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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F/A-1

(Mark One)



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

OR



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

For the fiscal year ended June 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

OR



| ̈ | 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 000-51505

Pharmaxis Ltd

(Exact name of Registrant as specified in its charter)



---

(Translation of Registrants name into English)

Australia

(Jurisdiction of incorporation or organization)

Unit 2, 10 Rodborough Road, Frenchs Forest, NSW 2086, Australia

(Address of principal executive
offices)

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



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  |                                          

Securities registered or to be registered pursuant to Section 12(g) of the Act.



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Ordinary Shares in the form of American Depositary Shares, evidenced by American Depositary Receipts

(Title of Class)

Securities for
which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

As of June 30, 2006 the number of outstanding shares of each of the issuers classes of capital or common stock was as
follows: 176,903,592 fully paid Ordinary Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer as defined
in Rule 405 of the Securities Act ̈Yes    x  No

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    x  No

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. x  Yes ̈No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer

 ̈Large Accelerated filer
                    x Accelerated filer ̈Non-accelerated filer

Indicate by check mark which financial statement item the registrant has elected to follow. ̈Item 17    x  Item 18

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    x  No

(APPLICABLE ONLY TO ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required
to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court. ̈Yes ̈No



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Explanatory Note

This Amendment No. 1 to our previously filed Form 20F contains the following new information:

1. Adds a risk factor to Item 3 entitled Limitation on Independent Registered Public Accounting Firms Liability.

2. Revises Item 18 to refile the audit report of PricewaterhouseCoopers without reference to Professional Standards Legislation and refiles without
change the previously filed financial statements.

3. Updates the certifications previously filed as Exhibit 12 and 13.

4. Adds the consent of PricewaterhouseCoopers to the incorporation by reference of its audit report filed herewith into our Registration Statement on
Form F-3 (File Number 333-140818).



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PART I



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



|A. | Selected Financial Data
|-- | -----------------------

The following table
presents our selected financial data for the dates and periods indicated. This data should be read together with Item 5 - Operating and Financial Review and Prospects. The statement of operations data for the years ended
June 30, 2004, 2005 and 2006, and for the period from inception (May 29, 1998) to June 30, 2006, and the balance sheet data as of June 30, 2005 and 2006, were derived from our audited financial statements and related notes thereto
included elsewhere in this annual report, were prepared in accordance with U.S. GAAP and are presented in Australian dollars (except as otherwise noted). The statement of operations data for the years ended June 30, 2002 and 2003, and the
balance sheet data as of June 30, 2002, 2003 and 2004, are derived from our audited financial statements and related notes thereto which are not included in this report, were prepared in accordance with U.S. GAAP and are presented in Australian
dollars (except as otherwise noted). Our fiscal year ends on June 30. We designate our fiscal year by the year in which that fiscal year ends; e.g., fiscal year 2006 refers to our fiscal year ended June 30, 2006.



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|                                                                                                       |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------- | ------ | - | ------------------------------------------------ | - | ------ | -------------------------- |  | - | ------ | - |  | ---- | ------- | - | -- | - | ------- | ----- |  | - | ------- | - |  | - | ------- | -
|                                                                                                       |  | Year ended June 30,                                |        |   | Periodfrominception(May 29,1998) to June 30,2006 |   |        | Year endedJune 30, 2006(2) | 
|                                                                                                       |  | 2002                                               |        |   | 2003                                             |   |        | 2004                       |  |   | 2005   |   |  | 2006 |         |   |   
|                                                                                                       |  | A$                                                 |        |   | A$                                               |   |        | A$                         |  |   | A$     |   |  | A$   |         |   | A$ |   |         | U.S.$ | 
|                                                                                                       |  | (in thousands, except per share and footnote data) |       
|Statement of Operations Data:                                                                          |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Revenue                                                                                                |  | $                                                  |       |   |                                                  | $ |       |                            |  | $ |       |   |  | $    |        |   |    | $ | 8       |       |  | $ | 8       |   |  | $ | 6       |  
|Cost of goods sold                                                                                     |  |                                                    |       |   |                                                  |   |       |                            |  |   |       |   |  |      |        |   |    |   | 2       |       |  |   | 2       |   |  |   | 2       |  
|                                                                                                       |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Gross profit                                                                                           |  |                                                    |       |   |                                                  |   |       |                            |  |   |       |   |  |      |        |   |    |   | 6       |       |  |   | 6       |   |  |   | 4       |  
|Operating expenses:                                                                                    |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Research and development(1)                                                                            |  |                                                    | 486    |   |                                                  |   | 925    |                            |  |   | 4,806  |   |  |      | 7,885   |   |    |   | 14,982  |       |  |   | 29,646  |   |  |   | 11,113  |  
|General and administrative                                                                             |  |                                                    | 141    |   |                                                  |   | 981    |                            |  |   | 2,182  |   |  |      | 3,105   |   |    |   | 4,005   |       |  |   | 10,555  |   |  |   | 3,007   |  
|Commercial                                                                                             |  |                                                    |       |   |                                                  |   |       |                            |  |   |       |   |  |      | 807     |   |    |   | 1,764   |       |  |   | 2,571   |   |  |   | 1,313   |  
|Amortization of intangible assets                                                                      |  |                                                    | 83     |   |                                                  |   | 86     |                            |  |   | 89     |   |  |      | 90      |   |    |   | 136     |       |  |   | 621     |   |  |   | 72      |  
|Fair value of stock options issued to employees related to:                                            |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Research and development                                                                               |  |                                                    | 32     |   |                                                  |   | 261    |                            |  |   | 253    |   |  |      | 115     |   |    |   | 613     |       |  |   | 1,366   |   |  |   | 455     |  
|Commercial                                                                                             |  |                                                    |       |   |                                                  |   |       |                            |  |   |       |   |  |      | 116     |   |    |   | 175     |       |  |   | 291     |   |  |   | 130     |  
|General and administrative                                                                             |  |                                                    | 37     |   |                                                  |   | 122    |                            |  |   | 279    |   |  |      | 29      |   |    |   | 335     |       |  |   | 862     |   |  |   | 249     |  
|                                                                                                       |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Total operating expenses                                                                               |  |                                                    | 779    |   |                                                  |   | 2,375  |                            |  |   | 7,609  |   |  |      | 12,147  |   |    |   | 22,011  |       |  |   | 45,913  |   |  |   | 16,339  |  
|                                                                                                       |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Loss from operations                                                                                   |  |                                                    | (779   | ) |                                                  |   | (2,375 | )                          |  |   | (7,609 | ) |  |      | (12,147 | ) |    |   | (22,005 | )     |  |   | (45,907 | ) |  |   | (16,333 | )
|Interest and other income                                                                              |  |                                                    | 44     |   |                                                  |   | 327    |                            |  |   | 1,123  |   |  |      | 1,702   |   |    |   | 4,282   |       |  |   | 7,538   |   |  |   | 3,178   |  
|Foreign currency gain (loss)                                                                           |  |                                                    |       |   |                                                  |   |       |                            |  |   |       |   |  |      |        |   |    |   | (5      | )     |  |   | (5      | ) |  |   | (4      | )
|Amortization of preference share issue expenses                                                        |  |                                                    |       |   |                                                  |   | (65    | )                          |  |   | (161   | ) |  |      |        |   |    |   |        |       |  |   | (226    | ) |  |   |        |  
|                                                                                                       |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Net loss before tax                                                                                    |  | $                                                  | (735   | ) |                                                  | $ | (2,113 | )                          |  | $ | (6,647 | ) |  | $    | (10,445 | ) |    | $ | (17,728 | )     |  | $ | (38,600 | ) |  | $ | (13,159 | )
|Income tax expense                                                                                     |  |                                                    |       |   |                                                  |   |       |                            |  |   |       |   |  |      |        |   |    |   | (5      | )     |  |   | (5      | ) |  |   | (4      | )
|Net loss                                                                                               |  | $                                                  | (735   | ) |                                                  | $ | (2,113 | )                          |  | $ | (6,647 | ) |  | $    | (10,445 | ) |    | $ | (17,733 | )     |  | $ | (38,605 | ) |  | $ | (13,163 | )
|                                                                                                       |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                                                                   |  | $                                                  | (0.07  | ) |                                                  | $ | (0.19  | )                          |  | $ | (0.09  | ) |  | $    | (0.08   | ) |    | $ | (0.11   | )     |  | $ | (0.78   | ) |  | $ | (0.08   | )
|                                                                                                       |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  
|Weighted average number of ordinary shares used in calculating basic and diluted net loss per share(3) |  |                                                    | 11,200 |   |                                                  |   | 11,200 |                            |  |   | 75,744 |   |  |      | 123,933 |   |    |   | 160,349 |       |  |   | 49,672  |   |  |   | 160,349 |  
|                                                                                                       |  |                                                    |        |   |                                                  |   |        |                            |  |   |        |   |  |      |         |   |    |   |         |       |  |   |         |   |  |   |         |  

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|(1) | Research and development expenses have been reduced by government research grants of A$663,000, A$751,000, A$1,105,000, A$1,132,000, A$1,245,000 and A$5,796,000 in fiscal 2002,
2003, 2004, 2005 and 2006, and the period from inception (May 29, 1998) to June 30, 2006, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The amounts have been translated into U.S. dollars from Australian dollars based upon the noon buying rates in New York City as determined by the Federal Reserve Bank of New York on
June 30, 2006, which was A$1.00 to U.S.$0.7423. These translations are merely for the convenience of the reader and should not be construed as representations that the Australian dollar amounts actually represent such U.S. dollar amounts or
could be converted into U.S. dollars at the rate indicated.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Fiscal 2002, 2003 and 2004, and the period from inception (May 29, 1998) to June 30, 2006, have been retroactively adjusted for an eight-for-one share split effected
immediately prior to the closing of our initial public offering in Australia. The increase in ordinary shares in fiscal 2004 is attributable to our Australian initial public offering in which a total of 50,000,000 new ordinary shares were issued,
and immediately before which 46,816,000 convertible redeemable preference shares converted to ordinary shares on a one-for-one basis. The increase in ordinary shares in fiscal 2005 is primarily attributable to a share placement and share purchase
plan in which a total of 26,362,092 new ordinary shares were issued. The increase in ordinary shares in fiscal 2006 is primarily attributable to a U.S. public offering and a concurrent Australian share placement in which a total of 39,400,000 new
ordinary shares were issued. In addition, 2,733,500 shares were issued upon the exercising of stock options by management or employees under the Companys Employee Option Plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                            |  |                |       |   |      |   |        |      |  |      |        |      |   |          |  |   |         |  |   |       
|------------------------------------------- |  | -------------- | ----- | - | ---- | - | ------ | ---- |  | ---- | ------ | ---- | - | -------- |  | - | ------- |  | - | ------
|                                            |  | As of June 30,
|                                            |  | 2002           |       |   | 2003 |   |        | 2004 |  | 2005 |        | 2006 |   | 2006    
|                                            |  | A$             |       |   | A$   |   |        | A$   |  | A$   |        | A$   |   | U.S.$(2)
|                                            |  | (in thousands)
|Balance Sheet Data:                         |  |                |       |   |      |   |        |      |  |      |        |      |   |          |  |   |         |  |   |       
|Cash and cash equivalents                   |  | $              | 751   |   |      | $ | 7,384  |      |  | $    | 25,101 |      | $ | 33,268   |  | $ | 97,840  |  | $ | 72,627
|Total assets                                |  |                | 2,144 |   |      |   | 10,459 |      |  |      | 28,111 |      |   | 37,836   |  |   | 104,213 |  |   | 77,357
|Convertible redeemable preference shares(1) |  |                | 2,000 |   |      |   | 11,630 |      |  |      |       |      |   |         |  |   |        |  |   |      
|Total shareholders (deficit) equity        |  |                | (46   | ) |      |   | (1,776 | )    |  |      | 26,631 |      |   | 35,467   |  |   | 98,888  |  |   | 73,405

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|(1) | Convertible redeemable preference shares were converted to ordinary shares immediately prior to the quotation of our ordinary shares on the Australian Stock Exchange after our
Australian initial public offering in November 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The amounts have been translated into U.S. dollars from Australian dollars based upon the noon buying rates in New York City as determined by the Federal Reserve Bank of New York on
June 30, 2006, which was A$1.00 to U.S.$0.7423. These translations are merely for the convenience of the reader and should not be construed as representations that the Australian dollar amounts actually represent such U.S. dollar amounts or
could be converted into U.S. dollars at the rate indicated.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Exchange Rate Information:

The following tables present exchange rates of the Australian dollar into the U.S. dollars for the periods indicated. Annual averages are calculated using
the average of month-end rates of the relevant year. Monthly averages are calculated using the average of the daily rates during the relevant period.



|                                                       |  |         |  |        |  |       
|------------------------------------------------------ |  | ------- |  | ------ |  | ------
|Period                                                 |  | Average |  | High   |  | Low   
|                                                       |  | U.S.$   |  | U.S.$  |  | U.S.$ 
|Five most recent fiscal years                          |  |         |  |        |  |       
|2002                                                   |  | 0.5240  |  | 0.5748 |  | 0.4841
|2003                                                   |  | 0.5884  |  | 0.6729 |  | 0.5280
|2004                                                   |  | 0.7155  |  | 0.7979 |  | 0.6390
|2005                                                   |  | 0.7568  |  | 0.7974 |  | 0.6880
|2006                                                   |  | 0.7472  |  | 0.7781 |  | 0.7056
|Six most recent months                                 |  |         |  |        |  |       
|June 2006                                              |  | 0.7399  |  | 0.7527 |  | 0.7284
|July 2006                                              |  | 0.7528  |  | 0.7664 |  | 0.7407
|August 2006                                            |  | 0.7631  |  | 0.7699 |  | 0.7568
|September 2006                                         |  | 0.7549  |  | 0.7704 |  | 0.7461
|October 2006                                           |  | 0.7544  |  | 0.7743 |  | 0.7434
|November 2006                                          |  | 0.7728  |  | 0.7896 |  | 0.7643
|As of November 30, 2006, the exchange rate was $0.7896 |  |         |  |        |  |       



|B. | Capitalization and Indebtedness
|-- | -------------------------------

Not applicable



|C. | Reasons for the Offer and Use of Proceeds
|-- | -----------------------------------------

Not
applicable.



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|D. | Risk Factors
|-- | ------------

The following risks relate
specifically to the Companys business and should be considered carefully. Our business, financial condition and results of operations could be materially and adversely affected by any of the following risks. As a result, the trading
price of our ordinary shares and our American Depositary Shares, or ADSs, could decline and the holders could lose part or all of their investment.

Risks Related to Our Business

We are at an early stage of our development as an integrated pharmaceutical company and our first
product, Aridol, has only recently commenced generating initial revenue in a limited number of jurisdictions. We may not be successful in deriving meaningful revenues from Aridol. We do not currently have and we may never have any other products
other than Aridol that generate revenues. Unless we are able to generate sufficient product revenue, we will continue to incur losses from operations and may not achieve or maintain profitability.

We are at an early stage of our development as an integrated pharmaceutical company. We were incorporated in May 1998 and we have a limited operating
history on which to evaluate our business and prospects. To date, we do not have, and may never have, any products that generate significant revenues. We have funded our operations primarily through the private sales of our securities, the initial
public offering of our securities in Australia and the U.S. and a share purchase plan. We have also received funding from government research grants and earned interest income on invested funds. We have recently launched our first product, Aridol,
in a limited number of jurisdictions including Australia and Sweden. We have only generated small amounts of revenue from Aridol in these jurisdictions.

We have incurred losses in each year since our inception and expect to continue to incur substantial losses. We incurred losses of approximately A$6.6 million, A$10.4 million and A$17.7 million in the fiscal years
ended June 30, 2004, 2005 and 2006, respectively. Our accumulated losses from inception to June 30, 2006 are A$38.6 million. These losses, among other things, have had and will continue to have an adverse effect on our shareholders
equity and working capital. Unless we are able to generate sufficient product revenue, we will continue to incur losses from operations and may not achieve or maintain profitability.

We expect our expenses to increase significantly in the short term in connection with:



| |  |  | the regulatory marketing authorization process to approve the sale of Aridol in the U.S. and parts of the E.U and other jurisdictions. Aridol is the first of our
product candidates to complete Phase III trials in any jurisdiction and the first of our product candidates for which we have sought marketing authorization. We have to date received marketing authorization in Australia and Sweden. We are also
seeking marketing authorization in other European countries. The work involved in seeking regulatory marketing authorization for Aridol in other jurisdictions is extensive, time consuming and expensive;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the development of our sales and marketing capability. Our existing sales and marketing capability is currently limited to a small sales team for Australia and four
distributors in the E.U. and, to date, has not represented a significant cost to us. In the short term, our sales and marketing capability must be increased to enable the sales and marketing of Aridol in Europe and Australia and thereafter in the
U.S.;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the continuation of simultaneous Phase III clinical trials of Bronchitol. These clinical trials are carried out in a number of jurisdictions and with respect to a
number of indications and are expensive.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expenses will increase as we commence new clinical trials or we progress existing trials to more advanced phases. The more advanced clinical trials typically
require more clinical trial participants, clinical trial sites and research investigators than earlier stage clinical trials and are consequently more expensive;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the commencement of Phase I clinical trials of PXS64, which will represent a significant new expense for us; and
| | - |  | ----------------------------------------------------------------------------------------------------------------



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| |  |  | although we already have existing expenses associated with the preclinical testing of PXS2076 and other products candidates, in the short term, we will continue to
incur expenses as a result of preclinical testing of PXS2076 and any other clinical trials and preclinical testing that we may initiate.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also expect to incur increased general and administrative expenses in support of our increased operations as well as the ongoing costs to operate as a company listed on the Australian Stock Exchange and on the
Nasdaq Global Market.

Over the longer term, the costs referred to above will fluctuate, primarily dependant on the number and type of
clinical trials being undertaken by us at any one time, regulatory marketing authorizations being sought and the extent of our sales and marketing operations. Costs will also increase if we are able to progress any further clinical trial candidates
from preclinical testing to clinical trials or if we are able to complete clinical trials of any product candidates and seek regulatory marketing authorizations.

We may not become profitable if Bronchitol is unsuccessful in clinical trials or we are unable to obtain regulatory approvals for Aridol and Bronchitol in key jurisdictions. Even though we have received regulatory approval for Aridol in
a limited number of jurisdictions and may receive regulatory approval for Aridol and other product candidates in other jurisdictions, profitability will depend on our ability to generate revenues from the sale of our products or the licensing of our
technology.

We cannot be certain that the clinical development of Bronchitol or any of our other product candidates in preclinical
testing or clinical development will be successful, that any of our products or product candidates will receive the regulatory approvals required to commercialize them, or that any of our research and development programs will yield additional
product candidates suitable for investigation through clinical trials.

If Bronchitol is unsuccessful in clinical trials, or if the results
of continuing trials of Aridol are not successful, or we are unable to obtain marketing authorization of our products and product candidates in all key jurisdictions, we may not be profitable. We have recently completed the Phase III clinical trials
of Aridol necessary for U.S. registration of Aridol. However, we cannot be certain that marketing approval will be granted in the U.S. and/or the E.U. There is a risk that these Phase III clinical trials in the U.S. may not be sufficient and that
marketing authorization may not be granted in the U.S. We are undertaking simultaneous Phase II clinical trials of Bronchitol and Phase III clinical trials of Bronchitol. Clinical trials of Bronchitol will continue for several years, but may take
significantly longer to complete. There is a risk that these clinical trials of Bronchitol may not be successful or that marketing approval may not be granted in the future. If we are not able to successfully complete clinical trials of Bronchitol,
and if we are unable to obtain marketing authorization of Bronchitol, we may not be profitable. If we are unable to obtain marketing authorization of Aridol in the U.S. and other key jurisdictions, we may not be profitable.

The process to develop, obtain regulatory approval for, and commercialize potential product candidates is long, complex and costly. Even if we receive
regulatory approval for any product candidates, profitability will depend on our ability to generate revenues from the sale of our products or the licensing of our technology that will offset the significant and continuing expenditures required for
us to advance our research, protect and extend our intellectual property rights and develop, manufacture, license, market, distribute and sell our technology and products successfully. Our ability to generate revenue depends on a number of factors,
including our ability to:



| |  |  | successfully conduct and complete clinical trials for Bronchitol and our other product candidates;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | develop and obtain all necessary regulatory marketing authorization, as well as approvals concerning pricing and reimbursement, which may be necessary in some of
the E.U. member states, for Aridol and Bronchitol in our target markets where we do not currently have regulatory marketing authorization and, in the future, to develop and obtain regulatory marketing authorization for our other product candidates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | manufacture or obtain commercial quantities of Aridol and Bronchitol or our other product candidates at acceptable cost levels; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | successfully market and sell Aridol, Bronchitol and our other product candidates. In circumstances where we have licensed our technology to third parties, our
ability to generate revenue will depend on the success of the licensor of the technology to successfully market and sell the licensed technology.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Although we have a pipeline of potential product candidates, our business is currently substantially
dependent on our ability to complete development, obtain regulatory approval for, and successfully commercialize Aridol and Bronchitol in a timely manner. If we are unable to successfully commercialize Aridol and/or Bronchitol, we may not be able to
earn sufficient revenues to continue our business. If we fail to become and remain profitable, or if we are unable to fund our continuing losses, there would be a material adverse effect on our business and the holders of our ordinary shares and
ADSs could lose all or part of their investment.

Unsuccessful or delayed marketing authorization could increase our future development costs or impair
our future revenue. Approvals that may be given may not cover all the indications for which we seek approval or may contain significant limitations.

To receive regulatory marketing authorization for the commercial sale of our product candidates, we must conduct preclinical studies and clinical trials to demonstrate safety and efficacy in humans. This process of
attempting to gain regulatory approval is expensive and can take many years, and failure can occur at any stage of the testing. We have recently received regulatory marketing authorization for Aridol in some initial target markets including
Australia and Sweden. Our failure to adequately demonstrate the safety and efficacy of Aridol in our other target markets and/or our failure to adequately demonstrate the safety and efficacy of Bronchitol and/or any of our other product candidates
or otherwise fail to satisfy regulatory requirements will prevent regulatory approval and commercialization of such product candidates. Our inability to successfully and effectively complete clinical trials for our product candidates, in particular
Bronchitol, will severely harm our business and we may not be profitable.

Significant delays in clinical development could materially
increase our product development costs, delay our receipt of revenue or allow our competitors to bring product candidates to market before we do, impairing our ability to effectively commercialize Aridol and Bronchitol or our other product
candidates.

In addition, any authorization we may obtain may not cover all of the clinical indications for which we seek approval. Also,
an authorization might contain significant limitations in the form of narrow indications, warnings, precautions or contraindications with respect to conditions of use.

We will continue to need significant amounts of additional capital that may not be available to us on favorable terms or at all or which may be dilutive.

To date, we have funded our operations and capital expenditures with proceeds from the sale of our securities, government grants and interest on
investments.

In order to achieve our goal of being a fully integrated pharmaceutical company and to conduct the lengthy and expensive
research, preclinical studies, clinical trials, regulatory approval process, manufacture, sales and marketing necessary to complete the full development of our product candidates, we may require substantial additional funds in addition to the funds
received in connection with the U.S. public offering and the Australian placement completed in November 2005. In particular, we may require substantial additional funding as a result of our strategy of not always entering into strategic alliances or
partnerships in order to commercialize our product candidates.

To meet these financing requirements, we may raise funds through public or
private equity offerings, debt financings, and through other means, including collaborations and license agreements. Raising additional funds by issuing equity or convertible debt securities may cause our shareholders to experience significant
additional dilution in their ownership interests. Raising additional funds through debt financing, if available, may involve covenants that restrict our business activities. Additional funding may not be available to us on favorable terms, or at
all. If we are unable to obtain additional funds, we may be forced to delay, reduce the scope or terminate our clinical trials and the development, manufacturing and marketing of our products. To the extent that we raise additional funds through
collaborations and licensing arrangements, we may have to relinquish valuable rights and control over our technologies, research programs or product candidates, or grant licenses on terms that may not be favorable to us.

If we fail to obtain additional financing, we may be unable to fund our operations and commercialize our product candidates.

We expect that our cash expenditure will increase for the next several years, and that we will spend substantial amounts to complete the clinical
development and commercialization of Aridol, Bronchitol, PXS64 and



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our other product candidates, and to license or acquire other product candidates. We believe that our existing cash and cash equivalents will be sufficient
to meet our projected operating requirements for at least 12 months.

Our future funding requirements will depend on many factors,
including:



| |  |  | the scope, results, rate of progress, timing and costs of preclinical studies and clinical trials and other development activities. The funding requirements for
clinical trials of Aridol, Bronchitol and PXS64 are significant. The funding requirements for the preclinical testing and potential future clinical testing of PXS2076 and any other testing that we may initiate is also significant;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of seeking and obtaining regulatory approvals;
| | - |  | -------------------------------------------------------------------



| |  |  | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of developing our sales and marketing capabilities and establishing distribution capabilities. We will also need to establish a distribution capability;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of expanding our manufacturing capabilities which are capable of limited commercial manufacture;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the cost of additional management and scientific, manufacturing and sales and marketing personnel. We will be required to increase the number of our personnel over
time;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the terms, timing and cash requirements of any future acquisitions, collaborative arrangements, licensing of product candidates or investing in businesses, product
candidates and technologies;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of securing coverage, payment and reimbursement of our product candidates, if any of our product candidates receive regulatory approval; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of competing clinical, technological and market developments.
| | - |  | -------------------------------------------------------------------------

If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more of our clinical trials
or research and development programs or future commercialization efforts.

The suspension or termination of our government research grant may result in
lost revenue. We may also be required to repay previously received grant revenue in certain circumstances which would have an adverse effect on our cash position.

We currently receive substantial grant funding under a grant agreement with the Commonwealth of Australia. There is a risk that we will not be entitled to the grant payments for failing to incur eligible expenditure
or failing to undertake activities associated with the grant or otherwise for failing to satisfy the relevant conditions in the grant agreement. Furthermore, there is a risk we will not be entitled to the funds under the grant agreement, including,
if the Commonwealth of Australia has insufficient funding for the relevant grant program, if we fail to submit reports when required, if we have not otherwise complied with our obligations under the funding agreement, or if the Commonwealth of
Australia is entitled to or does terminate the relevant agreement. The Commonwealth of Australia may terminate the grant agreements on different bases, including by giving us written notice of termination if we are in breach of the agreement and if
in the opinion of the Commonwealth of Australia the breach is not capable of being remedied or if capable of being remedied it is not remedied after receipt of written notice, if we fail to submit reports, if our research and development activities
or the quality of those activities do not satisfy the grant eligibility criteria, if there is a change of control of us or if we become insolvent.

In certain circumstances where we fail to use our best endeavors to commercialize the project within a reasonable time of completion of the project or upon termination of a grant due to our breach of agreement or our insolvency, the
Commonwealth of Australia may require us to repay some or all of the grant. If required to repay the grant amounts, we may be required to reallocate funds needed to continue the commercialization of our products and such repayment may have a
material adverse effect on our cash position and us.



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Currency fluctuations may expose us to increased costs and revenue decreases.

Our business may in the future be affected by fluctuations in foreign exchange rates. Currency fluctuations could, therefore, cause our costs to increase
and revenues to decline. The majority of our expenses will continue to be denominated in Australian dollars although we will also be expending cash in other denominations, including U.S. dollars, British pounds, Swedish krona and the European euro.
The exchange rates of the Australian dollar to the U.S. dollar, the British pound, the Swedish krona and the European euro have fluctuated in recent years. In circumstances where the Australian dollar devalues against any or all of the U.S. dollar,
the British pound, the Swedish krona or the European euro, this may have an adverse effect on our costs incurred in either the U.S. or Europe (as applicable) but may have a positive effect on any revenues which we source from the U.S. or Europe (as
applicable). The same principles apply in respect of our costs and revenues in other jurisdictions. In addition, we conduct clinical trials in many different countries and we have manufacturing of some of our product candidates undertaken outside of
Australia, which exposes us to potential cost increases resulting from fluctuations in exchange rates. We do not currently have any plans to hedge the effect of currency fluctuations on our overseas expenditures. We manage our currency risks by
settling foreign currency payables immediately upon recognition of a foreign currency liability.

Risks Related to Research and Development of Our
Products

Clinical trials are expensive, time consuming, subject to delay and their outcome is uncertain and may not be completed at all.

Before we can obtain regulatory authorization for the commercial sale of any product or product candidate, we are required to complete
preclinical development and extensive clinical trials in humans to demonstrate its safety and efficacy. Preclinical development and clinical trials are subject to extensive regulation by the FDA and other regulatory authorities in the United States,
the European Union, Australia and elsewhere. In addition, clinical trials must be conducted with product candidates produced under applicable current Good Manufacturing Practices. Clinical trials are expensive and complex, can take many years, are
often subject to delay and have uncertain outcomes. The FDA has accepted an Investigational New Drug Application, or IND, for inhaled dry powdered mannitol. We have recently completed the Phase III clinical trials of Aridol that we believe are
necessary for U.S. marketing authorization of Aridol. We have not yet finalized the protocol with the FDA for the Phase III trials in subjects with cystic fibrosis or bronchiectasis. Clinical trials of our product candidates, Bronchitol and PXS64,
will continue for several years, but may take significantly longer to complete. We are also likely to undertake continuing trials of Aridol.

There are numerous factors that could affect the timing of the commencement, continuation and completion of clinical trials which may delay the clinical trials or prevent us from completing these trials successfully, including but not
limited to:



| |  |  | delays in securing clinical investigators or trial sites for our clinical trials, scheduling conflicts with participating clinicians and clinical institutions, and
delays in obtaining institutional review board, or IRB, and other regulatory approvals to commence a clinical trial. There are a limited number of clinical investigators and clinical trials sites worldwide able to conduct the clinical trials
required by us. Clinical investigators and trial sites may have demands from a number of companies competing to use their resources;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | slower than anticipated recruitment and enrollment of patients who meet the trial eligibility criteria or the loss of patients during the course of the clinical
trials. By way of example, we experienced delays on our Bronchitol clinical trials for the treatment of cystic fibrosis because recruitment was slower than anticipated. We managed the enrollment problem by modifying the protocol to widen the
eligibility of clinical trial participants, adding additional clinical trial sites and assisting with resourcing at clinical trial sites. We may not be able to successfully manage such enrollment problems in the future;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the requirement to repeat or undertake large clinical trials. Our Phase II and Phase III clinical trials involve a large number of patients and are typically
carried out in different jurisdictions and may also need to be repeated if required by regulatory authorities;
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| |  |  | negative or inconclusive results from clinical trials, or deficiencies in the conduct of the clinical trials may require us to repeat clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen safety issues or unforeseen adverse side effects or fatalities or other adverse events arising during a clinical trial due to medical problems that may
or may not be related to clinical trial treatments;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the product candidate may not be as good as current therapies. For example, Aridol must prove to be convenient and effective as a lung capacity test which assists
in the identification of and determines the severity of asthma. In addition, Bronchitol must improve the quality of life and health of people with chronic obstructive lung diseases such as cystic fibrosis and bronchiectasis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | quality or stability of the product candidate may fall below acceptable standards;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | shortages of available product supply. We may be required to simultaneously provide product to patients in a range of jurisdictions and there may be shortages or
delays in supplying the product in those jurisdictions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | uncertain dosing issues; and
| | - |  | ----------------------------



| |  |  | inability to monitor patients adequately during or after treatment or problems with investigator or patient compliance with the trial protocols.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

Due to the foregoing and other factors, the regulatory approval of Aridol in the U.S. or in other key markets where we
do not currently have marketing approval of Aridol, as well as the regulatory approval of Bronchitol, PXS64 and any of our other future product candidates, could take a significantly longer time to gain regulatory approval than we expect or these
products may never gain approval or may only gain approval in some but not all jurisdictions, which could reduce or eliminate our revenue by delaying or terminating the potential commercialization of our products or product candidates. If we suffer
any significant delays, setbacks or negative results in, or termination of, our clinical trials, we may be unable to continue the development of our products or product candidates or generate revenue and our business may be materially adversely
affected.

Ongoing and future clinical trials of our product candidates may not show sufficient safety or efficacy to obtain requisite regulatory
approvals.

Ongoing and future clinical trials of our product candidates may not show sufficient safety or efficacy to obtain regulatory
approval for marketing. Phase I and Phase II clinical trials are not primarily designed to test the efficacy of a product candidate but rather to test safety, to study pharmacokinetics and pharmacodynamics and to understand the product
candidates side effects at various doses and schedules. Furthermore, success in preclinical and early clinical trials does not ensure that later large-scale trials will be successful nor does it predict final results. Acceptable results in
early trials may not be repeated in later trials. The final results of our recently completed Phase III clinical trial of Aridol in the U.S. is required before an application for marketing authority can be filed with the FDA. There is a risk that
the final results of this trial may not show sufficient safety or efficacy to obtain regulatory approval for marketing Aridol in the U.S. despite the completion of the Phase III trials of Aridol in other jurisdictions and the granting of marketing
authority in other jurisdictions. Likewise, clinical trials of Bronchitol and our other product candidates may not show sufficient safety or efficacy to obtain regulatory approval for marketing.

We may conduct lengthy and expensive clinical trials of our product candidates, only to learn that the product candidate is not an effective treatment. A
number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. In addition, clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals. Negative or inconclusive results or adverse medical events during a clinical trial could cause the clinical trial to be delayed, redone or terminated. In addition,
failure to construct appropriate clinical trial protocols or other factors could result in the test or control group experiencing a disproportionate number of adverse events and could cause a clinical trial to be redone or terminated. The length of
time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by applicable regulatory authorities may also vary significantly based on the type, complexity and novelty of the product candidate
involved, as well as other factors.



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Due to our reliance on contract research organizations, hospitals and investigators to conduct clinical trials, we are
unable to directly control the timing, conduct and expense of our clinical trials. We also use third parties to provide research and development services and do not have direct control of the timing, conduct and expense of certain of our research
programs.

We rely on third parties such as contract research organizations, hospitals and research investigators to provide services in
connection with our clinical trials. Our clinical trials are conducted by a number of third parties at a number of different sites in different jurisdictions.

We believe that the agreements that we enter into with these third parties are customary for agreements relating to the provision of clinical trial services. The agreements set out the parameters and protocols for the
relevant clinical trials, set out the amount payable by us, as well as setting out the rights and obligations of the third parties and us.

To date, we have been able to manage the use of these third parties in order to effectively carry out our clinical trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet
expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical
trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. Although there are a range of suitable institutions and investigators that would
be able to conduct the clinical trials on our behalf, there is no guarantee that we will be able to enter into any such arrangement on acceptable terms, if at all.

Risks Related to the Manufacture of Our Products

The failure to secure an adequate supply of the inhalers to be used in the
administration of Aridol and Bronchitol could compromise the commercialization of Aridol and Bronchitol.

Both Aridol and Bronchitol are
administered through a dry powder inhaler. If we are not able to enter into a supply agreement or the number of inhalers supplied are inadequate to meet patient demand, we would be subject to costly delays which may compromise the commercialization
of Aridol and/or Bronchitol. The supply of inhalers may be delayed or we may need to change our supplier of inhalers which could delay the commercialization of Aridol and/or Bronchitol.

Delays in the supply of the necessary quantity or quality of mannitol could compromise the commercialization of our products.

Any delays in the supply of the necessary quantity or quality of mannitol for the manufacture of Aridol and Bronchitol could compromise the commercialization of our products. The supply of mannitol may be delayed, or
we may need to change our supplier of mannitol, which could potentially result in delays to the supply of the product to clinical trials and for sale while we sourced alternative suppliers of mannitol.

We currently have limited manufacturing capacity and outsource some manufacturing for the clinical development and commercial production of our products, all of which
puts us at risk of lengthy and costly delays of bringing our products to market.

We currently operate manufacturing facilities in
Sydney, Australia. Our manufacturing facilities are licensed by the Australian Therapeutic Goods Administration, or TGA, to manufacture Good Manufacturing Practice grade material for commercial sale. We have outsourced the manufacturing of Good
Manufacturing Practice grade PXS64 for preclinical trials and clinical trials as our manufacturing facilities are not suitable for the production of PXS64.

We expect that it will be necessary to build or establish suitable additional or alternative manufacturing facilities as the commercial demand for our products increase. If we establish new manufacturing facilities,
we will incur significant costs and undetermined risks associated with the funding and building of such facilities which may delay or severely compromise the commercialization of our products and our results and operations may be harmed.



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There is also a risk of delays to our research and clinical trial activities if we needed to change our existing
outsourced manufacturers of PXS64.

In circumstances where we seek to outsource the manufacture of certain products, there is no guarantee that we will
be able to enter into any such arrangement on acceptable terms, if at all, and as a result we are at risk of lengthy and costly delays of bringing our products to market.

In circumstances where we seek to outsource the manufacture of certain product candidates, such as PXS64, there is no guarantee that we will be able to
enter into any such arrangement on acceptable terms, if at all. We may be required to enter into long-term manufacturing agreements that contain exclusivity provisions and/or substantial termination penalties. To date, the manufacturing agreements
for the manufacture of PXS64 do not contain any such exclusivity provisions or termination penalties. In addition, contract manufacturers may have a limited number of facilities in which our products can be produced and any interruption of the
operation of those facilities could result in the cancellation of shipments and loss of product, resulting in delays and additional costs.

We and our contract manufacturers are required to produce our clinical product and commercial product under FDA and E.U. current Good Manufacturing Practices in order to meet acceptable standards. If such standards change, our ability and
the ability of contract manufacturers to produce our products when we require may be affected.

We have outsourced the manufacturing of
Good Manufacturing Practice grade PXS64 for Phase I clinical trials as our manufacturing facilities are not suitable for the production of PXS64. Our existing manufacturers of PXS64 and any future contract manufacturers for PXS64 or any of our other
product candidates which we seek to contract manufacture may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store and distribute our products. We, or our contract
manufacturers, may also fail to achieve and maintain required production yields or manufacturing standards which could result in patient injury or death, product recalls or withdrawals, product shortages, delays or failures in product testing or
delivery or other problems that could seriously harm our business. In addition, we are, and our contract manufacturers are, subject to ongoing inspections and regulation of regulatory authorities, including by the TGA and the FDA.

The ability to find an acceptable manufacturer or to change manufacturers may be difficult for a number of reasons, including that the number of
potential manufacturers is limited and we may not be able to negotiate agreements with manufacturers on commercially reasonable terms, the complex nature of the manufacturing process of certain of our product candidates, such as PXS64, which may
require a significant learning curve for the manufacturer, and the FDA must approve any replacement manufacturer prior to manufacturing, which requires new testing and compliance inspections.

If we were required and able to change manufacturers, the FDA would also require that we demonstrate structural and functional comparability between the
same product manufactured by different organizations and may require comparability studies.

Risks Related to Marketing, Distribution and Sales

If we are unable to expand our sales and marketing force our business may be harmed.

We currently have a limited number of sales and marketing staff and limited distribution capabilities including a small sales force located in Australia
and four marketing/distribution partners in Europe. Our goal is to build an integrated pharmaceutical business undertaking research and development, clinical trials, sales and marketing for certain of our product candidates. We are proposing to
develop our sales and marketing capability for products which address highly concentrated markets served by specialist physicians. We intend to contract or partner with third parties in respect of sales and marketing of products where the markets
are larger, more diverse or less accessible. For our early stage products or any new products, we may form other strategic alliances with third parties, which have established distribution systems and sales forces, in order to commercialize our
products. We market Aridol directly in Australia and, assuming receipt of all necessary approvals of Aridol for commercial sale, we intend to use a combination of direct marketing to pulmonary specialists and third parties in Europe and later in the
U.S.



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We will need to incur significant additional expenses and commit significant additional management
resources to establish a sales and marketing force. Although we have already begun to develop our sales and marketing capability, we may not be able to successfully establish these capabilities despite these additional expenditures. Even if we are
successful in establishing a sales and marketing force, it may not be as effective as a third-party sales and marketing force. In circumstances where we elect to rely on third parties, we may receive less revenue than if we sold such products
directly. In addition, we may have little or no control over the sales efforts of those third parties and they may not perform as agreed. In the event we are unable to sell sufficient quantities of Aridol, Bronchitol and other product candidates,
either directly or through third parties, our business may be significantly harmed and we may be forced to delay, reduce the scope or terminate our clinical trials and the development, manufacturing and marketing of our products.

Our failure to establish and manage a distribution network for our products could delay or compromise the commercialization of Aridol and Bronchitol and other
products.

We have recently established systems and processes necessary for distributing products to customers in Australia and to
marketing/distribution partners in Europe. Failure to secure additional contracts with distributors could negatively impact the distribution of our products. If we are unable to effectively establish and manage the distribution process, the
commercialization of Aridol and Bronchitol and other products may be delayed or severely compromised and our results of operations may be harmed.

To
the extent we are able to enter into collaborative arrangements or strategic alliances, we will be exposed to risks related to those collaborations and alliances.

Although our goal is to be a fully integrated pharmaceutical company, an important element of our strategy for developing, manufacturing and commercializing our product candidates is entering into partnerships and
strategic alliances with other pharmaceutical companies or other industry participants to advance our programs and enable us to maintain our financial and operational capacity. We may not be able to negotiate alliances on acceptable terms, if at
all. Although we do not believe any of the marketing or distribution agreements we have are material, such arrangements may become material in the future to the extent any of them represents a significant source of our revenue. Although we are not
currently party to any collaborative arrangement or strategic alliance that is material to our business, in the future we may rely on collaborative arrangements or strategic alliances to complete the development and commercialization of some of our
product candidates. These arrangements may result in us receiving less revenue than if we sold such products directly, may place the development, sales and marketing of our products outside our control, may require us to relinquish important rights
or may otherwise be on terms unfavorable to us. Collaborative arrangements or strategic alliances will subject us to a number of risks, including the risk that:



| |  |  | we may not be able to control the amount and timing of resources that our strategic partner/collaborators may devote to the product candidates;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our strategic partner/collaborators may experience financial difficulties;
| | - |  | --------------------------------------------------------------------------



| |  |  | we may be required to relinquish important rights such as marketing and distribution rights;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | business combinations or significant changes in a collaborators business strategy may also adversely affect a collaborators willingness or ability to
complete its obligations under any arrangement;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a collaborator could independently move forward with a competing product developed either independently or in collaboration with others, including our competitors;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | collaborative arrangements are often terminated or allowed to expire, which would delay the development and may increase the cost of developing our product
candidates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

We face costs associated with importing our products into markets outside of Australia.

As much of our product is likely to be manufactured in Australia, we may face difficulties in importing our products into various jurisdictions as a
result of, among other things, import inspections, incomplete or inaccurate import documentation or defective packaging. There will be increased costs associated with importing/exporting our product.



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Risks Relating to Competition

If our competitors are able to develop and market products that are preferred over Aridol, Bronchitol or our other product candidates our commercial opportunity may be significantly reduced or eliminated.

We face intense competition from established pharmaceutical and biotechnology
companies, as well as from academic institutions, government agencies and private and public research institutions. We are seeking to develop and market products that will compete with other products and drugs that currently exist or are being
developed or may be developed in the future. For Aridol, various products and treatments are currently marketed for monitoring lung capacity and the identification and assessment of asthma, including methacholine (Provocholine®) by Methapharm Inc as a direct bronchiol provocation agent and nitric oxide (Niox®) by Aerocrine AB of Stockholm, Sweden. We believe Aridol is the only lung capacity test that is being
developed using dry powder inhalation technology. This test may not be well accepted in the market place or the medical community. Similarly, for Bronchitol, various products and treatments are currently marketed, including inhaled antibiotics,
mucolytic agents and bronchodilators. Bronchitol may not work well in conjunction with existing marketed therapies. In addition, a number of companies are developing new approaches for the treatment of cystic fibrosis, including new antibiotic
preparations by Gilead Sciences Inc. and Novartis AG. and new agents to restore salt balance from Inspire Pharmaceuticals Inc. In addition, many companies are interested in gene therapy. New antibiotic preparations are being tested in patients with
bronchiectasis. For patients with chronic bronchitis, new anti-inflammatory agents and new bronchodilating agents are under development.

Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient, are less expensive, or that reach the market sooner
than our products. Scientific, clinical or technical developments by our competitors may render Aridol and/or Bronchitol or our other product candidates obsolete or noncompetitive. Further, public announcements regarding the development of any such
competing products could adversely affect the market price of our ordinary shares or ADSs. We anticipate that we will face increased competition in the future as new companies enter the markets and as scientific developments progress. If our
products obtain regulatory approvals, but do not compete effectively in the marketplace, our business will suffer.

Many of our competitors
currently have significantly greater financial resources and expertise in conducting clinical trials, obtaining regulatory approvals, undertaking and managing manufacturing and sales and marketing of products than we do. Other early-stage companies
may also prove to be significant competitors, particularly through collaborative arrangements they may have with large and established companies. In addition, these third parties compete with us in recruiting and retaining qualified scientific and
management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring therapies and therapy licenses complementary to our programs or advantageous to our business. We expect that our ability to
compete effectively will depend upon our ability to:



| |  |  | successfully and rapidly complete clinical trials and obtain all requisite regulatory approvals in a cost-effective manner;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | attract and retain key personnel;
| | - |  | ---------------------------------



| |  |  | demonstrate the competitive advantages of our product candidates. For example, Aridol must prove to be convenient and effective as a test for airway inflammation
which identifies and determines the severity of asthma. In addition, Bronchitol must improve the quality of life and health of people with chronic obstructive lung diseases such as cystic fibrosis and bronchiectasis;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | build an adequate manufacturing, sales and marketing infrastructure. We face the risk that our future manufacturing, sales and marketing infrastructure may be
inadequate for the commercialization of our products or that competitors have faster and more effective manufacturing, sales and marketing capacities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | secure the support of key clinicians and physicians. The success of our products is dependant on the acceptance of our products by key clinicians and physicians. We
face the risk that our products may not
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| | be well received or that a product will be released by a competitor which is preferred by key clinicians and physicians; and
| | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | identify and obtain other product candidates on commercially reasonable terms which will provide us with a pipeline of potential product candidates which may reduce
the risk if any of our existing product candidates or are adversely effected.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Future sales of our products may suffer if they are not
accepted in the marketplace by physicians, patients and the medical community.

There is a risk that Aridol, Bronchitol or our other
product candidates may not gain market acceptance among physicians, patients and the medical community. The degree of market acceptance of Aridol and Bronchitol or our other product candidates will depend on a number of factors. For example, Aridol
must prove to be convenient and effective as a test for airway inflammation which identifies and determines the severity of asthma. In addition, Bronchitol must improve the quality of life for people with chronic obstructive lung diseases such as
cystic fibrosis and bronchiectasis. The prevalence and severity of any side effects to Aridol or Bronchitol could negatively affect market acceptance of both Aridol and Bronchitol. Failure to achieve market acceptance of Aridol and Bronchitol would
significantly harm our business.

The degree of market acceptance of any of our approved products will depend on a variety of factors,
including:



| |  |  | timing of market introduction and the number and clinical profile of competitive products. There are currently a range of existing alternative products to each of
our products and we are aware that new products are being developed;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to provide acceptable evidence of safety and efficacy and our ability to secure the support of key clinicians and physicians for our products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | relative convenience and ease of administration. In the case of Aridol and Bronchitol, there is a risk that using dry powder inhalation technology may not be well
accepted in the market place;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cost-effectiveness compared to existing and new treatments;
| | - |  | -----------------------------------------------------------



| |  |  | availability of coverage, reimbursement and adequate payment from health maintenance organizations and other third-party payors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | prevalence and severity of adverse side effects; and
| | - |  | ----------------------------------------------------



| |  |  | other advantages over other treatment methods.
| | - |  | ----------------------------------------------

If we are unable to obtain acceptable prices or adequate reimbursement from third-party payors for Aridol and Bronchitol, or any other product candidates that we may seek to commercialize, our revenues and prospects for profitability
will suffer.

The commercial success of our product candidates is substantially dependent on whether third-party coverage and
reimbursement is available from governmental payors such as Medicare and Medicaid, private health insurers, including managed care organizations, and other third-party payors.

Many patients will not be capable of paying for our products themselves and will rely on third-party payors to pay for their medical needs. The U.S.
Centers for Medicare and Medicaid Services, health maintenance organizations and other third-party payors in the United States, the European Union, Australia and other jurisdictions are increasingly attempting to contain healthcare costs by limiting
both coverage and the level of reimbursement of new drugs and, as a result, they may not cover or provide adequate payment for our products. Our products may not be considered cost-effective and reimbursement may not be available to consumers or may
not be sufficient to allow our products to be marketed on a competitive basis. Large private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the
use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are challenging the prices charged for medical products and services, and many third-party



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payors limit or delay reimbursement for newly approved health care products. In particular, third-party payors may limit the reimbursed indications.
Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues lower than anticipated. If the prices for our product candidates decrease or if governmental and other third-party payors do
not provide adequate coverage and reimbursement levels, our prospects for revenue and for profitability will suffer.

If there are fewer individuals in
our target markets than we estimate, we may not generate sufficient revenues to continue development of our product candidates or continue operations.

Our estimate of the patient population of our target markets is based on published studies as well as internal analyses and studies we have commissioned. If the results of these studies or our analysis of them do not
accurately reflect the number of patients in our target markets, our assessment of the market may be wrong, making it difficult or impossible for us to meet our revenue goals. In addition, it is difficult to determine the portion of the patient
population that might use Aridol and/or Bronchitol, or our other product candidates.

Our orphan drug exclusivity for Bronchitol may not provide us with
a competitive advantage.

The FDA has granted Orphan Drug designation to Bronchitol for the treatment of both bronchiectasis and CF for
patients at risk of developing bronchiectasis. Orphan drug designation for Bronchitol for the treatment of both bronchiectasis and cystic fibrosis for patients at risk of developing bronchiectasis is an important element of our competitive strategy.
Any company that obtains the first FDA approval for a designated orphan drug for a rare disease generally receives marketing exclusivity for use of that drug for the designated condition for a period of seven years from approval. However, the FDA
may permit other companies to market a form of mannitol, the active ingredient in Bronchitol, not covered by our patent, to treat bronchiectasis and cystic fibrosis for patients at risk of developing bronchiectasis if any such product demonstrates
clinical superiority, or if we are unable to provide sufficient drug supply to meet medical needs. More than one product may also be approved by the FDA for the same orphan indication or disease as long as the products are different drugs. Any of
these FDA actions could create a more competitive market for us. Our orphan drug exclusivity for Bronchitol does not apply to drugs to treat bronchiectasis and cystic fibrosis for patients at risk of developing bronchiectasis that do not contain
mannitol, or to drugs containing mannitol that seek approval for uses other than bronchiectasis and cystic fibrosis for patients at risk of developing bronchiectasis.

The European Medicines Agency has likewise granted Orphan Drug designation for Bronchitol in the treatment of CF. European orphan drug designation provides comparable benefits but likewise, there are risks and
limitations associated with orphan drug designation in Europe. Our orphan drug exclusivity may thus not ultimately provide us a true competitive advantage, and our business could suffer as a result.

Risks Relating to Regulatory Issues

Our products are
subject to extensive regulation, which can be costly and time-consuming, and we may not obtain approvals for the commercialization of some or all of our products.

The clinical development, manufacturing, sales and marketing of our products are subject to extensive regulation by regulatory authorities in the U.S., the E.U., Australia and elsewhere. These regulations vary in
important, meaningful ways from country to country.

We are not permitted to market a potential drug in the U.S. until we receive approval
of a New Drug Application, or NDA, from the FDA. We have not yet received an NDA approval from the FDA for any of our products. Obtaining an NDA approval is expensive and is a complex, lengthy and uncertain process. The FDA approval process for a
new drug involves completion of preclinical studies and the submission of the results of these studies to the FDA, together with proposed clinical protocols, manufacturing information, analytical data and other information in an IND, which must
become effective before human clinical trials may begin. Clinical development typically involves three phases of study: Phase I, II and III. The most significant costs associated with clinical development are the Phase III clinical trials as they
tend to be the longest and largest studies conducted during the drug development process. After completion of clinical trials, an NDA may be submitted to the FDA. In responding to an NDA, the FDA may refuse to file the application, or if accepted
for filing, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. In addition, failure to comply with FDA and other
applicable foreign and U.S.



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regulatory requirements may subject us to administrative or judicially imposed sanctions. We have recently completed the Phase III clinical trials of Aridol
necessary for U.S. registration of Aridol. The FDA has accepted an IND for Aridol and for Bronchitol. Clinical trials of our other product candidates, including Bronchitol and PXS64, will continue for several years, but may take significantly longer
to complete. We have completed a Phase II clinical trial of Bronchitol for the treatment of bronchiectasis and have commenced an additional clinical trial of Bronchitol for bronchiectasis. We have also completed a Phase II clinical trial of
Bronchitol for the treatment of cystic fibrosis and are preparing for additional clinical trials of Bronchitol for CF. Our other product candidates, PXS64 and PXS2076, are currently in varying stages of the research or preclinical phase of
development.

Despite the substantial time and expense invested in preparation and submission of an NDA or equivalents in other
jurisdictions, regulatory approval is never guaranteed. The FDA and other regulatory authorities in the United States, the European Union, Australia and elsewhere, exercise substantial discretion in the drug approval process. The number, size and
design of preclinical studies and clinical trials that will be required will vary depending on the product, the disease or condition for which the product is intended to be used and the regulations and guidance documents applicable to any particular
product. The FDA or other regulators can delay, limit or deny approval of a product for many reasons, including, but not limited to, the fact that regulators may not approve our or our third-party manufacturers processes or facilities or that
new laws may be enacted or regulators may change their approval policies or adopt new regulations requiring new or different evidence of safety and efficacy for the intended use of a product.

Even if our product candidates receive regulatory approval, we may still face development and regulatory difficulties that may delay or impair future sales of our
products and we would be subject to ongoing regulatory obligations and restrictions, which may result in significant expense and limit our ability to commercialize our product candidates.

Even with regulatory approval to sell Aridol or any other product candidate, the relevant regulatory authorities may, nevertheless, impose significant
restrictions on the indicated uses, manufacturing, labeling, packaging, storage, advertising, promotion and record keeping or impose ongoing requirements for post-approval studies and adverse event reporting. In addition, regulatory agencies subject
a marketed product, its manufacturer and the manufacturers facilities to continual review and periodic inspections. Potentially costly follow-up or post-marketing clinical studies may be required as a condition of approval to further
substantiate safety or efficacy, or to investigate specific issues of interest to the regulatory authority. Previously unknown problems with the product candidate, including adverse events of unanticipated severity or frequency, may result in
restrictions on the marketing of the product, and could include withdrawal of the product from the market. If we discover previously unknown problems with a product or our manufacturing facilities or the manufacturing facilities of a contract
manufacturer, a regulatory agency may impose restrictions on that product, on us or on our third-party contract manufacturers, including requiring us to withdraw the product from the market. If we fail to comply with applicable regulatory
requirements, a regulatory agency may:



| |  |  | issue warning letters;
| | - |  | ----------------------



| |  |  | impose civil or criminal penalties;
| | - |  | -----------------------------------



| |  |  | suspend our regulatory approval;
| | - |  | --------------------------------



| |  |  | suspend any of our ongoing clinical trials;
| | - |  | -------------------------------------------



| |  |  | refuse to approve pending applications or supplements to approved applications filed by us;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | impose restrictions on our operations, including closing our contract manufacturers facilities or terminating licenses to manufacture Good Manufacturing
Practice grade material; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | seize or detain products or require a product recall.
| | - |  | -----------------------------------------------------

Any of the foregoing could seriously harm the commercialization of our products and our results and operations may be seriously harmed. Likewise, any failure to comply with ongoing regulatory requirements may
significantly and adversely affect our ability to commercialize our product.



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In addition, the law or regulatory policies governing pharmaceuticals may change. New statutory requirements may be
enacted or additional regulations may be enacted that could prevent or delay regulatory approval of our products. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or
administrative action. If we are not able to maintain regulatory compliance, we might not be permitted to market our products and our business could suffer.

Risks Relating to Product Liability Claims

If product liability lawsuits are successfully brought against us, we will incur
substantial liabilities and damage to our reputation and may be required to limit commercialization of Aridol and Bronchitol or other product candidates.

We face product liability exposure related to the testing of our product candidates in human clinical trials. We are currently conducting continuing clinical trials in respect of Aridol as well as clinical trials of
Bronchitol and we expect to commence clinical trials of PXS25. If any of our products are approved for sale, we may face exposure to claims by an even greater number of persons than were involved in the clinical trials once we begin marketing,
distribution and sales our products commercially. We have commenced initial commercial sales of Aridol in Australia and expect to commence some initial commercial sales of Aridol in Europe in late 2006.

Regardless of merit or eventual outcome, liability claims may result in:



| |  |  | decreased demand for our products and product candidates;
| | - |  | ---------------------------------------------------------



| |  |  | injury to our reputation;
| | - |  | -------------------------



| |  |  | withdrawal of clinical trial participants;
| | - |  | ------------------------------------------



| |  |  | costs of related litigation;
| | - |  | ----------------------------



| |  |  | substantial monetary awards to patients and others;
| | - |  | ---------------------------------------------------



| |  |  | loss of revenues; and
| | - |  | ---------------------



| |  |  | the inability to commercialize our products and product candidates.
| | - |  | -------------------------------------------------------------------

We enter into indemnity agreements with the hospitals, institutions and authorities in which the clinical trials are conducted and with the clinicians and investigators who carry out the clinical trials on our behalf.
The majority of the indemnities are in a substantially similar form and are based on an Australian industry standard agreement. Certain of the agreements have been negotiated on a case by case basis and vary from the standard. The standard
indemnities typically provide that we will indemnify in respect of all claims and proceedings made by any of the patients or non-patient volunteers participating in the relevant clinical trials for personal injury arising from the administration of
the product under investigation or any clinical intervention or procedure required.

We have liability insurance that covers our clinical
trials in North America and in other countries where we conduct clinical trials. Having regard to the insurance requirements of the ethics committees who oversee the clinical trials, the good safety profile of Aridol and Bronchitol, the varied use
of mannitol in humans, the number of clinical trials undertaken to date without a material claim being made against us, the use of informed consents by trial participants, and the number of clinical trials being undertaken at any one time, we
consider that our clinical trial insurance is reasonable for our current activities. We have expanded our insurance coverage to include the sale of Aridol and will expand insurance coverage in the future for any product candidates which are granted
regulatory marketing authorization. However, insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that we consider reasonable or that
will be adequate to satisfy any liability that may arise and the claim for damages could be substantial. If we are not able to obtain adequate coverage at a reasonable cost, the commercialization of our products may be delayed or severely
compromised.

If there is a claim made against us or some other problem that is attributable to our products or product candidates, our
ordinary share and ADS prices may be negatively affected. Even if we were ultimately successful in product liability litigation, the litigation would consume substantial amounts of our financial and managerial



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resources and may create adverse publicity, all of which would impair our ability to generate sales of the product the subject of the litigation as well as
our other potential products.

Risks Relating to Intellectual Property and License Arrangements

Aridol and Bronchitol are based in part on intellectual property rights we license from others, and any termination of those licenses could seriously harm our business
as the loss of any rights to market key products would seriously harm our operating results.

We have an exclusive worldwide license
from Sydney South West Area Health Service to develop and commercialize certain intellectual property relating to the use of mannitol, the component part of both Aridol and Bronchitol, to induce sputum and promote airway clearance and also in the
use as a test of airway function and susceptibility to asthma. We also have an exclusive license from ANU Enterprises Pty Ltd to develop and commercialize intellectual property relating to the treatment of inflammatory or immune-mediated conditions
in patients by administering a phosphosugar. Both of these license agreements impose payment and other material obligations on us. If our agreement with Sydney South West Area Health Service were terminated, then we would have no further rights to
develop and commercialize Aridol and Bronchitol which would seriously harm our business as this license is critical to both Aridol and Bronchitol.

Third parties may own or control patents or patent applications that we may be required to license to commercialize our product candidates, that we may infringe, or that could result in litigation that would be costly and time consuming.

Our ability to commercialize Aridol and Bronchitol and our other product candidates depends upon our ability to develop, manufacture,
market and sell these products without infringing the proprietary rights of third parties. A number of pharmaceutical and biotechnology companies, universities and research institutions have or may be granted patents that cover technologies similar
to the technologies owned by or licensed to us. We may choose to seek, or be required to seek, licenses under third-party patents, which would likely require the payment of license fees or royalties or both. A license may not be available to us on
commercially reasonable terms, or at all. We may also be unaware of existing patents or other proprietary rights of third parties that may be infringed by Aridol and Bronchitol or our other product candidates. As patent applications can take many
years to issue, there may be other currently pending applications which may later result in issued patents that are infringed by Aridol and Bronchitol or our other product candidates.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and
biotechnology industries. Defending ourselves against third-party claims, including litigation in particular, would be costly and time consuming and would divert managements attention from our business, which could lead to delays in our
development or commercialization efforts. If third parties are successful in their claims, we might have to pay substantial damages or take other actions that are adverse to our business. As a result of intellectual property infringement claims, or
to avoid potential claims, we might be:



| |  |  | prohibited from selling or licensing any product candidate that we may develop unless the patent holder licenses the patent to us, which it is not required to do;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | required to expend considerable amounts of money in defending the claim;
| | - |  | ------------------------------------------------------------------------



| |  |  | required to pay substantial royalties or grant a cross license to our patents to another patent holder;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | required to pay substantial monetary damages; or
| | - |  | ------------------------------------------------



| |  |  | required to redesign the formulation of a product so it does not infringe, which may not be possible or could require substantial funds and time.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

We may also be forced to bring an infringement action if we believe that a third party is infringing our protected
intellectual property. Any such litigation will be costly, time consuming and divert managements attention, and the outcome of any such litigation may not be favorable to us.



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Our intellectual property rights may not preclude competitors from developing competing products and our business may
suffer.

If we are not able to protect our proprietary technology, trade secrets and know-how, our competitors may use our intellectual
property to develop competing products. Our patents, including our licensed patents relating to the use and manufacture of Aridol and Bronchitol, may not be sufficient to prevent others from competing with us or using similar technologies. Most of
our patents covering Aridol and Bronchitol expire in 2015. Therefore, we will not be able to depend on these patents past these relevant dates to exclude competitors from developing generic versions of Aridol and Bronchitol. Our issued patents and
those that we may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or the term of patent protection that we may have for
our product candidates. The occurrence of any of the foregoing events could harm our competitive position and seriously harm our business.

Our trade secrets relating to our product candidates and the manufacture of our product candidates may become known or independently discovered or competitors may develop alternatives. We disclose confidential information and trade secrets
from time to time provided that the recipient executes a non-disclosure agreement or otherwise owes us obligations of confidentiality. Confidentiality agreements may be breached and we may have no effective remedy for such a breach. Enforcing a
claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. Failure to obtain or maintain confidential information and trade secret protection could adversely affect
our competitive business position.

If we fail to enforce adequately or defend our intellectual property rights our business may be harmed.

Our commercial success depends, to a large extent, on obtaining and maintaining patent and trade secret protection for our products,
the methods used to manufacture those products and the methods for treating patients using those products. A key tool in protecting our products and our technologies from unauthorized use by third parties is the extent that valid and enforceable
patents or trade secrets cover them. Our ability to obtain patents is uncertain and there is a risk that we may not be able to secure and maintain patents which we require to defend our intellectual property position. Patents provide only limited
protections and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Some countries in which we may sell our product candidates or license our intellectual property may fail to protect our intellectual
property rights to the same extent as the protection that may be afforded in the U.S. or Australia. Some legal principles remain unresolved and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in
patents in the U.S., the E.U., Australia or elsewhere. In addition, the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant
legal, scientific and factual issues. Changes in either patent laws or in interpretations of patent laws in the U.S., the E.U. or elsewhere may diminish the value of our intellectual property or narrow the scope of our patent protection.

Even if patents are issued, those patents can be challenged by our competitors who can argue such patents are invalid. Patents also will not protect
our products if competitors devise ways of making these product candidates without legally infringing our patents. The U.S. Federal Food, Drug and Cosmetic Act and FDA regulations and policies and equivalents in other jurisdictions provide
incentives to manufacturers to challenge patent validity or create modified, noninfringing versions of a drug in order to facilitate the approval of abbreviated new drug applications for generic substitutes.

Proprietary trade secrets and unpatented know-how are also very important to our business. We rely on trade secrets to protect our technology, especially
where we do not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or
willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party illegally
obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. Failure to obtain or maintain trade secret protection could adversely affect our competitive business position. To date, we are not aware of
any unintentional or willful disclosure of any of our material confidential information or any unauthorized use of our confidential information and we have not been required to seek remedy for any such unauthorized disclosure or use.



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Risks Relating to Resources

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop and commercialize our product candidates.

Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel, manufacturing
personnel, sales and marketing personnel and on our ability to develop and maintain important relationships with clinicians, scientists and leading academic and health institutions, including in particular the Sydney South West Area Health Service.

The loss of services of one or more of our members of key management could delay or compromise the successful completion of our clinical
trials or the commercialization of Aridol and Bronchitol and our other product candidates. We enter into employment agreements with each of our employees, including each member of our key management. Each of our employees agree to a specific period
of notice that they or we must give in order to terminate their employment. Employees can terminate their employment by giving between one to three months notice (as set out in the relevant employees employment agreement).

In the near term we will need to continue to attract and retain manufacturing personnel and sales and marketing personnel and effectively integrate them
into our organization to coincide with the expected commencement of commercial sales of Aridol in Europe. If we fail to attract or effectively integrate new personnel and consultants into our organization and create effective working relationships
among them and other members of management, the future development and commercialization of Aridol and our other product candidates may suffer, harming future regulatory approvals, sales of our products and our results of operations.

There is significant competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If
we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.

The addition of new employees and the loss of key employees, particularly in key positions, can be disruptive and may also cause the future development and commercialization of our product candidates to suffer,
harming future regulatory approvals, sales of our products and our results of operations.

We do not currently carry key person
insurance on the lives of members of senior management. We consider that at this stage of our development it is reasonable not to carry any key person insurance.

We will need to significantly increase the size of our organization, and we may experience difficulties in managing growth.

We are currently a small company with 65 employees and full time contractors as of June 30, 2006. In order to continue our clinical trials and commercialize our product candidates, manufacture commercial quantities of Aridol and market
and sell Aridol, we will need to increase our operations, including expanding our employee base. Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage
any future growth effectively. To that end, we must be able to:



| |  |  | manage our preclinical studies and clinical trials effectively;
| | - |  | ---------------------------------------------------------------



| |  |  | undertake and manage the manufacturing of product effectively;
| | - |  | --------------------------------------------------------------



| |  |  | undertake and manage sales and marketing effectively;
| | - |  | -----------------------------------------------------



| |  |  | integrate current and additional management, administrative, financial and sales and marketing personnel;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | develop our administrative, accounting and management information systems and controls; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | hire and train additional qualified personnel.
| | - |  | ----------------------------------------------



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The acquisition or licensing of other products or product candidates may put a strain on our operations and will
likely require us to seek additional financing.

One of our strategies is to develop and license or acquire complementary products or
product candidates. We have no present agreement regarding any new material licensing or acquisitions. However, if we do undertake any licensing or acquisitions, the process of undertaking the licensing or acquisitions and integrating a licensed or
acquired product or product candidate into our business may put a strain on our operations, including diversion of personnel and financial resources and diversion of managements attention. In addition, any acquisition would give rise to
potentially significant additional operating costs which would likely require us to seek additional financing. Future acquisitions could result in additional issuances of equity securities that would dilute the ownership of existing shareholders and
holders of our ADSs. Future acquisitions could also result in us incurring debt, contingent liabilities or the amortization of expenses related to other intangible assets, any of which could adversely affect our operating results.

Risks Relating to Takeovers

Our constitution may
discourage attempts by shareholders to make a proportional takeover for us and could restrict the ability for shareholders to obtain a premium from such a transaction.

Provisions of our constitution contain a proportional takeover provision which provides that if a person makes a proportional takeover offer for less than all of the share capital in us, shareholders are entitled to
vote to determine whether the proportional takeover offer may proceed. A person may wish to make a proportional takeover offer for a number of reasons, including, if they wish to increase their control of us and/or influence the composition of the
board of directors. Arguably, the proportional takeover provisions in our constitution make it more difficult to achieve a proportional takeover and therefore may discourage proportional takeover offers and make it more difficult for a person to
gain proportional control of us and could restrict the ability for shareholders to obtain a premium from such a transaction. The proportional takeover provisions in our constitution terminate and must be renewed every three years. At our annual
general meeting of shareholders held on 26 October 2006, our shareholders approved the extension of the proportional takeover provision for a further three years.

Australian takeovers laws may discourage takeover offers being made for us or may discourage the acquisition of large numbers of our shares.

We are incorporated in Australia and are subject to the takeovers laws of Australia. Among other things, we are subject to the Corporations Act 2001
(Commonwealth of Australia). Subject to a range of exceptions, the Corporations Act prohibits the acquisition of a direct or indirect interest in our issued voting shares (including through the acquisition of ADSs) if the acquisition of that
interest will lead to a persons or someone elses voting power in us increasing from 20% or below to more than 20%, or increasing from a starting point that is above 20% and below 90%. Exceptions to the general prohibition include
circumstances where the person makes a formal takeover bid for us, if the person obtains shareholder approval for the acquisition or if the person acquires less than 3% of the voting power of us in any rolling six month period. Australian takeovers
laws may discourage takeover offers being made for us or may discourage the acquisition of large numbers of our shares. This may have the ancillary effect of entrenching our board of directors and may deprive or limit strategic opportunities of our
shareholders and ADS holders to sell their shares and may restrict the ability of our shareholders and ADS holders to obtain a premium from such transactions. See Item 10BChange of Control.

Risks Related to our ADSs or Ordinary Shares

The price of
our ordinary shares is highly volatile and could decline significantly.

The market price of our ordinary shares historically has been,
and we expect will continue to be, subject to significant fluctuations over short periods of time. These fluctuations may be due to factors specific to us, to changes in analysts recommendations and earnings estimates, to arbitrage between our
Australian quoted shares and our ADSs, to changes in exchange rates, or to factors affecting the biopharmaceutical industry or the securities markets in general. For example, from our initial quotation on the Australian Stock Exchange on
November 10, 2003 until October 5, 2006, the closing price per share of our ordinary shares ranged from a low of A$0.34 on November 27, 2003 to a high of A$3.41 on November 13, 2006. We may experience a material decline in the
market price of our



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shares, regardless of our operating performance. Therefore, a holder of our ordinary shares or ADSs may not be able to sell those ordinary shares or ADSs at
or above the price paid by such holder for such shares or ADSs. Price declines in our ordinary shares or ADSs could result from a variety of factors, including many outside our control. These factors include:



| |  |  | adverse or inconclusive results or delays in our clinical trial programs;
| | - |  | -------------------------------------------------------------------------



| |  |  | unforeseen safety issues or adverse side effects resulting from the clinical trials or the commercial use of any of our products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | regulatory actions in respect of any of our products or the products of any of our competitors;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | failure of any of our products, such as Aridol, of any of our product candidates, such as Bronchitol (if approved), to achieve commercial success;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements of the introduction of new products by us or our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | market conditions, including market conditions in the pharmaceutical and biotechnology sectors;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | increases in our costs or decreases in our revenues due to unfavorable movements in foreign currency exchange rates;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | developments or litigation concerning patents, licenses and other intellectual property rights;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | litigation or public concern about the safety of our potential products;
| | - |  | ------------------------------------------------------------------------



| |  |  | changes in recommendations or earnings estimates by securities analysts;
| | - |  | ------------------------------------------------------------------------



| |  |  | actual and anticipated fluctuations in our quarterly operating results;
| | - |  | -----------------------------------------------------------------------



| |  |  | deviations in our operating results from the estimates of securities analysts;
| | - |  | ------------------------------------------------------------------------------



| |  |  | rumors relating to us or our competitors;
| | - |  | -----------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | changes in third-party reimbursement policies; and
| | - |  | --------------------------------------------------



| |  |  | developments concerning current or future strategic alliances or acquisitions.
| | - |  | ------------------------------------------------------------------------------

Class action litigation has been brought in the past against companies which have experienced volatility in the market price of their securities. We may
become involved in this type of litigation in the future. Litigation of this type is often extremely expensive and diverts managements attention and companys resources.

In addition, since the initial listing of our ADSs on Nasdaq Global Market trading volume in our ADSs has been limited and a significant portion of the
ownership of our ADSs is concentrated with a small number of holders. The limited trading volume may adversely affect the prices at which the ADSs may be bought or sold. There can be no assurance that a more active trading market in our ADSs will
develop in the U.S.

Rights as a holder of ordinary shares are governed by Australian law and our Constitution and differ from the rights of
shareholders under U.S. law. Holders of our ordinary shares or ADSs may have difficulty in effecting service of process in the United States or enforcing judgments obtained in the United States.

Pharmaxis Ltd is a public company incorporated under the laws of Australia. Therefore, the rights of holders of our ordinary shares are governed by
Australian law and our Constitution. These rights differ from the typical rights of shareholders in U.S. corporations. The rights of holders of ADSs are affected by Australian law and our Constitution but are governed by U.S. law. Circumstances that
under U.S. law may entitle a shareholder in a U.S. company to claim damages may also give rise to a cause of action under Australian law entitling a shareholder in an Australian company to claim damages. However, this will not always be the case.



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Holders of our ordinary shares or ADSs may have difficulties enforcing, in actions brought in courts in
jurisdictions located outside the U.S., liabilities under U.S. securities laws. In particular, if such a holder sought to bring proceedings in Australia based on U.S. securities laws, the Australian court might consider:



| |  |  | that it did not have jurisdiction; and/or
| | - |  | -----------------------------------------



| |  |  | that it was not an appropriate forum for such proceedings; and/or
| | - |  | -----------------------------------------------------------------



| |  |  | that, applying Australian conflict of laws rule, U.S. law (including U.S. securities laws) did not apply to the relationship between holders of our ordinary shares
or ADSs and us or our directors and officers; and/or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | that the U.S. securities laws were of a public or penal nature and should not be enforced by the Australian court.
| | - |  | ------------------------------------------------------------------------------------------------------------------

All but one of our directors and executive officers are residents of countries other than the U.S. Furthermore, all or a substantial portion of their
assets and our assets are located outside the U.S. As a result, it may be very difficult or may not be possible for a holder of our ordinary shares or ADSs to:



| |  |  | effect service of process within the U.S. upon any of our directors and executive officers or on us;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | enforce in U.S. courts judgments obtained against any of our directors and executive officers or us in the U.S. courts in any action, including actions under the
civil liability provisions of U.S. securities laws;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enforce in U.S. courts judgments obtained against any of our directors and senior management or us in courts of jurisdictions outside the United States in any
action, including actions under the civil liability provisions of U.S. securities laws; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | bring an original action in an Australian court to enforce liabilities against any of our directors and executive officers or us based upon U.S. securities laws.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Holders of our ordinary shares and ADSs may also have difficulties enforcing in courts outside the U.S. judgments
obtained in the U.S. courts against any of our directors and executive officers or us, including actions under the civil liability provisions of the U.S. securities laws.

Limitation on Independent Registered Public Accounting Firms Liability

The liability of
certain Australian independent registered public accounting firms, such as PwC Australia, with respect to claims arising out of their audit reports on companies financial statements, is subject to the limitations set forth in the Professional
Standards Act 1994 of New South Wales, Australia (the Professional Standards Act) and the accountants scheme adopted by CPA Australia and the Institute of Chartered Accountants in Australia and approved by the New South Wales
Professional Standards council pursuant to the Professional Standards Act (the NSW Accountants Scheme). As a result, the Professional Standards Act and the NSW Accountants Scheme limit the liability of PwC Australia for damages with
respect to certain civil claims arising in, or governed by the laws of, New South Wales directly or vicariously from anything done or omitted in the performance of its professional services for us, including, without limitation, its audits of our
financial statements, to the lesser of ten times the reasonable charge for the service by PwC Australia that gave rise to the claim and A$20 million. The limit does not apply to claims for breach of trust, fraud or dishonesty.

These limitations may limit recovery upon the enforcement in Australian courts of any judgment under U.S. law rendered against PwC Australia based on or
related to its audit report on our financial statements. Substantially all of PwC Australias assets are located in Australia.

Shares or ADSs
eligible for public sale could adversely affect the price of our ordinary shares.

The market price for our shares or ADSs could decline
as a result of sales by our existing shareholders or management of ordinary shares or the perceptions that these sales could occur. These sales may also make it difficult for us to sell equity securities in the future at a time and at a price when
we deem appropriate.

Currency fluctuations may adversely affect the price of the ADSs relative to the price of our ordinary shares.

The price of our ordinary shares is quoted in Australian dollars and the price of our ADSs is quoted in U.S. dollars. Movements in the Australian
dollar/U.S. dollar exchange rate may adversely affect the U.S. dollar price of our ADSs and the U.S. dollar equivalent of the price of our ordinary shares. The exchange rates between the Australian dollar and the U.S. dollar have fluctuated. If the
value of the Australian dollar appreciates against the U.S. dollar, this may positively affect the U.S. dollar price of our ADSs and the U.S. dollar equivalent of the price of our ordinary shares, even if the price of our ordinary shares in
Australian dollars increases or remains unchanged. However, if the Australian dollar weakens against the U.S. dollar, the U.S. dollar price of the ADSs could decline, even if the price of our ordinary shares in Australian dollars increases or
remains unchanged. If dividends are payable, we will likely calculate and pay any cash dividends in Australian dollars and, as a result, exchange rate movements will affect the U.S. dollar amount of any dividends holders of our ADSs will receive
from the depositary (as defined below in Description of American Depositary Shares). As previously noted, in the last two years, the Australian dollar has as a general trend appreciated against the U.S. dollar. Any continuation of this
trend may positively affect the U.S. dollar value of our dividends. However, this trend may not continue and may be reversed. A reversal of this trend may result in a decrease in the U.S. dollar value of our dividends. The potential impact that
currency fluctuations may have on our earnings is set out in the risk factor Risks Related to Our Business  Currency fluctuations may expose us to increased costs and revenue decreases.



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We may become a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes, which could
result in negative tax consequences to the holders of our ordinary shares or ADSs.

Based on an analysis of our assets and gross income,
we believe that we will be a PFIC for our current tax year and that we have been a PFIC for our tax years ended June 30, 2006, June 30, 2005 and June 30, 2004. We have not conducted a PFIC analysis for any tax year prior to our
tax year ended June 30, 2004. The determination of whether we are, or at any time in the past have been, a PFIC is made annually on a taxable year basis and depends on factors such as the composition of our income and the value of our assets.
If we are classified as a PFIC in any taxable year that a U.S. Holder (as defined in the section entitled Taxation) owns our ordinary shares or ADSs, we generally will continue to be treated as a PFIC for that U.S. Holder in
all succeeding years. Such U.S. Holder would be subject to additional taxes on any excess distributions received from us and any gain realized from the sale or other disposition of our ordinary shares or ADSs. We urge U.S. investors to
consult their own tax advisors about the application of the PFIC rules and certain elections that may help to minimize adverse U.S. federal income tax consequences in their particular circumstances. For a further discussion of the U.S. federal
income tax consequences of investing in a PFIC, see the discussion below under the section entitled Item 10D - Taxation.

We have never
paid a dividend and we do not intend to pay dividends in the foreseeable future which means that holders of shares and ADSs may not receive any return on their investment from dividends.

To date, we have not declared or paid any cash dividends on our ordinary shares and currently intend to retain any future earnings for funding growth. We
do not anticipate paying any dividends in the foreseeable future. Dividends may only be paid out of our profits. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors or, if our directors do not
exercise their power to issue dividends, our shareholders in a general meeting may. Our holders of shares and ADSs may not receive any return on their investment from dividends.

Our ADR holders are not shareholders and do not have shareholder rights.

The Bank of New York, as
depositary, executes and delivers our American Depositary Receipts, or ADRs, on our behalf. Each ADR is a certificate evidencing a specific number of American Depositary Shares, also referred to as ADSs. Our ADR holders will not be treated as
shareholders and do not have the rights of shareholders. The depositary will be the holder of the shares underlying our ADRs. Holders of our ADRs will have ADR holder rights. A deposit agreement among us, the depositary and our ADR holders, and the
beneficial owners of ADRs, sets out ADR holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADRs.

Our ADR holders do not have the same voting rights as our shareholders. Shareholders are entitled to our notices of general meetings and to attend and vote at our general meetings of shareholders. At a general
meeting, every shareholder present (in person or by proxy, attorney or representative) and entitled to vote has one vote on a show of hands. Every shareholder present (in person or by proxy, attorney or representative) and entitled to vote has one
vote per fully paid ordinary share on a poll. This is subject to any other rights or restrictions which may be attached to any shares. Our ADR holders may instruct the depositary to vote the ordinary shares underlying their ADRs, but only if we ask
the depositary to ask for their instructions. If we do not ask the depositary to ask for the instructions, our ADR holders are not entitled to receive our notices of general meeting or instruct the depositary how to vote. Our ADR holders will not be
entitled to attend and vote at a general meeting unless they withdraw the ordinary shares. However, our ADR holders may not know about the meeting enough in advance to withdraw the shares. If we ask for our ADR holders instructions, the
depositary will notify our ADR holders of the upcoming vote and arrange to deliver our voting materials and form of notice to them. The depositary will try, as far as practical, subject to Australian law and the provisions of the depositary
agreement, to vote the shares as our ADR holders instruct. The depositary will not vote or attempt to exercise the right to vote other than in accordance with the instructions of the ADR holders. We cannot assure our ADR holders that they will
receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. In addition, there may be other circumstances in which our ADR holders may not be able to exercise voting rights.

Our ADR holders do not have the same rights to receive dividends or other distributions as our shareholders. Subject to any special rights or
restrictions attached to a share, the directors may determine that a dividend will be payable on a share and fix the amount, the time for payment and the method for payment (although



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##### Table of Contents

we have never declared or paid any cash dividends on our ordinary stock and we do not anticipate paying any cash dividends in the foreseeable future).
Dividends may be paid on shares of one class but not another and at different rates for different classes. Dividends and other distributions payable to our shareholders with respect to our ordinary shares generally will be payable directly to them.
Any dividends or distributions payable with respect to ordinary shares will be paid to the depositary, which has agreed to pay to our ADR holders the cash dividends or other distributions it or the custodian receives on shares or other deposited
securities, after deducting its fees and expenses. Our ADR holders will receive these distributions in proportion to the number of shares their ADSs represent. In addition, there may be certain circumstances in which the depositary may not pay to
our ADR holders amounts distributed by us as a dividend or distribution.

There are circumstances where it may be unlawful or impractical to make
distributions to the holders of our ADRs.

The deposit agreement with the depositary allows the depositary to distribute the foreign
currency only to those ADR holders to whom it is possible to do so. If a distribution is payable by us in Australian dollars, the depositary will hold the foreign currency it cannot convert for the account of the ADR holders who have not been paid.
It will not invest the foreign currency and it will not be liable for any interest. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, our ADR holders may lose some of the value of the
distribution.

The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any
ADR holders. This means that our ADR holders may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for us or the depositary to make them available to them.



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##### Table of Contents

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



|A. | Consolidated Statements and Other Financial Information
|-- | -------------------------------------------------------

Our financial statements are included as Item 18 of this registration statement on Form 20-F.

Legal Proceedings

We are not involved in any significant legal, arbitration or governmental proceedings. We are not aware of any pending significant legal, arbitration
or governmental proceedings with respect to the Company.

Dividend Policy

We have never declared or paid any cash dividends on our ordinary stock and we do not anticipate paying any cash dividends in the foreseeable
future. Dividends may only be paid out of our profits. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors or, if our directors do not exercise their power to issue dividends, our
shareholders in a general meeting may exercise the powers. See Item 10. Additional Information  B. Constitution Dividends.



|B. | Significant Changes
|-- | -------------------

None



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##### Table of Contents

PART III



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

The financial statements are
included as the F pages attached to this report



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

The following exhibits are filed as part
of this report



|            |  |                                                                                                                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                      
|1.1         |  | Constitution*                                                                                                                                                                                                    
|            | 
|2.1         |  | Form of American Depositary Receipt (included in Exhibit 2.2) *                                                                                                                                                  
|            | 
|2.2         |  | Form of Depositary Agreement (Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-120026) filed by the Company with the Commission on
October 28, 2004)                            
|            | 
|4.1         |  | Form of Deed of Access to Documents and Indemnity entered into with Company Directors and Company Secretary*                                                                                                     
|            | 
|4.2         |  | Form of Employment Agreement entered into with Company Officers*                                                                                                                                                 
|            | 
|4.3         |  | Lease dated August 22, 2006 between Trust Company of Australia Ltd and the Company**                                                                                                                             
|            | 
|4.4         |  | Agreement dated October 14, 1999 between ANU Enterprises Pty Ltd (formerly Anutech Pty Ltd) and the Company (formerly Praxis Pharmaceuticals Australia Pty Ltd), as amended*                                     
|            | 
|4.5         |  | Patent License Agreement dated October 10, 2001 between the Company (formerly Praxis Pharmaceuticals Australia Pty Ltd) and Sydney South West Area Health Service (formerly Central Sydney
Area Health Service) *
|            | 
|4.6         |  | Service Agreement dated December 9, 2002 between ANU Enterprises Pty Ltd (formerly Anutech Pty Ltd) and the Company, as amended*                                                                                 
|            | 
|4.7         |  | R&D Start Grant Program Grant Agreement dated June 17, 2003 between the Commonwealth of Australia (acting through the Industry Research and Development Board) and the
Company*                                  
|            | 
|4.8         |  | Pharmaceuticals Partnerships Program P3Funding Agreement
dated August 12, 2004 between the Commonwealth of Australia (represented by the Department of Industry, Tourism and Resources) and the Company*         
|            | 
|11.         |  | Code of Conduct**                                                                                                                                                                                                
|            | 
|12.         |  | Certification required by Rule 13a-14(a)                                                                                                                                                                         
|            | 
|13.         |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                           
|            | 
|15.         |  | Consent of PricewaterhouseCoopers.                                                                                                                                                                               

---

|* | Incorporated by reference to our Registration Statement on Form F-1 (File No. 000-51505)
|- | ----------------------------------------------------------------------------------------

|** | Incorporated by reference to our Form 20F filed on December 6, 2006
|-- | -------------------------------------------------------------------



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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 registration statement on its behalf.



PHARMAXIS LTDBy:

/s/ David M. McGarveyName:

David M. McGarveyTitle:

Chief Financial Officer


Date: June 4, 2007



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##### Table of Contents

Index to Financial Statements



|                                                                                                                                            |  |     
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of PricewaterhouseCoopers, Independent Registered Public Accounting Firm                                                             |  | F-2 
|Balance Sheets as of June 30, 2005 and 2006                                                                                                 |  | F-3 
|Statements of Operations for the years ended June 30, 2004, 2005 and 2006 and for the period from inception (May 29, 1998) to June 30, 2006 |  | F-4 
|Statements of Changes in Shareholders (Deficit) Equity for the period from inception (May 29, 1998) to June 30, 2006                       |  | F-5 
|Statements of Cash Flows for the years ended June 30, 2004, 2005 and 2006 and for the period from inception (May 29, 1998) to June 30, 2006 |  | F-6 
|Notes to Financial Statements                                                                                                               |  | F-7 
|Schedule II  Valuation and Qualifying Accounts                                                                                             |  | F-22



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Pharmaxis Ltd:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders (deficit) equity
and cash flows present fairly, in all material respects, the financial position of Pharmaxis Ltd and its subsidiary (a development stage enterprise) at June 30, 2006 and 2005, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2006 and, cumulatively, for the period from May 29, 1998 (date of inception) to June 30, 2006 in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule represents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and the financial
statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule 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 and the
financial statement schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



|                                                        
|--------------------------------------------------------
|                                                        
|/s/ PricewaterhouseCoopers                              
|                                                        
|PricewaterhouseCoopers Sydney, Australia 5 December 2006



F-2



---

##### Table of Contents

Pharmaxis Ltd

(A Development Stage Enterprise)

Balance Sheets

(Australian dollars)



|                                                                                                                   |  |                                   |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | --------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                   |  | As of June 30,                    |        
|                                                                                                                   |  | 2005                              |         |   | 2006 |  
|                                                                                                                   |  | (in thousands, except share data) |        
|ASSETS                                                                                                             |  |                                   |         |   |      |   |         |  
|Current assets:                                                                                                    |  |                                   |         |   |      |   |         |  
|Cash and cash equivalents                                                                                          |  | $                                 | 33,268  |   |      | $ | 97,840  |  
|Grant receivable                                                                                                   |  |                                   | 106     |   |      |   | 400     |  
|Accounts receivable                                                                                                |  |                                   |        |   |      |   | 7       |  
|Inventory                                                                                                          |  |                                   |        |   |      |   | 100     |  
|Other current assets                                                                                               |  |                                   | 718     |   |      |   | 964     |  
|                                                                                                                   |  |                                   |         |   |      |   |         |  
|Total current assets                                                                                               |  |                                   | 34,092  |   |      |   | 99,311  |  
|Property, plant and equipment, net                                                                                 |  |                                   | 2,376   |   |      |   | 3,289   |  
|Intangible assets, net                                                                                             |  |                                   | 1,106   |   |      |   | 1,057   |  
|Other long-term assets                                                                                             |  |                                   | 262     |   |      |   | 556     |  
|                                                                                                                   |  |                                   |         |   |      |   |         |  
|Total assets                                                                                                       |  | $                                 | 37,836  |   |      | $ | 104,213 |  
|                                                                                                                   |  |                                   |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                               |  |                                   |         |   |      |   |         |  
|Current liabilities:                                                                                               |  |                                   |         |   |      |   |         |  
|Accounts payable                                                                                                   |  | $                                 | 757     |   |      | $ | 813     |  
|Accrued compensation                                                                                               |  |                                   | 484     |   |      |   | 844     |  
|Accrued clinical development liabilities                                                                           |  |                                   | 546     |   |      |   | 3,013   |  
|Income tax payable                                                                                                 |  |                                   |        |   |      |   | 5       |  
|Other accrued liabilities                                                                                          |  |                                   | 582     |   |      |   | 650     |  
|                                                                                                                   |  |                                   |         |   |      |   |         |  
|Total current liabilities                                                                                          |  |                                   | 2,369   |   |      |   | 5,325   |  
|Commitments and Contingencies (Refer to note 14)                                                                   |  |                                   |         |   |      |   |         |  
|Shareholders equity:                                                                                              |  |                                   |         |   |      |   |         |  
|Ordinary shares, $Nil par value; 134,770,092 and 176,903,592 shares issued at June 30, 2005 and 2006, respectively |  |                                   | 56,339  |   |      |   | 137,492 |  
|Foreign currency translation reserve                                                                               |  |                                   |        |   |      |   | 1       |  
|Deficit accumulated during the development stage                                                                   |  |                                   | (20,872 | ) |      |   | (38,605 | )
|                                                                                                                   |  |                                   |         |   |      |   |         |  
|Total shareholders equity                                                                                         |  |                                   | 35,467  |   |      |   | 98,888  |  
|                                                                                                                   |  |                                   |         |   |      |   |         |  
|Total liabilities and shareholders equity                                                                         |  | $                                 | 37,836  |   |      | $ | 104,213 |  
|                                                                                                                   |  |                                   |         |   |      |   |         |  

See accompanying notes to the financial statements.



F-3



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##### Table of Contents

Pharmaxis Ltd

(A Development Stage Enterprise)

Statements of Operations

(Australian dollars)



|                                                            |  |                                       |        |   |                                                  |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Years ended June 30,                  |        |   | Periodfrominception(May 29,1998)
toJune 30, 2006 |  
|                                                            | 
|                                                            |  | 2004                                  |        |   | 2005                                             |   |         | 2006 |  |  
|                                                            |  | (in thousands, except per share data) |       
|Revenue                                                     |  | $                                     |       |   |                                                  | $ |        |      |  | $ | 8       |   |  | $ | 8       |  
|Cost of goods sold                                          |  |                                       |       |   |                                                  |   |        |      |  |   | 2       |   |  |   | 2       |  
|                                                            |  |                                       |        |   |                                                  |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                                |  |                                       |       |   |                                                  |   |        |      |  |   | 6       |   |  |   | 6       |  
|Operating expenses:                                         |  |                                       |        |   |                                                  |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                    |  |                                       | 4,806  |   |                                                  |   | 7,885   |      |  |   | 14,982  |   |  |   | 29,646  |  
|General and administrative                                  |  |                                       | 2,182  |   |                                                  |   | 3,105   |      |  |   | 4,005   |   |  |   | 10,555  |  
|Commercial                                                  |  |                                       |       |   |                                                  |   | 807     |      |  |   | 1,764   |   |  |   | 2,571   |  
|Amortization of intangible assets                           |  |                                       | 89     |   |                                                  |   | 90      |      |  |   | 136     |   |  |   | 621     |  
|Fair value of stock options issued to employees related to: |  |                                       |        |   |                                                  |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                    |  |                                       | 253    |   |                                                  |   | 115     |      |  |   | 613     |   |  |   | 1,366   |  
|Commercial                                                  |  |                                       |       |   |                                                  |   | 116     |      |  |   | 175     |   |  |   | 291     |  
|General and administrative                                  |  |                                       | 279    |   |                                                  |   | 29      |      |  |   | 335     |   |  |   | 862     |  
|                                                            |  |                                       |        |   |                                                  |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                    |  |                                       | 7,609  |   |                                                  |   | 12,147  |      |  |   | 22,011  |   |  |   | 45,913  |  
|                                                            |  |                                       |        |   |                                                  |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                        |  |                                       | (7,609 | ) |                                                  |   | (12,147 | )    |  |   | (22,005 | ) |  |   | (45,907 | )
|Interest and other income                                   |  |                                       | 1,123  |   |                                                  |   | 1,702   |      |  |   | 4,282   |   |  |   | 7,538   |  
|Foreign currency gain (loss)                                |  |                                       |       |   |                                                  |   |        |      |  |   | (5      | ) |  |   | (5      | )
|Amortization of preference share issue expenses             |  |                                       | (161   | ) |                                                  |   |        |      |  |   |        |   |  |   | (226    | )
|                                                            |  |                                       |        |   |                                                  |   |         |      |  |   |         |   |  |   |         |  
|Net loss before income tax                                  |  | $                                     | (6,647 | ) |                                                  | $ | (10,445 | )    |  | $ | (17,728 | ) |  | $ | (38,600 | )
|Income tax expense                                          |  |                                       |       |   |                                                  |   |        |      |  |   | (5      | ) |  |   | (5      | )
|Net loss                                                    |  | $                                     | (6,647 | ) |                                                  | $ | (10,445 | )    |  | $ | (17,733 | ) |  | $ | (38,605 | )
|                                                            |  |                                       |        |   |                                                  |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                        |  | $                                     | (0.09  | ) |                                                  | $ | (0.08   | )    |  | $ | (0.11   | ) |  | $ | (0.78   | )

See accompanying notes to the financial statements.



F-4



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##### Table of Contents

Pharmaxis Ltd

(A Development Stage Enterprise)

Statements of Changes in Shareholders (Deficit) Equity

(Australian
dollars)



|                                                                                                                                                                                    |  |                                   |   |                    |        |         |                                   |   |                                    |   |  |   |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | - | ------------------ | ------ | ------- | --------------------------------- | - | ---------------------------------- | - |  | - | - |  | - | ------- | -
|                                                                                                                                                                                    |  | Ordinary shares                   |   | AccumulatedDeficit |        |         | ForeignCurrencyTranslationReserve |   | Total Shareholders(Deficit)Equity |  
|                                                                                                                                                                                    |  | Shares                            |   |                    | Amount |         |                                   |  
|                                                                                                                                                                                    |  | (in thousands, except share data) |   |                    |       
|Balance at inception (May 29, 1998)                                                                                                                                                 |  |                                  |   |                    |        |        |                                   |   |                                   |   |  |   |  |  |   |        |  
|Issuance of ordinary shares at $0.125 per share for cash on incorporation of the Company in May 1998                                                                                |  | 808                               |   |                    |        |        |                                   |   |                                   |   |  |   |  |  |   |        |  
|Issuance of ordinary shares at $0.125 per share as consideration for patent license                                                                                                 |  | 11,200,000                        |   |                    |        | 1,400   |                                   |   |                                   |   |  |   |  |  |   |        |  
|Fair value of stock options issued to directors and employees in year ended June 30, 2000                                                                                           |  |                                  |   |                    |        | 74      |                                   |   |                                   |   |  |   |  |  |   |        |  
|Fair value of stock options issued to directors and employees in year ended June 30, 2001                                                                                           |  |                                  |   |                    |        | 77      |                                   |   |                                   |   |  |   |  |  |   |        |  
|Fair value of stock options issued to directors and employees in year ended June 30, 2002                                                                                           |  |                                  |   |                    |        | 70      |                                   |   |                                   |   |  |   |  |  |   |        |  
|Net loss for period from inception to June 30, 2002                                                                                                                                 |  |                                  |   |                    |        |        |                                   |   | (1,667                             | ) |  |   |  |  |   |        |  
|Cancellation of common stock                                                                                                                                                        |  | (808                              | ) |                    |        |        |                                   |   |                                   |   |  |   |  |  |   |        |  
|Fair value of stock options issued to directors and employees                                                                                                                       |  |                                  |   |                    |        | 383     |                                   |   |                                   |   |  |   |  |  |   |        |  
|Net loss                                                                                                                                                                            |  |                                  |   |                    |        |        |                                   |   | (2,113                             | ) |  |   |  |  |   |        |  
|                                                                                                                                                                                    |  |                                   |   |                    |        |         |                                   |   |                                    |   |  |   |   |  |   |         |  
|Balance at June 30, 2003                                                                                                                                                            |  | 11,200,000                        |   |                    |        | 2,004   |                                   |   | (3,780                             | ) |  |   |  |  |   | (1,776  | )
|Conversion of A and B class convertible redeemable preference shares to ordinary shares                                                                                         |  | 46,816,000                        |   |                    |        | 11,631  |                                   |   |                                   |   |  |   |  |  |   | 11,631  |  
|Issuance of ordinary shares at $0.50 per share for cash in initial public offering of Company in Australia in November 2003, net of issuance
costs                                  |  | 50,000,000                        |   |                    |        | 22,891  |                                   |   |                                   |   |  |   |  |  |   | 22,891  |  
|Fair value of stock options issued to directors and employees                                                                                                                       |  |                                  |   |                    |        | 532     |                                   |   |                                   |   |  |   |  |  |   | 532     |  
|Net loss                                                                                                                                                                            |  |                                  |   |                    |        |        |                                   |   | (6,647                             | ) |  |   |  |  |   | (6,647  | )
|                                                                                                                                                                                    |  |                                   |   |                    |        |         |                                   |   |                                    |   |  |   |   |  |   |         |  
|Balance at June 30, 2004                                                                                                                                                            |  | 108,016,000                       |   |                    |        | 37,058  |                                   |   | (10,427                            | ) |  |   |  |  |   | 26,631  |  
|Issuance of ordinary shares at $0.75 per share for cash in private placement to Australian institutional and sophisticated investors closed in
December 2004, net of issuance costs |  | 22,000,000                        |   |                    |        | 15,702  |                                   |   |                                   |   |  |   |  |  |   | 15,702  |  
|Share purchase plan closed in December 2004 at $0.75 per share, net of issuance costs                                                                                               |  | 4,362,092                         |   |                    |        | 3,256   |                                   |   |                                   |   |  |   |  |  |   | 3,256   |  
|Issuance of ordinary shares upon exercise of employee options                                                                                                                       |  | 392,000                           |   |                    |        | 63      |                                   |   |                                   |   |  |   |  |  |   | 63      |  
|Fair value of stock options issued to directors and employees                                                                                                                       |  |                                  |   |                    |        | 260     |                                   |   |                                   |   |  |   |  |  |   | 260     |  
|Net loss                                                                                                                                                                            |  |                                  |   |                    |        |        |                                   |   | (10,445                            | ) |  |   |  |  |   | (10,445 | )
|                                                                                                                                                                                    |  |                                   |   |                    |        |         |                                   |   |                                    |   |  |   |   |  |   |         |  
|Balance at June 30, 2005                                                                                                                                                            |  | 134,770,092                       |   |                    | $      | 56,339  |                                   | $ | (20,872                            | ) |  |   |  |  | $ | 35,467  |  
|Issuance of ordinary shares at $2.1899 per share cash in public offering to U.S. public investors closed in November 2005, net of issuance
costs                                    |  | 19,500,000                        |   |                    |        | 38,154  |                                   |   |                                   |   |  |   |  |  |   | 38,154  |  
|Issuance of ordinary shares at $2.20 per share for cash in private placement to Australian institutional and sophisticated investors closed in
November 2005, net of issuance costs |  | 19,900,000                        |   |                    |        | 41,278  |                                   |   |                                   |   |  |   |  |  |   | 41,278  |  
|Issuance of ordinary shares upon exercise of employee options                                                                                                                       |  | 2,733,500                         |   |                    |        | 598     |                                   |   |                                   |   |  |   |  |  |   | 598     |  
|Fair value of stock options issued to directors and employees                                                                                                                       |  |                                  |   |                    |        | 1,123   |                                   |   |                                   |   |  |   |  |  |   | 1,123   |  
|Net loss                                                                                                                                                                            |  |                                  |   |                    |        |        |                                   |   | (17,733                            | ) |  |   |  |  |   | (17,733 | )
|Gain on translation of foreign currency net assets                                                                                                                                  |  |                                  |   |                    |        |        |                                   |   |                                   |   |  |   | 1 |  |   | 1       |  
|Balance at June 30, 2006                                                                                                                                                            |  | 176,903,592                       |   |                    | $      | 137,492 |                                   | $ | (38,605                            | ) |  | $ | 1 |  | $ | 98,888  |  
|                                                                                                                                                                                    |  |                                   |   |                    |        |         |                                   |   |                                    |   |  |   |   |  |   |         |  

See accompanying notes to the financial statements.



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##### Table of Contents

Pharmaxis Ltd

(A Development Stage Enterprise)

Statements of Cash Flows

(Australian dollars)



|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | - | ----------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                        |  | Years ended June 30, |        |   | Periodfrominceptionto June 30, 2006 |  
|                                                                                                        | 
|                                                                                                        |  | 2004                 |        |   | 2005                                |   |         | 2006 |  |  
|                                                                                                        |  | (in thousands)       |       
|Cash flows from operating activities:                                                                   |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                                                                |  | $                    | (6,647 | ) |                                     | $ | (10,445 | )    |  | $ | (17,733 | ) |  | $ | (38,605 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                             |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Depreciation and impairment of plant & equipment                                                        |  |                      | 353    |   |                                     |   | 489     |      |  |   | 763     |   |  |   | 1,827   |  
|Amortization and impairment of intangible assets                                                        |  |                      | 89     |   |                                     |   | 90      |      |  |   | 137     |   |  |   | 622     |  
|Amortization of preference share issue expenses                                                         |  |                      | 161    |   |                                     |   |        |      |  |   |        |   |  |   | 226     |  
|Write-off of non-current assets                                                                         |  |                      |       |   |                                     |   |        |      |  |   | 40      |   |  |   | 40      |  
|Fair value of stock options issued for service                                                          |  |                      | 532    |   |                                     |   | 260     |      |  |   | 1,124   |   |  |   | 2,520   |  
|Change in assets and liabilities:                                                                       |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Accounts receivable                                                                                     |  |                      |       |   |                                     |   |        |      |  |   | (7      | ) |  |   | (7      | )
|Inventory                                                                                               |  |                      |       |   |                                     |   |        |      |  |   | (100    | ) |  |   | (100    | )
|Prepaid expenses and other current assets                                                               |  |                      | (180   | ) |                                     |   | (454    | )    |  |   | (246    | ) |  |   | (964    | )
|Grant receivable                                                                                        |  |                      | 63     |   |                                     |   | (106    | )    |  |   | (294    | ) |  |   | (400    | )
|Other long-term assets                                                                                  |  |                      | (16    | ) |                                     |   | (2      | )    |  |   | (294    | ) |  |   | (556    | )
|Accounts payable                                                                                        |  |                      | 132    |   |                                     |   | 512     |      |  |   | 56      |   |  |   | 813     |  
|Accrued compensation                                                                                    |  |                      | 196    |   |                                     |   | 190     |      |  |   | 67      |   |  |   | 551     |  
|Accrued clinical development liabilities                                                                |  |                      | 793    |   |                                     |   | (260    | )    |  |   | 2,468   |   |  |   | 3,014   |  
|Income tax payable                                                                                      |  |                      |       |   |                                     |   |        |      |  |   | 5       |   |  |   | 5       |  
|Other accrued liabilities                                                                               |  |                      | (244   | ) |                                     |   | 446     |      |  |   | 361     |   |  |   | 943     |  
|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Net cash used in operating activities                                                                   |  |                      | (4,768 | ) |                                     |   | (9,280  | )    |  |   | (13,653 | ) |  |   | (30,071 | )
|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Cash flows from investing activities:                                                                   |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Purchases of property, plant and equipment                                                              |  |                      | (360   | ) |                                     |   | (1,541  | )    |  |   | (1,716  | ) |  |   | (5,156  | )
|Payment for patent and trademark applications                                                           |  |                      | (46    | ) |                                     |   | (33     | )    |  |   | (88     | ) |  |   | (279    | )
|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Net cash used in investing activities                                                                   |  |                      | (406   | ) |                                     |   | (1,574  | )    |  |   | (1,804  | ) |  |   | (5,435  | )
|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Cash flows from financing activities:                                                                   |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Proceeds from issuance of ordinary shares, net of issuance costs                                        |  |                      | 22,891 |   |                                     |   | 18,958  |      |  |   | 79,432  |   |  |   | 121,281 |  
|Proceeds from issuance of ordinary shares from the exercise of employee options                         |  |                      |       |   |                                     |   | 63      |      |  |   | 597     |   |  |   | 660     |  
|Proceeds from issuance of A class convertible redeemable preference shares, net of issuance costs     |  |                      |       |   |                                     |   |        |      |  |   |        |   |  |   | 2,000   |  
|Proceeds from issuance of B class convertible redeemable preference shares, net of issuance costs     |  |                      |       |   |                                     |   |        |      |  |   |        |   |  |   | 9,405   |  
|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Net cash provided by financing activities                                                               |  |                      | 22,891 |   |                                     |   | 19,021  |      |  |   | 80,029  |   |  |   | 133,346 |  
|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Net increase in cash and cash equivalents                                                               |  |                      | 17,717 |   |                                     |   | 8,167   |      |  |   | 64,572  |   |  |   | 97,840  |  
|Cash and cash equivalents at beginning of period                                                        |  |                      | 7,384  |   |                                     |   | 25,101  |      |  |   | 33,268  |   |  |   |        |  
|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Cash and cash equivalents at end of period                                                              |  | $                    | 25,101 |   |                                     | $ | 33,268  |      |  | $ | 97,840  |   |  | $ | 97,840  |  
|                                                                                                        |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Supplemental non-cash activities:                                                                       |  |                      |        |   |                                     |   |         |      |  |   |         |   |  |   |         |  
|Issuance of ordinary shares on conversion of A and B class convertible redeemable preference shares |  | $                    | 11,631 |   |                                     | $ |        |      |  | $ |        |   |  | $ | 11,631  |  

See accompanying notes to the financial statements.



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##### Table of Contents

Pharmaxis Ltd

(A Development Stage Enterprise)

Notes to Financial Statements

(for the years ended June 30, 2004, 2005
and 2006 and for the period from inception

(May 29, 1998) to June 30, 2006)

(in A$ thousands, except share and per share amounts)

1. Organization of the Company

Pharmaxis Ltd (the Company) was incorporated on May 29, 1998 in the Australian Capital
Territory, Australia. On June 6, 2002 the Company changed its name from Praxis Pharmaceuticals Australia Pty Ltd to Pharmaxis Pty Ltd. On September 5, 2003 the Company changed its name from Pharmaxis Pty Ltd to Pharmaxis Ltd. The Company
was listed on the Australian Stock Exchange on November 10, 2003 following its initial public offering and on the NASDAQ Global Market on August 29, 2005.

The Companys primary activities since incorporation have been the purchase of a license for our autoimmune technology from the Australian National University; conducting research in the area of autoimmune
diseases; the filing of five new patent families; commencing preclinical development of one autoimmune candidate (PXS25); obtaining a license for our respiratory technology from the Sydney South West Area Health Service; establishing our own
manufacturing facility for the production of Aridol and Bronchitol to standards of Good Manufacturing Practice; obtaining a license to manufacture to GMP from the Australian Therapeutics Goods Administration; commencing and successfully completing
an Australian Phase III clinical trial and a U.S. Phase III clinical trial of our lung capacity test Aridol for the diagnosis of the existence and severity of asthma; obtaining regulatory marketing approval in Australian and Sweden, commencing and
successfully completing a 60 patient, four center Phase II clinical trial of Bronchitol for the disease bronchiectasis; commencing and successfully completing a 59 patient, eight center Phase II clinical trial of Bronchitol for the disease cystic
fibrosis; establishing a management team with relevant experience in sales and marketing, manufacturing, clinical trial management, regulatory affairs and finance; initial Aridol sales in Australia and listing the Company on the Australian Stock
Exchange and the NASDAQ Global Market.

2. Basis of Presentation

Pharmaxis Ltd is an Australian company and its operations are located there. Accordingly, its books of account are maintained in Australian dollars and its annual and interim financial statements are prepared in
accordance with Australian International Financial Reporting Standards (AIFRS). These financial statements are presented in accordance with the accounting principles generally accepted in the United States of America (U.S.
GAAP). All amounts are expressed in Australian dollars and are rounded to the nearest thousand, except share and per share data.

The Companys
financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained operating losses since inception and expects such losses to continue as it furthers its research and development programs.

3. Summary of Significant Accounting Policies

Use
of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant management judgment is required to make estimates in relation to: the carrying value and recoverability of intangible assets and property, plant and equipment; the recoverability of deferred income
taxes; and the accruing of liabilities for clinical and preclinical development activities. Actual results could differ from those estimates.



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##### Table of Contents

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany accounts and transactions are eliminated.

Cash and Cash Equivalents

The Company invests its excess cash in bank deposits, money market accounts and bank
accepted commercial bills. The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents.

Bank accepted commercial bills are acquired at a discount to their face value. The bills are carried at cost plus a portion of the discount recognised as income on an effective yield basis. The discount brought to
account each period is accounted for as interest received.

Concentration of Credit Risk and Other Risks and Uncertainties

Cash and cash equivalents consist of financial instruments that potentially subject the Company to concentration of credit risk to the extent of the amount recorded on
the balance sheet. The Companys cash and cash equivalents are invested with three of Australias four largest banks. The Company is exposed to credit risk in the event of default by the banks holding the cash and cash equivalents to the
extent of the amount recorded on the balance sheets. The Company has not experienced any losses on its deposits of cash and cash equivalents.

Product
candidates developed by the Company may require approvals or clearances from the U.S. Food and Drug Administration (FDA) or other international regulatory agencies prior to commercialized sales. There can be no assurance that the
Companys product candidates will receive any of the required approvals or clearances. If the Company was denied approval or clearance or such approval was delayed, it may have a material adverse impact on the Company.

Foreign currency and currency transactions

Monetary assets and
liabilities in foreign currencies are translated into Australian dollars at the rate ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into Australian dollars at the rate of
exchange ruling at the balance sheet date. Transaction gains and losses are recognized in the statement of operations. The Company has no assets denominated in foreign currencies and immediately settles liabilities denominated in foreign currencies.

The Company has recorded foreign currency transaction losses of $0, $0, $5 and $5 for each of the years ended June 30, 2004, 2005 and 2006, and the
period from inception to June 30, 2006, respectively. The Company has recorded foreign currency transaction gains of $0, $0, $0 and $2 for each of the years ended June 30, 2004, 2005 and 2006, and the period from inception to June 30,
2006, respectively.

The Companys functional and reporting currency is the Australian dollar.

Fair Value of Financial Instruments

For financial instruments
consisting of cash and cash equivalents, accounts payable and accrued liabilities included in the Companys financial statements, the carrying amounts are reasonable estimates of fair value due to their short maturities.

Property, Plant and Equipment

Property, plant and equipment are
recorded at acquisition cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the related assets, which are generally three to ten years.
Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related assets, typically three years. Maintenance and repairs are charged to
operations as incurred.

The Company receives grants under certain government research agreements to purchase plant and equipment. The grants are
recognized against the acquisition costs of the related plant and equipment as and when the related assets



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##### Table of Contents

are purchased. Grants received in advance of the relevant expenditure are treated as deferred research grants and included in Other Accrued Liabilities on
the balance sheet as the Company does not control the monies until the relevant expenditure has been incurred. Grants due to the Company under research agreements are recorded as receivables and included on the balance sheet.

Impairment of Long-Lived Assets

The Company reviews its capital
assets, including patents and licenses, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. In performing the review, the Company estimates undiscounted
cash flows from products under development that are covered by these patents and licenses. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition
is less than the carrying amount of the asset. Impairment, if any, is measured as the amount by which the carrying amount of the asset exceeds its fair value. Impairment, if any, is assessed using discounted cash flows. Related patents are grouped
in estimating future cash flows to determine whether patents are impaired and in measuring the amount of the impairment.,

Interest Income

Interest revenue is recognized as it accrues, taking into account the effective yield on the financial instruments.

Research and Development

Research and development expenses consist
of costs incurred to further the Companys research and development activities and include salaries and related employee benefits, costs associated with clinical trials and preclinical development, regulatory activities, research-related
overhead expenses, costs associated with the manufacture of clinical trial material, costs associated with developing a commercial manufacturing process, costs for consultants and related contract research, facility costs and depreciation. Research
and development costs are expensed as incurred.

The Company has received grants under certain government research agreements that partially fund eligible
research expenditure on certain of the Companys research projects. The grants are recognized against the related research and development expenses as and when the relevant research expenditure is incurred. Grants received in advance of
incurring the relevant expenditure are treated as deferred research grants and included in Other Accrued Liabilities on the balance sheet as the Company does not control the monies until the relevant expenditure has been incurred. Grants due to the
Company under research agreements are recorded as receivables and included on the balance sheet.

Patent and License Costs

Costs to purchase patent licenses and application costs for new patents are capitalised and amortised over the life of the patent. All of the Companys patents and
licenses have finite lives with the remaining lives ranging from 9 to 20 years at June 30, 2006.

Clinical Trial Expenses

Clinical trial costs are a component of research and development expense. These expenses include fees paid to participating hospitals and other service providers, which
conduct certain product development activities on behalf of the Company. Depending on the timing of payments to the service providers and the level of service provided, the Company records prepaid or accrued expenses relating to these costs.

These prepaid or accrued expenses are based on estimates of the work performed under service agreements, milestones achieved, patient enrollment and
experience with similar contracts. Changes in these estimates are recognized in income in the period of change.



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##### Table of Contents

Leased Assets

All of
the Companys leases for the years ended June 30, 2004, 2005, and 2006 are considered operating leases. The costs of operating leases are charged to the statement of operations on a straight-line basis over the lease term.

Pension Costs

As required by Australian law, the Company contributes
to standard defined contribution superannuation funds on behalf of all employees at an amount up to nine percent of each such employees salary. Superannuation is a compulsory savings program whereby employers are required to pay a portion of
an employees remuneration to an approved superannuation fund that the employee is typically not able to access until they are retired. The Company permits employees to choose an approved and registered superannuation fund into which the
contributions are paid. Contributions are charged to the statement of operations as they become payable.

Income Taxes

The Company applies Statement of Financial Accounting Standards No. 109  Accounting for Income Taxes (SFAS 109) which establishes financial accounting and
reporting standards for the effects of income taxes that result from a companys activities during the current and preceding years. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets also are recognized for credit carryforwards. Deferred tax assets and liabilities are measured using the
enacted rates applicable to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. An assessment is made as to whether or not it is more likely than not that deferred tax assets are recoverable. This assessment includes anticipating future taxable income and the Companys
tax planning strategies and is made on an ongoing basis. Consequently, future material changes in the valuation allowance are possible.

Net Loss Per
Share and Anti-dilutive Securities

Basic and diluted net loss per share are presented in conformity with Statement of Financial Accounting Standards
No, 128  Earnings Per Share (SFAS 128). Basic and diluted net loss per share have been computed using the weighted-average number of ordinary shares outstanding during the period. All the share information presented for the fiscal year 2004
and for the period from inception to June 30, 2006 have been retroactively adjusted to give effect to the 8 for 1 share split in November 2003. The potentially dilutive options issued under the Pharmaxis Employee Option Plan and the
A and B class convertible redeemable preference shares were not considered in the computation of diluted net loss per share because they would be anti-dilutive.

Sales Revenue

Sales revenue is measured at the fair value of the consideration received or receivable. Amounts
disclosed as revenue are net of returns and sales deductions such as discounts and incentives. Revenue from the sale of goods is recorded when goods have been dispatched and title passes to the customer.

Inventory

Raw materials, work in progress and finished goods are
stated at the lower of cost or market. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Costs are assigned
to individual items of inventory on basis of weighted average costs. Costs of purchased inventory are determined after deducting rebates and discounts.

Stock-based Compensation

Prior to 2006, the Company accounted for stockbased compensation utilizing the fair value recognition
provisions of SFAS No. 123. Under SFAS No. 123, stockbased compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period.



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##### Table of Contents

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R ShareBased
Payment. SFAS No 123R is a revision of SFAS No. 123 Accounting for StockBased Compensation. Among other items, SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R is the first annual reporting period beginning after June 15, 2005. SFAS 123R permits companies to adopt its
requirements using a modified prospective method. Under the modified prospective method, stock-based compensation is recognized for new awards, the modification, repurchase or cancellation of awards, and the remaining portion
of service under previously granted, unvested awards outstanding as of the date of adoption. Under the modified retrospective method, the requirements are the same as under the modified prospective method, but also permits
entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123. The Company adopted SFAS 123R beginning July 1, 2006 using the modified prospective method therefore, prior
periods were not restated. There were no transitional adjustments on adoption of SFAS 123(R)

Prior to 2006, the Company utilized a standard option pricing
model, such as Black-Scholes, to measure the fair value of stock options granted to employees. The following assumptions were used to estimate the fair value of the options outstanding: dividend yield and expected volatility of 50%, risk free rate
between 5.15% and 6.45%, and expected lives of 6 years.

Effective July 1, 2006, the Company adopted the provisions of SFAS 123R using the
graded-vesting attribution method. Under this method, the Company recognizes compensation cost related to service based awards ratably over the requisite service period.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, Accounting for Income Taxes, which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and
disclosure. The provisions of FIN 48 are effective beginning January 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the possible
impact of FIN 48 on our consolidated financial statements.

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how the effects of the carryover or reversal of prior
year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income
statement was misstated (rollover method) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (iron curtain method). Reliance on either method in prior years could have resulted
in misstatement of the financial statements. The guidance provided in SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after
adoption. The cumulative effect of the correction would be reflected in the opening balance sheet with appropriate disclosure of the nature and amount of each individual error corrected in the cumulative adjustment, as well as a disclosure of the
cause of the error and that the error had been deemed to be immaterial in the past. We believe that SAB 108 will not have a material impact on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). This Statement defines fair value as used in numerous accounting
pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosure related to the use of fair value measures in financial statements. SFAS No. 157 does not expand the use
of fair value measures in financial statements, but standardizes its definition and guidance in



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##### Table of Contents

GAAP. The Standard emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which
the entity sells an asset or transfers a liability (exit price). SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entitys own fair value assumptions as the lowest
level. The Statement is to be effective for our financial statements issued in 2008; however, earlier application is encouraged. We believe that SFAS No. 157 will not have a material impact on our consolidated financial statements.

In September 2006 the FASB also issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan
amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after December 15, 2006. Because we do not have a defined benefit pension plan or other qualifying post retirement plan our adoption of SFAS No. 158 is not expected to have a material
effect on our consolidated financial position or results of operations.

In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154  Accounting Changes and Error Corrections (SFAS 154), a replacement of Accounting Principles Board Opinion No. 20 (APB 20) and Statement No. 3 (SFAS 3), which previously addressed
accounting changes. SFAS 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted
accounting principle. SFAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS 154 carries
forward without change the guidance in APB 20 for reporting the correction of an error in previously issued financial statements. SFAS 154 will be effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The adoption of this standard will not have a material impact on the Companys financial statements.

4. Related Party
Transactions

In November 2003, The Principals Funds Management Pty Ltd, an entity in which the Companys directors DM Hanley and CPH Kiefel hold
shares, was paid a fee of $45 by Wilson HTM Corporate Finance Ltd, the underwriter and lead manager of the Companys Australian initial public offering, as consideration for a firm commitment by The Principals Funds Management Pty Ltd to
subscribe for shares in the Australian initial public offering.

B.H. Smith is associated with GBS Venture Partners Ltd, The Australian Bioscience Trust
and Bioscience Ventures II. Perpetual Trustees Nominees, as trustee of The Australian Bioscience Trust, received 45,000 shares from Wilson HTM Corporate Finance Ltd as consideration for a firm commitment to subscribe for shares in the Australian
initial public offering in November 2003. GBS Venture Partners Ltd, as trustee and manager of Bioscience Ventures II, received 180,000 shares from Wilson HTM Corporate Finance Ltd as consideration for a firm commitment to subscribe for shares in the
Australian initial public offering in November 2003.

C.J. Hillyard is associated with CM Capital Investments Pty Ltd, CM Capital Venture Trust No. 3,
CIBC Australia Fund LLC and the Australia Venture Capital Fund L.P. CM Capital Investments Pty Ltd, as trustee of the CM Capital Venture Trust No. 3, received 171,777 shares from Wilson HTM Corporate Finance Ltd as consideration for a firm
commitment to subscribe for shares in the Australian initial public offering in November 2003. CIBC Australia Fund LLC, as general partner of the Australia Venture Capital Fund L.P., received 53,223 shares from Wilson HTM Corporate Finance Ltd as
consideration for a firm commitment to subscribe for shares in the Australian initial public offering in November 2003.

Messrs. Hanley and Kiefel are
directors and shareholders of The Principal Funds Management Pty Ltd. Cameron Billingsley of PFM Legal Pty Ltd, our primary legal counsel in Australia, serves as a director of The Principal Funds Management Pty Ltd. We paid PFM Legal Pty Ltd $Nil,
$108 and $206 for legal services in each of the years ended June 30, 2004, 2005 and 2006 respectively.



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5. Property, Plant and Equipment

Property, plant and equipment consist of the following:



|                                          |  |                |        |   |      |   |        |  
|----------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                          |  | As of June 30, |       
|                                          |  | 2005           |        |   | 2006 |  
|                                          |  | (in thousands) |       
|Plant and equipment                       |  | $              | 2,966  |   |      | $ | 4,772  |  
|Leasehold improvements                    |  |                | 166    |   |      |   | 162    |  
|Motor vehicles                            |  |                | 92     |   |      |   | 114    |  
|Capital work in process                   |  |                | 216    |   |      |   |       |  
|                                          |  |                |        |   |      |   |        |  
|                                          |  |                | 3,440  |   |      |   | 5,048  |  
|Accumulated depreciation and amortization |  |                | (1,064 | ) |      |   | (1,759 | )
|                                          |  |                |        |   |      |   |        |  
|Property, plant and equipment, net        |  | $              | 2,376  |   |      | $ | 3,289  |  
|                                          |  |                |        |   |      |   |        |  

Depreciation and amortization expense was $353, $489, $763 and $1,827 for the fiscal years ended June 30,
2004, 2005 and 2006, and the period from inception to June 30, 2006, respectively. The 2006 expense includes an impairment charge of $109 in relation to an item of plant & equipment that was taken out of service.

6. Intangible Assets

Intangible assets consist of the following:



|                         |  |                |       |   |      |   |       |  
|------------------------ |  | -------------- | ----- | - | ---- | - | ----- | -
|                         |  | As of June 30, |      
|                         |  | 2005           |       |   | 2006 |  
|                         |  | (in thousands) |      
|Patent license           |  | $              | 1,400 |   |      | $ | 1,400 |  
|Patent applications      |  |                | 189   |   |      |   | 174   |  
|Trademark applications   |  |                | 2     |   |      |   | 59    |  
|                         |  |                |       |   |      |   |       |  
|                         |  |                | 1,591 |   |      |   | 1,633 |  
|Accumulated amortization |  |                | (485  | ) |      |   | (576  | )
|                         |  |                |       |   |      |   |       |  
|Intangible assets, net   |  | $              | 1,106 |   |      | $ | 1,057 |  
|                         |  |                |       |   |      |   |       |  

The patent license was acquired in October 1999 from Anutech Pty Limited, an agent for the Australian National
University. A license to the acquired technology was previously held by Praxis Pharmaceuticals Inc, a related party. The license was granted to Pharmaxis Ltd by Anutech at the request of Praxis Pharmaceuticals Inc, in consideration for which Praxis
Pharmaceuticals Inc was issued 1.4 million ordinary shares in the Company. The license was included in long-term assets on the balance sheet at its estimated fair value of $1,400 at the time of the purchase. The patents underlying the license
relate to potential treatments for autoimmune diseases. The license is an exclusive, worldwide sub-licensable license within the field of phosphosugars as ethical therapeutics. A royalty is payable to Anutech, calculated based on revenue, net of
expenses, received by the Company in connection with the Companys use of the related intellectual property. In addition the Company must reimburse Anutech for one third of any costs incurred in filing, maintaining and renewing the patents
underlying the license. Trademark applications included registration of the Aridol and Bronchitol names. The 2006 amortization expense of $137 includes an impairment charge of $46 in relation to Patent Family 6 which was
allowed to lapse.



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##### Table of Contents

7. Other Accrued Liabilities

Other accrued liabilities consist of the following:



|                          |  |                |     |      |   |    
|------------------------- |  | -------------- | --- | ---- | - | ---
|                          |  | As of June 30,
|                          |  | 2005           |     | 2006
|                          |  | (in thousands)
|Deferred research grants  |  | $              | 55  |      | $ |   
|Legal and accounting fees |  |                | 106 |      |   | 199
|Manufacturing consultants |  |                | 230 |      |   | 253
|Other                     |  |                | 191 |      |   | 198
|                          |  |                |     |      |   |    
|                          |  | $              | 582 |      | $ | 650
|                          |  |                |     |      |   |    

8. Sydney South West Area Health Service (SSWAHS) License

In October 2001 the Company obtained an exclusive, worldwide sub-licensable license from SSWAHS in relation to certain patents in the area of respiratory disease. The
term of the SSWAHS license is country specific and is for the longer of 10 years from the first commercial sale of products which exploits the SSWAHS intellectual property in that country until the expiry of the last registered patent in that
country. The Company must bear the cost of maintaining the registered SSWAHS intellectual property and must use its reasonable commercial endeavors to exploit and undertake research and development of the SSWAHS intellectual property. Royalties are
payable by the Company to SSWAHS for the term of the SSWAHS license on net sales of products and services which exploit the SSWAHS intellectual property. No amounts were paid or are payable under the license.

9. Ordinary Shares

In fiscal 2004, as part of the transition to an
Australian listed public company, shareholders approved an 8 for 1 share split of all A and B class convertible redeemable preference shares, ordinary shares and other securities; a change in the Companys status from a
proprietary to a public company; the adoption of a new constitution; and, following the share split all A and B class convertible redeemable preference shares were converted to ordinary shares. Before the 8 for 1 share split
the Company had on issue 1,400,000 ordinary shares, 2,000,000 A class convertible redeemable preference shares and 3,852,000 B class convertible redeemable preference shares. After the 8 for 1 share split there were
11,200,000 ordinary shares, 16,000,000 A class convertible redeemable preference shares and 30,816,000 B class convertible redeemable preference shares. After the conversion the Company had 50,816,000 ordinary shares. All
share and per share amounts for the fiscal years 2004 and the period from inception to June 30, 2006 presented in the accompanying financial statements have been retroactively adjusted to give effect to the share split.

The Company completed its initial public offering and listed on the Australian Stock Exchange on November 10, 2003, issuing 50 million shares and raising
$25,000 before costs associated with the issue.

In fiscal 2005 the Company issued 22 million ordinary shares in a private placement to institutional
and sophisticated investors, 4,362,092 ordinary shares in a share purchase plan offered to existing shareholders, and 372,000 ordinary shares upon the exercise of employee options.

In fiscal 2006 the Company completed a public offering of 19,500,000 ordinary shares in the form of 1,300,000 American Depositary Shares in the United States. Concurrently the Company placed 19,900,000 ordinary shares
in Australia to institutional and sophisticated investors. The Company further issued 2,733,500 ordinary shares upon the exercise of employee options. At June 30, 2006 the Company had 176,903,592 ordinary shares on issue.

Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the
shares held. At a general meeting every shareholder present (in person or by proxy, attorney or representative) has one vote on a show of hands. Every shareholder present (in person or by proxy, attorney or representative) has one vote per fully
paid share on a poll.



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##### Table of Contents

10. Convertible Redeemable Preference Shares

Up until the time of the Companys Australian initial public offering, the Company had on issue 16,000,000 A and 30,816,000 B class convertible redeemable preference shares.

The Company issued 29,920,000 B class convertible redeemable preference shares on August 28, 2002 and 896,000 B class convertible redeemable
preference shares on May 2, 2003, raising a total of $9,600 in 2003 before costs associated with the issues.

The A and B
class convertible redeemable preference shares were convertible by the holders into ordinary shares at any time or could be compulsorily converted at the time of an initial public offering, subject to certain conditions. The conversion ratio was one
ordinary share per convertible redeemable preference share, subject to variation for capital reconstructions and share dilutions.

The holders of the
A and B class convertible redeemable preference shares could redeem their shares after October 15, 2005 if the Company had not listed on a securities exchange, on the winding up of the Company, or the disposal of its
business or on a voluntary merger of the Company. The redemption price payable to the holders was their original issue price adjusted for any capital reconstructions plus any unpaid accrued cumulative dividends and a prorata share of surplus assets
and profits at redemption date. On redemption B class convertible redeemable preference shares had priority over A class shares.

Both A and B class convertible redeemable preference shares were entitled to a 10% per annum cumulative dividend (based on original issue prices), B class having priority over A class.
The dividends were only payable on the occurrence of a defined liquidity event or a voluntary merger of the Company. The dividend was not accrued as the events requiring the dividend to be paid were considered uncertain to occur and not probable.
All rights to preference dividends lapsed upon the Companys Australian listing in November 2003.

11. Stock Option Plan

The Pharmaxis Employee Option Plan (EOP) was approved by shareholders in 1999 and amended by shareholders in June 2003. The maximum number of options
available to be issued under the EOP is 15% of total issued shares including the EOP. All employees and directors are eligible to participate in the EOP, but do so at the invitation of the Board. The terms of option issues are determined by the
Board. Options are generally granted for no consideration and have a life of ten years. Options granted to executives and employees generally vest equally over a four year period. For options granted after January 1, 2003 the annual vesting is
subject to approval by the Remuneration and Nomination Committee of the Board. The Committee gives its approval for vesting based on the achievement of individual employees personal annual objectives. Independent non-executive directors are
granted options on joining the Board and from fiscal 2006 are allowed to package their remuneration to include options in the company. Options granted to directors upon joining the Board and options granted before fiscal 2006 vest over a period of
approximately four years. Other options granted to non-executive directors vest in the year of grant. Upon a Liquidity Event, all unvested awards will become immediately exercisable. A Liquidity Event is defined as a response issued by the Company
in respect of a takeover offer for all the shares of the Company.

Options granted under the EOP carry no dividend or voting rights. When exercisable, each
option is convertible into one ordinary share.

The exercise price is set by the Board. Before the Company listed on the Australian Stock Exchange
(ASX) in November 2003, the Board set the exercise price based on its assessment of the market value of the underlying shares at the time of grant. Since listing the exercise price is set as the average closing price of Pharmaxis Ltd
shares on the Australian Stock Exchange on the five business days prior to the grant of the options.

A total of 3,125,500 options have been exercised to
June 30, 2006, of which 392,000 were exercise in fiscal 2005 and 2,733,500 were exercise in fiscal 2006.

There were 7,772,625 vested options at
June 30, 2006 (8,792,250 at June 30, 2005) with a weighted average exercise price of $0.362 ($0.308 at June 30, 2005). The average remaining life of options outstanding at June 30, 2006 is 6.52 years (6.72 years at June 30,
2005). All share and option amounts for the fiscal years 2004 and for the period from inception to June 30, 2006 have been retroactively adjusted to give effect to the share split described in note 9 above.



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##### Table of Contents

The following table summarizes stock option activity under the EOP:



|                         |  |                     |   |  |                                 |       |                             |   |      
|------------------------ |  | ------------------- | - |  | ------------------------------- | ----- | --------------------------- | - | -----
|                         |  | Options Outstanding |   |  | Weighted-Average Exercise Price |       | Weighted-Average Fair Value
|Options granted          |  | 2,400,000           |   |  | $                               | 0.125 |                             | $ | 0.070
|                         |  |                     |   |  |                                 |       |                             |   |      
|Balance at June 30, 2000 |  | 2,400,000           |   |  | $                               | 0.125 |                             | $ | 0.070
|Options granted          |  | 640,000             |   |  | $                               | 0.125 |                             | $ | 0.069
|                         |  |                     |   |  |                                 |       |                             |   |      
|Balance at June 30, 2001 |  | 3,040,000           |   |  | $                               | 0.125 |                             | $ | 0.070
|Options granted          |  | 800,000             |   |  | $                               | 0.275 |                             | $ | 0.044
|                         |  |                     |   |  |                                 |       |                             |   |      
|Balance at June 30, 2002 |  | 3,840,000           |   |  | $                               | 0.156 |                             | $ | 0.065
|Options granted          |  | 5,344,000           |   |  | $                               | 0.313 |                             | $ | 0.168
|Options cancelled/lapsed |  | (160,000            | ) |  | $                               | 0.125 |                             | $ | 0.070
|                         |  |                     |   |  |                                 |       |                             |   |      
|Balance at June 30, 2003 |  | 9,024,000           |   |  | $                               | 0.249 |                             | $ | 0.126
|Options granted          |  | 1,750,000           |   |  | $                               | 0.340 |                             | $ | 0.187
|Options cancelled/lapsed |  | (23,000             | ) |  | $                               | 0.440 |                             | $ | 0.234
|                         |  |                     |   |  |                                 |       |                             |   |      
|Balance at June 30, 2004 |  | 10,751,000          |   |  | $                               | 0.264 |                             | $ | 0.136
|Options granted          |  | 605,000             |   |  | $                               | 1.005 |                             | $ | 0.548
|Options cancelled/lapsed |  | (50,000             | ) |  | $                               | 0.43  |                             | $ | 0.228
|Options exercised        |  | (392,000            | ) |  | $                               | 0.159 |                             | $ | 0.102
|                         |  |                     |   |  |                                 |       |                             |   |      
|Balance at June 30, 2005 |  | 10,914,000          |   |  | $                               | 0.308 |                             | $ | 0.160
|Options granted          |  | 1,541,000           |   |  | $                               | 1.990 |                             | $ | 1.455
|Options cancelled/lapsed |  | (30,000             | ) |  | $                               | 1.287 |                             | $ | 0.804
|Options exercised        |  | (2,733,500          | ) |  | $                               | 0.218 |                             | $ | 0.120
|Balance at June 30, 2006 |  | 9,691,500           |   |  | $                               | 0.597 |                             | $ | 0.375
|                         |  |                     |   |  |                                 |       |                             |   |      

The Company recorded stock compensation expense of $532, $260 and $1,124, and $2,521 in the fiscal years ended
June 30, 2004, 2005 and 2006, and the period from inception to June 30, 2006.

In accordance with SFAS 123(R), the fair values of the option
grants were estimated on the date of each grant using the Black-Scholes option pricing model. The assumptions for these grants were:



|                  |  |                |        |                           |   |            |  |    |               |  |                         |  |      |  
|----------------- |  | -------------- | ------ | ------------------------- | - | ---------- |  | -- | ------------- |  | ----------------------- |  | ---- | -
|Grant Date        |  | Exercise Price |        | Share Price at Grant Date |   | Volatility |  |    | Expected Life |  | Risk Free Interest Rate | 
|December 1, 1999  |  | $              | 0.125  |                           | $ | 0.125      |  | 50 | %             |  | 6 years                 |  | 6.45 | %
|July 1, 2000      |  | $              | 0.125  |                           | $ | 0.125      |  | 50 | %             |  | 6 years                 |  | 6.03 | %
|January 1, 2001   |  | $              | 0.125  |                           | $ | 0.125      |  | 50 | %             |  | 6 years                 |  | 5.31 | %
|September 1, 2001 |  | $              | 0.3125 |                           | $ | 0.125      |  | 50 | %             |  | 6 years                 |  | 5.29 | %
|December 2, 2001  |  | $              | 0.125  |                           | $ | 0.125      |  | 50 | %             |  | 6 years                 |  | 5.26 | %
|May 12, 2003      |  | $              | 0.3125 |                           | $ | 0.3125     |  | 50 | %             |  | 6 years                 |  | 5.26 | %
|July 1, 2003      |  | $              | 0.3125 |                           | $ | 0.3125     |  | 50 | %             |  | 6 years                 |  | 4.85 | %
|July 4, 2003      |  | $              | 0.3125 |                           | $ | 0.3125     |  | 50 | %             |  | 6 years                 |  | 4.85 | %
|December 9, 2003  |  | $              | 0.376  |                           | $ | 0.376      |  | 50 | %             |  | 6 years                 |  | 5.68 | %
|April 25, 2004    |  | $              | 0.508  |                           | $ | 0.508      |  | 50 | %             |  | 6 years                 |  | 5.62 | %
|June 4, 2004      |  | $              | 0.426  |                           | $ | 0.426      |  | 50 | %             |  | 6 years                 |  | 5.56 | %
|February 2, 2005  |  | $              | 0.834  |                           | $ | 0.834      |  | 50 | %             |  | 6 years                 |  | 5.57 | %
|May 12, 2005      |  | $              | 1.147  |                           | $ | 1.147      |  | 50 | %             |  | 6 years                 |  | 5.15 | %
|August 5, 2005    |  | $              | 1.790  |                           | $ | 1.790      |  | 50 | %             |  | 6 years                 |  | 5.31 | %
|October 17, 2005  |  | $              | 2.772  |                           | $ | 2.772      |  | 50 | %             |  | 6 years                 |  | 5.46 | %
|November 15, 2005 |  | $              | 1.790  |                           | $ | 2.300      |  | 50 | %             |  | 6 years                 |  | 5.48 | %
|February 13, 2006 |  | $              | 2.194  |                           | $ | 2.194      |  | 50 | %             |  | 6 years                 |  | 5.29 | %
|June 1, 2006      |  | $              | 2.034  |                           | $ | 2.034      |  | 50 | %             |  | 6 years                 |  | 5.74 | %



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##### Table of Contents

The following table presents information relating to stock options outstanding under the plans as of June 30, 2006:



|               |  |                     |  |                                          |  |          
|-------------- |  | ------------------- |  | ---------------------------------------- |  | ---------
|               |  | Options Outstanding |  | Options Exercisable(1)                  
|Exercise Price |  | Shares              |  | Weighted Average Remaining Life in Years |  | Shares   
|$0.125         |  | 1,340,000           |  | 3.7                                      |  | 1,340,000
|$0.3125        |  | 5,698,000           |  | 6.1                                      |  | 5,474,000
|$0.376         |  | 500,000             |  | 7.4                                      |  | 437,500  
|$0.508         |  | 22,500              |  | 7.8                                      |  | 7,500    
|$0.426         |  | 15,000              |  | 7.9                                      |  | 7,500    
|$0.834         |  | 225,000             |  | 8.6                                      |  | 108,750  
|$1.147         |  | 330,000             |  | 8.9                                      |  | 120,000  
|$1.790         |  | 954,500             |  | 9.1                                      |  | 238,625  
|$2.772         |  | 155,000             |  | 9.3                                      |  | 38,750   
|$2.194         |  | 310,000             |  | 9.6                                      |  |         
|$2.034         |  | 111,500             |  | 9.9                                      |  |         

The following table presents information relating to stock options outstanding under the plans as of June 30,
2005:



|               |  |                     |  |                                          |  |          
|-------------- |  | ------------------- |  | ---------------------------------------- |  | ---------
|               |  | Options Outstanding |  | Options Exercisable(1)                  
|Exercise Price |  | Shares              |  | Weighted Average Remaining Life in Years |  | Shares   
|$0.125         |  | 2,720,000           |  | 4.6                                      |  | 2,720,000
|$0.3125        |  | 7,044,000           |  | 7.1                                      |  | 5,686,000
|$0.376         |  | 500,000             |  | 8.4                                      |  | 375,000  
|$0.508         |  | 30,000              |  | 8.8                                      |  | 7,500    
|$0.426         |  | 15,000              |  | 8.9                                      |  | 3,750    
|$0.834         |  | 275,000             |  | 9.6                                      |  |         
|$1.147         |  | 330,000             |  | 9.9                                      |  |         



|(1) | Options Exercisable includes a total of 5,940,000 options that were vested at June 30, 2005, but were locked up and could not be exercised until November 10, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

12. Retirement Benefits

As required by
Australian law, the Company contributes to standard defined contribution superannuation funds on behalf of all employees at an amount up to nine percent of employee salary. The Company permits employees to choose the superannuation fund into which
the contributions are paid, provided the fund is appropriately registered.

The Company contributed $125, $196 and $337, and $728 for the fiscal years
ended June 30, 2004, 2005 and 2006, and the period from inception to June 30, 2006, respectively.

13. Income Taxes

The Company has made a taxable loss in each of the operating periods since incorporation.



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##### Table of Contents

A reconciliation of the (benefit) provision for income taxes with the amount computed by applying the statutory company
tax rate of 30% to the loss before income taxes is as follows:



|                                                              |  |                      |        |   |                                       |     |   |      |   |         |   |  |     |   |  |   |         |   |  |     |   |  |   |         |   |  |     |  
|------------------------------------------------------------- |  | -------------------- | ------ | - | ------------------------------------- | --- | - | ---- | - | ------- | - |  | --- | - |  | - | ------- | - |  | --- | - |  | - | ------- | - |  | --- | -
|                                                              |  | Years ended June 30, |        |   | Period frominception to June 30, 2006 |    
|                                                              |  | 2004                 |        |   | 2005                                  |     |   | 2006 |   |        
|                                                              |  | (in thousands)       |       
|                                                              |  | $                    |        |   | %                                     |     |   | $    |   |         | % |  |     | $ |  |   | %       |   |  | $   |   |  | % |        
|Loss before income taxes                                      |  |                      | (6,647 | ) |                                       |     |   |      |   | (10,445 | ) |  |     |   |  |   | (17,733 | ) |  |     |   |  |   | (38,605 | ) |  |     |  
|Income tax expense computed at statutory corporation tax rate |  |                      | (1,994 | ) |                                       | 30  |   |      |   | (3,134  | ) |  | 30  |   |  |   | (5,320  | ) |  | 30  |   |  |   | (11,582 | ) |  | 30  |  
|Research & development incentive                              |  |                      |       |   |                                       |    |   |      |   | (819    | ) |  | 8   |   |  |   | (1,556  | ) |  | 9   |   |  |   | (2,375  | ) |  | 6   |  
|Disallowed expenses                                           |  |                      |        |   |                                       |     |   |      |   |         |   |  |     |   |  |   |         |   |  |     |   |  |   |         |   |  |     |  
|Stock option expense                                          |  |                      | 160    |   |                                       | (2  | ) |      |   | 78      |   |  | (1  | ) |  |   | 337     |   |  | (2  | ) |  |   | 756     |   |  | (2  | )
|Amortization of intangible assets                             |  |                      | 25     |   |                                       |    |   |      |   | 25      |   |  |    |   |  |   |        |   |  |    |   |  |   | 140     |   |  |    |  
|Other                                                         |  |                      | 1      |   |                                       |    |   |      |   | 3       |   |  |    |   |  |   | (379    | ) |  | 2   |   |  |   | (374    | ) |  | 1   |  
|Change in valuation allowance                                 |  |                      | 1,808  |   |                                       | (28 | ) |      |   | 3,847   |   |  | (37 | ) |  |   | 6,923   |   |  | (39 | ) |  |   | 13,440  |   |  | (35 | )
|                                                              |  |                      |        |   |                                       |     |   |      |   |         |   |  |     |   |  |   |         |   |  |     |   |  |   |         |   |  |     |  
|Income tax expense                                            |  | $                    |       |   |                                       |    |   |      | $ |        |   |  |    |   |  | $ | 5       |   |  |    |   |  | $ | 5       |   |  |    |  
|                                                              |  |                      |        |   |                                       |     |   |      |   |         |   |  |     |   |  |   |         |   |  |     |   |  |   |         |   |  |     |  

Significant components of the Companys deferred tax assets are shown below:



|                                                        |  |                |   |  |         |  
|------------------------------------------------------- |  | -------------- | - |  | ------- | -
|                                                        |  | As of June 30, |  
|                                                        |  | 2005           |   |  | 2006    |  
|                                                        |  | (in thousands) |  
|Deferred tax assets (liabilities):                      |  |                |   |  |         |  
|Net operating loss carryforwards                        |  | 6,849          |   |  | 14,364  |  
|Accrued compensation costs                              |  | 68             |   |  | 105     |  
|Research grants offset to property, plant and equipment |  | 30             |   |  | 16      |  
|Share issue expenses                                    |  | 801            |   |  | 2,313   |  
|                                                        |  |                |   |  |         |  
|Total deferred tax assets                               |  | 7,748          |   |  | 16,798  |  
|Valuation allowance for deferred tax assets             |  | (7,743         | ) |  | (16,798 | )
|                                                        |  |                |   |  |         |  
|                                                        |  | 5              |   |  |        |  
|Patent cost amortization                                |  | (5             | ) |  |        |  
|                                                        |  |                |   |  |         |  
|Net deferred taxes                                      |  |               |   |  |        |  
|                                                        |  |                |   |  |         |  

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting and tax purposes. A valuation allowance has been established, as realization of such assets is not more likely than not.

At June 30, 2006 the Company has $47.9 million ($21.6 million at June 30, 2005) of accumulated tax losses available for carry forward against future earnings, which under Australian tax laws do not expire but may not be available
under certain circumstances.



|14. | Commitments and Contingent Liabilities
|--- | --------------------------------------

Operating leases

In August 2006, the Company renewed its operating lease for its headquarters and manufacturing facilities in Frenchs Forest, Sydney, Australia. The
operating lease expires in June 2011, with an option to renew for a further five years thereafter. The Companys bankers have issued a bank guarantee of $169 in relation to a rental bond to secure the payments under the lease. This bank
guarantee is secured by a security deposit held at the bank. In 2004 the Company leased additional office space in Canberra, Australia and the Company also leases equipment from time to time as required. During 2006 the Company entered into
operating leases for additional offsite storage space and a small suite of laboratories. Both leases expire within five years.



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The Company recognized rent expense of $346, $327 and $371, and $1,343 for the fiscal years ended June 30, 2004,
2005 and 2006, and the period from inception to June 30, 2006, respectively.

Future minimum lease payments under all non-cancelable operating leases
are as follows:



|                                      |  |   |      
|------------------------------------- |  | - | -----
|Years ending June 30,                 |  |   |      
|2007                                  |  | $ | 389  
|2008                                  |  |   | 332  
|2009                                  |  |   | 342  
|2010                                  |  |   | 352  
|2011 and thereafter                   |  |   | 363  
|                                      |  |   |      
|Total minimum lease payments required |  | $ | 1,778
|                                      |  |   |      

Government research grants

The Company has received three separate Australian Government research grants under the R&D START Program; All of these grant programs were completed by June 30, 2006. The Government may require the Company
to repay all or some of the amount of a particular grant together with interest in either of the following circumstances:



| |  |  | the Company fails to use its best endeavors to commercialise the relevant grant project within a reasonable time of completion of the project; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | upon termination of a grant due to breach of agreement or insolvency.
| | - |  | ---------------------------------------------------------------------

Technical failure of the grant funded research project does not of itself constitute failure to use best efforts to commercialise the relevant grant project. The grants have funded certain aspects of the
Companys development projects for the Aridol asthma product, multiple sclerosis and cystic fibrosis. The Company continues the development of all three projects funded by the START Program and has commenced commercialisation of its asthma
project as evidenced by the commencement of sales of Aridol in Australia. The Company believes that the likelihood of being required to repay grant funding is remote while the Company continues to act in good faith with respect to the grants. The
total amount received under the START Program at June 30, 2006 was $4,708.

The Company has been awarded a research grant under the Australian
Governments Pharmaceuticals Partnerships Program (P3). The Government may require the Company to repay all or some of the amount of the grant together with interest in any of the following circumstances:



| | a) | the Government determines that expenditures claimed on research projects do not meet the P3 guidelines; or
| | -- | ----------------------------------------------------------------------------------------------------------



| | b) | upon termination of the grant due to breach of agreement, change in control of the Company or insolvency.
| | -- | ---------------------------------------------------------------------------------------------------------

The total amount received under the P3 Program at June 30, 2006 was $848.



|15. | Research Grants
|--- | ---------------

Research grants received have been accounted for
as follows:



|                                                                       |  |                      |       |                                       |   |       |  |   |       |  |   |      
|---------------------------------------------------------------------- |  | -------------------- | ----- | ------------------------------------- | - | ----- |  | - | ----- |  | - | -----
|                                                                       |  | Years ended June 30, |       | Period frominception to June 30, 2006
|                                                                       |  | 2004                 |       | 2005                                  |   | 2006  | 
|Recognized against related research and development expenses           |  | $                    | 1,105 |                                       | $ | 1,132 |  | $ | 1,245 |  | $ | 5,796
|Recognized against the acquisition cost of related plant and equipment |  |                      |      |                                       |   |      |  |   |      |  |   | 225  
|                                                                       |  |                      |       |                                       |   |       |  |   |       |  |   |      
|                                                                       |  | $                    | 1,105 |                                       | $ | 1,132 |  | $ | 1,245 |  | $ | 6,021
|                                                                       |  |                      |       |                                       |   |       |  |   |       |  |   |      

Grants received in advance of incurring the relevant expenditure are treated as deferred research grants and
included in Other Accrued Liabilities on the balance sheet as the Company does not control the monies until the relevant



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expenditure has been incurred. Grants due to the Company under research agreements are recorded as receivables and included on the balance sheet.



|16. | Guarantees and Indemnifications
|--- | -------------------------------

Pharmaxis Ltd has entered into
Deeds of Access to Documents and Indemnity agreements with certain executive officers and each of its directors. Each deed provides each respective officer with the following:



| |  |  | a right to access certain board papers of the Company during the period of their tenure and for a period of seven years after that tenure ends;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | subject to the Corporations Act, an indemnity in respect of liability to persons other than the Company and its related bodies corporate that they may incur while
acting in their capacity as an officer of the Company or a related body corporate, except where that liability involves a lack of good faith and for defending certain legal proceedings; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the requirement that the Company maintain appropriate directors and officers insurance for the officer.
| | - |  | ---------------------------------------------------------------------------------------------------------

No liability has arisen under these indemnities as at June 30, 2006.



|17. | Net Loss per Share
|--- | ------------------

Basic net loss per ordinary share was computed
by dividing the net loss applicable to ordinary shares by the weighted-average number of ordinary shares and contingently issuable shares outstanding during the period. Diluted net loss per ordinary share was computed by dividing the net loss
applicable to ordinary shares by the weighted-average number of ordinary shares, contingently issuable shares and convertible redeemable preferred shares outstanding during the period. All periods presented in the financial statements have been
retroactively adjusted to give effect to the 8 for 1 share split that occurred prior to the Companys Australian initial public offering in November 2003. Options granted to employees under the Pharmaxis Employee Option Plan are considered to
be potential ordinary shares for the purpose of calculating diluted net loss per share. However, all such issued options outstanding were not included in the calculation of diluted net loss per share as the effect of including such options is
anti-dilutive.



|                                                                                                                       |  |                      |  |                                      |  |             |  |           
|---------------------------------------------------------------------------------------------------------------------- |  | -------------------- |  | ------------------------------------ |  | ----------- |  | ----------
|                                                                                                                       |  | Years ended June 30, |  | Period frominception toJune 30, 2006
|                                                                                                                       |  | 2004                 |  | 2005                                 |  | 2006        | 
|Weighted average number of ordinary shares used as the denominator in calculating basic and diluted net loss per share |  | 75,744,000           |  | 123,933,133                          |  | 160,349,332 |  | 49,671,842
|                                                                                                                       |  |                      |  |                                      |  |             |  |           

+



|18. | Segments
|--- | --------

The Company operates in one segment. The principal
activities of the Company are the research, development and commercialization of pharmaceutical products.

The Company operates predominantly in one
geographical area, being Australia.



|19. | Subsequent Events
|--- | -----------------

On August 15, 2006 the
Company announced that, subsequent to a review of employee and director performance for the year ended June 30, 2006, the directors granted 928,457 options under the Pharmaxis Employee Option Plan. The terms of the options granted under the
Plan are set out in note 11. The exercise price was calculated as $1.917. The grant of options to directors requires shareholder approval and therefore 278,957 of the option grant were approved by shareholders at the Companys annual meeting on
October 26, 2006.

On October 26, 2006 the annual general meeting approved the grant of 200,000 options to Dr Peter C. Farrell,
under the Pharmaxis Employee Option Plan. The grant was proposed by the board of directors on March 27, 2006 upon the appointment of Dr Farrell to the Board. The options have an exercise price of $2.068 and expire on March 15, 2016.



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##### Table of Contents

On November 15, 2006 the board of directors proposed a grant of 200,000 options under the Pharmaxis
Employee Option Plan to Dr. John Villiger upon his appointment to the Board. The proposed grant of options has an exercise price of $3.2258 and expire on November 14, 2016. The grant of options to a director requires shareholder approval
and therefore the option grant to Dr Villiger is contingent upon a favorable vote by shareholders at our next general meeting of shareholders.



|20. | Subsidiary Company
|--- | ------------------

On February 3, 2006 the Company
incorporated a subsidiary in the United Kingdom at a cost that rounds to nil. The subsidiary provides sales, marketing and clinical trial management services to Pharmaxis Ltd on a cost-plus basis.



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Pharmaxis Ltd

(A Development Stage Enterprise)

Schedule II  Valuation and Qualifying Accounts

(for the years ended
June 30, 2004, 2005 and 2006 and for the period

from inception (May 29, 1998) to June 30, 2006)

(in A$ thousands, except share and per share amounts)



|                                        |  |                              |  |                             |  |                            |  |            |  |                       
|--------------------------------------- |  | ---------------------------- |  | --------------------------- |  | -------------------------- |  | ---------- |  | ----------------------
|                                        |  |                              |  | Additions                   |  |                            |  |           
|Description at                          |  | Balance atBeginningof Period |  | Charged toCosts andExpenses |  | Charged toOtherAccounts(1) |  | Deductions |  | Balance atEnd ofPeriod
|Year ended June 30, 2003                |  |                              |  |                             |  |                            |  |            |  |                       
|Deferred income tax valuation allowance |  | 358                          |  | 494                         |  | 2                          |  |           |  | 854                   
|Year ended June 30, 2004                |  |                              |  |                             |  |                            |  |            |  |                       
|Deferred income tax valuation allowance |  | 854                          |  | 1,808                       |  | 632                        |  |           |  | 3,294                 
|Year ended June 30, 2005                |  |                              |  |                             |  |                            |  |            |  |                       
|Deferred income tax valuation allowance |  | 3,294                        |  | 3,847                       |  | 602                        |  |           |  | 7,743                 
|Year ended June 30, 2006                |  |                              |  |                             |  |                            |  |            |  |                       
|Deferred income tax valuation allowance |  | 7,743                        |  | 6,923                       |  | 2,132                      |  |           |  | 16,798                
|Period from inception to June 30, 2006  |  |                              |  |                             |  |                            |  |            |  |                       
|Deferred income tax valuation allowance |  |                             |  | 13,440                      |  | 3,358                      |  |           |  | 16,798                

---

|(1) | Recognized through equity as a result of share issue costs.
|--- | -----------------------------------------------------------



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EXHIBITS



|    |  |                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------
|12. |  | Certification required by Rule 13a-14(a)                                                                              
|    | 
|13. |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|    | 
|15. |  | Consent of Pricewaterhouse Coopers