI of 4.4% effective July 1, 2008, increasing his base salary to A$403,402. Under the
agreement we agreed to pay Mr. Kempler a bonus of $50,000 upon a capital raising of at
least A$7.0 million (before costs) prior to September 30, 2007, which milestone was timely
met and therefore we paid such bonus to Mr. Kempler in the 2008 fiscal year. In addition,
Mr. Kempler is entitled to a bonus of $6,000 for holding regular meetings (minimum twice a
year) of the full Research and Development Advisory Board. We also agreed to pay Mr.
Kempler additional bonuses subject to certain milestones that were not timely met and
therefore he is no longer entitled to such bonuses. Mr. Kempler is entitled to (i) up to
20 days vacation a year. Vacation days that are not used in any calendar year will be
carried over for use in the following year to a maximum carry-over of two years; and (ii)
reimbursement of reasonable business expenses incurred in the performance of his duties.
Mr. Kempler is also 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.

46

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

| |  | By
our company without cause (as defined in the agreement) or by Mr. Kempler with good
reason (as defined in the agreement), he will be entitled to: (i) the sum of A$1
million provided we have sufficient capital requirements to fulfill this obligation
within 90 days of termination date; (ii) business expenses that have not been
reimbursed and accrued and 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 of such options.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | By
our company with cause (as defined in the agreement) or by Mr. Kempler without good
reason (as defined in the agreement), he will be entitled to business expenses that have
not been reimbursed and accrued and unused vacation days. Mr. Kempler will only be
permitted to exercise unvested options to purchase shares that had been granted 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.

Agreement
with Chief Operating Officer. Effective as of October 2, 2006, we entered into an
employment agreement with Ms. Dianne Angus, in connection with her appointment as our
Senior Vice President, Business Development, Intellectual Property and Research. Under the
agreement we agreed to pay Ms. Angus a base salary of A$268,125 per year, plus
superannuation equivalent to 9% of the base salary (or the percentage stipulated by
applicable Australian law). In addition, we agreed that we would grant to Ms. Angus
options to purchase 1,000,000 ordinary shares, which were granted in the 2007 fiscal year.
Such options are exercisable for nil consideration on or before August 7, 2014 and will
not be exercisable unless the price of our ordinary shares has achieved and maintained a
minimum value of A$0.40 for five consecutive trading days. The options were granted under
the 2004 ASX Plan. On June 12, 2007 we entered into an amendment to the employment
agreement with Ms. Angus in connection with her appointment as our Chief Operating
Officer, effective as of May 31, 2007.All entitlements under the October 2, 2006
agreement remain in full force and effect. Under the June 12, 2007 agreement, we granted
to Ms. Angus options to purchase an additional 250,000 ordinary sharesin
recognition of our companys achievements and performance. Such options are
exercisable for nil consideration on or before August 7, 2014 and will not be exercisable
unless the price of our ordinary shares has achieved and maintained a minimum value of
A$0.40 for five consecutive trading days. The options were granted under the 2004 ASX
Plan. If we terminate the employment agreement without cause or if Ms. Angus terminates
the employment agreement with good reason (as such terms are defined in the agreement) (i)
we will pay to Ms. Angus, within 90 days of such termination, the sums she would have been
entitled to receive had she continued to provide services for one year following the
termination date; and (ii) any unvested options shall be accelerated and will become fully
vested and she will be entitled to exercise her options during the remainder of their
term. Effective January 1, 2008, Ms. Angus received a salary increase of 9%
bringing her annual base salary to A$292,256. In May 2009, in recognition of her
performance in 2008 and continued commitment to our company, we awarded Ms. Angus with a
grant of options to purchase 194,837 ordinary shares. Such options are exercisable for nil
consideration on or before 2014.

47

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|C. | BOARD
PRACTICES
|-- | ---------------

# Introduction

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

# Election of Directors

Directors
are elected at our annual general meeting of shareholders. Under our Constitution, the
term of office of our directors are staggered, such that at every annual general meeting
of shareholders one-third, rounded down to the nearest whole number, of the directors,
except a Managing Director, must retire from office and may offer himself/herself for
re-election. No director, except a Managing Director, shall retain office for a period in
excess of three years without submitting for re-election. Under Australian law, directors
who have reached the age of 72 must stand for re-election annually. Our Board of Directors
has the power to appoint any person to be a director, either to fill a vacancy or as an
additional director (provided that the total number of directors does not exceed the
maximum allowed by law), and any director so appointed may hold office only until the next
annual general meeting when he or she shall be eligible for election. Mr. Kempler is our
Managing Director. Dr. Mihaly must retire and may stand for re-election at our 2009 annual
general meeting of shareholders. Messrs. Marks and Meltzer must retire and may stand for
re-election at either our 2010 or 2011 annual general meeting of shareholders.

# Non-Executive and
Independent Directors

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

Under
NASDAQ Marketplace Rules, in general 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.

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

# Committees of the Board
of Directors

Our
Board of Directors has established the following committees:

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

Our
Audit Committee assists our Board of Directors in overseeing the accounting and financial
reporting processes of our company and audits of our financial statements, including the
integrity of our financial statements, compliance with legal and regulatory requirements,
our independent public accountants qualifications and independence, the performance
of our internal audit function and independent public accountants, and such other duties
as may be directed by our Board of Directors. The Audit Committee is also required to
assess risk management.

48

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---

Our
Audit Committee currently consists of three board members, each of whom satisfies the
independence requirements of the Securities and Exchange Commission, NASDAQ
Marketplace Rules and ASX Rules. Our Audit Committee is currently composed of Messrs.
Peter Marks, Brian Meltzer and George Mihaly. The audit committee meets at least four
times per year.

Remuneration
Committee.Our Board of Directors has established a Remuneration Committee,
which is comprised solely of independent directors, within the meaning of NASDAQ
Marketplace Rules. The Remuneration Committee is responsible for reviewing the salary,
incentives and other benefits of our executive officers and to make recommendations on
such matters for approval by our Board of Directors. The Remuneration Committee is also
responsible for overseeing and advising our Board of Directors with regard to the adoption
of policies that govern our compensation programs, including share and ADR option and
employee benefit plans. Additionally, the Remuneration Committee administers our share and
ADR option plans and any other employee benefit plans through a sub-committee that it
established for this purpose (see Share Plan Committee below). Messrs. Mihaly and Meltzer
are the current members of the Remuneration Committee, each of whom qualifies as an
independent director within the meaning of NASDAQ Marketplace Rules.

Share
Plan Committee. Our Remuneration Committee has established a sub-committee, the
Share Plan Committee, which administers our share and ADR option plans. Messrs. Mihaly and
Meltzer are the current members of the Share Plan Committee, each of whom qualifies as an
independent director within the meaning of NASDAQ Marketplace Rules.

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

Research
and Development Advisory Board. Our Research and Development Advisory Board
oversees and administers our research activities. Our Research and Development Advisory
Board is comprised of a number of the leading scientists in the field of age-related
degenerative disorders. The members of our Scientific Advisory Board are as follows:

Dr.
          Jeffrey Cummingsis the Chairman of our Research and DevelopmentAdvisory
Board. Dr. Cummings is the Director and founder of the UCLA           Alzheimers
Disease Center; the Augustus S. Rose Professor of Neurology at           UCLA and the
Director of the UCLA Behavioral Neuroscience and Dementia Research           Fellowship.
Dr. Cummings interests embrace clinical trials and the           development of new
treatments for neurodegenerative disorders and other           neurological diseases. He
has authored or edited 20 books and over 450 peer           reviewed papers. Dr. Cummings
has broad interests in dementing disorders,           neuropsychiatry, neurotherapeutics
and the interface of neuroscience and           society. The UCLA Alzheimers
Disease Center has an active clinical trials           program and fosters imaging,
genetics, clinical and neuroscience research. Professor Ashley Ian Bush is the
Director of the Laboratory for Oxidation           Biology within the Genetics and Aging
Unit at the Massachusetts General Hospital           and Associate Professor in the
Department of Psychiatry of Harvard Medical           School. Professor Bush is also
Principal Fellow/Associate Professor, Departments           of Pathology and Psychiatry,
University of Melbourne. Professor Bush, born and           educated in Melbourne,
established his laboratory at the Massachusetts General           Hospital after
receiving the distinguished Harness Fellowship in 1992. His           discovery of the
role of metals and oxidative stress in Neurological disorders           has formed the
basis of our platform technology.Professor Jean-Marc           Orgogozo is the
Chair of the Department of Neurology and Professor of           Neurology at the
University of Bordeaux, France. Professor Orgogozo has           extensive experience in
neuroepidemiology and clinical trials. Professor           Orgogozos publications
on the amyloid vaccines have helped to shape the           field of anti-amyloid
therapeutics. Dr. Craig Ritchie is the Clinical           Research Fellow
(Senior), Old Age Psychiatry at Imperial College, London. Dr.           Ritchie is
heavily involved, both clinically and academically, in psychiatric           disorders of
late life, in particular Alzheimers disease, Delirium and           Schizophrenia.
Dr. Ritchies interest in conducting and assimilating           evidence from
clinical trials is based on his clinical background, having worked           with elderly
patients with dementia for most of his career.

49

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Professor
Colin Masters is the Executive Director of the Mental Health Research Institute of
Victoria (Australia) and an ex-founding director of our company. For more than 30 years,
Professor Masters has dedicated his research to the study of the nature of
Alzheimers disease and other neurodegenerative disorders. Professor Masters and his
team are internationally renowned for their work on the disease and he is considered the
most eminent neuroscientist in Australia. In addition, Professor Masters is regarded as
one of the leading worldwide researchers in the study of Alzheimers disease. In the
last year, Professor Masters was awarded the Lifetime Achievement Award in
Alzheimers Disease Research at the 10th International Conference on Alzheimers
Disease (ICAD), the Lennox K. Black International Prize for Excellence in Biomedical
Research and the Grand Hamdan International Award for a research breakthrough in the
subject of Molecular and Cellular Pathology of Neurological Disorders.

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

Dr.
          Steven D. Targum is our Chief Medical Advisor. Dr. Targum is an
          Executive-in-Residence at Oxford Bioscience Partners, where he advises
portfolio           companies in central nervous system, or CNS, drug development. In
addition, Dr.           Targum consults widely to the pharmaceutical industry regarding
the design and           implementation of clinical trials for new psychotropic drugs and
the progression           of drug development from concept to approval to launch. Dr.
Targum founded           PharmaStar, a global rater training and medical education
company focused on CNS           drug development and international clinical trials.
Previously, Dr. Targum was           Professor of Psychiatry and Vice-Chairman of the
Department of Mental Health           Sciences at Hahnemann University School of Medicine
(Philadelphia) from           1989-1995.

# Directors Service
Contracts

Our
Chief Executive Officer. On September 21, 2007, we entered into an agreement with Mr.
Geoffrey Kempler, the Chairman of our Board of Directors, in connection with his
employment as our Chief Executive Officer. For details regarding the agreement with Mr.
Kempler, including benefits upon termination of his employment, see Item 6.B.
Operating and Financial Review and Prospects  Compensation.

Other.
          Except as described above, there are no arrangements or understandings between
          us and any of our subsidiaries, on the one hand, and any of our directors, on
          the other hand, providing for benefits upon termination of their employment or
          service as directors of our company or any of our subsidiaries.

# Indemnification of
Directors and Officers

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

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

50

---

---

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

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

| |  | for
costs and expenses incurred by that person defending proceedings, whatever their outcome.
| | - | ---------------------------------------------------------------------------------------------

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

|D. | EMPLOYEES
|-- | ---------

At
June 30, 2009, we had 12 employees. Of such employees, seven persons were employed in
research and development, three persons in management and administration and two persons
in operations. All such employees were located in Australia.

At
June 30, 2008, we had 13 employees. Of such employees, eight persons were employed in
research and development, three persons in management and administration and two persons
in operations. All such employees were located in Australia.

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

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

|E. | SHARE
OWNERSHIP
|-- | ---------------

# Beneficial Ownership of
Executive Officers and Directors

The
following table sets forth certain information as of September 21, 2009 regarding the
beneficial ownership of our ordinary shares by each of our directors and executive
officers and by all of our directors and executive officers as a group:

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

---

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

51

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

| | 2. | The
percentages shown are based on 232,945,639 ordinary shares issued and
               outstanding as of September 21, 2009.
| | -- | ------------------------------------------------------------------------------------------------------------------------------

| | 3. | Includes
17,055,000 ordinary shares, of which 30,000 ordinary shares are held
               directly by Mr. Kempler, 13,965,000 ordinary shares are held by Baywick
Pty                Ltd., an Australian corporation owned by Mr. Kempler, 90,000 ordinary
shares are                held of record by Crystal Triangle Pty Ltd., an Australian
corporation owned by                Mr. Kempler and 2,970,000 ordinary shares are held of
record by NRB Developments                Pty Ltd., an Australian corporation in which
Mr. Kempler holds a 50% interest.                Mr. Kempler may be deemed to be the
beneficial owner of the ordinary shares held                directly by Baywick Pty Ltd.,
Crystal Triangle Pty Ltd. and NRB Developments Pty                Ltd.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Includes
2,000,000 ordinary shares issuable upon the exercise of options for nil
               consideration, all of which were granted under the 2004 ASX Plan (as
defined                below). Of such options (i) options to purchase 1,000,000 ordinary
shares are                exercisable on or before June 30, 2010. Such options may not be
exercised unless                the price of our ordinary shares has achieved and
maintained a minimum value of                A$1.00 for five consecutive trading days;
and (ii) options to purchase 1,000,000                ordinary shares are exercisable on
or before October 31, 2010 at a price of                A$0.30 per share.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 6. | Includes
options to purchase 350,000 ordinary shares, all of which were granted
               under the 2004 ASX Plan (as defined below). The options are exercisable on
or                before October 31, 2010 at a price of A$0.30 per share and are held by
Mr.                Revelins spouse.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | Of
such shares, 250,000 ordinary shares are held directly by Ms. Angus.
| | -- | -----------------------------------------------------------------------

| | 8. | Includes
options to purchase 1,694,837 ordinary shares, all of which were                granted
under the 2004 ASX Plan (as defined below). Of such options, options to
               purchase 1,444,837 ordinary shares are exercisable for nil consideration
on or                before August 7, 2014. These options may not be exercised unless the
price of                our ordinary shares has achieved and maintained a minimum value
of A$0.40 for                five consecutive trading days. The remaining options to
purchase 250,000                ordinary shares are exercisable for nil consideration on
or before October 31,                2010.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9. | Of
such shares, 43,111 ordinary shares are held by Lampam Pty Ltd, an Australian
               corporation owned by Mr. Marks.
| | -- | -------------------------------------------------------------------------------------------------------------------------------

| | 10. | Includes
options to purchase 650,000 ordinary shares, all of which were granted
               under the 2004 ASX Plan (as defined below). Of such options, (i) options
to                purchase 300,000 ordinary shares are exercisable for nil consideration
on or                before June 30, 2010. Such options may not be exercised unless the
price of our                ordinary shares has achieved and maintained a minimum value
of A$1.00 for five                consecutive trading days; and (ii) options to purchase
350,000 ordinary shares                are exercisable on or before October 31, 2010 at a
price of A$0.30 per share.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

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---

| | 11. | Of
such shares, 326,666 ordinary shares are held by RBC Dexia Pty Ltd., a
               superannuation fund of Mr. Meltzer.
| | --- | ----------------------------------------------------------------------------------------------------------------------------

| | 12. | Includes
options to purchase 650,000 ordinary shares, all of which were granted
               under the 2004 ASX Plan (as defined below). Of such options, (i) options
to                purchase 300,000 ordinary shares are exercisable for nil consideration
on or                before June 30, 2010. Such options may not be exercised unless the
price of our                ordinary shares has achieved and maintained a minimum value
of A$1.00 for five                consecutive trading days; and (ii) options to purchase
350,000 ordinary shares                are exercisable on or before October 31, 2010 at a
price of A$0.30 per share.                The options are held in escrow for one year
from the date of grant.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 13. | Of
such shares 166,666 ordinary shares are held directly by Dr. Mihaly, 52,000
               ordinary shares are held by Waide Pty Ltd., an Australian corporation
owned by                Dr. Mihaly, and 4,000 ordinary shares are held by each of Kieren
Mihaly and                Warwick Mihaly, Dr. Mihalys sons. Dr. Mihaly disclaims
beneficial                ownership of the ordinary shares held by his sons, Kieren
Mihaly and Warwick                Mihaly.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 14. | Includes
options to purchase 650,000 ordinary shares, all of which were granted
               under the 2004 ASX Plan (as defined below). Of such options, (i) options
to                purchase 300,000 ordinary shares are exercisable for nil consideration
on or                before June 30, 2010. Such options may not be exercised unless the
price of our                ordinary shares has achieved and maintained a minimum value
of A$1.00 for five                consecutive trading days; and (ii) options to purchase
350,000 ordinary shares                are exercisable on or before October 31, 2010 at a
price of A$0.30 per share.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 15. | See
Footnotes (3)  (14).
| | --- | -------------------------

# Stock Option Plans

In
November 2004, we adopted the 2004 Employees, Directors and Consultants
Share and Option Plan, or the 2004 ASX Plan and the 2004 American Depository Share (ADS)
Option Plan, or the 2004 ADS Plan. For the description below, the 2004 ASX Plan and 2004
ADS Plan are referred to together as the 2004 Plans. Under the 2004 ASX Plan we may issue
ordinary shares and under the 2004 ADS Plan we may issue ADSs. We were initially
authorized to issue under the 2004 Plans up to an aggregate 12,000,000 ordinary shares or
ADSs representing 12,000,000 ordinary shares. In November 2005, our shareholders approved
an amendment to the 2004 Plans to provide for the issuance thereunder of an additional
10,000,000 ordinary shares (or ADSs representing 10,000,000 ordinary shares), following
which we could issue under the 2004 Plans up to an aggregate 22,000,000 ordinary shares or
ADSs representing 22,000,000 ordinary shares. In December 2007, our shareholders approved
an amendment to the 2004 Plans to provide for the issuance thereunder of an additional
8,000,000 ordinary shares (or ADSs representing 8,000,000 ordinary shares) following which
we may issue under the 2004 Plans up to an aggregate 30,000,000 ordinary shares or ADSs
representing 30,000,000 ordinary shares. In November 2008, our shareholders approved an
amendment to the 2004 Plans to provide for the issuance thereunder of an additional
15,000,000 ordinary shares (or ADSs representing 15,000,000 ordinary shares) following
which we may issue under the 2004 Plans up to an aggregate 45,000,000 ordinary shares or
ADSs representing 45,000,000 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 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
45,000,000 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 Share Plan Committee, a sub-committee of the
Remuneration Committee. For the purpose of the disclosure below, the term
Remuneration Committee shall refer to the Remuneration Committee or Share Plan
Committee, as applicable. 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.

53

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---

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

Under
the 2004 ADS Plan, we may grant to employees, officers, consultants, independent
contractors and directors of our company or any of its subsidiaries, from time to time,
options to purchase ADSs representing up to 45,000,000 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 to options that expire unexercised or which are otherwise
surrendered by an optionee without receiving any payment or other benefit with respect to
such option may again become available for new option grants under the 2004 ADS Plan.

The
2004 ADS Plan is administered by our Share Plan 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.

54

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---

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, 2009, 2008 and 2007, and changes
during the years ended on those dates, is presented below:

|                                          | As of June 30,
|----------------------------------------- | --------------
|
|
|
|
|Options outstanding at the beginning of   |               
|the year                                  |               
|Granted                                   |               
|Exercised                                 |               
|Expired                                   |               
|                                          |               
|Forfeited                                 |               
|                                          |               
|                                          |               
|Options outstanding at the end of the     |               
|year                                      |               
|                                          |               
|Options exercisable at the end of the     |               
|year                                      |               
|                                          |               
|                                          |               
|Options that may be granted as of the end |               
|of the year                               |               
|                                          |               

In
addition, as of June 30, 2009, 2,108,439 ordinary shares have been issued under the ASX
Plan that were not issued upon the exercise of options.

55

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

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

The
following table sets forth certain information, as of September 21, 2009, 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)
|----------------------------- | ------------------------------------------------ | ---------------------------------------------
|
|
|
|
|BAM Opportunity Fund, L.P.    |                                                  |                                              
|Geoffrey P. Kempler           |                                                  |                                              
|Jagen Nominees Pty Ltd.       |                                                  |                                              
|Balyasny Asset Management LP. |                                                  |                                              

|
|

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

|(2) | The
percentages shown are based on 232,945,639 ordinary shares issued and
                    outstanding as of September 21, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(3) | Based
solely upon, and qualified in its entirety with reference to, a Schedule
                    13G filed by BAM Opportunity Fund, L.P., or BAM Partnership, with the
Securities                     and Exchange Commission on September 15, 2009. The
Schedule 13G indicates that                     BAM Capital, LLC, or BAM Capital, which
serves as the general partner of BAM                     Partnership, and BAM Management,
LLC, or BAM Management, which serves as the                     investment manager to BAM
Partnership, have discretionary trading authority over                     the shares
held by BAM Partnership. The managing members of BAM Capital and BAM
                    Management are Ross Berman and Hal Mintz, who share investment
management                     duties. Each of BAM Partnership, BAM Capital, BAM
Management, Mr. Mintz and Mr.                     Berman disclaims beneficial ownership
of the ordinary shares, except to the                     extent of such persons
pecuniary interest therein.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes
17,055,000 ordinary shares, of which 30,000 ordinary shares are held
                    directly by Mr. Kempler, 13,965,000 ordinary shares are held by
Baywick Pty                     Ltd., an Australian corporation owned by Mr. Kempler,
90,000 ordinary shares are                     held of record by Crystal Triangle Pty
Ltd., an Australian corporation owned by                     Mr. Kempler and 2,970,000
ordinary shares are held of record by NRB Developments                     Pty Ltd., an
Australian corporation in which Mr. Kempler holds a 50%
                    interest. Mr. Kempler may be deemed to be the beneficial owner of the
ordinary                     shares held directly by Baywick Pty Ltd., Crystal Triangle
Pty Ltd. and NRB                     Developments Pty Ltd.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes
option to purchase 2,000,000 ordinary shares, all of which were granted
                    under the 2004 ASX Plan (as defined below). Of such options, (i)
options to                     purchase 1,000,000 ordinary shares are exercisable for nil
consideration on or                     before June 30, 2010. Such options may not be
exercised unless the price of our                     ordinary shares has achieved and
maintained a minimum value of A$1.00 for five                     consecutive trading
days; and (ii) options to purchase 1,000,000 ordinary shares                     are
exercisable on or before October 31, 2010 at a price of A$0.30 per share.
                    The options are held in escrow for one year from the date of grant.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Based
upon a Notice of Change of Interest of Substantial Holder filed by Jagen
                    Nominees Pty Ltd with the ASX on September 16, 2009 and other
information                     available to the company. Includes 280,112 ordinary
shares issuable upon the                     exercise of options exercisable for A$0.446
on or before November 30, 2009 held                     by Jagen Nominees Pty Ltd. Mr.
Boris Liberman is the sole owner of Jagen                     Nominees Pty Ltd. and may
be deemed to hold the voting and investment powers for                     the ordinary
shares held by Jagen Nominees Pty Ltd.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

56

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|(7) | Based
solely upon, and qualified in its entirety with reference to a Notice of
                    Change of Interest of Substantial Holder filed by Balyasny Asset
Management LP                     with the ASX on May 23, 2008. Balyasny Asset Management
LP serves as investment                     manager to Atlas Master Fund Ltd. Atlas
Master Fund Ltd. holds the voting and                     investment powers for the
ordinary shares held by Balyasny Asset Management LP.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Significant Changes in
the Ownership of Major Shareholders

Mr.
          Geoffrey Kempler. As of June 30, 2006, Geoffrey Kempler, the Chairman of
our           Board of Directors and our Chief Executive Officer, beneficially owned
          18,055,000 of our ordinary shares, representing approximately 13.98% of our
then           outstanding shares. During fiscal 2007, we granted to Mr. Kempler options
to           purchase 1,000,000 ordinary shares exercisable on or before June 30, 2009.
Such           options may not be exercised unless the price of our ordinary shares has
          achieved and maintained a minimum value of A$0.80 for five consecutive trading
          days. As a result, as of June 30, 2007, Mr. Kemplers beneficial ownership
          increased to 19,055,000 ordinary shares, representing approximately 12.57% of
          our then outstanding shares. During fiscal year 2008, we granted to Mr. Kempler
          options to purchase 1,000,000 ordinary shares that are exercisable on or before
          October 31, 2010 at a price of A$0.30 per share. The options were held in
escrow           for one year from the date of grant. As a result, as of June 30, 2008
and 2009,           Mr. Kemplers beneficially owned 20,055,000 ordinary shares,
representing           approximately 9.94% and 9.89%, respectively, of our then
outstanding shares.

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

Jagen
Nominees Pty Ltd. As of September 27, 2007, Jagen Nominees Pty Ltd., or Jagen,
beneficially owned 15,409,060, or 10.17% of our then outstanding ordinary shares. On
October 19, 2007, Jagen filed with the ASX a Notice of Change of Interest of Substantial
Holder, reflecting ownership of 15,409,060, or 8.89%, of our then outstanding shares. On
May 28, 2008, Jagen filed with the ASX a Notice of Change of Interest of Substantial
Holder, reflecting ownership of 15,409,060, or 7.15%, of our then outstanding shares. On
September 16, 2009, Jagen filed with the ASX a Notice of Change of Interest of Substantial
Holder, reflecting ownership of 15,409,060, or 6.61%, of our then outstanding shares.

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

BAM
Capital LLC. On September 15, 2009, BAM Capital LLC filed with the ASX a Notice of
Initial Substantial Holder, reflecting beneficial ownership of 30,000,000, or 12.88% of
our then outstanding ordinary shares.

# Major Shareholders
Voting Rights

Our
major shareholders do not have different voting rights.

# Record Holders

As
of September21, 2009, there were 2,388 holders of record of our ordinary shares, of which
18 record holders, holding approximately 3.45% 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 30.28% of our ordinary shares as
of such date.

57

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

None.

|C. | INTERESTS
OF EXPERTS AND COUNSEL
|-- | --------------------------------

Not
applicable.

|ITEM 8. |  | FINANCIAL INFORMATION
|------- |  | ---------------------

|A. | FINANCIAL
STATEMENTS AND OTHER FINANCIAL INFORMATION
|-- | ----------------------------------------------------

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

# Legal Proceedings

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

# Dividend Distribution
Policy

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

|B. | SIGNIFICANT
CHANGES
|-- | -------------------

On
September 8, 2009, we entered into a private placement agreement with one of our
institutional shareholders in the United States, under which we will raise an aggregate
A$6.0 million before costs (approximately A$5.7 million net of costs) in a private
placement of our ordinary shares to such investor. Of such amount, A$3.0 million was paid
at the closing of the private placement on September 11, 2009 and an additional A$3.0
million will be paid on or before September 30, 2009. The private placement was for 30
million ordinary shares (equivalent to three million ADRs) at a price of A$0.20 per share
(A$2.0 per ADR). We also agreed to grant the investor, subject to shareholder approval,
options to purchase 10 million ordinary shares (equivalent to one million ADRs) at an
exercise price of A$0.30 per share (A$3.0 per ADR) that will expire four years after the
date of the issuance of the shares in the private placement. If shareholder approval is
not obtained for the option grant, the options will be granted at such time that
shareholder approval is no longer required for the issuance under the rules of the
ASX. For additional information regarding the terms of the private placement, see Item
10.C. Additional Information  Material Contracts. The proceeds from the
private placement will be used to support our research and development programs and to
fund our working capital requirements.

Other
than as described above, there have been no significant changes in the operation or
financial condition of our company since June 30, 2009.

58

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|ITEM 9. |  | THE OFFER AND LISTING
|------- |  | ---------------------

|A. | OFFER
AND LISTING DETAILS
|-- | -------------------------

# Australian Stock Exchange

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

|                                 | Per Ordinary Share (A$)
|-------------------------------- | -----------------------
|
|
|
|
|Fiscal Year Ended June 30,       |                        
|2005                             |                        
|2006                             |                        
|2007                             |                        
|2008                             |                        
|2009                             |                        
|                                 |                        
|Fiscal Year Ended June 30, 2008: |                        
|First Quarter                    |                        
|Second Quarter                   |                        
|Third Quarter                    |                        
|Fourth Quarter                   |                        
|                                 |                        
|Fiscal Year Ended June 30, 2009: |                        
|First Quarter                    |                        
|Second Quarter                   |                        
|Third Quarter                    |                        
|Fourth Quarter                   |                        
|                                 |                        
|Month Ended:                     |                        
|March 2009                       |                        
|April 2009                       |                        
|May 2009                         |                        
|June 2009                        |                        
|July 2009                        |                        
|August 2009                      |                        

# 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$)
|-------------------------- | -------------
|
|
|
|
|Fiscal Year Ended June 30, |              
|2005                       |              
|2006                       |              
|2007                       |              
|2008                       |              
|2009                       |              

59

---

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|                                 |  |  |  |      |  |  |      | 
|-------------------------------- |  |  |  | ---- |  |  | ---- | 
|Fiscal Year Ended June 30, 2008: |  | 
|First Quarter                    |  |  |  | 3.10 |  |  | 2.20 | 
|Second Quarter                   |  |  |  | 4.05 |  |  | 2.06 | 
|Third Quarter                    |  |  |  | 6.73 |  |  | 3.25 | 
|Fourth Quarter                   |  |  |  | 4.45 |  |  | 3.56 | 
|                                 |  | 
|Fiscal Year Ended June 30, 2009: |  | 
|First Quarter                    |  |  |  | 5.70 |  |  | 3.20 | 
|Second Quarter                   |  |  |  | 3.50 |  |  | 1.30 | 
|Third Quarter                    |  |  |  | 3.11 |  |  | 1.00 | 
|Fourth Quarter                   |  |  |  | 1.75 |  |  | 1.14 | 
|                                 |  | 
|Month Ended:                     |  | 
|March 2009                       |  |  |  | 1.65 |  |  | 1.00 | 
|April 2009                       |  |  |  | 1.75 |  |  | 1.33 | 
|May 2009                         |  |  |  | 1.60 |  |  | 1.14 | 
|June 2009                        |  |  |  | 1.48 |  |  | 1.20 | 
|July 2009                        |  |  |  | 1.80 |  |  | 1.05 | 
|August 2009                      |  |  |  | 2.17 |  |  | 1.45 | 

|B. | PLAN
OF DISTRIBUTION
|-- | --------------------

Not
applicable.

|C. | MARKETS
|-- | -------

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

|D. | SELLING
SHAREHOLDERS
|-- | --------------------

Not
applicable.

|E. | DILUTION
|-- | --------

Not
applicable.

|F. | EXPENSES
OF THE ISSUE
|-- | ---------------------

Not
applicable.

|ITEM 10. |  | ADDITIONAL INFORMATION
|-------- |  | ----------------------

|A. | SHARE
CAPITAL
|-- | -------------

Not
applicable.

|B. | MEMORANDUM
AND ARTICLES OF ASSOCIATION
|-- | --------------------------------------

We
were registered on November 11, 1997 as Prana Pty Ltd and on November 26, 1999 we
converted to a public company and changed our name to Prana Corporation Ltd. On
January 1, 2000, we changed our name to Prana Biotechnology Ltd. Our registration
number is ACN 080699065.

60

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# Pranas Purposes
and Objects

As
a public company we have all the rights, powers and privileges of a natural person. Our
Constitution does not specify any purposes or objects.

# The Powers of the
Directors

Under
the provisions of our Constitution our directors may exercise all of the powers of our
company, other than those that are required by our Constitution or the Corporations Law of
Australia to be exercised at a general meeting of shareholders. A director may participate
in a meeting and vote on a proposal, arrangement or contract in which he or she is
materially interested, so long as the directors interest is declared in accordance
with the Corporations Law. The authority of our directors to enter into borrowing
arrangements on our behalf is not limited, except in the same manner as any other
transaction by us.

# Rights Attached to Our
Ordinary Shares

The
concept of authorized share capital no longer exists in Australia and as a result, our
authorized share capital is unlimited. All our outstanding ordinary shares are validly
issued, fully paid and non-assessable. The rights attached to our ordinary shares are as
follows:

Dividend
rights.If our board of directors recommends a dividend, registered
holders of our ordinary shares may declare a dividend by ordinary resolution in a general
meeting. The dividend, however, cannot exceed the amount recommended by our board of
directors. Our board of directors may declare an interim dividend. No dividend may be paid
except out of our profits.

Voting
rights. Holders of ordinary shares have one vote for each ordinary share held on all
matters submitted to a vote of shareholders. Such voting rights may be affected by the
grant of any special voting rights to the holders of a class of shares with preferential
rights that may be authorized in the future.

The
quorum required for an ordinary meeting of shareholders consists of at least two
shareholders represented in person or by proxy who hold or represent, in the aggregate, at
least one third of the voting rights of the issued share capital. A meeting adjourned for
lack of a quorum generally is adjourned to the same day in the following week at the same
time and place or any time and place as the directors designate in a notice to the
shareholders. At the reconvened meeting, the required quorum consists of any two members
present in person or by proxy.

An
ordinary resolution, such as a resolution for the declaration of dividends, requires
approval by the holders of a majority of the voting rights represented at the meeting, in
person, by proxy or by written ballot and voting thereon. Under our Constitution, a
special resolution, such as amending our Constitution, approving any change in
capitalization, winding-up, authorization of a class of shares with special rights, or
other changes as specified in our Constitution, requires approval of a special majority,
representing the holders of no less than 75% of the voting rights represented at the
meeting in person, by proxy or by written ballot, and voting thereon.

Pursuant
to our Constitution, our directors are elected at our annual general meeting of
shareholders by a vote of the holders of a majority of the voting power represented and
voting at such meeting.

Rights
in our profits. Our shareholders have the right to share in our profits distributed as
a dividend and any other permitted distribution.

Rights
in the event of liquidation. In the event of our liquidation, after satisfaction of
liabilities to creditors, our assets will be distributed to the holders of ordinary shares
in proportion to the nominal value of their holdings. This right may be affected by the
grant of preferential dividend or distribution rights to the holders of a class of shares
with preferential rights that may be authorized in the future.

61

---

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# Changing Rights Attached
to Shares

According
to our Constitution, in order to change the rights attached to any class of shares, unless
otherwise provided by the terms of the class, such change must be adopted by a general
meeting of the shareholders and by a separate general meeting of the holders of the
affected class with a majority of 75% of the voting power participating in such meeting.

# Annual and Extraordinary
Meetings

Our
Board of Directors must convene an annual meeting of shareholders at least once every
calendar year, within five months of our last fiscal year-end balance sheet data. Notice
of at least twenty-eight (28) days prior to the date of the meeting is required. An
extraordinary meeting may be convened by the board of directors, it decides or upon a
demand of any directors, or of one or more shareholders holding in the aggregate at least
five percent (5%) of our issued capital. An extraordinary meeting must be called not more
than twenty-one (21) days after the request is made. The meeting must be held not later
than two months after the request is given.

# Limitations on the
Rights to Own Securities in Our Company

Neither
our Constitution nor the laws of the Commonwealth of Australia restrict in any way the
ownership or voting of shares.

# Changes in Our Capital

Pursuant
to the Listing Rules of the Australian Stock Exchange, our directors may in their
discretion allow securities equal to not more than 15% of our issued capital within a
12-month period. Other allotments of securities requiring approval by an ordinary
resolution of shareholders.

|C. | MATERIAL
CONTRACTS
|-- | ------------------

See
the patents and license agreements described under Item 4.B. Information on the
Company  Business Overview  Patents and License Agreements.

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. Such projects include structure-based
drug design involving the design of various metal-based compounds as potential diagnostics
and therapeutics, drug screening and development involving the characterization of our
compounds in vitro and in vivo models of neurodegenerative disorders, and
cell-based drug discovery involving the screening and assessment of our compounds in
cell-based systems to measure toxicity and cellular dysfunction and to develop new screens
for our company. In consideration of such services, we agreed to pay the University of
Melbourne a sum of A$297,000 (inclusive of goods and services tax) each year for a period
of three years. In consideration for the assignment of rights to intellectual property
developed by the University of Melbourne during the research period, we agreed to pay to
the University of Melbourne royalties equal to 1.5% of the net invoice price of all
products incorporating such intellectual property sold by us or on our behalf, or, the
lesser of 1.5% of the net invoice price of such products sold by a licensee or assignee
and 10% of gross revenues received from licensees or assignees relating to the
exploitation of such intellectual property. Following the expiration of this agreement,
the parties entered into a second research funding and intellectual property assignment
agreement, which is deemed to have commenced as of the expiration date of the previous
agreement on December 1, 2003 and expired on December 1, 2006. Following the expiration of
this second agreement, the parties entered into a third research funding and intellectual
property assignment agreement, which is deemed to have commenced as of the expiration date
of the previous agreement on December 1, 2006 and expires on December 1, 2009. The
financial consideration terms under the original agreement remain unchanged by the second
and third research funding and intellectual property assignment agreements. Under the
terms of the second and third research funding and intellectual property assignment
agreements an annual budget is set for each of the three years of each respective
agreement. We provided to the University of Melbourne funding in an amount equal to
A$690,500 (exclusive of goods and service tax) for the year running December 2006 to
November 2007 and A$704,000 for the year running December 2007 to November 2008. We
estimate that we will provide to the University of Melbourne funding in an amount equal to
A$564,000 (exclusive of goods and services tax) for the year running December 2008 to
November 2009.

62

---

---

On
January 8, 2004, we entered into a ten year consultancy services agreement with Professor
Ashley Bush, effective as of February 1, 2003. The consulting services provided by
Professor Ashley Bush include the discussion of current and future developments in the
field of therapies based on metal mediated, oxidative stress or toxic gain of function of
proteins involved in selected neurodegenerative diseases. His services also include
possible participation in research projects, the assignment of intellectual property
rights arising from such projects and assisting is with our patent prosecutions. The
services are provided for a maximum of 40 days per year of service under the agreement.
Under the agreement, 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,
which effective June 1 ,2009 was reduced to AU$60,000 per year, increasing on the
anniversary of the agreement by the Australian consumer price index. We also agreed, as a
bonus package, to issue to Professor Bush 1,650,000 ordinary shares and to grant to him
options to purchase 825,000 ordinary shares at an exercise price of A$0.50 per share. The
shares and options vest in four equal installments on each of the six months anniversaries
following the effective date of the agreement. In addition, subject to the achievement of
certain milestones, Professor Bush, is entitled to purchase up to 5,000,000 additional
ordinary shares at a price per share that is 10% below the mean market price of our
ordinary shares during the 30-day period prior to their purchase. Once a milestone has
been achieved, up to 250,000 ordinary shares out of the total tranche of ordinary shares
to which he becomes entitled may be purchased each six months after such achievement. The
first milestone has been achieved (the publication of results of a Phase II trial) and as
such, Professor Bush is now entitled to purchase up to 1,250,000 ordinary shares in
accordance with the foregoing terms, of which Professor Bush acquired 250,000 ordinary
shares during the 2007 fiscal year. The ordinary shares issued and options granted to
Professor Bush under the agreement are subject to certain resale restrictions. During the
period of 20 years after the effective date of the agreement, Professor Bush is also
entitled to receive royalties equal to 5% of the income that we derive from the
exploitation of new intellectual property developed by him or contributed to our company
though his services pursuant to the agreement. Initially, the agreement provided that it
could be terminated for any reason by either party upon 90 days prior notice, which period
was reduced to 30 days as of November 14, 2007.

On
July 28, 2004, we and The General Hospital Corporation of Massachusetts settled all
outstanding litigation with P.N. Gerolymatos S.A., or P.N.G., regarding the exploitation
rights to certain patents relating to pharmaceutical compositions and uses of clioquinol,
or PBT1. Pursuant to the settlement agreement, all patent oppositions in Europe and
Australia were withdrawn and the law suits then pending before the U.S. District Court for
the District of Columbia and the Court of Athens in Greece were dismissed. Under the
settlement agreement, we and P.N.G. agreed to recognize the rights of each other to
develop clioquinol in our respective territories. As a result of the settlement agreement,
we now hold the rights to selected uses of clioquinol and pharmaceutical compositions in
the United States and selected uses of clioquinol in Japan, and P.N.G. holds certain
patent rights on the uses of clioquinol for Europe and other territories. Under the
settlement agreement, we issued 1,350,000 of our ordinary shares to P.N.G. (which were
held in escrow for 12 months), and made a payment of US$150,000 to P.N.G. Such settlement
in the total value of A$971,764 was expensed in fiscal year 2004. Under the settlement
agreement we also agreed to pay a sales royalty to P.N.G. on sales of PBT1 in the United
States and Japan and we are entitled to receive a percentage of P.N.G.s income on
sales of PBT1 in the other territories. In April 2005, we announced our decision not to
proceed with the PBT1 study. P.N.G. is also entitled to receive 2% of our worldwide income
from PBT2 and any other future clioquinol derivative.

In
November 2006, we entered into a general services agreement with Quintiles Limited, a
clinical research organization, to perform services relating to the conduct of the Phase
IIa PBT2 clinical trial, including site initiation, patient screening and monitoring, data
analysis, investigator meetings, statistical analysis and clinical trial reporting. We
paid Quintiles Limited US$140,003, US$2,287,306 million and US$874,135 million for fiscal
years 2009, 2008 and 2007, respectively.

On
May 22, 2007, we entered into an agreement with Patheon Inc., or Patheon, to undertake the
capsule formulation development and prospective clinical trial manufacturing of PBT2 into
capsules to support prospective further development of PBT2 into a Phase IIb study and/or
other secondary clinical applications of PBT2. During the 2008 fiscal year, Patheon
undertook the development of a capsule formulation suitable for large scale manufacture,
as well as the development and validation of analytical methods to release the capsules.
During the 2009 fiscal year, Patheon manufactured a feasibility batch of capsules using
the newly developed process. We paid Patheon US$238,737 and US$259,372 for fiscals years
2009 and 2008, respectively, for services provided under the agreement.

63

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In
June 2007, we entered into two GMP drug manufacture and laboratory development agreements
with the Institute for Drug Technology Australia Limited, or IDT, to undertake the GMP
manufacture of an initial 4kg batch and subsequent large scale manufacture of 30kg of
PBT2. IDT is engaged to also undertake process development, quality control release
testing and stability testing of the final drug product before its release. We paid IDT
A$11,442 and A$1,147,272 for fiscals year 2009 and 2008, respectively, for services
provided under the two agreements.

In
December 2008, we entered into a process development and manufacturing agreement with Dr.
Reddys Laboratories Limited, or Dr. Reddys, to enable the transfer of existing
manufacturing methods for PBT2 to Dr. Reddys to work on improving the route of
manufacture, optimization and scale up manufacture of PBT2. The agreement is comprised of
a series of independent sub-projects, each of which is subject to our prior authorization
to be initiated and funded, at our sole discretion. At this time, our committed
expenditure for authorized sub-projects is US$175,500. If all sub-projects are initiated
and completed, the total funding under the agreement will be approximately US$1.4 million.
The term of the agreement is for 90 days post the receipt by us of a written report and/or
manufacturing deliverables under the last approved sub-project under the agreement. Early
termination is available to either party under specified conditions, including material
breach and voluntary termination by either party upon 30 days written notice.

On
September 8, 2009, we entered into a private placement agreement with one of our
institutional shareholders in the United States, under which we will raise an aggregate
A$6.0 million before costs (approximately A$5.7 million net of costs) in a private
placement of our ordinary shares to such investor. Of such amount, A$3.0 million was paid
at the closing of the private placement on September 11, 2009 and an additional A$3.0
million will be paid on or before September 30, 2009. The private placement was for 30
million ordinary shares (equivalent to three million ADRs) at a price of A$0.20 per share
(A$2.0 per ADR). We also agreed to grant the investor, subject to shareholder approval,
options to purchase 10 million ordinary shares (equivalent to one million ADRs) at an
exercise price of A$0.30 per share (A$3.0 per ADR) that will expire four years after the
date of the issuance of the shares in the private placement. If shareholder approval is
not obtained for the option grant, the options will be granted at such time that
shareholder approval is no longer required for the issuance under the rules of the ASX. If
within 45 days of the private placement, we issue ordinary shares to a third party at a
price that is less than $A0.20, the investor is entitled, for no additional consideration,
to additional ordinary shares so as to reduce the average price of the ordinary shares and
options issued in the private placement and the additional ordinary shares being issued to
the investor to the price per share paid by the third party. We also agreed to promptly
take steps to register the ADRs with respect to the ordinary shares issued for
distribution from time to time by the investor, and after January 1, 2010, upon the
investors demand, to file a registration statement covering the shares underlying
the options. The investor is also entitled to up to an additional 3,000,000 ordinary
shares, or 300,000 ADRs, if the daily closing price of our ordinary shares on the ASX on
any day from the date of the private placement until five days after the date on which the
registration statement for the ordinary shares issued in the private placement is declared
effective, declines below A$0.19, based on a formula set forth in the agreement.

|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.

64

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# The Foreign Acquisitions
and Takeovers Act 1975

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

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

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

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

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

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

|E. | TAXATION
|-- | --------

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

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

# AUSTRALIAN TAX
CONSEQUENCES

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

65

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# Nature of ADSs for
Australian Taxation Purposes

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

# Taxation of Dividends

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

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

# Tax on Sales or other
Dispositions of Shares  Capital Gains Tax

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

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%
for non-Australian resident individuals.  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.

66

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

# Dual Residency

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

# Stamp Duty

A
transfer of shares of a company listed on the Australian Stock Exchange is not subject to
Australian stamp duty except in some circumstances where one person, or associated
persons, acquires 90% or more of the shares.

# Australian Death Duty

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

# Goods and Services Tax

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

# UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES

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

67

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

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

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

# Taxation of Dividends

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

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

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

Subject
to certain limitations, qualified dividend income received by a noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 will be subject to tax
at a reduced maximum tax rate of 15 percent. Distributions taxable as dividends generally
qualify for the 15 percent rate provided that either: (i) the issuer is entitled to
benefits under the Tax Treaty or (ii) the shares are readily tradable on an established
securities market in the United States and certain other requirements are met. We believe
that we are entitled to benefits under the Tax Treaty and that the ADRs currently are
readily tradable on an established securities market in the United States. However, no
assurance can be given that the ADRs will remain readily tradable. Furthermore, the
reduction does not apply to dividends received from PFICs in any future year, if we are
not treated as a PFIC in any future year. U.S. Holders of ADRs should consult their own
tax advisors regarding the effect of these rules in their particular circumstances.

68

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# Disposition of ADRs

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

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

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

# Passive Foreign
Investment Companies

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

For
U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in
which either (i) 75% or more of our gross income is passive income, or (ii) at least 50%
of the average value of all of our assets for the taxable year produce or are held for the
production of passive income. For this purpose, cash is considered to be an asset which
produces passive income. Passive income generally includes dividends, interest, royalties,
rents, annuities and the excess of gains over losses from the disposition of assets which
produce passive income. As a result of our substantial cash position and the decline in
the value of our stock, we believe that we became a PFIC during the taxable year ended
June 30, 2005, and once again qualified as a PFIC for the taxable years ended June 30,
2006 and 2007 and 2008, under a literal application of the asset test that looks solely to
market value. We believe that we will once again qualify as a PFIC for the taxable year
ended June 30, 2009.

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

69

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

| |  | the
amount allocated to the current taxable year and any taxable year before we became a PFIC
will be taxable as ordinary income in the current year, and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| |  | A
shareholder of a PFIC that is a shareholder of another PFIC, or
| | - | -----------------------------------------------------------------

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

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

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

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

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.

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

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

# U.S. Gift and Estate Tax

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

|F. | DIVIDENDS
AND PAYING AGENTS
|-- | ---------------------------

Not
applicable.

|G. | STATEMENT
BY EXPERTS
|-- | --------------------

Not
applicable.

|H. | DOCUMENTS
ON DISPLAY
|-- | --------------------

We
are subject to the reporting requirements of the United States Securities and Exchange Act
of 1934, as amended, or the Exchange Act, as applicable to foreign private
issuers as defined in Rule 3b-4 under the Exchange Act. 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. In addition, 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 file with the Securities and Exchange Commission an annual report on Form 20-F
containing financial statements that have been examined and reported on, with an opinion
expressed by, an independent registered public accounting firm, and we submit reports to
the Securities and Exchange Commission on Form 6-K containing (among other things) press
releases and unaudited financial information for the first six months of each fiscal year.
We post our annual report on Form 20-F on our website (www.pranabio.com) promptly
following the filing of our annual report with the Securities and Exchange Commission. The
information on our website is not incorporated by reference into this annual report.

This
annual report and the exhibits thereto and any other document we 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. 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. The Exchange Act file number for our
Securities and Exchange Commission filings is 000-49843.

The
Securities and Exchange Commission maintains a website at www.sec.gov that contains
reports, proxy and information statements, and other information regarding registrants
that make electronic filings with the Securities and Exchange Commission using its EDGAR
(Electronic Data Gathering, Analysis, and Retrieval) system.

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.

71

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|I. | SUBSIDIARY
INFORMATION
|-- | ----------------------

Not
applicable.

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

We
invest our excess cash and cash equivalents in interest-bearing accounts and term deposits
with banks in Australia. Our management believes that the financial institutions that hold
our investments are financially sound and accordingly, minimal credit risk exists with
respect to these investments. Certain of our cash equivalents are subject to interest rate
risk. Due to the short duration and conservative nature of these instruments, we do not
believe that we have a material exposure to interest rate risk. Our major market risk is
changes in foreign exchange rates as we had approximately A$211,000 and A$300,000 in cash
held in U.S. dollars as of June 30, 2009 and 2008, respectively. A hypothetical 4% adverse
movement in end-of-period exchange rates would reduce the cash balance by approximately
A$8,450 and A$12,070, respectively.

We
do not currently utilize derivative financial instruments or other financial instruments
subject to market risk.

We
conduct our activities almost exclusively in Australia. However, we are required to make
certain payments in U.S. dollars and other currencies. An adverse movement in
end-of-period exchange rates would not have a material impact on our operating results. In
2008 and 2007, the Australian dollar depreciated against the U.S. dollar by 11% and 12%,
respectively, while the Australian dollar appreciated against the U.S. dollar by 16% in
2009. As of June 30, 2009, payables in U.S. dollars and other currencies were immaterial.
A hypothetical 4% adverse movement in the U.S. dollar and 11% adverse movement in the
Great British Pound exchange rates would increase the cost of these payables by
approximately A$2,000.

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

# Disclosure Controls and
Procedures

We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is accumulated and
communicated to our chief executive officer and chief financial officer to allow timely
decisions regarding required disclosure. Our management, including our chief executive
officer and chief financial officer, conducted an evaluation of our disclosure controls
and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period
covered by this Annual Report on Form 20-F. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of June 30, 2009,
our disclosure controls and procedures were effective.

72

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

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

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

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

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

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

Our
management assessed the effectiveness of our internal control over financial reporting as
of June 30, 2009. In making this assessment, our management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on that assessment, our management concluded that as
of June 30, 2009, our internal control over financial reporting is effective.

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

# Changes in Internal
Control over Financial Reporting

During
the year ended June 30, 2009, there were no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.

|ITEM 16. |  | RESERVED
|-------- |  | --------

|ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

Our
Board of Directors has determined that Mr. Brian Meltzer, an independent director, meets
the definition of an audit committee financial expert, as defined by rules of the
Securities and Exchange Commission. For a brief listing of Mr. Meltzers relevant
experience, see Item 6.A. Directors, Senior Management and Employees 
Directors and Senior Management.

73

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|ITEM 16B. |  | CODE OF ETHICS
|--------- |  | --------------

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

|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- |  | --------------------------------------

# Fees Paid to Independent
Public Accountants

The
following table sets forth, for each of the years indicated, the fees billed by
PricewaterhouseCoopers, which has served as our principal independent registered public
accounting firm since November 30, 2006.

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

Deloitte
Touche Tohmatsu served as our principal independent registered public accounting firm
until November 30, 2006. The fees billed by Deloitte Touche Tohmatsu, as well as the other
member firms of Deloitte Touche Tohmatsu and their respective affiliates, for the 2009 and
2008 fiscal years were A$9,267 and A$71,773, respectively, for audit-related services
provided in connection with a Securities and Exchange Commission review of our annual
report on Form 20-F for the fiscal year ended June 30, 2006 and an amendment to our annual
report on Form 20-F for such period.

# Pre-Approval Policies
and Procedures

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

|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, 2009.

74

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|ITEM 16F. |  | CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
|--------- |  | ---------------------------------------------

Not
applicable.

|ITEM 16G. |  | CORPORATE GOVERNANCE
|--------- |  | --------------------

Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our company,
are permitted to follow certain home country corporate governance practices instead of
certain provisions of Rule 4350. A foreign private issuer that elects to follow a home
country practice instead of any of such provisions of Rule 4350, must submit to NASDAQ, in
advance, 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.

On
March 30, 2005, we provided NASDAQ with a notice of non-compliance with Rule 4350 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 the NASDAQ Marketplace Rules. 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. 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.

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

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

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

|                                                           | Page
|---------------------------------------------------------- | ----
|
|
|
|
|Index to Consolidated Financial Statements                 | F-0 
|Report of Independent Registered Public Accounting Firm    | F-1 
|Consolidated Balance Sheet                                 | F-2 
|Consolidated Income Statements                             | F-3 
|Consolidated Cash Flow Statements                          | F-4 
|Consolidated Statements of Changes in Stockholders' Equity | F-5 
|Notes to Consolidated Financial Statements                 | F-6 

|ITEM 19. |  | EXHIBITS
|-------- |  | --------

Index
to Exhibits

|Exhibit |  | Description
|------- |  | -----------

|1.1 |  | Constitution
of Registrant
|--- |  | --------------------------

|2.1 |  | Deposit
Agreement dated March 23, 2001, as amended and restated as of December 21, 2007, among
the Registrant, the Bank of New York, as Depositary, and owners and holders from time to
time of ADRs issued thereunder, including the Form of American Depositary Receipts (1)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Agreement
for the Assignment of Patents and Intellectual Property Licensing dated February 8, 2000,
between Registrant and the Biomolecular Research Institute (2)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | License
Agreement dated January 1, 2001, between the Registrant and The General Hospital
Corporation (2)
|--- |  | --------------------------------------------------------------------------------------------------------

|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 (2)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | 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) (2)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

75

---

---

|4.5 |  | 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 (3)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Third
Research Funding and Intellectual Property Assignment Agreement dated December 2, 2006 (4)
|--- |  | ------------------------------------------------------------------------------------------------

|4.7 |  | General
Services Agreement dated November 13, 2006, between the Registrant and Quintiles Limited
(5)
|--- |  | ----------------------------------------------------------------------------------------------------

|4.8 |  | GMP
30kg Manufacture Agreement dated June 6, 2007, between the Registrant and Institute of
Drug Technology Australia Limited (6)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | GMP
4kg Manufacture Agreement dated June 6, 2007, between the Registrant and Institute of
Drug Technology Australia Limited (7)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | 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)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | Prana
Biotechnology Limited, 2004 American Depository Share (ADS) Option Plan (9)
|---- |  | ---------------------------------------------------------------------------------

|4.12 |  | Prana
Biotechnology Limited, 2004 Employees, Directors' and Consultants Share and Option Plan
(10)
|---- |  | ----------------------------------------------------------------------------------------------------

|4.13 |  | Employment
Agreement dated September 21, 2007, among the Registrant and Mr. Kempler (11)
|---- |  | ----------------------------------------------------------------------------------------

|4.14 |  | Letter
Agreements effective as of June 12, 2007 between the Registrant and Ms. Dianne Angus (12)
|---- |  | ------------------------------------------------------------------------------------------------

|4.15 |  | Assignment
and Novation Deed between Commonwealth Scientific Industrial and Research Organization
and       the Biomolecular Research Institute and the Registrant dated September 10, 2007
(13)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.16 |  | Agreement
dated May 22, 2007 by and between the Registrant and Patheon Inc. regarding the
formulation,       development and manufacture of capsules of PBT2 (14)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.17 |  | Placement
Confirmation Letter dated September 8, 2009, between the Registrant and BAM Capital LLC
(15)
|---- |  | ------------------------------------------------------------------------------------------------------

|4.18 |  | Consultancy
Services Agreement dated January 8, 2004 between the Registrant and Professor Ashley Bush
(16)
|---- |  | ----------------------------------------------------------------------------------------------------------

|4.19 |  | Letter
agreement dated November 14, 2007 between the Registrant and Professor Ashley Bush (17)
|---- |  | ----------------------------------------------------------------------------------------------

|4.20 |  | Letter
agreement dated May 22, 2009 between the Registrant and Professor Ashley Bush
|---- |  | ------------------------------------------------------------------------------------

|4.21 |  | Process
Development and Manufacturing Agreement dated December 26, 2008, between the Registrant
and Dr. Reddys Laboratories Limited, as amended by Amendment No. 1 effective
February 3, 2009, Amendment No. 2 effective March 13, 2009 and Amendment No. 3 effective
July 6, 2009 by and between the parties
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of Subsidiaries of the Registrant
|--- |  | --------------------------------------

|12.1 |  | Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act,
      as amended
|---- |  | -----------------------------------------------------------------------------------------------------------------------

|12.2 |  | Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act,
      as amended
|---- |  | -----------------------------------------------------------------------------------------------------------------------

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

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

|15.1 |  | Consent
of PricewaterhouseCoopers, Registered Public Accounting Firm
|---- |  | --------------------------------------------------------------------

|
|

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

|(2) | 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).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

76

---

---

|(3) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed
as Exhibit 4.7 to our Annual Report on Form 20-F for the year ended June
                    30, 2007, and incorporated herein by reference
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Filed
as Exhibit 4.8 to our Annual Report on Form 20-F for the year ended June
                    30, 2007, and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed
as Exhibit 4.9 to our Annual Report on Form 20-F for the year ended June
                    30, 2007, and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Filed
as Exhibit 4.10 to our Annual Report on Form 20-F for the year ended June
                    30, 2007, and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

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

|(10) | Incorporated
by reference to Annexure B to Item 1 of our Report on Form 6-K for
                    the month of November 2004.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(11) | Filed
as Exhibit 4.19 to our Annual Report on Form 20-F for the year ended June
                    30, 2007, and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Filed
as Exhibit 4.21 to our Annual Report on Form 20-F for the year ended June
                    30, 2007, and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Filed
as Exhibit 4.22 to our Annual Report on Form 20-F for the year ended June
                    30, 2007, and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Filed
as Exhibit 4.25 to our Annual Report on Form 20-F for the year ended June
                    30, 2007, and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated
by reference to our Report on Form 6-K for the month of September
                    2009.
|---- | --------------------------------------------------------------------------------------------------------

|(16) | Incorporated
by reference to Item 1 of our Report on Form 6-K for the month of
                    June 2009.
|---- | -------------------------------------------------------------------------------------------------------------

|(17) | Incorporated
by reference to Item 2 of our Report on Form 6-K for the month of
                    June 2009.
|---- | -------------------------------------------------------------------------------------------------------------

77

---

---

# PRANA BIOTECHNOLOGY
LIMITED

# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                                                       | Page Number
|-------------------------------------------------------------------------------------- | -----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm for fiscal years 2009 and 2008 | F-1        
|                                                                                      
|Consolidated Balance Sheet                                                             | F-2        
|                                                                                      
|Consolidated Income Statements                                                         | F-3        
|                                                                                      
|Consolidated Cash Flow Statements                                                      | F-4        
|                                                                                      
|Consolidated Statements of Changes in Stockholders' Equity                             | F-5        
|                                                                                      
|Notes to Consolidated Financial Statements                                             | F-6        
|                                                                                       |            

F - 0

---

---

PRICEWATERHOUSECOOPERS

# Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying
consolidated balance sheets and the related consolidated statements of income,
shareholders equity and cash flows present fairly, in all material respects, the
financial position of Prana Biotechnology Limited and its subsidiaries at 30 June 2009 and
30 June 2008, and the results of their operations and their cash flows for each of the
three years in the period ended 30 June 2009 in conformity with International Financial
Reporting Standards as issued by the International Accounting Standards Board. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopersPricewaterhouseCoopers
Melbourne, Australia
23 September 2009

F - 1

---

---

# PRANA BIOTECHNOLOGY
LIMITED

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

|                                                                                               |  | June 30,
|---------------------------------------------------------------------------------------------- |  | --------
|
|
|
|
|Current Assets                                                                                 |  |         
|Cash and cash equivalents                                                                      |  |         
|Trade and other receivables                                                                    |  |         
|Other current assets                                                                           |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Total Current Assets                                                                           |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Non Current Assets                                                                             |  |         
|Property and equipment, net of accumulateddepreciation of A$525,767 and A$576,826 respectively |  |         
|Other non current assets                                                                       |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Total Non Current Assets                                                                       |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Total Assets                                                                                   |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Current Liabilities                                                                            |  |         
|Trade and other payables                                                                       |  |         
|Provisions                                                                                     |  |         
|Financial liabilities                                                                          |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Total Current Liabilities                                                                      |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Non-Current Liabilities                                                                        |  |         
|Provisions                                                                                     |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Total Non-Current Liabilities                                                                  |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Total Liabilities                                                                              |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Commitments and contingencies                                                                  |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Net Assets                                                                                     |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Equity                                                                                         |  |         
|Issued and unissued capital                                                                    |  |         
|2009: 202,710,473 fully paid ordinary shares                                                   |  |         
|14,279,133 options over fully paid ordinary shares                                             |  |         
|2008: 201,800,240 fully paid ordinary shares                                                   |  |         
|14,279,133 options over fully paid                                                             |  |         
|ordinary shares                                                                                |  |         
|Reserves                                                                                       |  |         
|Accumulated deficit during the development stage                                               |  |         
|                                                                                               |  |         
|                                                                                               |  |         
|Total Equity                                                                                   |  |         
|                                                                                               |  |         
|                                                                                               |  |         

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

F - 2

---

---

# PRANA BIOTECHNOLOGY
LIMITED

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

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

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

F - 3

---

---

# PRANA BIOTECHNOLOGY
LIMITED

CONSOLIDATED CASH FLOW STATEMENTS
(in Australian dollars)

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

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

F - 4

---

---

PRANA BIOTECHNOLOGY LIMITED

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

|                                           | Notes | Number of
Shares | Issued and
unissued
Capital | Reserves | Accumulated
Deficit
During
Development
Stage | Total Equity
|------------------------------------------ | ----- | ---------------- | --------------------------- | -------- | -------------------------------------------- | ------------
|
|
|
|
|Balance, June 30, 2006                     |       |                  |                             |          |                                              |             
|                                           |       |                 
|Net loss                                   |       |                  |                             | 14       |                                              |             
|Issuance of shares in connection with      |       |                 
|private placement, net of costs            |       |                  |                             | 12(b)    |                                              |             
|Issuance of options in connection with     |       |                 
|private placement                          |       |                  |                             | 12(c)    |                                              |             
|Non-cash issuance of shares to consultants |       |                  |                             | 12(b)    |                                              |             
|Non-cash issuance of shares to employees   |       |                  |                             | 12(b)    |                                              |             
|Non-cash issuance of options to            |       |                 
|consultants                                |       |                  |                             | 13(b)    |                                              |             
|Non-cash issuance of options to directors  |       |                 
|and employees                              |       |                  |                             | 13(b)    |                                              |             
|Issuance of shares in connection with      |       |                  |                             | 12(b)&   |                                             
|exercise of options, net of costs          |       |                  |                             | 13(b)    |                                              |             
|Amortization of option expenses            |       |                  |                             | 13(b)    |                                              |             
|Options forfeited                          |       |                  |                             | 13(b)    |                                              |             
|                                           |       |                  |                             |          |                                              |             
|Balance, June 30, 2007                     |       |                  |                             |          |                                              |             
|                                           |       |                 
|Net loss                                   |       |                  |                             | 14       |                                              |             
|Issuance of shares in connection with      |       |                 
|private placement, net of costs            |       |                  |                             | 12(b)    |                                              |             
|Issuance of options in connection with     |       |                 
|private placement                          |       |                  |                             | 12(c)    |                                              |             
|Non-cash issuance of shares to consultants |       |                  |                             | 12(b)    |                                              |             
|Non-cash issuance of options to            |       |                 
|consultants                                |       |                  |                             | 13(b)    |                                              |             
|Non-cash issuance of options to directors  |       |                 
|and employees                              |       |                  |                             | 13(b)    |                                              |             
|Issuance of shares in connection with      |       |                  |                             | 12(b)&   |                                             
|exercise of options, net of costs          |       |                  |                             | 13(b)    |                                              |             
|Amortization of option expenses            |       |                  |                             | 13(b)    |                                              |             
|Options forfeited                          |       |                  |                             | 13(b)    |                                              |             
|                                           |       |                  |                             |          |                                              |             
|Balance, June 30, 2008                     |       |                  |                             |          |                                              |             
|Net loss                                   |       |                  |                             | 14       |                                              |             
|Issuance of shares in connection with      |       |                 
|private placement, net of costs            |       |                  |                             | 12(b)    |                                              |             
|Issuance of options in connection with     |       |                 
|private placement                          |       |                  |                             | 12(c)    |                                              |             
|Non-cash issuance of shares to consultants |       |                  |                             | 12(b)    |                                              |             
|Non-cash issuance of options to            |       |                 
|consultants                                |       |                  |                             | 13(b)    |                                              |             
|Non-cash issuance of options to directors  |       |                 
|and employees                              |       |                  |                             | 13(b)    |                                              |             
|Issuance of shares in connection with      |       |                  |                             | 12(b)&   |                                             
|exercise of options, net of costs          |       |                  |                             | 13(b)    |                                              |             
|Amortization of option expenses            |       |                  |                             | 13(b)    |                                              |             
|Option forfeited                           |       |                  |                             | 13(b)    |                                              |             
|                                           |       |                  |                             |          |                                              |             
|Balance, June 30, 2009                     |       |                  |                             |          |                                              |             
|                                           |       |                  |                             |          |                                              |             
|                                           |       |                  |                             |          |                                              |             

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

F - 5

---

---

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

|1. | BACKGROUND
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ---------------------------------------------------------

# Background

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

# Financial Reporting
Framework

The financial report of Prana
Biotechnology Limited for the year ended June 30, 2009 was authorized for issue in
accordance with a resolution of the Directors on September 23, 2009.

The financial report is a general
purpose financial report, which has been prepared in accordance with International
Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB), the Corporations Act 2001, Accounting Standards
and Urgent Issues Group Interpretations, and complies with other requirements of
applicable law. This financial report complies with both IFRS as issued by IASB and
Australian equivalents to IFRS.

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

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

The accounting policies set out below
have been applied in preparing the financial statements for the year ended June 30, 2009
and the comparative information presented in these financial statements for the years
ended June 30, 2008 and 2007.

# Critical accounting
estimates, judgments and assumptions

Estimates and judgments are
continually evaluated and are based on historical experience and other factors, including
expectations of future events that may have a financial impact on the entity and that are
believed to be reasonable under the circumstances.

The consolidated entity makes
estimates and assumptions concerning the future. The resulting accounting estimates will,
by definition, seldom equal the related actual results. The estimates and assumptions that
have a significant risk of causing a material adjustment to the carrying amounts of assets
and liabilities within the next financial year are discussed below.

(a)
          Valuation of options with market vesting conditions

The consolidated entity has granted
options that are exercisable into ordinary shares once the listed share price reaches a
defined level for a specified number of consecutive trading days.

The consolidated entity considers the
target share price that must be attained in order to exercise the awards to be a market
condition.

The Company is unable to predict the
ultimate success of research and development activities and the corresponding effect on
the listed share price. However, the following assumptions have been made when valuing the
options in relation to these market conditions:

|1) | The
market condition will be met as the listed share price will reach the           defined
share price during the life of the option; and
|-- | ------------------------------------------------------------------------------------------------------------------------------------------

|2) | Based
on the best estimate of the consolidated entity, made during the 2006           fiscal
year, the share price will reach the defined level:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | > | A$0.80
at June 30, 2009
| | - | -----------------------

| | > | A$1.00
at June 30, 2010
| | - | -----------------------

|3) | Based
on the best estimate of the consolidated entity, made during the 2009           fiscal
year, the share price will reach the defined level:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | > | A$0.25
at June 30, 2009
| | - | -----------------------

| | > | A$0.45
at June 30, 2010
| | - | -----------------------

The initial estimate made at the date
of grant as regards to the likelihood of achieving the market condition is never adjusted
for changes in the probability of the condition being achieved. At each reporting period,
the Company assesses the estimated period over which the defined market condition will be
achieved.

F - 6

---

---

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

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

(b)
          Critical judgments in applying the entitys accounting policies  use
          of volatility period in valuing warrant liabilities

Warrants and options exercisable into
American Depository Receipts (ADRs) recorded as financial liabilities under
IAS 32 Financial Instruments: Presentation (see Note 10) are measured at fair value
using a Black-Scholes valuation model. At each reporting date any options and warrants for
ADRs are recorded at fair value with the corresponding difference being recorded in the
income statement as a gain or loss.

Warrants that were exercisable for
ADRs expired without being exercised on June 4, 2009. Options for ADRs remain outstanding.

In using the Black-Scholes model to
fair value these options and warrants for financial year 2008, the consolidated entity
utilized a two year historical ADR price when calculating the volatility of the underlying
ADRs. It is the judgment of the consolidated entity that a two year period provides the
most appropriate history of ADR price over which a reasonable volatility input can be
calculated.

# Going Concern Basis

The consolidated entity is a
development stage medical biotechnology company and as such, expects to be utilizing cash
until its research and development activities have become marketable. As at 30 June 2009,
the consolidated entity had an operating loss of A$7,522,789 (2008 loss: A$13,560,678). As
at year end, the consolidated entitys net assets amounted to A$3,749,816 (2008:
A$9,866,327). The consolidated entitys cash position has decreased to A$4,304,977 at
30 June 2009 from A$11,219,035 at 30 June 2008.

The Directors believe that the going
concern basis of preparation is appropriate. Subsequent to year end the consolidated
entity raised $6 million of additional funding (refer to details in Note 18). This funding
will enable the consolidated entity to continue to pursue its current business objectives.
Notwithstanding, the Company has the ability to scale down its operations and continue
certain programs including research and discovery programs in Parkinsons disease and
vaccine program in Alzheimers disease, should the need arise.

# Development Stage 
Risks and Uncertainties

As a development stage enterprise,
the consolidated entitys prospects are subject to the risks, expenses and
uncertainties frequently encountered by companies which have not yet commercialized any
applications of their technology, particularly in new and evolving markets. Pranas
operating results may fluctuate significantly in the future as a result of a variety of
factors, including capital expenditure and other costs relating to establishing,
maintaining and expanding the operations, the number and mix of potential customers,
potential pricing of future products by the consolidated entity and its competitors, new
technology introduced by the consolidated entity and its competitors, delays or expense in
obtaining necessary equipment, economic and social conditions in the biotechnology
industry and general economic conditions.

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

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

F - 7

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

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

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

(a)Principles
of Consolidation

The consolidated financial statements
are prepared by combining the financial statements of all the entities that comprise the
consolidated entity, being the Company and its subsidiaries as defined in Accounting
Standard IAS 27: Consolidated and Separate Financial Statements. Consistent
accounting policies are employed in the preparation and presentation of the consolidated
financial statements.

Subsidiaries are all those entities
(including special purpose entities) over which the consolidated entity has the power to
govern the financial and operating policies, generally accompanying a shareholder of more
than one-half of the voting rights. The existence and effect of potential voting rights
that are currently exercisable or convertible are considered when assessing whether the
consolidated entity controls another entity.

Subsidiaries are fully consolidated
from the date on which control is transferred to the consolidated entity. They are
de-consolidated from the date that control ceases.

In preparing the consolidated
financial statements, all inter-company balances and transactions, and unrealized
profits/losses arising within the consolidated entity are eliminated in full. Investments
in subsidiaries are accounted for at cost in the individual financial statements of the
Company.

(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.

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.

F - 8

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

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

(c)Property
and Equipment

Property and equipment is measured at
historical cost 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.

Historical cost includes expenditure
that is directly attributable to the acquisition of the item.

Subsequent costs are included in the assets
carrying amount or recognised as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with the item will flow to the
consolidated entity and the cost of the item can be measured reliably. The carrying amount
of any component accounted for as a separate asset is derecognized when replaced. All
other repairs and maintenance are charged to the income statement during the reporting
period in which they are incurred.

Depreciation Depreciation is provided on property
and equipment. Depreciation is calculated on a straight-line method to allocate their
cost, net of their residual values, over their estimated useful lives.

The following estimated useful lives,
ranging from three to 20 years are used in the calculation of depreciation:

|Class of Fixed Asset   | Depreciation Rate | 
|---------------------- | ----------------- | 
|
|
|
|
|Furniture and fittings |                   | 
|Computer equipment     |                   | 
|Plant and equipment    |                   | 
|Leasehold improvements |                   | 
|                       |                   | 

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)Leases

Leases in which a significant
proportion of the risks and rewards of ownership are not transferred to the Company as
lessee are classified as operating leases.

Operating lease payments are
recognized as an expense on a straight-line basis over the lease term, except where
another systematic basis is more representative of the time pattern in which economic
benefits from the leased assets are consumed.

(e)Financial
Instruments

Loans and Receivables Loans and receivables are
non-derivative financial assets with fixed or determinable payments that are not quoted in
an active market. They are included in current assets, except for those with maturities
greater than 12 months after the reporting date which are classified as non-current
assets. Loans and receivables are included in trade and other receivables in the balance
sheet. Trade receivables, loans, and other receivables are recorded at amortized cost less
impairment.

Warrants and Options Under IAS 32, options and warrants
issued other than for goods or services that are exercisable in a currency other than the
functional currency of the Company and meet the definition of a liability are recorded as
financial liabilities rather than equity. Refer to accounting policy (p) share-based
payments for the accounting policy for warrants and options issued as share-based payments
for goods or services.

Warrants and options recorded as
financial liabilities under IAS 32 are valued at fair value using the Black-Scholes model.
The expected life used in the model has been adjusted, based on managements best
estimate, for the effects of non-transferability, exercise restrictions, and behavioural
considerations. At each reporting date, the options and warrants are revalued to their
current fair value, with the difference in fair value recorded in the Income Statement.

(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.

F - 9

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

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

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)Intangible
Assets  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, 2009 and 2008, Prana had
no capitalized research and development costs.

(h)Foreign
Currency Transactions and Balances

Functional and
Presentation Currency Items included in the financial
statements of each of the consolidated entitys entities are measured using the
currency of the primary economic environment in which the entity operates (the functional
currency). The consolidated financial statements are presented in Australian dollars,
which is Pranas functional and presentation currency.

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.

Group companiesThe results and financial position of
all the Companys entities that have a functional currency difference from the
presentation currency are translated into the presentation currency as follows:

| | assets
and liabilities for each balance sheet presented are translated at the closing rate at
the date of that balance sheet, and
|- | ---------------------------------------------------------------------------------------------------------------------------------

| | income
and expenses for each income statement are translated at average exchange rates (unless
this is not a reasonable approximation of the cumulative effect of the rates prevailing
on the transaction dates, in which case income and expenses are translated at the dates
of the transactions), and
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | all
resulting  exchange  differences  are recognized      as a separate component of equity.
|- | --------------------------------------------------------------------------------------------

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.

F - 10

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

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

(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.

Consideration is given to expected
future wage and salary levels and periods of service. Expected future payments are
discounted using market yields at the reporting date on national government bonds with
terms to maturity and currency that match, as closely as possible, the estimated future
cash outflows.

(j)Provisions

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

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

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

(k)Cash
and Cash Equivalents

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

(l)Revenue

Revenue is recognized to the extent
that it is probable that the economic benefits will flow to the entity and the revenue can
be reliably measured. Revenue is made up of interest income which is recognized on a time
proportion basis using the effective interest method.

(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 collectability 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.

(n)Goods
and Services Tax (GST)

Revenues, expenses and assets are
recognised 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 recognised 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 Cash
Flow Statement 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.

(o)Trade
and Other Payables

These amounts represent liabilities
for goods and services provided to the consolidated entity prior to the end of financial
year which are unpaid. The amounts are unsecured and are usually paid within 30 days of
recognition.

F - 11

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

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

(p)Share-Based
Payments

Equity-settled share-based payments
granted after November 7, 2002 that were unvested as of January 1, 2005 are measured at
fair value. The measurement date is determined for share-based payments issued to
directors, employees and consultants as follows:

Directors The issuance of share-based payments
to directors is subject to approval by shareholders as per ASX Listing Rule 10.11. The
measurement date for share-based payments issued to directors is the grant date, being the
date at which the share-based payments are approved by shareholders.

Employees The issuance of share-based payments
to employees may be subject to shareholder approval per ASX Listing Rule 7.1 which
prohibits the issuance of more than 15% of the Companys shares in a 12 month period
without shareholder approval. The measurement date for share-based payments issued to
employees is the grant date, being the date at which a shared understanding of the terms
and conditions of the arrangement is reached. However, if an issuance to an employee is
subject to shareholder approval because it exceeds the 15% threshold per ASX Listing Rule
7.1, then the measurement date of these share-based payments is the date at which the
share-based payments are approved by shareholders.

Consultants The issuance of share-based payments
to consultants may be subject to shareholder approval per ASX Listing Rule 7.1 which
prohibits the issuance of more than 15% of the Companys shares in a 12 month period
without shareholder approval. The measurement date for share-based payments issued to
consultants who provide services considered to be similar to employees is deemed to be the
date at which a shared understanding of the terms and conditions of the arrangement is
reached. The measurement date for share-based payments issued to consultants who provide
services considered to be differentiated from those provided by employees is deemed to be
the date at which the entity obtains the goods or the counterparty renders the service. If
a service period applies and the work is continually provided over the service period, and
if the share price of the Company does not change significantly during the service period,
then the average share price, volatility and risk-free rate over the service period are
used in calculating the value of the share-based payments issued. However, if the
underlying share price of the Company does change significantly during the service period,
then the value of share-based payments are calculated at each individual date that goods
and services are provided, using the actual valuation inputs at that date. Shares issued
to consultants for services are recorded as non-cash compensation and are recognized at
either the fair value of the services rendered, or if this cannot be reasonably estimated,
the fair value of the underlying equity instruments issued.

Equity-based compensation benefits
are provided to directors, employees and consultants under the 2004 ASX Plan (the
2004 ASX Plan) and the 2004 American Depository Share (ADS) Option Plan (the
2004 ADS Plan). Information relating to this plan is set out in Note 17.

The fair value of options granted
under the 2004 ASX Plan is recognized as an expense with a corresponding increase in
equity. The fair value is measured at grant date and recognized over the period during
which the recipients become unconditionally entitled to the options.

The fair value at grant date is
independently determined using a Black-Scholes (for options without market condition) and
Barrier Pricing (for options with market conditions) model that takes into account the
exercise price, the term of the option, the impact of dilution, the share price at grant
date and expected price volatility of the underlying share, the expected dividend yield
and the risk free interest rate for the term of the option. The expected life used in the
model has been adjusted, based on managements best estimate, for the effects of
non-transferability, exercise restrictions, and behavioral considerations.

The fair value determined at the
grant date of the equity-settled share-based payments is expensed on a straight-line basis
over the vesting period, 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)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.

(s)Trade
and Other Receivables

Trade and other receivables are
recognized initially at fair value and subsequently measured at amortized cost using the
effective interest rate method less provision for impairment.

(t)Comparative
Figures

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

F - 12

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

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

(u)     New
Accounting Standards And Interpretations

Certain new International accounting
standards and interpretations have been published that are not mandatory for June 30, 2009
reporting periods. Based on the Companys assessment, it believes that the following
new standards and interpretations could in the future have an impact on its consolidated
financial statements.

IAS
23 (Amendment), Borrowing costs (effective for annual periods beginning on or
after January 1, 2009 and applicable to the Company effective July 1, 2009). The
amendment requires an entity to capitalize borrowing costs directly attributable to the
acquisition, construction or production of a qualifying asset (one that takes a
substantial period of time to get ready for use or sale) as part of the cost of that
asset. The option of immediately expensing those borrowing costs will be removed. IAS 23
(Amendment) is not expected to have an impact on the Companys financial statements
as it has no qualifying assets.

IAS
1 (Revised), Presentation of financial statements (effective for annual
periods beginning on or after January 1, 2009 and applicable to the Company effective July
1, 2009).The revised standard will prohibit the presentation of items of
income and expenses (that is, non-owner changes in equity) in the statement of
changes in equity, requiring non-owner changes in equity to be presented
separately from owner changes in equity. All non-owner changes in equity will be required
to be shown in a performance statement, but entities can choose whether to present one
performance statement (the statement of comprehensive income) or two statements (the
income statement and statement of comprehensive income). Where entities restate or
reclassify comparative information, they will be required to present a restated balance
sheet as at the beginning comparative period in addition to the current requirement to
present balance sheets at the end of the current period and comparative period. These
amendments are only expected to affect the presentation of the Companys financial
statements and will not have a direct impact on the measurement and recognition of amounts
disclosed in the financial statements. The Company anticipates that it will present a
single Statement of Comprehensive Income rather than two separate statements due to the
minimum number of items expected to be classified as Other Comprehensive Income.

IFRS
2 (Amendment), Share-based payment (effective for annual periods beginning on
or after January 1, 2009 and applicable to the Company effective July 1, 2009). The
amended standard deals with vesting conditions and cancellations. It clarifies that
vesting conditions are service conditions and performance conditions only. Other features
of a share-based payment are not vesting conditions. These features would need to be
included in the grant date fair value for transactions with employees and others providing
similar services; they would not impact the number of awards expected to vest or valuation
there of subsequent to grant date. All cancellations, whether by the Company or by other
parties, should receive the same accounting treatment. The Company has share-based payment
arrangements with vesting conditions as defined under this standard; therefore these
amendments are not expected to have any impact on its financial statements.

IAS
32 (Amendment), Financial instruments: Presentation, and IAS 1 (Amendment),
Presentation of financial statements  Puttable financial instruments and
obligations arising on liquidation (effective for annual periods beginning on or
after January 1, 2009 and applicable to the Company effective July 1, 2009). The
amended standards require entities to classify puttable financial instruments and
instruments, or components of instruments that impose on the entity an obligation to
deliver to another party a pro rata share of the net assets of the entity only on
liquidation as equity, provided the financial instruments have particular features and
meet specific conditions. These amendments are not expected to have any impact on the
Companys financial statements as it has not issued puttable financial instruments as
defined by the amendments.

IAS
27 (Revised), Consolidated and separate financial statements (effective for
annual periods beginning on or after January 1, 2009 and applicable to the Company
effective July 1, 2009).The revised standard requires the effects of all transactions
with non-controlling interests to be recorded in equity if there is no change in control
and these transactions will no longer result in goodwill or gains and losses. The standard
also specifies the accounting when control is lost. Any remaining interest in the entity
is re-measured to fair value, and a gain or loss is recognized in profit or loss. The
Company began to apply IAS 27 (Revised) prospectively to transactions with non-controlling
interests from July 1, 2009.

IFRS
3 (Revised), Business combinations (effective for annual periods beginning on
or after January 1, 2009 and applicable to the Company effective July 1, 2009).The
revised standard continues to apply the acquisition method to business combinations, with
some significant changes. For example, all payments to purchase a business are to be
recorded at fair value at the acquisition date, with contingent payments classified as
debt subsequently re-measured through the income statement. There is a choice on an
acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree
either at fair vale or at the non-controlling interests proportionate share of the
acquirees net assets. All acquisition-related costs should be expensed. The Company
began to apply IFRS 3 (Revised) prospectively to all business combinations from July 1,
2009. These amendments are only expected to affect the presentation of the Companys
financial statements and will not have a direct impact on the measurement and recognition
of amounts disclosed in the financial statements. These amendments are not expected to
have any impact on the Companys financial statements as it does not have any
business combinations.

IAS
23 (Amendment), Borrowing costs (effective for annual periods beginning on or
after January 1, 2009 and applicable to the Company effective July 1, 2009). The
amendment is part of the IASBs annual improvements project published in May 2008.
The definition of borrowing costs has been amended so that interest expense is calculated
using the effective interest method defined in IAS 39 Financial instruments:
Recognition andmeasurement. This eliminates the inconsistency of terms between
IAS 39 and IAS 23.

F - 13

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---

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

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

IAS
28 (Amendment), Investments in associates (and consequential amendments to IAS
32, Financial Instruments: Presentation, and IFRS 7, Financial
instruments: Disclosures) effective for annual periods beginning on or after January
1, 2009 and applicable to the Company effective July 1, 2009). The amendment is part
of the IASBs annual improvements project published in May 2008. An investment in an
associate is treated as a single asset for the purposes of impairment testing. Any
impairment loss is not allocated to specific assets included within the investment, for
example, goodwill. Reversals of impairment are recorded as an adjustment to the investment
balance to the extent that the recoverable amount of the associate increases. The Company
has two inactive subsidiaries and does not have any jointly controlled entities or
associates and therefore its financial statements are not expected to be impacted by this
standard change.

IAS
19 (Amendment), Employee benefits (effective for annual periods beginning on
or after January 1, 2009 and applicable to the Company effective July 1, 2009).The
amendment is part of the IASBs annual improvements project published in May 2008.
The amendment clarifies that a plan amendment that results in a change in the extent to
which benefit promises are affected by future salary increases is a curtailment, while an
amendment that changes benefits attributable to past service gives rise to a negative past
service cost if it results in a reduction in the present value of the defined benefit
obligation. The definition of return on plan assets has been amended to state that plan
administration costs are deducted in the calculation of return on plan assets only to the
extent that such costs have been excluded from measurement of the defined benefit
obligation. The distinction between short term and long term employee benefits will be
based on whether benefits are due to be settled within or after 12 months of employee
service being rendered. IAS 37, Provisions, contingent liabilities and contingent
assets, requires contingent liabilities to be disclosed, not recognized. IAS 19
has been amended to be consistent. IAS 1 (Amendment), Presentation of financial
statements (application date of standard January1, 2009; application date for
Comopany July 1, 2009). The amendment is part of the IASBs annual improvements
project published in May 2008. The amendment clarifies that some rather than all financial
assets and liabilities classified as held for trading in accordance with IAS 39,
Financial instruments: Recognition and measurement are examples of
current assets and liabilities respectively. IAS 39 (Amendment) is not expected to have an
impact on the Companys financial statements.

There
are a number of minor amendments to IFRS 7, Financial instruments:
Disclosures, IAS 8, Accounting policies, changes in accounting
estimates and errors, IAS 10, Events after the reporting
period, IAS 18, Revenue and IAS 34, Interim
financial reporting, which are part of the IASBs annual improvements
project published in May 2008 (not addressed above). These amendments are unlikely to have
an impact on the Companys financial statements and have therefore have not been
described in further detail.

IFRIC
16, Hedges of a net investment in a foreign operation (effective for annual
periods beginning on or after January 1, 2009 and applicable to the Company effective July
1, 2009). IFRIC 16 clarifies the accounting treatment in respect of net investment
hedging. This includes the fact that net investment hedging relates to differences in
functional currency not presentation currency, and hedging instruments may be held
anywhere in the group. The requirements of IAS 21, The effects of changes in
foreign exchange rates, apply to the hedged item. IFRIC 16 is not expected to
have a material impact on the Companys financial statements.

|   |  | Years Ended June 30,
|-- |  | --------------------
|
|
|
|
|2. |  |                     
|   |  |                     

|Other revenue       |  |  |  |         |  |  |         |  |  |         | 
|------------------- |  |  |  | ------- |  |  | ------- |  |  | ------- | 
|Interest            |  |  |  | 428,193 |  |  | 490,943 |  |  | 507,150 | 
|Total other revenue |  |  |  | 428,193 |  |  | 490,943 |  |  | 507,150 | 
|                    |  | 
|Other income        |  | 
|Other income        |  |  |  | -       |  |  | 170     |  |  | 287     | 
|Total other income  |  |  |  | -       |  |  | 170     |  |  | 287     | 
|                    |  |  | 

F - 14

---

---

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

|   |  | Years Ended June 30,
|-- |  | --------------------
|
|
|
|
|3. |  |                     

|Research and development                     |  |  |  | 2,215,358 |   |  | 5,757,168  |  |  | 4,492,193  |  
|-------------------------------------------- |  |  |  | --------- | - |  | ---------- |  |  | ---------- | -
|                                             |  | 
|Personnel expenses                           |  | 
|Employees                                    |  |  |  | 1,359,887 |   |  | 1,317,782  |  |  | 1,308,920  |  
|Equity based payments - employees            |  |  |  | 169,043   |   |  | 329,588    |  |  | 753,484    |  
|Consultants and directors                    |  |  |  | 1,022,227 |   |  | 1,398,849  |  |  | 1,506,378  |  
|Equity-based payments - consultants and      |  | 
|directors                                    |  |  |  | 1,136,428 |   |  | 2,152,234  |  |  | 825,649    |  
|Defined contribution superannuation expenses |  |  |  | 145,219   |   |  | 151,736    |  |  | 160,300    |  
|                                             |  | 
|Total personnel expense                      |  |  |  | 3,832,804 |   |  | 5,350,189  |  |  | 4,554,731  |  
|                                             |  | 
|Intellectual property expenses               |  | 
|Overseas                                     |  |  |  | 497,947   |   |  | 140,705    |  |  | 229,256    |  
|Local                                        |  |  |  | 609,587   |   |  | 328,723    |  |  | 370,976    |  
|                                             |  | 
|Total intellectual property expense          |  |  |  | 1,107,534 |   |  | 469,428    |  |  | 600,232    |  
|                                             |  |  |  |           |   | 
|                                             |  | 
|Depreciation of non-current assets           |  | 
|Laboratory equipment                         |  |  |  | 1,748     |   |  | 4,362      |  |  | 11,581     |  
|Computer equipment                           |  |  |  | 26,488    |   |  | 16,152     |  |  | 22,757     |  
|Furniture and fittings                       |  |  |  | 2,688     |   |  | 3,383      |  |  | 3,068      |  
|Leasehold improvements                       |  |  |  | 1,420     |   |  | 1,452      |  |  | 21,176     |  
|Write-off non-current assets                 |  |  |  | 1,846     |   |  | -          |  |  | -          |  
|                                             |  |  |  |           |   | 
|                                             |  | 
|Total depreciation expense                   |  |  |  | 34,190    |   |  | 25,349     |  |  | 58,582     |  
|                                             |  |  |  |           |   | 
|                                             |  | 
|Other expenses                               |  | 
|Corporate compliance                         |  |  |  | 299,250   |   |  | 218,435    |  |  | 231,883    |  
|Office expenses                              |  |  |  | 444,579   |   |  | 455,010    |  |  | 494,782    |  
|Computer expenses                            |  |  |  | 23,178    |   |  | 34,794     |  |  | 22,328     |  
|Insurance                                    |  |  |  | 77,166    |   |  | 130,175    |  |  | 147,909    |  
|Office rental under operating lease          |  |  |  | 134,702   |   |  | 136,990    |  |  | 111,661    |  
|                                             |  |  |  |           |   | 
|                                             |  | 
|Total other expenses                         |  |  |  | 978,875   |   |  | 975,404    |  |  | 1,008,563  |  
|                                             |  |  |  |           |   | 
|                                             |  | 
|Auditor and accounting expenses              |  |  |  | 129,998   |   |  | 331,950    |  |  | 260,117    |  
|Travel expenses                              |  |  |  | 195,251   |   |  | 146,651    |  |  | 309,997    |  
|Public relations and marketing expenses      |  |  |  | 222,679   |   |  | 141,337    |  |  | 215,455    |  
|Foreign exchange gain                        |  |  |  | 6,723     |   |  | 402,886    |  |  | 757,578    |  
|Gain (loss) on fair valuation of financial   |  | 
|liabilities                                  |  |  |  | (772,430  | ) |  | 451,429    |  |  | (607,691   | )
|                                             |  |  |  |           |   | 
|                                             |  | 
|Total expenses                               |  |  |  | 7,950,982 |   |  | 14,051,791 |  |  | 11,649,757 |  
|                                             |  |  |  |           |   | 
|                                             |  |  | 

F - 15

---

---

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

|   |  | Years Ended June 30,
|-- |  | --------------------
|
|
|
|
|4. |  |                     

|(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%                                   |  | 
|(2008 & 2007: 30%)                                  |  |  |  | (2,256,837 | ) |  | (4,068,203 | ) |  | (3,342,696 | )
|Effect  of  lower  tax  rates  of tax on  overseas  |  | 
|income                                              |  |  |  | 48         |   |  | (286       | ) |  | 442        |  
|                                                    |  | 
|Add tax effect of:                                  |  | 
|(Over) provision of income tax in previous year     |  | 
|relating to a correction of estimates 1             |  |  |  | 13,806     |   |  | (288       | ) |  | (2,697,461 | )
|Equity issued for nil consideration                 |  |  |  | 391,641    |   |  | 744,547    |   |  | 473,740    |  
|Research and development tax concession             |  |  |  | (258,131   | ) |  | (552,400   | ) |  | (434,117   | )
|Gain on fair value of financial liabilities         |  |  |  | (231,729   | ) |  | 135,429    |   |  | (182,307   | )
|Other                                               |  |  |  | 1,701      |   |  | 116        |   |  | 2,452      |  
|                                                    |  | 
|Deferred tax asset not recognized                   |  |  |  | 2,339,501  |   |  | 3,740,797  |   |  | 6,179,947  |  
|                                                    |  | 
|Income tax expense attributable to loss before      |  | 
|income tax                                          |  |  |  | -          |   |  | -          |   |  | -          |  
|                                                    |  |  |  |            |   | 
|                                                    |  | 
|(b)    Potential deferred tax asset at June 30,     |  | 
|2009, 2008 and 2007 in respect of tax losses not    |  | 
|brought to account is:                              |  |  |  | 28,809,746 |   |  | 26,396,277 |   |  | 22,693,134 |  
|Temporary Differences                               |  |  |  | 246,714    |   |  | 1,242,278  |   |  | 392,720    |  
|                                                    |  |  | 

1
          This is the result of the difference between the accounting estimate included in
          the prior years tax note, as disclosed in the Form 20-F for the year ended
          June 30, 2008, and the tax return lodged with the Australian Tax Office after
          the filing of the Form 20-F for such period.

|   |  | Years Ended June 30,
|-- |  | --------------------
|
|
|
|
|5. |  |                     

|Accrued income                    |  |  |  | 526 |  |  | 89,569  | 
|--------------------------------- |  |  |  | --- |  |  | ------- | 
|Goods and services tax receivable |  |  |  | -   |  |  | 31,072  | 
|                                  |  |  |  |    
|                                  |  | 
|                                  |  |  |  | 526 |  |  | 120,641 | 
|                                  |  |  |  |    

|   |  | Years Ended June 30,
|-- |  | --------------------
|
|
|
|
|6. |  |                     

|Current      |  |  |  |         |  |  |         | 
|------------ |  |  |  | ------- |  |  | ------- | 
|Prepayments  |  |  |  | 185,433 |  |  | 243,261 | 
|Term Deposit |  |  |  | -       |  |  | 11,064  | 
|             |  |  |  |        
|             |  | 
|Total        |  |  |  | 185,433 |  |  | 254,325 | 
|             |  |  |  |        
|             |  | 
|Non-current  |  | 
|Term Deposit |  |  |  | 35,164  |  |  | 35,164  | 
|             |  |  |  |        
|             |  | 
|Total        |  |  |  | 35,164  |  |  | 35,164  | 
|             |  |  |  |        
|             |  | 

F - 16

---

---

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

|   |  |  | Years Ended June 30,  
|-- |  |  | ----------------------
|
|
|
|
|7. |  |  | PROPERTY AND EQUIPMENT

|Gross carrying amount         |  |  |  |   |  |  |          |   |  |          |  
|----------------------------- |  |  |  | - |  |  | -------- | - |  | -------- | -
|Balance at beginning of year  |  |  |  |   |  |  | 646,399  |   |  | 599,793  |  
|Additions                     |  |  |  |   |  |  | 36,191   |   |  | 46,606   |  
|Disposals                     |  |  |  |   |  |  | (86,162  | ) |  | -        |  
|                              |  |  |  |   | 
|                              |  | 
|Balance at end of year        |  |  |  |   |  |  | 596,428  |   |  | 646,399  |  
|                              |  |  |  |   | 
|                              |  | 
|Accumulated depreciation      |  | 
|Balance at beginning of year  |  |  |  |   |  |  | (577,250 | ) |  | (551,902 | )
|Disposals                     |  |  |  |   |  |  | 84,316   |   |  | -        |  
|Depreciation expense          |  |  |  | 4 |  |  | (32,344  | ) |  | (25,349  | )
|                              |  |  |  |   | 
|                              |  | 
|Balance at end of year        |  |  |  |   |  |  | (525,278 | ) |  | (577,251 | )
|                              |  |  |  |   | 
|                              |  | 
|Net book value at end of year |  |  |  |   |  |  | 71,150   |   |  | 69,148   |  
|                              |  |  |  |   | 
|                              |  |  | 

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

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

|   |  | Years Ended June 30,
|-- |  | --------------------
|
|
|
|
|8. |  |                     

|Trade creditors                           |  |  |  | 109,871 |  |  | 172,204 | 
|----------------------------------------- |  |  |  | ------- |  |  | ------- | 
|Accrued research and development expenses |  |  |  | 248,304 |  |  | 419,244 | 
|Accrued intellectual property expenses    |  |  |  | 111,217 |  |  | 19,313  | 
|Accrued personnel expenses                |  |  |  | 246     |  |  | 657     | 
|Accrued audit fees                        |  |  |  | 124,069 |  |  | 122,993 | 
|Accrued marketing expenses                |  |  |  | -       |  |  | 54,939  | 
|Other accrued expenses                    |  |  |  | 10,435  |  |  | 59,763  | 
|                                          |  |  |  |        
|                                          |  | 
|Total                                     |  |  |  | 604,142 |  |  | 849,113 | 
|                                          |  |  |  |        

F - 17

---

---

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

|   |  |  | Years Ended June 30,
|-- |  |  | --------------------
|
|
|
|
|9. |  |  | PROVISIONS          

|Current             |  |  |  |    |  |  |         |  |  |         | 
|------------------- |  |  |  | -- |  |  | ------- |  |  | ------- | 
|Annual leave        |  |  |  | 17 |  |  | 126,427 |  |  | 121,082 | 
|Long service leave1 |  |  |  |    |  |  | 68,476  |  |  | -       | 
|                    |  |  |  |    | 
|                    |  | 
|Total               |  |  |  |    |  |  | 194,903 |  |  | 121,082 | 
|                    |  |  |  |    | 
|                    |  | 
|Non-Current         |  | 
|Long service leave  |  |  |  | 17 |  |  | 48,389  |  |  | 89,361  | 
|                    |  |  | 

A provision has been recognized for
employee entitlements relating to long service leave. In calculating the present value of
future cash flows in respect of long service leave, the probability of long service leave
being taken is based on historical data. The measurement and recognition criteria relating
to employee benefits have been included in Note 1 to this report.

1
          Amounts not expected to be settled within the next 12 months

The current provision for long
service leave includes all unconditional entitlements where employees have completed the
required period of service and also those where employees are entitled to pro-rata
payments in certain circumstances.

The entire amount is presented as
current, since the consolidated entity does not have an unconditional right to defer
settlement. However, based on past experience, the consolidated entity does not expect all
employees to take the full amount of accrued long service leave or require payment within
the next 12 months. The following amounts reflect leave that is not to be expected to be
taken or paid within the next 12 months.

|                                             | Years Ended June 30,
|-------------------------------------------- | --------------------
|
|
|
|
|Long service leave obligation expected to be |                     
|settled after 12 months                      |                     

|    |  | Years Ended June 30,
|--- |  | --------------------
|
|
|
|
|10. |  |                     

|Current            |  |  |  |   |  |  |         | 
|------------------ |  |  |  | - |  |  | ------- | 
|Warrants over ADRs |  |  |  | - |  |  | 772,430 | 
|                   |  | 

Following a meeting of shareholders
on June 1, 2004, the Company issued 4 million ADRs (1 ADR = 10 ordinary shares) and
warrants to purchase 3 million ADRs to U.S. investors. The U.S. investors acquired the
ADRs at a price of USD 5.00 per ADR and also received a warrant to purchase 3 ADRs for
each 4 ADRs purchased. The private placement raised USD 20 million (AUD 28.9 million)
before costs. The warrants were exercisable for ADRs on or before June 4, 2009 at an
exercise price of USD 8.00 per ADR. The warrants expired without being exercised on June
4, 2009.

Under IAS 32 paragraph 11, the
warrants associated with this transaction are required to be classified as a Financial
Liability, as opposed to Issued Capital, as a result of the warrants being exercisable in
a foreign currency, that is a currency different to the functional currency of the
Company.

During 2005 the International
Financial Reporting Interpretations Committee (IFRIC) noted that based on the
existing wording of IAS 32 (the International Financial Reporting Standards equivalent to
AASB 132), any contract entered into by an entity to exchange a fixed number of its own
equity instruments for a fixed amount of cash that is denominated in a foreign currency is
a Financial Liability and not an equity instrument. The IFRIC discussed and questioned
whether this was the appropriate and intended outcome of the standard, and consequently
submitted a proposal to the International Accounting Standards Board (IASB) to
amend IAS 32. As the IASB declined to make such an amendment to the standard, the IFRIC
conclusion that instruments as described above should be classified as Financial
Liabilities continues to stand.

As a consequence, on initial
recognition the fair value of the warrants was required to be recognized as a Financial
Liability at their fair value, reducing the Issued Capital recorded. At each reporting
date the Financial Liability representing the warrants is required to be revalued to fair
value with the movement in the fair value recorded in the Income Statement.

F - 18

---

---

PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars
(unless otherwise noted)

|    |                              
|--- | -----------------------------
|11. | COMMITMENTS AND CONTINGENCIES

There has been
no change in contingent liabilities since the last annual reporting date.

The Companys
former Chief Executive Officer, who also served as a director, has threatened
to initiate a claim against the Company arising from his alleged inability
to freely transfer shares underlying certain unexercised ADR options
previously granted to him pursuant to the Companys 2004 ADS Plan. The Company believes, based on the explicit
terms of the 2004 ADS Plan and applicable law and regulations, his allegations
to be without merit and it intends to vigorously defend any such claim if
formally asserted. No actions or other
legal proceedings in respect of this case have been filed.

Otherwise, the
consolidated entity is not involved in any legal or arbitration proceedings
nor, so far as Directors are aware, are such proceedings pending or threatened
against the consolidated entity.

In respect of
expenditure commitments, refer to Note 16.

|    |               
|--- | --------------
|12. | ISSUED CAPITAL

|                                        |  |  |       |  |                      |            |      |  |            |  |  |            | 
|--------------------------------------- |  |  | ----- |  | -------------------- | ---------- | ---- |  | ---------- |  |  | ---------- | 
|                                        |  |  |       |  | Years Ended June 30, |           
|                                        |  |  | Notes |  | 2009                 |            | 2008 |  | 2007       | 
|                                        |  |  |       |  |                      |            |      |  |            | 
|                                       
|(a) Issued Capital                      |  |  |       |  |                      |            |      |  |            |  |  |            | 
|Fully paid
 ordinary shares             |  |  | 12(b) |  |                      | 67,487,345 |      |  | 67,140,659 |  |  | 52,726,073 | 
|Options for
 fully paid ordinary shares |  |  | 12(c) |  |                      | 2,701,644  |      |  | 2,701,644  |  |  | 1,262,339  | 
|                                        |  |  |       |  |                      |            |      |  |            |  |  |            | 
|                                        |  |  |       |  |                      |            |      |  |            |  |  |            | 
|                                        |  |  |       |  |                      | 70,188,989 |      |  | 69,842,303 |  |  | 53,988,412 | 
|                                        |  |  |       |  |                      |            |      |  |            |  |  |            | 

(b) Movements in Issued Shares

|                          |  |          |             |      |  |            |  |   |             |     |  |            |  |  |             |  |  |            | 
|------------------------- |  | -------- | ----------- | ---- |  | ---------- |  | - | ----------- | --- |  | ---------- |  |  | ----------- |  |  | ---------- | 
|                          |  | June 30, |            
|                          |  |          |            
|                          |  | 2009     |             | 2008 |  | 2007       | 
|                          |  |          |             |      |  |            | 
|                          |  | No.      |             | $    |  | No.        |  | $ |             | No. |  | $          | 
|                          |  |          |             |      |  |            |  |   |             |     |  |            | 
|                         
|Beginning of
 the year    |  |          | 201,800,240 |      |  | 67,140,659 |  |   | 151,517,978 |     |  | 52,726,073 |  |  | 128,144,260 |  |  | 46,274,127 | 
|                          |  |          |             |      |  |            |  |   |             |     |  |            |  |  |             |  |  |            | 
|Movement
 during the year |  |          | 910,233     |      |  | 359,879    |  |   | 50,282,262  |     |  | 14,414,586 |  |  | 23,373,718  |  |  | 6,451,946  | 
|                          |  |          |             |      |  |            |  |   |             |     |  |            |  |  |             |  |  |            | 
|                          |  |          |             |      |  |            |  |   |             |     |  |            |  |  |             |  |  |            | 
|End of the
 year          |  |          | 202,710,473 |      |  | 67,487,345 |  |   | 201,800,240 |     |  | 67,140,659 |  |  | 151,517,978 |  |  | 52,726,073 | 
|                          |  |          |             |      |  |            |  |   |             |     |  |            |  |  |             |  |  |            | 

F - 19

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars
(unless otherwise noted)

|    |                           
|--- | --------------------------
|12. | ISSUED CAPITAL (continued)

Details of
share issuances are as follows:

|                          |  |                                                                             |  |       |  |        |            |             |  |         |  |  |            |  
|------------------------- |  | --------------------------------------------------------------------------- |  | ----- |  | ------ | ---------- | ----------- |  | ------- |  |  | ---------- | -
|Date                      |  | Details                                                                     |  | Notes |  | Number |            | Issue Price |  | $       | 
|                          |  |                                                                             |  |       |  |        |            |             |  |         | 
|                         
|October 30,
 2007         |  | Shares to
 investors as part of a private placement                         |  |       |  |        | 29,778,699 |             |  | 0.24    |  |  | 7,047,624  |  
|December 24,
 2007        |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 31,250     |             |  | 0.27    |  |  | 8,437      |  
|December 24,
 2007        |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 250,000    |             |  | 0.30    |  |  | 75,000     |  
|December 24,
 2007        |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 22,135     |             |  | 0.25    |  |  | 5,534      |  
|February 26,
 2008        |  | Exercise of
 options  consultants                                          |  |       |  |        | 205,000    |             |  |        |  |  | 65,712     |  
|February 26,
 2008        |  | Exercise of
 options  employees                                            |  |       |  |        | 800,557    |             |  |        |  |  | 184,128    |  
|                         
|February 26,
 2008        |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 500,000    |             |  | 0.26    |  |  | 130,000    |  
|February 26,
 2008        |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 55,000     |             |  | 0.34625 |  |  | 19,044     |  
|February 26,
 2008        |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 9,115      |             |  | 0.25    |  |  | 2,279      |  
|March 20,
 2008           |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 31,250     |             |  | 0.50    |  |  | 15,625     |  
|March 20,
 2008           |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 55,000     |             |  | 0.34625 |  |  | 19,044     |  
|April 2,
 2008            |  | Exercise of
 options  employees                                            |  |       |  |        | 27,440     |             |  |        |  |  | 10,976     |  
|April 9,
 2008            |  | Exercise of
 options  employees                                            |  |       |  |        | 46,282     |             |  |        |  |  | 18,513     |  
|May 27, 2008              |  | Shares to
 investors as part of a private placement                         |  |       |  |        | 18,125,000 |             |  | 0.40    |  |  | 7,250,000  |  
|June 2, 2008              |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 31,250     |             |  | 0.43    |  |  | 13,437     |  
|                         
|June 12,
 2008            |  | Exercise of
 options  consultants                                          |  |       |  |        | 275,000    |             |  |        |  |  | 113,895    |  
|June 25,
 2008            |  | Exercise of
 options  consultants                                          |  |       |  |        | 39,284     |             |  |        |  |  | 15,714     |  
|                          |  | Security
 issuance costs                                                    |  |       |  |        |            |             |  |        |  |  | (580,376   | )
|                          |  |                                                                             |  |       |  |        |            |             |  |         |  |  |            |  
|Year ended
 June 30, 2008 |  |                                                                             |  |       |  |        | 50,282,262 |             |  |         |  |  | 14,414,586 |  
|                          |  |                                                                             |  |       |  |        |            |             |  |         |  |  |            |  

|                          |  |                                                                             |  |       |  |        |         |             |  |      |  |  |         |  
|------------------------- |  | --------------------------------------------------------------------------- |  | ----- |  | ------ | ------- | ----------- |  | ---- |  |  | ------- | -
|Date                      |  | Details                                                                     |  | Notes |  | Number |         | Issue Price |  | $    | 
|                          |  |                                                                             |  |       |  |        |         |             |  |      | 
|                         
|July 23,
 2008            |  | Exercise of
 options  consultants                                          |  |       |  |        | 80,000  |             |  |     |  |  | 38,400  |  
|July 31,
 2008            |  | Exercise of
 options  consultants                                          |  |       |  |        | 80,000  |             |  |     |  |  | 35,200  |  
|August 27,
 2008          |  | Exercise of
 options  employees                                            |  |       |  |        | 18,939  |             |  |     |  |  | 7,576   |  
|September 3,
 2008        |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 31,250  |             |  | 0.42 |  |  | 13,125  |  
|October 15,
 2008         |  | Exercise of
 options  employees                                            |  |       |  |        | 21,952  |             |  |     |  |  | 8,781   |  
|October 15,
 2008         |  | Exercise of
 options  employees                                            |  |       |  |        | 28,947  |             |  |     |  |  | 6,658   |  
|November 13,
 2008        |  | Exercise of
 options  consultants                                          |  |       |  |        | 49,803  |             |  |     |  |  | 11,455  |  
|December 3,
 2008         |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 31,250  |             |  | 0.30 |  |  | 9,375   |  
|December 4,
 2008         |  | Exercise of
 options  consultants                                          |  |       |  |        | 400,000 |             |  |     |  |  | 158,000 |  
|March 3,
 2009            |  | Non cash
 share issue in consideration for services provided by consultants |  | (i)   |  |        | 31,250  |             |  | 0.18 |  |  | 5,625   |  
|March 3,
 2009            |  | Exercise of
 options  consultants                                          |  |       |  |        | 136,842 |             |  |     |  |  | 65,684  |  
|                          |  | Security
 issuance costs                                                    |  |       |  |        |         |             |  |      |  |  | (13,193 | )
|                          |  |                                                                             |  |       |  |        |         |             |  |      |  |  |         |  
|Year ended
 June 30, 2009 |  |                                                                             |  |       |  |        | 910,233 |             |  |      |  |  | 359,879 |  
|                          |  |                                                                             |  |       |  |        |         |             |  |      |  |  |         |  

F - 20

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars
(unless otherwise noted)

|    |                           
|--- | --------------------------
|12. | ISSUED CAPITAL (continued)

(i) Shares
issued to consultants for services are recorded as non-cash compensation and
are recognized at either the fair value of the services rendered, or if this
cannot be reasonably estimated, the fair value of the underlying equity
instruments issued. Shares issued to
consultants have been valued as outlined below:

December 24, 2007, February 26, 2008, March 20, 2008 and June 2, 2008

The services
provided by these consultants were documented in consultancy agreements which
outlined remuneration in the form of an annual fee and share-based compensation
in the form of shares. The equity-based
compensation is not linked to any particular milestone or element of the
services to be provided under the terms of the agreements.

Given the
extended period of consultants involvement and associated milestones, the
Company determined there were no comparable service examples against which to
benchmark the value of the consultants services. Additionally, there was no
distinction between the portion of the services which gave rise to the cash
entitlements and the portion that gave rise to share entitlements. As the Company could not reliably estimate
the fair value of the services received, the Company determined that it was
appropriate to measure the services at the fair value of the underlying equity
instruments issued.

(c) Movements in Options

|                          |  |                   |            |      |  |                   |  |   |            |                   |  |           |  |  |           |  |  |           | 
|------------------------- |  | ----------------- | ---------- | ---- |  | ----------------- |  | - | ---------- | ----------------- |  | --------- |  |  | --------- |  |  | --------- | 
|                         
|                          |  | June 30,          |           
|                          |  |                   |           
|                          |  | 2009              |            | 2008 |  | 2007              | 
|                          |  |                   |            |      |  |                   | 
|                          |  | Number of Options |            | $    |  | Number of Options |  | $ |            | Number of Options |  | $         | 
|                          |  |                   |            |      |  |                   |  |   |            |                   |  |           | 
|                         
|Beginning of
 the year    |  |                   | 14,279,133 |      |  | 2,701,644         |  |   | 4,352,893  |                   |  | 1,262,339 |  |  |          |  |  |          | 
|                          |  |                   |            |      |  |                   |  |   |            |                   |  |           |  |  |           |  |  |           | 
|Movement
 during the year |  |                   |           |      |  |                  |  |   | 9,926,240  |                   |  | 1,439,305 |  |  | 4,352,893 |  |  | 1,262,339 | 
|                          |  |                   |            |      |  |                   |  |   |            |                   |  |           |  |  |           |  |  |           | 
|                          |  |                   |            |      |  |                   |  |   |            |                   |  |           |  |  |           |  |  |           | 
|End of the
 year          |  |                   | 14,279,133 |      |  | 2,701,644         |  |   | 14,279,133 |                   |  | 2,701,644 |  |  | 4,352,893 |  |  | 1,262,339 | 
|                          |  |                   |            |      |  |                   |  |   |            |                   |  |           |  |  |           |  |  |           | 

Details of
option grants are as follows:

|                           |  |                                                    |  |                |      |        |  |            |  |      |  |  |  |           | 
|-------------------------- |  | -------------------------------------------------- |  | -------------- | ---- | ------ |  | ---------- |  | ---- |  |  |  | --------- | 
|Date                       |  | Details                                            |  | Exercise Price |      | Number |  | Fair Value |  | $    | 
|                           |  |                                                    |  |                |      |        |  |            |  |      | 
|                          
|October 30,
 2007          |  | Options to
 investors as part of a capital raising |  | $              | 0.37 |        |  | 3,628,598  |  | 0.15 |  |  |  | 544,290   | 
|October 30,
 2007          |  | Options to
 investors as part of a capital raising |  | $              | 0.43 |        |  | 3,628,598  |  | 0.14 |  |  |  | 508,004   | 
|October 30,
 2007          |  | Options to
 investors as part of a capital raising |  | $              | 0.37 |        |  | 1,188,323  |  | 0.15 |  |  |  | 178,248   | 
|October 30,
 2007          |  | Options to
 investors as part of a capital raising |  | $              | 0.43 |        |  | 1,188,323  |  | 0.14 |  |  |  | 166,365   | 
|October 30,
 2007          |  | Options to
 investors as part of a capital raising |  | $              | 0.37 |        |  | 146,199    |  | 0.15 |  |  |  | 21,930    | 
|October 30,
 2007          |  | Options to
 investors as part of a capital raising |  | $              | 0.43 |        |  | 146,199    |  | 0.14 |  |  |  | 20,468    | 
|                           |  |                                                    |  |                |      |        |  |            |  |      |  |  |  |           | 
|Year ended 
 June 30, 2008 |  |                                                    |  |                |      |        |  | 9,926,240  |  |      |  |  |  | 1,439,305 | 
|                           |  |                                                    |  |                |      |        |  |            |  |      |  |  |  |           | 
|Year ended
 June 30, 2009  |  |                                                    |  |                |      |        |  |           |  |      |  |  |  |          | 
|                           |  |                                                    |  |                |      |        |  |            |  |      |  |  |  |           | 

(d)
Terms and Conditions of Issued CapitalOrdinary sharesOrdinary shares have the right to receive dividends as declared and, in the
event of a winding up of the Company, to participate in the proceeds from the
sale of all surplus assets in proportion to the number of and amounts paid up
on shares held. Ordinary shares entitle
their holder to vote, either in person or by proxy, at a meeting of the Companys
shareholders.

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

F - 21

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars
(unless otherwise noted)

|    |                           
|--- | --------------------------
|12. | ISSUED CAPITAL (continued)

(e) Shares Issued after Reporting Date

After
reporting date the following equity issues occurred:

|               |  |                                    |  |       |  |        |         |             |  |   |  |  |        | 
|-------------- |  | ---------------------------------- |  | ----- |  | ------ | ------- | ----------- |  | - |  |  | ------ | 
|Date           |  | Details                            |  | Notes |  | Number |         | Issue Price |  | $ | 
|               |  |                                    |  |       |  |        |         |             |  |   | 
|              
|July 15,
 2009 |  | Exercise of
 options  consultants |  |       |  |        | 80,000  |             |  |  |  |  | 15,200 | 
|July 15,
 2009 |  | Exercise of
 options  employees   |  |       |  |        | 100,666 |             |  |  |  |  | 22,167 | 
|               |  |                                    |  |       |  |        |         |             |  |   |  |  |        | 
|               |  |                                    |  |       |  |        | 180,666 |             |  |   |  |  | 37,367 | 
|               |  |                                    |  |       |  |        |         |             |  |   |  |  |        | 

|    |         
|--- | --------
|13. | RESERVES

|                                        |  |  |       |                      |      |           |      |  |           |  |  |           | 
|--------------------------------------- |  |  | ----- | -------------------- | ---- | --------- | ---- |  | --------- |  |  | --------- | 
|                                        |  |  |       | Years Ended June 30, |     
|                                        |  |  | Notes |                      | 2009 |           | 2008 |  | 2007      | 
|                                        |  |  |       |                      |      |           |      |  |           | 
|                                        |  |  |       |                      |      |           |      |  |           |  |  |           | 
|(a) Share Based Payments                |  |  |       |                      |      |           |      |  |           |  |  |           | 
|Options for
 fully paid ordinary shares |  |  | 13(b) |                      |      | 5,158,335 |      |  | 4,098,743 |  |  | 2,137,824 | 
|Options for
 ADRs                       |  |  | 13(c) |                      |      | 1,515,434 |      |  | 1,515,434 |  |  | 1,515,434 | 
|Warrants for
 ADRs                      |  |  | 13(d) |                      |      | 453,563   |      |  | 453,563   |  |  | 453,563   | 
|                                        |  |  |       |                      |      |           |      |  |           |  |  |           | 
|                                        |  |  |       |                      |      |           |      |  |           |  |  |           | 
|                                        |  |  |       |                      |      | 7,127,332 |      |  | 6,067,740 |  |  | 4,106,821 | 
|                                        |  |  |       |                      |      |           |      |  |           |  |  |           | 

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

(b) Movements in Options for Fully Paid
Ordinary Shares

|                                       |  |                      |                   |      |  |                    |   |  |                   |   |  |                    |   |  |                   |   |  |                    |  
|-------------------------------------- |  | -------------------- | ----------------- | ---- |  | ------------------ | - |  | ----------------- | - |  | ------------------ | - |  | ----------------- | - |  | ------------------ | -
|                                       |  | Years Ended June 30, |                  
|                                       |  | 2009                 |                   | 2008 |  | 2007               |  
|                                       |  |                      | Number of Options |      |  | Comp.
 Expense ($) |   |  | Number of Options |   |  | Comp.
 Expense ($) |   |  | Number of Options |   |  | Comp.
 Expense ($) |  
|                                       |  |                      |                   |      |  |                    |   |  |                   |   |  |                    |  
|                                      
|Beginning of the year                  |  |                      | 11,051,832        |      |  | 4,098,743          |   |  | 9,928,262         |   |  | 2,137,824          |   |  | 5,752,500         |   |  | 898,252            |  
|Issued during the year                 |  |                      | 3,099,818         |      |  | 760,913            |   |  | 5,617,133         |   |  | 1,949,511          |   |  | 5,908,762         |   |  | 1,153,422          |  
|Expired during the year                |  |                      |                  |      |  |                   |   |  | (1,100,000        | ) |  |                   |   |  | (825,000          | ) |  |                   |  
|Forfeited during the year              |  |                      |                  |      |  |                   |   |  | (2,000,000        | ) |  | (143,133           | ) |  | (150,000          | ) |  | (2,950             | )
|Amortization of option expenses        |  |                      |                  |      |  |                   |   |  |                  |   |  | 563,479            |   |  |                  |   |  | 195,839            |  
|Exercised during the year (Note 13(b)) |  |                      | (816,483          | )    |  | (217,754           | ) |  | (1,393,563        | ) |  | (408,938           | ) |  | (758,000          | ) |  | (106,739           | )
|                                       |  |                      |                   |      |  |                    |   |  |                   |   |  |                    |   |  |                   |   |  |                    |  
|                                       |  |                      |                   |      |  |                    |   |  |                   |   |  |                    |   |  |                   |   |  |                    |  
|End of the year                        |  |                      | 13,335,167        |      |  | 5,158,335          |   |  | 11,051,832        |   |  | 4,098,743          |   |  | 9,928,262         |   |  | 2,137,824          |  
|                                       |  |                      |                   |      |  |                    |   |  |                   |   |  |                    |   |  |                   |   |  |                    |  

Details of
option grants are summarized as follows.

2007

·On
October 13, 2006, the Company granted options to purchase 133,000 ordinary
shares to employees under the 2004 ASX 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$0.40 for five consecutive trading days. The options are exercisable at A$nil
consideration and expire on July 31, 2008.
The fair value of the options is A$0.42.

· On
December 1, 2006, the Company granted options to purchase 3,200,000 ordinary
shares to directors and an employee under the 2004 ASX 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$0.80 for five consecutive trading days. The options are exercisable at A$nil consideration
and expire on July 31, 2009. The fair
value of the options is A$0.38.


· On
December 1, 2006, the Company granted options to purchase 312,500 ordinary
shares to an employee under the 2004 ASX 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$0.40 for five consecutive trading days. The options are exercisable at A$nil
consideration and expire on August 7, 2014.
The fair value of the options is A$0.08.


· On
April 16, 2007, the Company granted options to purchase 206,478 ordinary shares
to employees under the 2004 ASX 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$0.50 for five consecutive trading days. The options are exercisable at A$nil
consideration and expire on December 31, 2011.
The fair value of the options is A$0.40.


· On
April 16, 2007, the Company granted options to purchase 39,284 ordinary shares
to an outside consultant under the 2004 ASX Plan (see Note 17) in consideration
for services rendered to the Company. The
options are exercisable once the ASX share price reaches A$0.50 for five
consecutive trading days. The options
are exercisable at A$nil consideration and expire on December 31, 2011. The fair value of the options is A$0.40.


F - 22

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars
(unless otherwise noted)

|    |                     
|--- | --------------------
|13. | RESERVES (continued)

·On
April 16, 2007, the Company granted options to purchase 1,000,000 ordinary
shares to an employee under the 2004 ASX 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$0.40 for five consecutive trading days. The options are exercisable at A$nil
consideration and expire on August 7, 2014.
The fair value of the options is A$0.48.

· On
April 16, 2007, the Company granted options to purchase 40,000 ordinary shares
to an outside consultant under the 2004 ASX Plan (see Note 17) in consideration
for services rendered to the Company. The
options are exercisable once the ASX share price reaches A$0.40 for five
consecutive trading days. The options
are exercisable at A$nil consideration and expire on August 7, 2014. The fair value of the options is
A$0.36.


· On
May 31, 2007, the Company granted options to purchase 312,500 ordinary shares
to an employee under the 2004 ASX 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$0.40 for five consecutive trading days. The options are exercisable at A$nil
consideration and expire on August 7, 2014.
The fair value of the options is A$0.08.


· On
June 12, 2007, the Company granted options to purchase 40,000 ordinary shares
to an outside consultant under the 2004 ASX Plan (see Note 17) in consideration
for services rendered to the Company. The
options are exercisable once the ASX share price reaches A$0.40 for five
consecutive trading days. The options
are exercisable at A$nil consideration and expire on August 7, 2014. The fair value of the options is
$A0.38.


· On
June 12, 2007, the Company granted options to purchase 375,000 ordinary shares
to outside consultants under the 2004 ASX Plan (see Note 17) in consideration
for services rendered to the Company. The
options are exercisable once the ASX share price reaches A$0.50 for five
consecutive trading days. The options
are exercisable at A$nil consideration and expire on December 31, 2011. The fair value of the options is $0.34.


· On
June 19, 2007, the Company granted options to purchase 250,000 ordinary shares
to an employee under the 2004 ASX 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$0.40 for five consecutive trading days. The options are exercisable at A$nil
consideration and expire on August 7, 2014.
The fair value of the options is $0.34.


2008

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

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


· On
November 28, 2007, the Company granted options to purchase 400,000 ordinary
shares to a consultant under the 2004 ASX Plan (see Note 17) in recognition of
services rendered to the Company. The
options are exercisable at A$0.285 consideration and expire on December 17,
2008. The fair value of the options is
A$0.11.


· On
February 26, 2008, the Company granted options to purchase 1,131,307 ordinary
shares to employees under the 2004 ASX Plan (see Note 17) in recognition of
future contributions to the growth and success of the Company. The options are exercisable at A$nil
consideration and expire on October 31, 2010.
The fair value of the options is A$0.23.


· On
February 26, 2008, the Company granted options to purchase 375,000 ordinary
shares to consultants under the 2004 ASX Plan (see Note 17) in recognition of
services rendered to the Company. The
options are exercisable at A$nil consideration and expire on October 31,
2010. The fair value of the options is
A$0.29.


· On
March 14, 2008, the Company granted options to purchase 2,400,000 ordinary
shares to directors and the Companys secretary under the 2004 ASX Plan (see
Note 17) in recognition of future contributions to the growth and success of the
Company. The options were held in
escrow for one year from the date of grant.
The options are exercisable at A$0.30 consideration and expire on
October 31, 2010. The grant was
approved by the Companys shareholders at the 2007 Annual General Meeting. The fair value of the options is $A0.50.


· On
March 20, 2008, the Company granted options to purchase 286,842 ordinary shares
to consultants under the 2004 ASX Plan (see Note 17) in recognition of services
rendered to the Company. The options
are exercisable at A$nil consideration and expire on October 31, 2010. The fair value of the options is
A$0.48.


· On
April 2, 2008, the Company granted options to purchase 80,000 ordinary shares
to consultants under the 2004 ASX Plan (see Note 17) in recognition of services
rendered to the Company. The options
are exercisable at A$nil consideration and expire on October 31, 2010. The fair value of the options is
A$0.48.


· On
May 15, 2008, the Company granted options to purchase 80,000 ordinary shares to
consultants under the 2004 ASX Plan (see Note 17) in recognition of services
rendered to the Company. The options
are exercisable at A$nil consideration and expire on October 31, 2010. The fair value of the options is
A$0.44.


F - 23

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless
otherwise noted)

|    |                     
|--- | --------------------
|13. | RESERVES (continued)

2009·On October 17, 2008, the
Company granted options to purchase 2,000,000 ordinary shares to consultants under the 2004 ASX Plan (see Note 17) in
recognition of services rendered to the Company. The options are exercisable at
A$nil consideration and expire on June 30, 2010. The fair value of the options
is A$0.28.·On June
16, 2009, the Company granted options to purchase 330,000 ordinary shares to
consultants under the 2004 ASX Plan (see Note 17) in recognition of services
rendered to the Company. The options are exercisable at A$nil consideration and
expire on October 31, 2010. The fair
value of the options is A$0.22.·On June 16, 2009, the Company granted
options to purchase 574,981 ordinary shares to employees under the 2004 ASX
Plan (see Note 17) in recognition of future contributions to the growth and
success of the Company. The options are exercisable at A$nil consideration and
expire on October 31, 2010. The fair value of the options is A$0.19.·On June 16, 2009,
the Company granted options to purchase 194,837 ordinary shares to employees
under the 2004 ASX Plan (see Note 17) in recognition of future contributions to
the growth and success of the Company. The options are exercisable at A$nil
consideration and expire on August 7, 2014. The fair value of the options is
A$0.18.

(c) Movements in
Options for ADRs

|                       |  |                       |         |                    |  |                   |  |                    |         |                   |  |                    |  |  |         |  |  |           | 
|---------------------- |  | --------------------- | ------- | ------------------ |  | ----------------- |  | ------------------ | ------- | ----------------- |  | ------------------ |  |  | ------- |  |  | --------- | 
|                       |  | Years
 Ended June 30, |        
|                       |  |                       |        
|                       |  | 2009                  |         | 2008               |  | 2007              | 
|                       |  |                       |         |                    |  |                   | 
|                       |  | Number of Options     |         | Comp.
 Expense ($) |  | Number of Options |  | Comp.
 Expense ($) |         | Number of Options |  | Comp.
 Expense ($) | 
|                       |  |                       |         |                    |  |                   |  |                    |         |                   |  |                    | 
|                      
|Beginning of the year  |  |                       | 380,000 |                    |  | 1,515,434         |  |                    | 380,000 |                   |  | 1,515,434          |  |  | 380,000 |  |  | 1,515,434 | 
|Issued during the year |  |                       |        |                    |  |                  |  |                    |        |                   |  |                   |  |  |        |  |  |          | 
|                       |  |                       |         |                    |  |                   |  |                    |         |                   |  |                    | 
|                       |  |                       |         |                    |  |                   |  |                    |         |                   |  |                    |  |  |         |  |  |           | 
|End of the year        |  |                       | 380,000 |                    |  | 1,515,434         |  |                    | 380,000 |                   |  | 1,515,434          |  |  | 380,000 |  |  | 1,515,434 | 
|                       |  |                       |         |                    |  |                   |  |                    |         |                   |  |                    | 

(d) Movement in
Warrants for ADRs

|                        |  |                       |          |                    |  |                    |  |                    |         |                    |  |                    |  |  |         |  |  |         | 
|----------------------- |  | --------------------- | -------- | ------------------ |  | ------------------ |  | ------------------ | ------- | ------------------ |  | ------------------ |  |  | ------- |  |  | ------- | 
|                        |  | Years
 Ended June 30, |         
|                        |  | 2009                  |          | 2008               |  | 2007               | 
|                        |  | Number of Warrants    |          | Comp.
 Expense ($) |  | Number of Warrants |  | Comp.
 Expense ($) |         | Number of Warrants |  | Comp.
 Expense ($) | 
|                        |  |                       |          |                    |  |                    |  |                    |         |                    |  |                    | 
|Beginning of the year   |  |                       | 320,000  |                    |  | 453,563            |  |                    | 320,000 |                    |  | 453,563            |  |  | 320,000 |  |  | 453,563 | 
|Expired during the year |  |                       | (320,000 | )                  |  |                   |  |                    |        |                    |  |                   |  |  |        |  |  |        | 
|                        |  |                       |          |                    |  |                    |  |                    |         |                    |  |                    | 
|                        |  |                       |          |                    |  |                    |  |                    |         |                    |  |                    |  |  |         |  |  |         | 
|End of the year         |  |                       |         |                    |  | 453,563            |  |                    | 320,000 |                    |  | 453,563            |  |  | 320,000 |  |  | 453,563 | 
|                        |  |                       |          |                    |  |                    |  |                    |         |                    |  |                    | 

(e) Terms and Conditions of Reserves

Options and warrantsOption
holders and warrant holders do not have the right to receive dividends and are
not entitled to vote at a meeting of the Companys shareholders. Options and
warrants may be exercised at any time from the date they vest to the date of
their expiration. Share options are exercisable into ordinary shares on a one
for one basis on the date they are exercised. Options granted under the 2004
ADS Plan are exercisable into
ADRs, being one option for one ADR, which equals ten ordinary shares, on the
date they are exercised.

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

(f) Options and
Warrants Issued after Reporting Date

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

On September 8, 2009, the Company entered into a private placement
agreement with one of its institutional shareholders in the United States,
under which it agreed to grant the investor, subject to shareholder approval,
options to purchase 10 million ordinary shares (equivalent to one million ADRs)
at an exercise price of A$0.30 per share (A$3.0 per ADR) that will expire four
years after the date of the issuance of the shares in the private placement. If
shareholder approval is not obtained for the option grant, the options will be
granted at such time that shareholder approval is no longer required for the
grant under the rules of the ASX.

F - 24

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless
otherwise noted)

|    |                                             
|--- | --------------------------------------------
|14. | ACCUMULATED DEFICIT DURING DEVELOPMENT STAGE

|                             |  |                      |             |      |  |             |  
|---------------------------- |  | -------------------- | ----------- | ---- |  | ----------- | -
|                             |  | Years Ended June 30, |            
|                             |  |                      |            
|                             |  | 2009                 |             | 2008 | 
|                             |  |                      |             |      | 
|                            
|Balance at beginning of year |  |                      | (66,043,716 | )    |  | (52,483,038 | )
|Net loss for the year        |  |                      | (7,522,789  | )    |  | (13,560,678 | )
|                             |  |                      |             |      |  |             |  
|                             |  |                      |             |      |  |             |  
|Balance at end of year       |  |                      | (73,566,505 | )    |  | (66,043,716 | )
|                             |  |                      |             |      |  |             |  

|    |                      
|--- | ---------------------
|15. | CASH FLOW INFORMATION

|                                                                  |  |                      |            |      |  |             |   |  |             |  
|----------------------------------------------------------------- |  | -------------------- | ---------- | ---- |  | ----------- | - |  | ----------- | -
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|                                                                  |  | Years Ended June 30, |           
|                                                                  |  | 2009                 |            | 2008 |  | 2007        |  
|                                                                 
|(a)
 Reconciliation of Net Loss to Net Cash Flows From Operations |  |                      |            |      |  |             |   |  |             |  
|Net loss                                                          |  |                      | (7,522,789 | )    |  | (13,560,678 | ) |  | (11,142,320 | )
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|Non-cash
 items                                                   |  |                      |            |      |  |             |   |  |             |  
|Depreciation of property and
 equipment                           |  |                      | 34,190     |      |  | 25,349      |   |  | 58,582      |  
|Non-cash issue of equity in
 consideration of operating expenses  |  |                      | 1,305,471  |      |  | 4,097,562   |   |  | 1,579,132   |  
|Foreign exchange (gain) loss                                      |  |                      | (15,501    | )    |  | 434,309     |   |  | 775,238     |  
|(Gain) loss on fair value of
 financial liabilities               |  |                      | (772,430   | )    |  | 451,429     |   |  | (607,691    | )
|Loss on sale of non-current
 asset                                |  |                      |           |      |  |            |   |  | 161         |  
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|Changes in
 assets and liabilities                                |  |                      |            |      |  |             |   |  |             |  
|Decrease (increase) in trade
 and other receivables               |  |                      | 120,115    |      |  | (24,142     | ) |  | 97,662      |  
|Decrease (increase) in other
 current assets                      |  |                      | 68,892     |      |  | (85,786     | ) |  | (57,707     | )
|(Decrease) increase in trade
 and other payables                  |  |                      | (244,971   | )    |  | (812,496    | ) |  | 123,251     |  
|Decrease (increase) in
 provision for employee entitlements       |  |                      | 32,849     |      |  | 83,063      |   |  | (26,058     | )
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|Net cash flows used in
 operating activities                      |  |                      | (6,994,174 | )    |  | (9,391,390  | ) |  | (9,199,750  | )
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|(b)
 Reconciliation of Cash and Cash Equivalents                  |  |                      |            |      |  |             |   |  |             |  
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|Cash and cash equivalents
 balance comprises:                     |  |                      |            |      |  |             |   |  |             |  
|- cash and cash equivalents on
 hand                              |  |                      | 4,304,977  |      |  | 468,619     |   |  | 456,193     |  
|- term deposit/on call                                            |  |                      |           |      |  | 10,750,416  |   |  | 6,953,063   |  
|- commercial bill                                                 |  |                      |           |      |  |            |   |  |            |  
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|                                                                  |  |                      |            |      |  |             |   |  |             |  
|Closing cash and cash
 equivalents balance                        |  |                      | 4,304,977  |      |  | 11,219,035  |   |  | 7,409,256   |  
|                                                                  |  |                      |            |      |  |             |   |  |             |  

(c) Non-Cash
Financing and Investing Activities

During the years ended June 30, 2009, 2008 and 2007, the Company issued
shares and granted options in connection with non-cash transactions. See Notes
12(b) and 13(b).

F - 25

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in Australian dollars (unless
otherwise noted)

|    |                        
|--- | -----------------------
|16. | EXPENDITURE COMMITMENTS

The Company has a non-cancelable operating lease contracted for but not
capitalized in the financial statements. The Company has commitments under this
contract within one year of $110,411 and between one year and five years of
$40,521. The property lease is a non-cancellable lease with an 18 month term,
with rent payable monthly in advance. The property lease commenced May 1, 2008
and is due to expire October 31, 2009. Commencing November 1, 2009, the lease
has been renewed for a further term of 12 months. An option exists to renew the
lease at the end of October 31, 2010 for a further 12 months. Within the lease
agreement there is a contingent rental provision which allows the lease
payments to be increased by 3.50% of the rental payments on an annual basis.

Details in relation to commitments under employee service agreements
with Directors and Key Management Personnel are outlined in Note 20.

The Company has commitments under research and development contracts
within one year of $449,677 and great than one year but less than three years
of $43,028, last year commitments under research and development contracts
within one year were $894,566. There are no researches and development contract
commitments after one year for the years ended June 30, 2008 and 2007.

|    |                     
|--- | --------------------
|17. | SHARE BASED PAYMENTS

(a)Employee and Consultant Plans

At the Annual
General Meeting held on November 17, 2004, the shareholders approved the
establishment of employee and consultant plans designed to reward directors,
employees and/or consultants for their contributions to the Company. The plans
are to be used as a method of retaining key personnel for the growth and
development of the Company. Due to Pranas U.S. presence, a U.S. plan (the 2004 ADS Plan) and an Australian plan
(the 2004 ASX Plan) were
developed. At June 30, 2009, equity had been issued to one previous Director
under the 2004 ADS Plan and five Directors, three key management personnel, 16
employees and 16 consultants under the 2004 ASX Plan. At June 30, 2008, equity
had been issued to one former and four current Directors, three key management
personnel, 16 employees and 10 consultants under the 2004 ASX Plan. At June 30, 2007, equity had been issued to one
director under the 2004 ADS Plan
and five directors, 10 consultants and 14 employees under the 2004 ASX Plan. At the 2004 Annual
General Meeting shareholders authorized the Company to issue in the aggregate
up to 12 million ordinary shares under the two plans. This was increased to 22
million ordinary shares at the 2005 Annual General Meeting. This was further
increase to 30 million ordinary shares at the 2007 Annual General Meeting. The
Share Plan Committee, a sub-committee of the Remuneration Committee administers
the two plans and is able to change the terms of the equity issued under them
from the default terms.

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

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

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

|                          |  |                       |            |                                     |      |                   |  |                                     |            |                   |      |                                     |  |  |           |   |      |  | 
|------------------------- |  | --------------------- | ---------- | ----------------------------------- | ---- | ----------------- |  | ----------------------------------- | ---------- | ----------------- | ---- | ----------------------------------- |  |  | --------- | - | ---- |  | 
|                          |  | Years
 Ended June 30, |           
|                          |  |                       |           
|                          |  | 2009                  |            | 2008                                |      | 2007              | 
|                          |  |                       |            |                                     |      |                   | 
|                          |  | Number of Options     |            | Weighted Average Exercise Price ($) |      | Number of Options |  | Weighted Average Exercise Price ($) |            | Number of Options |      | Weighted Average Exercise Price ($) | 
|                         
|Beginning of the year     |  |                       | 10,187,848 |                                     | 0.08 |                   |  |                                     | 9,928,262  |                   | 0.06 |                                     |  |  | 4,927,500 |   | 0.11 |  | 
|Issued during the year    |  |                       | 3,099,818  |                                     | 0.32 |                   |  |                                     | 4,753,149  |                   | 0.38 |                                     |  |  | 5,908,762 |   | 0.36 |  | 
|Exercised during the year |  |                       | (816,483   | )                                   | 0.27 |                   |  |                                     | (1,393,563 | )                 | 0.62 |                                     |  |  | (758,000  | ) | 0.38 |  | 
|Expired during the year   |  |                       |           |                                     | Nil  |                   |  |                                     | (1,100,000 | )                 | Nil  |                                     |  |  |          |   | Nil  |  | 
|Forfeited during the year |  |                       |           |                                     | Nil  |                   |  |                                     | (2,000,000 | )                 | Nil  |                                     |  |  | (150,000  | ) | Nil  |  | 
|                          |  |                       |            |                                     |      |                   |  |                                     |            |                   |      |                                     |  |  |           |   |      |  | 
|                          |  |                       |            |                                     |      |                   |  |                                     |            |                   |      |                                     |  |  |           |   |      |  | 
|Outstanding at year end   |  |                       | 12,471,183 |                                     | 0.14 |                   |  |                                     | 10,187,848 |                   | 0.08 |                                     |  |  | 9,928,262 |   | 0.06 |  | 
|                          |  |                       |            |                                     |      |                   |  |                                     |            |                   |      |                                     |  |  |           |   |      |  | 
|                          |  |                       |            |                                     |      |                   |  |                                     |            |                   |      |                                     |  |  |           |   |      |  | 
|Exercisable at year end   |  |                       | 7,398,846  |                                     | 0.14 |                   |  |                                     | 5,610,348  |                   | 0.15 |                                     |  |  | 2,140,000 |   | 0.26 |  | 
|                          |  |                       |            |                                     |      |                   |  |                                     |            |                   |      |                                     |  |  |           |   |      |  | 

F - 26

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in
Australian dollars (unless otherwise noted)

|    |                                 
|--- | --------------------------------
|17. | SHARE BASED PAYMENTS (continued)

The
range of exercise prices of options outstanding at period end is nil to A$0.50.
These options have a weighted average remaining contractual life of one and a
half years. The weighted average fair value of options granted during the
period was determined in accordance with Note 1(p) as A$0.25, A$0.38 and A$0.36
for the years ended June 30, 2009, 2008 and 2007, respectively. The weighted
average assumptions in calculating fair value were as follows:

|  |                                                                
|- | ---------------------------------------------------------------
|· | risk-free interest
 rate of 4.12% for 2009 and 6.63% for 2008; 
|· | no dividends;                                                  
|· | expected volatility
 of 155% for 2009 and 234.20% for 2008; and
|· | expected life of
 1.85 years for 2009 and two years for 2008.  

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 are exercisable for fully paid ordinary shares and the U.S. government
bond rate has been used for options which are exercisable for ADRs.

Dividend yield Prana has never declared or paid dividends on its ordinary shares and
does not anticipate paying any dividends in the foreseeable future.

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

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

Options existing in
2004 and 2006 to purchase 825,000 ordinary shares granted to a consultant
outside of the 2004 ASX Plan expired in the year ended June 30, 2007.

Information
with respect to the number of shares issued under the 2004 ASX Plan as follows:

|                           |  |                      |           |                   |  |                   |  |  |           | 
|-------------------------- |  | -------------------- | --------- | ----------------- |  | ----------------- |  |  | --------- | 
|                           |  | Years Ended June 30, |          
|                           |  |                      |          
|                           |  | 2009                 |           | 2008              |  | 2007              | 
|                           |  |                      |           |                   |  |                   | 
|                           |  | Number of
 Shares    |           | Number of
 Shares |  | Number of
 Shares | 
|                           |  |                      |           |                   |  |                   | 
|                           |  |                      |          
|Beginning
 of the year     |  |                      | 4,166,252 |                   |  | 1,787,689         |  |  | 428,439   | 
|Issued
 during the year 1  |  |                      | 910,233   |                   |  | 2,378,563         |  |  | 1,359,250 | 
|                           |  |                      |           |                   |  |                   | 
|                           |  |                      |           |                   |  |                   |  |  |           | 
|End
 of the financial year |  |                      | 5,076,485 |                   |  | 4,166,252         |  |  | 1,787,689 | 
|                           |  |                      |           |                   |  |                   | 

1In the years ended June 30, 2009 and 2008 this includes options to
purchase 816,483 and 1,393,563 ordinary shares, respectively granted under the
2004 ASX Plan that were exercised.

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

|                           |  |                       |         |                                     |                  |                   |  |                                     |         |                   |                  |                                     |  |  |         |  |                  |  | 
|-------------------------- |  | --------------------- | ------- | ----------------------------------- | ---------------- | ----------------- |  | ----------------------------------- | ------- | ----------------- | ---------------- | ----------------------------------- |  |  | ------- |  | ---------------- |  | 
|                           |  | Years
 Ended June 30, |        
|                           |  |                       |        
|                           |  | 2009                  |         | 2008                                |                  | 2007              | 
|                           |  |                       |         |                                     |                  |                   | 
|                           |  | Number of Options     |         | Weighted Average Exercise Price ($) |                  | Number of Options |  | Weighted Average Exercise Price ($) |         | Number of Options |                  | Weighted Average Exercise Price ($) | 
|                           |  |                       |         |                                     |                  |                   |  |                                     |         |                   |                  |                                     | 
|                           |  |                       |        
|Beginning
 of the year     |  |                       | 380,000 |                                     | US$5.00 (A$6.22) |                   |  |                                     | 380,000 |                   | US$5.00 (A$5.21) |                                     |  |  | 380,000 |  | US$5.00 (A$5.89) |  | 
|Issued
 during the year 1  |  |                       |        |                                     |                 |                   |  |                                     |        |                   |                 |                                     |  |  |        |  |                 |  | 
|                           |  |                       |         |                                     |                  |                   |  |                                     |         |                   |                  |                                     |  |  |         |  |                  |  | 
|                           |  |                       |         |                                     |                  |                   |  |                                     |         |                   |                  |                                     |  |  |         |  |                  |  | 
|Outstanding
 at year end   |  |                       | 380,000 |                                     | US$5.00 (A$6.22) |                   |  |                                     | 380,000 |                   | US$5.00 (A$5.21) |                                     |  |  |         |  | US$5.00 (A$5.89) |  | 
|                           |  |                       |         |                                     |                  |                   |  |                                     |         |                   |                  |                                     |  |  |         |  |                  |  | 
|                           |  |                       |         |                                     |                  |                   |  |                                     |         |                   |                  |                                     |  |  |         |  |                  |  | 
|Exercisable
 at year end 1 |  |                       | 380,000 |                                     | US$5.00 (A$6.22) |                   |  |                                     | 380,000 |                   | US$5.00 (A$5.21) |                                     |  |  |         |  | US$5.00 (A$5.89) |  | 
|                           |  |                       |         |                                     |                  |                   |  |                                     |         |                   |                  |                                     |  |  |         |  |                  |  | 

1 These options are
exercisable into ADRs (one option granted under the 2004 ADS Plan is
exercisable for one 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 Notes 12, 13 and
20 for further information.

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

F - 27

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in
Australian dollars (unless otherwise noted)

|    |                   
|--- | ------------------
|18. | SUBSEQUENT
 EVENTS

On September 8, 2009, the
Company entered into a private placement agreement with one of its
institutional shareholders in the United States, under which it will raise an
aggregate A$6.0 million before costs (approximately A$5.7 million net of costs)
in a private placement of its ordinary shares to such investor. Of such amount,
A$3.0 million was paid at the closing of the private placement on September 11,
2009 and an additional A$3.0 million will be paid on or
before September 30, 2009. The
private placement was for 30 million ordinary shares (equivalent to three
million ADRs) at a price of A$0.20 per share (A$2.0 per ADR). The Company also
agreed to grant the investor, subject to shareholder approval, options to
purchase 10 million ordinary shares (equivalent to one million ADRs) at an
exercise price of A$0.30 per share (A$3.0 per ADR) that will expire four years
after the date of the issuance of the shares in the private placement. If
shareholder approval is not obtained for the option grant, the options will be
granted at such time that shareholder approval is no longer required for the
grant under the rules of the ASX. The proceeds from the private placement
will be used to support the Companys research and development programs and to
fund its working capital requirements.

Other than as described
above, there have been no significant changes in the operation or financial
condition of the Company since June 30, 2009.

|    |               
|--- | --------------
|19. | LOSS PER SHARE

|                                                                                                                  |  |                       |             |      |  |             |   |  |             |  
|----------------------------------------------------------------------------------------------------------------- |  | --------------------- | ----------- | ---- |  | ----------- | - |  | ----------- | -
|                                                                                                                  |  | Years
 Ended June 30, |            
|                                                                                                                  |  |                       |            
|                                                                                                                  |  | 2009                  |             | 2008 |  | 2007        |  
|                                                                                                                  |  |                       |             |      |  |             |  
|                                                                                                                  |  |                       |             |      |  |             |  
|Basic and diluted
 loss per share                                                                                 |  |                       | (0.04       | )    |  | (0.08       | ) |  | (0.08       | )
|                                                                                                                  |  |                       |             |      |  |             |   |  |             |  
|                                                                                                                 
|Weighted average
 number of ordinary shares on issue used in the calculation of basic and
 diluted loss per share |  |                       | 202,357,885 |      |  | 174,714,146 |   |  | 140,754,495 |  

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

|    |                                      
|--- | -------------------------------------
|20. | KEY MANAGEMENT PERSONNEL COMPENSATION

(a) The Directors of
Prana during the year:

|                                                                  |                                           
|----------------------------------------------------------------- | ------------------------------------------
|Geoffrey
 Kempler                                                 | Executive
 ChairmanChief Executive Officer
|Brian
 Meltzer                                                    | Non-Executive
 Director                   
|George
 Mihaly                                                    | Non-Executive
 Director                   
|Peter
 Marks                                                      | Non-Executive
 Director                   
|                                                                  |                                           
|(b)
 The Key Management Personnel of the Company during the year:
|                                                                  |                                           
|Dianne
 Angus                                                     | Chief
 Operating Officer                  
|Richard
 Revelins                                                 | Company
 Secretary                        
|                                                                  | Chief
 Financial Officer                  

(c)
Key Management Personnel Remuneration

Remuneration
of all key management personnel of the Company is determined by the Board
following recommendation by the Remuneration Committee.

The
Company is committed to remunerating senior executives in a manner that is market
competitive and consistent with best practice including the interests of
shareholders. Remuneration packages are based on fixed and variable components,
determined by the executives position, experience and performance, and may be
satisfied via cash or equity.

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 issuance of equity. No retirement benefits
are payable other than statutory superannuation, if applicable.

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

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

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

F - 28

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in
Australian dollars (unless otherwise noted)

|    |                                                  
|--- | -------------------------------------------------
|20. | KEY MANAGEMENT PERSONNEL COMPENSATION (continued)

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

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

|  |                                                                                                         
|- | --------------------------------------------------------------------------------------------------------
|· | successful
 contract negotiations;                                                                      
|· | Company
 share price reaching a targeted rate on the ASX or applicable market over a
 period of time; or
|· | achievement
 of research project milestones within scheduled time and/or budget.                        

|                            |  |                     |         |                 |  |                             |  |          |        |        |  |         |  |  |         | 
|--------------------------- |  | ------------------- | ------- | --------------- |  | --------------------------- |  | -------- | ------ | ------ |  | ------- |  |  | ------- | 
|                            |  | Short Term Benefits |         | Post-Employment |  | Equity                      |  |          |       
|                            |  |                     |         |                 |  |                             |  |          |       
|2009Directors remuneration |  | Base Fee$           |         | Bonus$          |  | SuperannuationContribution$ |  | Options$ |        | Total$ | 
|                            |  |                     |         |                 |  |                             |  |          |        |        | 
|                            | 
|Geoffrey
 Kempler 1,2 & 4   |  |                     | 299,904 |                 |  |                            |  |          | 29,992 |        |  | 240,413 |  |  | 570,309 | 
|Brian
 Meltzer 1&3          |  |                     | 68,807  |                 |  |                            |  |          | 6,193  |        |  | 72,124  |  |  | 147,124 | 
|George
 Mihaly 1&3          |  |                     | 62,500  |                 |  |                            |  |          |       |        |  | 72,124  |  |  | 134,624 | 
|Peter
 Marks 1&3            |  |                     | 45,833  |                 |  |                            |  |          |       |        |  | 56,635  |  |  | 102,468 | 
|                            |  |                     |         |                 |  |                             |  |          |        |        |  |         |  |  |         | 
|                            |  |                     | 477,044 |                 |  |                            |  |          | 36,185 |        |  | 441,296 |  |  | 954,525 | 

1This includes equity issued as per the Annual
General Meetings held on November 30, 2006, November 30, 2005 and November 30,
2004. As per Australian accounting standards, the options granted to Directors
were valued at grant date and are being expensed over the anticipated life of
the options. As a result, the value does not reflect the current market price
of the Companys shares. The Board believes that if the options issued in 2005
and 2006 were valued in todays market, they would have minimal intrinsic value
given the market condition attached to the options that the share price must
reach $1.00 and $0.80, respectively, for five consecutive trading days.

2On March 1, 2009, Mr. Kempler voluntarily
elected to reduce his salary, the total decrease was $73,484. This is a
decrease to $329,896 from $403,380.

3Effective from March 1, 2009, the Non-Executive
Directors voluntarily elected to reduce their salaries by 50% for the period
March 1, 2009 to June 30, 2009; this represents a decrease of:

|                   |         
|------------------ | --------
|Mr.
 Brian Meltzer | $15,000 
|Dr.
 George Mihaly | $12,500 
|Mr.
 Peter Marks   | $  9,167

4In accordance with his employment contract, long
service leave has been accrued for Mr. Kempler. At June 30, 2009, $40,050 had
been accrued to date. No amounts have been paid in the June 30, 2009 financial
year.

F - 29

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in
Australian dollars (unless otherwise noted)

|    |                                                   
|--- | --------------------------------------------------
|20. | KEY MANAGEMENT PERSONNEL
 COMPENSATION (continued)

|                            |  |                     |         |                 |  |                             |  |          |        |        |  |           |  |  |           | 
|--------------------------- |  | ------------------- | ------- | --------------- |  | --------------------------- |  | -------- | ------ | ------ |  | --------- |  |  | --------- | 
|                            |  | Short Term Benefits |         | Post-Employment |  | Equity                      |  |          |       
|                            |  |                     |         |                 |  |                             |  |          |       
|2008Directors Remuneration |  | Base Fee$           |         | Bonus$          |  | SuperannuationContribution$ |  | Options$ |        | Total$ | 
|                            |  |                     |         |                 |  |                             |  |          |        |        | 
|                            | 
|Geoffrey
 Kempler 1,2, 3, 4 |  |                     | 351,273 |                 |  | 50,000                      |  |          | 35,127 |        |  | 741,072   |  |  | 1,177,472 | 
|Brian
 Meltzer 1            |  |                     | 91,743  |                 |  |                            |  |          | 8,257  |        |  | 247,321   |  |  | 347,321   | 
|George
 Mihaly 1            |  |                     | 75,000  |                 |  |                            |  |          |       |        |  | 247,321   |  |  | 322,321   | 
|Peter
 Marks 1              |  |                     | 75,000  |                 |  |                            |  |          |       |        |  | 231,790   |  |  | 306,790   | 
|                            |  |                     |         |                 |  |                             |  |          |        |        |  |           |  |  |           | 
|                           
|                            |  |                     | 593,016 |                 |  | 50,000                      |  |          | 43,384 |        |  | 1,467,504 |  |  | 2,153,904 | 
|                            |  |                     |         |                 |  |                             |  |          |        |        |  |           |  |  |           | 

1This includes equity issued as per the Annual
General Meetings held on December 20, 2007, November 30, 2006, November 30, 2005
and November 30, 2004. As per IFRS the options with market conditions issued to
Directors were valued at grant date and are being expensed over the anticipated
life of the options. As a result, the value does not reflect the current market
price of the Companys shares. The Board believes that if the options issued in
2004, 2005 and 2006 were valued in todays market, they would have minimal
intrinsic value given the market condition attached to the options that the
share price must reach $1.00 and $0.80 respectively for five consecutive
trading days. See the 2007 remuneration table for valuations of the options
approved at the November 30, 2006, November 30, 2005 and November 30, 2004
Annual General Meetings. The value of the options approved at the December 20,
2007 Annual General Meeting were calculated using the Black-Scholes Model
applying the following inputs:

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

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

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

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

|                             |  |                     |         |                 |  |                             |  |          |        |        |  |        |  |  |         | 
|---------------------------- |  | ------------------- | ------- | --------------- |  | --------------------------- |  | -------- | ------ | ------ |  | ------ |  |  | ------- | 
|                             |  | Short Term Benefits |         | Post-Employment |  | Equity                      |  |          |       
|                             |  |                     |         |                 |  |                             |  |          |       
|2009Executives Remuneration |  | Base Fee$           |         | Bonus$          |  | SuperannuationContribution$ |  | Options$ |        | Total$ | 
|                             |  |                     |         |                 |  |                             |  |          |        |        | 
|                             | 
|Richard
 Revelins1&2         |  |                     | 66,667  |                 |  |                            |  |          |       |        |  | 44,307 |  |  | 110,974 | 
|Dianne
 Angus 3 & 4          |  |                     | 292,256 |                 |  |                            |  |          | 26,303 |        |  | 11,718 |  |  | 330,277 | 
|                             |  |                     |         |                 |  |                             |  |          |        |        |  |        |  |  |         | 
|                             |  |                     |         |                 |  |                             |  |          |        |        |  |        |  |  |         | 
|                             |  |                     | 358,923 |                 |  |                            |  |          | 26,303 |        |  | 56,025 |  |  | 441,251 | 
|                             |  |                     |         |                 |  |                             |  |          |        |        |  |        |  |  |         | 

1This includes equity issued as per the Annual General Meetings held on
November 30, 2006, November 30, 2005 and November 30, 2004. As per Australian
accounting standards the options granted 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 granted in 2005 and 2006 were valued in
todays market, they would have minimal intrinsic value given the market
condition attached to the options that the share price must reach $1.00 and
$0.80 respectively for five consecutive trading days.

2On March 1, 2009, Mr. Revelins voluntarily
elected to reduce his salary by 50% for the period March 1, 2009 to June 30,
2009; this represents a decrease of $13,333.

F - 30

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in
Australian dollars (unless otherwise noted)

|    |                                                   
|--- | --------------------------------------------------
|20. | KEY MANAGEMENT PERSONNEL
 COMPENSATION (continued)

3Ms Angus received
unlisted options during the year. The option prices were calculated using the
Barrier Pricing Model applying the following inputs:

|                        |                                
|----------------------- | -------------------------------
|Grant Date: 26 May 2009 | Barrier: $0.00                 
|Pricing Model: American | Days to Expiry: 1,898          
|Option Type: Call       | Volatility: 52%                
|Barrier Type: Up and In | Risk-free Interest Rate:
 3.56%
|Strike Price: $0.00     | Expected Dividends: $0.00      
|Spot Price: $0.22       | Option Price: $0.18            

4In accordance with
her employment contract, long service leave has been accrued for Ms Dianne
Angus. At June 30, 2009, $17,449 had been accrued to date. No amounts have been
paid in the June 30, 2009 financial year.

|                             |  |                     |         |                 |  |                             |  |          |        |        |  |         |  |  |         | 
|---------------------------- |  | ------------------- | ------- | --------------- |  | --------------------------- |  | -------- | ------ | ------ |  | ------- |  |  | ------- | 
|                             |  | Short Term Benefits |         | Post-Employment |  | Equity                      |  |          |       
|                             |  |                     |         |                 |  |                             |  |          |       
|2008Executives Remuneration |  | Base Fee$           |         | Bonus$          |  | SuperannuationContribution$ |  | Options$ |        | Total$ | 
|                             |  |                     |         |                 |  |                             |  |          |        |        | 
|                             | 
|Richard
 Revelins            |  |                     | 80,000  |                 |  |                            |  |          |       |        |  | 219,428 |  |  | 299,428 | 
|Dianne
 Angus 1,2 & 3        |  |                     | 280,191 |                 |  |                            |  |          | 25,217 |        |  | 115,000 |  |  | 420,408 | 
|                             |  |                     |         |                 |  |                             |  |          |        |        | 
|                             |  |                     |         |                 |  |                             |  |          |        |        |  |         |  |  |         | 
|                             |  |                     | 360,191 |                 |  |                            |  |          | 25,217 |        |  | 334,428 |  |  | 719,836 | 
|                             |  |                     |         |                 |  |                             |  |          |        |        |  |         |  |  |         | 

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

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

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

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

F - 31

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES 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, 2009:

|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                     |                                                                                                                                                                                                                                           
|--------------------- |  | ------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Directors             |  | Duration                                                      |  | Notice Requirements                                                                                                               |                                                                    | Termination |                                                                                                                                                               | Bonus                                                                                                                      
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                            
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                     |                                                                                                                                                                                                                                           
|Mr.
 Geoffrey Kempler |  | Until
 termination by either party
 Signed September 21, 2007 |  | For
 Good Reason Mr. Kempler may terminate with 30 days notice 
 Or 
 Without Cause the Company may terminate with 90 days notice |                                                                    | ·           | Pay
 Mr. Kempler within ninety (90) days of the termination date $1,000,000
 provided the Company has sufficient capital requirements to fulfill this
 clause |                                                                                                                             | ·                                                                                   | Bonus
 of $50,000 following a capital raising of at least A$7m (before costs) prior
 to September 30, 2007.                                                                                                                               
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                            
|                      |  |                                                               |  | ·                                                                                                                                 | Accrued
 entitlements including all unreimbursed business expenses |             | ·                                                                                                                                                             | Bonus
 of $25,000 following a further capital raising of at least A$12m (before
 costs) anytime in the 2008 financial year.
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                     |                                                                                                                                                                                                                                           
|                      |  |                                                               |  |                                                                                                                                   |                                                                    | ·           | Accelerate
 the vesting of any unvested options                                                                                                               |                                                                                                                             | ·                                                                                   | Bonus
 of $25,000 for attaining a share price above $0.60 for at least four
 consecutive trading days by June 30, 2008.                                                                                                                   
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                     |                                                                                                                                                                                                                                           
|                      |  |                                                               |  | Without
 Good Reason Mr. Kempler may terminate with 90 days notice 
 Or
 With Cause the Company may terminate with 30 days notice |                                                                    | ·           | Bonus
 pro-rate only if termination occurs in 1st year                                                                                                        |                                                                                                                             | Bonus
 of $50,000 for implementation of the following:                             
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                    
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               | ·                                                                                                                           | Completion
 of clinical trial recruitment by September 30, 2007 - $10K bonus       
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                    
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               | ·                                                                                                                           | Completion
 of signed Statistical Analysis Report by February 29, 2008 - $10K bonus
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                     |                                                                                                                                                                                                                                           
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             | ·                                                                                   | Regular
 meetings (minimum twice yearly) of the full Integrated Advisory Board - $6k
 bonus                                                                                                                                               
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                     |                                                                                                                                                                                                                                           
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             | ·                                                                                   | Review
 and provide written proposal to the board of Pranas intellectual property
 portfolio to determine other value add opportunities for license, merger and
 acquisition or divestment by December 31, 2007 - $14K bonus             
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                     |                                                                                                                                                                                                                                           
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             | ·                                                                                   | Develop
 Prana staff retention strategy and action plan by October 31, 2007 and
 implement by December 31, 2007 - $10K bonus                                                                                                              
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             |                                                                                     |                                                                                                                                                                                                                                           
|                      |  |                                                               |  |                                                                                                                                   |                                                                    |             |                                                                                                                                                               |                                                                                                                             | ·                                                                                   | As
 per Remuneration Committee Meeting, June 5, 2008, bonus of $100,000 for
 outstanding performance including the overseeing of a $A 7.3 million capital
 raising without incurring the over $400K of fees usually associated with
 this.

F - 32

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in
Australian dollars (unless otherwise noted)

|    |                                                   
|--- | --------------------------------------------------
|20. | KEY MANAGEMENT PERSONNEL
 COMPENSATION (continued)

The following Senior
Executives were under contract during the financial year ended June 30, 2009:

|                         |  |                                                                                                   |  |                                                                                                                               |   |                                                                    |                                                                                                                                                                                                                                       |       |  | 
|------------------------ |  | ------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- |  | 
|Key Management Personnel |  | Duration                                                                                          |  | Notice Requirements                                                                                                           |   | Termination                                                        |                                                                                                                                                                                                                                       | Bonus
|                         |  |                                                                                                   |  |                                                                                                                               |   |                                                                    |                                                                                                                                                                                                                                       |      
|                         |  |                                                                                                   |  |                                                                                                                               |   |                                                                    |                                                                                                                                                                                                                                       |       |  | 
|Ms
 Dianne Angus         |  | Until
 termination by either party 
 Signed October 2, 2006 Letter Agreement signed June 12, 2007 |  | For
 Good Reason Ms Angus may terminate with 30 days notice
 Or
 Without Cause the Company may terminate with 120 days notice |   | ·                                                                  | Pay
 remuneration entitlements one year from the time of termination (less any
 payout made for the notice period). The Company can elect to pay such sum as
 cash, equity in the Company or as a combination of both cash and equity |       |  | 
|                         |  |                                                                                                   |  |                                                                                                                               |   |                                                                    |                                                                                                                                                                                                                                       |       |  | 
|                         |  |                                                                                                   |  |                                                                                                                               |   | ·                                                                  | Accrued
 entitlements including all unreimbursed business expenses                                                                                                                                                                    |       |  | 
|                         |  |                                                                                                   |  |                                                                                                                               |   |                                                                    |                                                                                                                                                                                                                                       |       |  | 
|                         |  |                                                                                                   |  |                                                                                                                               |   | ·                                                                  | Accelerate
 the vesting of any unvested options                                                                                                                                                                                       |       |  | 
|                         |  |                                                                                                   |  |                                                                                                                               |   |                                                                    |                                                                                                                                                                                                                                       |       |  | 
|                         |  |                                                                                                   |  | Without
 Good Reason Ms Angus may terminate with 120 days notice
 Or
 With Cause the Company may terminate without notice     |   | ·                                                                  | Permitted
 to keep and/or exercise options that have vested at the time of termination                                                                                                                                                |       |  | 
|                         |  |                                                                                                   |  |                                                                                                                               |   |                                                                    |                                                                                                                                                                                                                                       |       | 
|                         |  |                                                                                                   |  |                                                                                                                               | · | Accrued
 entitlements including all unreimbursed business expenses |                                                                                                                                                                                                                                       |       | 

|    |                       
|--- | ----------------------
|21. | AUDITORS REMUNERATION

|                           |  |                       |  |      |         |      |  |         |  | 
|-------------------------- |  | --------------------- |  | ---- | ------- | ---- |  | ------- |  | 
|                           |  | Years
 Ended June 30, | 
|                           |  | 2009                  |  | 2008 |         | 2007 | 
|                           |  |                       |  |      |         |      | 
|                           |  |                       |  |      |         |      | 
|- audit fees: current year |  | 120,951               |  |      | 219,920 |      |  | 240,800 |  | 
|- tax fees                 |  |                      |  |      |        |      |  |        |  | 
|- other fees               |  |                      |  |      |        |      |  |        |  | 
|                           |  |                       |  |      |         |      |  |         |  | 
|                           |  | 120,951               |  |      | 219,920 |      |  | 240,800 |  | 

PricewaterhouseCoopers
was appointed as the Companys principal independent registered public
accounting firm on November 30, 2006. No non-audit services were provided by
PricewaterhouseCoopers during the 2008 and 2009 fiscal years.

Deloitte
Touche Tohmatsu served as the Companys principal independent registered public
accounting firm until November 30, 2006. The fees billed by Deloitte Touche
Tohmatsu, as well as the other member firms of Deloitte Touche Tohmatsu and
their respective affiliates, for the 2009 and 2008 fiscal years were A$9,267
and A$71,773, respectively, for audit-related services provided in connection
with a Securities and Exchange Commission review of the Companys annual report
on Form 20-F for the fiscal year ended June 30, 2006 and an amendment to its
annual report on Form 20-F for such period.

F - 33

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS  in
Australian dollars (unless otherwise noted)

|    |                           
|--- | --------------------------
|22. | RELATED PARTY TRANSACTIONS

a.     Equity
Interests in SubsidiariesPrana
owns 100% of its subsidiaries, Prana Biotechnology Inc. and Prana Biotechnology
UK Ltd.

b.     Key
Management Personnel RemunerationDetails
of key management personnel remuneration is disclosed in Note 20 to the
financial statements.

c.     Key
Management Personnel Equity Holdings

|                                           |  |                      |            |                          |  |                                 |  |                   |   |                         |  |   |  |  |            | 
|------------------------------------------ |  | -------------------- | ---------- | ------------------------ |  | ------------------------------- |  | ----------------- | - | ----------------------- |  | - |  |  | ---------- | 
|Fully Paid Ordinary Shares of the
 Company |  | Balance July 1, 2008 |            | Received as Remuneration |  | Received on Exercise of Options |  | Net Change Other1 |   | Balance 
 June 30, 2009 | 
|                                           |  |                      |            |                          |  |                                 |  |                   |   |                         | 
|                                           |  | No.                  |            | No.                      |  | No.                             |  | No.               |   | No.                     | 
|                                           |  |                      |            |                          |  |                                 |  |                   |   |                         | 
|                                           |  |                      |           
|Geoffrey
 Kempler                          |  |                      | 17,055,000 |                          |  |                                |  |                   |  |                         |  |  |  |  | 17,055,000 | 
|Brian
 Meltzer                             |  |                      | 326,666    |                          |  |                                |  |                   |  |                         |  |  |  |  | 326,666    | 
|George
 Mihaly                             |  |                      | 226,666    |                          |  |                                |  |                   |  |                         |  |  |  |  | 226,666    | 
|Peter
 Marks                               |  |                      | 43,111     |                          |  |                                |  |                   |  |                         |  |  |  |  | 43,111     | 
|Richard
 Revelins                          |  |                      | 20,308     |                          |  |                                |  |                   |  |                         |  |  |  |  | 20,308     | 
|Dianne
 Angus                              |  |                      | 250,000    |                          |  |                                |  |                   |  |                         |  |  |  |  | 250,000    | 
|                                           |  |                      |            |                          |  |                                 |  |                   |   |                         |  |   |  |  |            | 
|                                           | 
|                                           |  |                      | 17,921,751 |                          |  |                                |  |                   |  |                         |  |  |  |  | 17,921,751 | 
|                                           |  |                      |            |                          |  |                                 |  |                   |   |                         |  |   |  |  |            | 

|                                           |  |                      |             |                          |  |                                 |  |                   |         |                         |  |         |   |  |            | 
|------------------------------------------ |  | -------------------- | ----------- | ------------------------ |  | ------------------------------- |  | ----------------- | ------- | ----------------------- |  | ------- | - |  | ---------- | 
|Fully Paid Ordinary Shares of the
 Company |  | Balance July 1, 2007 |             | Received as Remuneration |  | Received on Exercise of Options |  | Net Change Other1 |         | Balance 
 June 30, 2008 | 
|                                           |  |                      |             |                          |  |                                 |  |                   |         |                         | 
|                                           |  | No.                  |             | No.                      |  | No.                             |  | No.               |         | No.                     | 
|                                           |  |                      |             |                          |  |                                 |  |                   |         |                         | 
|                                           |  |                      |            
|Geoffrey
 Kempler                          |  |                      | 17,055,000  |                          |  |                                |  |                   |        |                         |  |        |   |  | 17,055,000 | 
|Colin
 Masters                             |  |                      | 184,666     |                          |  |                                |  |                   |        |                         |  | (98,333 | ) |  | 86,333     | 
|Brian
 Meltzer                             |  |                      | 326,666     |                          |  |                                |  |                   |        |                         |  |        |   |  | 326,666    | 
|George
 Mihaly                             |  |                      | 226,666     |                          |  |                                |  |                   |        |                         |  |        |   |  | 226,666    | 
|Peter
 Marks                               |  |                      | 43,111      |                          |  |                                |  |                   |        |                         |  |        |   |  | 43,111     | 
|Richard
 Revelins1                         |  |                      | 20,308      |                          |  |                                |  |                   |        |                         |  |        |   |  | 20,308     | 
|Dianne
 Angus                              |  |                      |            |                          |  |                                |  |                   | 250,000 |                         |  |        |   |  | 250,000    | 
|                                           |  |                      |             |                          |  |                                 |  |                   |         |                         |  |         |   |  |            | 
|                                           | 
|                                           |  |                      | 17, 856,417 |                          |  |                                |  |                   | 250,000 |                         |  | (98,333 | ) |  | 18,008,084 | 
|                                           |  |                      |             |                          |  |                                 |  |                   |         |                         |  |         |   |  |            | 

|                                           |  |                      |            |                          |  |                                 |  |                   |         |                         |  |         |   |  |            | 
|------------------------------------------ |  | -------------------- | ---------- | ------------------------ |  | ------------------------------- |  | ----------------- | ------- | ----------------------- |  | ------- | - |  | ---------- | 
|Fully Paid Ordinary Shares of the
 Company |  | Balance July 1, 2006 |            | Received as Remuneration |  | Received on Exercise of Options |  | Net Change Other1 |         | Balance 
 June 30, 2007 | 
|                                           |  |                      |            |                          |  |                                 |  |                   |         |                         | 
|                                           |  | 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
 Revelins1                         |  |                      | 92,808     |                          |  |                                |  |                   |        |                         |  | (72,500 | ) |  | 20,308     | 
|Ross
 Murdoch2                             |  |                      | 50,000     |                          |  | 120,000                         |  |                   | 625,000 |                         |  |        |   |  | 795,000    | 
|Dianne
 Angus                              |  |                      |           |                          |  |                                |  |                   |        |                         |  |        |   |  |           | 
|                                           |  |                      |            |                          |  |                                 |  |                   |         |                         |  |         |   |  |            | 
|                                          
|                                           |  |                      | 17,978,917 |                          |  | 120,000                         |  |                   | 625,000 |                         |  | (72,500 | ) |  | 18,651,417 | 
|                                           |  |                      |            |                          |  |                                 |  |                   |         |                         |  |         |   |  |            | 

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

F - 34

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
in Australian dollars (unless otherwise noted)

|    |                                       
|--- | --------------------------------------
|22. | RELATED PARTY TRANSACTIONS (continued)

|                             |  |                        |  |                            |  |                      |   |                      |   |                   |   |                                       |  |                         |  |                                              |  |                                 | 
|---------------------------- |  | ---------------------- |  | -------------------------- |  | -------------------- | - | -------------------- | - | ----------------- | - | ------------------------------------- |  | ----------------------- |  | -------------------------------------------- |  | ------------------------------- | 
|Share Options ofthe Company  |  | BalanceJuly 1, 2008No. |  | Granted as RemunerationNo. |  | Options ExercisedNo. |   | Options ForfeitedNo. |   | Options ExpiredNo |   | Options VestedDuring 2009 fiscal year |  | BalanceJune 30, 2009No. |  | Total Vested and ExercisableJune 30, 2009No. |  | Total Unvested June 30, 2009No. | 
|                             |  |                        |  |                            |  |                      |   |                      |   |                   |   |                                       |  |                         |  |                                              |  |                                 | 
|                            
|Geoffrey
 Kempler            |  | 3,000,000              |  |                            |  |                     |   |                     |   |                  |   |                                      |  | 3,000,000               |  | 1,000,000                                    |  | 2,000,000                       | 
|Brian
 Meltzer               |  | 950,000                |  |                            |  |                     |   |                     |   |                  |   |                                      |  | 950,000                 |  | 350,000                                      |  | 600,000                         | 
|George
 Mihaly               |  | 950,000                |  |                            |  |                     |   |                     |   |                  |   |                                      |  | 950,000                 |  | 350,000                                      |  | 600,000                         | 
|Peter
 Marks                 |  | 950,000                |  |                            |  |                     |   |                     |   |                  |   |                                      |  | 950,000                 |  | 350,000                                      |  | 600,000                         | 
|Richard
 Revelins            |  | 650,000                |  |                            |  |                     |   |                     |   |                  |   |                                      |  | 650,000                 |  | 350,000                                      |  | 300,000                         | 
|Dianne
 Angus                |  | 1,500,000              |  | 194,837                    |  |                     |   |                     |   |                  |   |                                      |  | 1,694,837               |  | 1,500,000                                    |  | 194,837                         | 
|                             |  |                        |  |                            |  |                      |   |                      |   |                   |   |                                       |  |                         |  |                                              |  |                                 | 
|                             |  | 8,000,000              |  | 194,837                    |  |                     |   |                     |   |                  |   |                                      |  | 8,194,837               |  | 3,900,000                                    |  | 4,294,837                       | 
|                            
|Share Options of the Company |  | BalanceJuly 1, 2007No. |  | Granted as RemunerationNo. |  | Options ExercisedNo. |   | Options ForfeitedNo. |   | Options ExpiredNo |   | Options VestedDuring 2008 fiscal year |  | BalanceJune 30, 2008No. |  | Total Vest and ExercisableJune 30, 2008No.   |  | Total Unvested June 30, 2008No. | 
|                             |  |                        |  |                            |  |                      |   |                      |   |                   |   |                                       |  |                         |  |                                              |  |                                 | 
|                            
|Geoffrey
 Kempler            |  | 2,000,000              |  | 1,000,000                  |  |                     |   |                     |   |                  |   | 1,000,000                             |  | 3,000,000               |  | 1,000,000                                    |  | 2,000,000                       | 
|Colin
 Master                |  | 2,000,000              |  |                           |  |                     |   | (2,000,000           | ) |                  |   |                                      |  |                        |  |                                             |  |                                | 
|Brian
 Meltzer               |  | 600,000                |  | 350,000                    |  |                     |   |                     |   |                  |   | 350,000                               |  | 950,000                 |  | 350,000                                      |  | 600,000                         | 
|George
 Mihaly               |  | 600,000                |  | 350,000                    |  |                     |   |                     |   |                  |   | 350,000                               |  | 950,000                 |  | 350,000                                      |  | 600,000                         | 
|Peter
 Marks                 |  | 600,000                |  | 350,000                    |  |                     |   |                     |   |                  |   | 350,000                               |  | 950,000                 |  | 350,000                                      |  | 600,000                         | 
|Richard
 Revelins            |  | 800,000                |  | 350,000                    |  |                     |   |                     |   | (500,000          | ) | 350,000                               |  | 650,000                 |  | 350,000                                      |  | 300,000                         | 
|Dianne
 Angus                |  | 1,250,000              |  | 500,000                    |  | (250,000             | ) |                     |   |                  |   | 750,000                               |  | 1,500,000               |  | 1,500,000                                    |  |                                | 
|                             |  |                        |  |                            |  |                      |   |                      |   |                   |   |                                       |  |                         |  |                                              |  |                                 | 
|                             |  | 7,850,000              |  | 2,900,000                  |  | (250,000             | ) | (2,000,000           | ) | (500,000          | ) | 3,150,000                             |  | 8,000,000               |  | 3,900,000                                    |  | 4,100,000                       | 
|                            
|Share Options of the Company |  | BalanceJuly 1, 2006No. |  | Granted as RemunerationNo. |  | Options ExercisedNo. |   | Options ForfeitedNo. |   | Options ExpiredNo |   | Options VestedDuring 2007 fiscal year |  | BalanceJune 30, 2007No. |  | Total Vest and ExercisableJune 30, 2007No.   |  | Total Unvested June 30, 2007No. | 
|                             |  |                        |  |                            |  |                      |   |                      |   |                   |   |                                       |  |                         |  |                                              |  |                                 | 
|                            
|Geoffrey
 Kempler            |  | 1,000,000              |  | 1,000,000                  |  |                     |   |                     |   |                  |   |                                      |  | 2,000,000               |  |                                             |  | 2,000,000                       | 
|Colin
 Master                |  | 1,000,000              |  | 1,000,000                  |  |                     |   |                     |   |                  |   |                                      |  | 2,000,000               |  |                                             |  | 2,000,000                       | 
|Brian
 Meltzer               |  | 300,000                |  | 300,000                    |  |                     |   |                     |   |                  |   |                                      |  | 600,000                 |  |                                             |  | 600,000                         | 
|George
 Mihaly               |  | 300,000                |  | 300,000                    |  |                     |   |                     |   |                  |   |                                      |  | 600,000                 |  |                                             |  | 600,000                         | 
|Peter
 Marks                 |  | 300,000                |  | 300,000                    |  |                     |   |                     |   |                  |   |                                      |  | 600,000                 |  |                                             |  | 600,000                         | 
|Richard
 Revelins            |  | 500,000                |  | 300,000                    |  |                     |   |                     |   |                  |   |                                      |  | 800,000                 |  | 300,000                                      |  | 500,000                         | 
|Ross
 Murdoch1               |  |                       |  | 625,000                    |  | (625,000             | ) |                     |   |                  |   | 625,000                               |  |                        |  |                                             |  |                                | 
|Dianne
 Angus                |  |                       |  | 1,250,000                  |  |                     |   |                     |   |                  |   | 1,000,000                             |  | 1,250,000               |  | 1,000,000                                    |  | 250,000                         | 
|                             |  |                        |  |                            |  |                      |   |                      |   |                   |   |                                       |  |                         |  |                                              |  |                                 | 
|                             |  | 3,400,000              |  | 5,075,000                  |  | (625,000             | ) |                     |   |                  |   | 1,625,000                             |  | 7,850,000               |  | 1,500,000                                    |  | 6,350,000                       | 

|                                                                                             
|---------------------------------------------------------------------------------------------
|1The
 balance at June 30, 2007, is the balance at date of resignation.                       
|For further information on equity entitlements under employment
 contracts, refer to Note 20.

F - 35

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES 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

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

(a) Market Risk

(i) Foreign Currency Risk

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

The following financial assets and liabilities are subject to foreign
currency risk, the currency of the original amounts are displayed in brackets,
all the amounts in the table below are displayed in $AUD at year-end spot
rates:

|                                  |  |                     |         |      |  |         |  
|--------------------------------- |  | ------------------- | ------- | ---- |  | ------- | -
|                                  |  | Consolidated Entity |        
|                                  |  | 2009                |         | 2008 | 
|                                  |  |                     |         |      | 
|                                  |  | $                   |         | $    | 
|                                 
|Cash and cash equivalents
 ($USD) |  |                     | 211,286 |      |  | 301,751 |  
|Cash and cash equivalents
 (EUR) |  |                     | 74,007  |      |  | 67,710  |  
|Cash and cash equivalents
 (£GBP) |  |                     | 725     |      |  | 73,230  |  
|Trade and other payables
 ($USD)  |  |                     | (53,338 | )    |  | (22,916 | )
|Trade and other payables
 (EUR)  |  |                     |        |      |  |        |  
|Trade and other payables
 (£GBP)  |  |                     |        |      |  | (957    | )
|                                  |  |                     |         |      |  |         |  
|Total exposure                    |  |                     | 232,680 |      |  | 418,818 |  
|                                  |  |                     |         |      |  |         |  

The consolidated entity has conducted a sensitivity analysis of its
exposure to foreign currency risk. The consolidated entity is currently exposed
to the US dollar (USD), Euro (EUR) and Great British Pound (GBP). The
sensitivity analysis below is conducted on a currency by currency basis using
the sensitivity analysis variable, which has been based on the average annual
movement in the AUD/USD, AUD/EUR and AUD/GBP exchange rates over the past five
years based on the year-end spot rates. The variables for USD and GBP being 4%
and 11%, respectively. There has been no material change in the average annual
movement in the AUD/EUR over the past five years based on the year-end spot
rates.

Based on the financial instruments held at June 30, 2009, had the Australian
dollar depreciated/appreciated by 4% against the U.S. dollar with all other
variables held constant, the consolidated entitys post-tax profit for the year
would have been $7,249 lower / $8,508 higher (2008: $10,719 lower / $12,580
higher), mainly as a result of foreign exchange gains/losses on translation of
U.S. dollar denominated financial instruments as detailed in the above table.
The consolidated entitys exposure to other foreign exchange movements is not
material.

F - 36

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
in Australian dollars (unless otherwise noted)

|    |                                  
|--- | ---------------------------------
|24. | FINANCIAL INSTRUMENTS (continued)

(ii) Interest Rate Risk

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

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

At June 30, 2009, the consolidated entity had the following cash
accounts:

|  |                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------
|· | A$53,671 in Australia dollar cheque accounts at variable interest
 rates ranging from 0.02% to 1.36% as of June 30, 2009;
|· | A$5,292 in Australia dollar savings accounts at an interest rate of
 2% as of June 30, 2009;                             
|· | A$16,882 in Australia dollar transaction accounts at variable rates
 ranging from 0% to 0.05% as of June, 2009.          
|· | A$3,942,443 in Australia Business Cash High Interest accounts at an
 interest rate of 3% as of June 2009;                
|· | A$313 in Australia dollar Business Cash accounts at an interest rate
 of 2.5% as of June 2009                            
|· | US$168,039 (A$208,872) in a U.S. checking account at a interest rate
 of 0% as of June 30, 2009;                         
|· | GBP$179 (A$368) in a GBP cheque account at a variable interest rate
 of 0% as of June 30, 2009;                          
|· | EUR$40,833(A$81,715) in a EUR cheque account at a variable interest
 rate of 0% as of June 30, 2009;                     
|· | A$35,164 in a six month term deposit at a fixed interest rate of
 3.70% which matures on 11 August 2009;                 
|· | A$200 in petty cash which does not earn any interest;                                                                    
|· | GBP$174 (A$357) in petty cash which does not earn any interest;                                                          
|· | SEK$970 (A$156) in petty cash which does not earn any interest;                                                          
|· | US$1,942 (A$2,414) in petty cash which does not earn any interest;
 and                                                  
|· | CA$2 (A$2) in petty cash which does not earn any interest.                                                               

The weighted average interest rate is 2.77% for cash and cash
equivalents and 0.59% for terms deposits over three months and apart from usual
variances in general rates of interest the consolidated entity is not exposed
to any significant interest rate risk.

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

|  |                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------
|· | A$25,554 in Australia dollar cheque accounts at variable interest
 rates ranging from 0.10% to 6.25% as of June 30, 2008;
|· | A$6,800,000 in a three month term deposit at a fixed interest rate of
 7.95% as of June 30, 2008;                        
|· | A$3,950,416 in at call deposit account, earning interest of 7.20% as
 of June 30, 2008;                                  
|· | US$286,264 (A$298,029) in a U.S. checking account at a interest rate
 of 1.43% as of June 30, 2008;                      
|· | GBP$35,075 (A$72,869) in a GBP cheque account at a variable interest
 rate of 3.57% as of June 30, 2008;                 
|· | EUR$41,166 (A$67,710) in a EUR cheque account at a variable interest
 rate of 3.16% as of June 30, 2008;                 
|· | A$11,064 in a 12 month term deposit at a fixed interest rate of
 7.25%which matures on 13 January 2009;                  
|· | A$35,164 in a three month term deposit at a fixed interest rate of
 6.30%which matures on 11 August 2008;                
|· | A$200 in petty cash which does not earn any interest;                                                                    
|· | GBP$174 (A$361) in petty cash which does not earn any interest;                                                          
|· | SEK$970 (A$169) in petty cash which does not earn any interest;                                                          
|· | US$3,575 (A$3,727) in petty cash which does not earn any interest;
 and                                                  
|· | CA$5 (A$5) in petty cash which does not earn any interest.                                                               

The weighted average interest rate is 7.45% for cash and cash
equivalents and 6.53% for terms deposits over three months and apart from usual
variances in general rates of interest the consolidated entity is not exposed
to any significant interest rate risk.

F - 37

---

---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
in Australian dollars (unless otherwise noted)

|    |                                  
|--- | ---------------------------------
|24. | FINANCIAL INSTRUMENTS (continued)

Receivables and payables are non-interest bearing.

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

|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|---------------------------- |  | --------------------- | --------- | ------------------------- | ---------------- | -------------------- | --------- | ----- | - | --------------------- | - | --------- |  | - | ---------- |  | ---- | -
|June 30, 2009                |  | FloatingInterest Rate |           | Fixed InterestMaturing in |                  | Non-Interest bearing |           | Total |   | Average Interest Rate
|                             |  |                       |           |                           |                  |                      |           |       |   |                      
|                             |  |                       |           |                           | 1 year 
 or less |                      | 1-5 years |       |   |                       |   |           |  |   |            | 
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            | 
|                            
|Financial
 Assets            |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|Cash
 and cash equivalents   |  | $                     | 4,299,229 |                           |                  |                     |           |       |  |                       | $ | 5,748     |  | $ | 4,304,977  |  | 2.77 | %
|Trade
 and other receivables |  |                       |          |                           |                  |                      |           |       |  |                       | $ | 526       |  | $ | 526        |  |      |  
|Other
 current assets        |  |                       |          |                           | $                | 35,164               |           |       |  |                       | $ | 185,433   |  | $ | 220,597    |  | 0.59 | %
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  | $                     | 4,299,229 |                           | $                | 35,164               |           |       |  |                       | $ | 191,707   |  | $ | 4,526,100  |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|Financial
 Liabilities       |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|Payables                     |  |                       |          |                           |                  |                     |           |       |  |                       | $ | 604,142   |  | $ | 604,142    |  |      |  
|Other
 financial liabilities |  |                       |          |                           |                  |                     |           |       |  |                       |   |          |  |   |           |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |          |                           |                  |                     |           |       |  |                       | $ | 604,142   |  | $ | 604,142    |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            | 
|June 30, 2008                |  | FloatingInterest Rate |           | Fixed InterestMaturing in |                  | Non-Interest bearing |           | Total |   | Average Interest Rate
|                             |  |                       |           |                           |                  |                      |           |       |   |                      
|                             |  |                       |           |                           | 1 year 
 or less |                      | 1-5 years |       |   |                       |   |           |  |   |            | 
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            | 
|                            
|Financial
 Assets            |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|Cash                         |  | $                     | 464,162   |                           | $                | 10,750,416           |           |       |  |                       | $ | 4,456     |  | $ | 11,219,035 |  | 7.45 | %
|Receivables                  |  |                       |          |                           |                  |                     |           |       |  |                       | $ | 120,641   |  | $ | 120,641    |  |      |  
|Other
 current assets        |  |                       |          |                           | $                | 46,228               |           |       |  |                       | $ | 243,261   |  | $ | 289,489    |  | 6.53 | %
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  | $                     | 464,162   |                           | $                | 10,796,644           |           |       |  |                       | $ | 368,359   |  | $ | 11,629,165 |  |      |  
|                            
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|Financial
 Liabilities       |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|Payables                     |  |                       |          |                           |                  |                     |           |       |  |                       | $ | 849,113   |  | $ | 849,113    |  |      |  
|Other
 financial liabilities |  |                       |          |                           |                  |                     |           |       |  |                       | $ | 772,430   |  | $ | 772,430    |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |          |                           |                  |                     |           |       |  |                       | $ | 1,621,543 |  | $ | 1,621,543  |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  
|                             |  |                       |           |                           |                  |                      |           |       |   |                       |   |           |  |   |            |  |      |  

F - 38

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---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
in Australian dollars (unless otherwise noted)

|    |                                  
|--- | ---------------------------------
|24. | FINANCIAL INSTRUMENTS (continued)

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

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

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

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

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

Maturities of Financial Liabilities

|                            |  |                    |  |             |                     |                             |         |                  |  |         | 
|--------------------------- |  | ------------------ |  | ----------- | ------------------- | --------------------------- | ------- | ---------------- |  | ------- | 
|2009                        |  | Less than 6 months |  | 6-12 months |                     | Total contracted cash flows |         | Carrying amounts
|                            |  |                    |  |             |                     |                             |         |                 
|                           
|                            |  |                    |  |             | Consolidated Entity |                             |         |                  |  |         | 
|Trade and other payables    |  | 604,142            |  |             |                     |                             | 604,142 |                  |  | 604,142 | 
|Other financial liabilities |  |                   |  |             |                     |                             |        |                  |  |        | 
|                            |  |                    |  |             |                     |                             |         |                  |  |         | 
|                            |  |                    |  |             | Parent              |                             |         |                  |  |         | 
|Trade and other payables    |  | 602,782            |  |             |                     |                             | 602,782 |                  |  | 602,782 | 
|Other financial liabilities |  |                   |  |             |                     |                             |        |                  |  |        | 
|                            |  |                    |  |             |                     |                             |         |                  |  |         | 
|2008                        |  |                    |  |             |                     |                             |         |                  |  |         | 
|                            |  |                    |  |             | Consolidated Entity |                             |         |                  |  |         | 
|Trade and other payables    |  | 849,113            |  |             |                    |                             | 849,113 |                  |  | 849,113 | 
|Other financial liabilities |  | 772,430            |  |             |                    |                             | 772,430 |                  |  | 772,430 | 
|                            |  |                    |  |             |                     |                             |         |                  |  |         | 
|                            |  |                    |  |             | Parent              |                             |         |                  |  |         | 
|Trade and other payables    |  | 848,072            |  |             |                    |                             | 848,072 |                  |  | 848,072 | 
|Other financial liabilities |  | 772,430            |  |             |                    |                             | 772,430 |                  |  | 772,430 | 

(d) Capital Risk
ManagementThe consolidated entitys objectives when managing capital are to
safeguard the consolidated entitys ability to continue as a going concern and
to maintain an optimal capital structure so as to maximize shareholder value.
In order to maintain or achieve an optimal capital structure, the consolidated
entity may issue new shares or reduce its capital, subject to the provisions of
the Companys constitution. The capital structure of the consolidated entity
consists of equity attributed to equity holders of the consolidated entity,
comprising contributed equity, reserves and accumulated losses disclosed in
Notes 12, 13 and 14. By monitoring undiscounted cash flow forecasts and actual
cash flows provided to the Board by the Companys Management the Board monitors
the need to raise additional equity from the equity markets.

(e) Fair Value
EstimationThe 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 - 39

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---



PRANA BIOTECHNOLOGY LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
in Australian dollars (unless otherwise noted)

|    |                               
|--- | ------------------------------
|25. | ADDITIONAL COMPANY INFORMATION

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

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

F - 40

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# SIGNATURES

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

| |  | Prana Biotechnology LimitedBy: /s/ Geoffrey P. Kempler
Geoffrey P. KemplerChief Executive Officer
| |  | ---------------------------------------------------------------------------------------------------------------

Dated: September 23, 2009

78

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